DBRS Confirms Ratings of Canadian Oil Sands Limited

DBRS has today confirmed the Issuer Rating and Senior Unsecured Long-Term Debt rating of Canadian Oil Sands Limited (COS or the Company) at BBB. All trends are Stable. The confirmation is based on the Company’s financial discipline, which has resulted in its maintaining a low financial risk profile and supporting an investment-grade rating. The low financial risk helps mitigate the higher business risk associated with the Company’s dependence on a single asset, a depleting reserve base with limited ability to grow beyond its current scope, and the high cost nature of its oil sands business. The robust pricing environment allows the Company to fund the majority of its high capital spending requirements for 2014 with internally generated cash flow. As a result, key financial metrics are expected to remain well within the current rating category and support the Stable trend.

DBRS expects COS to generate approximately $500 million in negative free cash flow in 2014, funded with both debt and cash on hand. The impact will likely see key credit metrics weaken only modestly, with total debt-to-capital remaining within the 25% to 30% range. The large negative free cash flow is primarily attributable to higher capex levels associated with the Company’s two major projects: (1) mine train replacement and (2) tailings management projects. DBRS anticipates COS will return to free cash neutral once the respective projects are completed late 2014 and mid-2015 and the associated capex requirement diminishes.

For H1 2014, earnings have been pressured by production challenges, rising cost pressures and higher feedstock (i.e., natural gas prices), with these negative factors more than offsetting a strong crude pricing environment. The Company continues to prioritize improving operating efficiency and reliability to maintain production at approximately 100,000 barrels per day (pro-rated share based on 36.74% ownership of Syncrude Canada Ltd.). Overall, despite weaker operating results in H1 2014, the completion of major capex projects centred on improving operating efficiencies should contribute to better operating performance in 2015 and beyond while maintaining the low financial risk 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 Companies in the Oil and Gas Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

This rating did not include issuer participation and is based solely on publicly available information.