August 24, 2015 - 8:21am EST by
2015 2016
Price: 20.36 EPS .33 0
Shares Out. (in M): 1,095 P/E 82 0
Market Cap (in $M): 22,200 P/FCF 0 0
Net Debt (in $M): 12,750 EBIT 1,750 0
TEV (in $M): 34,950 TEV/EBIT 13.3 0
Borrow Cost: General Collateral

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We are recommending a short in CNQ (US or Canadian shares).   We are focusing on Canadian oil sand shorts currently for the following reasons:

1) In any graph you see of marginal production costs, the Canadian oil sand players are usually much higher than competing technologies

2) The oil market is in a state of oversupply, and will likely remain this way for quite a while.  For instance, the forward curve for WTI oil doesn't show the price hitting $60 again untile 2024! (more about htis below)

3) The market price of the equities still hasn't reflected the change in oil prices


The basic economics of oil sands:

1) Low $30's cash cost to get what has already been developed out of the ground

2) Maybe $5 SG&A

3) $15 shipping (or is also reflected on avg of Western Canadian oil trading at a $15 discount to WTI)


So, currently WTI is trading for less than $40 / barrel, and Western Canadian oil is trading for $25 / barrel.  Every barrel of oil the oil sands producers make ends up costing them over $10!

Assuming the spread between WTI and WCS holds relatively constant, WTI would need to approach $55 for oil sand producers to be cash flow breakeven.... Which isn't expected until 2019/2010 on the forward curve.

This is clearly unsustainable economics for the oil sands region.  Even when WTI was $80+, the oil sands producers were not faring well.  At $40 they will have to shutter capacity and many will go bankrupt.  We picked CNQ for this write-up because its big, liquid, and 80-90% of its NAV (by sellside estimates) is related to oil sands / heavy oil. 

Our target price is $5/share as we zero out the value of the oil sands operations.  However, given weakness across the oil chain (i.e. still has significant assets in the North Sea) + nearly $13bn in debt + envirnomental liabilities + cash drag from current operations / winding them down, there could be further downside.

The brightside of this (for the oil markets) is that once oil sands production starts getting shut in, it may help to balance the oil markets (and other players should rally).

The major risk is oil price rebounds significantly from here.

Note: We are short and may cover at any time

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


1. No rebound in oil prices (or continue to fall)

2.  Production shut-ins announced

3. Sell/buyside analysts start signficantly writing down value of oil sands assets

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