A Look at Oil Sands

09/03/2004 12:00 am EST


Dan Ascani

Executive Vice President, Weiss Capital Management, Inc.

"Don’t become complacent as oil prices consolidate from record highs," says Dan Ascani, editor of Dan Ascani's Skeptical Investor. "Each time crude oil declines, you’ll hear analysts tell you that the crisis is over. Don’t listen. Here, he looks at an unusual energy play from Canadian oil sands.

"There’s no end in sight for the energy crisis. Despite much talk from Saudi Arabia about opening the spigots to stem the price rise, oil prices remain in the $40s. And China’s demand for crude has surged so much that China has moved from an oil exporting nation in 1993 to the second largest oil importing country now. Clearly, the world is caught short in oil, and it couldn’t come at a worse time, given geopolitical tensions in the Middle East. Your main goal should be to crisis-proof your portfolio to protect your wealth—even prosper—from the worsening energy crisis.

"To help you accomplish this, I’ve found an intriguing opportunity. It’s called the Canadian Oil Sands Trust (CA:COS.UN  Toronto). US oil production, once the highest in the world, peaked in 1970. Natural gas production peaked in 1973. Worse, there are six major oil fields in Saudi Arabia that produce about 95% of Saudi oil, but many now believe these fields are mature. That’s why some oil companies are pressing hard to find oil and gas in other parts of the world. And that’s why I want you to invest in Canadian Oil Sands, an energy trust that is tapping an estimated 1.6 trillion barrels of oil out of the tar sands of Alberta, Canada.

"The oil sands deposits are located in three main areas of the Province—Athabasca, Cold Lake, and Peace River. Since 1967, oil companies and developers have invested capital into the area. Lately, though, they’re flocking to it. An unprecedented amount of investment has occurred or is committed through 2016. And every day, hundreds of machines strip mine the tarry sands of Alberta and prepare it for processing. Although I don’t contend that it’s the singular solution to the depleting Saudi oil reserves, the oil sands of Alberta represent a viable source of oil.

"One push to extract oil from the area is known as the Syncrude Project, a joint venture whose owner is the Canadian Oil Sands Limited Partnership. Syncrude is the project operator. The Canadian Oil Sands Trust was formed ‘for the purpose of acquiring a 99% net royalty on the production of synthetic crude oil and associated products attributable to its working interest in the Syncrude Project.’ This is an open-ended Canadian investment trust that generates income from its 35.49% working interest in the Syncrude Joint Venture. According to the Trust, it represents the largest pure-play investment opportunity in the Alberta Oil Sands, and it is a resource that rivals the oil reserves of Saudi Arabia. Proven reserve life is approximately 35 years, and the trust projects production to reach about 350,000 barrels of Syncrude Sweet Blend, or 50% growth in production after mid-2006.

"The Trust pays about CA$2.00 (about US$1.50) in distributions per year. Its income is not taxed at the corporate level. Instead, you’re taxed at the unit holder level—typically a lower tax bracket than Canadian companies. The Trust’s stock sells for around US$35. It’s available either on the Over-the-Counter market or on the Toronto Stock Exchange. I recommend you buy on the TSE for better liquidity and a boost from the exchange rate if the Canadian dollar continues to appreciate."

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