By: Ben Schmidt, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
• Suncor Energy, Inc. (NYSE:SU) is a Canadian integrated energy company which develops petroleum resource basins through offshore oil and gas production, petroleum refining and product marketing.
• Suncor achieved 98% upgrader utilization despite production curtailments by the Government of Alberta. Historically in the Oil Sands, only about 40% is upgraded into synthetic crude oil (SCO).
• Total upstream production was 764.3 thousand barrels of oil equivalent per day (kboe/d), up from 689.4 (kboe/d) in 4Q2018. Total Oil Sands production was 657,200 barrels per day (bbls/d), compared to 571,700 bbls/d in the prior year quarter.
• Despite weak oil prices in the back half of FY2018 and early FY2019, SU still delivered $2.6 billion of cash from funds from operations in 1Q2019.
• They delivered $662 million in dividends to shareholders while also buying back $514 million of common shares in the first quarter of 2019.
In early December, the government in Alberta decided to impose production cuts of 325k barrels per day in response to a widening differential of the Western Canadian Select (WCS) to the WTI. This is largely attributable to the lack of takeaway capacity in Canada. As SU continues to produce more oil YoY, they have been realizing prices at lower than historical prices.
Due to the large overcorrection in differentials, Alberta began easing up on production curtailments. This decision ultimately raised their realizable prices per barrel which translated into positive Net Income of $1.5 billion, up from ($212 million) in 4Q2018. Despite the increases in Net Income, cash operation costs in the Oil Sands rose $3.10 per barrel to $29.95 largely in part to the production curtailments. Moving forward, as production activity increases and economies of scale takes place, these costs should start to trend down towards historical averages. Suncor expects these curtailments to trend closer to 175 kboe/d by June, allowing them to get in line with their 2019 guidance. Once this happens, they will begin working on optimizing their asset performance and safety to deliver stronger performance for the rest of FY2019. Furthermore, SU’s BOD approved a 17% dividend increase on ~ 1.7 billion and up to $2.0 billion for share repurchases on an annual basis.
On April 19th, the United Conservative Party of Alberta formed a ruling majority with 63 out of the 87 seats in the provincial government. With years of negligence from the New Democratic Party in forming deals for the energy industry Alberta, this should help turn things around and set up a fierce battle with the federal government. Before coming into power, their platform included an 8% corporate tax rate which reduces it from 12%. Also, they have proposed to decrease the carbon tax to spark more growth from the energy industry in hopes to spur job creation. Lastly, they would set up a $30 million “war room” in Canada and internationally to defend Alberta’s energy industry. If any or all of these come to fruition, Suncor stands to benefit.
What has the stock done lately?
On November 14th, the CEO of Suncor decided to retire. Around this same time period, Canada decided to cut production by 325k barrels per day. With these two negative announcements, the stock plummeted to a yearly low of ~ $27/share. Since then, the company announced that they were going to expand production by 10% during 2019 to an average of 820,000 boe/d for FY2019. Soon after this, the differentials between the WCS and WTI tightened sending the stock back up to around $32/share. It has hovered around this price for the past months of March and April.
Past Year Performance:
Over the past year, the volatility in Suncor can be attributed to the wild swings in oil prices, production curtailments and earnings announcements. Since the middle of August, Suncor sat at its 52 week high of $42/share – the height of oil prices for 2018. As prices started deteriorating, so did the stock. It fell to a yearly low of $26.5/share, a depreciation of 36.9%.
Suncor finds itself in a lucrative to benefit from certain favorable domestic and macro factors. The differential in the WCS has been at historic lows at has rebounded since the production cuts levied by the Canadian government continues to ease. With this, Suncor will be able to realize better prices per barrel and are to produce at rates they see fit. Moreover, takeaway capacity continues to get built out in Canada and the U.S. allowing maximum production. From a valuation perspective, their EV/EBITDA multiple of 6.57x is in line with peers despite weak EBITDA performance this past year. Also, Suncor holds one of the largest balance sheets among its peers in Canada. Since E&P’s benefit from scale, Suncor is once again a value play in the portfolio.