December 2015
COS Overview
•
“Pure-play” exposure to a scarce,
irreplaceable oil sands mining
asset in a low-risk, geopolitically
stable country
•
High quality leases border every
oil sands mining project
•
Fully upgraded production of light
sweet crude oil
•
Long-life non-declining asset base
1.6 billion barrels of reserves and 1.7 billion barrels of contingent
resources (net to COS) – all upgraded light, sweet crude oil
Source: RBC Capital Markets.
COS Can Deliver More Long-term Value to
Shareholders
1.
Superior oil price leverage
2.
Syncrude’s new era of lower costs
3.
Valuable, and highly profitable, upgrader
4.
High quality, strategic lease position
5.
Visible, non-declining production for decades
3
$0 $30 $60 $90 $120 $150 $180 $0 $10 $20 $30 $40 $50 $60
Dec-2005 Dec-2007 Dec-2009 Dec-2011 Dec-2013 Dec-2015
US $ W T I CO S S ha re P ri c e C$
COS Share Price C$ Current SU Offer US$ WTI
Why Sell at the Bottom?
4
Source: As per Bloomberg as at December 15, 2015
2
(1) For the period Jan. 1, 2014 – October 2, 2015
(2) Based on Suncor share price of $35.13 and exchange ratio of 0.25
COS’ correlation to US$
WTI is ~98%
(1)Giving up unique, irreplaceable and low-risk exposure to the price of light oil today, when oil prices are in
a trough, is the exact opposite of what long-term investors should be doing.
A Modest Improvement in Oil Prices Significantly
Increases COS’ 2016 Free Cash Flow per Share
1 Free cash flow per share is a Non-GAAP Financial Measure. See “Additional GAAP and Non-GAAP Financial Measures advisory”. Implied current Suncor dividend
assumes $0.29 per common share quarterly dividend and 0.25 exchange ratio per Suncor Offer. Assumes exchange rate of 0.75 US$/C$.
Source: Canadian Oil Sands.
$5.76
$6.19
$8.60
$10.97
$16.03
$18.30
$19.23
$19.75
$9.70
$12.07
$13.48
$17.38
$28.31
$30.05
$31.59
$33.73
$8.23
$8.18
$7.84
$8.94
$6.32
$6.85
$7.00
$7.26
$9.44
$9.98
$10.17
$9.91
$10.86
$11.27
$11.52
$11.69
$35
-$45
$45
-$55
$55
-$65
$65
-$75
$75
-$85
$85
-$95
$95
-$100
>$100
WTI Range (US$/bbl)
COS Provides Dramatically More Exposure to Oil
Price Increases
6
COS Share Price and Suncor Offer Price Sensitivity to WTI (Last 5 Years)
Source: As per Bloomberg; share price performance between October 2, 2010 to October 2, 2015 (1) Suncor’s share price range at a 0.25 exchange ratio
COS Share Price Suncor Share Price Converted at Offer Price(1)
$35 - $45
$45 - $55
$55 - $65
$65 - $75
$75 - $85
$85 - $95
$95 - $100
>$100
COS Share Price - Midpoint Suncor Share Price Converted at Offer Price - Midpoint(1)
• COS’ share price had a 98% correlation with WTI spot prices between January 2014 and November 2015, compared with a
66% correlation for Suncor’s shares
• Tendering to Suncor’s offer means sacrificing the benefit of rising oil prices
Syncrude’s New Era of Lower Costs
•
Syncrude is exceeding the estimated $1.3 billion of operating and capital cost savings (gross to
Syncrude) from the original budget
•
Cost reductions are expected to continue into future years
•
Completion of major projects ensures low sustaining capital through 2019
Operating Expenses (C$/bbl)
Capital Expenditures (C$ millions)
7
(1) Based on 2015 Guidance as at October 19, 2015, adjusted for revised production forecast of 90 million barrels, gross to Syncrude.
