Canadian Oil Sands Ltd. slashed its dividend by 86 per cent and plans to cut as much as $400-million in costs, the latest sign of mounting difficulties facing oil companies due to the collapse in prices.
The Calgary company's fourth-quarter results reported Thursday set an ominous tone for the wave of energy sector results coming in the weeks ahead. Canadian Oil Sands reported profit of $25-million or 5 cents a share, down 87 per cent from $192-million or 40 cents a year earlier.
But the company's profit prospects have since sharply weakened because West Texas intermediate oil prices have plunged to below $45 (U.S.) a barrel from an average of $73.20 in the quarter.
Canadian Oil Sands said the dividend cut to 5 cents (Canadian) from 35 cents was necessary in order to "preserve" its balance sheet.
The company's results and dividend reduction reflect how quickly the situation is deteriorating for energy firms.
The company in December said it intended to cut its dividend to 20 cents, but concluded it needed to go further. Larger oil sands firms have been able to protect their dividend by trimming spending in other areas, but Canadian Oil Sands does not have that luxury. Its only asset is its share of Syncrude Canada Ltd., the bitumen mine where many of the joint venture's costs are fixed.
Syncrude, Canadian Oil Sands said, is "undertaking a comprehensive review of costs."
Initial efforts "have identified potential cost reductions" for 2015 of between $260-million and $400-million in operating, development and capital costs, net to Canadian Oil Sands.
The company said it does not expect any cuts to production.
"While the potential cost savings announced [Thursday] are substantial, Syncrude is continuing to examine the longer-term opportunities to achieve a sustainable, lower cost structure," Ryan Kubik, Canadian Oil Sands' chief executive officer, said in a statement. The company said Syncrude's newly-discovered cost savings include "deferrals of discretionary projects."
Chris Cox, an analyst at Raymond James, said a large amount of Syncrude's costs are fixed, limiting its ability to make deep across-the-board cuts.
"Where I think most of the cost reductions are coming from, there's probably some overhead they can take out. There's also likely work force – they phrased it as 'work force initiatives,' " Mr. Cox said. "But a portion of it is just simply deferring spending on things into next year."
Syncrude is not breaking even on the oil it produces today, according to Toronto-Dominion Bank analyst Menno Hulshof. Syncrude needs the North American benchmark price for oil to trade at $49.21 (U.S.) a barrel in order to break even, and that excludes expenses such as taxes, interest, and general and administrative costs.
By comparison, Canadian Natural Resources Ltd.'s Horizon mine needs oil to be at least $37.99 a barrel in order to break even on the crude it produces today; Suncor Energy Inc.'s Millennium mine requires an oil price of at least $43.74; and Imperial Oil Ltd.'s Kearl operation needs a barrel of oil to trade at $54.02 in order to break even, according to Mr. Hulshof. Kearl, however, is a young mine, which in part explains why its break even price is so much higher.