The Canadian Oil Sands are expensive and messy to mine. They also only make sense when oil prices are relatively high—like they are today. And mining equipment maker Joy Global (NYSE:JOY) thinks that will be a long-term trend, which makes Suncor (NYSE:SU) and pipeline operator Pembina (NYSE:PBA) good investment candidates.
An alternative oil play
The easy oil has largely been found, which is why drillers are increasingly in hostile locations, environmentally and politically, to replenish reserves. However, oil sands are a plentiful and relatively safe (environmentally and politically) source of oil if oil prices remain high.
Edward Doheny, CEO of mining equipment maker Joy Global, doesn't think this is a problem. During Joy's fiscal first quarter conference call, he noted that, "$100 per barrel sustained oil prices, along with improving technology, has resulted in oil sands becoming increasingly economical..." His company believes that the oil sands are, "...an attractive investment opportunity."
Digging it up
One of the first companies to mine the oil sands was Suncor. Today the company is producing record amounts of oil from the sands, hitting over 400,000 barrels per day in the fourth quarter of 2013, and it isn't done growing. It wants to increase that by 25% over the next four years.
It's streamlining efforts and investments in technology will help move that process along. For example, in 2013, Suncor brought new hot bitumen facilities online that allowed it to increase production from its mining operations. According to Suncor CEO Steve Williams, "The net result was an increase of approximately 40,000 bbls/d of bitumen production." Upgrades and process improvements have also allowed the company to add, "...over 4% to the nameplate capacity of our refineries in the past two years."
Clearly, Suncor is working to get bigger. But, one of the big concerns about oil sands is the environmental impact. There, Suncor has used new technology to cut greenhouse gas emissions from its oil sands operations by, "...more than half since 1990..." More oil, more environmentally friendly—what's not to like?
Oil remains a commodity, no how matter how good of a miner Suncor is, so look for oil price movements to have a big impact on the top and bottom lines. That said, Suncor's dividend has been increased annually for a decade, which shows there's some level of consistency in the company's results and a strong commitment to shareholders.
Getting oil out of the oil sands is one thing. Getting it to market is another, and that's where Pembina comes in. In its early years, this Canadian pipeline company was largely dedicated to moving oil sands product. Even today it holds a leading position as the, "...sole transporter of crude oil for Syncrude Canada Ltd. (via the Syncrude Pipeline) and Canadian Natural Resources Ltd.'s Horizon Oil Sands operation..." It also serves customers in other major oil sands regions, too. In fact, Pembina has used that strong base to diversify its business into other areas, like natural gas pipelines, which are now bigger contributors to its overall results than its oil sands operations.
However, oil sands, which makes up about 15% of Pembina's business, remain a core growth vehicle. In the fourth quarter of 2013, volumes on its oil sands-focused Nipisi pipeline exceeded contracted capacity. An investment in a new pumping station was the reason, but it shows that there's more demand than capacity -- a good sign for continued growth. Also, Pembina is planning to build a new oil sands pipeline, Cornerstone, that it hopes to have online by the end of 2017.
The shares pay a monthly dividend and yield around 4%. The dividend has been increased regularly, with annual hikes in each of the last three years. Pembina's toll-taker business isn't a bad option for more conservative investors, even though they provide less exposure to the oil sands.
Easy oil, big opportunity
With Russia taking over Crimea and increasingly difficult exploration efforts, it's easy to see why companies would like Canada's Oil Sands. Suncor is a direct play on the space and a good option for long-term growth. Pembina is no longer as direct an investment, but it plays a big role in moving oil sands product. And that opportunity isn't over yet.