UTS: a rare breed on the oilsands (March 29, 2010)

UTS Energy (UTS-T) has established itself as a rarity amongst oilsands juniors.

After warding off a hostile takeover bid from Paris-based oil giant Total (TOT-N) last year, the Calgary-based company now holds key positions in three significant projects for itself.

Not that it is unfamiliar with the company of senior companies.

UTS is joint-ventured with Suncor Energy (SU-T, SU-N) at the massive Fort Hills project, and Teck Resources (TCK. A-T, TCK. B-T, TCK-N) at the nearby Frontier and Equinox projects.

Notwithstanding such affiliations, UTS can correctly bill itself as the last development oilsands mining company with the potential production capacity of 200,000 barrels of oil a day, for roughly 30 years.

A recent resource estimate backed up the claim, showing the company’s stake in the three projects amount to roughly 1.6 billion barrels of oil.

Those total resources are broken down as follows: 678 million barrels from Fort Hills; 725 million barrels from Frontier project and 166 million barrels from Equinox.

These are impressive numbers for a junior company with a market cap of $1.2 billion and a share price that has fluttered between $2.40 and $2.70 over the last three months — a range, incidentally, that is more than a $1 higher than Total’s bid in January 2009.

Given that UTS called the Total offer insufficient at the time, its current market value does read as sweet justification.

Now UTS’s mission is to see if it can turn all that bitumen in the ground into operating mines.

And while Fort Hills is the largest project it is involved in — the project has the potential to turn out 320,000 barrels of oil per day — UTS has just a 20% stake in the project as opposed to its 50% stakes in both Frontier and Equinox.

That vaults Frontier and its estimated 120,000 barrels per day of production, to the top of the pile, while Fort Hills with its 64,000 barrels of attributable barrels places second, ahead of the 25,000 barrels that Equinox is expected to turn out.

And while UTS, with its cash-rich balance sheet, is eager to get such production flowing, the decision to go into production, at least at Fort Hills, is not in its hands.

That right belongs to Suncor, who came on as a partner by way of its acquisition of Petro Canada. Suncor inherited Petro Canada’s 60% stake in the project with Teck Resources holding the remaining 20%.

Suncor is currently in the midst of assessing all of its oilsands assets — a process it says will take until the end of 2010. The company has, however, identified Fort Hills — which sits 90 km north of Fort McMurray, Alta., — as one of its priority project.

As for the UTS and Teck relationship, it extends beyond just Fort Hills.

The two companies also have 50/50 joint ventures on two other projects in the oilsands: Equinox and Frontier.

Equinox sits adjacent to Fort Hills but on the west side of the Athabasca River at the northern end of the property.

Frontier, which also sits on the west side of the Athabasca River, lies a further 13 km north of Equinox.

The two companies are working on getting a Design Basis Memorandum (DBM) engineering study done at Frontier. Beyond assessing the economics of Frontier itself, the study will examine the possibility of developing Equinox as a satellite to Frontier.

UTS says its goal is to have the study finished and its regulatory applications filed early in 2011.

And while such a bitumen-rich pipeline is impressive, investors may well be wondering how a junior will be able to afford to keep up with its senior partners when it comes to funding development.

Part of the answer lies in a deal the company cut in November of last year.

UTS was able to sell its 50% stake in what is known as the Lease 421 Area to Imperial Oil (IMO-N, IMO-T) for $250 million.

The deal was spurred on by the hostile activity of Total. After Total made its all-cash offer worth $617 million — valuing UTS shares at $1.30 piece — UTS immediately said its non-Fort Hills assets weren’t being properly valued by the offer.

UTS then set out to generate hard cash as proof that it was right.

The closing of the deal with Imperial offered not only vindication to UTS shareholders who ultimately rejected the Total offer, but also injected new life into UTS’s balance sheet.

The company now has roughly $458 million in cash and equivalents. And while such a figure is enviable, it is set to grow to even greater proportions.

That’s because both Suncor and Teck are still on the hook for earn-in payments that will become due as development ensues. Those payments will put another $695 million into UTS’s coffers.

With that amount of cash-on-hand and on its way, it is not surprising to learn that the company is fully funded all the way into the first quarter of 2014 — a rare position for a development company with three high-cost projects currently in development, and an encouraging sign for investors looking for a development play with some legs on it.