Will Canadian Oil Sands Ltd. Survive?

Canadian Oil Sands Ltd. (TSX:COS) just can’t catch a break.

The Motley Fool

Canadian Oil Sands Ltd. (TSX:COS) is working hard to get its house in order, but every time it looks like the company is making progress, something else goes wrong.

Syncrude troubles continue

The recent fire at Syncrude is just one more setback in a long line of operational problems at the oil sands facility. Canadian Oil Sands owns a 37% stake in Syncrude, the largest of the seven partners, and is therefore responsible for shouldering a significant part of the financial burden.

Syncrude has been a nightmare for the past three years as unplanned maintenance work and production shutdowns have driven up costs and hindered output. The facility has a design capacity to produce 350,000 barrels of oil per day, but 2014 output averaged just 258,000 barrels per day. In its Q2 earnings statement, Canadian Oil Sands said production for the first half of 2015 averaged 250,400 barrels per day.

Low production drives up the operating cost per barrel and Canadian Oil Sands is still a high-cost producer, although expenses are finally coming down.

The Q2 operating cost per barrel came in at $52.63, down from $59.64 a year earlier. For the first six months of 2015, the average cost per barrel was $42.83 compared to $52.33 for the first half of 2014.

Cash flow concerns

In the Q2 report the company said it expects to finish the year with cash flow of $474 million and capital expenditures of $422 million. The numbers of the first half of the year suggest that might be ambitious, especially given the meltdown in oil prices over the past two months. Canadian Oil Sands reported cash flow of $146 million for the first half of the year and capital expenditures of $228 million.

Dividend safety

Canadan Oil Sands already slashed the dividend once, but the trend in the patch is to preserve cash at all costs right now. Investors should consider the current dividend as a bonus when evaluating the stock.

Takeover possibilities

Rumours have been flying around that the other Syncrude partners could buy out Canadian Oil Sands. They certainly have the cash to do it, but I don’t see it happening unless things get so bad that Canadian Oil Sands can’t meet its financial obligations. At that point, investors would already be wiped out.

Should you buy?

Value investors look at Syncrude’s massive reserves and say the stock is a screaming bargain. They might be right, but the company has to survive the oil rout in order for investors to reap the rewards of those reserves.

The company is hanging in there, but the stock is still very volatile. I would look elsewhere for opportunities to deploy some extra cash.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »