SU - Suncor

[biaggio]

http://seekingalpha.com/article/294148-suncor-with-decades-of-growth-ahead-trades-at-the-same-multiple-as-the-no-growth-oil-majors

 

SU: $29

 

``Enterprise value $59 billion

Enterprise value/EBITA = 5.3...

I think of the Suncor valuation like this:

You buy 500,000 barrels a day of production at a very reasonable multiple of EBITA

Growth in that production is virtually assured

Technological improvements are likely to increase the amount of oil Suncor can develop and make it more economical

The price of oil is likely to increase the value of production and reserves

7 billion barrels of 2P reserves against a 59 billion enterprise value is around $8 per barrel

20 billion barrels of contingent reserves``

 

                       

Potential Catalysts:

Peak oil theory (Decreased supply of cheap oil)

Growth in consumption from emerging markets

Potential future geopolitical turmoil (U.S. needing domestic-north american supply)

Further devaluation of fiat currency

 

Insider buying at end of August

http://canadianinsider.com/coReport/allTransactions.php?ticker=su

 

Disclosure: own small stake (about 1%)

 

Anyone else hold this security or has looked at this.

[kevin4u2]

I recently was asked by someone about SU. I estimate the net assets are worth 70 billion and the market cap is 50 billion, implying a 30% discount.  They are selling for less than 2p reserves less debt at 10% (assuming $90 oil). You get the refining and marketing division for free.  Definitely cheap but not real cheap. 

 

The biggest question is where oil prices will take us over the next 5 years.  That will be the single largest determining factor for this company. 

 

What does Mr. Watsa think about commodities?

 

Clearly in the commodity markets. The price of gold and oil and whatever commodity you want to look at—corn, wheat, agricultural commodities, mining commodities—have all gone up in parabolic curves. Say you are a gold producer with gold at US$1,500 an ounce. You cannot hedge today. No gold company will hedge that gold production.  They could guarantee a huge amount of profits, but they won’t do that because they think it will be going higher. You would have been wrong if you tried to hedge at US$900, US$1,000, US$1,100, US$1,200, and US$1,300, so people will not hedge. They will not hedge oil. I can think of only one company that hedges its oil.  And very few will hedge the price of copper at US$4 per pound despite that fact is has rarely been at this price. The cost of production is very low, so you can make a lot of money if you hedge your copper price. But almost no one will hedge today, and that is an indication of speculation.

 

So what is the tipping point?

 

This is the beauty. You never can tell when the music will stop. I can’t tell, but you know it will end. In this case, it might end because the economy weakens and China goes into a little bit of a hiccup. Commodity price speculation will end as certainly as you and I are having this interview today. It will end, and for people who have speculated, it will end badly.

 

And from the 2010 Annual Report

 

Infrastructure and construction spending in China accounts for more than 40% of GDP – a number rarely seen in the past in any economy. In fact, this demand has resulted in commodity prices going up in a parabolic curve. Combine the increase in commodity prices, substantially from Chinese demand, with hedge funds and others again trying to allocate money to these very illiquid markets, and you can understand why some of these commodities have exploded in price

 

The price of oil is way above the marginal cost of new production.  I would stay clear until the dust settles. 

 

Cheers to my first post!

 

Best Regards,

Kevin

[Myth465]

I like Suncor and Canadian Oil Sands, but similar to Eric Nuttall I think the smaller companies tend to be more mispressed. These 2 beat the Majors though by far. Swizzled has some post on Suncor, and SU was mentioned by the Energy Analyst who was on C Mack last week.

 

I am an oil bull over the long term, but anything can happen over the next 2 years..

[Packer16]

I was re-examining some the tar sands plays and this and COSWF appear to be undervalued ways to play the oil sands.  COSWF also has a nice dividend (a fixed income alternative with growth potential).  The major risk I see is declining oil prices.  Does anyone else know of any other major risks.  TIA.

 

Packer

[no_free_lunch]

It is pretty simple from an investment perspective.  Their reserves are mammoth, costs are escalating but known, so if they are allowed to keep producing it is just a matter of oil prices. 

