The Secret Oil Sands

The Daily Reckoning PRESENTS: With China and India now requiring more oil than ever before, the Canadian oil sands have gained a lot of attention – but does that make it a good place invest? Doug Casey explores…


Everyone is telling you these days that the Canadian oil sands are the place to invest. Some commentators are talking about how the oil sands could produce more crude than Saudi Arabia, warning you not to miss the boat because investment dollars worldwide are about to flood to the region, making a fortune for all involved.

Most analysts will then go on to recommend stocks like Suncor Energy, Canadian Oil Sands Trust or UTS Energy as ways to cash in on the oil sands mania.

The problem: these three stocks – darlings of so many pundits – have a combined market cap of roughly $60 billion. There’d better be a lot of investment money coming… because it’s going to take a tidal wave of dollars to move the share prices of these large-caps.

True, if you had invested in these companies a year ago, you would have doubled and perhaps even tripled your money. Not a bad return. But with these stocks having already gained so much, so fast, it’s now going to take a double or triple of last year’s investment influx to achieve the same returns. As an investor in these companies you’re pushing a rock up a hill that’s growing steeper by the day.

That said, I am a believer in the oil sands sector. Simply put, political problems are looming in almost every major oil-producing nation around the globe. Iraq is a mess, with production still below the levels prior to the U.S. invasion. Iran looks like it may be next on Bush’s hit list. Nigeria has 420,000 barrels of oil production shut in because of attacks on pipelines and platforms. Russia is a Jekyll-and-Hyde game: one day happy to share its petro-riches with the world, the next turning off the taps to its neighbors. The Venezuelan government recently seized control of numerous oil fields, effectively evicting major companies from the country.

With all this going on, the Canadian oil sands may be the only significant oil reserve on “friendly” soil. As such, I’m not surprised to see the region getting a lot of attention. If I was U.S. energy secretary, I’d be shopping for a good townhouse in Fort McMurray.

But as a speculator, I’m always looking for ways to maximize my profits. Even though I see the oil sands as a sector whose time has come, I have a hard time sinking my money into a multi-billion-dollar company that’s on the lips of every Wall Street lackey. When everyone’s talking about something, you should look elsewhere.

But where? As speculators, I believe our best bet is to look for companies that are working oil sands plays in new areas that haven’t been recognized by the street. Go beyond the boundaries of the Suncors of the world to find the next big thing.

I’ll give you an example. In February of this year, an unknown numbered company, 1122131 Alberta Ltd, paid C$465 million for a set of oil sands leases in a part of Alberta that – at the time – looked to be rank moose pasture. The land was completely outside of the area where oil sands are known to exist.

Puzzled, our staff at Casey Research looked at the data and realized that the area was indeed a bust for conventional oil sands… but it was perfect for pursuing a completely new type of play. You see, the oil sands we usually hear about are hosted in sandstone that lies at relatively shallow depths. But many people don’t realize that there’s a completely different type of oil sands found deeper down, hosted in carbonate rock known as the Grosmont formation. In the March edition of the Casey Energy Speculator, we postulated this might be what 1122131 Alberta was after.

A few weeks later, our suspicions were confirmed. Shell announced that it was the player behind 1122131 Alberta, and it was indeed planning on pursuing the Grosmont.

Although this example of extending the oil sands into new areas didn’t provide a direct investment opportunity, it got us thinking about what other “new” oil sands plays might be lurking out there. Looking at a map, one possibility burned bright: Saskatchewan.

With attention focused on Alberta’s oil sands, few analysts have noted that development abruptly ends at the province’s eastern border with Saskatchewan. Do the rocks suddenly disappear? Unlikely.

In fact, looking deeper we found historical evidence that Saskatchewan hosts rich oil sands. Perhaps even richer than Alberta’s. The problem is politics. The Saskatchewan government has been all but closed to development, meaning that almost no companies have pursued projects here.

