Canadian Oil Sands : Announces Third Quarter Results and Substantial Completion of the Mildred Lake Mine Train Replacement

CALGARY, ALBERTA--(Marketwired - Oct 30, 2014) - Canadian Oil Sands Limited (TSX:COS)(OTCQX:COSWF) -

All financial figures are unaudited and in Canadian dollars unless otherwise noted.

"We have achieved substantial completion on construction of the $3.9 billion Mildred Lake Mine Train Replacement, on time and under budget, and are now in the commissioning and start-up phase," said Ryan Kubik, President and Chief Executive Officer. "This signals that Syncrude's major capital projects are winding down and the associated financing risk is coming out of the business."

Mr. Kubik adds: "After many years of engineering and construction, we are looking forward to the successful integration of the new Mildred Lake Train asset and its industry-leading technology into Syncrude's operation."

Highlights for the three months ended September 30, 2014:

• Cash flow from operations for the quarter was $302 million ($0.62 per Share) compared with $340 million ($0.70 per Share) in the same quarter of 2013 as a result of lower realized selling prices and higher operating expenses partially offset by higher sales volumes.
• Net income of $87 million ($0.18 per Share) was recorded for the quarter compared with $246 million ($0.51 per Share) in the third quarter of 2013. The decrease in net income was primarily a result of foreign exchange losses in 2014 as opposed to foreign exchange gains in 2013, as well as lower sales, net of crude oil purchases and transportation expense.
• Sales volumes for the quarter averaged 87,787 barrels per day, compared with 84,250 barrels per day in the comparative 2013 quarter.
• Operating expenses were $385 million in the third quarter of 2014 compared with $357 million the same quarter of 2013. The increase in third quarter operating expenses over the comparative quarter was due mainly to higher natural gas prices and additional maintenance associated with outages on sulphur processing units. On a per barrel basis, operating expenses in the third quarter of 2014 were $47.73 compared with $46.15 during the same period of 2013, reflecting the higher overall operating expenses, partially offset by higher sales volumes.
• The Mildred Lake Mine Train Replacement project reached an estimated 99 per cent completion and is on schedule to be in service by the end of this year.
• The Centrifuge Tailings Management project reached an estimated 90 per cent completion and is on schedule to be in service during the first half of 2015.
• COS declared a quarterly dividend of $0.35 per Share, payable on November 28, 2014 to shareholders of record on November 21, 2014.

2014 Outlook

Canadian Oil Sands provides the following key estimates and assumptions for 2014:

• We have reduced the top end of the forecast annual Syncrude production range by two million barrels for an updated range of 95 to 100 million barrels with a single point estimate of 97 million barrels. This reflects actual results to date and assumes an efficient start-up of the Mildred Lake mine trains in the fourth quarter.
• Offsetting the impact of the lower production estimate is an increase in the forecast annual realized SCO selling price. This reflects the strong realized SCO selling price in the third quarter, partially offset by the recent declines in the price of oil.
• We have increased our estimate of 2014 Crown royalties by $103 million, as heavy oil differentials have narrowed in the second half of 2014, resulting in higher estimated deemed bitumen values used to calculate Crown royalties.
• Our revised 2014 Outlook for cash flow from operations remains at approximately $1.3 billion and net debt at September 30, 2014 was $1.7 billion. We anticipate that net debt will end the year at similar levels in the upper end of our $1 billion to $2 billion net debt targeted range. With spending on major capital projects coming to an end, COS is positioned to fully fund its business in this current environment of lower crude oil prices. We will continue to assess dividend levels in the context of crude oil prices, Syncrude operations and our objective of targeting net debt in the range of $1 billion to $2 billion, while aiming to absorb short-term market volatility over several quarters.

Canadian Oil Sands expects to release its 2015 budget in early December. The specific date and conference call details will be provided in a future press release.

More information on the outlook is provided in our MD&A and the October 30, 2014 guidance document, which is available on our web site at www.cdnoilsands.com under "Investor Centre".

The 2014 Outlook contains forward-looking information and users are cautioned that the actual amounts may vary from the estimates disclosed. Please refer to the "Forward-Looking Information Advisory" in the MD&A section of this report for the risks and assumptions underlying this forward-looking information.

