Oilsands Quest: A Speculative, Intelligent Play
Thursday November 13, 2008

One of the most important lessons we have learned over the years, when it comes to investing, is to trust your gut and your intuition.  We were purchasing commodities during the technology peak in the late 1990s and early part of the turn of the millennia.  Our favorite was of course oil, and on September 11, 2001 it seemed that all of our profits we had racked up since our buying began near the bottom would surely be wiped out along with a healthy portion of our already invested capital.  When markets reopened, we made our move and purchased more shares in oil companies such as Talisman Energy (NYSE: TLM) sticking to our belief that oil prices would rise due to higher demand from emerging economies and the lack of investment in new oil fields and infrastructure for so long.  Looking back, it was a brilliant trade, and sure it would be easy to say that it was a no brainer, but there were no guarantees at that moment and it took tremendous courage to move into the market at that time.

That time in history is not so different from where we stand today.  Listening to the talking heads on the television, capitalism as we know it is coming to an end and tremendous amounts of wealth have been destroyed.  People say that this current period is going to be worse than ‘The Great Depression’ which began in 1929, which is what many felt at that time as well.  True this is an economic crisis, and not a jihad but we all thought back then that life would forever change and the American consumer would spend less in future years due to a fear of going outside ones home and traveling around.  Our problem right now is also of fear, but people’s fear for their jobs, homes, cars and future prospects for their retirement funds.  This is very serious, and we will not argue that all is well, as oil prices have collapsed along with other commodities indicating to us that things are getting worse and not better.  However we see opportunities here to add to positions which will provide opportunities to greatly increase invested capital in the years ahead.  Our favorite in the oil patch would be Oilsands Quest (AMEX: BQI) which provides investors significant leverage via their oil sands holdings in Alberta and Saskatchewan.

Our feeling is that the gloom-and-doom of the oil patch has reached a feverish pitch, which is unsustainable.  The saying goes that markets always do what they are supposed to do, just never when…so we very well could be off by a few dollars or months in our belief that oil does not go below $45.  It probably needs to hit $48 to totally wipe out any sellers remaining, but from what we have heard there are not many net sellers remaining or those looking to sell aggressively.  With the volatility in markets, trades are opened and closed quite quickly so trades are not piling up dramatically one way or the other to favor either side.  We hear though that although there seems to be no regard for current prices, buyers are looking out in the next few years out and seeing high prices holding steady so moving into equities at this point makes sense to us as a long-term investment.

This current market downturn and crisis in confidence of credit markets has caused many exploration companies to slow down drilling plans and infrastructure build-out.   Once again, supplies are not being added in a sufficient way so we still have to believe that prices are going to go higher in the years ahead.  We have witnessed China’s economy turn on a dime before, and with its current GDP growth rate, we have to assume it will consume more oil each year as the economy expands and more and more of their people switch from bicycles to mopeds/scooters and other gas consuming vehicles.

Oilsands Quest, Inc. has on a very conservative note (using the company’s low estimate of discovered resources) around 1.578 billon barrels of bitumen resources with 1.241 billion barrels of that located in the Axe Lake Discovery Area.  The company has multiple targets open to exploration and is one of the more successful exploration companies out there.  At one point, the company was adding each additional barrel at a cost of roughly $0.02 each with a success rate of nearly 75% when it came to finding bitumen.  The company has enough money for the next two drilling seasons and was smart enough to raise money before markets totally seized up and financing for projects in the energy sector all but dried up.

President-Elect Obama’s team has indicated that he will use his powers as President to stop drilling efforts in America.  This should help oil prices in the long-run and have a positive impact on BQI and other oil sands explorers.  Canada will once again become a hot spot of exploration as that will be the answer to securing future energy supplies for America.  Maybe America’s oil wealth will be saved for a future generation to deplete, this we do not know, but for the next few years we cannot imagine any serious exploration taking place under a Democrat-led Congress and White House.  Although it is not the cause of the downfall of oil prices, truthfully that was a result of deleveraging, oil prices began their downward spiral only after BOTH Presidential candidates (John McCain and Barack Obama) stated they wanted to drill America towards energy independence.    

We see many reasons to be bullish oil prices and energy prices in general.  A crisis in confidence is what is forcing us down, and it seems to be self-fulfilling downturn.  High oil prices scared us to this point, and as oil prices sink lower, many believe that they are indicating a serious recession ahead.  In short, high oil prices were bad and now low oil prices are bad.  When the economy re-inflates and world trade begins to pick up, oil will once again be in high demand and short supply and companies’ stocks such as BQI will move higher accordingly.  Our belief in the future of Canada’s oil sands and Oilsands Quest (BQI) has not faltered, and we stand by the thesis behind our original and subsequent investments.