SUNCOR ENERGY INC. $35 (Toronto symbol SU; Conservative Growth Portfolio, Resources sector; Shares outstanding: 1.5 billion; Market cap: $52.5 billion; Price-to-sales ratio: 1.2; Dividend yield: 3.2%; TSINetwork Rating: Average; www. suncor.com) gets 40% of its revenue and 65% of its earnings by producing oil and natural gas, mainly at its large Alberta oil sands projects. The remaining 60% of revenue and 35% of earnings come from its four oil refineries and 1,500 Petro-Canada gas stations.
Big merger boosted results
Suncor merged with rival Petro-Canada in 2009, increasing its revenue by 52.2%, from $25.5 billion in 2009 to $38.8 billion in 2011. Lower oil prices cut the company’s revenue to $38.5 billion in 2012. In 2013, Suncor sold most of its Western Canadian natural gas operations for $1 billion. However, higher oil prices offset the lower production, and its revenue rose to $40.3 billion.
Earnings soared 408.9%, from $1.1 billion in 2009 to $5.7 billion in 2011. Per-share earnings rose 288.2%, from $0.93 to $3.61, on more shares outstanding. Earnings then fell to $4.7 billion, or $3.13 a share, in 2013, mainly due to higher operating costs as Suncor grew in the oil sands.
Cash flow per share jumped 169.2%, from $2.34 in 2009 to $6.30 in 2012, but fell to $6.27 in 2013.
Suncor plans to spend between $6.2 billion and $6.8 billion to expand and upgrade its operations in 2015. It will invest 60% of this total in oil sands and other growth projects, including its 40.8% owned Fort Hills property; France’s Total SA holds 39.2%, while Teck Resources owns the remaining 20.0%. This $13.5-billion project (Suncor’s share is $5.5 billion) should start up in late 2017, and its reserves should last 50 years.
Refineries are an overlooked asset
The remaining 40% of Suncor’s 2015 spending will go to its conventional oil and gas properties and refineries. Making these facilities more efficient will help improve their profitability, particularly as today’s low oil prices cut their input costs.
The company expects to produce 540,000 to 585,000 barrels of oil equivalent a day in 2015. The midpoint of that range, 562,500, is 8.3% more than the 519,300 barrels a day it produced in the third quarter of 2014.
Suncor’s balance sheet remains strong. As of September 30, 2014, its long-term debt was $10.6 billion, or a moderate 20% of its market cap. It also held cash of $5.4 billion, or $3.67 a share.
Plenty of cash for buybacks, dividends
The company’s high cash balance will help fund its plan to buy back $1.1 billion worth of shares by August 2015. Suncor has also raised its dividend three times in the past 18 months. The current annual rate of $1.12 a share yields 3.2%.
The stock trades at just 10.8 times the $3.24 a share that Suncor probably earned in 2014, and 5.6 times its projected cash flow of $6.28 a share.
Suncor is a buy.
