Investors who missed the oil-sector rally are now looking at the battered group and wondering if it’s time to add some top names to their portfolios. Suncor is a different animal than many of the other oil giants, and I think the recent weakness is a good opportunity to take a long-term position in the stock.
1. Diversified revenue stream
Suncor’s integrated business model helps shield investors from volatility in the oil market because the company has strong operating assets all along the value chain.
In the upstream operations, Suncor’s oil sands properties hold nearly 7 billion barrels of oil reserves and more than 23 billion of contingent resources. In Q3 2014, the company achieved record oil sands production, reaching almost 412,000 barrels per day.
Lower market prices affected upstream revenues, but the company mitigated the impact. Third-quarter cash operating costs dropped to $31.10 per barrel, compared to $32.60 per barrel in Q3 2013. Strong revenue from the downstream assets also helped offset weaker realized crude prices. Suncor operates four refineries that have a combined processing capacity of 460,000 barrels per day. The facilities churn out products that include gasoline, diesel fuel, and asphalt.
The company also owns more than 1,500 Petro-Canada retail and wholesale locations.
In the midstream segment, Suncor continues to expand its assets. The new rail offloading facility in Quebec enhances Suncor’s midstream logistics operations and improves its ability to access new markets.
2. Nimble operations
Suncor is the master at finding cost-efficient ways to transport its crude to the most profitable markets. The company uses pipelines, rail cars, and tankers to secure the best prices possible for its products. Suncor sent its first tanker to Europe in September.
At some point, Keystone XL and/or Energy East will be built, providing the company with even better access to global markets.
3. Shareholder returns
Suncor continues to reward shareholders even as the oil market remains weak. During Q3 2014, Suncor repurchased $523 million in shares. The company also hiked its dividend by 22% to $1.12 per share. The payout has more than doubled in the past two years and yields about 2.9%.
Production growth and lower cash operating costs should help offset weak prices going forward. The payout ratio is only 48%, giving Suncor ample room to continue increasing the dividend.
4. Cheap valuation
Suncor is trading at only about 11 times forward earnings and 1.4 times book. The shares could drop further if oil prices continue to slide, but given the company’s competitive strength in all areas of its operations, long-term investors should consider picking up the stock at current levels.
If oil prices fall significantly lower and stay below $60 for an extended period of time, Suncor will definitely feel the pinch, and the generous dividend hikes might get put on hold. New regulations on crude-by-rail transport could restrict Suncor’s ability to move oil to the coast. Further delays in the big pipeline projects could also impact future earnings.
Suncor is not immune to falling oil prices. If you are looking for a stock that offers similar long-term dividend growth and capital appreciation, but doesn’t carry direct commodity risk, take a moment to read the following free report.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Andrew Walker has no position in any stocks mentioned.