Technical Analysis Report: Oilsands plays

Despite the recent ill wishes from the World Wildlife Fund and Canadian actress Neve Campbell, the development of Alberta’s oilsands continues unabated.

While a WWF report and a new documentary narrated by Campbell simultaneously unleashed their salvos at the oilsands from London on March 15, one of Britain’s biggest and most important companies, BP (BP-N, BP-L), was letting the ink dry on a large new investment in northern Alberta.

With some 173 billion barrels of oil reserves, the oilsands are second only to Saudi Arabia when it comes to the amount of oil in the ground.

And with resources that large, oil companies will continue to come calling — despite the opposition of some environmental groups.

Fortunately for Canadian investors, the Toronto Stock Exchange offers many ways to play the region. For those willing to take on more risk in hope of a greater reward, there are a host of junior companies with significant oilsands exposure.

The list includes: Southern Pacific Resources (STP-T), UTS Energy(UTS-T), North Peace Energy (NPE-T), Alberta Oilsands (AOS-V), Bronco Energy (BCF-T), Connacher Oil & Gas (CLL-T), Petrobank Energy (PBG-T), Opti Canada (OPC-T) and Habanero Resources (HAO-V).

Of course any technical analysis of junior oilsands companies must start by looking at the price chart for oil itself.

Since breaking through the US$60 a barrel mark in spring 2009, oil prices have been moving in an upward-trending but range-bound pattern with US$60 as the support and resistance in the US$85 area.

And while the thrust of this report remains technical, it doesn’t hurt to look at some underlying fundamentals when discussing oil prices.

Despite the U.S.’s declining significance in the global economy, the country still accounts for 25% of world crude demand and the U.S. Department of Energy’s (DOE) crude complex (which includes crude oil and gasoline) still has a large impact on price.

With that in mind, DOE inventories are closely watched by oil speculators and the surpluses they have shown — inventories rose by 1.7 million barrels to 719.8 million barrels in February — are considered bearish.

More bullish, however, is the fact that refinery throughput in the U.S. was up 5% in February — a sign that the U.S. economy is expanding and demand for fuel is growing.

Still, most onlookers agree that a sustained rally in crude prices will only come once the markets have complete faith in a global economic recovery and storage volumes get reduced.

The U.S. dollar also comes into play when looking at oil prices. A weak dollar has been a key catalyst to oil’s recovery out of the doldrums of 2008, and helps explain why prices have risen despite surpluses.

But with that driver largely priced in at this point, increases from here on will likely be driven by supply and demand fundamentals — and, of course, technical indicators.

Turning back to the companies whose task is to remove bitumen from the oilsands of northern Alberta, two of those already mentioned display interesting price patterns from a technical-analysis perspective.

Southern Pacific Resources has a strong presence for a junior in the oilsands, with an average 84%working interest in 269 sections of the region. The company has a near-term production project as well as key prospect areas.

Southern Pacific’s share price began a steady ascent in late August of last year. Its price has moved in almost a perfect Elliott Wave pattern since then, with a series of three successively higher waves, followed by a downturn. The price is currently on the last down leg of the correction pattern, meaning a new three-stage incline could be in store.

Another key element to the stock’s price pattern is volume.

After coming off a 19-month high of $1.18 at the end of 2009 (a price point that marked the peak of the fifth wave in the Elliott Wave series), Southern Pacific’s shares fell to the 80¢ level. But things began to get interesting at that level with massive buying volume coming on — indeed, the company’s shares have not experienced such heavy trading in all of its last five-year history.

Heavy buying volume is a very strong technical indicator with stocks often breaking up to new highs in the weeks after the influx of buying.

And while the heavy volume did drive the price up to the $1.10 mark, the amount of volume suggests that a stronger push could be in store. Southern Pacific shares are currently trading for 96¢.

Late August was also a good time for UTS Energy.

The company has four key assets in the oilsands, the most developed of which is its Fort Hills project which hosts between 2.1 and 4.3 billion barrels of oil. UTS stake in such reserves is 20%.

Its strong assets, however, couldn’t protect it from the 2008 meltdown that wiped out much of its market cap, leaving it to trudge along in a tight $1.50-$1.75 range-bound pattern. That is until August arrived. Since then, the company’s price chart has exhibited a steady upward bias reaching a 52-week high of $2.70 in late January 2010.

And while its chart doesn’t show the same strong Elliott Wave tendencies that Southern Pacific shows, it does exhibit other signs that can be encouraging. Since late January’s high point, UTS shares have moved sideways in a consolidation pattern that has established clear support at the $2.50 level.

Also boding well for the stock is a Rate of Change line that has recently broken above the key 0 mark and is trending higher; an Accumulation/ Distribution line that has been on a steady incline since May 2009 (which shows a bias towards buying over selling the stock), and a MACD line that has only recently broken above the signal line (the MACD crossing the signal line from below is a bullish indicator).

Watch for the stock to break above the previous high of $2.75, if it does, it could signal a new higher valuation for the company. Something that would be more likely for both UTS and Southern Pacific should oil prices remain on a steady trajectory upwards.

–The author holds no shares in any of the above-mentioned companies.