In our past two blog entries we discussed our long-term views on crude oil. Our first note outlined the reasons that average oil prices are likely to remain elevated well into the future. Our second note listed criteria for evaluating the investment merits of companies that produce oil. Today, we discuss a specific niche of the energy sector, namely the Canadian oil sands.
Alberta, Canada holds one of the largest stores of fossil fuel on earth in the form of very heavy oil deposits known as oil sands. Many energy firms are now exploiting this resource from small Canadian companies to the largest international integrated oil companies. While there are some drawbacks to operating in the oil sands (transforming the raw product into useable fuels is expensive and, like all extractive processes, is disruptive to the environment) we think the enormous size of the resource and its location in a politically stable country make it a uniquely attractive opportunity.
The best positioned firms in the space have access to decades worth of resources to drive future production growth. Therefore, they are not subject to exploration risk or high depletion rates that plague most of the industry. These companies can focus their efforts on lowering costs and improving production methods. In fact, even at current oil prices, many of these firms are already highly profitable.