Many of my favorite people (that’s you, dear Gumshoe readers) have been asking me about the latest pitch from Brian Hicks for his $20 Trillion Report … perhaps because, in this time of oil uncertainty (both on the demand side in Japan, and on the production side in the Middle East), oil is making headlines again and the subject line on this teaser email I received was the pithy “Canada to OPEC: Terrorize THIS.”
Hard to resist, eh? For me, too, so I thought I should dig in and sniff out the answers for you. Here’s how the ad opens:
“Just in the nick of time… Alberta Taps World’s Last and Largest Great Oil Reserve”
Hicks even spins the tale of his visit to Alberta, giving us the kind of descriptive tale of dread (from his helicopter ride) and awe (at the fabulous natural resources he saw) that we’ve gotten accustomed to seeing from most of the newsletter jockeys who boast of their “boots on the ground” research, just to remind you that the subscription bucks you’re paying are really doing something cool.
(That differs from any membership payments you might make for the Stock Gumshoe Irregulars, by the way — I’m not getting into a helicopter whether or not you pay your $49, it’s “buns in the chair” research for your friendly neighborhood Gumshoe.)
Here’s a little taste of his story from the ad, just to get you in the mood:
“Somewhere in that thick green overgrowth, the future of the industrialized world lay dormant.
“We touched down about an hour later in a gravelly clearing encircled by some dark rock formations.
“I could smell the pine as the electric door slid open and the frame stairway descended.
“But that wasn’t the only thing in the air…
“My host, a man whom I cannot name publicly due to fiduciary obligation, took no more than three steps from the chopper before he bent down and picked up a stone.
“It was round and black, about the size of a grown man’s fist.
“He took a whiff of it, smiled, and tossed it to me.
“‘Give it a try,’ he said to me.
“But I didn’t need to. Because I’d recognized the unmistakable stench the moment the door had opened — not just in my hand, but all around us.
“The chopper’s rotor hadn’t even stopped spinning, and we’d already struck oil… a lot of it.
“The gravity of the moment made the hair stand up on my back.
“Because right underneath our feet, locked in a hunk of land about the size of the state of Pennsylvania…
“Lay an oil resource holding an estimated 1.71 trillion barrels.
“That’s enough to satisfy world demand for as long as 40 years.”
After that, we get several pages of tease — the big story about increasing oil demand, peak oil, rising prices in the years go come, and the difficulty of finding big new oil reserves and the desperation of the oil majors like ExxonMobil to replace their reserves.
And Hicks tells us that the company he’s picking, though it’s not tiny, could grow up to be the next Exxon or BP … in his words,
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“In the next few minutes, I’m going to tell you about a young, cutting-edge company that’s finally perfected a process which gives it access to almost 100% of the world’s largest remaining major fossil fuel resource.”
So … who is it? And what’s the patented breakthrough that will lead to their massive profits? Let’s think on that together, shall we?
The heart of this tease, the huge oil reserves, are of course the estimated 1.7 trillion barrels of crude locked in the Alberta oil sands. They’ve been producing oil from the oil sands for many years, of course, though it’s expensive and dirty work, but we’re told that this new technology will make much more of that crude accessible:
“It wasn’t until very recently that the technology to effectively harvest oil from these geological formations was developed…
“A technology pioneered by a unique young mining company determined to take advantage of the almost immeasurable wealth hidden underneath the Canadian soil.
“Within several years, this hungry young company will make all of today’s oil empires obsolete.”
So what’s the problem? You’ve probably seen the pictures of the giant strip mining operations in the oil sands, run by folks like Suncor (SU) as they essentially dig up the bituminous sand and take it elsewhere for processing that extracts the oil (or the oil equivalent — “syncrude”). Apparenlty this process has its limitations, and can only access part of the potential reserves:
“Unfortunately, using traditional methods such as strip-mining could only access a mere 10% of this massive resource….
“Reaching this elusive 90%, however, has been a major challenge. But it’s a challenge that one of Alberta’s oil sands companies has found a way to meet.
