I spent a decade working Oil Sands Finance. Every geologist told me "it's all about the rocks", and the field performance that I saw seemed to always bear this out. The area between Foster Creek and Jackfish was the performance sweet spot, with the Christina Lake properties (MEG and CVE) close behind (Check out AB government's report "ST53: Alberta In Situ Oil Sands Production Summary". Best-in-class SOR is low 2's; many poor performers are in the 5-8 range).
As per their presentation, Cardinal's Reford target depth is deeper than all the peers; deeper means poorer quality steam, as energy is lost going down >600m (MEG's depth is 350m). SOR will be higher; 5 is probably a good guess for early project stage. CJ also quotes an API of 9 (!), which seems strange, because the general trend is API goes up as you head south (presentation error?). Heavier oil (lower API) would also mean more steam.
I wish CJ the best, but these projects are not slam dunks. Anyone can operate conventional (or unconventional shale) producing wells; not everyone can operate underground steam chambers. I think I'll wait for the inevitable early performance disappointment to come through (production ramp-up is loooong), and re-evaluate.
BTW, someday, I expect CNQ or CVE will take out MEG - so many operational synergies.
I doubt CJ made a presentation error and take at face value their claim the oil has a lower viscosity which implies less steam needed to make it flow which mitigates the depth. The Christina Lake deposits are best in class today with SOR ~2 and the question is whether the Saskatchewan deposits come close to that level. I suspect in Saskatchewan solvent injection may be used (likely butane) to further reduce SOR.
It is wise to wait for production data given the risks, which is why I have only a small CJ holding. I will add materially if the project demonstrates a low SOR and expect it will benefit from low transportation costs given location.
I think you are right about the likelihood of a MEG takeout, but don't see either CVE or CNQ paying more than the reserves are worth. I can't see any value north of CDN$30 for MEG but I have been wrong before and no doubt will be again.
Another interesting read. Oddly enough, I entered an order to reduce our MEG position this morning after a discussion with the g/f. She exclaimed ‘Cardinal pays us a ridiculous dividend and MEG pays us nothing.’ I appreciate that this is a highly superficial view but as retired investors it is important. We have been in both since ‘21 and as you say, Murray Edwards holds Cardinal.
Your girlfriend nails it. It is not a superficial view. MEG management relies more on buybacks to improve the value of their share based compensation, but at the expense of dividing shareholders into two camps - long term investors who prefer dividends and traders who want higher share prices.
Please Michael, don't sell yourself short... your opinion is worth a lot, especially to newbies such as myself. I learn a great deal from your articles. Thank you for spending the time.
I posted your article on Investor village(crediting you) so the folks could pull it apart... 1 comment was
"MEG’s major cost input is energy. With a steam to oil ratio (SOR) of about 3 times, every barrel of oil consumes 3 barrels of steam and each barrel of steam consumes about 33 cubic feet
of natural gas, so a good rule of thumb is 1 Mcf of gas for every barrel of oil.
Thanks Michael, I value your opinion and hold both. The CJ div is very attractive and Murray has been a very long term holder, last transaction mid 2022. The CJ location is very close to SCR - STRATHCONA operating oil sand, so things could be very favorable. Off the top of my head its around 60km or 60 miles, I havent purchased any SCR. I do hold some MEG, not too similar to CVE, but sold my CVE and moved it into MEG. I also prefer SU which has done fabulous in the last 18 months since the Fort hills purchase which was a steal and a bunch of other initiatives.
Of course Murray knows his oil sands so he could have coaxed them into Sask, it sure surprised me when announced as I feel CJ is already thinly spread.
Unlikely 2 to compare imo, but an enjoyable read. There is some question in my mind if Cardinal can deliver on time, budget and performance. A very ambitious and might even be risky expansion. I would have thought MEG was worth a lot more with all the buy backs, reduction in debt and now even a small div they are doing. ATH/CJ might also be an interesting pair to compare as ATH I think still has conventional production, with massive tax losses available
MEG buybacks and dividends don't alter the value of its reserves, just redistribute them. A MEG takeover by IMO or CNQ is a possibility. Murray Edwards is the largest shareholder of both CNQ and CJ and typically knows what he is doing.
Cardinal deposits are closer to the surface, have a lower viscosity , and are readily accessible by road. They require less energy to flow than MEG, but capital cost overruns are legion in the WCSB.
in case of MEG you count with $650 M as free cash flow (FCF) / year. At 35 years anuity with 12% discount rate you get NPV of $5,3 B. I.e. $23 / share.
In case of CJ you give an CF assumption of $300 M /year. In the calculation you use the whole $300 M, not only the FCF, which you state to be app. a half. Thus you get for 20y and 12% a NPV of $14 / share.
However if you calculated the FCF at a1/2 of those $300 M, you would not get $2,2 B, but just about a half. Divided by 160 M shares = app $7 / share.
Have I misinterpreted something? Or is there a reason why you included the whole CF in case of CJ, while you included just FCF in the case of MEG?
Thank you for sharing your thoughts, I really appreciate it and learn from everyone in the #com community. My perspective on MEG and ATH too really is that they have the potential to really be share cannibals. The math is basically that after a company eats 80% of their shares they really take off. Something like meg with more then 30y reserves should be able to eat at least 5%? Of their own shares a year. If they do that for a decade where will they be?
