(06/10/15) Suncor: Blue Chip in Energy

Owners of long-life, low-cost oil and gas assets in politically stable jurisdictions should be part of any investor’s core equity holdings, explains Gavin Graham, contributing editor of Internet Wealth Builder.

Suncor (SU) is the largest Canadian integrated energy company, the fifth-largest North American energy company, and one of the largest independent energy companies in the world.

For an investor wanting one exposure to the energy sector, there is no better place to start.

Following the takeover of the Canadian government-founded PetroCanada, Suncor expanded from its original business of developing the Alberta oil sands to become a fully integrated Canadian energy company with worldwide operations.

With exposure to both exploration and production, and refining and marketing, Suncor should be less volatile than more narrowly-focused energy stocks, as falling raw material costs benefit the refining division, offsetting much of the negative effects of lower prices.

The firm has managed to consistently grow its oil production in a timely fashion over the last five years, with a record of execution not matched by many of its peers.

Barrels of oil equivalent (boe) production from its oil-sands grew to 390,000 in 2014 from 350,000 in 2010 and rose further to 440,000 in the first quarter of 2015.

With an additional 160,000 boe from its offshore operations in Newfoundland and the UK, Suncor produced over 600,000 boe in the first quarter. It has proven and probable reserves of 38 years.

Suncor is obviously exposed to price drops in oil, but its low cost of production, efficient management, and large refining and marketing operations allow it to weather the downturn better than pure E&P operators.

Concerns over the environmental impact of producing oil from the oil-sands remain an issue, but Suncor is regarded as one of the most environmentally responsible oil companies in the world.

If oil prices remain below $50 a barrel for a prolonged period, some of Suncor’s newer and higher-cost projects could prove to be vulnerable in terms of their economic return on the capital invested.

With a low debt-to-capital ratio (26%), and no debt falling due until 2018, Suncor’s balance sheet is robust enough to allow it to negotiate a long period of low oil prices.

The firm has raised its dividend five times from $0.10 a share in 2011, equivalent to a 22.7% annual increase, giving it a yield of 3.1%. The dividend has been maintained during the halving of oil prices, unlike many other oil and gas companies, including Canadian Oil Sands.

Suncor is one of the blue chip energy stocks in North America with a solid balance sheet, decent growth in production, and a reasonable yield in absolute terms, which it has grown consistently over the last five years.