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Spreads hit Canadian Oil Sands’ cash flow

Also: bad news about natural gas injection levels, and a lawsuit emerges from the wreckage of Poseidon Concepts disastrous recent performance

Nov 30, 2012

by Max Fawcett

Canadian Oil Sands (TSE:COS) reported its 2013 guidance after yesterday’s market close, and it didn’t look particularly good to analysts. The company is expecting a production range of 288,000 to 315,000 barrels per day (of which 106,000 to 116,000 belongs to Canadian Oil Sands, as per its share of the Syncrude partnership) and will generate approximately $1 billion in cash flow from it. The problem is that it’s already committed to more than $2 billion in expenditures for 2013 – $1.33 billion for cap-ex and another $678 million for its dividend. The street was forecasting a much better cash flow figure – somewhere in the neighbourhood of $1.3 billion – but CIBC analyst Andrew Potter says that’s a function of the fact that said street wasn’t factoring in the heavy negative differentials Canadian heavy oil producers like COS are facing on their sales. “We believe street expectations have not been factoring in any meaningful SCO [Syncrude crude oil] discount,” he said in a note, “which in our view will be a major theme in 2013.”

If there’s a silver lining in all of this, it’s that the company’s cash flow is being hit by an unusually large tax bill. “COS noted in the release that it expects current taxes to be lower in years subsequent to 2013 given elevated spending levels in 2012 and 2013,” FirstEnergy analyst Michael Dunn said in a note. “We suspect our current tax estimates for 2014 and 2015 are coming down, perhaps by $100 million to $200 million per year.” FirstEnergy has a $22 price target on the stock. CIBC is a bit less optimistic, and has it marked for $18 by December of 2013.

Natural gas producers have to be hoping that the cold snap that’s settled over most of Alberta lasts all winter long – and extends far, far south in the process. So far that hasn’t been the case, as for the week ending November 23 working natural gas inventories in the United States increased by 4 billion cubic feet. That compares (badly, as far as the producers are concerned) to FirstEnergy’s estimate of a withdrawal of 19 billion cubic feet, and the median estimate of a withdrawal of 10 billion cubic feet (among analysts contacted in a Reuters survey). That puts the total amount of natural gas in storage in the United States at 3,877 billion cubic feet, 26 billion cubic feet above the already high level it was at this time last year. Not good.

And investors in Poseidon Concepts (TSE:PSN), who have seen their holdings absolutely abused over the last couple of weeks, are starting to fight back. A proposed $200 million class action lawsuit was filed in Ontario Superior Court on behalf of investors who bought shares in the company prior to November. Unfortunately, that news had the rather ironic effect of driving Poseidon shares down even further.



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