Is Canadian Oil Sands Ltd. Headed for Penny Stock Status?

Here’s why Canadian Oil Sands Ltd. (TSX:COS) could drop below $5.

The pain continues for Canadian Oil Sands Ltd. (TSX:COS) as crude prices appear determined to drill down to 2008 lows.

At the time of writing, the company’s shares are flirting with the $7 mark. Most technical pundits will tell you that this falling knife probably has further to go before it finally hits the floor.

The idea that Canadian Oil Sands could trade below $5 per share was completely unfathomable just six months ago, but the possibility now looks very real, especially if West Texas Intermediate (WTI) takes a run at US$40 in the next week or two.

The trade seems so one-sided that some brave souls are saying the stock is way oversold. Let’s take a look at the situation to see if the rout is offering an opportunity.

Dividend sustainability

A little over a month ago, Canadian Oil Sands slashed its quarterly dividend from 35 cents per share to 20 cents. Since then, the stock has dropped another 40%.

At the time of the announcement, Canadian Oil Sands said it expected 2015 oil prices to average US$75 per barrel. That looks a bit far-fetched at the moment, and investors should probably brace for an all-out cancellation of the dividend.

This shouldn’t be a surprise to anyone who has followed the stock over the past seven years. Canadian Oil Sands’ dividend chart looks like a wild roller coaster ride.

Operating costs

Production problems at the company’s Syncrude project have plagued Canadian Oil Sands for the past two years. In 2014, the company cut output guidance three times. The difficulties have resulted in operating expenses that are far above the current price of oil and that situation doesn’t look like it will be remedied anytime soon.

In the third quarter of 2014, Canadian Oil Sands reported operating expenses of $47.73 per barrel. Expenses for 2015 are budgeted at $1.7 billion, which is slightly higher than the 2014 number. Production guidance is set at 95 to 110 million barrels for 2015. This is the same as the original guidance for last year.

Hands tied

You have to feel a bit bad for the management team. Canadian Oil Sands owns about 37% of the Syncrude project, but Imperial Oil Ltd., which owns 25% of the asset, operates the facility. This is a very tough situation for Canadian Oil Sands to be in and it doesn’t bode well for the company moving forward.

Should you buy?

Canadian Oil Sands is in a free-fall right now and short-sellers are having a field day. Investors should probably look elsewhere given the company’s operating difficulties and the foggy outlook for oil prices. At this point, the stock looks like it could have a date with five bucks.

There is one place in the energy market that investors win no matter which way the oil price goes. The following report reveals where.

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.

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