Mr. Ryan Kubik reports
CANADIAN OIL SANDS ANNOUNCES FOURTH QUARTER RESULTS, $0.05 PER SHARE DIVIDEND AND COST REDUCTIONS AT SYNCRUDE
Canadian Oil Sands Ltd. (COS) generated cash flow from operations of $1,106-million ($2.28 per share) in 2014 and $207-million (43 cents per share) during the fourth quarter of the year. Cash flow from operations in the fourth quarter was down about 47 per cent compared with the same period of 2013, largely reflecting lower crude oil prices and higher operating expenses. The decline in crude oil prices has continued into 2015 with West Texas Intermediate (WTI) benchmark prices to date averaging $47 (U.S.) per barrel. While the decline in oil prices has been significant, a weaker Canadian dollar has offset some of the impact.
In response to the price environment, Syncrude is undertaking a comprehensive review of costs. An effort was already under way at Syncrude to reduce the cost structure, but this work has intensified to identify near-term opportunities. The initial efforts have identified potential cost reductions in 2015, net to COS, of $260-million to $400-million, or about 10 to 15 per cent, in operating, development and capital costs relative to the budget COS released on Dec. 3, 2014. COS has revised its outlook for 2015 to incorporate $294-million, net to COS, of these potential cost reductions. COS does not anticipate these reductions to have an impact on production or reliability initiatives under way at Syncrude, and it is maintaining its production range of 35 million to 40 million barrels net to COS for 2015.
COS is reducing its quarterly dividend to five cents per share for the first quarter of 2015. COS had previously indicated its intention to reduce the quarterly dividend, based on the 2015 budget assumptions released on Dec. 3, 2014, to 20 cents per share; however, crude oil prices have declined materially from the budget assumptions, requiring a further reduction in the dividend to better align with the current price environment and as a prudent step to preserve balance sheet strength in the short and medium term.
"We entered the current period of low crude oil prices with a strong balance sheet, and by reducing our dividend and cutting costs at Syncrude, COS is well positioned to manage its business through a prolonged period of low oil prices and retain its long-term value," said Ryan Kubik, president and chief executive officer. "Syncrude has the flexibility to respond to market conditions without affecting projections for 2015 production."
"While the potential cost savings announced today are substantial, Syncrude is continuing to examine the longer term opportunities to achieve a sustainable, lower cost structure. Syncrude and its owners strongly believe the competitiveness of the business can be enhanced through the full oil price cycle," said Mr. Kubik.
COS is in a strong financial position with net debt of approximately $1.9-billion at Dec. 31, 2014, representing long-term debt-to-total capitalization of 30 per cent. With a long-term debt-to-total capitalization covenant of 55 per cent, a significant increase in debt or decrease in equity would be required to negatively impact the company's financial flexibility. COS's earliest senior note maturity is in 2019 and COS has about $1.4-billion of unutilized credit facilities, which mature in 2018. With the cost and dividend reductions announced to date, COS has sufficient liquidity and balance sheet strength.
More detail on COS's outlook for 2015 is provided at the end of this press release, and further information on the company's fourth quarter 2014 results is provided in the fourth quarter management's discussion and analysis (MD&A), available on the company's website.
Highlights for the three months and year ended Dec. 31, 2014:
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Cash flow from operations for the quarter was $207-million (43 cents per share) compared with $391-million (81 cents per share) in the same quarter of 2013. The decline in cash flow from operations is mainly the result of a lower realized selling price and higher operating expenses, partially offset by lower current taxes. On an annual basis, cash flow from operations decreased to $1,106-million from $1,347-million in 2013, as lower sales volumes and higher operating expenses were partially offset by lower current taxes.
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Net income was $25-million (five cents per share) for the quarter compared with $192-million (40 cents per share) in the fourth quarter of 2013. On an annual basis, net income was $460-million in 2014 compared with $834-million in 2013. The decrease in net income reflects the same factors that impacted cash flow from operations. Additionally, foreign exchange losses and depreciation and depletion expense were higher in 2014 compared with 2013.
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Sales volumes for the quarter averaged about 108,100 barrels per day compared with about 112,100 barrels per day in the comparative 2013 quarter. On an annual basis, sales volumes averaged about 94,600 barrels per day in 2014 compared with 98,000 barrels per day the prior year.
