A Long Life and a Nice Dividend

04/16/2013 9:00 am EST


Marin Katusa

Chairman, Katusa Research

This oil sands company should stand out from the pack even if the market tumbles, writes Marin Katusa of Casey Energy Dividends.

Canadian Oil Sands (Toronto: COS) has the product, reserves, balance sheet, and dividend yield to keep the company and its shareholders in good stead, even if economies turn sour and oil prices drop.

COS has just one project: the Mildred Lake mining project outside Fort McMurray, Alberta. COS owns 36.74% of this project. It's a joint venture of seven companies designated Syncrude Canada—but what a project it is. Syncrude is the largest producer of synthetic crude oil from oil sands in the world.

Canadian Oil Sands' current yield of 6.76% far outshines its competitors in the oil-sands business. It stands out for a dividend-paying stock, period. Due to the spike in oil prices since 2009, combined with the fact that it used to be a Canadian income trust, COS has raked in some profits in the last few years that it's been passing on to shareholders.

Instead of bitumen as its product, Syncrude upgrades the black, tarry (as in tar, not dawdle) stuff to produce sweet, light oil that can then be shipped directly to refineries.

Therefore, instead of the $60 per barrel that companies currently get for bitumen, Syncrude—and Canadian Oil Sands, of course—receives the $90 per barrel enjoyed by most conventional oil and gas companies. This greatly increases Syncrude's operating margins and the amount of money the participating companies make per barrel.

The entire operation of Syncrude produces about 270,000 barrels of oil per day, and has a reserve of more than 14 billion barrels. That's a lot of oil. At today's production rate, 140 years would pass before Syncrude would mine out its reserves.

So high production, long life. A combination that's the envy anywhere in the oil industry.

Even with large reserves, we can't forget it costs more to produce oil-sands crude than its conventional counterpart. Thus oil-sands companies are far more negatively exposed to a drop in oil prices.

Nor can we forget that though Canadian Oil Sands produces high-quality sweet crude at a reasonable cost—about $40 per barrel—its dividends could be in trouble if prices dropped all the way down to around $50, as they did in early 2009. We don't believe oil will drop that much again, at least not for long, but it's something to keep in mind.

There's one quirk about COS to note. While it's listed on the Toronto Stock Exchange, in the United States it's traded as an over-the-counter (OTC) stock. This is a little unusual for a company this size, as the OTC platform isn't as regulated as, say, the New York Stock Exchange.

That means US investors have two choices: Either use a Canadian broker, or trust COS and buy it as an OTC stock.

Certainly the first choice is fine. But if you'd rather stick to US exchanges, that wouldn't make us suggest you avoid Canadian Oil Sands. Two reasons:

  • It's listed on the higher-tier OTCQX platform, which is partially regulated in that (at least) it requires validation of financial disclosures.
  • Its trading volume on the OTCQX typically ranges between 50,000 and 100,000 shares per day. That's pretty decent.

COS's manager of investor relations, Alison Trollope, told us the main reason the company isn't on a New York exchange is the fees and other costs associated with it. The OTCQX is indeed cheaper.

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