DBRS Downgrades Ratings of Canadian Oil Sands Limited to BBB (low), Maintains Negative Trends

DBRS Limited (DBRS) has today downgraded the Issuer Rating and Senior Unsecured Long-Term Debt rating of Canadian Oil Sands Limited (COS or the Company) to BBB (low) from BBB and has maintained the Negative trends. COS is a single-asset oil sands mining operator through its 36.74% equity interest in Syncrude Canada Ltd. (Syncrude).

On February 25, 2015, DBRS changed the trends on COS’s ratings to Negative from Stable. This rating action reflected DBRS’s concerns about the continued challenging crude oil market environment and its impact on the Company’s credit risk profile. The previously assigned BBB rating was predicated on maintenance of a conservative financial profile to offset the inherent weak business risk, which is underpinned by the Company’s asset concentration risk and smaller scale, as well as COS’s higher cost base compared with its peers. The combination of weak oil prices and below-average operating performance (largely driven by chronic reliability issues at Syncrude) has led COS’s credit profile to deteriorate to a level no longer consistent with the BBB rating. As noted in the report dated February 25, 2015, material deterioration in COS’s key credit metrics where debt-to-capital weakens to beyond 30% and debt-to-cash flow over 3.0 times (x) on a sustained basis would result in a further negative rating action. The debt-to-capital ratio deteriorated to approximately 37% as at June 30, 2015, from 30% as at December 31, 2014, while the debt-to-cash flow ratio declined to 4.16x for the 12 months ended June 30, 2015, from 1.71x in 2014. DBRS has maintained the Negative trend on the ratings, as it believes a meaningful recovery of the credit metrics remains uncertain given COS’s high sensitivity to weak crude oil prices. In the absence of a sustained recovery in oil prices and an improvement in reliability at Syncrude, COS will likely generate a free cash flow deficit of around $100 million to $250 million in 2015 despite a substantial reduction in dividends and capital investments (capex), potentially further pressuring the balance sheet. On a positive note, liquidity is expected to be reasonable to fund potential cash flow deficits over the next two years. Furthermore, there is no long-term debt refinancing risk over the next several years, as the earliest maturity is in May 2019.

If COS is successful in implementing a sustainable recovery of the credit metrics, which would be largely influenced by (a) the timing of the oil price recovery, (b) successful execution of reliability improvements, (c) cost saving initiatives and (d) potential equity issuance, DBRS may consider changing the trend to Stable. However, a weaker financial and liquidity profile could result in further rating pressure.

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 (September 2015), which can be found on our website under Methodologies.

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