DBRS Confirms the Senior Unsecured Long-Term Debt Rating of Canadian Oil Sands at BBB, Stable

DBRS has today confirmed the Senior Unsecured Long-Term Debt rating of Canadian Oil Sands Limited (COS or the Company) at BBB with a Stable trend. The rating confirmation reflects the Company’s strong financial profile and strong asset base in Alberta’s oil sands, with its equity interest (36.74%) in Syncrude Canada Limited (Syncrude), one of the largest oil sands mining projects in Canada.

The Company’s operating performance is highly sensitive to crude oil price movements given its 100% oil-weighted operations with unhedged production. Strong earnings from high oil prices have improved credit metrics sharply over the past two years, particularly debt-to-cash flow and interest coverage ratios. Leverage improved only modestly as strong operating cash flow was mainly used to support higher dividend payments and capital investments, as well as increasing liquidity on hand rather than paying down debt significantly. Based on strong crude oil prices, operating cash flow is expected to be sufficient to cover at the least the bulk of estimated capex of $1.46 billion and dividends of $0.53 billion (based on distributions paid in 2011). As a result, credit metrics should remain strong in the foreseeable future. In addition, the Company maintains sufficient liquidity through its $1.64 billion of credit facilities ($1,565 million undrawn as of December 31, 2011), with no long-term debt maturities until 2013 and significant liquidity on hand ($718 million).

There are other limiting factors that are considered manageable. Operations are based solely in Alberta, which adds to concentration risk. COS has high operating leverage as a large portion of its total operating costs are fixed, with remaining costs tied mainly to volatile natural gas prices. There are ongoing operating challenges associated with running complex equipment as unplanned outages have continued to occur despite Syncrude’s experienced operations team under a ten-year services agreement with Imperial Oil Limited (Imperial Oil; rated AA (high)). Incidents such as these curtail production and could result in significant increases in per-barrel operating costs, as was the case in 2008, 2009 and 2011.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.