Why Is Warren Buffett Buying Suncor Energy Inc. (TSX:SU)?

Warren Buffett now owns nearly 1% of Suncor Energy Inc. (TSX:SU)(NYSE:SU). Should you follow suit?

| More on:
close-up photo of investor Warren Buffett

Image source: The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

On February 14, shares of Suncor Energy (TSX:SU)(NYSE:SU) popped after Berkshire Hathaway’s Warren Buffett disclosed a 10.8 million share stake, representing 0.7% the entire company.

This move followed a 22% reduction in Buffett’s Phillips 66 stake, so the bet likely represents far more than a simple industry-wide wager. Still, Reuters reported that Buffett’s involvement “highlights the benefits of being an integrated oil company and could revive investor interest in the languishing Canadian energy sector.”

It’s as if suddenly, other fund managers came out of the woodwork to support the company and its shares.

“Suncor [has] a strong downstream operation, which financially benefits from oil bottlenecks and that is unique to Suncor, which you can’t get with many other companies in the energy space,” noted a portfolio manager at Manulife. A VP at Acumen Capital Finance commented that Buffett’s purchase was at an “attractive entry point for an out-of-favour sector.”

What exactly does Buffett see in Suncor? Why has market sentiment shifted so quickly since his stake was disclosed?

Perusing the bargain bin

It should come as no surprise to learn that the Canadian energy sector has been wildly out of favour. Since August, shares of Canadian Natural ResourcesHusky EnergyImperial Oil, and Encana have all experienced drops of 20% or more.

Suncor hasn’t been immune to this industry-wide pressure. In the summer of 2018, the stock was consistently around $55 per share. By Christmas, shares had fallen to just $35 apiece. Buffett’s purchase price is estimated to be in the low-$30s.

This actually isn’t the first time Buffett has purchased Suncor shares through his investment company Berkshire. In 2013, Berkshire took a position in Suncor, only to exit its stake in 2016 for roughly the same price. Buffett’s familiarity with the company likely influenced his ability to snap up shares quickly after they dipped suddenly.

Why did shares drop?

Suncor’s rapid dip stemmed from news outside its control. In December, I wrote that “Suncor is facing pressures regarding forced production cuts, limited pipeline capacity, and surprisingly weak Canadian crude prices.”

At the time, Alberta was awash with excess oil supply without enough pipeline or rail capacity to export production. Local crude prices fell by more than 50%. The government opted to enforce mandatory production cuts to correct the imbalance.

“On the contrary,” I continued, “certain tailwinds like cost-effective production gains and earnings stabilization from its refining arm could position the company for a rebound year.” These are likely the factors that Buffett purchased shares for.

While other oil producers need to compete aggressively to refine their output, Suncor owns three facilities that process more than 75% of its output. That’s a huge advantage considering investors don’t have to worry if WCS prices continue to trade at a discount. With multiple ways to cushion downside risk, it’s easy to understand why Buffett chose Suncor as his pick in a beaten-down industry.

Should you follow Buffett?

Suncor remains a viable investment option only for oil bulls. Like I said in January, most of the company’s growth projects target US$50-per-barrel breakeven prices. Unless crude prices remain above that level, shareholders will find growth difficult.

Due to its integrated nature, however, Suncor is a more diversified bet for taking advantage of rising energy prices. If the Canadian energy sector rebounds, Suncor should follow suit. If pressures remain, Suncor should have limited downside risk compared to its less-integrated peers.

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.

The Motley Fool owns shares of Berkshire Hathaway (B shares). Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Dividend Stocks

money cash dividends
Dividend Stocks

Market Correction: 2 Oversold TSX Dividend Stocks to Buy for Total Returns

These top value stocks pay attractive dividends and look cheap to buy for a TFSA or RRSP focused on total…

Read more »

Dividend Stocks

2 Undervalued TSX Dividend Stocks to Buy in July

These unloved TSX dividend stocks could deliver attractive returns in the back half of 2022.

Read more »

sad concerned deep in thought
Dividend Stocks

$20 Billion Telco Merger: More Concessions and Conditions Ahead?

The mediation process in the proposed telco merger could lead to more concessions and conditions before the competition watchdog grants…

Read more »

Dividend Stocks

RRSP Investors: 2 Cheap TSX Dividend Stars to Buy for Total Returns

RRSP investors seeking attractive total returns can now buy top TSX dividend stock with high yields at discounted prices.

Read more »

rail train
Dividend Stocks

Canadian Pacific Railway (TSX:CP): A Top Wide-Moat Stock to Buy and Hold Forever

CP Rail keeps the goods moving around the country. Here’s why it’s a great pick for new investors.

Read more »

Businessmen teamwork brainstorming meeting.
Dividend Stocks

The 3 Top Large-Cap Stocks for TSX Investors

Have peace of mind by investing in top large-cap stocks during this market correction. Start researching BAM (TSX:BAM.A)(NYSE:BAM)!

Read more »

Golden crown on a red velvet background
Dividend Stocks

3 Dividend Aristocrat Stocks to Buy and Hold Forever

Three Dividend Aristocrats are excellent holdings for new and old investors with long-term financial goals.

Read more »

Dividend Stocks

Top TSX Stocks: 2 Industry Leaders to Own for 25 Years

These top TSX stocks pay attractive dividends and have made some long-term investors quite wealthy.

Read more »