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8 Stocks for the Coming Oil Sands Boom - 20829 views
WINDERMERE, Fla. (Stockpickr) -- Crude oil prices continue to skyrocket due to tensions in the Middle East and North Africa -- and due to an even more serious driver, the plunging U.S. dollar.
The U.S. dollar is hovering just barely above its three-year lows, which it hit last week at 73.73. There are now fears in the market that the dollar is setting up for an even more sinister decline as the U.S. government grapples with credit issues. The only near-term catalyst that might stop the dollar liquidation is if the Federal Reserve ends its quantitative easing policy in June. An end to QE2, and more importantly, no QE3, could spark a rally in the dollar.
It’s possible that Fed chairman Ben Bernanke will hint at an end to his dollar printing campaign when he hosts the first-ever Q&A style press conference by a Fed chairman on Wednesday. This conference will follow an interest rate decision by Bernanke, where he’s expected to maintain interest rates between zero and 0.25%.
Even if that plays out, I still think crude oil will stay in its uptrend and potentially trade toward $150 to $200 barrel in the next six to 12 months. Crude oil for June delivery is now trading at around $112 a barrel, which represents a 32% rise in the past year. The path of least resistance is for crude oil to revisit its all-time high of $147.27 a barrel. If we hit that price, and we breakout above it, then the next psychological level is $200. That’s where I am getting my $150 to $200 target from. I am anticipating the move.
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As crude oil prices continue to skyrocket, one of the most profitable ways to capture gains is with Canadian oil sands producers. While it’s true that we get most of our crude oil from the Middle East, we also know that region of the world is rife with unrest and supplies disruptions. This leaves Canada positioned to pick up the slack and capitalize to meet booming global demand for oil. Don’t think for a second that Canada isn’t a major player; it's only second in the world in terms of oil reserves behind Saudi Arabia.
And the best part about Canadian oil sands is that it only costs around $30 to $40 per barrel to extract oil from the sand. The higher crude oil goes, the more profitable it becomes for Canadian oil sands producers and the higher the probability they will see massive revenues. Let’s also face another reality; the world is probably never going to have to worry about political unrest in Canada either.
Here‘s a look at a number Canadian oil sands stocks that are positioned to benefit off of rising crude oil prices.
Canadian Natural Resources
One company that is considered among many traders as a best-of-breed Canadian oil sands player is Canadian Natural Resources (CNQ), which engages in the exploration, development and production of crude oil and natural gas. It holds interest in the Horizon oil sands properties that produce synthetic crude oil through bitumen mining and upgrading operations. This stock hasn’t done much in 2011, with shares up only around 3%, but all that means to me is that investors now have a great chance to get into this name for a play on its oil sands operations.
This company is a big player in the energy space with a market cap of $50.26 billion and an enterprise value of $59.87 billion.
Canadian Natural Resources only gets about 16% of its production from oil sands. However, sometimes perception rules in the market, and as I stated above, CNQ is considered a best-of-breed player. It also doesn’t hurt that the stock is reasonably cheap trading at a forward price-to-earnings ratio of just 12.73.
From a technical standpoint, the stock has a ton of support at around $43.50 a share. It looks like CNQ just put in a triple bottom now that the stock has tested that $43.50 area three times in the last three months. I would be backing up the truck on this stock anywhere near that support level and use just below the 200-day moving average ($40.46) as my stop. I would also be watching for any up move through the 50-day moving average of $47.85 on volume that’s well above the three-month average activity of 3.6 million shares.
I would add to any long position above $50.25 (key resistance level) and above the 52-week high of $52.04. A move above that 52-week high should setup CNQ for a run towards $60 to $70 a share. Also, don’t forget that any positive future legislation out of the U.S. towards natural gas will be a big win for CNQ as well. The company is the second largest natural gas producer in Canada.
Some big bets on CNQ, as of the most recently reported quarter, come from Julian Robertson's Tiger Management -- the stock comprises 4.5% of the total portfolio -- and Chris Davis' Davis Selected Advisers, with a 46.2 million-share position.
Another best-of-breed Canadian oil sands player is Suncor Energy (SU), an integrated energy company. Suncor is focused on developing petroleum resource basins, such as Canada's Athabasca oil sands. The stock is off to a solid start in 2011, with shares up around 17%. This is a huge energy company with a market cap of $70.48 billion and an enterprise value of $82.68 billion.
Suncor has pretty solid oil sands production numbers at around 55%. The stock is also one of the cheapest oil sands plays, with shares trading at a forward price-to-earnings of 13.69. You can also capture some yield with SU since their current dividend payout is around 1%.
From a technical standpoint, this stock has just started to move above its 50-day moving average of $44.67 a share. You could be a buyer of this stock right now and add to the position every time it trades above past overhead resistance levels, such as $47 and then $48.50 a share. Only add if you see strong volume moves through those levels. I would want to see volume that’s well above the three-month average activity of 8.1 million shares.
It’s possible that SU could drop down towards its rising trend line which would put the stock very close to $42 a share. I would use that trend line as major support and sell the stock only if it trades through that level with big volume.
