Canadian Oil Sand Trust (COS.WF) report of Q1 results demonstrates the power of higher oil prices to leverage its cash flow.  Based on an average WTI price of $97.82, up from $58.23 in 1Q07 (+68%), operating cash flow rocketed ahead 119%, to C$0.98 vs. C$0.42 per share despite plant outages that caused unit sales to fall by 9%.  

The company’s decision to boost its quarterly dividend by 33% to C$1.00 per share demonstrates its confidence in the continuation of strong cash flow.  Since the company cannot control the price of crude (it does not sell its output forward in the futures market), I take the new dividend level to indicate, in part, its belief that output will be substantially higher going forward. 

Production in Q1 was 17% below the expected level due to weather-related damages to the plant.  More important, Q1 production was 31% lower than the new rated capacity of the Syncrude plant.  The company should be able to achieve that objective going forward.  In addition, cap ex is reduced substantially since the completion of Stage 3 capacity last year.

With crude prices recently 20% higher than the level realized in Q1 and with the plant capable of increasing COS’ share of Syncrude production by 31% from 8.9 mb/d to 11.3 mb/d (COS’s owns 36.74% of Syncrude), it seems clear that going forward cash flows could potentially grow substantially.  Given the company’s stated policy of maximizing cash distributions prior to a possible change of organizational structure after 2011, one might reasonably anticipate further dividend increases if the price of oil remain at recent highs or goes higher.

COS remains a core portfolio holding.  I would note that by 2011, when the new Canadian tax treatment of trusts may cause COS to adjust its legal structure, I expect the price of crude to be $175 - $325 per barrel.    Operating cash flow in three years, if I am correct, could well be north of $2.50 per quarter. 

Tags: peak oil energy investments

This entry was posted on Tuesday, April 29th, 2008 at 5:18 pm and is filed under Canada (oil sands), Canadian Oil Sands Trust (COSWF). You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.