Report: Cost cutting gives Canadian oil sands companies temporary credit relief

In a report released Aug. 21, Standard & Poor's Ratings Services said it believes that reducing costs and operating efficiently are vital for Canadian oil sands operators wanting to maintain their credit quality.

As low prices persist, oil and gas exploration and production (E&P) companies globally have cut back capital spending in 2015 as they try to preserve their balance-sheet strength and liquidity. At the same time, reducing operating costs for existing production is essential for these companies to generate profits and free cash flow.

Companies ranging from large, integrated firms to small, conventional E&P producers are limiting their cash outlays by delaying new projects and improving efficiencies of existing operations through cost-cutting measures. Fixed costs are a high proportion of oil sands operation costs, so a stable to increasing production level improves the cost structure and increases cash flow, thereby funding ongoing capital expenditures.

"Companies have done a lot on both fronts, with an eye on preserving liquidity, even if it means cutting dividends," said Standard & Poor's credit analyst Aniki Saha-Yannopoulos in the report, entitled "Canadian Oil Sands Companies' Falling Operating Costs Protect Their Balance Sheets – But For How Long?"

Saha-Yannpoulos added, "However, persistently low – or even lower – oil prices could end up causing a lot of trouble for companies whose margins are still tight."

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