In 2009, when oil prices started to recover from lows of under $35, Suncor Energy Inc.’s (TSX:SU)(NYSE:SU) stock price languished as it struggled with rising costs and a lack of capital discipline. Suncor’s earnings in 2009 were halved. But even as earnings subsequently started to recover, management had come to the realization that 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.
So, now the company is faced with another period of oil prices in the $45 range or below. But things are different this time because management has focused on cost containment, capital discipline, and production growth over the last three years.
Suncor’s value can be seen in the following points:
Integrated business
The nature of the company’s diversified business model means that it produces more stable results as the refining side of the business provides a cushion in times of low oil prices. The company enjoys an even split between its downstream and upstream segments.
Costs are coming down
In 2012, Suncor’s CEO Steve Williams 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, were continuing to rise. He said that he could just as well abandon these projects if they continued to drag profitability down.
And he did just that, cancelling the Voyageur project in 2013 and supporting Total SA’s decision to put the Joslyn project on hold. That left Fort Hills, and on this project the company has brought costs down considerably.
Suncor’s management has pointed out that contrary to popular belief, the oil sands business is no longer a high-cost business. Suncor has achieved a cash operating cost of just over US$20 in its oil sands business, with the expectation that this will continue to trend down. Year over year, the company is seeing an 18% reduction in cost. This is due mostly to labour and lower commodity prices.
Free cash flow positive
In the latest quarter, Suncor generated over $700 million in free cash flow, and remained cash flow positive even after taking into account the dividend.
Strong balance sheet
Suncor has spent within its means and, as a result, has amassed over $5 billion in cash and over $12 in liquidity, and a debt to cap ratio of 25%.
Good record of returning cash to shareholders
In the last five years, the CAGR of Suncor’s dividend is over 20%, and the company has repurchased $5.3 billion worth of shares. In the latest quarter the company once again increased its dividend (by 4%), reflecting management’s continued confidence in the business.
