When Suncor Energy Inc. (TSX:SU)(NYSE:SU) launched a bid to acquire Canadian Oil Sands Ltd. (TSX:COS) it was clearly being opportunistic in its approach. Canadian Oil Sands’s stock had been hammered over the past year as persistently weak oil prices, along with its debt-laden balance sheet, sent its stock down by more than 65% before Suncor made an offer.

However, in not only outright rejecting, but now fighting that deal, Canadian Oil Sands is walking a fine line because the fact of the matter remains is that it still has a lot of debt and negative cash flow. In other words, it might be getting a little too greedy.

Numbers don’t lie

As the chart below shows, Canadian Oil Sands’s net debt has ballooned to more than $2 billion since the onset of the downturn.


As a result of this ballooning debt, Moody’s downgraded its credit rating to one notch above junk, specifically citing the deterioration of the company’s balance sheet. Further, it pointed out that the company was expected to generate negative cash flow of $125 million over the next 15 months that would also largely be funded by more debt. That would likely trigger another credit downgrade, this time to a junk rating.

This lack of cash flow fueled whispers in the market place that the company was looking for alternatives such as selling its future production in order to bring in some cash. While the company quickly shot down those rumours, the fact remains that it’s struggling under the current oil price. It’s a price that has yet to show too many signs of improving. In other words, if oil prices do stay lower for longer, Canadian Oil Sands will only continue to struggle.

A tale of two companies

Suncor Energy, on the other hand, is generating almost as much cash flow now as it was when oil prices were higher. In fact, it’s generating so much cash flow that it has a surplus on its balance sheet. That’s why the company said it was on the lookout for acquisitions. Further, CEO Steve Williams specifically said that he was looking for an opportunity to acquire assets in a fire sale brought about by low oil prices.

That’s exactly where we find Canadian Oil Sands. It’s a company that has too much debt for the current oil price, and is running an unsustainable business if the current oil price is the new normal. Further, if oil prices were to really collapse (some are warning that $20 per barrel isn’t out of the question), that would put Canadian Oil Sands on precarious footing.

There’s a growing risk that it might not survive if a wave of bankruptcies sweep through the energy sector, which is a growing risk if oil remains weak and credit starts to tighten.

Investor takeaway

There’s no denying that Suncor Energy is making an opportunistic offer to acquire Canadian Oil Sands as the company has been waiting patiently for the opportunity to go shopping for assets at fire sale prices.

However, given Canadian Oil Sands’s rising debt levels, and the fact that oil prices might not recover for a while, this might just be the best offer the company receives. It’s running a real risk of being too greedy at a time when its financials are deteriorating. If oil prices take another leg down, or credit really tightens in the sector, the company might regret fighting to remain independent.

Our TOP turnaround stock for 2015

As Canadian Oil Sands has shown us, turnarounds are really tough to engineer. This is especially true when tech companies fall from grace like this Canadian icon did, it's typically impossible to regain relevance. Here at Motley Fool Canada, we think this company and its CEO are prepared to prove all of the doubters wrong. We have even named it one TOP turnaround stock for 2015. Will you be left on the outside looking in should our intuition come to fruition?

If you're a curious soul (like me), then you can download the name, ticker symbol, and price guidance absolutely FREE.

Simply click here to receive your Special FREE Report, "A Top Turnaround Stock Idea for 2015."


Let’s not beat around the bush – energy companies performed miserably in 2015. Yet, even though the carnage was widespread, not all energy-related businesses were equally affected.

We've identified an energy company we think offers one of the best growth opportunities around. While this company is largely tied to the production of natural gas, it doesn't actually produce the gas. Instead, it provides the equipment required to get natural gas from the ground to the end user. With diversified operations around the globe, we think it's a rare find in the industry.

We like it so much, we’ve named it as 1 Top Stock for 2016 and Beyond. To find out why, simply enter your email address below to claim your FREE copy of this brand new report, "1 Top Stock for 2016 and Beyond"!

Fool contributor Matt DiLallo has no position in any stocks mentioned.