SU - Suncor

[RadMan24]

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)?

 

That's a good question. They have both been taken out to the woodshed and beaten. The marginal cost to produce these barrels is actually pretty low. With that said, the capex at both will likely be cut to maintenance spend only. Suncor has refinery operations, which typically have provided a boost during low oil prices and captured the differential between wcs and brent prices. But, in this scenario with weak demand, it might not be as robust. Both have improved balance sheets since 2014, and cut costs. I don't forsee a need for liquidity at either, as they should have enough resources to ride out low prices for much of the year.

 

Suncor also deferred a major capex project recently, which looks smart in hindsight. Also, Suncor's Syncrude had another fire, which will impact its operations.

 

Dividends could be cut to save cash. There's a lot of levers they can still pull prior to raising share capital.

[NewValueinvestor]

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)?

 

That's a good question. They have both been taken out to the woodshed and beaten. The marginal cost to produce these barrels is actually pretty low. With that said, the capex at both will likely be cut to maintenance spend only. Suncor has refinery operations, which typically have provided a boost during low oil prices and captured the differential between wcs and brent prices. But, in this scenario with weak demand, it might not be as robust. Both have improved balance sheets since 2014, and cut costs. I don't forsee a need for liquidity at either, as they should have enough resources to ride out low prices for much of the year.

 

Suncor also deferred a major capex project recently, which looks smart in hindsight. Also, Suncor's Syncrude had another fire, which will impact its operations.

 

Dividends could be cut to save cash. There's a lot of levers they can still pull prior to raising share capital.

 

I think that's a big one and could cause further drop in the price once they're cut. I don't see suncor blowing up anything soon, with the weak CAD it actually supports their bottom line as they sell in USD and costs are in CAD. They have an ok amount of cash on the books and little debt and the majority of their operations are in refining/downstream. I think we are close to peak pessimism in the canadian oil patch.

[Viking]

Doubled my position yesterday at CAN $15.50. Is anyone buying big oil right now?

 

My investment thesis is pretty simple. We are going to need oil for many more years. The move to alternatives will take time to play out (decades). I do not think we have seen peak consumption in oil; China and India have decades of growth ahead and they will see growing demand. So i still see a place for oil stocks in investment portfolios.

 

I expect oil stocks to be very volatile. Positive news on a vaccine would be positive for prices. Another spike in virus cases in the coming months would likely be negative. Oil stocks should see lots of tax loss selling (perhaps thats what we were already seeing in Sept). Etc, etc.

 

Longer term, the move for large funds to divest oil stocks would be net negative. However, tobacco stocks are still traded so my guess is oil stocks find their place in investors portfolios.

 

I am not overly bullish on oil prices. There appears to be lots of oil out there and as prices rise production will likely quickly come on line. So i am not expecting oil to get much over $60 in the medium term.

 

Why Suncor? I am reasonably familiar with the company having owned it is the past. Lots of other options though as most oil companies have been crushed.

 

What i like about SU:

- stock is trading at close to 20 year low; oil stocks are hated (please note i said the same thing when the stock was trading at $39 in July of 2019 :-)

- diversified business model; will help it through should oil prices stay low for the next 12-18 months.

- quality assets

- long life reserves

- dividend yield is good at 5.5% and should be sustainable (already cut more than 50%)

- debt profile is ok; not over levered (dividend cut helps)

- recently announced major reduction in work force; see low oil prices for longer

 

Concerns:

- tar sands performance is very lumpy

- 2021 maintenance capex will be elevated

- lower oil prices for longer; pandemic could be with us for years; muted economic performance; muted demand for oil

- political risk is high (Canada and US)

- will new pipelines be completed (Canada and US)

- sector could become new tobacco

 

Not sure

- quality of current management team; not saying they are bad. Personally, i liked the dividend cut (i was not a shareholder at the time) as it gives the company more options should prices stay low for longer. Decision was made with medium term health of company in mind which i like.

 

Catalysts

- short term: news on vaccine front, leading to improvement in economic growth

- medium term: air travel picks up

 

Market cap for SU is CAN $24 billion. At what point does big oil simply become an asset play?

