It hasn’t been an easy ride for any of the constituents of the Canadian oil patch. Whether we’re talking about oil weighted companies, natural gas weighted companies, or even integrated companies that do a bit of everything, the last few years have been difficult, to say the least.
As investors in the Canadian oil and gas space, we know this all too well. While on the one hand, there are glimmers of value and operational strength, on the other hand, the uncertainty related to commodity prices, the ultimate long-term death wish for the industry, and the lack of demand for any stock oil and gas related.
Despite all this, however, we continue to see certain oil and gas companies that are thriving with respect to their businesses and business performance.
Suncor Energy Inc. (TSX:SU)(NYSE:SU) is one of the integrated oil and gas companies that by its very nature provides a diversified exposure that shelters it from the large swings of the more focused and narrow oil and gas companies.
With 48% of its earnings coming from oil sands, 47% of its earnings coming from its refining and marketing operations and the remainder of its earnings coming from exploration and production, Suncor’s stock and financial results have relatively stable and steady histories.
Suncor stock is trading slightly higher than five-years ago and if we look at the company’s results, we can see major strength.
Free cash flow margin as a measure of value
Suncor is now operating at a free cash flow margin of almost 15%, as the company’s integrated business model continues to generate strong cash flows. In the first nine months of 2019, Suncor’s free cash flow margin (calculated as free cash flow divided by revenue) shows how well a company can convert revenue to cash and the quality of the company and its stock.
It’s the ultimate measure of profitability, the quality of a business, and the returns the business can provide. An almost 15% free cash flow margin shows us the quality of Suncor’s operations and business model.
Suncor’s quality balance sheet, low debt levels, and strong profitability support the company’s dividend payments and growth. Currently, Suncor stock’s dividend yield stands at almost 4%.
Its dividend has grown more than 47% since 2015, and according to estimates can be expected to continue to grow at an accelerated pace in the next few years. Projects aimed at driving margins will contribute to Suncor’s capacity to continue to grow and drive incremental free cash flow of $2 billion annually by 2023.
Warren Buffet agrees
In the past year, Warren Buffet bought a stake in Suncor. With Berkshire Hathaway Inc.’s investment into the Canadian oil and gas sector through Suncor, this may leave investors with a sense of the value that exists in this beaten-up sector.
Suncor Energy invests in a cleaner future
One major hurdle that Suncor and all oil and gas stocks are facing is the negative impact that they are having on the environment. Suncor’s stated greenhouse gas emissions goal is to “harness technology and innovation to reduce our emission intensity by 30% by 2030.”
This will be achieved by using more co-generation facilities, a highly efficient technology that reduces waste by investing in technology to change the way the company extracts and processes the oil sands and by conducting research into Carbon capture and conversion technologies.
Finally, the company’s initiative also includes investing in lower carbon forms of energy, even including renewable energy such as wind and biofuels, and indication that this $65-billion company intends to be around for the long term.
Foolish bottom line
Suncor Energy remains a top energy stock to buy for exposure to the oil and gas industry. With massive cash flows continuing to roll into the company’s coffers coupled with a long-term strategy to remain sustainable and to reduce its carbon footprint, Suncor is in a great position today.
