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Buffett Watch: Canadian Natural Resources

Posted on: August 21, 2008 - Email Article - Printable Version

Charles W. Petredis

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Over the past week Warren Buffett and his other moderately rich friend Bill Gates were spotted touring facilities belonging to Canadian Natural Resources LTD [CNQ: 46.11, 0.00 (0.00%)], one of the largest Canadian oil sands producers. This should be very interesting and exciting news for investors who follow the Oracle of Omaha’s every step.

Buffett and Gates often invest together as they are great friends and Buffett advises Gates on matters concerning his wealth. What I found most interesting about this vacation to the north was the timing. Crude oil prices are down from roughly $148 to around $121 at today’s close. The reason this is important is because the costs of producing a barrel of crude from oil sands is generally quoted around at least $90 a barrel, if not more. (I have seen some quotes over $130 a barrel) If Buffet is interested in investing in oil sands and is willing to tour the facility after the energy sector and crude oil’s big run it tells me that he is obviously a long term crude bull. (Or at least a believer in the fact that more and more of our crude oil imports in the future will come from Canada.) I generally don’t like to bet against Buffett, his track record has been slightly better than mine.

The oil sands are a very interesting investment from a risk-reward standpoint. Currently only a small portion of the world’s crude oil output comes from oil sands although this has the potential to grow exponentially in the future with the unfathomably vast amount of reserves that Canada and other countries have. The biggest problem with the oil sands besides the input costs are the environmental factors as well as the amount of energy that is consumed to produce each barrel of crude oil. Oil sands also require a vast amount of very pure water to convert to crude oil. Advancements have been made in these fields but new and more efficient technology is needed. The scattered reports that have recently circulated of 2 headed turtles and 2 jawed fish swimming in the pools around oil sands facilities can’t be viewed as a plus, especially if PETA finds out.

Personally I think it may be somewhat early to invest in oil sands, especially when there has been a great deal of uncertainty around the next President of the United States and his respective energy plan. On top of that their may be new tax laws going into effect in Canada. Oil sands may be a good investment for those with high levels of risk tolerance. One of the other interesting oil sand plays that comes to mind is Suncor Energy [SU: 22.99, 0.00 (0.00%)]. Suncor is the biggest oil sands company in the world and is one of the best pure players in the sub-sector.

Disclaimer: The Author has no position in the equities, the authors family is long SU. The author is short PETA.

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