Plummeting oil prices have drastically altered the landscape for the energy industry, leaving some industry stalwarts struggling to catch up. But hidden strengths could help this jeered energy giant back to profitable heights, making a fortune for shareholders in the process. I’m talking about Suncor Energy Inc. (NYSE:SU).
You might be wondering why I would recommend investing in energy stocks when the market is so volatile. Indeed, if you look beyond the oil price rally in the last 36 hours, market conditions would appear to be dismal for energy producers. And they are, unless you’re a company that’s well-positioned to weather today’s low-price environment.
Enter Suncor, one of Canada’s largest integrated oil and gas companies.
If You Ignore Suncor Stock Now, You’ll Hate Yourself Later
While other North American energy giants have been forced to cut investments and shareholder dividends in an effort to maximize cash flow and balance their finances, Suncor was several steps ahead of the competition.
Before oil began its rapid nosedive in the summer of 2014, Suncor’s executives understood that barrels of oil going for $100.00 or more was an unsustainable trend. As a result, steps were taken to minimize operating expenses in anticipation of a low-price environment (Source: Suncor, last accessed August 28, 2015.) The company began an initiative to reduce its operating costs by $600-$800 million over two years. (Source: CBC, last accessed August 28, 2015.)
In slashing its production costs, today Suncor is able to maximize its revenue stream even as oil hovers in the mid-$40.00s.
Still not convinced? A barrel of oil cost Suncor approximately $46.55 to produce in the second quarter of 2013, while it cost approximately $28.00 in the same period in 2015 (Source: Financial Post, last accessed August 28, 2015.) Since the company increased oil sands output by approximately 11% this year compared to last, the low breakeven cost helped in maximizing profits.
Of course, continued low oil prices have hammered away at Suncor as with any other energy company. Cash flow from operations fell by nine percent year-over-year in the second quarter of 2015. (Source: Suncor, last accessed August 28, 2015.) But you have to remember that oil prices declined by more than 40% in this period.
Chart courtesy of www.StockCharts.com
This wasn’t an accident or stroke of good luck; the market was stacked against Suncor.
I don’t know about you, but a company that manages to not only recognize an incoming major price decline but also implement strategies to survive it is one that is well-managed.
Still need convincing? Take a minute to mull over these numbers before making up your mind.
Suncor benefits from its integrated structure, where profits in the downstream refining sector can help to offset losses in upstream production when prices start to tilt downward. The company was able to drastically increase the profitability of its downstream segments in 2014 and 2015.
In the second quarter of 2015, Suncor nearly tripled its refining margin from the same period last year, bringing it from 4.55 to 12%. (Source: Suncor, last accessed August 28, 2015.) Refinery utilization was brought up to over 90%, causing a 6.55 spike in the amount of crude oil refined since the same period last year.
The result was an impressive surge in downstream profits exactly when Suncor needed it. In an industry where having just enough cash flow to service your growing debts is considered something of a success, Suncor shines as a beacon of good management.
In 2015, Suncor is planning on investing approximately $6.0 billion in capital expenditures, of which half will go into future growth projects. (Source: Suncor, August 28, 2015.) Combine this forward-thinking strategy with sound financial management in the present, and you have the recipe for strong profits once oil price rebounds.
Share volume for Suncor has decreased by four percent over the last two years, yet its dividend payment increased by 45%. Some of this increase occurred when oil was priced higher, of course, but the company has continued the practice of rewarding its shareholders.
Have Suncor Shares Bottomed?
Indeed, Suncor raised its second-quarter dividend by 3.6%, or $0.29 per share, which brought its dividend up to $1.16 per share. (Source: Financial Post, last accessed August 28, 2015.) Now these certainly aren’t the exciting numbers craved by high-risk traders, but that’s not what I’m advocating here.
Suncor is a well-managed energy company which performs well even in volatile markets where the price of its main product drops by more than half. It’s a solid long-term investment which has the potential to richly reward the savvy investor who knows a good investment when they see it.