Management's Discussion and Analysis

The following Management's Discussion and Analysis ("MD&A") was prepared as of October 30, 2014 and should be read in conjunction with the unaudited consolidated financial statements and notes thereto of Canadian Oil Sands Limited (the "Corporation") for the three and nine months ended September 30, 2014 and September 30, 2013, the audited consolidated financial statements and MD&A of the Corporation for the year ended December 31, 2013 and the Corporation's Annual Information Form ("AIF") dated February 20, 2014. Additional information on the Corporation, including its AIF, is available on SEDAR at www.sedar.com or on the Corporation's website at www.cdnoilsands.com. References to "Canadian Oil Sands", "COS" or "we" include the Corporation, its subsidiaries and partnerships. The financial results of Canadian Oil Sands have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and are reported in Canadian dollars, unless otherwise noted.

Advisories

Forward-Looking Information

In the interest of providing the Corporation's shareholders and potential investors with information regarding the Corporation, including management's assessment of the Corporation's future production and cost estimates, plans and operations, certain statements throughout this MD&A and the related press release contain "forward-looking information" under applicable securities law. Forward-looking statements are typically identified by words such as "anticipate", "expect", "believe", "plan", "intend" or similar words suggesting future outcomes.

Forward-looking statements in this MD&A and the related press release include, but are not limited to, statements with respect to: the expectations regarding the 2014 annual Syncrude forecasted production range of 95 million barrels to 100 million barrels and the single-point Syncrude forecasted production estimate of 97 million barrels (35.6 million barrels net to the Corporation); the Corporation's intention to fund the Syncrude major projects primarily with cash flow from operations; all expectations regarding dividends; the expected sales, operating expenses, purchased energy costs, development expenses, Crown royalties, current taxes, capital expenditures and cash flow from operations for 2014; the expected price for crude oil and natural gas in 2014; the expected foreign exchange rates in 2014; the expected realized selling price, which includes the anticipated differential to West Texas Intermediate ("WTI") to be received in 2014 for the Corporation's product; the expectations regarding net debt; the anticipated impact of increases or decreases in oil prices, production, operating expenses, foreign exchange rates and natural gas prices on the Corporation's cash flow from operations; the belief that fluctuations in the Corporation's realized selling prices, U.S. to Canadian dollar exchange rate fluctuations, planned and unplanned maintenance activities, changes in bitumen values, changes in natural gas prices and current taxes may impact the Corporation's financial results in the future; the expectation that the major projects will be substantially complete by the end of 2014, reducing future capital expenditures and increasing future Crown royalties and net finance expenses; the expected amount of total major project costs, anticipated target in-service dates and estimated completion percentages for the Mildred Lake mine train replacements and the centrifuge plant at the Mildred Lake mine; the cost estimates for 2014 and 2015 major project spending; the belief that with spending on major capital projects coming to an end, the Corporation is positioned to fully fund its business in the current environment of lower crude oil prices; and the estimate of prospective resources impacted by the exercise of the option on a portion of Leases 29 and 31 by certain third parties.

You are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Although the Corporation believes that the expectations represented by such forward-looking statements are reasonable and reflect the current views of the Corporation with respect to future events, there can be no assurance that such assumptions and expectations will prove to be correct.

The factors or assumptions on which the forward-looking information is based include, but are not limited to: the assumptions outlined in the Corporation's guidance document as posted on the Corporation's website at www.cdnoilsands.com as of October 30, 2014 and as subsequently amended or replaced from time to time, including without limitation, the assumptions as to production, operating expenses and oil prices; the successful and timely implementation of capital projects; Syncrude's major project spending plans; the ability to obtain regulatory and Syncrude joint venture owner approval; our ability to either generate sufficient cash flow from operations to meet our current and future obligations or obtain external sources of debt and equity capital; the continuation of assumed tax, royalty and regulatory regimes and the accuracy of the estimates of our reserves and resources volumes.

