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China's Oil Sands Ambitions

Posted: Sep 18, 2009 11:45 AM by Aaron Levitt

Tickers in this Article: SNP, TCK, TOT, BQI, CNQ, SU, PTR

The Canadian Oil Sands are a unique piece of geography. Situated in the Athabasca region of northern Alberta, the site is one of the richest petroleum deposits on the planet. The Alberta government estimates nearly 2.5 trillion barrels of petroleum are located within the sand.

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However, extracting the oil-rich bitumen is extremely costly, both on the mining front and in the environmental clean-up. With crude prices down well beneath its $150 a barrel high, exacting oil from the Canadian oil sands seems less of priority. Therefore, many of the assets of the region are trading for cheap even with the Conference Board of Canada expecting output from the oil sands to double by 2013.

China Takes Notice
With an ever increasing appetite for energy, China is taking notice of the potential of the Alberta Oil Sands and its cheap prices. PetroChina (NYSE: PTR), one of the country's largest state owned oil companies, recently made a $1.7 billion investment in privately held oil concern Athabasca. This investment gives China a 60% stake in two undeveloped, small oil sands projects in Northern Alberta. The company says it can break even on both projects at an oil price of $50 to $60.

Oil has been recently trading in the 70s. This isn't the first acquisition by the Chinese in Alberta. French oil giant, Total (NYSE: TOT), sold a 10% stake in the Northern Lights oil sands project to Sinopec (NYSE: SNP) this year.

In addition, the Chinese sovereign wealth fund, China Investment Corporation, paid C$1.7bn for a 17% interest in Vancouver-based metals producer, Teck Resources (NYSE: TCK), which has a minority interest in the Fort Hills oil sands project. With all this activity and interest in the oil sands, there may be more deals to come.

How to Play the Upcoming Oil Sands Resurgence: Three Picks
After merging with Petro-Canada, Suncor (NYSE: SU) became Canada's largest integrated oil company. Beforehand, the company was the first to develop the oil sands, giving birth to the industry. It remains one of its biggest players with nearly 19 billion barrels of oil in contingent reserves. The stock is well off its 52-week low of $14, currently trading in the upper 30s. Any future activity in this sector could see Suncor as a major beneficiary.

With 115,000 acres of leased land 70 kilometers north of Fort McMurray, Canadian Natural Resources (NYSE: CNQ) has an estimated 16 billion barrels of bitumen in place via its Horizon project. Within that project, approximately 6 - 8 billion barrels are recoverable under existing mining technologies. With the company beginning phase one of the multi-year project, there is still room for a partner in the venture.

Oil Sands Quest's (AMEX:BQI) 731,000 acres along the Saskatchewan and Alberta border and its 488,000 acres in the Pasquia Hills oil shale could be worth far more than the company's $300 million market cap would suggest. As oil begins to climb again, the company could become a total buy target.

The Bottom Line
The Alberta oil sands offer an interesting long-term value play. Mining bitumen is costly and the current oil price environment has caused many players to cash out. However, as oil begins its creep upward once again the true value of these lands will be unlocked. The Chinese have proved to be shrewd investors and we can follow their lead and pick up some of these oil sands specialists cheap, relative to their future values. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

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By Aaron Levitt

Aaron Levitt is an accountant with a non-publicly traded real estate limited partnership. He received his Bachelor of Science degree in economics and international business from Pennsylvania State University and is currently working on his master's degree. Levitt advocates long-term value investing within a global framework.

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