 

So the only thing that would keep them from producing would be the environmental issues.  There is a fairly widespread belief that the oil sands operations are causing water contamination, to the point where it could affect the water quality in multi-province areas at some point.  If the NDP got into power there would be a minimum, IMO, increased costs to meet tougher environmental regulation.  I don't think it would be more than $5-10 per barrel.  It seems unlikely the NDP would actually shut the whole thing down, it is just such a massive money maker.

 

The thing is oil prices are incredibly variable, I wouldn't underestimate what can happen with them.  Oil was at $13 per barrel in the late 90's.  People think oil prices are down when they hit $80 now.  With increasing renewable energy and fracking, I just don't know how you can accurately predict where the price will end up.

[Packer16]

BTW when is the next Canadian election?

 

Packer

[no_free_lunch]

It should be 2015.

[kfh227]

I'm surprised that there was no bump of this discussion when Buffett recently bought it.

 

http://www.cnbc.com/id/101548522

 

[nodnub]

It was discussed in other threads.  Maybe under the subforums General Discussion or Berkshire Hathaway. 

[RadMan24]

http://seekingalpha.com/article/2698335-suncor-energy-a-true-value-investment-opportunity

 

Couple updates since this article.  Oil continued to plunge.  Suncor's capex can be broken down into growth/sustaining capital.  E&P capex should be looked at sustaining capital as reserves are depleted pretty quickly.  The oil sands production cash flow will give you a sense of the cash going through the business.  Even at low oil prices, the company generates significant cash flow.  Reserves are right underground.  Refineries are being converted to handle more heavy crude, and capture Brent pricing.  Bitumen is a discount oil; therefore, until that Keystone pipeline is built, Canadian oil will be discounted to WTI.  Interesting things to think about that as well, what happens when the gap closes. 

 

Capital allocation and discipline are huge reasons why Suncor has $5b in cash and still able to continue on two huge projects during this downturn.  Cost overruns should abate this time. 

 

Share repurchases have been halted until oil prices recover to $70+ likely.  Dividend increases not likely for a while. 

 

They shoot for a return on capital of 15%.  Analysts and investors have critiqued the high initial investment, long ramp up, large fixed costs overshadow the huge reserve base, scale of operations, and mid-teen returns on large capital investments.  They love to talk about Shale, quick investments, high returns (smaller amounts of capital deployed), quick depletion, no scale (maybe some depending on wells on well head), and tricky reserve resources and land lease costs.  I think Pioneer Energy is one of the top Shale plays, but their valuation remains very rich compared to distressed plays and even Canadian companies. 

 

With most of the investment community thinking of oil sands as high cost; requiring too much capital, and generating small (mid teen compared to 40+ for shale) returns they ignore the benefits of these larges scale projects and cash flow they generate for years down the road with significantly reduced maintenance capex.  Suncor is also integrated unlike Canadian Natural Resources with refineries and marketing operations that provide maximum profit per barrel throughout Suncor's operations. 

 

Little over 10% position, obviously been adding since $35.  I would say its going to be much more valuable 5+ years down the road.  Strong US dollar, buys weak oil Canadian dollar, depressed oil prices, and overall unexciting oil sand development has led to Suncor's valuation providing significant downside protection and upside. 

 

Catalysts:

Libya production

Continued cost savings on large scale projects

Successful ramp up of oil production over next few years

Continued share repurchase while shares undervalued. 

Valuation (Plenty of growth projects to start in 2020 as well)

Development of unconventional resources (long time frame)

 

 

[kfh227]

FWIW just grabbed some calls out to Jan 2016.  50 calls for what is essentially free.

 

Yes, it's gambling but with small dollar amounts ... tails I loose a little, heads I win a lot.

[nodnub]

Thinking about the fire impact.  I wonder if anyone has any thoughts on how much this will impact Suncor production and margins. 

 

After Slave Lake fire I think it took about a year to get a lot of residential stuff rebuilt.

 

Optimistic view, assume fire is stopped before it affects any of the camps or mines/plants - there is still going to be a huge time/cost to rebuild in the town. And it may be more expensive for Suncor to house workers in the interim. Production slow-downs or shut-downs already occurring due to diluent supply pipelines shut down, and evacuated staff. I also read that it is expensive to restart SAGD operations if they have to shut them down for any reason.

 

Pessimistic view. Lack of rain continues. Fire burns out of control for another week or two.  Area remains unsafe and production affected further. Fire spreads north towards Suncor Base Plant provoking further expense and plant slowdown. I am not real concerned about fire actually reaching the plant. It is pretty much an empty wasteland around there.  But it could affect other pipelines in that area?