Cost Structure Has Improved Dramatically
•
COS’ total cash costs have decreased to US$40 per barrel
•
Fully-upgraded synthetic crude oil (SCO), attracts a 40-55% higher sales price than bitumen
•
Established, non-declining production
8
(1) Total Cash Costs is a Non-GAAP Financial Measure. See “Additional GAAP and Non-GAAP Financial Measures advisory”. Conversion to US$ assumes foreign exchange rate of 0.75 (2) Includes Major Projects capital expenditures
2
Total Cash Costs
1
(US$/bbl)
Syncrude’s Break-Even US$WTI Price
Compares Favourably with Oil Sands Peers
•
Syncrude’s premium-price SCO means that its break-even US$ WTI price
compares very favourably with other oil sands companies
Source: TD Securities, COS estimates
Strong Financial Position
•
COS is one of only 7 Canadian exploration and production (E&P) companies with
an investment grade credit rating (of the 122 listed Canadian E&P companies with
a market capitalization over $100 million)
•
No debt maturities until 2019
•
Credit facilities totalling $1.5 billion committed to 2019
Canadian Oil Sands resilient with a “lower for longer” oil price
10
“Along with a strong balance sheet, no debt maturities until 2019 and debt covenants tied to
its substantial asset value (not cash flow), COS is well positioned to ride out the current
period of low oil prices. And when prices recover, given its fixed costs, cash flows and the
share price will recover even more. And remember the 98% correlation between COS and
COS’ Upgrader Has Significant Value
COS’ Shareholders are being asked to give the upgrader away for free
Bitumen vs. Upgraded SCO Pricing
Sources: Canadian Oil Sands; Bloomberg.
1 Free cash flow is a Non-GAAP Financial Measure. See “Additional GAAP and Non-GAAP Financial Measures” advisory. 2 Free cash flow in this calculation excludes major capital projects.
•
Syncrude’s fully upgraded SCO has averaged a ~40-60% premium to bitumen
•
Since 2009, Syncrude’s upgrader generated 75% of COS’ free cash flow
1,2
20%
40%
60%
80%
100%
120%
Jan-14 Mar-14May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15May-15 Jul-15 Sep-15 Nov-15
COS’ Upgrader Provides a Distinct
Advantage Over Bitumen-Only Projects
•
COS should attract a significant
premium over a bitumen-only
project like Fort Hills
–
COS includes an upgrader
to produce light, sweet SCO
–
Fort Hills is 2 years from
production and will produce
bitumen
Suncor recently paid more for a lower quality asset
Mine Only Project vs. Canadian Oil
Sands’ Mine + Upgrader –
Implied Capital Efficiency ($/bbl/d)
$56,000
$54,000
Suncor / Fort Hills Transaction (Sep. 21, 2015) Illustrative Upgrader Value Suncor Offer (Oct. 2, 2015)
Mine Only
Mine & Upgrader
1 Calculated as Suncor’s $310 million acquisition cost for a 10% interest in Fort Hills Project from Total E&P Canada Ltd. plus remaining capital associated with that 10% interest (approximately $700 million) divided by the 18 Mbbl/d productive capacity associated with that 10% interest.
2 Calculated as the total enterprise value of the Suncor Offer (calculated as the Implied Offer Price of $8.84 as of October 2, 2015, multiplied by 484.6 million Common Shares outstanding, plus long term debt of the Corporation as at June 30, 2015, less cash of the Corporation as at June 30, 2015), divided by estimated 2016 consensus SCO production of 105 Mbbl/d, grossed up by a factor of 0.86 bbl of SCO = 1 bbl of bitumen.