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Operating expenses were $438-million in the fourth quarter of 2014 compared with $388-million in the same quarter of 2013. The increase mainly reflects additional maintenance costs associated with unplanned outages on upgrading units, and higher natural gas and diesel costs. Per-barrel operating expenses also rose to $44.04 in the fourth quarter of 2014 compared with $37.60 in the comparative 2013 period, reflecting lower sales volumes in the 2014 period. Operating expenses in 2014 were $1.7-billion, which were in line with the company's expectations for the year, but higher on a per-barrel basis as a result of lower sales volumes.
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COS is reducing its quarterly dividend to five cents per share, payable on Feb. 27, 2015, to shareholders of record on Feb. 20, 2015. The corporation paid dividends totalling $678-million, or $1.40 per share, in 2014.
Three months ended Year ended
Dec. 31, Dec. 31,
2014 2013 2014 2013
Cash flow from operations(1)
($ millions) $207 $391 $1,106 $1,347
Per share(1) ($/share) $0.43 $0.81 $2.28 $2.78
Net income ($ millions) $25 $192 $460 $834
Per share, basic and
diluted ($/share) $0.05 $0.40 $0.95 $1.72
Sales volumes(2)
Total (mmbbl) 9.9 10.3 34.5 35.8
Daily average (bbl) 108,139 112,092 94,557 98,037
Realized SCO selling price
($/bbl) $81.32 $91.47 $99.24 $99.55
West Texas Intermediate
(WTI) (average $U.S./bbl) $73.20 $97.61 $92.91 $98.05
SCO premium (discount) to WTI
(weighted average $/bbl) $(3.23) $(10.84) $(2.55) $(1.10)
Average foreign exchange rate
($U.S./$Cdn) $0.88 $0.95 $0.91 $0.97
Operating expenses ($ millions) $438 $388 $1,686 $1,494
Per barrel ($/bbl) $44.04 $37.60 $48.86 $41.75
Capital expenditures ($ millions) $170 $292 $930 $1,342
Dividends ($ millions) $169 $169 $678 $678
Per share ($/share) $0.35 $0.35 $1.40 $1.40
(1) Cash flow from operations and cash flow from operations per share are
additional GAAP (generally accepted accounting principles) financial
measures and are defined in the "additional GAAP financial measures"
section of the company's MD&A.
(2) The corporation's sales volumes differ from its production volumes due
to changes in inventory, which are primarily in transit pipeline volumes.
Sales volumes are net of purchases.
Syncrude operations
During the fourth quarter of 2014, Syncrude produced 26.9 million barrels, or 292,600 barrels per day, reflecting an unplanned outage in Syncrude's largest sour water treatment unit, which limited upgrading capacity. In the fourth quarter of 2013, Syncrude produced 28.3 million barrels, or 307,600 barrels per day.
On an annual basis, Syncrude produced 94.2 million barrels, or 258,100 barrels per day, in 2014 compared with 97.5 million barrels, or 267,000 barrels per day, in 2013. Production in 2014 was reduced by unplanned outages in Coker 8-1, sulphur processing units and a sour water treatment unit, whereas in 2013, delays completing scheduled turnarounds, as well as unplanned outages in extraction units, impacted production.
In 2014, Syncrude formed a cost analysis and strategy taskforce to identify more efficient and effective ways to conduct its business. The aim is to reduce the cost structure at Syncrude and improve profitability. Efforts under the taskforce intensified with the substantial decline in crude oil prices over the fourth quarter of 2014. As a result of this work, the company is estimating reductions in 2015 of $160-million to $250-million in operating and development expenses and $100-million to $150-million in capital expenditures, net to COS. The cost savings represent efficiencies in work scope, deferrals of discretionary projects and work force initiatives. The reductions are not anticipated to impact production or reliability initiatives under way at Syncrude. As a long-term initiative, the taskforce will continue to explore further opportunities to establish a sustainable, lower cost structure at Syncrude.
