This article is a follow-up to my original article on Canadian Oil Sands (OTCQX:COSWF) from a month ago (previous article), so we can skip the intro and get straight to the analysis. Since my previous article, the stock has risen ~20% and the company released its Q3 earnings on Oct. 27, 2011.
Q3 EARNINGS ANALYSIS
The first thing that jumps out is that cash from operations increased by 123% from 2010 Q3 and increased by 84% YTD. Earnings per share increased to $0.5 from $0.4 from the same quarter last year. Sales volume was in-line and averaged 109,000 barrels per day, up 5% over the 2010 period, which is positive as Canadian Oil Sands have missed this number in the past. Capital expenditures estimates for 2011 have been decreased to $691 million. Net debt decreased to $0.4B from $1.2B at 2010-12-31, helping to increase the current ratio (current assets/current liabilities) to 2.4. And the dividend has remained constant at $0.30, equating to a respectable 5% yield in 2011 at today’s share price.
The following excerpt from the 2011 Q3 filing discusses the main drivers of profitability at Canadian Oil Sands:
Quarterly variances in net income and cash flow from operations are caused mainly by fluctuations in crude oil prices, production and sales volumes, operating expenses and natural gas prices. Net income is also impacted by unrealized foreign exchange gains and losses, depreciation and depletion, impairment charges and deferred tax amounts.
Several of these factors are outside of the control of Canadian Oil Sands and the one with the largest impact is the price of oil, which determines the selling price of their product. For those interested in performing a sensitivity analysis, pg. 27 of the report summarizes the main factors the company uses in its sensitivity analysis. Each $1 increase in the price of WTI (West Texas Intermediate oil) increases cash flow from operations by $0.07/share (the company uses a $92 WTI price for its baseline projections). It should be noted that Canadian Oil Sands prefers not to hedge crude oil prices and during the first 9 months of 2011 and 2010 had no crude oil hedges in place. Long term this makes sense if you are bullish on oil prices, however, over shorter time periods this provides for a volatile ride and means you need to be aware of what is happening at the macro level.
Short-term it’s hard to be too bullish on oil as there are signs that the Chinese juggernaut is slowing, the U.S. economy never really picked up (OECD just cut its 2012 economic outlook from 3.1% to 1.8%) and Europe is teetering on the brink (OECD lowered its 2012 outlook from 2.0% to 0.3%). The concern is not that Greece will default, but who will be next, especially since now CDS (Credit Default Swaps) no longer appear to be a viable insurance policy for bond holders against their debtors defaulting (who will be willing to lend periphery Europe money now?). To see the angst in the markets, look no further than the widening spread between German bunds and other European bonds. In the short-term, it looks like oil will be subdued barring the next round of money printing…but, then again maybe that is not too far off (maybe the presses are already rolling?).
So where does that leave me with respect to Canadian Oil Sands? Overall, Q3 earnings were good: capital expenditures are under control, projects appear to be running on schedule, production quotas are being met and cash flow from operations increased by 123% since Q3 last year. The company did lower its expected WTI crude price to $92 from $95, but at the same time it increased the expected premium between its product and WTI by $2. If I was looking at the company’s earnings in isolation I would be adding to my position, however, in light of the overall macro environment I am currently holding and continue to add to my position at prices below $20, as mid-to-long term I remain bullish on the energy sector and view Canadian Oil Sands as a great long-term investment.
Disclosure: I am long Canadian Oil Sands and adding to my position at prices below $20.