Income investors should sell Canadian Oil Sands

Canadian Oil Sands Limited (TSX─COS) has reduced its quarterly dividend to $0.05 a share for the first quarter of 2015. The company had previously indicated its intention to reduce its quarterly dividend, based on its 2015 budget assumptions released in December, to $0.20 a share. But crude oil prices have declined substantially since then. Consequently, the company has reduced the dividend further to better align it with current oil prices. Management regards this move as a prudent step to preserve balance sheet strength.

Canadian Oil Sands is a pure investment vehicle in light, sweet crude oil. The company is the largest owner in the Syncrude project with a 36.7-per-cent interest.

Last year was difficult enough for the company without the impact of falling oil prices. For the year ended Dec. 31, 2014, Canadian Oil Sands’ cash flow was $1.1 billion, or $2.28 a share, compared with $1.3 billion, or $2.78 a share, in 2013. The decrease was due to lower sales volumes and higher operating expenses.

Sales volumes averaged about 94,600 barrels a day in 2014 compared with 98,000 in 2013. Production in 2014 was reduced by unplanned outages in Syncrude’s Coker 8-1, sulphur processing units and a sour water treatment unit.

Operating expenses, meanwhile, rose 12.9 per cent to $1.7 billion. The increase mainly reflects maintenance costs associated with unplanned outages on upgrading units, and higher natural gas and diesel costs. Per-barrel operating expenses rose to $48.86 compared with $41.75 in 2013, reflecting lower sales volumes in 2014. For the year, the company realized an average selling price for synthetic crude oil (SCO) of $99.24 a barrel.

Of course, Canadian Oil Sands won’t enjoy anywhere near such a selling price this year. The company’s outlook assumes that West Texas intermediate will average about US$55 a barrel and the average Canadian/U.S. foreign exchange rate will average $0.82. Under these circumstances, management forecasts the company will realize an average SCO selling price of about $63 a barrel, and that it will be able to get its operating cost down to about $40 a barrel. Based on these assumptions, cash flow per share is forecasted to come in at just $0.73 a share for 2015.

That means the stock trades at a high 15.6 times its 2015 estimated cash flow per share. And now that the shares have recovered some ground from their 52-week low of $6.01, we don’t see much upside in them, at least for now. In the meantime, the stock’s current dividend yield of 1.8 per cent is unlikely to appeal to income investors. For these reasons, we advise income investors to switch out of the stock into one of our other high-income oil and gas stocks, such as ARC Resources.

 

Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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