Some of the risks and other factors which could cause actual results or events to differ materially from current expectations expressed in the forward-looking statements contained in this MD&A and the related press release include, but are not limited to: volatility of crude oil prices; volatility of the synthetic crude oil ("SCO") to WTI differential; the impact that pipeline capacity and apportionment and refinery demand have on prices for SCO and the ability to deliver SCO; the impacts of regulatory changes especially those which relate to royalties, taxation, tailings, water and the environment; the impact of new technologies on the cost of oil sands mining; the impacts of rising costs associated with tailings and water management; the inability of Syncrude to obtain required consents, permits or approvals, including without limitation, the inability of Syncrude to obtain approval to release water from its operations; the impact of Syncrude being unable to meet the conditions of its approval for its tailings management plan under Directive 074; various events which could disrupt operations including fires, equipment failures and severe weather; unsuccessful or untimely implementation of capital or maintenance projects; the impact of technology on operations and processes and how new complex technology may not perform as expected; the obtaining of required owner approvals from the Syncrude owners for expansions, operational issues and contractual issues; labour turnover and shortages and the productivity achieved from labour in the Fort McMurray area; uncertainty of estimates with respect to reserves and resources; the supply and demand metrics for oil and natural gas; currency and interest rate fluctuations; volatility of natural gas prices; the Corporation's ability to either generate sufficient cash flow from operations to meet its current and future obligations or obtain external sources of debt and equity capital; the inability of the Corporation to continue to meet the listing requirements of the Toronto Stock Exchange; general economic, business and market conditions and such other risks and uncertainties described in the Corporation's AIF dated February 20, 2014 and in the reports and filings made with securities regulatory authorities from time to time by the Corporation which are available on the Corporation's profile on SEDAR at www.sedar.com and on the Corporation's website at www.cdnoilsands.com.

You are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the forward-looking statements contained in this MD&A and the related press release are made as of October 30, 2014, and unless required by law, the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD&A and the related press release are expressly qualified by this cautionary statement.

Additional GAAP Financial Measures

In this MD&A and the related press release, we refer to additional GAAP financial measures that do not have any standardized meaning as prescribed by Canadian GAAP. Additional GAAP financial measures are line items, headings or subtotals in addition to those required under Canadian GAAP, and financial measures disclosed in the notes to the financial statements which are relevant to an understanding of the financial statements and are not presented elsewhere in the financial statements. These measures have been described and presented in order to provide shareholders and potential investors with additional measures for analyzing our ability to generate funds to finance our operations and information regarding our liquidity. Users are cautioned that additional GAAP financial measures presented by the Corporation may not be comparable with measures provided by other entities.

Additional GAAP financial measures include: cash flow from operations, cash flow from operations per Share, net debt, total net capitalization, total capitalization, net debt-to-total net capitalization and long-term debt-to-total capitalization.

Cash flow from operations is calculated as cash from operating activities before changes in non-cash working capital. Cash flow from operations per Share is calculated as cash flow from operations divided by the weighted-average number of Shares outstanding in the period. Because cash flow from operations and cash flow from operations per Share are not impacted by fluctuations in non-cash working capital balances, we believe these measures are more indicative of operational performance than cash from operating activities. With the exception of current taxes, liabilities for Crown royalties and the current portion of our asset retirement obligation, our non-cash working capital is liquid and typically settles within 30 days.

Cash flow from operations is reconciled to cash from operating activities as follows:

Net debt, total net capitalization, total capitalization, net debt-to-total net capitalization and long-term debt-to-total capitalization are used by the Corporation to analyze liquidity and manage capital, as discussed in the "Liquidity and Capital Resources" section of this MD&A and in Note 12 to the unaudited consolidated financial statements for the three and nine months ended September 30, 2014.

Overview

Syncrude has substantially completed construction of the $3.9 billion Mildred Lake Mine Train Replacement project, which began commissioning in October. Significant progress was also made on Syncrude's Centrifuge Tailings Management project, which is now estimated at 90 per cent complete and on target to be in service in the first half of 2015. The cost of these projects remains in line with our lowered estimate.

Syncrude's production was 22.5 million barrels during the third quarter of 2014. The production was below our Outlook estimate due to unplanned outages in sulphur processing units, which were resolved by the end of the third quarter.

