The media doesn't just give us the news anymore, it gives us the news with the drama turned up 1,000%. And bad news can result in some huge returns for investors.
A perfect example of negative publicity creating opportunity was the British Petroleum (BP) oil spill in the Gulf of Mexico in 2010. Day after day, while the oil flowed into the ocean the headlines were full of stories about the disaster. There was even a live camera feed from the bottom of the ocean showing oil gushing out on CNN 24 hours a day.
Any companies with significant operations in the Gulf of Mexico had their stock prices crushed. Not just BP or Transocean (RIG) -- the companies directly involved -- but all companies operating in the region.
And it didn't stop there. Deepwater drillers operating all around the globe were also sold off mercilessly.
The Macondo spill was a serious matter, but the fact that every company operating in the sector was crushed created a wonderful opportunity for investors with a contrarian constitution...
As you can see in the following chart, within a year of the spill the stock prices of many of these companies had completely recovered providing fantastic returns in just one year. I was lucky enough to buy a few of these companies in early July 2010 and sell them in March of 2011:
To me, this is proof that a contrarian investment strategy -- while sometimes nerve racking -- is often a successful one.
If a certain sector of the market is regularly appearing in the headlines in a negative light, there is a good chance that stock prices of companies in the sector are being overly discounted.
Today, I believe we are looking at another opportunity to make a fortune off of bad press.
There aren't many things that are more unpopular than the Canadian oil sands. The Keystone Pipeline discussion is in the news every week with more than a few Hollywood celebrities telling us how evil oil sands production is.
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In light of all the negative press, investors have seemingly soured on oil sands assets, and that has driven share prices down in the industry. The proof lies in the fact that stock prices of some of these pure play oil sands companies remain where they were when oil was less than half of where it is today.
High oil prices mean a big increase in revenues and cash flows, which should translate into higher share prices. The market can ignore that for a while, but over time it is my belief that it will be the cash generating ability of these companies that drives stock prices, not the fact that oil sands are unpopular.
As the father of value investing Ben Graham famously said, "in the short term the stock market is a voting machine, in the long term it is a weighing machine."
And there is a disconnect with one company in particular that could reward investors handsomely.
Have a look at the stock chart on Canadian Oil Sands (COSWF) below. Leading up to the financial crisis of 2008 shares of the company traded for over $50 per share. Then not surprisingly as oil crashed to around $30 per barrel, shares of Canadian Oil Sands crashed along with it -- dropping briefly below $20.
Fast forward to today, and we have oil prices that have more than tripled from the bottom in 2009 to over $100 per barrel. Meanwhile, shares of Canadian Oil Sands are still stuck just above $20!
The stock price has traded sideways for two years. That means the current shareholder base has built up an average cost at or around the current share price. These folks aren't going to be in a hurry to sell when this stock finally breaks out.
When you consider the leverage this company has to the price of oil, it seems downright ridiculous that oil can triple and Canadian Oil Sands shares hardly budge.
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The chart above which is from the most recent company presentation shows how Canadian Oil Sands' cash flow reacts to changes in WTI crude oil prices. As the price of oil goes, so too should go the shares of Canadian Oil Sands.
The chart shows that at $70 per barrel oil prices, Canadian Oil Sands generates about $1.30 per share in cash flow. Meanwhile at $100 per barrel oil, the company generates close to $3.00 per share in cash flow.
My point is that a $30 per barrel difference in oil prices more than doubles cash flow per share, and therein lies the disconnect between oil which has gone from $30 to $100 since 2009, and the Canadian Oil Sands share price which hasn't gone anywhere.
I've highlighted the fact that this company's shares should track the price of oil given its leverage to the commodity. Now I'd like to show you what I think this company is worth on a per share basis.
Figuring out what a publicly traded company is actually worth can be a difficult and inexact process. In a broad sense, for Canadian Oil Sands that is not the case.
That's because Canadian Oil Sands only owns one asset -- a 36.74% interest in oil sands producer, Syncrude.
Independent reserve auditors estimate that the Syncrude proven and probable reserves have a 44-year life at current production rates. There are also unbooked contingent and prospective resources beyond that which should significantly extend Syncrude's production window.
Only a mining project like what is found in the Canadian oil sands can offer that kind of long term production security. The environmentalists may not like it, but over time these reserves are going to prove to be extremely valuable for an energy starved world.
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Some simple math tells us that if a 9.03% interest in Syncrude is worth $4.65 billion, then Canadian Oil Sands' 36.74% interest must be worth $18.9 billion. That $18.9 billion translates to $38 per Canadian Oil Sands share.
Compare that to the current share price of $24, and it appears that there is almost 60% upside to reach the real value of this company's holdings.
It is also important to note that at the time Sinopec purchased the Conoco stake, oil prices were hovering around $70. Today, WTI is over $100 and global prices are even higher than that. That means my estimate of what Canadian Oil Sands' interest in Syncrude is worth should be conservative.
A purchase of Canadian Oil Sands by a larger company would likely result in a large capital gain for shareholders. If that transaction doesn't happen, this is also a company that should be a good long term hold as well.
At the current share price Canadian Oil Sands yields almost 6%, so investors get paid very well to wait. Plus, the company is also extremely well set up for the long term with some of the longest life oil reserves on the planet, through its stake in Syncrude.
Risks to Consider: While personally I think the world is going to desperately need every barrel of oil we can find, it is possible that the environmental movement and negative press could continue to hold this company's share price down. Some kind of massive environmental tax on oil sands production could also be a concern.
Action to Take –> Buy shares of Canadian Oil Sands, tuck them away and enjoy the dividend. If forty years from now oil prices are higher than today it is quite likely that your grandchildren could be enjoying an ever larger stream of dividend income from this very company. Or even better, someone acquires the company in the short term and you realize a nice capital gain.