Shareholders of Suncor Energy Inc. (TSX:SU)(NYSE:SU) have had an interesting ride. After a steep drop following the oil-price collapse in 2008, the stock failed to rebound strongly after oil returned to $100 a barrel. Fortunately, the company has been continually less volatile than oil prices in recent years; shares have hardly budged since 2014 despite a 50% drop in oil.
Now that the oil markets are starting to rebalance, how should investors view Suncor today? Here are the most important things you need to know.
Upping the ante with oil sands
In February, Suncor announced that it would successfully acquire Canadian Oil Sands Ltd. for $6.9 billion, including the assumption of $2.6 billion in debt. The buyout upped Suncor’s stake in the Syncrude oil sands project to 48.7%.
In April, Suncor made another announcement that it would buy Murphy Oil Corporation’s 5% Syncrude stake for $937 million. Suncor now holds a majority 53.7% position in the project. The two acquisitions boost Suncor’s output by about 146,000 barrels a day.
Following these two moves, Suncor is now heavily exposed to the future of Alberta’s oil sands. The remaining Syncrude partners include Imperial Oil Limited (25% stake), Sinopec Shanghai Petrochemical Co. (9%), Nexen Energy ULC (7%), and Mocal Energy (5%).
At the right price, expect Suncor to continue rolling up its interest in the project, although it has commented that operational control will continue to lie with Imperial Oil, which is majority owned by Exxon Mobil Corporation.
Not just Syncrude
Suncor has two other projects that will drive future profitability, both of which are expected to begin production next year.
The first is Fort Hills. The project is yet another oil sands play, and following its buyout of Total SA’s 10% stake for $310 million, Suncor now has a majority 51% interest. It seems as if the strategy is to go all-in on oil sands, while securing controlling interests in what have otherwise been issue-laden projects.
Eventually, Fort Hills is expected to produce 180,000 barrels a day in total. With an estimated $13.5 billion cost, 50-year lifespan, and US$90 a barrel breakeven level, Suncor is highly levered to oil prices completely rebounding by early 2018.
Suncor’s final major project is its Hebron development off Canada’s east coast. While it’s expected to cost $14 billion, a bit more expensive than Fort Hills, Suncor only has a 21% interest. The project in total should have output of 150,000 barrels a day. Its expected lifespan is only 20-25 years.
What should you do?
Suncor is well capitalized with $9.9 billion in total liquidity, including $3.1 billion in cash and $6.8 billion in committed credit lines. While it will have no problem completing its current project backlog and boosting production over the next few years, Suncor’s management team is clearly betting on an ultimate rebalancing of oil markets. Shares are right for you if you’re a believer in $100 oil by 2017 or 2018.
