Seeking Alpha
Profile| Send Message|
( followers)  

We recommend Canadian Oil Sands Trust (OTCQX:COSWF) stock as a Contrarian Buy for an expected distribution yield of 7% a year and unlevered appreciation potential of 38% to Net Present Value (NPV) of US$38 a unit. Second quarter results, released the evening of July 29, demonstrated effective cost control as cash flow (Ebitda minus Interest) exceeded expectations from three months ago after adjusting for actual oil price.

Aiming for sustained production at capacity of 350,000 barrels daily (bd) by year end, management has nonetheless had to reduce expectations for the intervening months to allow for unplanned outages that seem to recur. At current oil futures prices for the first half of 2011, capacity operations would generate about C$0.85 a unit in quarterly cash flow. Though oil futures appear to be in a downtrend with current quote below the 40-week average, we think the trend will reverse with strengthening global growth. Most of cash flow could be available for distribution despite the upcoming conversion of the trust to a corporation. Income would be sheltered from corporate tax by capital spending at a measured pace to expand oil sands capacity by 70% to 600,000 bd.

A low, 0.07 ratio of Debt to Present Value supports judicious use of debt to help finance capital investment. As a result, in our projection the distribution at C$0.50 a quarter could continue and possibly increase.

Originally published on July 30, 2010.

Source: Canadian Oil Sands' Q2 Demonstrates Effective Cost Control