Synenco makes gains despite rising capital costs

News that capital costs are spiraling at its Northern Lights project in the Alberta oil sands, indirectly lead to Synenco Energy (SYN-T) being one of the largest market gainers from the region over the past few weeks.

The Calgary-based company reached a year-to-date high of $16.55 on May 2, giving it a 43% gain in just under a month, after speculation over the sale of the company grew.

That speculation was fuelled by a May 1 press release from the company that admitted it was looking at repositioning itself.

While not saying directly that a sale was in the cards, it offered that it was looking at either bringing in more partners to get better economies of scale, finding alternative commercial ventures, or other corporate-level options that enhance shareholder value.

Those words lead the Street to conclude that a sale was the most likely option.

And while that could bring more value to shareholders, it comes with a caveat according to Raymond James analyst Justin Bouchard.

Bouchard lowered his rating for Synenco to an outperform from a strong buy, citing higher risks for oil sands startups. Bouchards six-to 12-month target price, however, remained unchanged at $20.

Synencos sole asset is in the form of its 60% stake in the $10.7-billion Northern Lights project in Alberta.

Synenco now says capital cost for just the downstream portion of the project or the upgrader have risen to $6.3-billion a significant hike from the $1.9 billion projection made by the company back in 2005.

A possible buyer could be its partner at the project, Chinese state-controlled major Sinopec (SNP-N).

Sinopec has the right of first refusal if Synenco tries to sell its stake in the asset, but has no such right if Synenco is bought outright.

Synenco is the project operator.

The company also said it was retracting its guidance regarding oil production by mid-2011. No new guidance was given in its place.