Could Canadian Oil Sands Ltd. Double in 2015?

The bloodbath in the oil sector during the past few months has taken its toll on many of Canada’s favourite dividend stocks. Canadian Oil Sands Ltd. (TSX: COS) has been hit especially hard, and new investors are wondering if now is a good time to take a position in the company.

Let’s look at the current situation to see how things look for 2015.

Dividend safety

In early December, Canadian Oil Sands cut its dividend by 43%. The stock was already on the slide but the news sent the last remaining holdouts running for the door. The stock bottomed at $8.20 per share and now trades near the $11 mark.

The big concern for investors is that the current quarterly dividend of 20 cents per share still yields about 12.75%, meaning the market expects another cut.

Canadian Oil Sands has a poor history when it comes to dividend consistency. Between 2006 and 2008, the quarterly distribution went from 20 cents to $1.25. A series of cuts brought it back down to 15 cents in 2009. The company then bumped the payout back up to 50 cents in 2010. In 2011, it dropped again to 35 cents. The latest cut takes the dividend once again to 20 cents per share.

This is brutal for income investors who rely on their dividend-paying stocks for reliable distributions.

Production problems

Canadian Oil Sands slashed production guidance three times in 2014 due to ongoing operational issues at its Syncrude facility. Original production guidance for the year was 95 to 110 million barrels. The last cut brought that down to 95 to 100 million and the company’s CEO, Ryan Kubik, recently stated the final numbers will be near the bottom of the range.

Canadian Oil Sands expects 2015 production to once again be 95 to 110 million barrels.

The challenge for Canadian Oil Sands and its investors is that the company owns 37% of the Syncrude project but Imperial Oil Ltd., which has a 25% stake in the facility, runs the operation.

Lower cash flow

In the Q3 2014 earnings statement, Canadian Oil Sands reported cash flow from operations of $302 million, compared to $340 million in the third quarter of 2013. Net income was $0.18 per share compared to $0.51 per share the year before.

Given the continued weakness in oil prices, the Q4 results could be ugly.

Increased operating costs

Operating expenses were $385 million or $47.73 per barrel of oil in the third quarter. This is very high compared other major players. The company’s expected operating expenses for 2015 have been set at $1.7 billion, which indicates further difficulties moving forward given the fact that Canadian Oil Sands is forecasting little or no production growth in the new year.

Lower capital expenditures

Canadian Oil Sands is expecting capital expenditures in 2015 to be about $564 million. This is down significantly from the $1.1 billion budgeted for 2014. The reduction comes as a result of the completion of two major projects. This should help free up cash flow to support the dividend, but it might not be sufficient.

Should you buy?

The company’s latest forecasts assume an average oil price of $75 per barrel for 2015. Unless oil moves higher and stabilizes at $80, Canadian Oil Sands is going to struggle and investors should brace for a further reduction in the dividend.

For the stock to hit $20 in 2015, oil prices will have to rally significantly. If you believe that will happen, there are still better places to put you money right now. The following report analyzes one of them.

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

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