 

 

 

 

[Cardboard]

Having been there, it must be a scary place as spruce is all around: not around the mine but, everywhere else and with the dry and very hot temperature that they have had, the risk of more forest fires remain high. My thoughts are with them.

 

There is also only one way to get to Fort McMurray or Hwy 63 and then on up North to Suncor, CNRL and others and that highway is busy under normal times. Again all surrounded by spruce.

 

While I don't think that any Suncor facilities will burn down, pipeline pumping stations and In Situ or steam assisted gravity drainage operations from other companies are much more exposed to fire damage. Access is most of the time just a forest road on the side of Hwy 63 and these operations don't clear the forest miles around them.

 

Staffing at Suncor may not be impacted as they may offer temporary living but, they will have to pay overtime or compensation. For example, if a family worker was living in Fort McMurray or 30 minutes away from the mine and now the house is burned down and they are living somewhere in Edmonton or 5 hours away, it will create a bunch of problems. Then you have a lot of staffing for all support operations like pipelines as you mentioned. Almost impossible to not create some slowdown or extra cost.

 

Cardboard

[Cardboard]

http://www.oilsandsmagazine.com/news/2016/5/4/fort-mcmurray-fire-takes-1-million-bpd-production-offline

 

https://www.thestar.com/news/canada/2016/05/05/size-of-fort-mcmurray-fire-grows-as-fast-as-losses-mount.html

[Jurgis]

Sorry to hear about the fire. Hoping for rain and at least safe evacuation until then...  :'(

[RadMan24]

It will take time for the communities to be rebuilt and things back in order. If you take 300,000 bls/d offline, Suncor probably loses around $100 million in operating cash flows a month, subject to various factors of course. But a crude estimate. No pun intended.

[Foreign Tuffett]

Has anyone done serious valuation work on Suncor? I just started looking at the name today. They have continued increasing production through the oil price downturn and should produce upwards of 800 MBPD by 2019. Companies in cyclical industries that can keep investing through downturns tend (in general) to come out ahead.

 

I also think the market is overly bearish on oil sands production by vertically integrated producers like Suncor. Yeah oil sands bitumen production sells for a massive discount to WTI, but once upgraded at the refinery the discount doesn't look so bad. That's the genius of Suncor's management, and why they've gone "full retard" all in on the Alberta sands.

 

Anyway I still have lots of work to do on the company, but it does look promising.

 

[JayGatsby]

Has anyone done serious valuation work on Suncor? I just started looking at the name today. They have continued increasing production through the oil price downturn and should produce upwards of 800 MBPD by 2019. Companies in cyclical industries that can keep investing through downturns tend (in general) to come out ahead.

 

I also think the market is overly bearish on oil sands production by vertically integrated producers like Suncor. Yeah oil sands bitumen production sells for a massive discount to WTI, but once upgraded at the refinery the discount doesn't look so bad. That's the genius of Suncor's management, and why they've gone "full retard" all in on the Alberta sands.

 

Anyway I still have lots of work to do on the company, but it does look promising.

If oil eventually prices at the cost of the marginal barrel my big question is what is that number? Most analysis today would say that oil sands have a higher all-in cost than fracking. So if that's true would we end up with more fracking and less oil sands? I'm still not convinced of the underlying economics of most of these fracking operations though. EIA production would imply the decline rates for some of these new wells are as steep as people have warned: https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W

 

I haven't spent any time with Suncor but I have a small investment in Civeo which provides lodge rooms to Suncor. I probably know less about oil and sands than I should to have that investment.

[Viking]

Is anyone buying Canadian oil stocks these days? Is Suncor a good first step (for a stable core position)? RBC has Just moved SU to top pick.

 

Looks like they have a strong balance sheet. Cash flow should grow nicely in 2019 and 2020. Good dividend. Share repurchases should be decent. Just starting my reading but looks interssting.

 

Are they also be well positioned to be able to aquire nice assets for cheap?

[Viking]

Positive sign; as Peter Lynch said, insiders sell stock for all sorts of reasons. They usually only buy stock for one reason, especially $2 million worth.

