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From the Survey: Suncor Energy
Suncor Energy (SU), not to be confused with Sunoco (SUN), is an oil company that was founded in 1953, and is headquartered in Calgary, Canada. Suncor has a market cap of about $70 billion, and an enterprise value (equity plus debt minus cash) of around $83 billion. The company has refineries, pipelines, specialty lubricants, and gasoline outlets in Canada (under the Petro-Canada name) and in the U.S. (under the Phillips 66 and Shell brands). But the overriding reason why we have chosen Suncor as our highlight is that it boasts strong and reliable crude oil production from the Alberta oil sands region. Indeed, it is the leading developer of these sands. The crude is of high-quality bitumen, a commodity in demand since it requires less refining than other tar-based crudes. Suncor expects to boost its oil sands production at a 10% average annual rate over the next decade, or so.
Like it or not, oil will likely continue to be America’s primary energy source over the next 20 years, growing annually by about 0.5%. Over the next 10 years, it is projected that America’s dependence on foreign oil and gas, specifically from the Middle East, will decrease by about a third. We think America will increasingly look to Canada (as its biggest trading partner) to supply it with energy.
Suncor holds 28 billion barrels of oil equivalent (boe) in oil, natural gas, and liquefied natural gas sources, with 90% of estimated 2011 operations focused on crude oil. Amazingly, for a company that few have heard of, SU’s production tally only falls short to E&P behemoth’s ExxonMobil (XOM – Free ExxonMobil Stock Report), Chevron (CVX – Free Chevron Stock Report), and ConocoPhillips (COP).
Why invest in a Canadian company?
By almost every measure, Canada’s economy is outperforming that of the U.S. The Canadian dollar is likely to continue gaining ground on, and possibly surpass, the U.S. dollar. With that in mind, investors should think of diversifying into Canadian stocks. Canada benefits from being a major exporter of critical raw materials (rare earth minerals included). Indeed, it is second only to China; Australia is third. Furthermore, unemployment is down to 7.8%, versus 8.8% in the United States, and government debt is a mere $55.6 billion. And that’s with a corporate tax rate of only 17%. Lastly, consumer and investor confidence are much higher in Canada than they are in the United States.
Strong operating conditions
Suncor is in a good position to capitalize on higher oil prices. We estimate that for every $1 hike in the price of crude per barrel, SU’s operating cash flow rises by about $115 million. Moreover, it is reducing its debt. The company has a strategic partnership with Total SA (TOT). Total is providing SU with $1.75 billion in the first half of 2011 to help it pay down debt and fund mining operations. In return, Total gets a share of the profits and benefits from asset ownership swaps. Proceeds from divestitures of certain non-specific natural gas holdings has also helped Suncor pay down debt. At March 31, 2011, debt should have been just under $11 billion, compared to $13.3 billion at the end of 2009.
Being a major player in the high-grade bitumen Canadian oil sands is a huge positive when one considers that these Alberta oil sands are estimated to hold over 170 billion barrels of reserves, second only to Saudi Arabia (at 260 billion barrels). Iran is third with 140 billion barrels. Suncor gets more than half of its daily 600,000 barrels of production from the Alberta sands, and aims to boost this to over a million barrels a day by 2020, almost entirely from oil-sands expansion.
With many positives and few risks, an investment in Suncor is suitable for a wide variety of investors. SU’s greatest strength is diverse and reliable production. With its wide array of refineries, and wholly-owned pipelines and gas stations, it is vertically integrated. SU is also horizontally integrated in that it has both Canadian and U.S. retail gas outlets. The company posts its mining results on a monthly (rather than a quarterly) basis. This makes it easier for investors to follow the company’s average daily production. Civil unrest in the Middle East has increased uncertainty in the energy markets. Companies exposed to those uncertainties are at greater risk than a company like Suncor, which is not. All told, the price of oil will probably continue to rise as the global economy gradually improves and tensions remain high in the fractious Middle East and North African regions.
At the time of this article’s writing, the author did not have any positions in the companies mentioned.