Connacher puts oilsands project 'in hibernation,' scales back 2009 spending

By Lauren Krugel, The Canadian Press

CALGARY - Connacher Oil and Gas Ltd.'s (TSX: CLL.TO) Algar oilsands project will remain on hold for the time-being, but the Calgary-based company's chief executive says he senses a recovery in crude oil prices.

The firm has already spent $150 million on the steam-assisted gravity drainage operation at Algar, which is expected to produce 10,000 barrels of bitumen per day. The total estimated cost is $345 million.

"This project is temporarily in hibernation, awaiting improved crude oil pricing and visibility that higher prices that appear to be emerging can be sustained over a period of time," said Connacher CEO Dick Gusella on a conference call with analysts Friday.

"We sense recovery is in the air and as crude oil prices appreciate, we will have the wherewithal and the competence to reactivate Algar construction and position ourselves for the big leap forwards towards our next phase of growth."

Oil prices surged above US$50 per barrel on the New York Mercantile Exchange this week - their highest levels so far in 2009 - but some analysts have been cautioning the rally is likely short-lived.

The company's shares were trading down 6.6 per cent on the Toronto Stock Exchange Friday to 71 cents, a day after the company reported a steep 2008 loss on higher costs.

Late Thursday Connacher said it lost $26.6 million, or 13 cents per share, in 2008, reversing a year-earlier profit of $40.9 million, or 20 cents per share. However revenues soared from $344.5 million to $629.3 million.

"Our losses for the year are largely related to significant increases in non-cash charges, especially in the fourth quarter," Gusella said.

Production for the year averaged 8,581 barrels of oil equivalent per day, up from 2,320 barrels per day in 2007.

The bottom line of Connacher's 9,500-barrel-per-day heavy oil refinery in Montana was hurt by soaring crude oil prices in the first part of the year.

In 2008, the cost of sales was $382 million compared to $265 in 2007 as refining margins fell last year.

Connacher is expecting refining operations to improve in 2009, as government spending infrastructure projects like roads boosts demand for asphalt.

"This product is currently in short supply in the United States. This improvement should start to be apparent in the second quarter of 2009," the company stated.

Connacher has set a capital spending for 2009 of $123 million, scaled back two-thirds from an earlier budget of $373 million. The company predicts it won't need to raise any additional capital this year, even if crude prices stay at US$45 for the rest of the year.

"We have the liquidity and the runway to get through this very difficult period of economic downturn," Gusella said on the call.