Four Unique Oil Sands Plays You've Never Heard Of
As reported yesterday in a variety of Media outlets (Here is the link for Bloomberg), billionaires Warren Buffett and Bill Gates were in Northern Alberta this week, visiting the Canadian Oil Sands. While it may have been more fun to see them "bundle up" and go up there in January when it warms up to -40C (it's just as bad in Fahrenheit, trust me!), their presence shows that investors are beginning to really notice the activity going on in this region.
Here are some stunning facts (from Wikipedia) about the Oil Sands:
• The Athabasca Oil Sands (as they are officially known) contain up to 1.7 Trillion barrels of Bitumen, which is a mixture of Crude Bitumen (a semi-solid form of Crude Oil), Silica Sand, Clay Minerals and Water.
• With a conservative estimate of 10% recoverability, this would place the Economically feasible Reserve total at 170 Billion barrels, making it the 2nd largest collection of Oil reserves after Saudi Arabia.
• The Oil Sands cover an area about of New York State.
• Production of the Oil Sands is expected to reach 4 Million Barrels per day in less than 10 years.
Ok, so how do you make money on it? Most retail investors have heard of large producers such as Suncor (SU) and Petro-Canada (PCA). While they are great ways to play this development, I decided to put together a list of 4 companies with unique exposure to Oil Sands that you likely haven't heard of.
Churchill Corp (CRHLA.PK)For those of you whom have never had the privilege of seeing an Oil Sands operation, I can tell you first-hand that it is difficult to not be impressed by the shear magnitude of these projects. The projects virtually are cities onto themselves. The amazing part is how little infrastructure was actually there only a few years ago.
One of the companies benefiting from these massive projects is Churchill Corp, a diversified Construction company based out of Edmonton, Alberta. The company is divided into 5 sub-sections:
- Fuller Astin - Industrial Insulation, Fireproofing, and Plant Maintenance
- Laird Electric - Electrical Instrumentation, Power-Line construction and Maintenance Services
- Northern Industrial Insulation - Similar to Fuller Astin, including Asbestos Abatement and Sheet Metal
- Stuart Olson - Residential, Light Industrial and Institution building construction
- Triton Project - Large Mechanical Contractor
Their expertise plays well into the needs of the growing Northern Alberta communities. First, with the huge influx of new workers to the area, there is a great shortage of places to live and offices for them to work in. Next, Oil Sands Projects need a lot of Power, so there is a huge need for their Power-Line division. Finally, there is a large shortage of staff to perform on-going maintenance, so companies are very willing to farm out this work to companies like Churchill.
With expected earnings of $1.80 CDN for 2008, this company is trading less than 9x its current year earnings. The company also reports that they have a work backlog that exceeds $700M, which is roughly equal to their entire 2007 Revenue. Down significantly from its high of close to $30 CDN in November, this stock has likely been hurt by investors fleeing from Small Caps. With a conservative P/E of 13x on its 2009 earnings, and an expected 2009 earnings of about $2/share, this one could see the mid-20's again before long.
Northern Property REIT [TO: NPR.UN]
While Churchill Corporation may be the ideal choice for building places to live in the North, someone needs to run these properties after they are built. Most workers are not likely to live in these areas for decades, so much of the demand is in Short-term Rentals. Northern Property REIT has a virtual monopoly on this, and are often known as the "Landlord of the North". Northern's Property breakdown is as follows:
- 1,100 Rental units in Northern Alberta
- 1,200 in the Northwest Territories
- 700 in Nunavut
- 151 in Saskatchewan
- 1,000 in Newfoundland
- 1,300 in North-east British Columbia
They also have strong exposure to Seniors Housing in Calgary, Furnished Executive Suites in the Northwest Territories and Commercial office space throughout the entire North. While many of these areas are not directly linked to the Oil sands, they are all heavily exposed to the commodity boom (the NWT provides exposure to Diamonds/Gold, NE British Columbia provides strong Natural Gas exposure and Newfoundland provides exposure to Off-shore Oil and Natural Gas drilling).
