Suncor Energy Inc. (USA) (SU), Talisman Energy Inc. (USA) (TLM): What Does the Future Hold for Canada’s Oil Sands?

Faced with growing uncertainty, some operators are even scaling back investments and reducing cash flow guidance. Talisman Energy Inc. (USA) (NYSE:TLM), Canada’s sixth-largest independent oil producer, cut its capital budget forecast for the year by 25%, while Cenovus Energy Inc (USA) (NYSE:CVE) in December lowered its cash flow forecast for the year by 16% to as low as C$3.1 billion. And Canadian Natural Resource Ltd (USA) (NYSE:CNQ) said that it plans to reduce spending on thermal sands production.

The threat from alternative energy sources
Some analysts argue that if oil sands producers fail to surmount these hurdles, additional investment in Alberta could soon dry up, especially if the price of crude oil sees a sustained decline. Jeremy Grantham, co-founder and chief investment strategist at Boston-based investment firm GMO, is one of the more outspoken critics, arguing that growing competition from alternative energy sources threatens to send oil sands operators packing:

I believe anyone investing in tar sands is very likely to end up with stranded assets in the next decade or two. Solar is getting cheaper by the minute, whereas petroleum is getting more expensive. It is only a matter of time before their expenses cross.

While foreseeing the evolution of solar energy would require a crystal ball, Grantham’s point – that alternative sources of energy pose a major long-term threat to expensive, unconventional oil projects – is an important one.

Perhaps, then, there is a good reason why the share prices of oil sands producers – especially those with high exposure to particularly expensive projects – have remained depressed over the past few years. Investors attracted to some of these companies’ cheap valuations would be wise to heed Grantham’s words of wisdom.

The article What Does the Future Hold for Canada’s Oil Sands? originally appeared on Fool.com is written by Arjun Sreekumar.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR).

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