Everyone is telling you these days that the Canadian oil sands are the place to invest. Some commentators are talking about how the oil sands could produce more crude than Saudi Arabia, warning you not to miss the boat because investment dollars worldwide are about to flood to the region, making a fortune for all involved.

Most analysts will then go on to recommend stocks like Suncor Energy, Canadian Oil Sands Trust or UTS Energy as ways to cash in on the oil sands mania.

The problem: these three stocks—darlings of so many pundits—have a combined market cap of roughly $60 billion. There’d better be a lot of investment money coming… because it’s going to take a tidal wave of dollars to move the share prices of these large-caps.

True, if you had invested in these companies a year ago, you would have doubled and perhaps even tripled your money. Not a bad return. But with these stocks having already gained so much, so fast, it’s now going to take a double or triple of last year’s investment influx to achieve the same returns. As an investor in these companies you’re pushing a rock up a hill that’s growing steeper by the day.

That said, I am a believer in the oil sands sector. Simply put, political problems are looming in almost every major oil-producing nation around the globe. Iraq is a mess, with production still below the levels prior to the U.S. invasion. Iran looks like it may be next on Bush’s hit list. Nigeria has 420,000 barrels of oil production shut in because of attacks on pipelines and platforms. Russia is a Jekyll-and-Hyde game: one day happy to share its petro-riches with the world, the next turning off the taps to its neighbors. The Venezuelan government recently seized control of numerous oil fields, effectively evicting major companies from the country.

With all this going on, the Canadian oil sands may be the only significant oil reserve on “friendly” soil. As such, I’m not surprised to see the region getting a lot of attention. If I was U.S. energy secretary, I’d be shopping for a good townhouse in Fort McMurray.

But as a speculator, I’m always looking for ways to maximize my profits. Even though I see the oil sands as a sector whose time has come, I have a hard time sinking my money into a multi-billion-dollar company that’s on the lips of every Wall Street lackey. When everyone’s talking about something, you should look elsewhere.

But where? As speculators, I believe our best bet is to look for companies that are working oil sands plays in new areas that haven’t been recognized by the street. Go beyond the boundaries of the Suncors of the world to find the next big thing.

I’ll give you an example. In February of this year, an unknown numbered company, 1122131 Alberta Ltd, paid C$465 million for a set of oil sands leases in a part of Alberta that—at the time—looked to be rank moose pasture. The land was completely outside of the area where oil sands are known to exist.

Puzzled, our staff at Casey Research looked at the data and realized that the area was indeed a bust for conventional oil sands… but it was perfect for pursuing a completely new type of play. You see, the oil sands we usually hear about are hosted in sandstone that lies at relatively shallow depths. But many people don’t realize that there’s a completely different type of oil sands found deeper down, hosted in carbonate rock known as the Grosmont formation. In the March edition of the Casey Energy Speculator, we postulated this might be what 1122131 Alberta was after.

A few weeks later, our suspicions were confirmed. Shell announced that it was the player behind 1122131 Alberta, and it was indeed planning on pursuing the Grosmont.

Although this example of extending the oil sands into new areas didn’t provide a direct investment opportunity, it got us thinking about what other “new” oil sands plays might be lurking out there. Looking at a map, one possibility burned bright: Saskatchewan.

With attention focused on Alberta’s oil sands, few analysts have noted that development abruptly ends at the province’s eastern border with Saskatchewan. Do the rocks suddenly disappear? Unlikely.

In fact, looking deeper we found historical evidence that Saskatchewan hosts rich oil sands. Perhaps even richer than Alberta’s. The problem is politics. The Saskatchewan government has been all but closed to development, meaning that almost no companies have pursued projects here.

I say almost none because it turns out there is one little-known oil sands developer working in Saskatchewan. A company it just so happens holds a land package larger than all Alberta’s oil sands projects combined. With management that has already built one oil sands company into a billion-dollar player.

But despite these glaring positives, the company has gotten little love from the market. So much so that when we came upon it, it was trading at a $200 million market cap—tiny by oil sands standards. In December 2005, we jumped on the huge potential here and within three months saw gains as high as 315%—the kind of returns you get by going where others haven’t.

The best thing is that despite this run, the stock is still less than half the market cap of the smallest Alberta oil sands company—with potential for reserves that dwarf those of most Alberta players. I can’t mention the name here—it would be unfair to Casey Energy Speculator subscribers—but rest assured this is a story that will be receiving a great deal of mention in the pages of our letter.

© 2006 Doug Casey
Editorial Archive

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