Canadian Oil Sands Ltd. (TSX:COS) might be Canada’s most debated energy stock.

The former favourite of dividend investors has been on a roller-coaster ride this year, and nimble traders have made a pretty penny trading the volatile moves in the stock.

Canadian Oil Sands owns 36% of the massive Syncrude oil sands operation. Investors with a long-term outlook are sitting in two camps. One group looks at the value of Syncrude’s resources and sees decades of generous cash flows oozing into their pockets once oil prices rebound.

Bears see a prolonged slump in oil prices and think Canadian Oil Sands will be dead before it can stop the bleeding from all of Syncrude’s ongoing operating challenges.

Let’s take a look at the current situation to see if the company deserves a spot in your portfolio.


The first quarter was a brutal one for the entire energy patch.

Canadian Oil Sands reported a net loss of $186 million for the first three months of 2015. The company received 47% less for every barrel of oil it sold compared with Q1 2014. Unrealized foreign exchange losses tied to the company’s U.S.-dollar denominated debt also affected results.

Production, operating costs, and capital expenditures

Syncrude is a wounded duck but the company might finally be healing.

The facility has a production capacity of 350,000 barrels per day, but only averaged about 258,000 in 2014. High maintenance costs and low output resulted in an average 2014 operating cost of $49 per barrel.

The Q1 2015 numbers were much better. Production averaged 294,000 barrels per day and operating expenses came in at $35.71 per barrel.

The company has also completed a large portion of two major capital projects and Canadian Oil Sands plans to spend $1.7 billion less in 2015 than it did last year. More importantly, capital outlays are expected to remain low for several years.

Cash flow concerns

Cash flow guidance for 2015 is now $407 million, up from $368 million estimated at the end of January. The company expects to spend $429 million on capital projects by year-end, which means there is still a shortage of $22 million even before paying the dividend.

Debt situation

Canadian Oil Sands has about $2.3 billion in long-term debt. The rally in the U.S. dollar pushed the debt-to-total capitalization ratio up to 35% as of March 31. The company needs to keep this number below 55% to stay within its agreements with lenders.

For the time being, there shouldn’t be much risk, but investors need to keep the covenants in mind given the recent volatility in the market.

Should you buy?

Management is making good progress getting operating costs under control and boosting production. However, cash flow is still coming up short, so oil prices need to strengthen further to ensure a continuation of the dividend payment.

A surge in crude prices would certainly put a tailwind behind the stock, and it could rally strongly on the back of renewed interest and short covering. Something extraordinary would have to happen for the shares to get back to $20.

Energy analysts are all over the map on crude price forecasts, so another plunge could also be in the cards. If that happens, the stock could easily retest the January low of $6 per share.

Given the ongoing volatility in the energy sector, it might be best to stay on the sidelines.

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Fool contributor Andrew Walker has no position in any stocks mentioned.