Commodity prices remained strong during the third quarter of 2014 with a realized SCO selling price of $103 per barrel compared with our annual Outlook of $99 per barrel issued in the second quarter.

Operating expenses were in line with our Outlook for the third quarter of 2014 but were slightly higher than the same quarter of 2013 due to higher natural gas prices and additional maintenance associated with the outages on the sulphur processing units.

Our revised 2014 Outlook for cash flow from operations remains at approximately $1.3 billion and net debt at September 30, 2014 was $1.7 billion. We anticipate that net debt will end the year at similar levels in the upper end of our $1 billion to $2 billion net debt targeted range. With spending on major capital projects coming to an end, COS is positioned to fully fund its business in this current environment of lower crude oil prices. We will continue to assess dividend levels in the context of crude oil prices, Syncrude operations and our objective of targeting net debt in the range of $1 billion to $2 billion, while aiming to absorb short-term market volatility over several quarters.

Review of Operations

During the third quarter of 2014, Syncrude produced 22.5 million barrels, or 244,800 barrels per day, reflecting unplanned outages in sulphur processing units during the quarter. This compares with Syncrude production of 20.9 million barrels, or 227,000 barrels per day, in the third quarter 2013 when planned turnarounds on Coker 8-1, the LC Finer and a hydrotreating unit impacted production.

On a year-to-date basis, Syncrude produced 67.3 million barrels, or 246,400 barrels per day, in 2014 compared with 69.2 million barrels, or 253,400 barrels per day, in 2013. Lower year-to-date production in 2014 was due to unplanned outages on Coker 8-1 and sulphur processing units. Production in the first nine months of 2013 was impacted by delays completing scheduled turnarounds, as well as unplanned outages in extraction units.

Review of Financial Results

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Cash flow from operations decreased in the third quarter of 2014 from the third quarter of 2013 as a result of a lower realized selling price and higher operating expenses, partially offset by higher sales volumes.

On a year-to-date basis, cash flow from operations decreased in 2014 from 2013, as lower sales volumes and higher operating expenses were partially offset by a higher realized selling price and lower current taxes.

The changes in the components of cash flow from operations are discussed in greater detail later in this MD&A.

Canadian Oil Sands reported net income of $87 million, or $0.18 per Share, in the third quarter of 2014 compared with $246 million, or $0.51 per Share, in the third quarter of 2013, primarily reflecting foreign exchange losses in 2014 as opposed to foreign exchange gains in 2013, as well as lower sales, net of crude oil purchases and transportation expense.

On a year-to-date basis, net income decreased to $435 million, or $0.90 per Share, in 2014 from $642 million, or $1.32 per Share, in 2013 due primarily to higher operating expenses.

The changes in the components of net income are discussed in greater detail later in this MD&A.

The $42 million decrease in third quarter sales, net of crude oil purchases and transportation expense, reflects a lower realized selling price partially offset by higher sales volumes relative to the third quarter of 2013.

• The third quarter of 2014 realized selling price decreased by $10 per barrel, reflecting a lower U.S. dollar WTI price and a deterioration of the SCO differential to WTI, partially offset by a weaker average Canadian dollar during the quarter.
• Sales volumes in the third quarter of 2014 averaged 87,800 barrels per day, up from sales volumes of 84,300 barrels per day in the third quarter of 2013. The lower volumes in 2013 reflect planned turnarounds on upgrading units, while the third quarter of 2014 was impacted by unplanned outages in sulphur processing units.

Year-to-date sales, net of crude oil purchases and transportation expense, were largely unchanged with lower sales volumes offset by a higher realized selling price relative to 2013.

• Sales volumes in 2014 averaged 90,000 barrels per day, down from 93,300 barrels per day in the comparative 2013 period due mainly to the unplanned Coker 8-1 outage during the second quarter and unplanned outages in sulphur processing units in the third quarter.
• The year-to-date 2014 realized selling price increased by $4 per barrel, reflecting a stronger U.S. dollar WTI price and a weaker average Canadian dollar in the first nine months of the year, partially offset by a deterioration in the SCO differential to WTI.

Crude oil purchases decreased in 2014 compared with 2013, as fewer purchased volumes were required to support production shortfalls and transportation arrangements.