“And it’s about to start paying off in billions to a select few investors with just the right information, at just the right time…”
So what is the “cutting-edge mining technology” that this teased company is using? Here’s how Hicks puts it:
“It’s called Steam Assisted Gravity Drainage (SAGD), and after more than a century of traditional drilling techniques, it’s changing the face of the oil industry forever.
“The method uses superheated vapors to literally ‘steam clean’ the unrefined oil-bearing medium, or bitumen, from within underground oil sands deposits.
“Aside from being able to reach deeper and go places no strip mining operation would ever be able to go…
“It’s far less taxing on the environment — leaving almost no detectable surface footprint.
“All it takes is some natural gas to create steam, and the crude literally bleeds from the earth.”
If you’ve ever invested in an oil sands company, or in a firm that’s trying to get into the oil sands, you may well have heard of SAGD — it wasn’t invented yesterday, and it has been used by several firms in recent years to extract oil either in pilot projects or in real production. I’m sure there are different kinds of this technology, but we’ve seen similar techniques described as “underground refining” as the processing is effectively moved underground — in short: you find some way to heat the oil sands, which releases the oil.
And the big deal, beyond any potential lower impact on the environment, is that they can access deeper oil sands — otherwise, reserves that aren’t right near the surface would be prohibitively expensive to mine due to the need to clear off the overburden (what you and I might call “dirt and stuff”) on top.
Finally, then, we start to hear some specifics about our little (or not so little) teased stock:
“As a pioneer in SAGD-mining, the young energy company whose Alberta-based property I visited personally has literally scheduled a 309% production increase in its oil operations within the next three years.
“This isn’t a projection, a plan, or just some wishful thinking; this is an actual scheduled production increase based on expansions of their already-functioning properties.”
And, of course, some fairly extreme projections that are couched as “conservative” …
“These expansions don’t take into account projected jumps in global crude prices.
“If prices do as expected, and go to a conservative $200 by 2014-2015, this company could easily extend their 309% scheduled expansion…
“Into a 727% profit bonanza!”
I don’t know, he might be right about oil prices doubling again within three or four years — but that doesn’t mean it’s “conservative” in my book. “Conservative” might be thinking about whether the company can stay in business if oil prices go back down to $35, where they were a year or so ago. But I digress. Some more clues about this company, please?
“… this isn’t just some thinly-traded penny stock, which will go through the roof one day and then plummet back to the basement the next….”
So as I noted above, it ain’t a tiny stock — how big?
“Because once their plans are executed, this $28 billion company will transform itself…
“Into a quarter TRILLION dollar player on in the world oil market.
“That’s as big as British Petroleum — and about twice as big as Exxon.
“Furthermore, with over three million acres of natural gas drilling in full swing…
“And new wells being added at a rate of 1 every 12 hours…
“This company’s interests within the energy industry are not just substantial, but cover a wide spectrum as well…
“It makes this company ready for any shift in global policy and trend, and therefore an aggressive but remarkably safe way to grow your wealth.”
We also get a list of the major institutional investors who hold “significant” positions of this company, names we’ve all heard like Royal Bank of Canada, Blackrock, Vanguard, and Bank of Montreal — it’s almost never particularly relevant to look at the institutional holders of large cap stocks unless you specifically want to follow one investment manager, since every large cap stock is owned in scale by many of the huge institutional investment managers you’ve heard of, just by nature of their size and the massive diversification of their (and their clients’) aggregated portfolios.
So who is this company that they’re calling the “The $20 Trillion Report’s Oil Sands Play of 2011!”
Well, toss those details into the Thinkolator … new well every 12 hours … three million acres of drilling … $28 billion market cap … and our answer comes through loud and clear:
This is Cenovus (CVE in both Toronto and Canada)
Because of the disaster in Japan and the subsequent drop in oil prices, what was a $28 billion company is now a $26 billion one — the stock has dropped from about $38 to $35 over the past week, but the other clues are precise matches … their natural gas drilling, which is mostly in relatively easy and shallow formations in southeast Alberta, can be done in about 12 hours per well, and they do have about three million acres of gas production (though I don’t know if it’s an exaggeration to say they’re “drilling three million acres” right now).
