Desjardins Takeaway Canadian Oil Sands Limited
Justin Bouchard, P.Eng., CFA • (403) 532-6615 • justin.bouchard@vmd.desjardins.com
Rating: Hold, Risk: Average, Target: C$13.00
COS C$8.60, TSX
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The Desjardins Takeaway: Negative
Canadian Oil Sands last night reported another outage at Syncrude, further dampening an already
weak operational year for the massive mining project. With production being impacted in the 4Q,
the company now expects to miss its previously published guidance range of 96–101 mbbl/d for
2014 (management has now provided an updated point estimate of 94.6 mbbl/d for the year, which
translates into about 74% utilization).
This is yet another sign of performance not improving since Imperial Oil took over management of
the project in 2006—a sign that does not bode well in the current oil price environment. Recall that
Canadian Oil Sands set its budget using a US$75/bbl WTI estimate (nearly US$20/bbl above the current
prompt-month price). Even at the higher WTI level, the company cut its dividend in an attempt to
balance cash inflows and outflows. Given the further drop in oil pricing and yet another unexpected
outage at Syncrude, we believe the dividend will need to be cut further to reflect the new reality.
In the current environment, we would not be surprised to see Canadian Oil Sands cut the dividend again
—at US$55/bbl WTI, we see the company generating cash flow of ~C$400m and having to increase its
debt position to fund the C$564m capital program (this is before an incremental dividend payout of ~C
$390m at the current rate). In other words, at the current dividend of C$0.20 per quarter, cash inflows
of C$400m are significantly lower than cash outflows of C$954m—hence, the need to cut the dividend
again, reduce capex or lever up, assuming the current oil price environment persists.