Suncor Energy Inc. (TSX: SU) is one of the lowest cost producers in North America, and continues to deliver superior margins and reward shareholders
SmallCapPower | July 27, 2017: Suncor Energy Inc. (TSX: SU) (NYSE: SU) shares have declined 13% from its May 13, 2017 high to its current price of C$38.37, on falling crude oil prices. This presents an opportunity for investors to accumulate the stock. Suncor Energy is Canada’s leading integrated energy company with significant presence in upstream oil sands operation and downstream refining and marketing. Suncor Energy also boasts of low production costs, strong funds from operations, and a consistent dividend payout for the past 15 consecutive years.
Share price of Suncor Energy (YTD)
Investment Thesis
- Canada’s leading integrated energy producer with presence across upstream oil production and refining and marketing
- Consistent dividend payout for the past 15 years
- Strong balance sheet
Integrated and low-cost energy producer capable of withstanding volatile crude prices
Suncor Energy is Canada’s leading integrated energy company with significant presence in upstream oil sands operation and downstream refining and marketing. For 2017, the Company is guiding for an annual upstream production of 680k to 720k (420k-450k BOEPD) and downstream refinery throughput of 425k-445k BOEPD. In addition, Suncor Energy generates superior refining and marketing margins of ~US$9/BBL of capacity compared to the peer average of less than US$5/bbl of capacity. As of March 31, 2017, the Company has more than 410 million barrels of 2P reserves.
In addition to its diversified business, Suncor Energy is one of the lowest cost producers in North America. Aided by operational and productivity improvements, the oil sands cash operating costs of the Company reached C$22.25/BBL, almost half the 2011 levels of $39.05/BBL. Operating, selling and general expense (OS&G) also stayed below 2014 levels although the production is up 30%.
Refining and Marketing Margins
The integrated business model coupled with low cost production helps Suncor Energy to withstand any volatility in crude prices.
Robust growth in production and funds from operations
Suncor’s total upstream production increased to 725 mboe/d in 1Q17 from 691 mboe/d in the prior year quarter. Oil Sands contributed 590.6 mboe/d during the quarter compared to 565.8 mboe/d in the prior year quarter. Suncor Energy guides for a robust growth in production through 2019 to more than 800 MBPD, with oil sands contributing to the bulk of this at 700 MBPD, driven primarily by growth debottlenecks and brownfield expansions.
Funds from Operations reached C$2.0 billion in 1Q17 from C$682 million in the prior year quarter, with oil sands contributing nearly half ($1.0 billion). Compared to the large U.S. (BP, Chevron, Exxon, Shell, Total) and Canadian (Cenovus, CNRL, Husky, Imperial) peers, Suncor Energy generates superior Funds from Operations as shown in the chart below.
Source: Company presentation
Rewarding shareholder with consistent dividend payout; announces $2 billion stock repurchase
Suncor Energy has been paying annual dividends for the past 15 consecutive years. In 1Q17, the Company paid a dividend of $0.237 per share, or a $0.95 annualized dividend, which translates into a dividend yield of 2.5%. In April 2017, the Company’s board authorized a $2.0 billion repurchase program that will allow buying up to 3.9% of its stock through open market purchases. The decision of Suncor Energy to buy back stock will not only reduce the number of shares but also indicates that the shares are undervalued according to the management.
Source: Company presentation
Sufficient capital to fund capex requirements
As of March 31, 2017, Suncor Energy had liquidity of $10.6 billion comprising $3.6 billion in cash and $7.0 billion in credit facilities, which should be more than sufficient to fund its 2017 planned capex requirements of $4.8-$5.2 billion. The Company’s net debt to FFO as of 1Q17 stands at a decent 1.8x, lower than conservative targets of 3.0x.
Financial Analysis
Suncor Energy reported strong growth in top and bottom lines, driven by improved upstream production and price realizations. Revenues increased nearly 41% to $7.8 billion on a 4.4% growth in production to 590.6 MBoe/d and average WTI crude prices of US$51.85/bbl during 1Q17 compared to US$33.5/bbl during 1Q16. Operating earnings improved to $812 million compared to a loss of $500 million, attributable to improved crude price realizations combined with strong upstream production, a Refining and Marketing (R&M) first-in, first-out (FIFO) gain and lower company-wide operating costs. As a result of the above factors, Funds from Operations doubled to $2.0 billion during the quarter from $682 million in the prior year quarter.
Net earnings quadrupled to $1.35 billion, or $0.81 per share, from $257 million, or $0.17 per share, in the prior year quarter. In addition to improved operational performance, net earnings were also impacted positively by $437 million of after-tax gains on the sale of the Company’s lubricants business and its interest in the Cedar Point wind facility and an unrealized after-tax foreign exchange gain of $103 million on the revaluation of U.S. dollar denominated debt.
Source: Company Filings
Valuation and outlook
Owing to its integrated business model and operational efficiencies, Suncor Energy continues to deliver superior margins and reward shareholders with consistent dividends. The Company could deliver strong financial performance with robust production growth guidance through 2019. Its stock price has corrected 13% from the recent high of ~$44 on falling crude prices. As and when crude prices inch up, the share price of Suncor Energy could also rally. In terms of valuation too, the Company looks attractive, trading at EV/EBITDA of 29.2x compared to the peer average of 46.18x. Additionally the recent announcement of $2.0 billion stock repurchase program indicates that the stock is undervalued according to the Company’s management.
Peer comparison
Source: Bloomberg, Company filings
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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