Canadian Oil Sands slashes dividend more than expected amid crude drop

CALGARY – Canadian Oil Sands Ltd. (TSX:COS), the biggest partner in the Syncrude Canada Ltd. oilsands project, is slashing its quarterly dividend to five cents a share from 35 as the outlook for crude prices deteriorates.

In December, Canadian Oil Sands signalled it would be cutting its quarterly payout to 20 cents in order to protect its balance sheet, but the picture has become gloomier since then.

At the time, oil prices were around US$67 a barrel. On Thursday, the March contract settled at US$44.53.

When it released its forecast in December, Canadian Oil Sands was planning based on US$75 oil for this year. Now it’s expecting US$55. That’s a sharp drop from crude’s 2014 peak above US$107 a barrel in June.

“We entered the current period of low crude oil prices with a strong balance sheet, and by reducing our dividend and cutting costs at Syncrude, COS is well positioned to manage its business through a prolonged period of low oil prices and retain its long-term value,” CEO Ryan Kubik said in a release.

“Syncrude has the flexibility to respond to market conditions without affecting projections for 2015 production.”

Production at Syncrude is expected to range between 95 million and 110 million barrels in 2015 — the same as its earlier forecast.

The dividend cut did not come as a surprise to John Stephenson, president and CEO of Stephenson & Company Capital Management.

“I’m kind of bearish on the name and I did expect a pretty severe cut,” he said. “I don’t like this name. I don’t think you need to be there as an investor.”

Canadian Oil Sands has a lot working against it, Stephenson said. It has high fixed operating costs, produces only crude oil and has not locked in higher prices through hedging contracts.

The one bright spot is that the company has about $1.4 billion in unused credit facilities, meaning it shouldn’t face a funding crunch for now, he said.

Canadian Oil Sands has a 37 per cent stake in Syncrude, a massive mining operation north of Fort McMurray, Alta. Since its Syncrude interest is virtually its only asset, the company is particularly vulnerable to swings in crude prices.

The other partners in Syncrude include Imperial Oil Ltd. (TSX:IMO), Suncor Energy Inc. (TSX:SU) and Chinese firms CNOOC Ltd. and Sinopec, along with Mocal Energy and Murphy Oil.

Trading in Canadian Oil Sands shares was halted on the Toronto Stock Exchange on Thursday afternoon. The stock was down about seven per cent at $6.51 before that.

During the last three months of 2014, Canadian Oil Sands’ profits fell by nearly 87 per cent. Net income was $25 million, or five cents per share, versus $192 million, or 40 cents per share in the same year-earlier period.

Cash flow from operations fell to $207 million, or 43 cents per share, from $391 million, or 81 cents per share.

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