Canadian Oil Sands Releases Bittersweet 1Q Earnings

Canadian Oil Sands Trust's (COSWF.PK) first quarter earnings announcement was bittersweet for investors, highlighted by lower-than-expected cash flow numbers on the one hand, and a healthy increase in quarterly distributions on the other.

On the bitter side, the company said cash flow per share was C$0.87 per share versus consensus estimates of 88¢ thanks to higher operating costs in the quarter that averaged C$35.93 per barrel.

In a note, UBS analysts Andrew Potter said:

While high costs were expected due to low throughput, they were higher than our expectation given unexpected third-party bitumen acquisition costs as well as much higher than expected energy consumption per barrel.

His first quarter cash flow estimate was C$0.95 with an operating cost expectation of C$29.79 per barrel.

Now that Canadian Oil Sands has increased its operating cost guidance from C$27 to C$32.08 per barrel to reflect higher energy consumption and other costs, Mr. Potter is reducing his cash flow estimates from C$3.33 to C$3.09 in 2008 and in 2009 from C$3.63 to C$3.48.

On the sweet side, the company increased its quarterly distribution from C$0.75 to C$1 per unit, well above Mr. Potter's expectation of an C$0.85 to C$0.90 distribution. Even better, Mr. Potter said the Canadian Oil Sands could support further hikes to the distribution.

He told clients:

Although this is a significant distribution increase, we note that due to very strong oil prices there could be more distribution in store. At current strip oil prices and assuming the conversion to a bitumen based royalty in 2009, we estimate the trust could be capable of a $1.25 per unit quarterly distribution.

Mr. Potter increased his price target on the stock from C$38.50 to C$43, and maintained his "neutral" rating.

Comments

[Jim Kingsdale]

The UBS analysis illustrates the uncomfortable box all Street analysts are contained in. They simply cannot look down the road to a realistic assessment of the price of oil. There will be severe oil shortages in two or three years according to all serious non-industry analysts and the price of oil will be substantially higher. That is the reason to own Canadian Oil Sands, not it's current distribution or even a $1.25 dividend that could come next year. I recently posted a very different view of the COS announcement on my site, energyinvestmentstrate....

[steve Ward]

Rising operating costs and rising capital costs continue to plague the Canadian oil sands industry.
Rising oil prices continue to bail out the companies with improved earnings and larger throughput for those who can achieve it

The rising costs have cancelled projects and only the well heeled such as Total and Stst Hydro have the capital to proceed on new projects.

The well -heeled and those companies with current production and soon to be current production, such as Opti of Canada will survive. coupled with the Alberta Royalty Tax hikes a consolidation is taking place within the industry itself leaving only a smaller group of companies in the near future operating or opening new oil sands projects.

This leaves Oil Sands Quest and companies like her in serious doubt as to the ability to raise capital for development and leaves Canadian Oil Sands Trust in the driver seat so to speak.

[deuxsous]

Since I am retired, I live on my investment base. Most of what I hold must produce a decent income stream, not just fervent hope for capital gains. The energy area is however one place, apart from "go-anywhere bond funds", where one can get income as well as inflation protection. There are oil majors which are yielding 4-5% right now. I expect as the upper echelons of the majors begin to grasp the realities of an inability to reliably replace reserves, we are going to see some huge new royalty trusts yielding much higher rates as "wasting assets" that they do for "going concern" operations. Sabine Trust and Mesa Royalty have been giving high yields for 25 years and haven't extinguished yet.

In particular I would urge people to look at buying Canadian Oil Sands Trust--on big pull backs--not as a feel-good, "peak oil" play but as a good yielder with a long lived reserve base. I own it and also own four of the US gas/oil trusts with conservative reserve estimates longer than ten years.

Even in the absence of "peak oil" considerations, the simple fact of demand having oustripped supply capability in nearly all world commodities after two decades of neglect, from 1980 to 2001, provides a solid underpinning for energy as well as metals and foods for **at least** another decade. Naturally there are long periods of consolidation at new higher levels after rapid price gains, but the long term is golden for many commodities including oil.

[gebby]

whats wrong with a 10% yield. why not just have a buy rating. oil prices will stay high no?