If oil prices get back to US$82 a barrel and stay there, Canadian Oil Sands Trust could raise its quarterly distribution to 50¢ a unit, up from 35¢ now, says Versant Partners analyst Mark Friesen.
"Distributions will be somewhat impacted following the mandatory conversion to a corporation at the end of 2010; however, management of the Trust has indicated that it will continue to maintain a discretionary dividend policy going forward," he said in note to clients
"At our oil price estimates, we estimate that Canadian Oil Sands will pay roughly $1 billion of distributions this year, and without a competing use of funds will be in a position to pay roughly $1 billion of dividends next year before becoming cash taxable, likely in the end of 2011 or early 2012 time frame based on our oil price outlook.
Mr. Friesen initiated coverage of Canadian Oil Sands with a Buy rating and a $34 target price.
In addition to the company's high level of free cash flow that will be used to pay distributions, but also consolidate additional working interests at Syncrude, it's flagship project, the analyst likes Canadian Oil Sands for its 95% unit price correlation to oil prices, its relatively low capital re-investment risk and the long life nature of its asset base.
"Given our positive oil price outlook and the strong correlation of Canadian Oil Sands units to oil price, we would expect the units to perform well in an
environment of strong oil prices," he said.