The Syncrude project’s second-largest shareholder is not an oil company at all. But year-end found the
The trust is the only shareholder whose sole asset is its shareholding in Syncrude. By comparison,
That strategy has served them well during recent years, as the operational performance of the project has been strong. The trust was formed by the merger of two of the Syncrude consortium: Athabasca Oil Sands Trust and Canadian Oil Sands Trust. The July 2001 merger created a single investment trust, holding just under 22% of the project.
Canadian Oil Sands made a profit of $169 million on revenue of $673 million in 2001, down from the previous year, when the two trusts’ earnings totalled $176 million on combined revenue of $671 million. The most significant difference was in operating expenses, which were $345 million, or $62 million higher than in the previous year, and interest expenses, which were up $12 million. The increased expenses offset a significant decline in Crown royalties, which fell to $53 million, from $125 million in 2000.
Net income per trust unit (the trust’s “per-share” figure) slid to $2.98 from $3.11 in the previous year, but the distributable income (in effect, the “dividend”) jumped to $2.75 from $2.34, on the strength of several large cash distributions in the early part of the year, when oil prices were especially high.
The trust realized an average of $37.80 per barrel in 2001, down from $40.66 in 2000. The realized price takes both oil price and exchange rate hedges into account. Syncrude Sweet Blend is a high-quality product, fetching about a 70% net-back premium over conventional crudes. The 7% decline in Canadian Oil Sands’ realized price compares with a 14% slide in average spot oil prices (the benchmark West Texas Intermediate price quoted on the New York Mercantile Exchange).
For the last quarter of 2001, the trust realized $30.73 per barrel, down from $44.58 in the last quarter of 2000, when oil prices peaked. At that time, West Texas Intermediate crude averaged US$31.90 per barrel, but by the third quarter of 2001 it was down to US$26.78, and in the last quarter it averaged US$20.53.
Canadian Oil Sands’ total revenue for the quarter was $146 million, down from $177 million a year before, and earnings were $37 million, compared with $50 million in the final quarter of the previous year. The lower revenue meant that the trust reduced its cash distribution at year-end, sending out 50 per unit, or about two-thirds of operating cash flow.
The flip side of falling energy prices for an oil-sands producer is a fall in the price of natural gas — a major expense in the energy-intensive business of getting oil out of tar sands. Gas prices have fallen even faster than oil prices since the end of last winter, bringing down Syncrude’s costs and offering the trust a distinct savings opportunity on the natural gas market.
Hedging programs reduce the volatility of the trust’s earnings on both the revenue side and the cost side. On the revenue side, about 30% of the trust’s share of Syncrude’s oil production is hedged.
On the natural gas futures market, Canadian Oil Sands has been picking up contracts for 19 million cubic feet per day at an average of $3.63 per thousand cubic feet. The contracts represent about 60% of the trust’s share of Syncrude’s natural gas cost.
Stage 3
The trust expects to have no trouble funding its share of Syncrude’s Stage-3 production expansion, a $4-billion program to add a second production train at the Aurora mine and expand the main Mildred Lake upgrading plant (including the addition of a third coking unit). The trust will have to provide about $450 million, including $60 million in sustaining capital, but it anticipates $911 million in cash flow over the next two years and has working capital of $299 million and credit facilities for a further $490 million. The trust’s credit lines all bear interest at 0.6% above published bankers’ acceptance rates, except for the two largest, whose rate increases to 0.65% above the benchmark rate if the trust borrows more than 66% of the available funds.
The other source of possible funds for the expansion is a distribution reinvestment plan, which allows unit-holders to take their cash distribution in the form of shares, at a 5% discount to market price, much as a conventional corporate dividend reinvestment plan does. But a second feature is the trust’s “premium distribution,” which allows a unit holder that prefers to take cash to pre-arrange the sale of additional units of the trust into the market. The trust keeps 95% of the proceeds of the sale, the broker takes about 3%, and the unit holder gets his cash distribution plus 2%.
At year-end, Canadian Oil Sands had $357 million in cash and a total of $448 million in current assets, including oil inventories. That is more than double the figure for year-end 2000, when Athabasca and Canadian held a total of $210 million in current assets, $102 million of it in cash.
Current liabilities amounted to $130 million, up from $111 million at the end of the previous year. With the issue in August 2001 of US$250 million in unsecured notes, bearing interest at 7.9%, long-term debt grew to $626 million from $216 million.
Coming expansions to production at Syncrude will not just have an impact on quantity, but on quality as well. The Sweet Blend the mine now produces will be replaced by a higher-quality blend called SSB-1, which will have lower sulphur content and higher smoke points. It is likely that SSB-1 will command an even higher market premium over conventional crude oil.
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