Oil sands stocks: What's driving an unlikely surge

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A funny thing happened while energy investors were crying in their beer – some of the most beaten-down stocks rebounded in a big way.

That was even before Tuesday's spike in crude prices. It was easy to miss amid the flow of gloomy headlines, from cuts in corporate spending and dividends to drastically weaker Calgary real estate stats to forecasts of squelched economic growth in Alberta and nationally. Oil's a fickle mistress.

Now, have a look at the Toronto Stock Exchange's oil and gas group. It has rocketed up nearly 14 per cent in the past three sessions, having risen another 4 per cent on Tuesday. U.S. oil prices have been most supportive, climbing from below $45 (U.S.) a barrel to above $53, the highest this year.

There's more at play, though. It has to do with how companies' market values had been pummelled out of whack, even considering sharply weaker outlooks for energy markets versus just a few months ago.

Nowhere is it more evident than with Canadian Oil Sands Ltd., the company that's essentially a proxy for the Syncrude Canada Ltd. project in northern Alberta. The shares have been unstoppable since bouncing off a nearly 14-year low of $6.52 (Canadian) last week.

It started with a confusing few hours last Thursday, when, according to regulators, the company's decision to slash its dividend leaked early, causing the shares to skid before being halted. The Investment Industry Regulatory Organization of Canada cancelled thousands of afternoon trades.

Since that day, Canadian Oil Sands is up more than 70 per cent, closing on Tuesday at $11.35, vastly outpacing the sector.

Let's back up. Canadian Oil Sands has a 37-per-cent stake in Syncrude, which started commercial operations in 1978. It's the largest single interest-owner, but does not operate the highly complex works.

According to TD Securities, the operation – which mines the oil-soaked sands, separates out the gooey crude then turns it into light-grade refinery feedstock – breaks even at a West Texas intermediate oil price of just under $50 (U.S.) a barrel. Canadian Oil Sands and its partners, already trying to solve a problem of frequent equipment failures, took some tough medicine to deal with that.

Moves include deferring planned activities at the site to reduce costs, as well as undertaking what Canadian Oil Sands referred to, somewhat imprecisely, as "work force initiatives." The company also slashed its dividend by 86 per cent to 5 cents a share (Canadian), nearly obliterating its yield.

So, in the darkest hours of last week the company's shares slumped, making it a unique bargain for any company wanting a light-oil manufacturing business for a small fraction the value of previous deals for stakes in the project, or the price it takes to build a new one. It made the most sense for another member of the Syncrude fold.

Imperial Oil Ltd., which has a 25-per-cent stake in the project and, though its parent Exxon Mobil Corp. essentially manages it, was discussed as having the most to gain. The company declined to discuss even the idea, citing a no-comment policy on market speculation. Still, it's a wager some investors made in recent days.

Here's why: Deep-pocketed Imperial, not prone to knee-jerk reactions to commodity prices, is staring down weak energy markets and pushing ahead the second phase of its Kearl oil sands project and it's not a cheap venture. Imperial's per-barrel cost to build Kearl, which has no plant for upgrading, was much higher than the per-barrel cost of snapping up Canadian Oil Sands's stake, upgrader and all.

Of course, there would be complications, including Imperial's already-massive exposure to the oil sands, which also includes its Cold Lake project, and its hands-on experience with Syncrude's operational problems.

Now, given the subsequent market action, there's the added wrinkle of Canadian Oil Sands's rising share price, which has quickly made the trade less of a screaming buy, especially factoring in a premium to offer shareholders.

Not that Canadian Oil Sands investors are complaining. Deal or no, they've make up some lost ground, and fast.