 

Suncor insiders signal investors are too gloomy about the stock

“Insiders seem to be signalling that too much bad news is priced into the stock. In late December, as the stock headed toward levels not seen since the fall of 2016, multiple insiders were buying at intensities not seen in years. One of the buyers was CEO Steven Walter Williams who acquired 54,000 shares at $36.86 on Dec. 21. This represented a nearly $2-million purchase. We note Mr. Williams was selling in February when the stock was trading around just above $43.“

 

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-suncor-insiders-signal-investors-are-too-gloomy-about-the-stock/

[Viking]

Suncor just reported results and they were solid. For Q2 free cash flow was $1.6 billion. They reduced debt by $724 million and repurchased $552 million common shares. All numbers are CAN$.

 

Stock is trading at $39.40. Dividend is $0.42 = yield of 4.26%

Free cash flow yield is about 11%; assets are high quality, long life; balance sheet is in good shape.

 

Very rational company. Very shareholder friendly. Solid long term record (in terms of how they are managed). They invested heavily the past couple of years and now they are reaping the reward with elevated free cash flow which is expected to be $6.9 billion in 2019 (market cap is about $60 billion). 2020 is expected to also be a solid year for free cash flow generation. Cash flow will be split between dividend, share repurchases and paying down debt. This is one of the few companies that i see reducing debt in a meaningful way when they do not have to. (They have a history of buying assets when prices are distressed.)

 

The sector is very out of favour right now. Near term catalyst might be annoucement in next month or two from Alberta government allowing private companies to manage rail cars, perhaps allowing incremental production. A second catalyst is with all the free cash flow they are currently generating we could see them shift and buy back much more stock and slow debt repayment (as the balance sheet is in good condition).

[cwericb]

For what it is worth... I hear they are actively hiring in Fort Mac and have just signed a wage agreement giving a 11% increase over four years so they seem optimistic about the future. Just what I heard from a happy employee last week.

 

[RadMan24]

Is anyone buying Canadian oil stocks these days? Is Suncor a good first step (for a stable core position)? RBC has Just moved SU to top pick.

 

Looks like they have a strong balance sheet. Cash flow should grow nicely in 2019 and 2020. Good dividend. Share repurchases should be decent. Just starting my reading but looks interesting.

 

Are they also be well positioned to be able to acquire nice assets for cheap?

 

It's an interesting play, I only got interested after BRK disclosed a stake back in 2013/14 time frame. Another catalyst to look at is Syncrude reliability and its run-time operations. Also, study Suncor's future replication strategy for in situ. It'll be interesting to see how prolific those will be - and by then, pipelines will be expanded, so excess crude is not a real concern long term. It was widely predicted that oil sands would be the biggest loser in the oil crash given the rebalanced power of the Permian. A few years on, Suncor still generates significant cash flow and is making prudent capital decisions. So, in a way, the true earnings power of this company is not fully known at the moment.

 

 

On a similar note, OXY is trading at lower levels, yet both SU and OXY are highly beneficial to current oil prices. There's a lot of doubt regarding the Anadarko transaction; however, it is likely a great move to improve underperforming assets. Its the same reason why Suncor bought Syncrude. If it pays off, big gains. If it doesn't, so be it. But buying oil companies with good capital management and underground assets to drive future earnings pays off big in this space. Relying on one or the other usually brings mixed results. Having both enhances the odds of great returns.

 

In my opinion, the intrinsic value of Suncor is well above current values. But then again, gotta weigh that against other opportunities.

[Spos]

Suncor reminds me of IMO before they started Kearl and other expansion projects.  Long life oil sands projects, no exploration risk, no new projects, generating lots of cash and returning it to shareholders.  If memory serves, IMO reduced share count by half over the 15 year period prior to the launch of Kearl.  IMO used to trade at a big premium to the peers at the time.  That would not be a bad outcome for SU.

[Viking]

Is anyone buying? I am looking at both Suncor and Canadian Natural Resources. They both appear to be the 2 best positioned in Canada to get ‘safe’ exposure to oil. The key is who has the financial wherewith-all to ride out the storm that may last 12-18 months. I think Suncor also has a history of making acquisitions at the bottom of the market.

 

Is it likely either of these companies will need to issue equity to shore up their balance sheet? Or go to someone like Buffett for convertible debt (paying high interest and diluting shareholders down the road)?