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On the Money: American Sands Energy

Could North America’s most profitable oil sands play actually be on the other side of the border?

Jody Chudley is the author of The Punchcard Portfolio, a value-oriented newsletter with a focus on Canadian oil and gas stocks

Jul 25, 2014

by Jody Chudley

The Play

At the 2014 Berkshire Hathaway annual shareholder meeting, Warren Buffett said, “I think that the oil sands are an important asset for mankind.” Buffett’s partner Charlie Munger is on board as well. Earlier this year I came across a video of Munger talking about future oil prices. “Oil is absolutely certain to become incredibly short in supply and very high priced,” he said in it. “The imported oil is not your enemy; it’s your friend. Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you’re going to need to feed your people and maintain your civilization.”

Two centuries ago, the world had a population of one billion people. Today that figure stands at seven billion, and the only reason we are able to feed that many mouths is the production power of hydrocarbons. In the coming decades, not only is that population number going to rise but so will the number of barrels of oil that each person consumes on average globally. The growing middle classes in China, India and elsewhere mean that the rest of the world is moving towards a Western level of per capita oil consumption.

In other words, we are going to need every barrel of oil we can squeeze out of the ground. That makes Canada’s oil sands very important, and likely full of good long-term investment opportunities – Buffett certainly seems to think so, given that he owns $500 million of Suncor. But while it’s the biggest unconventional deposit in North America, it might not be the most profitable. That designation may belong to a formation in the state of Utah, of all places.

Why? One of the primary challenges of the Canadian oil sands is its remote location, and the costs that places on producers throughout the supply chain. Utah’s oil sands, on the other hand, aren’t nearly as remote. And the easier access in Utah isn’t the only thing that differentiates their oil sands play from the deposits in Canada. The actual sands themselves are different too. Canada’s oil sands are saturated with water and known as “water wet,” but in Utah the oil sands are known as “oil wet” because, well, they’re wet with oil instead of water. The Utah deposits are very dry, which means production does not result in so much wastewater. No water means no tailings ponds, which is a big bugaboo for the Canadian oil sands and a big plus for Utah.

The Pick

American Sands Energy (OTC: AMSE)
One year total return: 140%

on_the_money_story

American Sands Energy is poised to capitalize on these advantages. The production process that American Sands Energy is going to apply (and has an exclusive licence in Utah for) uses a proprietary solvent solution that separates the oil from the sand. Since AMSE isn’t going to need to handle huge amounts of water, its production costs should be lower than traditional oil sands operations. AMSE estimates that its energy costs could be as much as 60 per cent lower than a Canadian oil sands mining operation, while associated startup costs should also be lower as there is no need to plan, design and build a tailings pond.

As a result, where a new Canadian oil sands project would require $80 or higher oil prices to just break even, AMSE estimates its break-even oil price to be just $45. If true, these are going to be highly profitable barrels of oil at the current price the commodity. On its Sunnyside lease, AMSE has the rights to mine oil sands ore and extract bitumen from approximately 1,800 acres of private property. Here, AMSE controls an estimated resource of approximately 150 million barrels of recoverable bitumen. In March of 2014, AMSE filed its application for an operating permit with the Utah Department of Oil, Gas and Mining. Initial production from the Sunnyside location is planned at 5,000 barrels per day, which the company hopes to have online by the summer of 2016. Eventually, AMSE plans to take production up to 50,000 barrels per day from its existing resource base.

PostScript

A more environmentally friendly oil sands project without any of the associated geopolitical or infrastructure challenges that Canada’s massive deposits face, and lower cost to boot? It almost sounds too good to be true.

In time we’ll find whether that’s actually the case, but for now it looks like a very intriguing investment opportunity.

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