[Spekulatius]

One thing about SUN and CNQ that they will outlast shale with the possible exception of the Permian. I do agree they are cheap and decently managed. Their breakeven cost seems to be lower than even the oil multinationals like CVX, XOM , RDS and BP and the Long asset live makes it easier to survive long periods of low crude prices.

 

No position yet.

[obtuse_investor]

Thanks for your post, Viking. For the first time since deep water horizon I am looking at oil sector again. Instead of buying specific names, why not pick up a low cost energy ETF? It reduces specific company risk and still lets you play your thesis out.

 

Maybe it’s my lack of sophistication in the sector, but I am starting to get interested in XLE or similar ETFs.

[Viking]

Obtuse, simply buying an ETF to get exposure is very good advice. I some times stick with what is familiar. Something to think about :-)

[KJP]

Obtuse, simply buying an ETF to get exposure is very good advice. I some times stick with what is familiar. Something to think about :-)

 

If the underlying thesis is that oil will be around for many years to come, other options to consider are oil-heavy mineral interest owners (e.g., Dorchester Minerals) or oil/refined products pipeline owners (e.g., Magellan Midstream). 

 

Although more gassy than Dorchester, Black Stone Minerals may also interest you.  Very limited basin risk due to large, geographically diversified minerals portfolio and benefits from advances in drilling tech without have to pay for any of it.

[Gregmal]

Ive long liked MSB and wanted to like BSM. I recently put on bit of a trade/mid duration investment with GEOS, but by and large with a sector this messy(and messy is probably an understatement), the ETF is probably good, if not the best advice, or a basket approach. If XOM, CVX, OXY can trade where they are, its probably best not to fight fate or try to be a hero swinging for the fences on single stock ideas.

[KJP]

Ive long liked MSB and wanted to like BSM. I recently put on bit of a trade/mid duration investment with GEOS, but by and large with a sector this messy(and messy is probably an understatement), the ETF is probably good, if not the best advice, or a basket approach. If XOM, CVX, OXY can trade where they are, its probably best not to fight fate or try to be a hero swinging for the fences on single stock ideas.

 

I guess it depends on what risk you're trying to eliminate by diversifying and which ETF you use to do that.  To put my Murray Stahl hat on for a minute, XLE is market-cap weighted, so 45% of XLE is Exxon and Chevron. 

[Gregmal]

Good point. I generally just hate the energy sector. But it is getting interesting. TPL is another one to keep an eye on.

[RadMan24]

Doubled my position yesterday at CAN $15.50. Is anyone buying big oil right now?

 

My investment thesis is pretty simple. We are going to need oil for many more years. The move to alternatives will take time to play out (decades). I do not think we have seen peak consumption in oil; China and India have decades of growth ahead and they will see growing demand. So i still see a place for oil stocks in investment portfolios.

 

I expect oil stocks to be very volatile. Positive news on a vaccine would be positive for prices. Another spike in virus cases in the coming months would likely be negative. Oil stocks should see lots of tax loss selling (perhaps thats what we were already seeing in Sept). Etc, etc.

 

Longer term, the move for large funds to divest oil stocks would be net negative. However, tobacco stocks are still traded so my guess is oil stocks find their place in investors portfolios.

 

I am not overly bullish on oil prices. There appears to be lots of oil out there and as prices rise production will likely quickly come on line. So i am not expecting oil to get much over $60 in the medium term.

 

Why Suncor? I am reasonably familiar with the company having owned it is the past. Lots of other options though as most oil companies have been crushed.

 

What i like about SU:

- stock is trading at close to 20 year low; oil stocks are hated (please note i said the same thing when the stock was trading at $39 in July of 2019 :-)

- diversified business model; will help it through should oil prices stay low for the next 12-18 months.

- quality assets

- long life reserves

- dividend yield is good at 5.5% and should be sustainable (already cut more than 50%)

- debt profile is ok; not over levered (dividend cut helps)

- recently announced major reduction in work force; see low oil prices for longer

 

Concerns:

- tar sands performance is very lumpy

- 2021 maintenance capex will be elevated

- lower oil prices for longer; pandemic could be with us for years; muted economic performance; muted demand for oil

- political risk is high (Canada and US)

- will new pipelines be completed (Canada and US)

- sector could become new tobacco

 

Not sure

- quality of current management team; not saying they are bad. Personally, i liked the dividend cut (i was not a shareholder at the time) as it gives the company more options should prices stay low for longer. Decision was made with medium term health of company in mind which i like.

