Canada’s largest integrated energy firm has strengthened its presence in the Alberta oil sands.
The company now owns controlling interest in one of the largest projects in the oil sands. This year it also began operations at another major oil sands project, which is now producing over 128,000 barrels per day. Thanks to strong cash flow and low debt, this stock continues to invest in exploration and upgrades. Even with the Province of Alberta’s temporary production cuts, the company expects its production will increase in 2019. Its dividend, raised earlier this year, yields 3.4%.
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SUNCOR ENERGY INC. (Toronto symbol SU; www.suncor.com) is Canada’s largest integrated oil company, with major projects in the Alberta oil sands. It also owns four refineries (three in Canada and one in Colorado), along with 1,500 Petro-Canada gas stations.
The company has a commanding presence in Alberta’s oil sands.
In March 2016, the company acquired Canadian Oil Sands Ltd. in an all-stock transaction; that firm owned 36.74% of the Syncrude oil sands project in northern Alberta. If you include Canadian Oil Sands’ debt of $2.6 billion, the total price was $7.1 billion. Subsequent purchases have increased Suncor’s stake in Syncrude to 58.74%.
Due to that acquisition and improving oil prices, in 2017 Suncor’s revenue rose by 19.3%, to $32.2 billion in 2017 from $27.0 billion in 2016.
Earnings were $0.28 a share (or a total of $445 million) in 2016, and rose substantially to $2.68 a share (or $4.5 billion) in 2017. Cash flow per share jumped 47.8% from $3.72 in 2016 to $5.50 a share in 2017.
Suncor also owns 50.8% of the Fort Hills oil sands project 90 kilometres north of Fort McMurray, Alberta. France’s Total SA holds 29.2% of the development, while Teck Resources owns the last 20.0%. The project, which cost $17 billion, began full operations in January 2018. In the most recent quarter, the project yielded 128,300 barrels per day, 69,400 barrels net to Suncor.
In the quarter ended September 30, 2018, jumped 46.1%, to $4.8 billion from $3.3 billion. Earnings also soared, rising 40.6%, to $1.8 billion from $1.3 billion a year earlier. On a per share basis, Suncor earned $1.11 a share, 42.3% higher than the $0.78 a share it earned a year earlier. Cash flow per share rose 30.2% during the quarter, from $1.94 a share to $1.49.
The company’s average daily production during the quarter was 743,800 barrels, up 0.5% from a year earlier.
Suncor spent $1.18 billion on exploration and upgrades in the quarter, down 22.0% from a year earlier due to the recent start-up of the Fort Hills oil sands project. The company still expects to have spent $5.2 billion to $5.5 billion on upgrades in 2018.
Energy stocks: Even with provincial cutbacks, Suncor expects higher production in 2019
Suncor recently joined the consortium now developing the Fenja offshore oil field near Norway. It paid $54.5 million U.S. for a 17.5% stake in that field. The company will also contribute $250 million (Canadian) to Fenja’s development costs. Fenja should begin operating in 2021.
The company expects production to rise 10 per cent in 2019, even after implementing Alberta’s required cuts in output. The province has mandated temporary cuts of 325,000 barrels per day (bpd) until excess crude in storage is drawn down. This production cut, which takes effect January 1, comes at a time of depressed prices for Canada’s heavy crude due in large part to pipeline bottlenecks.
For all of 2019, Suncor forecasts production of 780,000 to 820,000 barrels of oil equivalent per day, an increase from about 730,000 in 2018.
The company also expects to spend $4.9 billion to $5.6 billion to upgrade and expand its operations, roughly the same as in 2018.
The company can comfortably afford those investments. As of September 30, 2018, it held cash of $1.9 billion, and its long-term debt of $13.3 billion is a moderate 20% of its market cap.
Suncor’s earnings for all of 2018 are expected to be $3.24 a share. The stock trades at 12.2 times that estimate. It also trades at a low 4.8 times its projected cash flow per share of $6.39.
Suncor last raised its quarterly dividend in March 2018. Investors now receive $0.36 a share, up 12.5% from $0.32. The new annual rate of $1.44 yields 3.4%
Recommendation in The Successful Investor:Suncor is a buy.
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