Friday, October 17, 2008

From The Mailbag: UTS

The stock price of UTS Energy (UTS) has come down drastically from about $6 in July to just 87 cents. This has left UTS with a market cap of $412M with the following key balance sheet items:

Cash: 335M
Property: 460M
Debt: 0
Total Liabilities: 113M

Not fully reflected on the balance sheet (for conservative accounting reasons) is that the company owns an estimated 1.5 billion barrels of oil in the form of oil sands. With its cash position representing over 80% of its share price, plus its oil sands reserves, this company has the appearance of a great value play on paper. Unfortunately, there are mitigating circumstances which make this a risk!

One problem is, their first project is not scheduled to come online until the end of 2011, with the next two scheduled to start around 2015. Until then, the company will be spending its cash and fast: based on its cost estimates, the company will run out of cash in 2009, and therefore needs financing soon.

Although we have an estimate of the amount of oil the company will develop, what will the price of oil be when these projects come online? Along with most value investors, we don't pretend to know what the oil price will be at that time (although several months ago I did bet my friend Charles who owns that the oil price will be less than $115 in five years).

The initial costs, however, (before a dime in revenues is received) are quite high. The estimated Phase I costs of UTS' first project (for which UTS owns a 20% share) are over $15 billion, meaning this company will be spending a lot of cash in the next few years with little certainty as to its returns.

For someone who can reliably predict energy prices (if such a person exists!) and who therefore understands the value of the oil sands this company owns, this may be a great investment. However, we only invest in companies we understand well, and so despite the current strong balance sheet and low P/B ratio, this company appears to be a risk for those of us who prefer to swing at sure things.

1 comment:

Anonymous said...

There is a big issue with Oil sands.
If Oil is around or under $70 a barrel it's not worth producing in which case the company could face a stagnation pattern on the oil sand reserves.