SUNCOR ENERGY INC. $32 - Toronto symbol SU

SUNCOR ENERGY INC. $32 (Toronto symbol SU; Conservative Growth Portfolio, Resources sector; Shares outstanding: 1.5 billion; Market cap: $48.0 billion; Price-to-sales ratio: 1.2; Dividend yield: 2.5%; TSINetwork Rating: Average; www. suncor.com) recently agreed to sell its conventional natural gas operations in Alberta, northeastern British Columbia and southern Saskatchewan for $1 billion. The deal does not include Suncor’s undeveloped shale gas and oil properties in B.C. and Alberta.

The cash from this sale prompted Suncor to raise its quarterly dividend by 53.8%, to $0.20 a share from $0.13. The new annual rate of $0.80 yields 2.5%. The company also plans to buy back up to $2 billion of its shares over the next five months.

In addition, Suncor continues to expand its oil sands operations. In the three months ended March 31, 2013, the company produced an average of 596,100 barrels of oil equivalent (including gas) a day. That’s up 6.0% from 562,300 barrels a year earlier.

The gain is mainly due to its Firebag oil sands project, which increased its production to 137,000 barrels a day from 83,600 a year earlier. Firebag’s output should rise to 180,000 barrels a day by early 2014.

Thanks to the higher production and a 9% drop in operating costs at its oil sands projects, Suncor’s earnings per share before unusual items rose 25.0%, to $0.90 from $0.72. Lower oil prices also boosted earnings at the company’s oil refineries, which accounted for 45% of its overall profits.

However, cash flow per share fell 3.2%, to $1.50 from $1.55. That’s mainly due to the extra costs related to Suncor’s recent decision to cancel its Voyageur project, which was 15% completed when the company halted construction. Voyageur would have upgraded bitumen from the oil sands into a lighter oil that’s easier to pump through pipelines. However, a lack of new pipeline capacity has hurt oil prices and this project’s economic viability.

The stock trades at just 9.4 times Suncor’s forecast 2013 earnings of $3.40 a share and 5.0 times its likely cash flow of $6.46 a share.

Suncor is a buy.

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