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Is Suncor Energy Inc. Worth $79 Per Share?

If you’re a serious investor in Canada, I’d recommend watching “Market Call,” which airs twice every weekday on Business News Network. The show consists of viewers calling in and asking fund managers and analysts for their opinion on certain stocks. Each guest brings a trio of top picks to the program, and there’s also a segment dedicated to looking at how the previous top picks performed.

One of my favorite guests is Brian Acker, from Acker Finley Inc. Acker is perhaps best known for his Model Price valuation model, which takes factors including a company’s earnings power, the strength of its balance sheet, and the market’s underlying interest rate expectations, and combines them together to come up with a stock’s fair value. Essentially it’s value investing, but done in a scientific way.

Depending on the stock, Acker’s model price swings from a huge discount to a huge premium on a company’s current price. The stocks with the biggest discount to the model price end up in the portfolio. It’s really that simple.

One stock with a huge discount to the model price is Suncor Energy Inc. (TSX: SU)(NYSE: SU). According to Acker, Suncor is worth $79 per share, an upside of nearly 100%. While I don’t have access to the inner workings of exactly why Suncor is worth $79, here are three reasons why I think it’s a good buy.

1. Oil sands

The oil sands are Canada’s largest source of oil, and Suncor is the largest player in the region. It’s really that simple.

Suncor has been operating in the region since 1967. Over the years, it has acquired reserves that will keep production going for 40 years, based on current output. It’s clearly the class of the oil sands.

Don’t underestimate Suncor’s experience in the region. Sure, plenty of other oil companies are planning their own oil sands expansions, but there’s little doubt that having the experience of operating in the region for nearly 50 years will help Suncor avoid some of the problems that are sure to plague these new projects.

In 2017, the company is scheduled to have the Fort Hills project come online, which is projected to add 160,000 boe/d to its oil sands production of nearly 400,000 boe/d. That’s some nice growth just from one project.

2. Downstream assets

One of the things I like most about Suncor is its downstream assets, which were mostly acquired when it merged with Petro-Canada in 2009.

In 2013, the company had $2 billion worth of operating earnings from its refineries and fleet of more than 1,500 Petro-Canada gas stations. It earned $2.1 billion in operating profit from its oil sands production. The oil sands assets get all the attention, while it quietly makes a solid profit turning that oil into gasoline.

3. Giving back to shareholders

Since 2011, Suncor has repurchased 7% of its outstanding shares and increased its quarterly dividend five times.

Look for both these trends to continue. The company’s payout ratio is still extremely low, projected capital expenditures are modest, and operating earnings continue to look solid. This leaves it with plenty of cash available to both buy back shares and increase the dividend.

If shares are as undervalued as Acker thinks they are, buying back shares is a terrific move. And even if they’re not, shareholders still appreciate that the company is putting its cash to good use. Give share buybacks enough time and they’ll start to make a big difference.

I’m not sure if Suncor is worth the $79 per share that Acker says, but it’s a solid buy at these levels. Production is set to increase, it has terrific downstream assets, and investors are getting a rising dividend. It should be in your portfolio.

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