Vertical Integration Will Allow Suncor to Get Through

SU - Suncor Energy

Suncor Energy is one of the largest independent energy companies in the world and the largest oil producer in Canada. The company engages in oil sands operations, offshore oil and gas production, petroleum refining and marketing. In addition, Suncor is involved in energy trading and operates a renewable energy business. It owns international and offshore assets in key strategic geographic locations like the U.K. North Sea, Canada’s east coast and Norway which provides steady and diversified cash flow. The company operates four refineries, Canada’s largest ethanol plant, wind farms, and a network of 1750 retail sites in North America.

As Canada’s leading integrated company, Suncor owns 940 mbpd oil production capacity, 550 mbpd upgrading capacity, and 460 mbpd refining capacity. The company has operations across the entire value chain, including resource extraction, upgrading, refining and marketing, and midstream logistics. A holistic presence across upstream, midstream and downstream cushions Suncor from price volatility in the energy market.

Investment Data

Revenue Growth & Market Exposure

Suncor Energy derives a majority of its revenues from its oil sand business and holds one of the largest positions in oil sands. The oil sands make up 7.37 of the 7.79 billion barrels of Suncor’s proved plus probable reserves. Suncor’s core oil sands production is complemented by its international and offshore assets that provide stable, low-cost cash flow. Suncor is strategically focused on developing Canada’s Athabasca oil sands, which is one of the largest petroleum resource basins in the world. The company deploys in-situ technology for mining and believes the next phase of growth will be in situ sites. The in situ process will result in structural savings and improved future designs. Suncor has received approval for multiple in situ developments.

In more than 50 years of its existence, Suncor has developed operational excellence and has a balanced portfolio of high-quality assets with significant growth prospects. Suncor’s long-life, low-decline reserve base with a proven life of 31+ years, sets it apart from peers. In addition, its offshore business provides geographic and cash flow diversification, while its midstream assets provide operational flexibility.

As an integrated energy company, Suncor’s presence across the entire value chain insulates it against volatility in any one segment. The company’s focus on cost reduction as well as production growth should drive future profitability. Projects like Fort Hills, Hebron and Syncrude are expected to add value for its shareholders while increasing long-term profitability for the company. The 50-year, long-life, low-decline production profile of Fort Hills has already begun. The company is targeting driving utilization rates above 90% by 2020 and achieved ~85% at Syncrude in 2019. Suncor faced mandatory production curtailment and planned maintenance downtime during the last quarter of 2019, which impacted production and cash costs per barrel across Oil Sands. Despite this, its Oil Sands assets recorded the highest SCO volumes last year on a full-year basis.

Suncor Energy has cut its 2020 Capex and production outlook and suspended share buybacks for the year, in response to the decline in crude oil prices and the economic impact of the coronavirus. It has also lowered its 2020 production outlook to 740K-780K boe/day. Suncor now expects capital spending for the year of C$3.9 billion -C$4.5 billion. The company has begun to adjust refinery utilization as product demand in Canada begins to decline and this trend is expected to continue over the next few quarters.

Suncor is evaluating future projects taking into account the current environment of volatile commodity prices, market access challenges and government intervention into crude markets. It is also making progress on new technology development, which has the potential to significantly reduce capital and operating costs. Suncor has the potential to add another 20,000 to 30,000 barrels a day of lower capital intensity production by 2024-2025.

Dividends

Suncor, a Canadian Dividend Aristocrat, is a shareholder-friendly company deploying a combination of share repurchases and dividends to reward its shareholders. It has returned $14 billion to its shareholders over the last three years. Suncor has been paying dividends for the last 27 years and 2020’s increase of 11% will mark the eighteenth consecutive year of its dividend increases. The dividend increase should be supported by Suncor’s cash flow growth strategy by $2 billion annually through 2023. The company last raised its dividend by 29% annually and sports a dividend yield of 11.5% currently. Its dividend growth has been quite impressive with the last ten years showing a CAGR of more than 21%. Suncor had a $5 billion stock buyback program in place since May 2017. The company has, however, suspended its share buybacks for the year, in response to the decline in crude oil prices and the economic impact of the coronavirus.

Suncor’s vertically integrated business model has made it a market leader both in terms of funds from operations and discretionary free cash flow per barrel. As Canada’s leading integrated energy company, Suncor Energy stands in a good position to benefit from rising oil demand and growing offshore businesses. The company is expecting production growth from Fort Hills and Hebron projects as these projects complete. Its downstream integration business plays a major role in reducing the impact of wider heavy crude differentials. Suncor has completed the planning for a data-enabled enterprise-wide process that will improve the efficiency of its business. It expects this program to deliver ~$250 million in annual benefits at a cost of ~$450 million.

Suncor generated annual funds from operations in excess of $10 billion for the second year in a row. It returned $4.9 billion in 2019 in dividends and share repurchases to shareholders representing ~45% of its annual funds from operations. Suncor leads the industry in terms of FFO per barrel. The company plans to grow its free cash flow by $2 billion annually by 2023. Its FFO has consistently exceeded sustaining capital, associated interest, and dividends. Its dividends should also grow in line with sustainable FFO increases.

Competition

Suncor competes with other oil and gas companies, and companies that provide alternative sources of energy. The company faces intense pressure in virtually every aspect of its business. Suncor competes with the likes of Canadian Natural Resources which holds some of the best oil sands assets in North America, particularly thermal in situ properties. Another competitor is Cenovus Energy, a large Canadian integrated oil and gas company that doubled its oil sands production after the acquisition of most of ConocoPhillips’ operations in Western Canada. Another large integrated energy company in Imperial Oil. The company has a presence in both upstream and downstream businesses and is the largest refiner of petroleum products.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:SUSUSuncorEnergyOil & Gas Integrate0.3922.7034.620.0018.69-1.420.03703.701.000040.840.142034Consumable - NecessitiesNONONONOCanada1
TSE:IMOIMOImperial OilEnergyOil & Gas Integrate0.6921.4515.759.5818.692.240.04104.100.392940.880.119368Consumable - NecessitiesNOYESYESNOCanada1

Bottom Line

Suncor is an industry leader with an integrated business model, strong balance sheet, capital discipline, and proven operational excellence. The company’s significant long-life reserves base, industry expertise in oil sands and economies of scale act as strong tailwinds. It is expecting to drive down costs with the expected removal of curtailment in 2020. Continuous efforts towards increasing production and reducing costs and a history of strong FFO generation should aid future dividend growth.

The patient should be rewarded but it is a risk to invest in the Canadian oil industry considering the US has become self-reliant.

SU vs Indexes - 2020

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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