Operating Expenses

The following table shows the major components of operating expenses in total dollars and per barrel of SCO:

The $28 million increase in third quarter operating expenses over the comparative quarter was mainly due to higher natural gas prices and additional maintenance associated with outages on sulphur processing units.

On a year-to-date basis, operating expenses increased by $142 million due to maintenance costs associated with the unplanned Coker 8-1 outage during the second quarter, higher drilling and tailings management activities, higher natural gas prices and an increase in the value of Syncrude's long-term incentive plans. A portion of Syncrude's long-term incentive compensation is based on the market return of certain Syncrude owners' shares, the returns on which have been stronger in the first nine months of 2014 compared with 2013.

The following table shows operating expenses per barrel of bitumen and SCO. Costs are allocated to bitumen production and upgrading on the basis used to determine Crown royalties.

Crown Royalties

Crown royalties decreased to $62 million, or $7.68 per barrel, in the third quarter of 2014 from $71 million, or $9.20 per barrel, in the third quarter of 2013 due to lower estimated bitumen values, partially offset by lower deductible capital expenditures. Additionally, the higher Crown royalty expense recorded in the third quarter of 2013 reflects refinements at that time to the estimated bitumen values for 2013 and prior years.

On a year-to-date basis, Crown royalties increased to $161 million, or $6.54 per barrel in 2014 from $122 million, or $4.79 per barrel, in the comparative 2013 period, mainly reflecting lower deductible capital expenditures in 2014.

Depreciation and Depletion Expense

Depreciation and depletion expense increased to $126 million and $367 million in the third quarter and first nine months of 2014, respectively, from $101 million and $326 million in the comparative 2013 periods. The increase reflects new depreciation charges on significant tailings and lease development projects completed in the fourth quarter of 2013.

Interest costs on the Corporation's U.S. dollar-denominated long-term debt reflect lower average outstanding debt levels in the first nine months of 2014 due to a U.S. $300 million debt repayment in August, 2013, partially offset by a weaker Canadian dollar relative to the first nine months of 2013.

Foreign exchange gains and losses are the result of revaluations of the Corporation's U.S. dollar-denominated long-term debt, accounts receivable and cash into Canadian dollars.

The $US/$Cdn exchange rate was $0.89 at September 30, 2014 versus $0.94 at June 30, 2014 and December 31, 2013. The change in exchange rates during the third quarter generated foreign exchange losses on long-term debt of $80 million and $86 million in the three and nine months ended September 30, 2014, respectively.

In 2013, the $US/$Cdn exchange rate was $0.97 at September 30, 2013 versus $0.95 at June 30, 2013 and $1.01 at December 31, 2012. The change in exchange rates generated a foreign exchange gain on long-term debt of $40 million for the third quarter and a foreign exchange loss of $62 million on a year-to-date basis.

Year-to-date current tax expense decreased in 2014 due to changes in the timing and the amount of taxable income generated by the Corporation's partnership. Lower total tax expense in 2014 reflects lower year-to-date net income before taxes compared with 2013.

Canadian Oil Sands' asset retirement obligation increased from $896 million at December 31, 2013 to $989 million at September 30, 2014 primarily due to a decrease in the interest rate used to discount future reclamation and closure expenditures from 3.25 per cent at December 31, 2013 to 2.75 per cent at September 30, 2014.

The Corporation's obligation for Syncrude Canada Ltd.'s ("Syncrude Canada") accrued benefit liability decreased to $297 million at September 30, 2014 from $308 million at December 31, 2013 due to higher than expected actual returns on plan assets, largely offset by a 25 basis point decrease in the interest rate used to discount the accrued benefit liability.

