CANADIAN OIL SANDS: THE WORST
Canadian Oil Sands Ltd., one of Canada's largest producers of crude, is looking into selling some of its future production amid low crude oil prices and a growing debt load.
Canadian Oil Sands owns 37% of the Syncrude oil-sands mining consortium, one of the country's largest producers of crude from the Alberta oil sands. Production snags at Syncrude's operations and oil prices that recently fell to six-year lows have hit Canadian Oil Sands particularly hard because the Syncrude project is its only producing asset. In July, Canadian Oil Sands said it swung to a second-quarter loss, and last month Moody's Investors Service cut its credit-rating downgrade to one notch above speculative grade.
Boston-based hedge fund Highfields Capital Management LP, a company shareholder, recently spoke with Canadian Oil Sands and suggested it consider selling a chunk of its future production for an upfront payment to help boost its sagging stock price, according to people familiar with the matter.
Canadian Oil Sands management didn't make any promises to Highfields, but said it would consider the idea, one of the people familiar with the matter said.
Highfields is a well-known value investor that meets with the management of the companies in which it holds positions to present ideas to boost share prices. But it doesn't have a reputation as an activist investor.
Canadian Oil Sands doesn't need additional financing and isn't currently pursuing a specific plan to raise cash, according to company spokeswoman Siren Fisekci. But the sale of future production "is an option that we've looked at and (continue to) evaluate," she said.
Ms. Fisekci wouldn't comment on whether such a meeting with Highfields took place.
The other partners in the Syncrude project include Exxon Mobil Corp.'s Imperial Oil Ltd. subsidiary, the project's lead operator and owner of a 25% stake; Suncor Energy Inc., Canada's largest energy company, which owns another 12%; and two state-controlled energy majors, China Petroleum & Chemical Corp., also known as Sinopec, holder of a 9% stake; and the Canadian unit of Cnooc Ltd., owner of a 7% position.
Representatives for these companies weren't available for immediate comment.
A number of Canadian Oil Sands' peers in Western Canada have spun off or sold packages of royalty-producing assets to raise cash, including Cenovus Energy Inc., Encana Corp. and Penn West Petroleum Ltd. Canadian Natural Resources Ltd., another oil-sands mine operator, has said it wants to sell or spin out its royalty business this year.
For a buyer, these assets generate a recurring source of revenue without the added risks and operational costs that traditional oil and gas producers face.
Energy companies have been hurt by the swoon in crude prices this year, but Canadian Oil Sands is among the worst performing. The company's stock has lost almost 40% of its value so far this year, compared with a 22% decline in the Toronto Stock Exchange energy index.
The appeal for Canadian Oil Sands in selling a portion of its share of Syncrude's future production is the prospect of generating a big upfront payment that it can use to buy back shares to boost earnings per share or reduce its debt, according to one of the people familiar with the matter.
In June, Cenovus sold a package of oil and gas royalty production and mineral title lands to Ontario Teachers' Pension Plan for about 3.3 billion Canadian dollars ($2.49 billion)—a price well above analysts' expectations. That was three months after Penn West agreed to a similar deal for C$321 million with Freehold Royalties Ltd. Last year, Encana sold its remaining stake in a royalty spinoff called PrairieSky Royalty Ltd. via a C$2.6 billion secondary offering.
Still, any such deal by Canadian Oil Sands might be complicated by the fact that it doesn't have a majority stake in Syncrude Canada. The consortium comprises seven partners.
Another potential issue is the Alberta government's plan to review—and possibly raise—royalty rates paid by oil and gas producers.
Canadian Oil Sands has taken some steps to offset the impact of weak crude prices. Earlier this year, it slashed its dividend payment 75% to 5 Canadian cents a share, citing the need to keep its rapidly rising debt in check. Still, last month Moody's Investors Service cut the company's credit rating and said it would "likely" reduce it further to junk grade if oil prices stay low.
Last week, Canadian Oil Sands said output would likely come in at the "low end" of its annual production forecast after a fire shut down Syncrude's oil processing operations for what it estimated to be a two-week period. That added to a string of unplanned production outages over the past two years.
Before that blaze, Canadian Oil Sands had told investors that its worst maintenance problems were behind it and that its debt load would decline.
Highfields is already known in Canada. In 2013, it announced a stake in Canadian coffee-and-donut chain operator Tim Hortons Inc., proposing the company abandon or narrow its U.S. expansion. Last December Burger King Worldwide Inc. acquired Tim Hortons for $11 billion.
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