Does Canadian Oil Sands Ltd. Have More Upside Potential?

Here’s why Canadian Oil Sands Ltd. (TSX:COS) looks like a risky bet at the current price.

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Shares of Canadian Oil Sands Ltd. (TSX:COS) are up more than 50% since the beginning of October, and investors are wondering if the stock could go higher.

Takeover bid

A hostile bid by Suncor Energy sent the shares of Canadian Oil Sands rocketing higher at the beginning of last month, and the stock has remained pretty much stuck near the $10 mark ever since.

Canadian Oil Sands says the $6.6 billion bid is ridiculously low, while Suncor remains convinced the offer fairly reflects the value of the company in the current market and is a 40% premium over the closing price of Canadian Oil Sands’s shares before the bid was announced.

Investors seem to believe Canadian Oil Sands will be taken out at or near the offer price because the stock has not pulled back significantly on the standoff.

Syncrude trouble

Canadian Oil Sands owns 37% of the massive Syncrude oil sands project. Suncor holds 12%.

As the partner with the largest piece of the pie, Canadian Oil Sands has also been on the hook for the biggest part of all the maintenance and capital expenditures, and there has been a lot of problems.

In fact, Syncrude has been an operational nightmare for more than three years, and while the project is coming to the end of a major capital program, output is still lagging the design capacity.

When oil traded for more than $100 per barrel, all the inefficiencies in the operations weren’t a big problem because margins were still very high. Now that oil has dropped below $50 per barrel and appears determined to stay there for the foreseeable future, things haven’t been going so well for Canadian Oil Sands.

The company slashed its dividend and stripped down the capital program, but there is only so far it can go. At the moment, the company is barely keeping its head above water.

Canadian Oil Sands reported Q3 cash flow from operations of $82 million and spent $84 million on capital outlays. The company is still paying its shareholders a quarterly dividend of $0.05 per share, which ate up another $25 million, so the business is still cash flow negative.

The company reported a net loss of $174 million in the quarter as a result of the revaluation of its U.S. dollar-denominated long-term debt.

The company is sitting on $3.6 billion in long-term debt. Most of the obligations are not due until at least 2018, but the burden is still a problem. Interest costs on the debt totaled $38 million in Q3, almost half of the total funds the company brought in from operations.

Should you buy the stock?

It is certainly possible that Suncor could up its offer to get the deal done and out of the way. The only other realistic suitor would be Imperial Oil, which owns 25% of Syncrude and has the contract to run it.

At this point, buying the stock looks risky. If oil prices tank again and Suncor walks away, the shares could easily retest the $6 mark. I think Canadian Oil Sands will eventually be absorbed by one or more of the Syncrude partners, but I wouldn’t bet on it happening at a much higher price.

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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