SUNCOR ENERGY INC. $37 (Toronto symbol SU; Conservative Growth Portfolio, Resources sector; Shares outstanding: 1.4 billion; Market cap: $51.8 billion; Price-to-sales ratio: 1.6; Dividend yield: 3.1%; TSINetwork Rating: Average; www.suncor.com) gets 80% of its crude production from its huge Alberta oil sands projects. The remaining 20% comes from traditional oil and gas wells.
Lower oil and gas prices cut these properties’ contribution to just 39% of Suncor’s revenue and 31% of its earnings in the three months ended June 30, 2015.
However, low oil prices are a plus for Suncor’s four refineries and 1,500 Petro-Canada gas stations. As a result, these businesses supplied 61% of revenue and 69% of earnings.
Suncor produced an average of 559,900 barrels a day (99% oil, 1% gas) in the latest quarter, up 8.0% from 518,400 a year earlier. That’s mainly because unplanned outages at its oil sands projects cut output in the year-earlier quarter.
As well, the Golden Eagle offshore oil platform in the North Sea (26.69% owned by Suncor) recently started up.
However, lower oil prices offset the higher output, and Suncor’s revenue fell 23.5%, to $8.1 billion from $10.6 billion. Without unusual items, earnings per share declined 18.2%, to $0.63 from $0.77. Cash flow per share slipped 9.1%, to $1.49 from $1.64.
In response, Suncor has cut its planned 2015 capital spending by a further $400 million, to between $5.8 billion and $6.4 billion.
The company also aims to make its oil sands projects more efficient. To that end, it has teamed up with other producers to test a technology that uses radio waves to melt the tar-like bitumen. This process also injects solvents into the well to improve flow.
The tests will take two years to complete. If successful, this approach could cut the amount of energy Suncor uses to extract bitumen by 75%.
Meantime, the company’s balance sheet remains strong: its long-term debt of $13.2 billion is a moderate 25% of its market cap, and it holds cash of $4.9 billion, or $3.38 a share.
Low oil prices will probably cut Suncor’s 2015 earnings by 55.2%, to $1.41 a share, and the stock trades at 26.2 times that estimate. However, it trades at a more reasonable 7.4 times its projected cash flow of $5.00 a share.
The company also recently raised its dividend by 3.6%. The new annual rate of $1.16 yields 3.1%.
Suncor is a buy.
