Suncor Energy Inc. (NYSE:SU) operates as an integrated energy company. Based in Alberta, the company’s operations include oil sands development and upgrades, conventional and offshore oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand.
Recent issues: Sale of Alberta gas fields
Recently, Suncor Energy Inc. (NYSE:SU) announced its plan to sell its gas fields located mostly in southern and central Alberta for C$1 billion ($980 million) to Centrica and Qatar Petroleum. Centrica will operate the assets and produce about 250 million cubic feet of gas a day this year.
According to the agreement, 60% of the assets will be owned by Centrica and 40% by Qatar Petroleum. This announcement is in line with the latest strategy of fiscal discipline at Suncor, which has been described in the later part of the article.
No-go with Voyageur oilsands upgrader
Suncor Energy Inc. (NYSE:SU) has shelved its Voyageur oil sands upgrader project due to changes in market conditions. The project is no longer economical for Suncor. In 4Q 2012, Suncor took about a $1.5 billion write-down on Voyageur.
Disappointing 4Q 2012 results
Suncor operates in four business segments: oil sands, exploration and production (E&P), refining and marketing, and corporate, energy trading, and eliminations.
Operating earnings decreased from C$1.4 billion in Q4 2011 to C$1 billion in Q4 2012. Suncor posted a net loss of C$562 million. The oil-sands segment contributed majorly toward the loss.
Cash flow from operations decreased to C$2.2 billion in Q4 2012 from C$2.6 billion in Q4 2011. The average production of the oil sands segment is 378,700 barrels per day and the total average production is 556,500 barrels of oil equivalent per day.
Suncor’s stock analysis
Suncor’s stock has a P/E of approximately 15.6, which is higher than the 8.7 P/E ratio of its direct competitor, Imperial Oil Limited (NYSEMKT:IMO). Suncor’s operating margin is better at around 0.2 versus 0.1 for Imperial Oil Limited (NYSEMKT:IMO). When compared with major energy companies such as Exxon Mobil Corporation (NYSE:XOM), Total S.A. (ADR) (NYSE:TOT) and ConocoPhillips (NYSE:COP), Suncor has a greater price-to-earnings ratio.
Is Suncor still a buy?
Let’s see what caused Suncor’s financial loss in Q4 2012. It was due to the write-down of approximately C$1.5 billion taken on the books. Hence, the loss is not due to any operational issue but instead is a one-time impairment charge. So it does not signify that the business of the company in the future will be hampered.
Recently, Suncor announced its “2013 capital spending plan” and production outlook. According to the plan, Suncor will spend around $7.3 billion on the growth and sustainability of projects.
The energy play expects to increase its daily oil production by 8% to a range of 570,000 to 620,000 barrels a day, which will lead to an increase of about 12% in oil sands production as compared to the previous year.
Suncor will spend $3.3 billion out of the total $7.3 billion capex on growth projects. These projects will result in an increase in capacity and an increase in production levels. This may lead to an increase in the growth of earnings per share that is greater than analyst forecasts. Analysts have forecast annual EPS growth at around 3.6% per over the next five years.
Suncor’s new strategy also targets capital discipline and the continuous review and refinement of existing assets. Suncor plans to invest in projects that deliver profitable growth and strong returns to shareholders.
Suncor is planning to invest majorly in the advancement of exploration and production in Hebron. These steps will help Suncor to widen its margins. Suncor has a positive future-growth outlook.
Competitors
Imperial Oil operates in Canada’s exploration and production market. It also participates in the sale of crude oil and natural gas in the country. Imperial Oil is a subsidiary of Exxon Mobil Corporation (NYSE:XOM). Imperial Oil is investing extensively in projects for capacity additions, and its production is poised to increase in the future.
Recently, it acquired a 50% participating interest in Celtic Exploration following the acquisition of Celtic Exploration by ExxonMobil Canada. Imperial has paid $1.6 billion to ExxonMobil for a 50% stake in Celtic. Celtic has potential reserves of 128 million barrels of oil equivalent and will increase the future production potential for Imperial Oil. The capital-intensive projects have led to a slight beating on the stock price.
Currently its shares are trading at the level of $38, but Imperial Oil is expected to do well in the future as its production increases. Imperial is planning to double its production from about 300,000 barrels of oil equivalent per day in 2013 to about 600,000 barrels of oil equivalent per day in 2020.
ConocoPhillips (NYSE:COP), a Texas-based company, is into the worldwide exploration, production, transportation, and marketing of crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids.
Recently, ConocoPhillips Alaska suspended its plans for drilling in the Arctic waters off Alaska’s northwest shore due to some safety issues. The company was earlier planning to start the drilling in 2014.
The company is investing intensively to increase its production, and expects to increase it by 3% to 5% annually. ConocoPhillips has strong financials, and with an operating margin of 0.2 has the best operating margin in the industry.
Currently, its stock is trading at the level of $57 and has had a support level of $55 in past few months. The stock has a yield of 4.6% and good earnings per share of $6.72.
Conclusion
The Canadian oil sands have immense energy potential. After Saudi Arabia and Venezuela, Canada has the world’s third-largest proven-oil reserves. The 169 billion barrels of Canadian oil-sands reserves offers huge growth potential to companies like Suncor.
Currently, Suncor has the biggest oil-sands reserves in Canada. Its plan to expand the Canadian oil sands will strengthen its growth in the long term. A good thing about Suncor is that it has maintained a robust balance sheet and its dividends have increased by 21% for the past five years.
Suncor is a long-term buy for its positive future-growth outlook, strong balance sheet, low debt levels and increase in oil sands production volumes. Suncor can be considered a good buy with the expectation for a rise in oil prices in the future.
The article Is This Oil Stock Still a Buy? originally appeared on Fool.com and is written by Sujata Dutta.
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