Summary of Quarterly Results

During the last eight quarters, the following items have had a significant impact on the Corporation's financial results and may impact the financial results in the future:

• Fluctuations in realized selling prices have affected the Corporation's sales. During the last eight quarters, monthly average WTI prices have ranged from U.S. $87 per barrel to U.S. $107 per barrel, and the monthly average differentials have ranged from a $15 per barrel discount to a $10 per barrel premium.
• U.S. to Canadian dollar exchange rate fluctuations have resulted in foreign exchange gains and losses on the revaluation of U.S. dollar-denominated debt and have impacted realized selling prices.
• Planned and unplanned maintenance activities have impacted quarterly production volumes, revenues, operating expenses and per barrel results.
• Changes in bitumen values have impacted Crown royalties.
• Major capital projects to replace or relocate Syncrude mine trains and to support tailings management plans have increased capital expenditures and have reduced Crown royalties over the past eight quarters. These projects are expected to be substantially complete by the end of 2014, reducing future capital expenditures and increasing future Crown royalties and net finance expenses.
• Changes in natural gas prices have impacted operating expenses.
• Current taxes have impacted cash flow from operations. Prior to 2013, tax pools sheltered the Corporation's income from significant current taxes.

Capital expenditures decreased $191 million in the third quarter of 2014 and $290 million in the first nine months of 2014 from the comparative 2013 periods, reflecting the completion of several tailings and lease development projects in 2013, including two major projects: Aurora North Mine Train Relocations and Aurora North Tailings Management.

More information on the major projects is provided in the "Outlook" section of this MD&A.

Contractual Obligations and Commitments

Canadian Oil Sands' contractual obligations and commitments are summarized in the 2013 annual MD&A and include future cash payments that the Corporation is required to make under existing contractual arrangements entered into directly or as a 36.74 per cent owner in Syncrude. In 2014, Canadian Oil Sands assumed $75 million in new funding commitments relating to capital projects while the Corporation's share of payments prescribed by regulations on Syncrude Canada's registered pension plans decreased by approximately $200 million as a result of an actuarial valuation completed in April, 2014.

Dividends

On October 30, 2014, the Corporation declared a quarterly dividend of $0.35 per Share for a total dividend of approximately $170 million. The dividend will be paid on November 28, 2014 to shareholders of record on November 21, 2014. For the nine months ended September 30, 2014, the Corporation has paid dividends to shareholders totaling $509 million, or $1.05 per Share.

Dividend payments are set quarterly by the Board of Directors in the context of current and expected crude oil prices, economic conditions, Syncrude's operating performance and the Corporation's capacity to finance operating and investing obligations. Dividend amounts are established with the intent of absorbing short-term market volatility over several quarters and recognize our intention to fund the current major projects primarily with cash flow from operations, while maintaining a strong balance sheet to reduce exposure to potential oil price declines, cost increases or major operational upsets.

Other

During the second quarter of 2014, third parties exercised their option (as previously disclosed in our AIF) to acquire a portion of Leases 29 and 31. These option portions contain about 300 million barrels of COS' prospective resources. There was no impact to the financial statements as a result of the exercise of this option. By their nature, all prospective resources have a chance of discovery and development, but there is no certainty that prospective resources will be commercially viable.

Liquidity and Capital Resources

In the first nine months of 2014, net debt rose $944 million to $1,740 million at September 30, 2014, as payments for capital expenditures, dividends, and other liabilities were in excess of cash flow from operations. In addition, a weakening Canadian dollar from December 31, 2013 to September 30, 2014 increased the Canadian dollar equivalent value of long-term debt. As a result, net debt-to-total net capitalization increased to 27 per cent at September 30, 2014 from 14 per cent at December 31, 2013.

Based on the assumptions in our 2014 Outlook, we expect net debt to remain near the upper end of our targeted range of $1 billion to $2 billion at year end. While the significant oil price declines in October 2014 have been reflected in our Outlook, Canadian Oil Sands will be monitoring the impact of lower oil prices on its target net debt levels. With spending on major capital projects coming to an end, COS is positioned to fully fund its business in this current environment of lower crude oil prices. We will continue to assess dividend levels in the context of crude oil prices, Syncrude operations and our objective of targeting net debt in the range of $1 billion to $2 billion, while aiming to absorb short-term market volatility over several quarters.

Shareholders' equity decreased to $4,667 million at September 30, 2014 from $4,732 million at December 31, 2013, as dividends exceeded comprehensive income in the first nine months of the year.

In July 2014, Canadian Oil Sands extended the terms of its credit facilities by approximately one year. The $1,500 million credit facility was extended to June 30, 2018 and the $40 million credit facility to June 30, 2016. As at September 30, 2014, $200 million was drawn against these facilities (December 31, 2013 - $nil).

