Gritty Profit Found In Oil Sands (IMO, SU, MRO)

By Dean Lundell | July 05, 2007 AAA

Everything is relative, including market capitalization. In the oil business, where the major firms have a larger net worth than many countries, there are also smaller firms worth looking at. "Smaller" in this case, means market caps of only $40 billion or so. We're going to take a look at three of these smaller companies, noting the differences, similarities and where their (and your) opportunities lie.

A Major League Parent
Imperial Oil (NYSE: IMO) is the largest integrated oil company in Canada and is 70%-owned by Exxon-Mobil (NYSE: XOM). With the expertise management brings, along with the firms technical prowess and the resources of Exxon-Mobil, this company is a model of operational efficiency and execution. Imperial Oil has a track record of exceptional returns on capital, increases in dividends and share buybacks.

Imperial's major focus is the oil sands in Alberta, Canada. Unfortunately, Imperial Oil is not alone in this focus. The company's challenges are systemic to the entire region - namely a shortage of qualified labor, access to day-rate equipment and the ever present governmental influences on royalties, taxes and the environment. These all combine to threaten cost overruns and delays in execution.

The good news is that is with its record of innovation and execution, if any firm can pull off a successful operation it's Imperial Oil. For example, IMO owns a 70% stake in the Kearl Oil Sands Project with Exxon-Mobil owning the other 30%. This one project should deliver 100,000 barrels a day starting in 2011 and eventually pump out 345,000 barrels per day. And this is just one project - there are others under development.

Oil Sands Pioneer
Suncor Energy (NYSE: SU) is the pioneer in developing the oil sands in Alberta. The company started forty years ago, and more than a billion barrels later, it's still at it. Last year SU pumped out 265,000 barrels of oil per day and its estimated reserves are about 15 billion barrels, decades of supply. Suncor Energy is completely independent, owning a 100% interest in all of its projects both upstream and downstream. This independence manifests itself in exemplary cost containment, at least to the extent it can be contained in this regional at the moment. Fortunately, Suncor has plenty of experience to draw upon.

If everything goes according to plan, the firm's current level of expansion should take it to roughly 350,000 barrels per day by next year. You should know that this region is famous for its uncertainty in terms of labor and raw material costs. Costs can, and do, skyrocket very quickly. Suncor's one major shortcoming is its lack of refining capacity.

Suncor is subject to the same regulatory scrutiny as every other company in this sector, but there is one very positive aspect - the company is local. The firm has no interests or exposure to some of the more esoteric locales in the world such as the Middle East and Western Africa.

Sticking Its Neck Out?
Marathon Oil (NYSE: MRO) has been engaging in high-risk, but perhaps, high reward activities lately. The company is sitting on proven reserves of roughly 1.3 billion barrels of oil and natural gas. This oil is located primarily in North America and the North Sea off the coast of West Africa. Recently, MRO entered into agreements to go back into Libya and further develop projects in Equatorial Guinea with the idea of selling into North America and Europe.

Marathon has replaced much of the production it lost from 2000 to 2005, but the firm's real strength is its downstream refining and marketing ability - the company owns seven major refineries and is trying to increase its capacity there.

Since being spun off from U.S. Steel (NYSE: X) in 2002, Marathon has also been funneling money into developing its refining operations and increasing capacity in the oil sands in Alberta. Exotic locals not withstanding, this is where MRO's opportunities lie, such as partnering with another company that doesn't have the capacity.

One Ratio That Matters
Perhaps you've noticed the lack ROE and margin numbers that I usually include with my articles. With these three companies, they're all solid. Where the real difference comes into play is the market capitalization to sales ratio. Imperial Oil is tad over 2-to-1 and has a P/E ratio of 16-times. Suncor Energy's market cap to sales ratio is almost 3-to-1, with a P/E of 17-times. Finally Marathon is about 2-to-3 and a P/E of 9-times. Our market are appears to be somewhat efficient. The past is not prolog - the market does not look back; it looks forward. And so must you.

For further reading, see our Oil Services Industry Handbook.

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