investingfromtheright

I am retired and take educated guesses on all things financial.

May 27, 2008

May 27, 2008: Time To Change The Oil With COSWF

Commodities, especially oil, have had a remarkable run. When, not if, the bubble bursts in oil, it will still be essential to have some of the gooey substance in your portfolio. After researching oil companies, I believe I have found a long term gusher on shore, in a stable country and with a great long term future. This company is a trust located in the Alberta, Canada Oil Sands region, (COSWF).

Trading at US$51.83 and yielding over 8%, Canadian Oil Sands presents the investor with an excellent game plan for stability, value and total return even when oil price slips and Canadian taxes are raised.

COSWF offers the only pure play within Syncrude and its associated long-term growth. With an estimated 4.7b barrels of syncrude oil, trust holders assume none of the usual risk associated with conventional 20th century oil and gas exploration. As their product receives WTI equivalent prices, cash flow is not overly sensitive to swings in crude oil prices. We all know of the Canadian government's plan to raise taxes on the oil trusts after 2011. COSWF,with its under-leveraged balance sheet has indicated that long term debt will be increased in order to maximize distributions of income ahead of the taxation timeframe. Assuming oil prices in a range of US$90-140/barrel through 2011, Canadian Oil Sands can provide unitholders with a total return of over 40% over the next three years and solid returns thereafter.

Canadian Oil Sands owns 36.74% of the oil sands region (Syncrude) that is currently or shortly to be developed in Alberta. These oil sands represent long-life, no decline underpins to COSWL as much of the oil product is still in the ground. Management has been outstanding in the operation of the company, and decisions are transparent, conservative and appear to be consistently in the interest of unitholders. Current production is unhedged, unlike most other Canadian oil and gas trusts. Relatively low risk growth should ocur should production ramp up due to the massive untapped reserve potential. Whereas many mature oil fields are experiencing a slow decline, Canadiamn Oil Sands is not. A prototype facility to test a new oil sands slurry preparation technology was commissioned late last year. The technology is designed to allow shovels in oil "mines" to feed ore directly into mobile crushers and slurry preparation plants. Starting the slurry process closer to the mine allows for more extensive use of hydrotransport, which moves oil sand more cheaply than trucks or conveyors. The technology will improve recovery rates and reduce equipment down time, which has been a concern in Alberta. Even better, the reserve life of the oil sands of COSWF is more than 40 years - and that estimate could be raised further as new discoveries and advanced technologies are realised. Readily assessible markets for Canadian Oil Sands product are located in over twenty states, including large metropolitan areas of Salt Lake City, Chicago, Detroit, Seattle, etc. through an expanding delivery system.

Investors concered about tax increases on oil trusts should be aware that the Government of Alberta recently agreed to cap Suncor's oil sands mining royalties at 30% of net profits through 2016. Canadian Oil Sands and other trusts are likely to settle for the same tax level, which is a better deal than originally floated last year.

Oil may not sustain the present high price, but COSWF is likely to sustain investors with a nice yield. long term oil reserves and management that is benevolent to unitholders.

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