Invest In This Low Risk "Mining" Operation

Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A pure-play opportunity to invest in the ExxonMobil (NYSE: XOM)/Imperial Oil (NYSEMKT: IMO) -operated oil sands partnership, SYNCRUDE, is available through Canadian Oil Sands Trust . Canadian Oil Sands Trust owns a 37.74% working interest in the Syncrude partnership whose members are Imperial Oil (25%), Suncor (12%), Sinopec (9.03%), Nexen (7.23%), Murphy Oil (NYSE: MUR)  (5%), and Mocal (5%).  Syncrude was founded in 1964 as an experimental project and produced its first oil from the Athabasca oil sands in 1978.

No Exploration/Geopolitical Risk

Syncrude is essentially a mining operation in which the oil-saturated sandy soil is open-pit mined on a daily basis with giant shovels and transported for processing and upgrading into synthetic crude oil. There is no exploration risk in buying shares of Canadian Oil Sands Trust and no geopolitical risk, in as much as the oil is in the soil and the entire Syncrude operation is located in Alberta, Canada. These facts cannot be overlooked in these treacherous times when dry wells are an expensive hit to a company's balance sheet, and foreign governments are expropriating investments and/or changing the terms of contracts with regularity.

A few years ago, the Syncrude partners signed a management services agreement with Exxon and Exxon-controlled (69.9% ownership) Imperial Oil, which is in essence Exxon's Canadian alter-ego, with Exxon exerting defacto control and providing management, technological sharing/support, and line of credit financing. So in essence, Syncrude is in fact an Exxon-operated mining operation. It is surprising that Exxon, to date, has not purchased a direct ownership interest in this asset, as other owners have sold out through the years.

The goal in bringing in Exxon/Imperial Oil to manage Syncrude was to increase Syncrude production to its designed maximum production of 350,000 barrels per day. Despite the efforts of Exxon/Imperial Oil, in 2012 Syncrude has only been averaging approx. 282,300 barrels per day through Sept. 30. Although spectacular production in its own right, Syncrude production has been a disappointment to some in the investment community.

Priced Below Net Asset Value, Long-Life Reserves, Dividend Paying

What is really fascinating about an investment in Canadian Oil Sands Trust is that the stock is currently trading for only $20.15 per share as of Dec. 21, with a dividend yield of approx. 7%. The trading range in 2012 has been between $17.71-$25.23. Thus, the current price is a nice mid-range entry point on the year's average price. The dividend is paid out of cash flow, which in the third quarter of 2012 was 470 million dollars CDN, with net income of 338 million CDN. With the cash flow from an approx. 113,000 barrels a day available to it, Canadian Oil Sands Trust has financial flexibility. The company does not hedge its oil production and instead has a flexible dividend policy to reflect the ups and downs of oil prices.

It has been suggested that the net asset value of the Trust is closer to the over $34 a share equivalent paid by Sinopec in April, 2010 when it purchased the 9.03% interest of ConocoPhilips for $4.6 billion. Murphy Oil is now said to be shopping its 5% interest. Will ExxonMobil, Imperial Oil, or Canadian Oil Sands Trust be the buyer?

If this all hasn't been enough, the acreage controlled by Syncrude can produce oil for no less than forty (40) more years. The oil reserves attributable to Syncrude are 4.8 billion barrels of proven and probable reserves, with no less than an additional 2 billion barrels of contingent reserves.

Contrast this long-life reserve with the major oil companies, including Exxon, which often have reserve lives of under 15 years under current daily production rates. This also does not take into account the many jurisdictions that an integrated major is operating in on a daily basis, some with high political risk.

Canadian Oil Sands Trust stock, which hit a high of over $50 a share in 2008 when oil prices drfited over $130 a barrel, has been dragged down by high capital expenditures, in the form of cash calls to the partnership, which will total over 1 billion dollars in 2013-2014. Looking out to 2015-2016, these cash calls will diminish significantly. This all being said, many institutional investors prefer the diversity of Imperial Oil, which is integrated with upstream and downstream assets, or Suncor or Husky Energy as opposed to COSWF which is 100% dependent on daily Syncrude production.


It would appear that the Canadian Oil Sands Trust story is not well-known, but certainly as the facts illustrate, this is an investment that can appeal to income-oriented investors, as well as those seeking growth and income. Syncrude is not going anywhere in the near future. It needs no oil to be found; it simply needs to keep mining the oil saturated sands, and have Exxon/Imperial Oil continue to ensure that production continues smoothly.

In the final analysis, it would seem hard to make an argument against having a position in Canadian Oil Sands Trust in any portfolio, especially considering the current entry price.

ulysessjr has long position in Exxonmobil, Imperial oil, Murphy oil, and Canadian Oil Sands Trust. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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