Suncor Energy Inc. Is Shaping Up as the Best Play for a Rebound in Crude

Why Suncor Energy Inc. (TSX:SU)(NYSE:SU) is strongly positioned to take advantage of the eventual rebound in crude.

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The sharp collapse in crude has ushered in a brutal period for energy companies with many battling to remain cash flow positive. There are, however, those companies that continue to fare well in the current environment because of their solid balance sheets and the ability to cut costs while growing production.

One company that stands out for all of these reasons and more is Canadian integrated-energy major Suncor Energy Inc. (TSX:SU)(NYSE:SU).

Now what?

One of Suncor’s key strengths is the integrated nature of its business. It operates across the entire value chain for oil and gas, which means it operates both upstream and downstream businesses. This makes it resilient to weak oil prices because when oil prices fall, the profitability of its upstream (or oil-producing) business may decline, but the margins of its downstream business grow.

By increasing its refinery-utilization rate and the amount of crude that its refineries process, it is able to offset some of the earnings lost due to weak crude.

Another factor that continues to boost the resilience of Suncor’s operations has been its ability to sharply cut costs.

For the fourth quarter 2015, its oil sands operations had cash operating costs of $28 per barrel, which is 19% lower than they were for the same period in 2014. This is particularly important because Suncor generates 80% of its total oil production from oil sands.

Such an impressive reduction in cash operating costs highlights the additional efficiencies Suncor has been able to drive in its business so as to survive the harsh operating environment.

These cash costs are also lower than the spot price for Canadian heavy crude, or Western Canada Select, which is trading at $29 per barrel at the time of writing. This means that Suncor’s oil sands business remains cash flow positive and there is no incentive to cease operations for as long as that is the case.

More impressively, despite slashing capital expenditures for development and exploration, Suncor has been able to boost its overall production with it growing by an impressive 4.5% year over year to 583,000 barrels daily for the fourth quarter.

There are signs that this will continue as Suncor is focused on long-term growth.

This includes the development of the controversial Fort Hills oil sands project, which is expected to yield 91,000 barrels daily upon completion. There is also the offshore Hebron project in which Suncor has a 21% interest and is expected to pump first oil in late 2017.

Furthermore, an equally important aspect for Suncor’s outlook has been its ability to successfully acquire the largest investor in the Syncrude project, Canadian Oil Sands Ltd. After accounting for Canadian Oil Sands’s debt, which is worth $2.4 billion, the transaction is valued at $6.6 billion and will make Suncor the largest single investor in the Syncrude project.

This is particularly important because bitumen that is upgraded to synthetic light crude trades at a considerable premium to other forms of Canadian crude. In recent months, it has traded at premium of over 20% to Canadian light and medium crude blends as well as a massive 80% to Canadian heavy crude.

This acquisition will add an additional 109,000 barrels daily to Suncor’s total production and give it the ability to drive greater cost savings and efficiency initiatives at Syncrude. 

So what?

Suncor has not hesitated to take advantage of lower oil and depressed asset prices to expand its asset base and productive capacity. While things may look ugly in the harsh operating environment now being witnessed, Suncor is in a solid position to fully exploit higher oil prices when oil finally rebounds.

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 Matt Smith has no position in any stocks mentioned.

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