SUNCOR ENERGY INC. $34 (Toronto symbol SU; Conservative Growth Portfolio, Resources sector; Shares outstanding: 1.6 billion; Market cap: $54.4 billion; Price-to-sales ratio: 1.8; Dividend yield: 3.4%; TSINetwork Rating: Average; www.suncor.com) is Canada’s largest integrated oil company. Oil production supplies about 40% of Suncor’s overall revenue. The remaining 60% comes from its four oil refineries (three in Canada and one in Colorado) and 1,500 Petro-Canada gas stations.
Suncor gets 66% of its crude from its oil sands projects in northern Alberta. It gets a further 16% from the Syncrude oil sands project north of Fort McMurray. In March 2016, the company completed its all-stock acquisition of Canadian Oil Sands Ltd., which owns 36.74% of Syncrude. If you include Canadian Oil Sands’ debt of $2.6 billion, the total price was $7.1 billion.
The company has now agreed to buy an additional 5.0% interest in Syncrude from Murphy Oil Corp. (New York symbol MUR). Suncor will pay $937 million when it completes the purchase in the next few weeks. That will raise its stake in Syncrude to 53.74%.
Imperial Oil (see page 53), which owns 25.0% of Syncrude, will continue to operate the facility. However, Suncor’s expertise should help improve the project’s efficiency and profits.
The remaining 18% of Suncor’s crude comes from its interests in offshore oil platforms off the coast of Atlantic Canada and in the North Sea.
Low oil prices hurt recent results
Suncor’s revenue fell from $38.8 billion in 2011 to $38.5 billion in 2012. Revenue turned around and rose to $40.3 billion in 2013; it improved to $40.5 billion in 2014. Due to the decline in oil prices, revenue then dropped to $29.7 billion in 2015.
Overall earnings fell 17.2%, from $5.7 billion in 2011 to $4.7 billion in 2013. Due to fewer shares outstanding, earnings per share declined 13.3%, from $3.61 to $3.13. Total earnings fell again in 2014 to $4.6 billion, but per-share earnings rose to $3.15. In 2015, earnings dropped to $1.01 a share (or a total of $1.5 billion).
Cash flow per share rose from $6.20 in 2011 to $6.30 in 2012, but fell to $4.71 in 2015.
Due to lower crude prices, the company’s oil producing operations lost $558 million in the three months ended March 31, 2016. Losses from its energy trading and other businesses totaled $183 million. However, Suncor’s refineries benefit from lower oil prices: that division reported a profit of $241 million for the quarter.
As a result, Suncor’s overall loss for the quarter was $500 million, or $0.33 a share. A year earlier, it earned $175 million, or $0.12 a share.
Despite weak oil prices, the company continues to build its Fort Hills oil sands project, located 90 kilometres north of Fort McMurray. It owns 50.8% of Fort Hills; France’s Total SA holds 29.2%, while Teck Resources owns the remaining 20.0%.
Fort Hills set to boost output in 2017
Suncor’s share of Fort Hills’s development costs is $6.5 billion. That includes the $2.3 billion it plans to spend on this project in 2016. The operation is now 55% complete, and should start up in late 2017. It will add 91,000 barrels a day to Suncor’s crude production, which averaged 691,400 barrels a day in the first quarter of 2016.
As well, the company owns 21.03% of the Hebron offshore project in Newfoundland. Its share of the development costs is $2.8 billion. Hebron will contribute 31,500 barrels to the company’s daily production when it begins operating in late 2017.
For all of 2016, Suncor expects to spend between $6.0 billion and $6.5 billion on exploration and upgrades. Spending should decline by 2018 once it finishes the Fort Hills and Hebron projects.
In addition, the company continues to cut its operating costs. That includes reducing its workforce by 12%. It also cut its production costs per barrel by 17.6% in 2015, and boosted the efficiency of its oil sands operations. In all, these moves have lowered its annual operating expenses by $1 billion.
Asset sales will free up cash
Suncor also plans to sell $1.0 billion to $1.5 billion of its less-important operations. These include pipelines and wind farms. However, it will probably hang onto its 820 company-owned gas stations for now.
The company’s balance sheet remains strong. As of March 31, 2016, long-term debt was $16.3 billion. That’s a manageable 30% of its market cap. It also held cash of $3.1 billion, or $1.98 a share.
Suncor’s cash flow per share will likely drop 36.1% to $3.01 in 2016. However, higher production and lower costs could lift cash flow to $5.44 a share in 2017. The stock trades at just 6.3 times that forecast. The company’s $1.16-a-share dividend, which yields 3.4%, appears safe for now.
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