Canadian Oil Sands Ltd. (fka COSWF)

[OilStockReport]

Good Upside here?

Canadian Oil Sands Ltd – Pure Oil Play

Canadian Oil Sands Ltd is, not surprisingly, a pure play on Canada’s oil sands. All production and reserves are 100% oil based. This is a company for oil bulls who don’t have reservations about investing in an oil sands producer.

Canadian Oil Sands Ltd fully upgrades 100% of its production into light, sweet crude oil and is completely unhedged. There are few if any oil producers as leveraged to the price of oil as Canadian Oil Sands Ltd. From a recent company presentation cash flow per share was provided at various oil prices:

$75 WTI - $2.75 cash flow per share

$90 WTI - $3.75 cash flow per share

$105 WTI - $4.75 cash flow per share

$120 WTI - $5.75 cash flow per share

If you want exposure to higher oil prices, COS is a good choice for you. When oil goes up, cash flow per share for Canadian Oil Sands Ltd goes up faster.

Canadian Oil Sands Ltd – Very Clear Valuation Metric

Canadian Oil Sands Ltd is a simple company to understand, and that is good, because otherwise I wouldn’t be able to value it with any confidence. Canadian Oil Sands Ltd only owns one asset: a 36.74% interest in Sycrude, which is an oil sands producer.

In 2010 Conoco Phillips (COP) sold its 9.03% interest in Syncrude Chinese company Sinopec (SHI) for $4.65 billion. Applying this valuation to Canadian Oil Sands Ltd’s 36.74% interest in Syncrude results in a valuation of $38 per share after backing out $500 million of net debt.

Compare that to the current share price and it appears that there is almost 60% upside to reach that valuation target -- and investors get paid a dividend yield of over 5% while they wait for the valuation to be realized.

I think it is important to note that at the time Sinopec purchased the Conoco stake, oil prices were hovering either side of $70. Today WTI is around $90, and for the rest of the world $110 oil is the price of the day. If anything, the asking price for a share of Syncrude has increased since the Sinopec deal.