Syncrude embarks on aggressive cost-cutting but remains committed to meeting production targets
Syncrude’s largest owner Canadian Oil Sands [TSX:COS] generated $207 million in cash flow from its oil sands mining operation, down significantly from the same period in 2013. Net income was only $25 million for the company, or $0.05 per share, down from $0.40 per share in the fourth quarter of 2013. The company blamed the higher operating expenses on several unplanned outages and higher than expected input costs for natural gas and diesel.
Synthetic Crude Oil Production and Revenues
For the fourth quarter last year, Syncrude produced 292,600 barrels per day (bpd), bringing 2014 annualized production up to 258,100 bpd. 2014 numbers were significantly below nameplate capacity due to unexpected breakdowns in the coker, sulphur processing and sour treatment units. The company undertook several reliability improvement initiatives last year, including replacement of the Mildred Lake mine trains, retrofit of the Froth Treatment centrifuges, and replacement of heat exchangers in the hydrogen plant. The company expects much better reliability in 2015 and maintains its production target of 95 to 110 million barrels for the year (an average of 285,000 bpd).
Syncrude’s average sale price for its synthetic crude oil (SCO) in the fourth quarter was US$70 per barrel, only $3 lower than the West Texas Intermediate (WTI) benchmark crude which averaged US$73 for the quarter. COS reduced its 2015 WTI forecast from $75 to $55 per barrel, which is still significantly higher than the current $44 WTI spot price. Lower natural gas prices and a weakened Canadian dollar will provide much needed tailwind for the company’s bottom line.
Operating costs for the fourth quarter rose to $44 per barrel, bringing the 2014 average to almost $49 per barrel, a 17% increase from the previous year. The company admits that these operating costs would render its operation unprofitable under the current low-oil price regime. Syncrude has already pulled together a Cost Analysis and Strategy Taskforce to identify opportunities in cost savings, without impacting production or reliability. So far, the group has identified $430 to $675 million in operating savings, which would drop operating costs by $4 to 5 per barrel. Syncrude’s original operating budget for 2015 was set at $4.6 billion in December of last year.
2015 marks the last year of operation under its current royalty regime for Syncrude and Suncor. Both companies transition to the New Royalty Framework in 2016, when their respective Crown agreements expire.
As part of its cost-savings initiative, Syncrude is also looking to cut $270 to 400 million off its 2015 capital expenditures, which was originally budgeted at $1.5 billion. The capex budget includes $280 million earmarked for unfinished Major Projects, such as the Centrifuge Tailings Management project, which is expected to be completed later this year. The remainder will be spent on regular maintenance activities.
The company applied for regulatory approval of its Mildred Lake Mine Extension Project (MLX) in December 2014. If approved, MLX will extend Mildred Lake Mine operations by another 10 years. The project is still in the early feasibility phase and not yet approved by Syncrude’s partners. There are no significant Major Projects planned in the near term.
Quarterly Dividends Payouts
COS paid out $678 million worth of dividends in 2014 and is generally considered one of the more generous dividend payers in the Canadian energy patch. In order to remain cash-flow positive, the company has cut its quarterly dividend from $0.35 per share in Q4-2014 to $0.05 in the first quarter of this year. This marks a new all-time low for COS stock quarterly payouts. Historically, the company has been quick to adjust dividends as required. During the 2009 market melt-down, COS cut its dividend to $0.15 per share but payouts were quickly restored back to $0.35 per share by the end of the year. However, COS remains well capitalized carrying a net debt of only $1.9 billion.
COS Stock Performance
COS stock has been hit hard by the recent downturn in oil prices, down 15% in the past 5 days, 40% in the past month and over 70% in the past 6 months. The company noted in December that the breakeven cost for Syncrude is US$51 to US$56 per barrel, including royalties, reclamation and capital expenditures (excluding any 2015 cost-cutting initiatives). Factoring in corporate overhead and administrative costs, breakeven for COS is US$55 to US$60 per barrel. Unless oil prices improve or significant operating savings are achieved, COS risks going into the red in the early part of 2015.
COS stock closed at $6.51 per share prior to the release of 2014-Q4 earnings. Although a dividend cut was widely expected, it is very likely the stock price will continue to trend lower. Should share prices continue to fall, the company becomes an attractive takeover target given its strong production profile. Canadian Oil Sands' portion of the Syncrude leases contain about 3.5 billion barrels of proven and probable reserves with a 40+ year life expectancy.