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Saturday, October 09, 2004
Updated valuation on Canadian Oil Sands (COS.un) and OST
I reran my dividend discount model for COS with the latest CAD/USD exchange rate and the latest futures prices for oil. I now get a value of about $166CAD per unit.
My previous valuation in august was about $138CAD.
that's about (105CAD) on both COS.un / COSWF and OST.un which on a percentage basis is about 170% upside on COS and about 270% on OST.
These results are very leveraged to long term oil prices. If the supply and demand fundamentals for oil really do support a long term price of $50 then my model has COS worth about $250CAD but frankly I suspect that is a low number (and the current xchange rate is also too low, I think they'll go to parity). At parity and $50 the value is around $170CAD and parity with 100USD oil long term is about $425CAD.
Remember $100 oil is around the inflation adjusted all time high for oil. We very well may be around the production peak with demand continuing to grow. On that basis $100 is probably pretty low.
Anyway, the important thing to remember is; if oil has a long term price of 37.16 US then you can nearly triple your money in OST!
I stumbled onto your blog and thought I'd drop in and say hi.
Anyways, we do have something in common -- we are both long cos.un.
However I am not nearly as optimistic as you.
What assumptions are you using for your discount dividend model to get $166? What is your cost of capital and what are your cash flow assumptions for this valuation.
In my model, I assume $40 oil and am getting a potential distribution of $10/unit starting in 2007 ie once the phase 3 expansion is complete. Now if I was looking at the stock in 2007 and I saw a $10/unit distribution stretching far into the future, I would be willing to pay roughly $100 for that. So basically I have a 2 year price target of $100 on this stock. Add to that the 2005, 2006 distributions and I am looking at a compound annual return in the mid thirties with a moderate level of risk. Not bad, but not up to the value that you are estimating.
Good luck.
Dave
: 7:00 PMI'm using a discount rate of 10%, which is actually pretty high because their weighted average cost of capital is below 7%. I used the futures market for my price of oil calculations (for the post on Oct 9th I used the futures prices on Oct 9th which were $53 for the nearest month out to $37 in 2010.
I have COS debt free by 2008/2009 and a dividend of $12 in 2008 increasing by about a dollar to a dollar and a half a year. The model I have used is quite comprehensive and calculates cost increases based on inflation as well as maintainance capital expenditures.
Thanks for the comments, I think we're all going to do well in COS!
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