The news out of the oil patch has been anything but optimistic, and Suncor Energy Inc. (TSX: SU)(NYSE: SU) shares have reflected this. On Monday, December 8, Morgan Stanley cut its forecast for Brent Crude for 2015 from $98 per barrel, to as low as $53, with a best case scenario of $70 per barrel.
To make matters worse, on Wednesday, December 10, OPEC announced demand for oil in 2015 would be about 29 million barrels per day — a 12-year low. The result? Suncor shares are approaching their 52-week low of $32.42.
Although nearing a 52-week low can be a nerve-wracking experience for investors, there is very good reason to consider buying Suncor at these levels. Here’s why.
Suncor has low operating costs, and a solid balance sheet
Investors need to look beyond the share price volatility, and ask two fundamental questions about Suncor. Namely, can Suncor still produce good cash flows in a weak price environment, and does it have the balance sheet to withstand these conditions? The answer to both these questions is an unequivocal yes.
First, Suncor has been continually reducing its operating costs per barrel. In Q3 2014, Suncor’s cash operating costs per barrel were $31.10, down from $32.60 per barrel in Q3 2014, and nearly $40 per barrel in 2011. This is thanks largely to record oil sands production (411,700 bbls/d), and this should continue into 2015 as this is on the low end of Suncor’s corporate guidance.
Along with reducing operating costs, Suncor also generates more free cash flow than all of its current peer group combined, and this is thanks largely to the fact that Suncor carefully manages its capital expenditures. With estimated capital expenditures of $7.2 billion to $7.8 billion in 2015, well below the $9.2 billion of operating cash flow for the trailing 12 months, Suncor estimates even with Brent oil prices near $80 per barrel it should still be able to generate free cash flow.
Suncor also has a high quality balance sheet. With a cash position of over $5 billion, and low net debt of approximately $7 billion (equal to only two to three years of Suncor’s net earnings), Suncor is in an excellent position to withstand low oil prices, continue capital growth, and maintain its robust 3% yield.
The market has likely priced in low oil prices
It’s clear Suncor has strong fundamentals to carry it through this low-price period, but is there more downside in store for the share price? With OPEC announcing weak demand in 2015, Morgan Stanley predicting $70 per barrel in 2015, and Saudi Arabia predicting oil stabilizing around $60 per barrel, both the TSX and Suncor’s share price have had several weeks to price in the bad news.
With most 2015 oil predictions sitting within the $60-70 per barrel range, and with Brent oil currently being priced at around $66 per barrel, the run of bad news may be nearing its end.
Investors often consider buying after a price decline high-risk, but when the decline is in a high-quality company, and due to factors outside of the company’s fundamentals (such as low oil prices), a price decline can actually represent a lower risk opportunity due to the fact that much of the downside has been factored in.
The recent 13% decline in Suncor shares over the past five days on bad oil price news, combined with Suncor’s low operating costs, solid balance sheet, and large market position represents an excellent and low risk opportunity to purchase shares in this premier energy company, with plenty of upside for patient investors over the coming months and years as oil prices stabilize and recover.
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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 Adam Mancini has a position in Suncor Energy Inc.