TER: Scary for shareholders, that’s for sure.

ML: Yeah, the stock has fallen off more. We’ll see what happens. It’s a great example of a very successful team that just got caught in the crosshairs of a very violent market.

TER: What about Husky?

ML: More of a stable business. Husky has a low breakeven price on their East Coast offshore production of light oil. They do have some oil sands exposure, and actually went into partnership on U.S. refineries with BP. So they’re more of a stable company that will for sure survive this difficult time.

TER: Do you cover just Canadian companies? How does that work at BMO?

ML: Yes, I just cover the Canadian intermediate and junior groups.

TER: Can you tell investors who may be looking to get into oil companies the value of an oil sands play vis-à-vis the value of, say, light crude? It sounds as if oil sands has a pretty darned expensive extraction process versus light crude, which is more along the lines of putting the straw into the big pool under the ground.

ML: Absolutely. That’s why all the conventional light oil plays were chased first. It’s just cheaper and easier. A big part of the cost component for oil sands is labor. Is it possible for labor to come down very hard to bring down the breakeven prices on oil sands? Probably, but for how long would be the question. Would it be maybe a temporary setback for two years, after which labor prices would just go right back up? No matter who you spoke to around the globe prior to the current credit crisis, they consistently reference tight labor markets.

I guess in terms of the oil sands players themselves, companies that did not have a project off the ground yet will not get it off the ground. For instance, UTS Energy Corp. (TSX:UTS), which is a partner in the Fort Hills project north of Fort McMurray, just issued a press release saying that it would be a multiple billion-dollar project, and they don’t have access to capital to be able to fund it now.

Oilsands Quest? A company like that is very interesting when we’re in the $100 per barrel oil price environment. But now if you do not have an asset base with a real cash flow platform, you’re not going to get from Point A to Point B because you need the capital. So I guess I would segregate the oil sands producers from those that have production and those that just have a project on paper. And then if you have oil players that can hit oil wells at lower breakeven prices—EOG has a very good Bakken play in North Dakota—that kind of play can make money at lower breakeven prices and is not as capital-intensive.

So in this environment right now, picking one over the other, I would say you could go with a Suncor, the top performer within that oil sands play. That being said, though, they’re both having troubles right now. I would suspect that if you’re buying an oil investment, you’re taking the view that prices will recover at some point. And if that means that the demand is coming back into the picture, the oil sands will be needed and revalued and there would be good appreciation there for companies with assets that are producing. So the Bakken and the oil sands both make sense for different reasons.

TER: Has Oilsands been pushed down further because of the production costs than a play like Bakken? Or have they been equally decimated by the market in general?

ML: No, I would say the oil sands companies that don’t have a good-sized scale of operations already producing have been hit a lot harder because of their inability to access capital. The Bakken players have been hurt, but they haven’t been killed.

TER: So what kind of movement in oil prices do you see in the near term?

ML: Likely testing the downside. OPEC meetings in the near term are likely the only catalysts to potentially provide support for Crude Oil prices.

Oil and gas analyst Mark Leggett joined BMO Capital Markets as an integrated oils associate in 2002. He was promoted to analyst in 2004. Based in Calgary, he covers Canada’s intermediate and junior oil and gas producers. A Chartered Financial Analyst (CFA), Mark previously gained twelve years’ industry primarily at Canadian Natural Resources. An oil and Natural Gas company that produced about 1,400 barrels of oil a day and had market capitalization of about $1 million in 1989, it has since grown to production exceeding 565,000 barrels per day and an enterprise value of approximately $30 billion. Its first delivery of light, sweet synthetic crude from Project Horizon is targeted for late in the fourth quarter 2008, with startup capacity pegged at 70,000 barrels per day, moving up to 110,000 barrels per day late in the first quarter of 2009. Future phases will see production of 232,000 - 250,000 barrels daily, followed in due course by an expansion to 500,000 barrels. As work continues on Phase 1, future expansions to the project are in the design and engineering stages. The University of Calgary awarded Mark his Bachelor’s of Commerce degree in finance in 1990.

Courtesy: The Energy Report
www.theaureport.com

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