TSX Commentary

Veritas Research: Canadian Oil Sands Trust (COS.UN) – $27.99 – We View COS as Fully Valued
Sell, Intrinsic Value Estimate: $30.50 (w/ Oil at $80USD/bbl)
Syncrude finally proved it can run flat out in Q4, having emerged from its debottlenecking efforts to produce 327,000 barrels per day (bpd) – 120 thousand bpd net to Canadian Oil Sands (COS). Better still Syncrude operated at 361,100 bpd in December, slightly above its rated capacity. With a planned turnaround being moved up into Q1, and unplanned outages this January, Syncrude production is forecast to fall below 280,000 bpd in the first quarter. While the forecast is for Syncrude to run at better than 325,000 bpd for the rest of the year, until it can put at least a quarter of decent performance behind it, Veritas sees a
distribution increase for COS as unlikely. From $1.04B in net debt at Q4, the trust is considering adding $560 MM or $1.16 per unit by the end of 2010, when it plans to reconvert to a corporation. Thus, there is an outside chance that distributions could double in the latter half of the year if management arrives at a comfort level for production and commodity pricing. The trust currently pays royalties based on how it believes its bitumen should be valued and continues to ‘discuss’ the matter with
Alberta, which calculates royalties should have been $40 MM higher in 2009. Unlike many E&P companies, payouts from COS’ long life reserves are less like equity and more like a floating rate bond tied to oil prices, with operational risks on the side. A modest yield should put in perspective why Veritas views the trust as overvalued at US$70 oil and worth just $30.50 at US$80 oil.