1 2
1609 MMboe
725 MMboe
Current COS 2P Reserves
COS Shareholders' Stake
in 2P Reserves of
Combined COS & Suncor
696 MMboe
226 MMboe
Current COS PDP Reserves COS Shareholders' Stake
in PDP Reserves of
Combined COS & Suncor
Compared to Suncor Bid a Stand-alone COS
Maintains Immense Oil Reserves
Proved Developing Producing
(PDP) Reserves
1
Proved Plus Probable (2P)
Reserves
1
1 Current COS reserves based on independent reserves and resources estimates by GLJ Petroleum Consultants, Ltd. as of Dec. 31/14. See reserves and resources cautionary advisory in COS’ Annual Information Form dated Feb. 24/15 and definitions and forward-looking information advisory.
Combined COS & Suncor calculated on a pro forma basis including all Suncor reserves. Suncor reserves figures as at December 31, 2014. Source: Suncor Annual Information Form dated February 26, 2015 for the year ended December 31, 2014; Teck Resources Limited 2014 Annual Report.
Syncrude’s Undeveloped Leases Have
Significant Value
•
Lease 29 is contiguous with
Suncor’s North Steepbank mine
•
The sale of Lease 29 to Suncor
was being discussed; billions of
dollars of value could be derived
•
Suncor is not paying COS
shareholders for this value.
There is significant unrecognized value in COS’ undeveloped leases
Syncrude
Suncor
Suncor’s North
Steepbank mine
• Exhausted early
2020s
Syncrude’s Lease 29
• Continue mining
• Minimal capital
• Higher quality and
larger ore body
Suncor’s Voyageur South
Lease
•
Develop new mine
•
Significant capital
•
Lower quality and smaller ore
body
•
New environmental footprint
Lease 29 would allow Suncor
to avoid significant required
capital to develop its
Voyageur South mine once its
North Steepbank mine is
exhausted
Not to scale. For illustrative purposes only. Sources: Canadian Oil Sands; Suncor’s Voyageur South Mine Fact Sheet.
Production Improvement Plan is Underway
• Syncrude has made significant progress on its production improvement plan:
- Identifying root causes of outages
- Replacing, modifying and reconfiguring equipment as required
- Developing stronger leaders and a well-trained and engaged workforce
1
Millions of barrels, gross to Syncrude
15
Initiative / Project
Completed
2009-14
2015
Rebuild, redesign and expand
mine trains
11
-Retrofit, reconfigure and
debottleneck froth centrifuges
13
-Hydrotreating
Replace heat exchangers in
hydrogen plants
6
-Modifications to CO boiler
design
Current Focus
6
2
Coker performance
Current Focus
8
3
Turnaround execution
Current Focus
14
2
Pipe and Vessel Leaks
Inspect critical pipes and
vessels
Current Focus
12
10
Lost Barrels
1Bitumen Production
Decades of Visible, Non-Declining Production
•
Syncrude owners have endorsed a plan for improving reliability and increasing
production
Demonstrated
production level priced
into Suncor bid
Anticipated production
improvements are a
free option for COS
shareholders
COS is Strongly Positioned to Withstand Low Oil
Prices and Emerge With Even Greater Value
1.
A proven-cash generating business that returns cash to shareholders
2.
A premier oil sands mining lease position, located in the heart of the mining region,
and an upgrader that converts all bitumen into light, sweet crude oil that receives a
premium price
3.
Unparalleled oil price leverage; even a modest increase in oil prices would be
expected to significantly increase COS’ free cash flow
1
available for debt repayment
and dividends
4.
Positive free cash flow
1
at WTI oil prices above US$40 and benefiting from operating
cost reductions and the recent completion of major projects capital investment
5.
A strong balance sheet with significant financial flexibility - a 38%
2
long-term
debt-to-total capitalization ratio
1
, over $1 billion of its $1.5 billion credit facility still available,
and no long-term debt maturities until 2019
6.
Suite of value-enhancing opportunities available to and under consideration by
Syncrude and its owners
1. Free cash flow and long-term debt-to-total capitalization are GAAP and Additional GAAP Financial Measures, respectively. See “Additional GAAP and Non-GAAP Measures” advisory.
