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    Saturday, October 09, 2004


    Updated valuation on Canadian Oil Sands (COS.un) and OST

    This is an update to my valuation on Canadian Oil Sands (COS.un COSWF) and Oil Sands Split Trust (OST.un).

    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!

    Hello there!!

    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.

    I'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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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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