Canadian Oil Sands (OTCQX:COSWF) is a pure investment in light, sweet crude oil through Canadian oil sands. Currently, the company offers a high-dividend yield of 6.8%, which is quite attractive for income investors. Canadian Oil Sands has a market capitalization of about $9.5 billion and is traded in the U.S. in the over-the-counter market.
Canadian Oil Sands' only producing asset is its 36.74% interest in the Syncrude project, a joint venture to explore oil sands in Canada. Syncrude consortium was formed in 1964 with the mandate to research the economic and technical feasibility of mining oil from the Athabasca oil sands and production has started in 1978. It is one of the world's largest producers of synthetic crude oil from oil sands, and the largest single source producer in Canada. It has approximately 5.1 billion barrels of proven and probable reserves (11.9 billion when including contingent and prospective resources). Oil Sands have an exceptional long life and including fully realized prospective reserves, current production capacity could be sustained for more than 90 years.
Canadian Oil Sands has the largest ownership in the consortium, followed by Imperial Oil Resources (IMO) with a stake of 25%, and Suncor Energy Ventures Partnership (SU) which owns 12% of Syncrude. Canadian Oil Sands may expand its ownership in the joint venture given that Marathon Oil (MRO), which owns 5% of Syncrude, is willing to sell.
As operating results were not meeting design expectations, and in 2006, operatorship of Syncrude was shifted to a service contract provided by Imperial Oil and Exxon Mobil (XOM), but operational improvements have been limited. Currently, Syncrude is undergoing a major capital project to enhance operations and deliver strong long-term production growth. Until current operations are improved, it is unlikely that any further expansion programs will be undertaken. Syncrude has a stated productive capacity of 350,000 barrels per day, but production has been consistently below capacity. Last year Syncrude produced 104.9 million barrels of synthetic crude oil, practically unchanged from the production achieved in 2011, but below its target of 113 million barrels. Canadian Oil Sands, like all Syncrude partners, is responsible for the marketing of its share of production.
Regarding its financial performance, Canadian Oil Sands does not hedge its production, so it is entirely exposed to oil prices volatility. In 2012, its sales declined by 9.4% to $3.56 billion, due to lower realized selling prices, given that its sales volume remained stable from the previous year. Its profitability is very high, taking into account its EBITDA of $1.7 billion, which represents an EBITDA margin of close to 50%. Its net income stood at close to $1 billion. The company reported recently its third quarter and nine months results for 2013, which were negatively affected by lower volume production. Higher realized selling prices partially offset lower volumes, but were not enough to prevent lower profit. During the first nine months of 2013, the company's net income was $642 million, a 15% drop from the same period in 2012.
Canadian Oil Sands' dividend track record has been quite volatile, with several dividend cuts over the past few years. Its last cut was in 2011, when it reduced its dividend per share by 40% from $1.85 to $1.10. Currently, Canadian Oil Sands pays a quarterly dividend of $0.35 per share, or $1.40 annually. At its current stock price, it offers an attractive dividend yield of 6.8%. Its dividend payout ratio in the past year was 67%, which is an acceptable level for a relatively stable company with very high profitability like COS. The next dividend payment will be paid on November 29, 2013 to shareholders of record on November 22, 2013.
Canadian Oil Sands has traditionally funded its capital expenditures [capex] from operating cash flows. In 2012, the company's capex of $1.08 billion was fully funded by its $1.6 billion cash flow from operations. Heading into a period of large capital requirements for several special projects, Canadian Oil Sands has built up its cash balance to cushion spending and reduced leverage. The company is currently undergoing four major capital programs, but two of them are expected to be completed over the next few months. Therefore, at the end of 2013, the company expects that only about one-third of the total costs of the projects will remain. Thus, over the coming years capex should decline compared to the past few years, leading to higher free cash flow generation and improved dividend coverage.
One of the main positive factors about Canadian Oil Sands is its conservative balance sheet, given that its net debt was only about $709 million at the end of the second quarter of 2013. Net debt currently represents only 13% of its capitalization, and its net-debt-to-EBITDA ratio is only about 0.5x. Its low debt levels gives Canadian Oil Sands great flexibility when funding future capex programs, which is also supportive for a stable dividend policy over the long term.
Canadian Oil Sands offers a high-dividend yield close to 7%, which is attractive for income investors due to the company's fundamentals that can generate a steady long-term dividend stream, supported by a strong balance sheet and good cash flow generation capacity. Moreover, the company is trading at undemanding multiples given its forward price-to-earnings ratio of only 10.8x, making Canadian Oil Sands a compelling long-term investment both for capital appreciation and a reliable income stream.