 

Catalysts

- short term: news on vaccine front, leading to improvement in economic growth

- medium term: air travel picks up

 

Market cap for SU is CAN $24 billion. At what point does big oil simply become an asset play?

 

Future of hydrogen resource is a longer term catalyst for oil sands, though that could be outside your time horizon.

 

I wonder though if special dividends should replace stock buybacks at this point when the cycle reverses. Idk if anyone has mentioned that to the board, or if shareholders would be on board.

 

 

 

 

[Viking]

Cyclicals and dividends gets complicated if payout ratios get too high when times are good.

 

What i like about Suncor is they have been pretty good with what they do with their free cash flow with a balance of:

- opportunistic acquisitions

- debt repayment

- stock repurchases

- dividend

 

They tend to also think long term which is likely why they aggressively cut the dividend (versus leave it as it was and hope for the best).

[Gregmal]

Buybacks are typically a horrible idea for cyclicals because of the inherent risk that your excess cash is typically prone to being produced at the peak of the cycle. High share prices tend to also be more likely while the business is strong and results look good. So quite frequently you get capital intensive businesses buying high and then being starved for cash and having to sell low. Of course, there are exceptions, but over the years Ive changed my opinion on this quite a bit and think dividends are indeed the most considerate option for a shareholder friendly management.

[Xerxes]

Today’ cyclical were yesterday’ growth. A cyclical that keeps going is often heralded as being on a secular trend. O&G might be cyclical today but they were considered growth in the early 2000s thanks to the BRIC narrative and the tangible China pull. Suncor itself was a great growth story. Think back when Goldman analyst had a $200 USD per barrel before 08-09 took the air out of the balloon forever.

 

Majors bought back heavily then. Exxon was the Apple of that time and the rock of Gibraltar during the financial crisis.

 

Today their absolute dollar value of share price is lower than that time. Buyback was considered right at higher absolute and relative valuations then but damned as wrong now at a lower absolute and relative valuation.

[uncommonprofits]

Suncor is a new addition to my portfolio this year and seems very underpriced to me.  The dividend cut is the first that I can find in their history dating back to 1992.  The company’s growth up until now has been more than impressive. 

 

Full period 1992 - 2019. SU increased the dividend by 12.8% annually.  (Early years less, later years more)

 

1992 - 2002.  Dividend increased at a more moderate pace of 2.7% annually.  SU IPO’d in March 1992 at a split adjusted price of $2.38.  The average price for 2002 was $13ish.  So roughly 17-18%-ish annual increase - during a mostly depressed oil market (at least until 2000 or so).  This is not the integrated Suncor of today and leads me to think they were investing more toward growth than dividends, etc (but I didn’t delve further). 

 

2002 - 2019.  Dividend increases every year amounting to an average of 19.2% annually.  First part of this period is during a great bull oil run.

 

2009 - 2019.  Start entering a more difficult oil market.  They acquire Petro-Canada in 2009, perhaps creating some tailwinds?

 

2014 - 2019.  Very difficult period for Canadian oil during this stretch.  But SU perseveres with annual ave dividend increases of 10.5% up to 2019. (In fact another 10.7% increase in early 2020 that was very short lived). 

 

I know the above is a rear view look, but I am hard pressed to find another high quality fully integrated energy company with similar historic execution - and especially priced this cheap.  Historically, they have been opportunistic in difficult times (Petro-Canada is just one example).  But even without such an acquisition for a tail wind they have some growth initiatives in the works with little ‘tie-in’ to the price of oil.  While they have pulled back on these growth expenditures some by extending out completions -- they are still projecting an additional $2 billion in free funds flow by 2024/25 ($1 billion of this projected for 2023).  These are some very good returns - I don’t expect all free funds to make their way into the (current $1.3 billion) dividend/buyback pool but a decent portion will if they can execute.  From this low dividend base I can see a return of the historic dividend growth for the next several years even if the current depressed oil market persists.     

