Canadian Oil Sands shares drop as weak oil prices prompt dividend cut

CALGARY – Shares in Canadian Oil Sands Ltd. (TSX:COS) dropped as much as 18 per cent on Thursday after it announced it would be cutting its quarterly dividend by nearly 43 per cent.

The stock dropped to as low as $10.72 on the Toronto Stock Exchange, gaining a bit of ground and closing at $10.98, or off more than 16 per cent from Wednesday’s close.

Canadian Oil Sands has a 37 per cent stake in the massive Syncrude Canada oilsands mine north of Fort McMurray, Alta.

The company is particularly vulnerable to volatility in oil prices, since it doesn’t have much in the way of other assets to act as a buffer.

“This is a commodity based business and our fortunes rise and fall with the price of oil,” said CEO Ryan Kubik on a conference call Thursday. However, he noted the mine has ensured many ups and downs in its 35-year life.

Late Wednesday, Canadian Oil Sands said it would be cutting its quarterly dividend to 20 cents from 35 cents in January so that it can protect its balance sheet while it grapples with weak prices.

Benchmark U.S. oil prices are off by more than a third since the summer, settling at US$66.81 a barrel on Thursday. Canadian Oil Sands is expecting the price to average US$75 a barrel in 2015.

“We appreciate that a dividend reduction is not welcome news. But I suspect this isn’t a complete surprise to the market given our current yield of just over 10 per cent on the current dividend,” said chief financial officer Rob Dawson.

“By taking action now, we protect the long-term value for our shareholders and afford ourselves the flexibility to deliver future dividends reflective of the full commodity price cycle.”

Canadian Oil Sands aims to keep its debt load at between $1 billion and $2 billion. Given next year’s spending plans, combined with low prices, the debt would have exceeded the upper end of that threshold had the dividend not been cut.

Desjardins Capital Markets analyst Justin Bouchard said he wouldn’t be surprised to see Canadian Oil Sands cut its dividend further to 10 or 15 cents if commodity prices don’t improve. He noted the company’s 2015 plans assume an oil price much higher than where oil might be trading for the coming months.

Canadian Oil Sands assumes Syncrude will produce 103 million barrels throughout the year, about six per cent higher than 2014 estimated output.

Its capital spending is expected to be $564 million, down from its $938 million estimate for this year. The drop comes as major spending on improved mining equipment wraps up at Syncrude.

“With the completion of the major capital projects, the focus is squarely on getting the most from our installed capacity at Syncrude,” said Kubik.

The company is expecting Syncrude’s 2014 production to come in at the low end of its 95 to 100 million barrel range.

But Kubik said the mine is on track to deliver better performance next year.

“We know that the Syncrude operation has the potential to run at much higher rates and there is significant value to be realized in achieving that objective,” he said. “Over the past few years, various initiatives have been undertaken to resolve issues that have caused millions of barrels of lost production.”

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