DBRS Releases Report on Canadian Oil Sands Limited

DBRS has today released an updated report on Canadian Oil Sands Limited (COS or the Company). The Company’s financial profile helps support the current BBB rating, despite some challenges around unplanned outages and delays in project turnarounds that resulted in the Company experiencing lower production volumes. The Company has been a beneficiary of what DBRS believes to be top-of-cycle crude prices over the last nine months, but remains exposed to West Texas Intermediate (WTI)-Sweet Crude Oil differentials that historically have swung from significant premiums to large discounts to WTI prices. The Company continues to maintain significant financial flexibility with a healthy liquidity profile ($0.84 billion in cash and $1.54 billion in unused revolving credit facilities), a flexible dividend payout and no debt maturities in the medium term, which has enabled the Company to internally fund its elevated capital expenditure (capex) requirements with nominal pressure on the balance sheet.

High capex requirements are expected to cause negative free cash flow for the Company until at least H1 2015 when the last of the planned major projects is expected to be completed. The Company’s share of the (1) mine train relocation and (2) tailings management projects, along with regular maintenance, is expected to remain at around $1.3 billion during this period, resulting in cash flow deficits (~$500 million to $700 million) in each of 2013 and 2014, which DBRS expects largely to be funded by significant cash on hand ($840 million as of September 2013). DBRS expects that free cash flow will be neutral in 2015, as capex should return to normal levels of around $400 million to $500 million as spending on the major projects will be complete.

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 applicable methodology is Rating Companies in the Oil and Gas Industry, which can be found on our website under Methodologies.