The Canadian oil sands’ 180 billion barrels of oil reserves are second only to the reserves of Saudi Arabia. Canada is definitely much more geopolitically stable than the Middle East and Nigeria, and its reserves are not in post-Peak, as are the likes of Mexico or Saudi Arabia. This region has large potential for future oil production.

Some of the opposing arguments to the Canadian oil sands are that they are less economical to produce than conventional crude oil. This is very true, but we have already picked the low-hanging fruit in the world of oil. We are left with oil sands, deepsea production, CTL and GTL substitutes.

The Canadian oil sands are going to be a vital supply to the U.S. and the world, and it makes a whole lot of sense for local oil companies to head north of the border in order to get their hands on as much of the oil sands as possible. But, they missed the boat.

On April 27, Statoil, a Norwegian gas and oil company, climbed aboard the oil sands train when it bought out the privately owned North American Oil Sands Corp. (NAOSC) in a deal that fell just short of $2 billion.

Statoil received 257,200 acres of oil sands leases in the Athabasca region of Alberta. The leases hold oil reserves estimated to be around 2.2 billion barrels. By the end of 2009, a pilot project is expected to be implemented to produce 10,000 barrels per day. By the end of the next decade, Statoil believes that it will have 100,000 barrels per day of production from this buyout.

Just how bad did Statoil want this deal to work? There was a private placement of NAOSC shares issued in December at C$13.50. Statoil paid C$20 per share in April. Many investors thought Statoil overpaid, as its share price dropped on the news, but I believe that this Norwegian gas and oil company is looking far beyond $70 oil.

But Statoil isn’t the only, or the first, foreign prospect looking to grasp a piece of the Canadian oil sands.

In 2004, Enbridge Inc. put into plans the construction of an oil pipeline from Edmonton, Alberta, to the coast of British Columbia. Enbridge also announced that a Chinese company was taking a 49% stake in the operation and that the majority of oil will go to China. This pipeline is projected to carry approximately 20% of ALL oil sands production by 2010.

China has also taken minority stakes in four other smaller oil sands producers. This is an interesting strategy. The Chinese do not want to create controversy or be in the headlines. They would much rather subtly get their oil and be on their way. There are 180 billion barrels of oil reserves. With more production coming online every year, China is set to grab 20% of it, and nobody really knows.

These small Canadian oil sands producers are getting bought out left and right. It only makes sense. You have 180 billion barrels of proven oil reserves. You have one of the most geopolitically friendly areas on this earth, and you have a world where conventional oil is starting to run out. Nations everywhere are in the process of trying to get their hands on as much oil as possible.

We have only seen the tip of the iceberg for M&A activity in the market for Canadian oil sands producers. It doesn’t matter where the buyers come from, because these juniors are without prejudice when it comes to payday.

There is one particular company that stands out as a potential buyout target, Oilsands Quest Inc. (BQI: AMEX). On July 12, BQI released a report saying that it had resource potential in excess of 10 billion barrels of bitumen on its properties. Since the report was released, BQI’s share price has increased nearly 60%. That’s just a start…

BQI has 250 million outstanding shares on a fully diluted basis, of which management owns 19%.

Since, Marathon just paid $2.24 per barrel of bitumen reserves in its buyout of Western Oil Sands, let’s be conservative and value BQI’s reserves at $1. That would give us a share price of nearly $40.

I realize that this is a very big number with BQI’s share price currently trading around $4.20. But it is reasonable to think that it could get a bid at $20 with the buyer paying 50 cents per barrel. And what if more than one buyer comes in and starts bidding at BQI? Anyway you look at it, these guys could very easily end up in the sights of China, Norway or even the U.S.

There will surely be more M&A activity in the Canadian oil sands. So we’ll certainly keep an eye out to see where this oil goes.

Sincerely,
Nick Jones
August 2, 2007

Investing in Foreign Oil was originally featured in the Penny Sleuth.

Over some painfully uninspired eggs, burnt toast, and multiple cups of coffee, we spent the better half of two hours solving the world’s problems.

