Six months ago we dropped several names related development of the Canadian oil sands, that vast collection of potential reserves capable of solving the problem of excessive dependence on Middle East crude.

Here’s what we had to say on Aug. 11, 2010:

At one end of the Canadian oil sands story at the moment are MEG Energy and Athabasca Oil Sands (Toronto: ATH.TO, Other OTC: ATHOF.PK). At the other are heavyweights such as Canadian Oil Sands Trust (Toronto: COS-UN.TO, Other OTC: COSWF.PK), the biggest pure play, and Suncor Energy (Toronto: SU.TO, NYSE: SU).

Of the latecomers to the public market, MEG is a better proposition than, Athabasca Oil Sands, which listed on the TSX back in April. We like Suncor and Canadian Oil Sands, though Suncor is a bit beyond value range right now. The best investment remains longtime Canadian Edge Portfolio Holding Pembina Pipeline Income Fund (Toronto: PIF-UN.TO, Other OTC: PMBIF.PK).

MEG Energy (Toronto: MEG.TO, Other OTC: MEGEF.PK) had just made its initial public offering (IPO); it had fallen a little flat as of mid-August. We pointed out the following:

The MEG story includes many of the elements that make the broader case for Canada particularly compelling: a major piece of a key asset, the Canadian oil sands, and the 170.4 billion barrels of recoverable crude that distinguish Canada from the rest of the developed world; heavy participation by serious North American institutional players; and China.

MEG reached a post-IPO closing low of CAD30.86 on Aug. 26. Since then it’s been “to the moon, Alice”: The stock is trading at CAD47.92 as of midday Friday, a 58 percent gain.

Athabasca Oil Sands has up an even more impressive 61 percent. For comparison sake, the S&P 500 is up 22.2 percent, while its Canadian counterpart, the S&P/Toronto Stock Exchange Composite Index, is up 30.7 percent. The S&P 500 Energy Index is up a cool 36.1 percent and the S&P/TSX Energy Index is up 29.4 percent.

We’d love to claim credit for making a call on MEG, but that wasn’t the point of the piece at all. In fact, the vehicle we recommend has underperformed all but one of the names we mentioned. Suncor Energy has outperformed, returning 41.7 percent and rising above USD45 on the New York Stock Exchange. Canadian Oil Sands Ltd (Toronto: COS.TO, Other OTC: COSWF.PK), the converted Canadian Oil Sands Trust, has notched a 26.1 percent gain from Aug. 11, 2010.

Up until the pure play’s fourth-quarter and full-year earnings report investors had been deserting it left and right. The stock decoupled from crude, which began its latest leg up from below USD68 (based on the front-month generic New York Mercantile Exchange light sweet futures contract) in late May 2010. Events now unfolding in the Middle East quickened the pace of oil’s rise and have clarified the point that the oil sands are a “key asset,” and investors have been drawn to the stock with the easy-to-identify, easy-to-buy name.

That’s too snarky a spin on it, though, as Canadian Oil Sands did report along with fourth-quarter and 2010 results, that production at Syncrude had come as close as it ever has to approximating capacity during the final weeks of the year. In addition to the events in Egypt, Libya and elsewhere (Saudi Arabia?) this long-term positive supports a higher valuation.

The biggest question about the stock back was costs, a point I made when I named Canadian Oil Sands as my top pick for 2011 for Steven Halpern’s annual feature at BloggingStocks.com:

A series of unplanned turnarounds at the Syncrude operation, of which Canadian Oil Sands owns 36.7 percent, have analysts questioning whether rising costs will ever allow Canadian Oil Sands to really benefit from elevated oil prices. And the very skeptical wonder if actual output will ever match Syncrude’s capacity potential. All in all, after years of hype and outperformance the bar is now set rather low for Canadian Oil Sands.

That selection was made within a very limited context–that being the next 12 months. My rather blunt forecast was that Canadian Oil Sands would eventually follow oil prices higher as long-term stresses on supply and fundamental changes in the global demand profile came in to relief with a strengthening economic recovery. Canadian Oil Sands stock has reverted to the mean, and then some, and the company, the sole asset of which is a 36.7 percent interest in the Syncrude joint venture, continues to enjoy an uneventful 2011 from an operations standpoint.

Pembina Pipeline Corp (Toronto: PPL.TO, Other OTC: PBNPF.PK), the corporate successor converted Pembina Pipeline Income Fund, was the focal point of the August income-plays-and-IPOs story:

Pembina Pipeline Income Fund, about as secure and sound a dividend-payer as there is, according to the CE Safety Rating System, holds an exclusive contract to transport production from the Syncrude consortium to terminals in Edmonton, Alberta. Pembina Pipeline’s cash flow is based on throughput; its fee-for-service revenue is not directly tied to the price of crude oil.

It’s up 27.8 percent in US dollar terms since, not reflecting, of course, oil’s death-defying rise and underwhelming in the light of even the broad North American indexes. But when you take a look at the bigger picture, which accounts for all the various shocks and corrections that have taken place during the past half-decade, the Pembina proposition is clear. Note that since the third week of February 2006 Pembina Pipeline (the white line) has outperformed the S&P/TSX Composite (the green line) and the S&P/TSX Energy Index (the red line).

Source: Bloomberg

It’s also bested Canadian Oil Sands (the green line) and Suncor Energy (the red line), the integrated giant with significant (and growing) output from the resource:

Source: Bloomberg

The Roundup

In mid-January, about a week before the Egyptian revolution catalyzed uprisings across the Middle East, the International Energy Agency (IEA) warned that “triple-digit oil prices risk damaging” the economic recovery. It was interpreted in many quarters as a message to the Organization of Petroleum Exporting Countries (OPEC) that it should boost output. OPEC suggested the same day that global supplies were sufficient to meet demand.

