Suncor Energy (SU) announced on March 27, 2013 that it has decided not to proceed with the Voyageur Upgrader project. I discussed this project in a previous article on Suncor. The Voyageur Upgrader has been one of Suncor Energy's projects with the greatest potential for growth (second only to Firebag), and so the decision to cancel this project significantly reduces the company's growth prospects. Therefore, on the surface, that would appear to be a bad thing and the market seems to agree. The stock fell following the announcement. While it is disheartening to see the company give up a good portion of its future growth, I am not convinced that this is truly as negative as the market believes.
In my previous article on Suncor, I included this graphic showing the company's various growth projects:
Source: Suncor Energy
As this graphic shows, the Voyageur Upgrader project was expected to produce approximately 102,000 barrels of oil per day at full capacity. This makes it the second largest of the company's growth projects, being single-handedly responsible for 18.3% of the company's expected growth over current production levels. Obviously, the shelving of this project will have a huge negative impact on the company's expected growth.
I have noted several times in the past that Suncor has had the long-term ambition of raising its average daily production to one million barrels of oil equivalent by the end of the decade. The new CEO, Mr. Steve Williams, has not affirmed his predecessor's goals of aggressive growth but, up until now, the company has largely followed the growth plan laid out by the former CEO. Growth at all costs is self-defeating, however. A project that grows production is quite beneficial but if the company loses money on each barrel produced, then shareholders are ill-served. Mr. Williams stated some time ago that his goal is to focus on economically-viable growth and the cancellation of the Voyageur Upgrader project is the first sign that he intends to follow through on this statement.
The Voyageur Upgrader was an ambitious project back in 2010 when it was first proposed. However, the shale oil boom in areas like the Bakken formation has resulted in a flood of light, sweet crude that is threatening the viability of heavy crude producing projects like the Voyageur Upgrader. This surge of light crude oil has reduced the demand for and price of heavy crude since light crude oil is easier to transport and refine. As a result, projects such as Voyageur are not particularly accretive to value until the price for heavy crude oil exhibits a recovery. As that does not seem likely anytime soon, Suncor is making the right decision here.
This move does, however, make the company much less appealing to those who were interested or invested in it due to its growth prospects. It was only the Voyageur Upgrader project that was shelved. The company's other growth projects such as the Fort Hills Mine are still going forward. Therefore, Suncor still retains some of its growth potential. However, without the Voyageur Upgrader, the company will not be able to reach its previously-stated goal of producing an average of one million barrels of oil equivalent by 2020.
Suncor's enormous reserve base still gives it an advantage over other oil companies because the company does not need to go out and find more resources to replace what it extracts from the ground. At the end of 2012, Suncor's reserves consisted of:
- 6.9 billion barrels proved and probable reserves
- 12.4 billion barrels of in situ reserves
- 6.7 billion barrels of mining reserves
- 4.4 billion barrels of other reserves
Therefore, Suncor's reserves base totals 30.4 billion barrels of oil. As the company averaged 549,000 barrels of oil per day in 2012, this gives it a reserve life of 151.7 years. In other words, the company could keep producing at its present level for the next one-and-a-half centuries before it exhausts its current reserves. This uniquely positions the company among oil majors as there is no exploration risk here. This alone is something that should appeal to investors. At the time of writing, Suncor had a market cap of $45.60 billion. Thus, investors are essentially paying $1.50 for every barrel of oil in the ground and getting the rest of the company, including its highly profitable refining operation, for free.
Suncor took a loss of $1.487 billion in the fourth quarter due to the decreasing prospects for the Voyageur Upgrader project that the company noted at that time. This amount was large enough to deliver a loss to the company in the quarter. The company would have reported a net profit of $925 million were it not for this writedown. The cancellation of this project will result in another writedown this quarter, to the tune of $140 million. This could push the company's first quarter net income down to a value just shy of $800 million, assuming similar performance to that seen in the fourth quarter.
The Voyageur Upgrader project was previously a partnership with Total (TOT). Suncor announced on the same date as the cancellation announcement that it has acquired all of the assets of the partnership. This could prove accretive to future profits as Suncor will now receive all the money that previously went to Total. The positive impact to revenues here will be nowhere near as great as it would be were the project continued but, in the end, shareholders may ultimately derive greater benefits from this move.