my COS fcf estimates
** corrections and feedback welcome!! **
NB. this is strictly fwiw wild-ass guessing with no guarantees of correctness, and you should do your own D&D. this is not a recommendation to buy or sell.
NB. i am "clown long" COS so i am biased.
reference document: 2007 Guidance Document cos-trust.com
reference presentation slides: cos-trust.com
reference presentation webcast: events.streamlogics.net
COS stated in their latest investor presentation that they will pay down their debt to the targeted CAD1.6 billion as of Q1, after which they should be in a position to deliver nearly all free cash flow as dividends to shareholders. according to their baseline assumptions (see their guidance document), they will have FCF this year of CAD1.25. that is just enough to support the current dividend of 1.20.
however, their sensitivities show a higher FCF right now with the weak CAD and CL slightly higher than the baseline USD55. contrary to what some believe, COS profits increase as the Canadian dollar weakens. this is accounted for in their sensitivities. naturally, COS profits also increase as CL (light crude) increases, and is also accounted for in the sensitivities.
if one assumes as yearly averages the current CL price (~USD59) and CAD/USD cross (~USD0.86), i estimate their FCF according to the sensitivities would be CAD0.36 higher, or about CAD1.61. that means the quarterly dividend could be increased 33%, to about CAD0.40. i am assuming they could increase the dividend that high as soon as next quarter, if CL and CAD/USD stay where they are and the other baseline assumptions are fulfilled.
what's more, assuming they operate at full capacity next year, their FCF could increase a further CAD0.57 due to increased production volumes. adding this CAD0.57 to my estimated current runrate of CAD1.61 equals CAD2.18, so the quarterly dividend would go to CAD0.545, up from the current CAD0.30.
for that big of an increase to happen this year, CL would need to go much higher and/or their average production will need to be much higher than the baseline of 110 mmbpd (their target for next year is 129 mmbpd; the difference between 110mmbpd and 129mmbpd accounts for the estimated CAD0.57 increase in fcf next year).
so i do not see the dividend doing anything like a double this year, which i believe Wulff was estimating based on higher CL prices. in any case, assuming CL hangs in this high 50s range here, i believe the dividend will go up SIGNIFICANTLY next year--CAD0.57 on top of the current baseline CAD1.20 (or 1.61ish, if my estimates are correct for this year). that gives CAD1.77 or CAD2.18, depending on the scenario.
now, the above estimates are for free cash flow, and there are no assurances that COS will deliver ALL the fcf as dividends (although they have suggested that they will deliver the bulk). i don't know--maybe they hold back 5% or something.
in any case, my long-term expectation is for COS to be priced for a 5% dividend. if that happened on a CAD2.18 dividend, COS would go to around CAD44, about a 58% gain from current levels with no increase in the price of crude (actually, a significant DECREASE based on the current futures strip, which is pricing in crude above $63 for all of 2007).
the current COS dividend is around 4.3%, so my assumption that it would be repriced to 5% at the higher payout level is just a guess. if the market kept it at 4.3%, obviously COS would go higher still in the above scenario.
the 2007 strip looks like an average of around US63.75. that price, if achieved, would add another CAD0.33 to my fcf estimate for next year.
COS has also indicated that their entire production should be upgraded to SSP in the near future, which should trade at a premium to their current SSB product. however, they haven't listed any sensitivities for that so i will just consider it "gravy" when it happens. |