Rising energy costs were already being cited for rising food costs, the source of much of the tension that broke first in Cairo’s Tahrir Square. But Egypt may be the first domino in a series of regime changes that ratchet regional tension even tighter and squeeze the political premium in the price of oil even higher.

One solution is to localize supply–that is, to better develop the Canadian oil sands–in order to reduce dependence on the Middle East. To say we depend on the Middle East is to say our economy depends on the Middle East. Already, in fact, we’ve seen not-so-subtle signs of pressure from the Americans on the Saudis to boost production, which they’ve obliged by boosting output by an estimated 7 percent to more than 9 million barrels per day.

Turmoil in Libya has shut in much of an estimated 1.3 million barrels per day of that country’s exports. OPEC won’t meet until June. Meanwhile Brent crude closed near USD120 a barrel on Thursday, the highest since August 2008, and traded at USD111.48 on Friday, up from USD94.75 as of Dec. 31, 2010.

Even before the price of oil spiked above USD100 MEG Energy Corp (TSX: MEG, OTC: MEGEF), which made its initial public offering in late July 2010, was making good on the promise that attracted well-heeled, deep-pocketed investors such as CNOOC Ltd (NYSE: CEO), which paid USD150 million for a 16.7 percent stake (since diluted to 15.8 percent) in MEG when it was still private.

By cutting operating costs per barrel 73 percent, from CAD52.04 a year ago to CAD14.22 and posting a profit in its first full quarter as a public company management demonstrated its oil sands properties could be particularly valuable. MEG’s steam-to-oil ratio was a strong 2.3 times in the fourth quarter.

MEG had been profitable in 2009, when it was still private. But much of its revenue came from royalties on other assets. Since it started its own production in December 2009, revenues net of royalties have only grown. Net income in the fourth quarter was CAD46.5 million (CAD0.24 per share), reversing a CAD16 million (CAD0.11 per share) loss in the fourth quarter of 2009.

MEG did post an unrealized gain of CAD35.3 million because on the favorable impact of the translation of debt to Canadian terms. Revenue net of royalties rose 10-fold to CAD246.3 million, as fourth-quarter production averaged 27,744 barrels of bitumen per day, about 10 percent above the nominal design capacity of MEG’s facilities.

MEG expects fiscal 2011 production volumes to average between 25,000 and 27,000 barrels per day, accounting for a planned maintenance turnaround in September.

MEG is budgeting CAD900 million for capital expenditures in 2011; the prime objective is to boost bitumen production capacity to 260,000 barrels per day by 2020. A key part of this effort, Phase 2 of its flagship Christina Lake project in Alberta, started up during the fourth quarter, with production averaging 5,933 barrels of bitumen per day.

Management estimates 2011 operating costs at between CAD9 to CAD11 per barrel. Although not as impressive a reduction as that from the fourth quarter of 2009 to the fourth quarter of 2010, it’s still a feat. And the number is likely to be at the low end for all oil sands operators.

Athabasca Oil Sands (TSX: ATH, OTC: ATHOF), which debuted in April 2010 and, despite a significant rally since August, is still below its CAD18 IPO price, will report fourth-quarter and full-year 2010 earnings on Mar. 2. Look for a full recap in the March Canadian Edge, available next Friday, in which we’ll be adding MEG Energy Corp and Athabasca to How They Rate coverage.

Here’s an up-to-date list estimated (except where indicated) earnings announcement intentions for Canadian Edge Portfolio Holdings. Highlights for CE Portfolio Holdings that had announced as of Tuesday, Feb. 22 are available in Wednesday’s Flash Alert. We’ll have a Flash Alert early next week detailing what happened during the last three months of 2010 and the full year for those companies that have announced since Tuesday.

Aggressive Holdings

• Ag Growth International (TSX: AFN, OTC: AGGZF)–Mar. 14 (confirmed)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Feb. 10 (announced)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Feb. 23 (confirmed)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–Mar. 2
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Feb. 23 (announced)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–Feb. 25 (announced)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Mar. 2
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Mar. 2
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–Feb. 18 (announced)
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Mar. 8 (confirmed)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Mar. 9 (confirmed)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–Mar. 3
• Provident Energy Ltd (TSX: PVE, NYSE: PVX)–Mar. 9 (confirmed)
• Vermillion Energy Inc (TSX: VET, OTC: VEMTF)–Feb. 28 (confirmed)
• Yellow Media Inc (TSX: YLO, OTC: YLWPF)–Feb. 10 (announced)

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Feb. 24 (announced)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Mar. 2 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Mar. 29
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Mar. 11
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–Feb. 16 (announced)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Feb. 22 (announced)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Feb. 10 (announced)
• CML Healthcare Inc (TSX: CLC, OTC: CMHIF)–Mar. 4 (confirmed)
• Colabor Group (TSX: GCL, OTC: COLFF)–Mar. 10
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Mar. 8 (confirmed)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–Mar. 17
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–Mar. 23 (confirmed)
• Just Energy Group Inc (TSX: JE, OTC: JSTEF)–Feb. 10 (announced)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Feb. 17 (announced)
• Macquarie Power & Infrastructure Corp (TSX: MPT-U, OTC: MCQPF)–Mar. 10 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Mar. 9 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–Mar. 3
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Feb. 28 (confirmed)