 

Below is a compilation of SU’s full dividend history (split adjusted).  It’s been quite consistent and stable (up to this cut) - no special payouts as I recall going through the history.  If one were to include 2020 on the list it would be $1.095 assuming the current payout for Q4 (but of course the current annual payout is $0.84). 

 

2019 > $1.68

2018 > 1.44

2017 > $1.28

2016 > $1.16

2015 > $1.14

2014 > $1.02

2013 > $0.73

2012 > $0.50

2011 > $0.43

2010 > $0.40

2009 > $0.30

2008 > $0.20

2007 > $0.19

2006 > $0.15

2005 > $0.12

2004 > $0.115

2003 > $0.09625

2002 > $0.085

2001 > $0.085

2000 > $0.085

1999 > $0.085

1998 > $0.085

1997 > $0.085

1996 > $0.080

1995 > $0.07125

1994 > $0.06625

1993 > $0.065

1992 > $0.065

 

[samwise]

Yes the last time it was at such a price seems like 2004! Last year FCF was very good, and we are buying at 20% yield, if that ever comes back. (5B on a 25b stock). I am definitely tempted and trying to get up to speed.  How does it look in a lower oil scenario near term?

 

Suncor says that they need $35 oil to cover the dividend, while WCS is currently at ~30, and Brent is~40. They had negative FCF last quarter so I assume they mean WCS prices? So is this a bet on oil prices increasing as demand recovers? With the market pricing in recovery in many stocks, I wonder why this is back at March lows.

 

Or do the refineries capture the Brent wcs spread? Which oil price does suncor earnings depend on? Does anyone have a view of stabilized FCF at current oil prices?

 

Edit: I meant FCF yield above.

[RadMan24]

The company provides reasonably good disclosure on its estimated cash flow at various oil prices as well as price sensitives in its reports (10ks, powerpoints, etc).  A few hours looking into it will get you comfortable with a reasonable assumption.

 

With respect to dividends, it might be a bit premature to speculate when and if it will reach the prior dividend levels, particularly given the current environment and negative cash flow. That’s not to say cash doesn’t improve, but Suncor still has a few billion it would like to spend on capital return projects that might push back dividend increase rates as oil prices, and end user demand, recover (notwithstanding supply price impacts, including the removal of production quotas by Canada).

 

the divergence of SU and CNQ share prices since the march lows is quite interesting and might be worth looking into.

[bizaro86]

The divergence between CNQ and SU is VERY interesting. I like CNQ management better, but am thinking of switching my position because of the divergence. One possible explanation is the change in refining margins. Refining has historically been viewed as a stabilizer to E&P exposure, but the huge drop in demand has hurt refining margins quite a bit. SU has big refining exposure and CNQ not so much.

 

I would be very interested in hearing other thoughts on the reason for the divergence!

[samwise]

Thanks. Yes i’ve been reading their documents. Here is what I concluded. They should cover the sustaining capex at WTI $30.

Anything above that is FCF for equity holders. Every $10 on Brent leads to 2.8B in FCF. They don’t expect to build any more debt going forward.  At current USD ~$40 oil, SU should runrate at CAD 1.4B FCF on a CAD $25B market cap,

1. or about a FCF yield of 5-6%.

2. Adding or subtracting another 11% yield for every $10 move in crude. (2.8B)

3. This could all be cancelled by a 10cents move in CAD.

4. With another 8% due to planned improvements by 2025. They seem to have kept previous promises, so this is high probability.

5. Probably no growth investments, just improvements around the margins.

 

So seems one needs a longer term view on the crude price and CAD rate to get a valuation.

 

Best case oil could go to 60, and all improvements go as planned, and the FCF yield goes to 5+22+8=35% on current prices.

Worst case?  Oil could go lower,  Biden could impose a carbon tax on oil sands,  CAD could rally while oil is down (unlikely!).  Seems oil stocks have been going down as Biden’s odds improved over the last month. Any views?

 

I haven’t looked at CNQ yet, or the other majors. Is there one that is better ?

 

 

 

[SharperDingaan]

To buy anything in the WCSB is a bet on future oil prices.

The better operators doing the consolidating within their swim lanes, paying with equity, and everybody trying to scale up to extract economies of scale.

