By Rupert Nuttle
Canadian Oil Sands Stock by RFN on TradingView.com
Canadian Oil Sands Ltd., which was bought out by a major player in Canada’s energy sector this month, had been losing money and scrambling to offset debts for close to a year, according to analysis of their most recent financial statement.
To begin with, the company lost $488 million in the first nine months of 2015, versus a net income of $435 million in the same period the previous year. In other words, they lost more money in 2015 than they made in 2014. That’s a decline of close to a billion dollars.
To see an annotated version of the financial report click below.
What caused this change of fortune?
Some of the reasons are well-known. The global oil market has not been kind to Canadian crude producers lately. Canadian oil is relatively expensive to extract compared to Middle Eastern producers such as Saudi Arabia and Iran, where low production costs recently drove the per-barrel price of oil down to an unprecedented $30 USD.
On this point alone, Canadian Oil Sands was operating at a loss. Last year, it cost them $40 CAD to produce one barrel of crude, which, even at today’s slightly higher prices, would go to market for about $35. On a bad day, they could lose $10 on every barrel produced.
To try to mitigate these losses, the company slowed production and stopped expansion – a strategy that’s becoming more and more common among Canada’s oil producers, according to Canadian energy market analyst Jean-Thomas Bernard.
But for Canadian Oil Sands, it wasn’t enough. Slowed production means limited cash flow; limited cash flow means less money on the books. Financial reports reveal that their cash flow had dropped to a quarter of 2014 levels in 2015, meaning that if they were to survive they would have to wait for global prices to recover.
This hurry-up-and-wait message was exactly what Canadian Oil Sands CEO Ryan Kubik delivered to investors in early January, faced with a “hostile” takeover bid from Suncor Energy. In a video posted on the company’s website, Kubik promised “a new era of low-cost operations” that would help them weather the market’s deterioration until prices rose again.
In the end, though, independence wasn’t worth the wait.
When Suncor’s $4.3 billion offer for the company expired on Jan. 8, close to half of Canadian Oil Sands investors had already tendered their shares – not the two-thirds needed to secure the deal, but a telling sign that the merger was imminent.
So Suncor extended their offer once again, and on Jan. 18 the companies reached a “friendly” agreement. Suncor raised its bid to $6.6 billion, absorbing close to $2.4 billion in Canadian Oil Sands debt. Key investors finally tendered their shares.
“In the end, the willingness to fight the bid clearly was not strong enough, or was attenuated through a better offer by Suncor,” said André Plourde, an expert in oil sands economics at Carleton University.
With more assets distributed more broadly, Suncor was in a good position to take a larger slice of the oil-sands pie. The agreement with Canadian Oil Sands boosts Suncor’s share in the Fort McMurray project (also known as Syncrude) from 12 per cent to 49 per cent.
At a time when breaking even is a thing of the past, “there is definitely no expansion,” says Bernard. Hence Suncor’s move to purchase an ailing industry partner, instead of building new projects of their own. Bernard believes Suncor’s expanded Syncrude share will benefit all players in the oil patch by centralizing its operations and increasing information-sharing between companies.
Plourde agrees. But, he says, “time will tell whether this will be possible since these are hugely complicated operations.”
Both experts also mentioned that Suncor’s takeover makes Syncrude more responsive to provincial regulations. Since Suncor controls assets in other parts of Alberta, the new arrangement simplifies the industry’s relationship with regulators.
“As the owner of two sets of operations, [Suncor] will be in much better position to negotiate fiscal arrangements with the province,” says Plourde.
With Canadian Oil Sands no longer in the picture, the experts say that Alberta’s oil patch will now be characterized by a tug-of-war between Suncor’s increased share in Syncrude operations and the executive power of Imperial Oil – an Exxon Mobil subsidiary with a 25 per cent share of the project.