In July 2008, oil hit a high of $147 only to come tumbling down in the midst of the financial crisis and ensuing recession to lows of $32 in December 2008. It has been a wild ride for producers to say the least. To illustrate, here’s a look at Suncor’s (TSX:SU, NYSE:SU) stock has fared through it all.
Source: Capital IQ
The price of oil remains $100 currently, a level that seemed unheard of through the early and mid-2000’s but has become “normal” in the last few years. Meanwhile, despite a bit of a rally of late, Suncor’s stock price has languished as the company has struggled with rising costs.
In 2009, Suncor’s earnings were hit as oil prices crashed to levels that made Suncor’s operations struggle to remain profitable. As we can see from the table below, Suncor’s earnings in 2009 were halved.
| ($ millions) | ||||||
|
2008 |
2009 |
2010 |
2011 |
2012 |
LTM |
|
| Revenue |
28,418 |
24,404 |
32,003 |
38,339 |
38,208 |
38,467 |
| Earnings Before Taxes |
3,055 |
1,419 |
5,776 |
7,069 |
5,041 |
4,740 |
Source: Capital IQ
Then oil prices started to recover, which helped boost earnings. And while earnings were recovering, management came to the realization that Suncor’s costs on its various projects were skyrocketing to the point where expected capital expenditures became so high that the economics on these projects were not making sense anymore.
Escalating Costs
In 2012, Suncor’s new CEO told investors that “growth for the sake of growth doesn’t interest me too much. What interests me is profitable growth”. This came after the realization that costs on three of Suncor’s projects, the Joslyn and Fort Hills oil sands mines, and the Voyageur upgrader, continued to rise. He said that he might just as well abandon these projects if they continue to drag profitability down.
No question, oil sands development and mining costs are soaring. Back in 2007, oil sands companies were saying that they could yield reasonable returns at prices in the $50 to $60 per barrel range. Currently, companies are saying that they need over $90 or more per barrel in order to achieve these returns.
U.S. Bakken Oil
Complicating matters, light oil production from the U.S. Bakken has soared. Light oil does not need much upgrading to get to the consumer compared to Suncor’s oil from the oil sands. This, along with a lack of pipelines to deliver the oil, has left Suncor struggling to compete.
The eroding economics led to the announcement on March of 2013, when management said that Suncor had cancelled its $11.6 billion Voyageur project. Management explained how the market has changed since 2010 to the point where the economics of the project did not add up anymore. Suncor booked an after-tax impairment of $1.49 billion in the fourth quarter of 2012.
What About Fort Hills?
Suncor and its partners are currently evaluating whether the 190,000 barrels a day Fort Hills oil sands mine project should also be cancelled. An announcement is expected in November.
Bottom Line
Suncor has been struggling since the financial crisis, with volatile commodity prices and soaring costs. The stock has languished accordingly. Suncor is now under new management and is moving forward with profitability and shareholder returns on its mind. This is in contrast to the former emphasis that was placed on growing production, and could translate into a resurgence for owners of this Canadian energy giant.
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Fool contributor Karen Thomas does not own shares in any of the companies mentioned. The Motley Fool does not own shares in any of the companies mentioned.