Cenovus is a relatively new name to the public markets, but can stake at least some claim to roots going back about 130 years — most recently they were part of Encana before that company split into gas-focused Encana and oil-focused Cenovus in 2009 (and before that, Encana was formed from two other companies that merged in 2002, which in turn traced some of their land rights in Alberta back to the discovery of gas there in the 1880s, when the railroad went through). Cenovus is an integrated oil company with some natural gas production as well, they have two joint-venture refineries with ConocoPhilips, those aforementioned shallow gas wells (about 28,000 producing wells now, they way), and several oil sands production projects and lots and lots of untapped oil sands property in both Alberta and Saskatchewan.
And yes, Cenovus has a strong focus on oil sands, and particularly on the SAGD production process for several of their properties — they started getting regulatory approvals for oil sands and “heavy oil” properties in earnest in the late 1990s, started production around 2002, and moved more aggressively to develop those projects about five years ago. They have three heavy oil/oil sands projects that are now producing, and they expect substantial growth and long term production from all of them (Foster Creek, Cristina Lake, and Pelican Lake in the Athabasca area in Alberta), and they also produce oil in a massive CO2 injection/sequestration project in Saskatchewan (the Weyburn field).
They are trying to increase their exposure to oil prices rather than gas — right now they get about 65% of their cash flow from oil and liquids and 35% from natural gas, and by 2014 they expect that to be 80/20 (they also use about 20-25% of their natural gas internally, presumably to make the steam for their SAGD projects). Foster Creek, their biggest and lowest-cost producing site, started as a 1996 pilot project and became the first commercial-scale SAGD project ten years ago, with operating costs that are dramatically lower than any of the other big oil sands projects I’m aware of (though the capital costs were no doubt high) — the other projects have operating costs in the high-teens per barrel, about twice the cost at Foster Creek but still relatively cheap with oil prices anywhere near $100.
I don’t know where Hicks got the 309% number for increased oil production, the direction is right but I can’t easily match the exact numbers with Cenovus’ presentations and forecasts — their oil sands production is expected to roughly double from ~70 Mmbls in 2010 to almost 15 Mmbls in 2015, with the possibility of 350 Mmbls in the years following as “emerging opportunities” (outside of their core Christina Lake and Foster Creek properties) are developed and expanded. Indeed, the company’s strategic goal/business plan is to reach 300 Mmbls of production from just the oil sands in 2020. I can see how the number triples if you sneak in the non-oil-sands production (and indeed, tripling — going up 200% — is what he shows on his chart in the tease, despite the fact that 300% would be a quadrupling of production).
So … is Cenovus right for you? Well, it’s your money, so it’s your call — giant competitor Suncor (SU) is a bit cheaper and is expected by analysts to grow a bit more quickly, with slightly higher profit margins, but it’s also more than twice as big and arguably more focused on existing production than on huge gains in production (and, of course, the analysts may be underestimating Cenovus — or may be wrong in a multitude of other ways).
I don’t know of any patent or protected advantage Cenovus might have in their extraction technique, though they certainly have more experience at SAGD than any other company I can think of — and I also don’t know if any of the techniques that have been tried, including the THAI process, might turn out to be as effective or better (THAI is associated with another old teaser target, Petrobank — PBG in Toronto). Cenovus pays a slightly higher dividend (about 2%) and seems to be promising future dividend growth. There are a multitude of other pretty established oil sands players as well — Husky Energy (HSE in Toronto, which I’ve suggested for the Irregulars in the past) does both oil sands and offshore China development, Canadian Oil Sands (COS in Toronto), the largest single owner of the Syncrude project and, as a former trust, the most dividend focused of the major players (Syncrude and Suncor pioneered the first extraction of oil from the sands in the 1960s and 70s), or Canadian Natural Resources (CNQ), which has done better than any of the other biggies of late, perhaps because of its more diverse portfolio. There are also any number of smaller companies exploring or producing, including some old teaser targets from the last oil boom like Connacher (CLL in Toronto) or Oilsands Quest (BQI), neither of whom has even come close to returning to their 2008 prices, and I’m sure there are many more juniors and other players in the oil sands if you’d like to share your favorite with us with a comment below.