 

Heavy oil producers put shut-in back on line late august/early september. WTI at USD 43, 50-70% hedged 3+ months out, and net cumulative addition > 100,000 boe/d. As pipelines have increasing space, differentials have remained relatively stable. There was also some quiet fill of incremental rail tankers - as storage on rail.

 

With no new drilling, and high decline rates, there's less light oil to fill the pipe.

Heavy oil is making up a higher proportion of the flow, and replacing (often lower cost) VZ oil at the refinery  ;)

 

SD

 

[Xerxes]

SD

This must be the first time I hear someone calling Canadian tar sands as WCSB. 

And I lived here since the early 90s.

 

I don’t think buying Suncor and CNQ are a directional bet of future prices rather simply a bet that oil will have a significant role to play for the coming decades notwithstanding all hooplas about Model 3 and electrification. 

 

The only thing changed will be that they will not be investing heavily in new production but current assets will sustain production and last for decades. In fact I see an asset like Suncor with its reliable production as a pass-through pipeline for crude with a call option on price. Gone are the days of moonshots in the North Sea and the Arctic when Wall Street valued oil & gas companies by the size of their reserves. Oil yield-cos “manufacturers” will be in fashion in my humble opinion.

 

Financial services companies and banks were all the rage in the late 90s through 08-09. Then they weren’t. But they became steady-earners prized with their safe like fee-based machine. To invest in banks right after 08-09 didn’t mean that one was making a directional bet on their growth and that prop trading will be back in the vogue making huge waves. It did mean however that banks and financial service institutions operated key financial pipelines and were a cornerstone of the economy and that was were the value was. And that could have been a basis for a bet at an attractive price. At least that is what the Daily Journal vice chairman must have had in mind. 

 

 

[SharperDingaan]

WCSB is more a reference to anything oil related in Alberta/Sask, with limited egress you're just as screwed as the light oil producer.

Agreed that tar sands are a great long-term asset, but with WTI at USD 41 it's close to break-even - the big money is when WTI is > USD 50, and the dividend can be restored.

 

We hold CPG for much the same reasons as you have described.

Our higher risk tolerance just allows us to start lower down the quality curve, and elevate our share count.

 

SD

 

[Viking]

Suncor reports results Oct 28. Lots of noise:

1.) cut in production due to fire

- “Full-year corporate production is now estimated at a midpoint of 695,000 barrels of oil equivalent per day, down 65,000 boe/d from 760,000 boe/d in revised guidance in March, Suncor said.“

2.) 15% reduction in workforce over next 18 months

 

Potential near term catalyst? Downstream results. I am wondering in the is not the jewel in their business right now. In Q2 profits in this segment exceeded analysts expectation. Why asked to explain why management kind of chuckled and talked about the benefits of their ‘integrated model’. There are not a lot of refiners in Canada and i am wondering if this does not allow them to earn above average returns over time. Kind of like what we see with the big banks and telecom in Canada.

—————————-

 

For those holding Suncor with a longer holding perspective, pipelines are a key input.

 

Trans Mountain in BC is rolling right along. It will increase capacity when finished from 300,000 to 890,000 barrels per day. Completion date is late 2022 (likely pushed to 2023). I am surprised about how little it is in the news these days.

 

Bottom line, very positive development for oil producers in Alberta.

- https://www.transmountain.com/project-overview

 

[samwise]

 

I don’t think buying Suncor and CNQ are a directional bet of future prices rather simply a bet that oil will have a significant role to play for the coming decades notwithstanding all hooplas about Model 3 and electrification. 

 

... Oil yield-cos “manufacturers” will be in fashion in my humble opinion.

 

 

Oil was used in 1998. Priced at ~$10. 10 years later it was ~$150. What FCF would SU produce in all these scenarios? I don’t think it’s just a bet on oil being used. SU has to be competitive versus other oil producers. Good thing for them is they need their sustained capex+opex to compete versus full cycle costs of producers with lower production lifetimes.

[SharperDingaan]

Do a little back-of-the envelope math on average crude prices, differentials, and volumes shipped over Q3. Compare it to Q2, and look at the incremental volumes shipped since late August  ;)

 

SD