Canadian Oil Sands to stay in the black even if crude prices keep falling

Canadian Oil Sands to stay in the black even if crude prices keep falling

Syncrude’s Mildred Lake Mine Replacement (MLMR) project is expected to improve bitumen recovery and reduce maintenance requirements. (Image courtesy of Syncrude, via Flickr)

Even if oil prices fall below $45 per barrel, Canadian Oil Sands (TSX:COS), which is currently the target of a $4.3 billion takeover bid by Suncor (TSX, NYSE:SU), says it will still be able to make money.

In its recently published 2016 budget plan, the company unveiled a pared-back capital budget that reduces capital spending by 20% year-over-year to $295 million in 2016. In that scenario, COS could continue to operate as an independent entity and be cash flow positive, the company said.

“Canadian Oil Sands can clearly withstand the prevailing low oil price environment,” President and CEO Ryan Kubik said during a conference call Tuesday.

The oil sands player, which is under pressure to reduce costs and improve the reliability of its output, said it aims to produce at least 35 million barrels of oil next year, about 10% higher than the full-year estimate for 2015. Capital expenses are estimated at $220 million, based on a $50 U.S. benchmark crude, versus about $41 currently.

Canadian Oil Sands’ stock price, which is 98% correlated to the price of oil, has dropped about 14% so far this year alongside an ongoing collapse in crude prices, but it gained 4.3% Tuesday after the budget announcement to close at Cdn$8.93.

Calgary-based Suncor is seeking to take advantage of the roughly 60% fall in U.S. and global oil prices since mid-2014 to tighten its grip on Syncrude, Canada’s largest synthetic oil project. Suncor is aiming for a 49% stake in the venture, up from 12% currently. It is offering 0.25 of a share for each Canadian Oil Sands share.

The targeted company was hoping to give its shareholders more time to consider their options: 120 days or until early February 2016. But the Alberta Securities Commission ruled this week that Canadian Oil Sands’ poison pill provision must expire by Monday, Jan. 4, 2016.