I say almost none because it turns out there is one little-known oil sands developer working in Saskatchewan. A company it just so happens holds a land package larger than all Alberta’s oil sands projects combined. With management that has already built one oil sands company into a billion-dollar player.

But despite these glaring positives, the company has gotten little love from the market. So much so that when we came upon it, it was trading at a $200 million market cap – tiny by oil sands standards. In December 2005, we jumped on the huge potential here and within three months saw gains as high as 315% – the kind of returns you get by going where others haven’t.

The best thing is that despite this run, the stock is still less than half the market cap of the smallest Alberta oil sands company – with potential for reserves that dwarf those of most Alberta players. I can’t mention the name here – it would be unfair to Casey Energy Speculator subscribers – but rest assured this is a story that will be receiving a great deal of mention in the pages of our letter.

Bottom line: if you’re considering investing in the oil sands – and I believe there are many reasons you should – or in any other “hot” sector for that matter, look for ways to “extend the trend”. Uncover opportunities that are beyond most investors’ radar at the moment, but which have the ability to benefit from the rising tide once they do break. Doing so, you’ll maximize your returns… and garner a great deal of pleasure when the talking heads on CNBC start touting the company you bought months ago as the next big thing.


Doug Casey
for The Daily Reckoning
April 11, 2006

Editor’s Note: As a staunch contrarian, Doug Casey rarely goes along with the investment mainstream…making subscribers of his Casey Energy Speculator a lot of money in the process.

As a Casey Energy Speculator subscriber, you can expect your stocks to double or triple (and sometimes much, much more than that) within a year or two. A return that virtually no other, reasonably risky investment will give you.

This is not a get-rich-quick scheme. It’s a meticulously researched and carefully selected basket of mostly Canadian junior energy explorers – companies with huge growth potential that are so new, or so small, or so little promoted that they have been completely overlooked by conventional investors.

A USA Today headline caught our eye, early this morning:

“CEO pay soars in 2005.”

And, no CEO’s pay soared more than the CEO of Capital One Financial. Thanks to a generous package of options and perks, Mr. Fairbanks took home almost $250 million last year – a sum greater than the profits of 550 Fortune 1000 companies, including Goodyear Tire, Reebok and Pier 1.

Do we begrudge him the money? Do we want to get together a mob to string him up by the heels and shake the coins out of his pocket? No, dear reader, not at all. In fact, we rather admire him – he’s succeeded in gaming the system. This fat squirrel has found the softest, coziest, niche in the ol’ oak tree. The median pay for CEOs of America’s 100 largest companies rose 25% last year…to $17.9 million. Mr. Fairbanks left them all writhing in the dust.

More power to him.

Do any of these hustlers deserve even $1 million, let alone $17 or $250? Probably not. There are probably plenty of people who would do the job just as well for less money. We say that from experience as well as theory. We have been CEO of our own publishing business for nearly 30 years. Nothing we ever did was worth $1 million in a year. Granted, it is a very small business, but running a small business is harder in many ways than running a big one. In a big company, you have squads of highly paid professionals to help you cheat the shareholders. In a small company, you have to do it on your own.

Mr. Fairbanks owes his fortune to two things: He heads a company that is in the debt mongering business at a time when debt has never been more popular, and he heads up a business whose owners are idiots. In theory, Capital One Financial’s profits should go to the capitalists who own it. Instead, a big chunk of them go to the managers…the wily hustlers who figure out how to hijack the enterprise for their own interests.

Or, take Mr. Ivan Seidenberg, CEO of Verizon Communications. In 2005, the top man at Verizon got a raise of 48% – to $19.4 million. Wow…you would guess that Verizon had a very good year, right? And, you would be wrong. Verizon’s owners saw nothing but misery. Their stock went down 26%. Their bonds were downgraded. Earnings declined 5.5%. The other managers had to be clipped back; 50,000 managers had their pensions “frozen,” according to the New York Times report.

