The twin shocks of the fast-spreading coronavirus and lingering oil price war are snuffing the life out of Canada’s energy industry. Oil sand producers can still generate cash for operations if the U.S. benchmark West Texas Intermediate (WTI) price holds at $37 per barrel. Last week, however, the price fell below $10.
There’s little space left to breathe for the world’s fourth-largest oil supplier. Suncor Energy (TSX:SU)(NYSE:SU), the largest integrated oil company in Canada, finds itself in a hellish situation. If the whipping continues, the company might get buried deep in the oil sands.
Alberta is known as the Saudi Arabia of North America. One of the province’s gems is Suncor. The company is the top operator in the region with low production costs and boasts of long-life reserves. But investors, including hedge funds, are suddenly shunning this shareholder-friendly stock.
In the energy sector, Suncor is the gold standard when it comes to capital discipline and giving back to shareholders. Unfortunately, the coronavirus and the Saudi-Russia oil war are erasing the image.
The shares of Suncor have tumbled by 39.7% last week and have fallen by 63.8% since its high of $44.48 on January 14, 2020. As of this writing, this energy stock is trading at only $16.07 per share, and the year-to-date loss is 61.92%. The yield has risen to 11.62%, but analysts aren’t sure if Suncor should keep the dividends due to the virus.
The energy sector is receiving the worst beating. The oil and gas industry in Alberta in particular is in limbo. Many of the multiple oil sand projects will not move forward. The government gave Suncor permits for the Meadow Creek East and Meadow Creek West projects.
Even before the virus outbreak and oil price war, Suncor announced that it would defer project constructions until 2023 at the earliest. If Suncor completes both projects, the anticipated annual production capacity is between 80,000 and 120,000 barrels per day (bpd). Likewise, the facilities will operate for 40 years or more.
Despite the heightened volatility in the oil market, Suncor remains an ideal investment for the long term. Many smaller industry peers are living on a day-to-day basis. Suncor has the opportunity to buy a cluster of assets if these companies can no longer fight to survive.
Suncor is carefully evaluating future projects. According to its CEO Mark Little, the company is paying particular attention to the current environment of volatile commodity prices and market access challenges. Management also anticipates government intervention into crude markets.
Strong to overcome the crisis
People are witnessing extraordinary times. Under normal conditions, the oil sands exploration risk and costs to Suncor are zero. Suncor spends no more than 40% of its annual cash flow to sustain its oil production. Also, there’s no reserve risk because of its nearly limitless reserve life.
Suncor should be able to get through this ordeal. It is financially formidable to endure a market downturn and friendly enough to sustain robust dividends.