With a Monthly distribution (Canadian REITs pay out Monthly distributions. Please check to see how this may impact your income tax situation before buying this or any other Canadian Trust) of 12.5 cents per unit, Northern currently yields about 6.5% annually. With a low payout ratio, this stock should be able to increase its distributions by 5-8% annually, while having a unit appreciation rate of 5% or so. This means an overall return in the 10-15%, which is good for a safe, reliable stock like this.
Horizon Northern Logistics (HZNOF.PK)
Ok, you've now built places for people to work, and to live. You even have people that will manage the properties. So, how do you get people and supplies up to some of these remote areas?
This is where Horizon Northern Logistics comes in…. Horizon provides various services to many different "commodity projects" such as Diamond mines, Oil and Gas exploration and Pipeline construction. Their services are equally as diverse….
- Camp Services -Setting up camps, catering and construction of housing units
- Matting solutions - Providing Industrial-grade mats that allow work to be done on thawing ground, increasing the work season
- Marine - Tug boats and Fuel transfer
With massive projects, such as the proposed Alaskan Pipeline in the works, Horizon Northern will benefit from the lack of facilities in many of these areas, and the global demand for the resources that these areas hold. On the negative side, this is a really Small-Cap stock, and does move around with the prices of the various commodities.
The company is also not cheap, as it trades at close to 20x 2008 expected earnings. However, the company is expected to see strong growth over the next few years, and therefore, looks like a bargain at this price. Conservative 2009 earnings estimates are in the 25 cent range, meaning that this one trades at 11x 2009 earnings……
Liquor Stores Income Fund (LQSIF.PK) This one may surprise you, as it seems like an odd choice for Oil Sands exposure. It may even turn off those who do not invest in "Sin" stocks. Liquor Stores is a large chain of retail stores that sell Alcohol in Alberta and the lower mainlands in British Columbia. They have been recently acquiring many of their competitors, now becoming the largest player in this space. I chose this stock for three reasons:
- The majority of the workers who are migrating to the North for work are young. The average age in Fort McMurray (which is basically the main Oil Sands "Hub") is barely 30 years old. Combining this with the fact that most of the workers are male, and make over $100K per year, this is a recipe for an above-average amount of Alcohol to be consumed per person. With a virtual monopoly on many Northern markets, this bodes well for Liquor Stores.
- Next, most people assume that the Oil Sands boom is confined just to the north. All areas of the West are benefiting from this boom (as an example, Calgary has seen an incredible boom in Engineering, Finance, Construction and Infrastructure Development). This means that all areas of Alberta have had a large influx of young, male workers, making it likely to increase Per Capita Alcohol consumption. Liquor Stores has locations all over the province.
- Finally, Liquor Stores has shown the ability to effectively acquire many of its competitors, which has helped to further its moat in these areas.
As another Income trust, Liquor Stores also pays out a Monthly distribution to its Unit holders. Currently, this works out to an annualized distribution of about 10%. The market did not seem to not like its recent move into the Alaskan market, with its purchase of the Brown Jug chain in July. This has likely brought the down to the point that it now looks like a good entry point. In addition to its current yield, one could also expect Liquor Stores to grow its distribution by 5-10% a year, and see a small Unit price increase as well. I'll drink to a return like that!
Disclosure: None
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This article has 5 comments:
- steve Ward
- 198 Comments
Aug 21 09:41 AMSaskatchewan is the real hot area with the Bakken going strong and will get stronger. That's the area where an impossible crunch for living quarters will occur. Not enough hotels and not enough rentals near the oilfields.
Any news on NPR increasing its holdings there??
- beabaggage
- 59 Comments
Aug 21 10:20 AMThree things should help CN co's.-- slowdown in US and other developed countries in EU could attract good skilled labor, slowdown in CN could ease regulatory issues, which stifle development-- and the CN recession that appears to be developing would make govt/ province govt's. back off tax- to- death attitudes like the Canroy mess. Thanx for info, starting my research on these gems now!
- Larry Bellehumeur
- 62 Comments
Aug 21 12:47 PMBea Baggage -- Glad that I could be of service. I actually am close to pulling the trigger on a couple of them, so I am putting my money where my mouth is!
- Caltorguy
- 38 Comments
Aug 22 12:08 AM- vatexas645
- 8 Comments
Aug 22 09:08 AMMore by Larry Bellehumeur