Email of the day (2)
Comment of the Day

May 08 2012

Commentary by Eoin Treacy

Email of the day (2)

on oil sands:
“You know when bond guys start talking up commodities you should start taking notice. Bill Gross's latest missive ( ) highlights the inflation potential. He was (is?) not a fan of gold, but no matter, still finds assets in the "real" space he is warming up to. Jeff Gundach is finding opportunities as well.

“It's been tough love lately, but Jim Rogers is all over the networks lately advertising his commodity ETF's. He may have a personal interest in their success, but he's banging the drum. He particularly likes oil stocks, and since The Oil Sands now have fat dividends (COSWF-6.2%), you might revisit their long duration petroleum assets for subscribers. It's breaking out against majors like (Royal Dutch and Exxon), so might be a timely RV trade for bold investors on the pullback?”

Eoin Treacy's view Thank you for this interesting email. The Canadian oil sands represent a massive energy resource but also an expensive one to develop. The Canadian Oil Sands Trust has been ranging in the region of the 2009 lows since late last year despite the fact that oil prices have held above $100 for much of that time. It yields 6.54% but the pay-out has risen and fallen in line with the company's share price and therefore is at risk if prices decline further..

Oil sands suffer from a high cost of extraction relative to conventional crude oil. The capital expense of boosting production is also high. In addition, the evolution of the US oil shale sector is a headwind for oil sands because it is a domestic US resource that is competitive on a cost of extraction basis. Therefore, if Canada wants to economically exploit its energy resources it needs to diversify the markets for its products by building more pipelines to the West coast. The price of the Canadian Oil Sands Trust will need to find support in the region of C$20 if the base formation hypothesis is to remain credible.

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