Advisories
Suncor Offer
Certain information in this presentation relating to Suncor Energy Inc. (“Suncor”) and the Suncor offer to purchase all of the common shares (“Common Shares”) of Canadian Oil Sands Limited (the “Corporation”) has been derived from the Suncor offer and bid circular dated October 5, 2015, as amended and extended and other public sources. Neither the board of directors of the Corporation nor the Corporation independently verified such information or assumes any responsibility for the accuracy or completeness of such information or for any failure by Suncor to disclose events that may have occurred or that may affect the significance or accuracy of any such information.
Forward-Looking Information
This presentation, including the discussion of the reasons for the board of directors’ unanimous recommendation that shareholders of the Corporation (“Shareholders”) reject the Suncor offer and not tender their Common Shares, contains forward-looking information (as defined in the Securities Act (Alberta)) and statements (collectively, “forward-looking statements”) that are based on expectations, estimates and projections as of the date of this presentation. These looking statements can often, but not always, be identified by the use of forward-looking terminology such as “plans”, “predicts”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases, or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved.
Examples of such forward-looking statements in this presentation include, but are not limited to, the Corporation’s and Syncrude’s expectations for future profitability; expectations regarding the Corporation’s cash flow from operations; expectations with respect to production, capital expenditures and operating expenses at Syncrude and for the Corporation; Syncrude’s break-even price; expectations with respect to dividend payments by the Corporation; expectations with respect to the Corporation’s liquidity; expectations regarding future free cash flow generated by the Corporation; the amount of reserves recoverable and the time frame to recover such reserves; the estimated resources; future trading prices of the Common Shares; future commodity prices; the anticipated impact on cash flow from operations, free cash flow and the Corporation’s share price from increasing crude oil prices; expectations regarding net debt; and expectations regarding Lease 29.
Although the Corporation believes that the assumptions and expectations represented by such forward-looking statements are reasonable and reflect the current views of the Corporation with respect to future events, there can be no assurance that such assumptions and expectations will prove to be correct. The factors or assumptions on which the forward-looking statements are based include, but are not limited to: the assumptions outlined in the Corporation’s 2015 and 2016 guidance documents as posted on the Corporation’s website at
www.cdnoilsands.comas of the date hereof and as subsequently amended or replaced from time to time, including without limitation, the assumptions as to production, operating expenses, capital expenditures and oil prices; the successful and timely implementation of capital and maintenance projects; Syncrude’s business, maintenance and spending plans; the ability to obtain regulatory and joint venture owner approval; the continuation of assumed tax, royalty and other legislative and regulatory regimes; and the accuracy of the estimates of the reserves and resources.
In addition to being subject to a number of assumptions, forward-looking statements in this presentation involve known and unknown risks, uncertainties and other factors that may cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements. Some of the risks and other factors which could cause actual results or events to differ materially from current expectations expressed in the forward-looking statements contained in this presentation include, but are not limited to: volatility of crude oil prices; volatility of the synthetic crude oil (“SCO”) to West Texas Intermediate differential; the impact of the anticipated Syncrude cost reductions not materializing; the impact that pipeline capacity and apportionment and refinery demand have on prices for SCO and the Corporation’s ability to deliver SCO; the impacts of legislative and regulatory changes especially those which relate to royalties, taxation, tailings, water and the environment; the impact of new technologies on the cost of oil sands mining; the impacts of rising costs associated with tailings and water management; the inability of Syncrude to obtain required consents, permits or approvals, including without limitation, the inability of Syncrude to obtain approval to return water from its operations; various events which could disrupt operations including fires, equipment failures and severe weather; unsuccessful or untimely implementation of capital or maintenance projects; the impact of technology on operations and processes and how new technology may not perform as expected; the obtaining of required joint venture owner approvals from the Syncrude owners for expansions, operational issues and contractual issues; labour turnover and shortages and the productivity achieved from labour in the Fort McMurray area; uncertainty of estimates with respect to reserves and resources; the supply and demand metrics for oil and natural gas; the variances of stock market activities generally; currency and interest rate fluctuations; volatility of natural gas prices; the Corporation’s inability to either generate sufficient cash flow from operations to meet its current and future obligations or obtain
Advisories
external sources of debt and equity capital; general economic, business and market conditions; and such other risks and uncertainties described in the Corporation’s Annual Information Form dated February 24, 2015 and in the reports and filings made with securities regulatory authorities from time to time by theCorporation which are available on the Corporation’s profile on SEDAR at www.sedar.comand on the Corporation’s website at www.cdnoilsands.com.
