If you are looking for a mining company that generates energy with its own diversified refinery division, wholly owned pipelines, and a retail gas station network, then Suncor Energy Inc. (NYSE: SU) should be at the top of your list.
Here are just a few reasons why:
- Suncor offers diverse and reliable production at a time when civil unrest in the Middle East has increased uncertainty in the energy market.
- It's leveraged to higher oil prices.
- It's transparent
- And it's reducing its debt.
There's no question about it: Suncor Energy Inc. is a "Buy" (**).
Lots of Leverage - Little Risk
Suncor Energy Inc. was founded in 1953 and is headquartered in Calgary, Canada. The company has a market cap of $70 billion, with an enterprise value of $82.75 billion once net debt and cash are accounted for.
Suncor has refineries, wholly owned pipelines and specialty lubricant products. It sells gasoline in retail locations in Canada under the Petro-Canada brand and in the United States under the Phillips 66 and Shell brands. But most importantly, it boasts strong and reliable crude oil production from its oil sands operations.
So already we're talking about a company that is vertically integrated - with its wide array of refineries, pipelines, and gas stations - and horizontally integrated, with its U.S. and Canadian retail outlets.
This is Suncor's greatest strength: diverse and reliable production and revenue.
That's particularly important in light of the civil uprisings in Egypt, Libya and Yemen.
If you're anything like me, you're following the revolution in the Middle East with one eye while the other watches the price of gasoline regularly increase.
Well if you're looking for stable energy companies capable of leveraging higher oil prices, but not susceptible to the violence in the Middle East, you might consider this Canada-based company.
Energized by Oil Sands
Suncor produces bitumen in the Canadian oil sands, which it expects to account for 90% of its 2011 crude oil production.
Furthermore, Suncor has built the necessary refining capacity to convert the tar sands' synthetic oil into refined gasoline and oil products. This process allows the company to capture the profits of the full hydrocarbon supply chain.
Suncor has refining capacity of 443,000 barrels of oil equivalent per day (boe/day), with roughly half of that capable of running on oil sand feeds. That refining capacity is spread out over both eastern and western Canada. The company also has a small refinery outside of Denver, CO, giving it U.S. domestic refining exposure.
Currently, oil sands production accounts for 330,000 barrels of oil equivalent per day (boe/day). But Suncor expects that to grow to about 800,000 boe/day by 2020.
The company expects to grow at a compounded annual growth rate (CAGR) of 8% over the next decade. Suncor often highlights that fact to show that it expects to grow its oil sands production at a CAGR of 10% and its conventional and international CAGR production at 4%.
Of course, that growth is predicated on regulatory approval, due to a strategic oil sands partnership Suncor formed with Total S.A. (NYSE ADR: TOT). This relationship includes the development of new oil sands mines and upgrades, as well as asset ownership swaps between the two firms.
This new partnership will provide Suncor with $1.75 billion in the first half of 2011. The extra liquidity will allow the company to focus on mining as its engine of growth. Suncor also has divested some of its natural gas-specific projects, allowing it to pay down its debt load over the last year. This deleveraging process already has reduced Suncor's net debt to $11.1 billion from $13.3 billion a year ago.
Finally, transparency is another big reason to like Suncor. The company posts its monthly mining results, making it easy to follow its average daily production.
Investors almost never have access to that kind of data intra-quarter. Suncor investors do, and with it they can prepare for what the quarterly results should look like before they are released.
That said, it's time to "Buy" Suncor Energy.
Suncor closed Friday at $46.65 a share, just shy of its 52-week peak of $48.53. That gives the stock a Price/Earnings (P/E) ratio of 26.18.
Suncor Energy Inc. is a company that should be a core holding for any long-term global investor who is looking for safe international energy production. The company has made a major strategic relationship with Total S.A., giving it access to capital upfront and a larger, diversified basket of producing assets.
The company is deleveraging its balance sheet, while having ample liquidity and access to free cash flow with oil prices at these levels.
Suncor has a liquid options market, allowing us to write calls around this core position down the road, to raise its effective dividend yield. We may also want to consider an active naked put strategy to grow this position if oil prices continue to rise in the near term.
The company is leveraged to higher oil prices, and none of its oil fields are jeopardized by the turmoil spreading through the Middle East.
(**) Special Note of Disclosure: Jack Barnes has no interest in Suncor Energy Inc. (NYSE: SU).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Toyota Motor Company (NYSE: TM) ]
News and Related Story Links:
- Suncor Energy Inc.:
Oil Sands 2011 Outlook Summary
Canadian Oil Comapies set to outperform
- Money Morning News Archive:
Previous "Buy, Sell or Hold" Features.
Confessions of a Macro Contrarian.
- Money Morning:
Buy, Sell or Hold: Toyota Motor Corp. (NYSE: TM) Needs to Rebuild from Supply Chain Collapse
- Money Morning:
- With $2.3 Billion Deal, Thailand Joins Asian Rush For Canadian Oil Sands