DBRS Confirms Canadian Oil Sands Limited at BBB with a Stable Trend

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, based on results for the six months ended June 30, 2012 (H1 2012).

COS has benefited from favourable crude pricing, despite lower realized prices in the second quarter ended June 30, 2012 (Q2 2012). Given its 100% weighting toward crude oil production, the Company has built significant liquidity, and maintains a strong financial profile. Although the issuance of debt (US$700 million) in Q1 2012 negatively pressured leverage (to 30% at H1 2012), debt-to-capital remained within the parameters of the current rating category. Operating cash flow in H1 2012 was negatively impacted by the lower realized pricing. DBRS now estimates cash flow for the year to be approximately $1.5 billion (from approximately $1.8 billion). This is not expected to be sufficient to fully fund capex ($1.1 billion) and dividends ($0.6 billion) in 2012; however, current liquidity is sufficient to fund the expected shortfall. The Company also announced that Syncrude will proceed with a $1.9 billion (gross) centrifuge plant as part of tailings management. This is expected to add $0.7 billion (net) in capex to COS, spread through 2015.

Production levels for the first half of the year were lower than expected, as downtime at the Syncrude facility (both planned and unplanned) negatively impacted production and financial results. Reliability issues at Syncrude operations, which has yet to reach design capacity, continue to affect capacity utilization negatively. Continued operational issues will limit COS’s production growth in the near-to-medium term, and could result in significant increases in per-barrel operating costs if persistent. No significant growth in production is expected until the completion of the Aurora South mine train expansion (200 mboe/d capacity) after 2020.

Overall, the credit quality of COS reflects its strong financial profile, long-life reserves with minimal exploration risk and strong partnership in Syncrude operations. However, the Company’s business risk profile is limited by its concentration risk (both in terms of production mix and reliance on a single project) and reliability issues with current operations. This leaves COS’s cash flow highly susceptible to unplanned production downtime, as well as a potential weakening of crude oil prices (as shown in the current results).

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

The applicable methodology is Rating Oil and Gas Companies (April 2011), which can be found on our website under Methodologies.