How did Mr. Seidenberg do so well amidst so much financial suffering? He hired an independent consultant to help determine what his pay should be. This consultant noted that the company had exceeded its “challenging” benchmarks and rolled over.

But it turns out the consultant was not so independent after all. Instead, he had been doing business with Verizon for years and had received about half a billion dollars from the company since 1997. Neither Verizon nor the consultant is talking, according to the Times.

It happens everywhere, in every industry, in every government, in every body. The rot sets in. The parasites worm their way in. Eventually, we are all doomed to corruption, degeneration, and death.

There. How’s that for a happy note?

Well, there is a happy part, as we mentioned, yesterday. For even the swindles are often swindles. The company that employs a $250 million CEO has more money than it thinks; all it has to do is fire the man. The family that strains under the burden of heavy health care and education expenses could simply shrug it off. More below…

But first, we stand back in awe and wonder at the majesty of the whole swindling edifice. People have come to believe that they can build a heaven on earth – a big rock candy mountain, where thanks to the ever-improving miracles of central banking, compound interest, medical science, higher education, democracy and cosmetic surgery, they will live happily ever after.

History will stop. They can eat bon bons every day and their teeth won’t rot. They’ll be able to spend all their money, and still grow richer. Wall Street products will make them wealthier. The health industry’s products will make them healthier. The universities will make them smarter. Too bad it ain’t necessarily so…

More news from our team at The Rude Awakening…


Kevin Kerr, reporting from Connecticut:

“Hurricanes, Terrorism, Hugo Chavez or Murphy’s Law. One way or another gasoline prices are heading much higher this summer. Six dollars a gallon is not out of the question in some parts of the U.S.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.


Bill Bonner, with more of views from London:

*** “Americans ought to regard the word ‘growth’ with trepidation,” warns our friend James Kunstler.

“When invoked by presidents and economists, it is meant to imply ideas like ‘more’ or ‘better.’ It’s a habit of thinking left over from the exuberant phase of the industrial age, when there was always more of everything to get. Nowadays, though, as we enter the terminal years of cheap energy, the word ‘growth’ invokes a new set of ideas.

“For instance, ‘impossible.’ With the price of oil edging toward $70-a-barrel now, and likely to flirt with $100 by the end of the year, the effect will be higher costs for virtually all products and services, and tremendous stress on every socioeconomic organism from the family to government at all levels to the Ford Motor Car Corporation. The only ‘growth’ we might expect under these conditions is the growth in our exertions to stay where we are, and the truth is that many of the weak will simply fall behind.

“Another idea that ‘growth’ might invoke would be a fear of an unstoppable rising population competing for scarcer resources: incomes, energy, food, shelter. Surely this is one of the specters behind the illegal immigration issue, a dawning recognition that the American cornucopia is becoming an emptier basket, with fewer fruits, less energy, and not many gold nuggets left in it.

“The cheap energy era led us into a climax of surpluses, and these surpluses represented the general ‘more-ness’ and ‘better-ness’ of late industrial society. In a post cheap energy world, accumulated surpluses will be meager to nonexistent. There is bound to be a scramble for whatever is left. Geopolitically, this means a contest for the world’s remaining oil, which tends to be concentrated in just a few places. In each nation, there is likely to be a parallel scramble for whatever fruits, gold nuggets, and therms are still to be had, throwing off a lot of red-hot political sparks that will burn people. A lot of the remaining energy worldwide will be devoted to these scrambles, and thus essentially wasted.

“There are many ways of viewing this ‘growth’ predicament, and some strategies we can turn to in the face of it. An obvious one is to change our behavior, to stop acting as though our destructive, terminal, and futile activities were beneficial or indispensable. For instance, we could yield to the reality that the age of mass motoring will have to end. Instead of desperately seeking ‘alternative fuels’ to run our 100 million cars, we could make an effort to restore our railroads. Instead of a million McHousing starts out in the meadows and cornfields, we could repair our existing towns and cities. There is no reason why they cannot be rewarding, beautiful places. There may well be greater benefit in walking more and driving less. The well-off Americans who have visited Europe over the past several decades invariably notice this.

