The Commodity Investor Q&A
With Matt Badiali
February 4, 2009
Q: I saw Total bought UTS Energy for $617 million. Does that mean the tar-sand companies have hit bottom? – A.H.
A: How much would you pay for an oil asset that cost you $10 for every barrel produced? Total, a big French oil company, thinks it's worth hundreds of millions of dollars.
It costs Suncor, one of the most efficient tar-sand operators, $49 per barrel to produce oil from its mines. That means the best operator in the industry is taking a $10-per-barrel loss today.
But last week, Total offered to pay $617 million (Canadian) for UTS Energy. UTS Energy's only assets are 240,000 acres of non-producing leases in the heart of the tar-sand region and two uncertain tar-sand projects.
Its largest project by far is a 20% slice of the Fort Hills mine. The major partner, Canadian oil company Petro-Canada, put the project on hold as costs ballooned from $14 billion to $24 billion and oil prices fell far below the expected costs to produce from the mine.
UTS' second project is a 50% stake in an even earlier stage project called Equinox. Equinox is just thousands of acres covered in low boreal forest and dotted with drill pads.
Finally, UTS has $319 million in cash and only about $100 million in debt. So after subtracting net cash, Total offered to pay is about $400 million for UTS.
UTS' total resource is about 2.1 billion barrels of oil. That means Total is paying just 15¢ per barrel for those assets. So the buyout is the oil industry equivalent of a Powerball ticket. It didn't cost much money and could be worth billions of dollars when oil prices climb back above $50.
UTS shareholders already got their payout. Shares closed January 27 at 87¢ and opened the next day at $1.80... an overnight gain of 106%.
Despite the big buyout, I'm still not ready to jump back into tar-sand investments yet. The jury is still out on how weak the global economy will be over the next few years. Given this uncertainty, I prefer the safety and diversity of large "supermajors" right now. They pay solid dividends and have the financial strength to weather a period of low oil prices.
But if you are bound and determined to get into the tar sands right now, make sure to focus on companies with the qualities that rewarded UTS shareholders: cheap assets, low debt, and lots of cash.
Q: What is clean coal technology, and can I invest in it? – M.R.
A: The phrase "clean coal" has more spin today than "sexual relations" did back in the 1990s.
Raw coal is full of noxious compounds that cause old-fashioned air pollution and acid rain. In the 1980s, "clean coal" meant getting rid of all those compounds, like sulfur and nitrogen. Today, the new "clean" is no carbon dioxide. That's the problem...
Coal is really just a rock that contains more than 50% carbon. We burn coal to generate electricity. The result of burning is carbon dioxide. But there are a couple of ways to reduce the amount of carbon dioxide that gets released.
First, you can turn coal into natural gas. That means taking much of the carbon out and increasing the amount of hydrogen. Burning natural gas produces more water than it does carbon dioxide. Second, you can capture the carbon dioxide before it leaves the smoke stack and store it somewhere.
A few large energy companies are advancing these techniques. South Africa-based Sasol (SSL) converts coal to fuels and gases. Peabody Coal (BTU), the world's largest coal company, recently signed an agreement with ConocoPhillips to develop a coal-to-gas facility in Kentucky. And EnCana Corp (ECO), a large Canadian oil company, has been buying captured carbon dioxide to pump into old oil fields.
The problem with any of these companies is that the segment working with clean coal is tiny right now. So you're not going to get much of a boost if the clean coal movement takes off.
On the other hand, I don't think this is the time to speculate on tiny companies advancing still-new technologies. Money is too tight, companies can't get financing, and many will go out of business. You might as well buy a lottery ticket, because your odds of making money would be better (someone has to win the lottery, right?).
Good investing,
Matt
P.S. To submit questions for the Commodity Q&A, send me an e-mail and look for answers every Wednesday. Remember, I can't give personalized investment advice.
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