Canadian Oil Sands Senior Notes indentures and credit facility agreements contain certain covenants that restrict Canadian Oil Sands' ability to sell all or substantially all of its assets or change the nature of its business, and limit long-term debt-to- total capitalization to 55 per cent. Canadian Oil Sands is in compliance with its debt covenants, and with a long-term debt-to- total capitalization of 29 per cent at September 30, 2014, a significant increase in debt or decrease in equity would be required to negatively impact the Corporation's financial flexibility.

Shareholders' Capital and Trading Activity

The Corporation's shares trade on the Toronto Stock Exchange under the symbol COS. On September 30, 2014, the Corporation had a market capitalization of approximately $10 billion with 484.6 million shares outstanding and a closing price of $20.66 per Share. The following table summarizes the trading activity for the third quarter of 2014.

We have reduced the top end of the forecast annual Syncrude production range by two million barrels for an updated range of 95 to 100 million barrels with a single point estimate of 97 million barrels. This reflects actual results to date and assumes an efficient start-up of the Mildred Lake mine trains in the fourth quarter.

Offsetting the impact of the lower production estimate is an increase in the forecast annual realized SCO selling price. This reflects the strong realized SCO selling price in the third quarter, partially offset by the recent declines in the price of oil.

We have increased our estimate of 2014 Crown royalties by $103 million as heavy oil differentials have narrowed in the second half of 2014, resulting in higher estimated deemed bitumen values used to calculate Crown royalties.

Based on these assumptions, estimated 2014 cash flow from operations is $1.3 billion, or $2.62 per Share. While the significant oil price declines in October 2014 have been reflected in our Outlook, Canadian Oil Sands will be monitoring the impact of lower oil prices on its target net debt levels. With spending on major capital projects coming to an end, COS is positioned to fully fund its business in this current environment of lower crude oil prices. We will continue to assess dividend levels in the context of crude oil prices, Syncrude operations and our objective of targeting net debt in the range of $1 billion to $2 billion, while aiming to absorb short-term market volatility over several quarters.

Canadian Oil Sands expects to release its 2015 budget in early December. The specific date and conference call details will be provided in a future press release.

Changes in certain factors and market conditions could potentially impact Canadian Oil Sands' Outlook. The following table provides a sensitivity analysis of the key factors affecting the Corporation's performance.

The 2014 Outlook contains forward-looking information and users are cautioned that the actual amounts may vary from the estimates disclosed. Please refer to the "Forward-Looking Information Advisory" section of this MD&A for the risks and assumptions underlying this forward-looking information.

Major Projects

Syncrude has substantially completed construction of the $3.9 billion Mildred Lake Mine Train Replacement project, which began commissioning in October. The total cost is expected to meet our reduced $3.9 billion cost estimate that was issued during the first quarter of 2014.

The Centrifuge Tailings Management project continues to remain on budget and we have narrowed the range of the cost estimate. The project remains on schedule for completion in the first half of 2015.

The following tables provide cost and schedule estimates for Syncrude's major projects. Regular maintenance capital expenditures for years after 2014 will be provided on an annual basis concurrent with annual budget disclosures.

The major projects tables contain forward-looking information and users of this information are cautioned that the actual yearly and total major project costs and the actual in-service dates for the major projects may vary from the plans disclosed. The major project cost estimates and major project target in-service dates are based on current spending plans. Please refer to the "Forward-Looking Information Advisory" section of this MD&A for the risks and assumptions underlying this forward-looking information. For a list of additional risk factors that could cause the actual amount of the major project costs and the major project target in-service dates to differ materially, please refer to the Corporation's Annual Information Form dated February 20, 2014 which is available on the Corporation's profile on SEDAR at www.sedar.com and on the Corporation's website at www.cdnoilsands.com.

