Canadian Oil Sands: Buried Treasures

https://www.wsj.com/articles/canadian-oil-sands-buried-treasures-11647601381?mod=hp_minor_pos19

Dirty, expensive to extract and trapped by a lack of pipelines, Canadian oil sands can be a tough investment proposition. Yet a year of elevated oil prices has turned companies mining them into cash machines.

Soaring energy prices are set to reward almost everyone producing hydrocarbons: Major oil companies and U.S. shale producers reported record free cash flows in 2021 and should do even better this year. Analysts polled by FactSet predict that a subindex of U.S. oil and gas exploration companies in the S&P 500 will beat last year’s bounty by an impressive 35%. Impressive, that is, until compared with Canadian oil sands producers: Suncor Energy, SU -0.16% Canadian Natural Resources, CNQ -0.93% Imperial Oil and Cenovus are set to increase their free cash flow by 60.5% this year, on average.

Longer term, the bull case for carbon-heavy Canadian oil is shakier and will depend in part on a shift to a more nuanced view of environmental, social and governance concerns. Oil sands’ carbon footprint is high, but Russia’s invasion of Ukraine has brought social concerns to the forefront—Western oil majors almost immediately pulled out of Russia—as well as the perils of relying on autocratic regimes for vital commodities.

Energy investors today are laser-focused on two things these days: Immediate cash returns and ESG alignment. At the moment, Canadian oil companies are ticking the first box. A paradigm shift in ESG could really supercharge their shares.