He shared his opinions on America’s long-term commitment in Iraq… I voiced my concerns regarding Moscow’s capacity to intentionally disrupt energy supplies for political capital.

He quickly responded, “Why do you think America is even in Iraq?”

I laughed…to beat the Chinese to the oil, of course. He laughed.

He certainly didn’t disagree or show much concern. Maybe he knew something I didn’t…maybe he was privy to the possibility of a Russian/Iranian natural gas cartel. Those two countries alone hold nearly half the world’s natural gas reserves. Russia alone stands as the world’s top natural gas producer and No. 2 in oil.

It’s common knowledge that the world’s major oil reserves rest in the most politically sensitive regions of the world…countries like Iran, Russia, and Venezuela…countries that fear American foreign policy.

Consequently, oil’s value has increased well beyond its day-to-day commercial uses. Nations, especially those with limited influence, are leveraging their oil reserves for political capital. This practice has become a global trend that doesn’t seem to be ending any time soon.

This very week, the International Atomic Energy Agency (IAEA) now fears Iran may use Revolution Day (February 11) to announce plans to install 3,000 centrifuges to enrich uranium.

Who’s to stop them? We’re stretched so thin in Iraq that even Admiral William Fallon, the White House’s choice to command U.S. forces in the Middle East, believes that “There are no guarantees” on the success of America’s mission.

American resolve seems to be waning. And public sentiment in Britain certainly doesn’t seem to support aggressive actions in other Middle Eastern countries.

Even though French President Jacques Chirac officially retracted his remarks “If Iran had one or two nuclear weapons, it would not pose a big danger,” the message was loud and clear. Europe, Russia and China still want to avoid any direct confrontation.

Some fear a Nuclear Iran will cause other Middle Eastern countries to follow suit. I’m not suggesting we extend our military commitment in the Middle East… However, I am suggesting that this seemingly probable chain of events will only send the price of oil in one direction.

Ironically, many of the world’s major producers (Iran, Iraq, Nigeria, Russia and Venezuela) may support this.

Their domestic money pool hinges on the price of crude oil. The higher the price, the more funds they have to propagate their nationalistic agendas. This practice has been especially well received in both Russia and Venezuela.

As for the Middle East, aside from an overwhelming abundance of sand, oil stands as the only sustainable natural resource. And the major producers know their reserves won’t last forever. Setting the maximum possible price floor serves OPEC’s best interests. Why sell it for $40 if someone will pay you $60?

You may be wondering… Why haven’t the ministers of OPEC done this earlier?

In short, it’s the rapid growth of India and China pushing a sustainable increase in global demand. Consequently, Asia’s entry into the global struggle for the world’s limited energy resources has dramatically decreased excess supply.

So aside from potentially explosive geopolitical concerns, we’re still in a new era where oil supplies will constantly be challenged. Oil producing countries in the Middle East and Latin America are fully aware of this. OPEC ministers may be signaling an intention to support a price floor of approximately $60 a barrel.

All of this tells me the days of cheap oil are behind us… $60 is the new $20.

Unfortunately, major integrated oil and gas isn’t the best place to look for small-cap stocks. However, the oil and gas drilling and exploration sector offers plenty of options.

One stock in particular is Pogo Producing Company (PPP: NYSE) out of Houston, Texas. Pogo Producing engages in the exploration, development, acquisition, and production of oil and gas both onshore and offshore. The company continues shifting its focus to onshore North American oil and gas production.

This business appears to be selling at a very attractive price.

Margins are great. Revenue growth remains strong. Liquidity isn’t ideal and we must note that the company does carry a bit of debt. But the balance sheet certainly isn’t out of order.

Shaky supply lines from major producers in the Middle East, Russia and Venezuala should push demand for greater domestic exploration and production. And even if oil rests in less politically sensitive climates, the influx of Chinese and Indian players into the global energy shopping spree makes domestic production even more attractive.

One of the few certainties circling the world right now are that oil is in great demand. It’s no longer cheap to drill and refine…and it’s not going to get any cheaper.

Sincerely,
Christopher Hancock
February 2, 2007

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Trends in Global Oil Production was originally featured in the Penny Sleuth.