Betting on oil service ETFs has paid off well for investors. The energy sector has more than doubled in value over the last three years, and the recent slump in the price of crude has barely dented profits. For investors looking for a new energy play one of the most intriguing is an ETF that provides exposure to the world's second largest proven reserves: Canada's oil sands production.

Alberta Canada has about 175 billion barrels of proven reserves. This is more oil than Iran or Iraq, and second only to Saudi Arabia's 260 billion barrel reserve. But whereas Saudi Arabia pumps 12 million barrels of oil a day, Alberta currently produces barely 1 million. This lower production level reflects the relatively high cost of extracting oil from the sands.

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Crude oil is traditionally extracted from wells drilled into the ground. To extract oil from the Canadian sands the process is different: rich areas are mined to extract the oil-like bitumen, which is then refined. This process is so time-consuming and expensive that for years it was thought to be unfeasible. But technological advance combined with the rising price of crude has made oil sands production not just viable, but potentially immensely profitable.


A new ETF, the Claymore Oil Sands Sector ETF (TSX:CLO - News) will follow the Sustainable Oil Sands Sector Index, which is designed to track the future production of the oil sands. According to Claymore Investments Inc. president Som Seif, who is enthusiastic about the oil sand business, the index is tailor made for the oil sands business, designed to provide investors with "as much exposure to companies with greatest amount of oil sands business and output."


According to Seif, three key factors are involved in assembling companies to include in the index:


1. Current oil sands production in bpd

2. Projected oil sands production in the year 2015

3. Percentage of total production focused on oil sands production


In an early Claymore prospectus the top ten holdings of the proposed CLO are:

Holding Percentage
Suncor Energy Inc 11.4%
Imperial Oil LTD 9.2%
Canadian Oil Sands Trust 9.2%
Shell Canada Ltd. 7.5%
Opti Canada 7.0%
Western Oil Sands 6.6%
Synenco Energy 6.1%
UTS Energy 6.0%
Petrobank Energy and Resources 5.7%
Canadian Natural Resources 5.2%


(This allocation may have changed since recorded 7-31-06)


In comparison to a conventional oil services fund, the companies in CLO are smaller, with higher P/Es. The table below compares expected CLO holding characteristics with the conventional oil services benchmark Energy Select Sector SPDR (AMEX:XLE - News).

Price/Earnings Price/Book Average Market Cap Yield
CLO 15.33 4.17 20.2 billion 0.89
XLE 10.38 2.43 87.3 billion 1.15%


Some investors worry about the environmental degradation and relatively high cost that comes with mining oil sands. But with world-wide demand for oil growing and continued expansion of economies in India and China the price of oil will likely support the higher cost of this new production. In addition, the security of the location of the oil sands resource: far away from the hurricanes and geopolitical uncertainty that mark many other areas of conventional oil production will make the development of these oil sands facilities especially attractive.


According to Som Seif, CLO is scheduled for launch in "a couple of weeks" and should begin trading mid-October. The oil sand mining of Alberta is an emerging topic. CLO is a novel ETF that deserves a serious look from energy investors.