DBRS Confirms Canadian Oil Sands Limited at BBB with a Stable Trend

DBRS has today confirmed the Issuer and Senior Unsecured Long-Term Debt ratings of Canadian Oil Sands Limited (COS or the Company) at BBB with Stable trends.

COS’s financial profile has remained strong in 2012 and well within the rating parameters. COS continued to benefit from a favourable synthetic crude oil (SCO) pricing environment, as 100% of COS’s allotted bitumen production is upgraded to synthetic crude, which typically trades close to WTI pricing. This provides the Company with shelter from exposure to the volatile heavy-light oil pricing differentials experienced in the Alberta market. As a result, strong internally generated cash flow funded the majority of high capex and dividends for 2012.

The two key challenges facing the Company for 2013 and 2014 will be increased capital spending levels and volatile regional pricing differentials. Capital spending for 2013 and 2014 is expected to be approximately $1.3 billion each year, and will be focused on (a) mine train relocation and (b) tailings management. This significant level of spending is expected to result in cash flow deficits in each of 2013 and 2014, drawing down the Company’s current cash balance. DBRS expects that free cash flow will be neutral in 2015, as capex returns to normal levels of around $400 million to $500 million as spending on mine train relocation and tailings management is complete.

The other key challenge is the expected volatility in regional pricing differentials. As production of light oil is expected to increase, coupled with limited pipeline capacity, DBRS expects to see increased volatility in the differential between WTI and SCO in the near-to-medium term. Given that COS does not actively hedge, its earnings and cash flow are expected to remain highly sensitive to changes in oil prices. Significant pricing changes could lead to larger than anticipated free cash flow deficits, thereby pressuring the balance sheet. DBRS does note that the Company maintains flexibility in its dividend payout, and will likely curtail dividend payouts in order to preserve its financial profile.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Oil and Gas Companies (April 2011), which can be found on our website under Methodologies.