On the surface, earnings looked terrible. The company reported a 69% decrease in quarterly earnings compared to last year’s results. Net earnings were only $0.14 per share, down 85% from the company’s great first quarter.
Well, operationally, not much. The company produced more than half a million barrels of oil equivalent per day, growing production some 3% compared to the same period last year. There were issues with the company’s stake in the Syncrude oil sands project — which is majority-owned by Canadian Oil Sands Ltd (TSX: COS) — but that decreased production by only 8,000 barrels per day, a drop in the bucket for a big operator like Suncor. The company announced weak results in its exploration unit as well.
Operations weren’t the issue. Suncor pulled the plug on some projects, and was forced to take a few big write-offs.
In May, the company announced it and partner Total SA (ADR) were pulling the plug on their planned joint venture in the oil sands, dubbed the Joslyn Project. It took a $718 million charge on the cost of that project.
Suncor also announced it was writing off some Libyan assets and some additional oil sands assets. The total amount written off from those two issues was $520 million.
On the surface, $1.2 billion seems like a big number, but let’s dig deeper. Suncor is a true oil giant. It has more than $80 billion worth of assets. Even after accounting for all its liabilities and debt, the company still has a book value of more than $41 billion. If management wrote off 3% of book value, why would shares fall 7%? And again, it’s not like Joslyn was a surprise. Investors should have seen write-offs from it coming.
Besides, Joslyn isn’t a total loss. There are still reserves there, and obviously enough that they were at one point considered viable. That asset still exists. The reserves are still there for some point in the future.
Ultimately, something like this is a rounding error for Suncor. Remember, it still owns more than 40% of the Fort Hills Project, which is expected to come online in late 2017 and produce approximately 180,000 barrels of bitumen per day. Suncor’s share of that will be 72,000 barrels per day, or enough to increase its production nearly 15% from today’s levels.
In an obvious move to appease investors, the company announced a massive hike in its quarterly dividend, increasing it more than 20% from $0.23 per share to $0.28. While investors can’t control the price the market offers them for their shares, dividends are very real, and investors in the company just got a big reward for the company’s write-offs. I don’t think any long-term holders are too upset about this one earnings miss.
Is this an entry point? I think Suncor is a great operator, and the oil sands are a terrific asset. Oil is perhaps the world’s most important commodity, and having an ample supply of it automatically increases Canada’s influence on the world stage. This was true last week and it’s true now. The only difference is that today, shares are 7% cheaper than they were last week.
Investors should love quarterly earnings. The market unfairly punishes great companies for very temporary problems all the time. Suncor is just another example of that. In 10 years, is anybody really going to remember this?