Canadian Oil Sands Trust (COSWF.PK) may face selling pressure as its distribution cut was more than the market was expecting. At the same time, analysts are weighing in on where oil prices need to be for it not to be lowered again.
Along with reporting a 76% decline in fourth quarter profit to C$124-million, or C$0.26 per unit, compared with the same period a year earlier, the largest stakeholder in Syncrude Canada Ltd. slashed its quarterly distribution by 80% to C$0.15 per unit.
“This may lead to near term pressure on the units from investors looking for premium yielding units,” RBC Capital Markets analyst Gordon Gee said in a research note.
He does think the decision was wise given the weak commodity environment and expects the trust to revisit its distribution on a quarterly basis depending on further price movements.
“Investors should view the distribution level as a true return on capital rather than a combination of return of and return on capital as in the case of energy trusts,” Mr. Gee said, adding that the trust is now discounting long-term oil prices in the low $50 per barrel range.
He compared this with Suncor Energy Inc. (SU), which is discounting oil in the high $50 range, has higher financial leverage and a higher cost structure for 2009. As a result, RBC continues to rate COS at “outperform” with a C$28 price target.
Noting that this new distribution level is sustainable at oil prices of approximately $50 per barrel, UBS analyst Andrew Potter told clients that the cut was due to lower crude prices and the company’s need to manage liquidity prior to its debt maturities this summer.
“Given the uncertainty around oil prices, we would not be surprised to see further distribution cuts,” he said, adding that the market was anticipating a cut to the C$0.20 to C$0.30 range based on historical valuations.
Although COS will likely come under short-term pressure we believe there is still considerable medium and long-term upside potential based on our view of an oil price recovery by 2010.
He also reiterated a “buy” rating and C$26 price target on the stock. However, UBS continues to rate COS a short-term “sell.”
Raymond James’ Justin Bouchard agrees that the magnitude of the distribution cut will likely catch some investors by surprise as the consensus this quarter was C$0.36 per unit. He too expects to see downward pressure for the stock.
However, the analyst told clients that he continues to like the company’s story and the long-term leverage it provides to oil prices – recommending that investors take weakness as an opportunity to buy the units.
Mr. Bouchard rates COS a “strong buy” with a price target of C$44. He noted that the distribution cut allows the company to maintain its strong balance sheet and estimates that it is sustainable at $40 per barrel (WTI), “providing some buffer if oil prices remain at depressed levels through 2009.” Operating costs that remained at $32 per barrel, meanwhile, were attributed to the operational excellence ExxonMobil Corp. (XOM) brought to the project.
COS also re-introduced its dividend reinvestment plan (DRIP) effective February 2009 to lessen cash distribution outlays in the short-term. This will effectively issue shares from treasury in lieu of paying distributions from cash.
“This should serve to decrease cash outflows and preserve financial flexibility,” the analyst said.