You are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the forward-looking statements contained in this presentation are made as of the date of this presentation and unless required by law, the Corporation does not undertake any obligation to update publicly or revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this presentation are expressly qualified by this cautionary statement.
Additional GAAP and Non-GAAP Financial Measures
In this presentation, reference is made to additional GAAP and non-GAAP financial measures that do not have any standardized meaning as prescribed by GAAP. Additional GAAP financial measures are line items, headings or subtotals in addition to those required under GAAP, and financial measures disclosed in the notes to the financial statements which are relevant to an understanding of the financial statements and are not presented elsewhere in the financial statements. Non-GAAP and additional GAAP measures have been described and presented in order to provide Shareholders with additional measures for analyzing the Corporation’s operational performance, its ability to generate funds to finance its operations and information regarding its liquidity. Users are cautioned that non-GAAP and additional GAAP financial measures presented by the Corporation may not be comparable with measures provided by other entities.
Additional GAAP financial measures include: cash flow from operations (which is calculated as cash from operating activities before changes in non-cash working capital) and long-term debt-to-total capitalization (which is calculated as long-term debt divided by long-term debt plus Shareholders’ equity). For more information on additional GAAP financial measures please refer to our 2015 Third Quarter MD&A which is available on the Corporation’s profile on SEDAR at www.sedar.comand on the Corporation’s website at www.cdnoilsands.com.
Non-GAAP financial measures include: free cash flow (which is calculated as cash from operating activities before changes in non-cash working capital less capital expenditures), free cash flow per share (which is calculated as cash flow from operations before changes in non-cash working capital less capital expenditures, divided by the weighted-average number of shares outstanding in the period), total enterprise value (total enterprise value is defined in this presentation) and cash costs (cash costs includes operating expenses, development expenses, Crown royalties, interest expense, administration, insurance, reclamation and current tax expense).
Advisories
Oil and Gas Information
Unless otherwise stated, reserves and resources figures in this presentation refer to the Corporation’s reserves and resources as at December 31, 2014 as prepared by the Corporation’s independent reserves evaluator. For more information on the Corporation’s reserves and resources please refer to the Corporation’s Annual Information Form dated February 24, 2015 which is available on the Corporation’s profile on SEDAR at www.sedar.comand on the Corporation’s website at www.cdnoilsands.com.
“bbl” means barrel of oil.
“bbl/d” means barrels of oil per day.
“Mbbl/d” means thousand barrels of oil per day. “MM” means million.
“MMbbl” means million barrels of oil.
“probable reserves” are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.
“proved developed producing reserves” or “PDP” are those reserves that correspond to volumes recoverable through installed extraction equipment and infrastructure operational at the time of the reserves estimate.
“proved plus probable reserves” are those additional reserves that are less certain to be recovered than proved reserves. NI 51-101 defines the certainty level as “at least a 50 per cent probability that the quantities actually recovered will equal or exceed the sum of the estimated proved plus probable reserves.” Therefore, under NI 51-101, the proved plus probable reserves represent a “best estimate” or “expected reserves”.
“proved reserves” are those reserves that can be estimated with a high degree of certainty to be recoverable. NI 51-101 further identifies the certainty level for proved reserves as “at least a 90 per cent probability that the quantities actually recovered will equal or exceed the estimated proved reserves”.
“contingent resources” are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies.
“NI 51-101” means National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities.
