Posted on Stockhouse:
"Follow the money" isn't a bad mantra for those of us in this business of writing about financial news. It's also a good mantra in the investment business as investors try to figure what the smart guys are doing.
One of the country's smartest investors -- Seymour Schulich of Franco-Nevada fame -- has decided oil and gas, specifically the tar sands, is the best place for big returns in the next few years.
Schulich, who sold control of Franco to Newmont Mining a few years back, has backed up his view with a major investment.
He owns 2.5 million units of Canadian Oil Sands Trust. The country's largest oil and gas trust has a 35% stake in the Syncrude joint venture.
News of Schulich's stake -- together with the six million units held by Newmont -- will be officially disclosed later this week in a U.S. regulatory filing.
At current prices -- the units closed yesterday at $56.77, a 52-week high -- Schulich's stake is worth $142-million.
"It's my single largest investment," said Schulich, who turns 65 early next year. But like a good value investor, Schulich didn't buy at current prices: his average cost is around $44 a unit.
He contends his return will be a lot more too. He's looking for what is known as a multiple bagger. Based on the formula he used, assuming an oil price of US$50 a barrel -- and using a 10% discount factor -- he feels the units will be worth $207 in three years.
"I bought this thing to make four times on my money in three years," he said.
If Schulich's view materializes, it means investors are being offered the chance to buy assets for 25 cents on the dollar. Schulich said Canadian Oil Sands is the country's "most leveraged" stock to oil prices: each US$1 increase in the price adds, in net present value terms, $7 to the share price.
Schulich's due diligence on his investment included a visit to the facility in Alberta, which left him impressed -- not easy for a person who has seen more than 100 gold mines in his career. He listed a couple of key reasons:
- When the project's current expansion is completed, Syncrude will have spent about $18-billion. Those assets would cost about $30-billion to replace.
- The sheer volume of production. "They mine as much material -- about 1.6 million tonnes a day -- as Newmont does and Newmont has 16 gold mines around the world."
The investment also fits in with his "optimistic" view of oil prices. He expect oil prices will be in the US$40 to US$50 a barrel range for many years -- a view that isn't universally shared. When there is a supply disruption, he feels that oil could "spike" to US$70 a barrel.
"I don't see the oil price coming down dramatically any time soon," he said, adding, he figures Canadian Oil Sands is trading at the equivalent of US$27 a barrel.
It's undervalued, in part, because the analysts use too-low an oil price when they model such companies.
"They use US$30 a barrel. Oil ain't US$30 a barrel," he said adding the gold producers would also be a "sell" if a price of US$300 an ounce was used.
Schulich argues the analysts should use a blended forward price because such a price is available. Given that oil can be sold seven years forward, Schulich said analysts should use the average price over the next seven years. And that average price is near US$37 a barrel. |
