Oil sands cost reductions illustrated by Syncrude 2016 budget

“Syncrude’s success in reducing its cost structure is exceeding market expectations.” – Kubik

Canadian Oil Sands

Canadian Oil Sands Limited (“COS”) today announced its budget for 2016, demonstrating Syncrude’s competitiveness and resilience in a lower oil price environment; operating and capital costs in 2016 will be down significantly from prior years while still enabling production growth.

Syncrude Canada Ltd. is one of the world’s largest producers of synthetic crude oil from oil sands and the largest single Canadian producer. The plant is located just outside Fort McMurray, Alta. and has a capacity of 350,000 b/d. Canadian Oil Sands owns just over 36 per cent of Syncrude.

“Syncrude’s ability to reduce costs and respond to the lower oil price environment is exceeding market expectations. They proved it in 2015 with $1.3 billion, gross to Syncrude, in cost savings,”  said Ryan Kubik, president and CEO of Canadian Oil Sands.

“They proved it with the execution of the major projects, which were completed in 2015 under budget and on schedule.”

Based on the 2016 Budget, COS expects to generate $338 million of free cash flow, and every USD $10 per barrel increase in the annual oil price raises our estimated free cash flow by about $300 million.

Canadian Oil Sands

Even under a USD $45 per barrel WTI oil price assumption, COS can fully fund all costs, including capital expenditures and the current dividend. COS offers one of the best ways to benefit from a recovery in oil prices, as COS’ share price has historically demonstrated a 98 per cent correlation to crude oil prices.

“Syncrude’s success in reducing its cost structure is exceeding market expectations. The positive implications to the business going forward are just starting to be appreciated and will have lasting value. Now, our shareholders can capture the value of an improved Syncrude business,” said Kubik.

Highlights of the 2016 Budget:

• The production estimate range for COS is 35 million to 40 million barrels (95 million to 110 million barrels gross to Syncrude). COS’ budget assumes production of 38.6 million barrels (105 million barrels gross to Syncrude), approximately 10 per cent higher than 2015 estimated production.
• Capital expenditures are estimated at $295 million, or $7.64 per barrel based on production of 38.6 million barrels.
• Operating expenses are estimated to total $1.4 billion, or $37.14 per barrel, including purchased energy costs of $3.16 per barrel.
• Cash flow from operations is estimated to total $633 million, or $1.31 per share, based on a WTI crude oil price assumption of USD $50 per barrel, a foreign exchange rate of $0.75 (CAD:USD), and a discount for Synthetic Crude Oil (SCO) to Canadian dollar WTI of $2.00 per barrel. Under the 2016 Budget assumptions, cash flow from operations in 2016 is more than sufficient to fund estimated capital expenditures and the current dividend.