Anyways thats my logic on meg or ath or even cnq really. Please tell me what you think about them from thet perspective if you care to. Thank you
I spent a decade working Oil Sands Finance. Every geologist told me "it's all about the rocks", and the field performance that I saw seemed to always bear this out. The area between Foster Creek and Jackfish was the performance sweet spot, with the Christina Lake properties (MEG and CVE) close behind (Check out AB government's report "ST53: Alberta In Situ Oil Sands Production Summary". Best-in-class SOR is low 2's; many poor performers are in the 5-8 range).
As per their presentation, Cardinal's Reford target depth is deeper than all the peers; deeper means poorer quality steam, as energy is lost going down >600m (MEG's depth is 350m). SOR will be higher; 5 is probably a good guess for early project stage. CJ also quotes an API of 9 (!), which seems strange, because the general trend is API goes up as you head south (presentation error?). Heavier oil (lower API) would also mean more steam.
I wish CJ the best, but these projects are not slam dunks. Anyone can operate conventional (or unconventional shale) producing wells; not everyone can operate underground steam chambers. I think I'll wait for the inevitable early performance disappointment to come through (production ramp-up is loooong), and re-evaluate.
BTW, someday, I expect CNQ or CVE will take out MEG - so many operational synergies.
Agree generally. It is all about the rocks.
I doubt CJ made a presentation error and take at face value their claim the oil has a lower viscosity which implies less steam needed to make it flow which mitigates the depth. The Christina Lake deposits are best in class today with SOR ~2 and the question is whether the Saskatchewan deposits come close to that level. I suspect in Saskatchewan solvent injection may be used (likely butane) to further reduce SOR.
It is wise to wait for production data given the risks, which is why I have only a small CJ holding. I will add materially if the project demonstrates a low SOR and expect it will benefit from low transportation costs given location.
I think you are right about the likelihood of a MEG takeout, but don't see either CVE or CNQ paying more than the reserves are worth. I can't see any value north of CDN$30 for MEG but I have been wrong before and no doubt will be again.
Another interesting read. Oddly enough, I entered an order to reduce our MEG position this morning after a discussion with the g/f. She exclaimed ‘Cardinal pays us a ridiculous dividend and MEG pays us nothing.’ I appreciate that this is a highly superficial view but as retired investors it is important. We have been in both since ‘21 and as you say, Murray Edwards holds Cardinal.
Your girlfriend nails it. It is not a superficial view. MEG management relies more on buybacks to improve the value of their share based compensation, but at the expense of dividing shareholders into two camps - long term investors who prefer dividends and traders who want higher share prices.
Please Michael, don't sell yourself short... your opinion is worth a lot, especially to newbies such as myself. I learn a great deal from your articles. Thank you for spending the time.
Excellent, thank you.
I posted your article on Investor village(crediting you) so the folks could pull it apart... 1 comment was
"MEG’s major cost input is energy. With a steam to oil ratio (SOR) of about 3 times, every barrel of oil consumes 3 barrels of steam and each barrel of steam consumes about 33 cubic feet
of natural gas, so a good rule of thumb is 1 Mcf of gas for every barrel of oil.
No. 1 Mcf = 1000 CF, not 100"
Thanks Michael, I value your opinion and hold both. The CJ div is very attractive and Murray has been a very long term holder, last transaction mid 2022. The CJ location is very close to SCR - STRATHCONA operating oil sand, so things could be very favorable. Off the top of my head its around 60km or 60 miles, I havent purchased any SCR. I do hold some MEG, not too similar to CVE, but sold my CVE and moved it into MEG. I also prefer SU which has done fabulous in the last 18 months since the Fort hills purchase which was a steal and a bunch of other initiatives.
Of course Murray knows his oil sands so he could have coaxed them into Sask, it sure surprised me when announced as I feel CJ is already thinly spread.
Unlikely 2 to compare imo, but an enjoyable read. There is some question in my mind if Cardinal can deliver on time, budget and performance. A very ambitious and might even be risky expansion. I would have thought MEG was worth a lot more with all the buy backs, reduction in debt and now even a small div they are doing. ATH/CJ might also be an interesting pair to compare as ATH I think still has conventional production, with massive tax losses available
Many questions for sure.
MEG buybacks and dividends don't alter the value of its reserves, just redistribute them. A MEG takeover by IMO or CNQ is a possibility. Murray Edwards is the largest shareholder of both CNQ and CJ and typically knows what he is doing.
Cardinal deposits are closer to the surface, have a lower viscosity , and are readily accessible by road. They require less energy to flow than MEG, but capital cost overruns are legion in the WCSB.
I hold Cardinal but not MEG.
Dear Dr. Blair,
in case of MEG you count with $650 M as free cash flow (FCF) / year. At 35 years anuity with 12% discount rate you get NPV of $5,3 B. I.e. $23 / share.
In case of CJ you give an CF assumption of $300 M /year. In the calculation you use the whole $300 M, not only the FCF, which you state to be app. a half. Thus you get for 20y and 12% a NPV of $14 / share.
However if you calculated the FCF at a1/2 of those $300 M, you would not get $2,2 B, but just about a half. Divided by 160 M shares = app $7 / share.
Have I misinterpreted something? Or is there a reason why you included the whole CF in case of CJ, while you included just FCF in the case of MEG?
Thank you
Regards,
Tom
Thank you for sharing your thoughts, I really appreciate it and learn from everyone in the #com community. My perspective on MEG and ATH too really is that they have the potential to really be share cannibals. The math is basically that after a company eats 80% of their shares they really take off. Something like meg with more then 30y reserves should be able to eat at least 5%? Of their own shares a year. If they do that for a decade where will they be?
Anyways thats my logic on meg or ath or even cnq really. Please tell me what you think about them from thet perspective if you care to. Thank you