Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss with you, why Investing in Canadian Oil Sands Ltd (TSX:COS) can be so lucrative.
Company Profile:
Canadian Oil Sands Limited, was founded in 1995, by PanCanadian Petroleum – now Encana Corporation (TSX:ECA) – and is headquartered in Calgary, Canada and generates its income from its oil sands investment in the Syncrude Joint Venture.
Syncrude operates an oil sands facility and produces crude oil through the mining of oil sands deposits in the Athabasca region of northern Alberta, Canada.
The Athabasca deposit is the largest known reservoir of crude bitumen in the world and the largest of three major oil sands deposits in Alberta.
As of January 2, 2007, the company holds a 36.74% interest in Syncrude, which is the largest stake of any of the joint owner as can be seen from below chart.
Syncrude produces about 100 million barrels of oil each year from its proven and probable reserves of 4.5 billion barrels with contingent and prospective resources of at least that amount again.
As can be seen from below chart, the shares of the company have earned high returns on equity for many years, averaging 24% since 2001.
Based on its high returns, the shares of the company have also outperformed the Toronto Stock Exchange for the past decade by a wide margin as can be seen from below chart.
The company also holds some arctic natural gas interests through a wholly owned subsidiary, Canadian Arctic Gas Limited.
PGM CAPITAL COMMENTS:
As can be seen from below chart, Canadian Oil Sands can be seen as a life annuity since it is likely to be an oil producer for the next 100 years.
We believe shares of Canadian Oil Sands will continue to outperform for many years to come.
At its closing price of CAD 22.93 a share of last Friday, July 11 and annual dividend of CAD1.40 a share the shares of a company offer a sustainable yield of over 6%.
As a producer of solely light sweet crude oil, Canadian Oil Sands is a pure play on long term trends in oil prices.
Since its costs are in Canadian dollars, Canadian Oil Sands benefits from a lower Canadian dollar in relation to USD and Euro.
Canadian Oil Sands is highly leveraged to oil prices and estimates that every US$1 per barrel increase in the WTI prices adds US$25 million to cash flows of the company.
The company’s April 30, 2014 guidance for the current year projected cash flows of US$1,194 million or US$2.46 per share based on an average WTI of US$92.00 a barrel for the year.
Based on the above mentioned fundamentals and the company’s strong balance sheet a quick ratio of more than one (1) a P/E ratio of 14.20 (based on the closing price of last Friday, July 11) we have a BUY rating on the shares of the company.
Last but not least, before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that stock prices don’t move in a straight line and that sharp corrections may happen in the short term.
Yours sincerely,
Eric Panneflek