CEO Kubik: An independent COS offers more upside to shareholders
(Editor’s note: all figures in Canadian dollars)
On December 1, 2015, Canadian Oil Sands (ticker: COS) issued a press release with an accompanying conference call detailing its 2016 budget and what it described as a “new era of lower cost operations.”
The timing comes as no coincidence, as Suncor’s $6.6 billion (including debt) hostile takeover bid is scheduled to expire at the end of the week. Suncor owns 12% of the Syncrude oil sands consortium project in Alberta, while Canadian Oil Sands (whose operations focus exclusively on the project) owns 37% interest – the most of the any of the seven companies. COS adopted a “poison pill” to fend off SU’s bid and has issued a handful of news releases criticizing what they feel to be a low-ball offer.
Suncor has sent letters to COS shareholders, and any visitors to its web site are greeted by a pop-up notification for more information on the potential COS buyout.
COS Defense Claims
In a nutshell, the management of Canadian Oil Sands said Suncor’s offer is undervalued because of:
- Increased cost efficiencies. All-in expenses are listed at $44.78/barrel, which gives COS enough cash flow to fully fund its dividend and capital expenditures if oil prices are at $45/barrel. At $50/barrel, COS generates $633 million in annual cash flow from operations, equating to $1.31 per share. According to the company, an additional $300 million in estimated cash flow is generated if oil prices increase to $60/barrel.
- Stable expenditure costs. As part of its near-term plan, COS has no large-scale projects in need of funding and expects to spend about $300 million annually for the next four years. The company is “prioritizing” on reducing its debt level to the lower end of its $1 to $2 billion range.
- Undeveloped leases, including one that was being actively marketed to Suncor prior to the takeover bid. COS Management said the SU offer “doesn’t recognize the value” of its undeveloped properties, which border existing projects.
- COS and its link to commodity prices. COS shares historically have a 98% correlation with commodity prices, which COS management believes points to significant upside when oil prices recover. “We tend to move up twice as much as Suncor when those oil prices rise,” said Ryan Kubik, President and Chief Executive Officer of COS.
- Potential synergies realized by Suncor, stemming from becoming the largest interest holder in the project.
- Estimated operating costs of $37/barrel in 2016, which is below SU’s preliminary estimated operating costs of $38 to $45 per barrel.
While management refuted SU’s offer, they did, however, say they were “exploring alternatives that offer our shareholders full and fair value for assets.”
The Elephant in the Room
The outliers were not enough to deter criticism in the conference call. The latest offer follows a pitch that was made in April, which was above the latest official offer. In the midst of the commodity downturn, COS slashed its dividend by 85% to salvage some cash flow while Suncor has boosted its dividends by 23% over the last five years.
Kubik defended the decision to defy SU’s bid a second time, saying: “We were approached in the spring with a non-binding expression of interest. I won’t even call it a proposal. It was a letter that was brought to us, and it represented a discount to where Canadian Oil Sands shareholders could sell their shares in the market. So, you could have gone to the market and sold your shares at a price above what they were offering to buy the entire company at. So, clearly, there was no basis for further discussions. We did not hear from Suncor until they came back in October with this latest hostile offer.”
The correlation of COS shares with WTI prices have weighed more heavily on COS stock than Suncor, but Kubik and his fellow executives encouraged shareholders to think carefully in their merger decision. “Canadian Oil Sands shareholders will own less than 8% of the combined company, significantly diluting any upside for Canadian Oil Sands shareholders,” said Kubik, adding that SU shareholders would receive the benefits from COS’ groundwork. “Our shareholders know the value of the assets they own and they deserve full and fair value, not distressed value, for their irreplaceable assets.”
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