Ultimately, I think SU will stay in its uptrend and trade above $48.50, which would be a major breakout for SU. A breakout for SU could easily set the stock up for a run back towards its all-time highs, which are over $70 a share. This is plenty of upside from current levels, so watch this oil sands play closely in the coming days and weeks.
Imperial Oil (IMO), which engages in the exploration, production and sale of crude oil and natural gas in Canada, is loaded with exposure to Canadian oil sands. So far in 2011, this stock has been on a tear, with shares up over 25%.
Imperial Oil’s exposure to oil sands production is currently a whopping 75%. The stock isn’t super cheap, but it’s also not expensive, with shares trading at a forward price-to-earnings of 16.08. That industry average price-to-earnings for the sector IMO operates in is 21.06.
Imperial Oil’s chairman, president and CEO Bruce March recently commented on the company’s oil sands Kearl project in northern Alberta. He called it the next generation of oil sands facility, and said it was scheduled for startup in late 2012. Clearly, this company knows that the future is in oil sands and they are positioning themselves to benefit big.
From a technical standpoint, you could be a buyer of this stock right now and then add heavily to your position if it breaks out above $55 to $55.63 a share. If IMO breaks out, it would set the stock up for a run towards its all-time high just above $60 a share. A move above the all-time high would be even more bullish, since the stock would be clear of all past resistance levels.
If you’re looking for some significant support areas on IMO, then I would key off of $50 to $48 a share. I wouldn’t be interested in going long this stock if it breaks those levels because it would take it below a consolidation range it’s been in since late February.
Canadian Oil Sands
If you want an absolute pure-play on Canadian oil sands, then take a look at Canadian Oil Sands (COSFW), which gets 100% of its production from oil sands. This company, through its indirect interest in the Syncrude joint venture, engages in the mining and upgrading of bitumen from oil sands in northern Alberta. This stock is off to a strong start in 2011, with shares already up around 25%.
Canadian Oil Sands is positioned just right to benefit big off of increased oil sands production through their 36.74% interest in the Syncrude Project. Syncrude has a productive capacity of 350,000 barrels per day of light, high-quality crude oil. Basically, this company is a leverage play on the experience of Syncrude which has been an oil sands player for the past 30 years.
From a technical standpoint, shares of COSWF have run into some stiff resistance at around $35 to $35.32 a share during the past two months. I would be a buyer of this stock on any weakness, and I would only add to the position if it breaks out above $35.32 with strong volume. I would want to see volume that’s well above the three-month average activity of 240,000 shares.
Remember to use tight mental stops on all of the stocks in this article, because if the sector decides to trade down you can always buy them back. One way to do this is simply buying the stock near the 50-day and use the next available support levels, or simply buy the breakouts with mental stops a few percentage points away from the breakout levels.
Also, there’s nothing wrong with buying a stock and selling it right away if it trades much below where you bought it. The object is always to capture the meat of an uptrend, so focus more on your entry and protecting your hard earned capital.
Back to COSWF: If this stock does breakout, I think it can easily uptrend towards $40 to $50 a share. Keep in mind, that this stock traded as high has $52 back in 2008 during the last major oil sands bull market. I see no reason we can’t revisit those levels if oil runs back towards $150 again.
If you like to trade speculative penny stocks, then take a look at Oilsands Quest (BQI), a development-stage company that operates through its subsidiary companies. It is engaged in a range of projects in the oil and gas industry in Western Canada with an emphasis on the oil sands. This stock is up around 7% so far in 2011.
It’s important to understand that at this time, Oilsands Quest makes no money and is bleeding cash. Its EBITDA is -$57.85 million, and net income is -$57.76 million. The company is cash-rich, with over $20 million in cash on its balance sheet, but if it doesn't start turning oil sands permits into production, then it probably won’t be around long enough to reap the oil sands rewards.
The way I would play this stock is to look for any upside volume spikes that are well above the three-month average trading volume of 2.5 million shares. This stock can produce massive returns once the volume starts kicking in, so if you see any unusual upside volume, then buy the stock for a short-term trade. You could also just buy it now with a stop under 40 cents a share. This stock will easily double from current levels if the entire oil sands sector sees big institutional money flow in the coming weeks or months.
Another way to play the coming boom in Canadian oil sands is to buy some of the heavy machinery equipment makers that are needed to move materials and extract oil from the sand pits. If you buy the machine equipment makers, all you need is for production to be in full gear to win. As product ramps up, these companies will be in high demand for their products and services.
Some names to consider that could trade much higher if Canadian oil sands production takes off due to rising crude oil prices are Joy Global (JOYG), Terex (TEX) and Caterpillar (CAT). All three of these stocks are trading within range of their 52-week highs, so as long as crude oil continues to trend higher, then these three should follow suit. None of these names are expensive either; they all trade at a forward price-to-earnings of around 13 to 15.
To see more Canadian oil sands stocks, check out the Canadian Oil Sands Stock Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.