“Anyway, we are going to need every meadow, cornfield, and pasture that we have, because as cheap energy wanes, we are going to be desperate to grow enough food to feed ourselves – another reason to be wary of alt.fuel fantasies based on growing crops dedicated to gasoline substitutes.”

[Ed. Note: James Kustler’s latest nonfiction book, “The Long Emergency,” describes the changes that American society faces in the 21st century…and if you live in Western Pennsylvania, you’re in luck! Mr. Kunstler will be speaking on Thursday, April 13, 2006 at 7:00 PM at JOSEPH-BETH Books, 2705 East Carson Street, Pittsburgh, PA 15203 (telephone 412.381.3600).

Adding to the enjoyment of the festivities, Whiskey & Gunpowder’s Byron W. King will also be in attendance. So add this event to your calendar, and join Jim and Byron for a Peak Oil evening.]

*** Henry has been bringing us up-to-date on the status of globalized commerce as seen through the eyes of a French history teacher and recollected by a 15-year-old:

“She said the world has changed. We, in the West – well, actually she refers to it as the North – got a big lead in the industrial revolution. Now, we’re rich so we can afford to educate people. So, we don’t have to do the manual work anymore. In China and India, they now make everything. In the North – well, I guess she means in Europe, but she says Australia, America, and New Zealand are all in the North, too – we don’t have to make anything.

“We have service economies. You know, we make movies…and invent video games…and sell insurance. That’s why our countries can be clean. We don’t need any heavy industries. Besides, they don’t pay very well. And even though we don’t make anything, we still have so much money left over from the Industrial Revolution that we’re able to own the factories overseas – like Coca Cola. They sell Coke all over the world, and the profits go to the United States. That’s the way it works now. But, she doesn’t think its fair to the countries in the South.”

“Henry, what does she say about the riots in France over the new work rules?”

“She says that the government is trying to make France more like England and America,” replied Henry, “where people don’t have any rights. You know, you can fire people whenever you want…for no reason.”

*** Poor Jacques Chirac. Yesterday, he withdrew the CPE – the reform measure that would have made it easier to hire young people, and fire them, too. Who wants reform when you can earn a decent living without having to work too hard?

*** A letter about education expenses…and how to avoid them:

“We definitely think along the same lines! When we looked at the price tag for college for our (gifted, naturally!!) son, we ran for the nearest exit. (Though admit to having sweat blood to pay for his Friends School [in Baltimore] education – worth every penny and by graduation time, probably equivalent to most college diplomas) While his Friends went to Ivies and strangled their families financially, our son got in the honors program of a state university out west – and had a wonderful education, too.

“Later, he rejected Columbia and NYU grad school admission offers because of the ugly debt lurking under the offers, and got two master’s degrees from The New School – with lots less debt plus plenty of work experience. When I suggest to my friends that they invest in the best elementary & secondary schools (private or public, depending on where you live) and let college take care of itself (work-study, whatever), they look at me like I’m out of my mind.

“There’s a real fear that without a diploma from a top school, little Johnny or Judy will never succeed in life – won’t get that all-important interview, won’t be at the front of the line, etc. It’s tragic, really – one of my friends confided that she and her husband have over $200,000 in debt for their three kids’ education – going into their retirement years. She’s desperate, but has to keep up appearances, so the debt continues to rack up.”

*** Education, defense, wealth, health – who doesn’t want more? And, who can resist the simple logic – spend more on them and you will get more from them? But, the point of diminishing returns comes very quickly. Studies show that life expectancy can be greatly increased by a few simple measures – basic medical services, penicillin, decent nutrition, and sanitation. Beyond that, a man can spend a lot on health care. Still, he is likely to be carried to his grave by pallbearers who spent much less.