As well, Syncrude continues to focus on improving reliability. In 2014, Syncrude completed improvements in mining, froth treatment and upgrading to address the root causes of previous unplanned outages. The work included the recapitalization of all of Syncrude's primary bitumen mining facilities with the relocation and refurbishment of the Aurora North mine trains in 2013 and the replacement of the Mildred Lake mine trains in 2014. In bitumen froth treatment, Syncrude retrofitted bitumen centrifuges to improve the quality of bitumen feed and increase throughput rates to the upgrader. In upgrading, Syncrude replaced the heat exchangers in its hydrogen plants to prevent production losses as a result of unplanned hydrogen plant outages. Syncrude has a number of initiatives planned for 2015.
Progress on Syncrude's major projects continued with the new Mildred Lake mine trains commencing operations in the fourth quarter of 2014 and completion of the centrifuge tailings management project expected in 2015. With the completion of these major projects, the financing and execution risk of Syncrude's major capital program is largely behind the company. The investment in this program provides Syncrude with the infrastructure to produce the remaining ore at its two operating mines and improve its tailings management performance, as well as support new ore production from its Mildred Lake Extension (MLX) project once approved.
Syncrude filed an application for regulatory approval of its MLX project in December, 2014. If approved, this project is intended to extend the life of Syncrude's Mildred Lake mine operations by approximately 10 years. Project scoping is under way and a cost estimate has not yet been approved by Syncrude's owners. Pending regulatory approval, capital investment and construction would begin late this decade.
2015 outlook
COS is maintaining its estimate for annual Syncrude production to range from 95 million to 110 million barrels with a single-point estimate of 103 million barrels.
The company is reducing its estimate for the average WTI crude oil price to $55 (U.S.) per barrel. Assuming an 82-Canadian-cent:$1 (U.S.) exchange rate and a $4-per-barrel discount for synthetic crude oil (SCO) relative to Canadian dollar WTI, the company's forecast annual realized SCO selling price is about $63 per barrel.
The estimate for operating expenses has been reduced to $1,521-million, or about $40 per barrel, based on a production estimate of 103 million barrels at Syncrude and a natural gas price assumption of $3 per gigajoule, as well as the other assumptions outlined in the company's guidance. The decrease comprises $166-million in cost reductions and $45-million due to the lower natural gas price assumption.
The company has decreased its estimate for 2015 Crown royalties to $119-million.
Based on the company's updated guidance assumptions, cash flow from operations is estimated at $368-million, or 76 cents per share.
The estimate for capital expenditures has also been reduced to $451-million, net to COS, which includes $104-million of remaining expenditures on the major projects and incorporates $110-million in cost reductions.
(millions of Canadian dollars, except As of As of
volume and per barrel amounts) Jan. 29, 2015 Dec. 3, 2014
Operating assumptions
Syncrude production (mmbbl) 103 103
Canadian Oil Sands sales (mmbbl) 37.8 37.8
Sales, net of crude oil purchases and
transportation $ 2,387 $ 3,074
Realized SCO selling price ($/bbl) $ 63.08 $ 81.23
Operating expenses $ 1,521 $ 1,729
Operating expenses per barrel $ 40.19 $ 45.69
Development expenses $ 151 $ 169
Crown royalties $ 119 $ 176
Current taxes $ 65 $ 120
Cash flow from operations(1) $ 368 $ 730
Capital expenditure assumptions
Major projects $ 104 $ 104
Regular maintenance $ 315 $ 425
Capitalized interest $ 32 $ 35
Total capital expenditures $ 451 $ 564
Business environment assumptions
Sales-weighted average WTI crude oil
(U.S.$/bbl) $ 55.00 $ 75.00
Sales weighted average premium/discount
to CAD WTI ($/bbl) $ (4.00) $ (4.00)
Sales weighted average foreign exchange
rate (CAD:U.S.$) $ 0.82 $ 0.88
Sales weighted average AECO natural gas
(CAD/GJ) $ 3.00 $ 4.00
(1) Cash flow from operations is an additional GAAP financial measure and is
defined in the "additional GAAP financial measures" section of the MD&A. Changes in certain factors and market conditions could potentially impact Canadian Oil Sands' outlook. More information on the outlook and a sensitivity analysis of the key factors affecting the corporation's performance is provided in the company's MD&A and the Jan. 29, 2015, guidance document, which are available on the company's website.
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