Published: June 30, 2008
Canadian Oil Sands Trust (OTC: COSWF, $52.85)
is the dominant player among several
in the Alberta Syncrude Project. This project mines tar sands or
"bitumen" and then refines this substance into light, sweet crude
oil. The trust is by far the largest member of the consortium,
with a 36.74% stake -- nearly +50% larger than the next biggest
player.
As crude oil prices have moved steadily higher, Canadian Oil
Sands' distributions have also dramatically increased. In the
first quarter of 2007, the trust paid $0.40 Canadian per unit.
After raising the distribution to $0.75 a unit late in 2007, the
trust increased it again in early 2008 to $1.00 per unit. That
increase creates a forward distribution of $4.00 per unit,
or a
yield of almost 8% at current prices ($4.00/$52.85). But
distributions are only part of the equation as the unit price
has also appreciated +914% in the last five years --
contributing to Canadian Oil Sands' total returns of +1,161% over
that same time period.
The trust's payouts are based on rapidly increasing cash flow from
operations. In the first quarter of 2008, this amount was $0.92
a unit, more than double the $0.42 a unit generated in the same
period in 2007. The increase is not surprising when you consider
that Canadian Oil Sands received an average of $58.23 for
benchmark West Texas Intermediate (WTI) oil last year. This
amount zoomed to $97.82 in the first quarter of this year
At current production levels, Canadian Oil Sands' interests in
an estimated 4.7 billion barrels reserves are estimated to last
about 35 years. The trust notes,
however, that the development
of currently held leases should allow it to operate beyond 2050.
For 2008, the trust anticipates its operating cash flow will be
$4.01 a unit. This forecast is based on $100 a barrel oil prices
and the Canadian dollar at parity with the U.S. At $120 oil, a
price below current levels, the company anticipates $5.01 a unit
in operating cash flow, about +25% above current forecasts.
If that scenario unfolded, in addition to a possible
distribution increase, the share price of Canadian Oil Sands
would likely rise. The shares are already up more than +30% for
the year.
Investors should be aware there are risks in the story. If oil
prices do average $100 and operating cash flow is $4.01 per
unit, the trust will be paying out virtually 100% of its cash
flow. Furthermore, if oil drops, an average price of $80 a
barrel could affect distributions.
A sharp rise in the Canadian dollar, now trading about even with
the U.S. dollar, could also negatively impact results. Although
a strong Canadian dollar increases the value of the company's
dividends for a U.S. investors, it can decrease the company's
operating results.
Finally, as with most Canadian income trusts, the big
distribution will likely shrink when the company is taxed as an
ordinary corporation starting January 1, 2011. Depending on oil
prices, however, the unit price could go through the roof and
more than make up for the lower payouts. Meanwhile, you still
have a few years to enjoy both sources of returns.
Canadian
Oil Sands Trust is suitable for investors willing to risk
commodity price volatility in return for a handsome yield and
strong upside potential.
Carla Pasternak
Editor
High-Yield
Investing
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