Canadian Oil Sands declares another quarterly loss despite cost cuts at Syncrude
Syncrude’s largest owner Canadian Oil Sands (COS) reported second quarter earnings today and continues to struggle to turn a profit. Lower oil production and a higher provincial tax rate failed to offset lower operating costs at the Syncrude mega-mine north of Fort McMurray, AB.
Syncrude produced an average of 207,700 barrels per day (bpd) in Q2, up slightly from 2014 but far below its nameplate capacity of nearly 300,000 bpd. During the quarter, Syncrude completed a planned maintenance turnaround of Coker 8-3 and the Vacuum Distillation Unit which negatively impacted production. Several design improvements were also made to two CO boilers and the Flue Gas Desulphurizer, which should help improve reliability of the upgrader.
Operating costs fell by $7 to $52.53 per barrel, thanks mostly to lower natural gas prices and improved workforce efficiencies. Capital expenditures continue to decline at the oil sands mining facility, as all major projects come to an end. The Centrifuge Tailings Management project was reported 100% mechanically complete and is now in the commissioning phase.
The recent 20% increase in provincial taxes cost the company $120 million in deferred tax expenses. The effective tax rate for COS is now 27%, at both the federal and provincial level.
The new carbon emissions regulation implemented by the Alberta government in June will cost Syncrude approximately $0.60 per barrel when it takes full effect in 2017. The company recently won the Emerald Award for Large Business for its Sandhill Fen Watershed Research Project. Syncrude is working with seven universities on a number of wetland and land reclamation initiatives.
Synthetic crude oil (SCO) produced at Syncrude traded at a $2.49 per barrel premium to West Texas Intermediate (WTI) in the second quarter.
2015 FULL YEAR OUTLOOK
- Syncrude is expected to average approximately 263,000 to 293,000 bpd for the full year, with no major maintenance work planned for the remainder of 2015.
- Canadian Oil Sands is maintaining its US$55 per barrel average price target for WTI in 2015. This translates to an estimated average sale price of $65.75 per barrel for its SCO product.
- Operating expenses, including purchased energy, is expected to average $39.56 per barrel for the full year. Adding in royalties, taxes, interest and administrative costs brings the total cost for COS to $52 per barrel. This leaves just under $14 per barrel in free cash flow for maintenance and capital projects (or $475 million).
- Projections for capital expenditures were reduced slightly to $422 million for the full year. Most of the capital funds are allocated towards regular maintenance (about 70%). The remaining funds ($87 million) are allocated to the wrap-up of 2 major projects - the Centrifuge Tailings Management Project and the Mildred Lake Mine Train Replacement project, which are both essentially complete.
If the company manages to achieve its 2015 targets, Canadian Oil Sands should return to profitability by the end of 2015 and hopefully break-even for the full year. There are no major projects in the horizon for the company until oil prices improve.
Canadian Oil Sands (TSX:COS) holds a 36.74% interest in the Syncrude project, which is the largest producer of light, sweet synthetic oil from Canada’s oil sands. The company recently slashed its quarterly dividend to $0.05 per share. COS stock currently yields approximately 2.6%.
Note: All funds are in Canadian dollars unless otherwise stated.