In strictly moral terms, the oil industry should not exist. Think about the geopolitical conflicts that have pit Western empires against the populations of the Middle East, Africa and Latin America, or the environmental effects of burning fossil fuels indiscriminately and you will understand why big oil is hated so much. But moralists don’t run the world. Assholes with huge appetites do. And they love black gold. They have pumped over 1 trillion barrels of oil from the ground (since the 1850s) and there’s an estimated 4.5 trillion barrels still waiting to be sucked dry according to the International Energy Agency (IEA). The name of the players change, but the objective remains the same. And while the “easy” oil is gone, new technology is making it possible to extract more from unimaginable depths, and at lower costs.
When the global recession caused oil prices to plunge the industry was devastated. Those who were leveraged to the hilt were forced to shutdown; others merged with bigger players or stayed nimble. Then came the solar and wind boom. Suddenly, everyone was talking about the death of oil and peak demand. But the supply and demand data is not always reliable. There is a paradigm shift to be sure, renewable energy is the future, but it is a future that will take a while to be fully realized. I certainly won’t live to see it. In the meantime, demand for energy will continue to grow.
Access to oil and natural gas is what’s driving China to Africa and the Middle East and drawing it closer to Russia. That’s because China is going to need massive amounts of oil and finding new reserves is a difficult thing to do on your own. The scale of those projects require the involvement of governments and large corporations. Transport and delivery is also a big challenge (another reason to own railroad stocks) but fortunes will be made building new pipelines.
This brings me to Canada’s massive oil sands reserves. There has been little enthusiasm for Canadian oil sands because moving that oil to market has been a logistical nightmare. Extracting tar oil is also a high capital enterprise that has crippled many companies. But this is where innovation and know-how come into play. Cenovus Energy, for example, has come up with a process that will dramatically reduce the cost of production. We’re talking break-even price at $45 per barrel. The company is a year or two away from making this happen, which is why I have decided to buy the stock now. Shares are seriously undervalued and the long-term outlook is promising. Cenovus is also a Canadian operation that has nothing to do with Middle Eastern politics or the kind of geopolitical turmoil that has tainted the reputation of so many in the past.
Below are some key points about Cenovus:
Cenovus Energy (CVE)
Current Price: $9.14
Fair Value: $16.00
Morningstar Profitability Rating: B
Reasons for buying:
- Strong balance sheet
- Able to navigate low oil prices
- Huge oil sands reserves
- Cutting-edge technology
- Refining capabilities
Data source: Morningstar