Volatility in the shares of Canadian Oil Sands Ltd. (TSX:COS) is making traders rich, but investors hoping to cash in on a perceived value play are getting their heads handed to them.

Value in the ground

Pundits who see the long-term potential of the company’s Syncrude stake look at the value of the resources and say the stock is extremely undervalued, and they are right, but there are a lot of moving parts to the story.

The risk for investors is that the company might not be able to hold on long enough for shareholders to benefit from all that value sitting in the ground.

Syncrude troubles

Syncrude is a massive oil sands operation that has seven partners with ownership stakes ranging from 5% to Canadian Oil Sands Ltd.’s 37%. The plunge in oil prices has been a big headache for the entire industry, but Syncrude has been hit especially hard because the oil rout arrived at a time when the project was battling with operational issues.

In fact, it has pretty much been a perfect storm for Syncrude, and Canadian Oil Sands Ltd. has been on the hook for the largest part of the expenses to keep Syncrude going.

Through 2014 Canadian Oil Sands Ltd. had to reduce guidance three times as it struggled to get a grip on production troubles. Syncrude has the capacity to produce 350,000 barrels per day, but 2014 output only averaged 258,000 barrels per day. High maintenance expenses combined with low production resulted in an abysmal operating cost of $49 per barrel.

Better times?

This year started out much better. Production in Q1 averaged 294,000 barrels per day and operating expenses dropped to $35.71 per barrel.

Another positive development is the near completion of two major capital projects, which means capital outlays should drop by $1.7 billion in 2015.

Cash flow gap

However, cash flow guidance for 2015 is $407 million. The company expects to spend $429 million on capital projects, which means there is still a short fall of $22 million. That’s not bad, but the company is still paying a dividend that has to be covered.

Canadian Oil Sands Ltd. is sitting on $2.3 billion in long-term debt, which is quite a bit for a company with a market capitalization of $4.6 billion.

Much of the debt is denominated in U.S. dollars. As the U.S. dollar rises against its Canadian counterpart, the debt-to-total capitalization ratio increases, and that is a concern if the ratio gets close to the maximum limit for the company’s lending covenants. As of March 31 the debt-to-total capitalization ratio was 35%. The company has to keep it below 55%, so things look safe for the moment, but that gap can close quickly.

The end game

Rumours are making the rounds that Canadian Oil Sands Ltd. could be taken over by Suncor or Imperial Oil, which are also large partners in Syncrude. Imperial Oil actually operates the facility and has a 25% stake, so it might be interested, but a buyout would only occur if Canadian Oil Sands Ltd. gets to the point where it can no longer meet its obligations on the project.

If things get to that point, investors will already be dead in the water.

The uncertainty surrounding the NDP government’s plans for reviewing royalty and corporate tax policies is also causing trouble. Until there is more clarity, all of Alberta’s oil sands operators are going to be under pressure.

A surge in oil prices would certainly help the situation and Canadian Oil Sands Ltd. might survive and thrive. At the moment, the trend isn’t your friend and any investment in the stock should be considered extremely speculative.

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