The Triumvirate Ruling the Canadian Oil Sands

In a previous article, I discussed three underrated small-cap producers involved in the Peace River area of the famous Canadian oil sands. My last article looked into three buried gems in Cold Lake. In this article, I will discuss three major producers that are well-engaged in the most prolific area of the Canadian oil sands, the Athabasca region. My triumvirate is generating serious cash flow and has grown exponentially since being involved in that play.

The great Canadian oil sands
The Canadian oil sands represent the second largest reserve of oil in the world. They are also the largest supplier of crude for the U.S. At year-end 2004, the region contained an ultimately recoverable crude bitumen resource of 315 billion barrels, with remaining reserves of almost 174 billion barrels.

The Canadian oil sands can be divided into three specific regions, Peace River, Cold Lake, and Athabasca. Notably, the Athabasca region is estimated to hold total reserves of 1.34 trillion barrels of oil within two formations, Grosmont and Wabiskaw-Mcmurray. About 8% would be recoverable given the existing technologies. Therefore, Athabasca would hold reserves of  approximately 134 billion barrels of oil, representing a tremendous catalyst for the producers involved in the area.

The Athabasca rulers
My first privileged member of the triumvirate pioneered the commercial development of the Canadian oil sands in 1967. Since then, Suncor Energy (NYSE: SU  ) has grown to become a globally integrated energy producer, the fifth largest North American energy company.

Suncor's production is growing for more than 6% year over year. At year-end 2011, its production averaged 305,000 Bbls/d. Last year, it totaled 324,000 Bbls/d, and so far this year, 344,000 Bbls/d. Regarding its oil sands operations, Suncor reported second quarter production of 276,600 Bbls/d, representing more than 80% of its total production. Furthermore, it has generated quarterly cash flow from operations of $2.25 billion.

The producer owns several quality assets in Athabasca such as Millennium, North Steepbank, Firebag and Mackay River. Furthermore, it owns 12% in working interest in Syncrude, a joint-venture operating in the oil sands as well. For the second quarter of 2013, Suncor's share of production amounted to 32,800 Bbls/d.

Suncor also invests substantial amounts in R&D annually, developing new technologies to recover oil more efficiently. The producer still has tremendous upside with more than 6.9 billion barrels in 2P (proved and probable) reserves as well as 23.5 billion barrels in contingent resources, making Suncor a formidable cash flow generator.

My next pick is a wholly owned subsidiary of CNOOC (NYSE: CEO  ) , the major international Chinese oil and gas producer that made a splash in early 2013 in Canada, acquiring Nexen for $15.1 billion. The bold move allowed CNOOC to finally get involved in the oil sands with 100% working interest. Also, by acquiring Nexen, it ensured CNOOC would strengthen its global presence in the North Sea, West Africa and the Gulf of Mexico.

Nexen has an interest in more than 300,000 acres in the Athabasca region. Production averaged 197,900 Boe/d in 2012, 4% lower than 2011. For Q3 of 2013, production averaged 181,000 Boe/d from 213,000 Boe/d achieved during the last quarter. The drop was attributable to scheduled turnarounds.

Nexen generated cash flow from operations of $2.65 billion, an increase of 12% from 2011. Nexen has also a 7.23% working interest in Syncrude, where its share of production averaged 20,700 Bbls/d for 2012. Nexen added about 22% in CNOOC's production at acquisition time, as well as 1,122 Mmboe of 2P reserves to CNOOC's reserves.

Headquartered in Calgary, Alberta, Cenovus Energy (NYSE: CVE  ) currently has two producing 50/50 joint-venture projects with ConocoPhillips in the oil sands, Foster Creek and Christina Lake. These two assets combined are producing about 218,800 Bbls/d, and there is plenty of room for more. As a matter of fact, Christina Lake's Phase E expansion will add 40,000 Bbls/d to total production. Still, 160,000 Bbls/d expansion is scheduled in four additional phases from 2016 to beyond 2020.

Foster Creek is also scheduled for five additional phases that would add 190,000 Bbls/d to total production, from 2014 to beyond 2020. Moreover, Cenovus is developing Narrows Lake near Christina Lake. This emerging project is expected to have a total production capacity of 130,000 Bbls/d that will be developed in three phases. The construction of the initial phase of 45,000 Bbls/d began in the fall of 2012, and ramp-up is scheduled for 2017.

Cenovus reported an average of 176,938 Bbls/d for the third quarter, from which 101,824 Bbls/d was produced in the oil sands. This production generated $932 million in quarterly cash flow from operations. The producer is still growing nicely, and with more than 3.1 Bboe in 2P reserves, Cenovus has terrific potential.

My Foolish conclusion
Without a doubt, my Canadian oil sands triumvirate is the most prolific group of producers in the area and has tremendous potential down the road. Athabasca holds about 134 billion barrels of oil, and the producers involved are making the most of the opportunities that the region has to offer. These three producers are solid financially and rely on strong balance sheets.

The Canadian oil sands aren't only one of the most prolific oil producing regions in the world, but also one of the safest places to operate. Therefore, if you're not a "member" of that ultimate club, now is the time to take the plunge and claim your share.

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