There’s no denying that oil companies are currently suffering due to the drop in the price of the resource. And one company that has been hurting is Canadian Oil Sands Ltd. (TSX: COS), an oil company based out of Calgary that makes its money from its oil sands. Oil sand is either loose sand or a mix of sandstone containing sand, clay, and water. This is all saturated in a viscous form of petroleum. That petroleum is what Canadian Oil Sands acquires and sells.
With oil prices hovering around $80 a barrel, it’s difficult for any oil company to make money. But Canadian Oil Sands has been hammered in the markets because it has been investing so much money in a couple of different projects. However, I believe the time is near to start investing in this company again. And there are two reasons.
1. CAPEX is coming to an end
The company has two big projects that are nearing completion. When these two projects are done, the big spending on the quarterly earnings reports will disappear, which will give the company more money to return to investors. According to Canadian Oil’s Q2 quarterly report, “as of June 30, 2014, the Mildred Lake Mine Train Replacement project is estimate to be 94 per cent complete and the Centrifuge Tailings Management project is estimated to be 85 per cent complete.”
This is big news. The train replacement will start operation in the fourth quarter of this year. That’ll increase efficiency for the company. The company anticipates that the Centrifuge Tailings Management project will be in service in the first half of 2015. These are two big projects that will help the company to become more effective.
And these are just two of the many projects that the company is bringing to a close. As each one is finished, the financial statements should look a lot better.
But here’s why it benefits you. With the company operating more efficiently, andno longer needing to invest in these big projects, it will have more cash flow that it can return to investors either in a stronger dividend or in a stock buyback. And that brings me to my second reason for liking Canadian Oil Sands.
2. That dividend is so sweet
Canadian Oil Sands pays a 7.93% yield. That’s a really lucrative dividend for income investors. But the question is: can it continue to pay that with the price of oil lagging? And I think it can.
The company had initially planned on increasing that dividend come 2015, especially with the reductions in CAPEX. But with oil prices lagging, it’s not likely that we’ll see that increase in the dividend. But because of those reductions in CAPEX, the company’s cash flow should remain strong enough that it won’t have to cut the dividend.
However, if oil prices were to return to the high $90s or even low $100s, I’m pretty sure that the company would be able to further increase its dividend, thus rewarding its dedicated investors.
Now, this company is not without danger. It’s a pure play oil company. That means that it has no hedge against dropping oil prices. If prices drop even lower, the company could be force to cut its dividend. However, if you are a believer in the future of oil, this risk shouldn’t be that difficult to handle.
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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 Jacob Donnelly has no position in any stocks mentioned.