Canada’s oil sands are regularly attacked by environmentalists, politicians and movie stars. But whether you like it or not, the 170 billion barrels of oil sands reserves can only be ignored at your own portfolio’s peril.
There’s a lot of money to be made from the oil sands. That’s because there’s a lot of money invested in the sector – $20 billion in 2012 according to CAPP forecasts, up from $19 billion in 2011.
Oil sands companies make a pretty healthy return with oil prices above $60 per barrel WTI. Forecasts are calling for WTI prices to average in the $90-$100 range in the next few years.
But investing in this sector doesn’t have to be a play on the price of oil.
Through camp providers, you get all the upside of the oil sands sector minus the volatility and the risk associated with the price of oil. Is that possible?
Yes and the reason is simple: these camp providers enjoy predictable, stable recurring cash flow. Oil sands workers represent approximately 70% of the Canadian camps market. A market that is expected to grow significantly on the back of rising investments through 2025.
The first company is Horizon North Logistics HNL.TO $2.32 [+0.18]. HNL offers customers a broad array of services through 3 divisions:
- Camps & Catering
- Full service accommodation and food services to companies involved in developing natural resources in remote regions such as northern Alberta, Nunavut or the North Western Territories. HNL basically builds and manages work camps in the middle of nowhere where local infrastructure is non-existent.
- Matting Solutions
- A full service matting solution consisting of manufacturing, sales and rentals of mats, trucking, repair and maintenance, inventory control and storage. Matting is deployed over unstable, wet or frozen ground to facilitate operations by heavy equipment. Customers are predominantly the oil and gas companies in the WCSB.
- Marine Services
- Offshore logistics including tugs and barges used for the transportation of fuel and equipment. Camp/work barges are used to house working crews.
HNL derives a significant portion of its revenue from the oil sands sector, 60% in 2011. Let’s put it bluntly here, the company makes money from renting beds, toilets and providing internet access to camp workers.
The second company is Black Diamond Group BDI.TO $15.05 [+1.11]. BDI also makes its money in the remote accommodation business. The company operates 4 business segments:
- Work Force Accommodation:
- Provide remote workforce accommodations (just like HNL).
- BOXX Modular
- Provide modular office/storage solutions for urban & industrial customers.
- Energy Services
- Supply oilfield equipment and services for drilling & completions (nuts & bolts required on a drilling site)
- Provide the services of transportation, installation, dismantling, repair and maintenance of modular structures.
BDI’s business is predominantly driven by the resource sector; In Q2-12 Oil sands projects accounted for 21% while conventional oil and gas activity accounted for 46%. The company owns over 2 million square feet of net leasable modular space used across its divisions. This rental business is accompanied with value added services (logistics, maintenance etc.) – it’s very lucrative.
HNL estimates there are currently ~58,000 beds in the Ft.McMurray region with future additions totaling more than 21,000 beds.
Both companies enjoy a diverse asset base & geographic reach. You’re not only profiting from the oil sands, you get to profit from unconventional oil and gas operations along with LNG, mining and Hydro sectors across Western Canada.
Finally, to top it off, both companies pay a sustainable dividend funded from internally generated cash flow. These companies still have a lot of visible growth ahead; new project expenditures in the sector could exceed $100 billion through 2016. The future appears to be bright and the market seems to agree; just look at the charts of HNL and BDI. Both stocks have been top performers in the oilfield services sector.