At least for Alberta, the oil sands are going to be a hugely important resource going forward. Estimates vary, but experts agree that there’s a lot of bitumen still in the oil sands. Most figure there’s at least 100 years of crude left, based on current production. Once you add up all the production of all the major producers in the region, you get more than two million barrels of oil being taken out of the ground — per day. Thanks to all the new production coming online over the next few years, that’s expected to nearly double by 2022 to…
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At least for Alberta, the oil sands are going to be a hugely important resource going forward.
Estimates vary, but experts agree that there’s a lot of bitumen still in the oil sands. Most figure there’s at least 100 years of crude left, based on current production. Once you add up all the production of all the major producers in the region, you get more than two million barrels of oil being taken out of the ground — per day. Thanks to all the new production coming online over the next few years, that’s expected to nearly double by 2022 to almost four million barrels per day. That’s a huge amount of energy.
Of course, there’s the issue of getting this energy to refineries. If pipeline growth doesn’t keep up with the growth in production, there could be an issue, but pipelines are quite aware they need to add capacity in the region. Getting regulatory approval can be a long process, but it’s happening.
There are three main players in the oil sands — Suncor Energy Inc. (TSX: SU)(NYSE: SU), Canadian Oil Sands Ltd (TSX: COS), and Cenovus Energy Inc (TSX: CVE)(NYSE: CVE). While I think there’s a case for owning any one of these three behemoths, let’s look at three reasons why Cenovus should be the one you choose.
1. Great production growth
Since 2009, since the company split from Encana Corporation, its oil sands production growth has been strong, rising from 44,000 barrels per day to 102,500 barrels per day in 2013. So far, in 2014, oil sands production is up again, averaging 125,000 barrels per day.
But that’s not all. The company has several new projects in various stages of development for the region. It’s expanding both its Foster Creek and Christina Lake properties, as well as moving ahead on the first phase of construction of its Narrows Lake property. Narrows Lake is slated to begin production in 2017 at 45,000 barrels per day. Additionally, the company got approval to begin construction on its Grand Rapids project, which is expected to produce 180,000 barrels of oil per day. No timetable has been set for Grand Rapids yet.
Based on these new projects and expansion of its existing properties, it’s not out of the question to see Cenovus triple or quadruple its oil sands output over the next decade. That’s remarkable growth for a company with a $25 billion market cap.
2. Rising dividend
Cenovus is a great dividend play, too. Its shares currently yield 3.2% and boast a payout ratio of under 70% of net earnings. When you compare the dividend to the company’s cash flow, it drops dramatically, to just over 20%. Even during this time of heavy capital investment by the company, investors can be assured of a safe dividend.
Management has even been increasing the dividend, from $0.20 per share in 2011 to $0.27 today. Considering how dividend growth is a stated company goal, look for it to continue in the future.
3. Non-oil-sands operations
When investing in an oil sands stock, investors can get hammered if something goes wrong in the region. This is why it’s important to look at other operations.
In 2013, Cenovus had approximately 75,000 barrels of daily production from outside the oil sands. It has operations south of the oil sands, as well as operations just outside Weyburn, in the Bakken fields of southern Saskatchewan.
Additionally, Cenovus also co-owns two oil refineries in Texas with Philips 66, an unrelated company in the U.S. These refineries offer nice diversification, providing the company with more than $1.1 billion in operating cash flow in 2013.
Cenovus has terrific growth potential in the oil sands, some nice assets away from the region, a solid balance sheet, and an even better dividend. If investors are looking for an oil sands play, it doesn’t look like a bad choice.
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Fool contributor Nelson Smith has no position in any stocks mentioned.