March 29, 2010 / 11:16 AM / 10 years ago

RPT-BAY STREET-Dissecting the disconnect in oil sands stocks

(Repeats column that originally ran on Sunday)

* Oil sands stock prices still below two years ago

* Oil majors ascribe more value than investors

* Uptick in oil demand seen as trigger for share prices

By Jeffrey Jones

CALGARY, Alberta, March 28 (Reuters) - Canada’s oil sands producers aren’t feeling the love.

There’s no question that Alberta’s huge unconventional crude deposits hold some of the richest potential for supplying North America and even Asia with oil.

Investors don’t seem to care right now.

Maybe it’s fear that a rebound in development is fleeting after the 18-month downturn that prompted the halt of C$90 billion ($87 billion) of projects. It may be concern about what policy-makers might do in the name of cutting carbon emissions or tightening other environmental regulations.

Either way, stocks of oil sands companies still lag 2008 levels, and in some cases are up only a tad from 12 months ago, when economies had just begun to recover.

“There’s a disconnect. Global companies are seeing the value in the oil sands. They’re acting on it, and investors are not reflecting that same value in the stocks,” Versant Partners analyst Mark Friesen said. “Investors are telling the market that they’re not willing to pay for resources.”

Case in point: BP Plc’s (BP.L) recent deals aimed at kick-starting its oil sands operations. In the past two weeks, the British oil major took on Devon Energy Corp (DVN.N) as a partner in its Kirby oil sands project, then snapped up a majority stake in a property owned by Value Creation Inc.

Now look at shares of Suncor Energy Inc (SU.TO), the biggest oil sands producer which bulked up last year with a C$22.8 billion takeover of Petro-Canada. Closing at C$30.80 on the Toronto Stock Exchange on Friday, Suncor is down 38 percent from March 2008, a year before it even announced the deal.

Suncor Chief Executive Rick George said this past week he believed his company was “in the penalty box” for a couple of recent unplanned outages at his company’s oil sands upgrading operations, which is forcing cuts in production forecasts.

It’s tough to argue, given his two decades of experience with such matters. Nonetheless, of the well-known Canadian names most associated with oil sands only one, Canadian Natural Resources Ltd (CNQ.TO), operator of the Horizon project, is worth more than it was 24 months ago.

Friesen said therein lies the opportunity for investors. The trick is pegging the timing of a change in sentiment.

At the Reuters Canadian Oil Sands Summit in Calgary this past week, top executives and analysts said the recession had changed thinking in the industry.

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For stories, factboxes and video from the Reuters Canadian Oil Sands Summit click on: here

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In recent months, several companies, including Total SA (TOTF.PA), ConocoPhillips (COP.N) Husky Energy Inc (HSE.TO) and others, have rekindled investment plans.

But it is a far cry from the frenzied period through mid-2008, when the sky seemed to be the limit on how much developers would pay to bring projects to fruition, or even snap up leases that were still little more than moose pasture.

The boom, fueled by oil prices that topped $147 a barrel, stretched the labor supply and drove up the costs of materials like steel. That ended abruptly when crude tumbled into the $30s a barrel in the last part of 2008.

Now it’s back to around $80 and costs have dropped by an estimated 10 percent to 15 percent. So what’s the problem?

For one, there is uncertainty over how climate change policies in Washington and in U.S. states might affect the crude source. With health-care legislation now moving forward, a climate bill is one of the next items facing Congress.

Speakers at the Reuters summit, including Alberta Energy Minister Ron Liepert, are closely watching California and other states for low-carbon fuel standards and their potential impact on oil sands-derived crude. A big fear is carbon levies in multiple jurisdictions in Canada and the United States.

But the U.S. economy, which consumes one of every four barrels of the world’s oil output, is likely a much bigger factor, said Lanny Pendill, an analyst with Edward Jones.

Crude has been in the same range for the past six months, suggesting relatively flat U.S. demand. The upcoming summer driving season will show if a shift is taking place, he said.

“In the bigger picture, the answer lies in whether underlying companies are moving forward with projects or not,” Pendill said. “That’s my signal as to the market’s gauge of what the future climate picture might look like, and for the most part, most of the companies are bringing projects back.” (Editing by Frank McGurty) ($1=$1.03 Canadian)

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