Seeking the King of the Oil Sands

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Back in February, the folks at Macquarie gave us a rundown on all things oil sands, including the research shop's estimates for breakeven costs, what factors are most critical to a low-cost operation, and who the sector's standouts are.

This week, another top shop is out with an updated spin on the oil sands. This is pretty timely, following the year's biggest IPO, not to mention China Petroleum & Chemical Corp's proposed purchase of ConocoPhillips' (NYSE: COP  ) 9% Syncrude stake.

Calgary-based Peters & Co. estimates that oil sands projects employing steam-assisted gravity drainage (SAGD) technology to produce bitumen need $55 per barrel to break even. That's up from a previous estimate of $50, reflecting higher average costs than the company had previously modeled. Macquarie pegged breakeven (defined as a 10% after-tax rate of return) at a slightly higher $61 per barrel in its February report.

Whether Peters or Macquarie has the better break-even estimate, SAGD economics look very attractive at today's oil prices. Of course, that's only on average. Some projects, like Nexen's (NYSE: NXY  ) Long Lake play, are not faring particularly well. Investors need to focus on the best-in-class operators here.

As discussed in the Macquarie report, Devon Energy (NYSE: DVN  ) , Cenovus Energy (NYSE: CVE  ) , and Suncor Energy (NYSE: SU  ) are some of the lowest-cost oil sands players. The Peters crew concurs with those picks, and adds Imperial Oil (AMEX: IMO  ) as another efficient operator for investors to consider.

Imperial has been active in the space for decades, with pilot production at Cold Lake tracing back to the mid-1960s. Imperial developed the cyclic steam stimulation (CSS) process, a SAGD alternative under the right conditions, in-house, and has used it to pump more than 1 billion barrels of bitumen out of the ground.

This is another strong name in the space, though you should be aware that a significant portion of Imperial's future growth will come from the Kearl project, an open pit mining joint venture with ExxonMobil (NYSE: XOM  ) . If, like me, you're more keen on SAGD, you might prefer to keep your focus on Cenovus.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.

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  • Report this Comment On April 26, 2010, at 1:49 PM, prginww wrote:

    I plan to stick with NXY- according to the 2009 annual report, Long Lake has proved reserves of 318 [mmboe] as of 12/09 and probable reserves of 888. This is high quality crude that sells a a premium. Their total combined proved +probable is 2.2 billion boe represents a 25 yr reserve life, not counting shale gas and sands. To date, the oil sands project has produced 2.2 million of Premium Synthetic Crude. NXY expects that once Long Lake is operating at a steady rate, the company can realize a $10/bbl margin advantage- sounds like a low cost producer to me! I also like their North Sea exposure and the promising Golden Eagle area- which could be the 2nd largest discovery in a decade[ 150 million boe]. NXY is the 2nd largest oil producer in the North Sea-thanks to Buzzard-their UK team has found more than1 billion barrels over the past 5 years. Buzzard produces 200-220,000 boe/d-[86-95,000 net to NXY]; it is expected to produce at this level until 2014.

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