1) Nature of Operations

Canadian Oil Sands Limited ("Canadian Oil Sands" or the "Corporation") is incorporated under the laws of the Province of Alberta, Canada. The Corporation indirectly owns a 36.74 per cent interest ("Working Interest") in the Syncrude Joint Venture ("Syncrude"). Syncrude is involved in the mining and upgrading of bitumen from oil sands near Fort McMurray in northern Alberta. The Syncrude Project is comprised of open-pit oil sands mines, utilities plants, bitumen extraction plants and an upgrading complex that processes bitumen into Synthetic Crude Oil ("SCO"). Syncrude is jointly controlled by seven owners and each owner takes its proportionate share of production in kind, and funds its share of Syncrude's operating, development and capital costs on a daily basis. The Corporation also indirectly owns 36.74 per cent of the issued and outstanding shares of Syncrude Canada Ltd. ("Syncrude Canada"). Syncrude Canada operates Syncrude on behalf of the owners and is responsible for selecting, compensating, directing and controlling Syncrude's employees, and for administering all related employment benefits and obligations. The Corporation's investment in Syncrude and Syncrude Canada represents its only producing asset.

The Corporation's office is located at the following address: 2000 First Canadian Centre, 350 - 7th Avenue S.W., Calgary, Alberta, Canada T2P 3N9.

2) Basis of Presentation

These unaudited interim consolidated financial statements are prepared and reported in Canadian dollars in accordance with Canadian generally accepted accounting principles as set out in Part 1 of the Chartered Professional Accountants of Canada Handbook and in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and effective on October 30, 2014.

Certain disclosures that are normally required to be included in the notes to the annual audited consolidated financial statements have been condensed or omitted as permitted by International Accounting Standard ("IAS") 34, Interim Financial Reporting. These unaudited interim consolidated financial statements should be read in conjunction with the Corporation's audited consolidated financial statements and notes thereto for the year ended December 31, 2013.

3) Accounting Policies

The same accounting policies and methods of computation are followed in these unaudited interim consolidated financial statements as compared with the most recent audited annual consolidated financial statements for the year ended December 31, 2013 except as follows:

Taxes

Current taxes in interim periods are accrued based on our best estimate of the annual effective tax rate applied to year-to- date earnings. Current taxes accrued in one interim period may be adjusted prospectively in a subsequent interim period if the estimate of the annual effective tax rate changes.

Impairment

In January 2013, the IASB issued amendments to IAS 36, Impairment of Assets, which removed fair value guidance from the standard to ensure consistency with the enhanced fair value measurement and disclosure requirements provided under IFRS 13, Fair Value Measurements. Canadian Oil Sands has applied these amendments effective January 1, 2014 in accordance with the applicable transitional provisions, with no impact on the financial statements or disclosures.

Levies

In May 2013, the IASB issued International Financial Reporting Interpretations Committee ("IFRIC") Interpretation 21, Levies, which provides guidance on when to recognize a liability for levies imposed by governments. Canadian Oil Sands has applied this interpretation effective January 1, 2014, in accordance with the applicable transitional provisions, with no impact on the financial statements or disclosures.

4) Property, Plant and Equipment, Net

For the three and nine months ended September 30, 2014, interest costs of $29 million and $81 million, respectively, were capitalized and included in property, plant and equipment (three and nine months ended September 30, 2013 - $29 million and $80 million, respectively) based on an interest capitalization rate of 6.6 per cent for the three and nine months ended September 30, 2014 (6.5 per cent for the three and nine months ended September 30, 2013).

5) Accounts Payable and Accrued Liabilities

6) Employee Future Benefits

The Corporation's 36.74 per cent share of Syncrude Canada's obligation for pension and other post-employment benefits in excess of the fair value of the assets held in the benefit plans (the "accrued benefit liability") is as follows:

7) Asset Retirement Obligation

The Corporation and each of the other Syncrude owners are liable for their share of ongoing obligations related to the reclamation and closure of the Syncrude properties on abandonment. The Corporation estimates reclamation and closure expenditures on disturbed mines and existing facilities will be made progressively over the next 70 years and has applied a risk-free interest rate of 2.75 per cent at September 30, 2014 (December 31, 2013 - 3.25 per cent) in deriving the asset retirement obligation.

12) Capital Management

The Corporation's capital consists of cash and cash equivalents, debt and Shareholders' equity. The balance of each of these items at September 30, 2014 and December 31, 2013 was as follows: