Suncor Evaluates Strategy for Acquired Assets

Sporting a McDep Ratio at the low end of the range, buy-recommended Suncor (SU) offers 42% unlevered appreciation potential to a McDep Ratio of 1.0. Management is saying less than usual to investors in recent weeks while it is focused on the future for resources acquired in the Petro-Canada merger. Combining the previous outlooks we had for each company, we update our Suncor model to include operations from acquired properties beginning August 1.

A primary purpose of the merger was to make Suncor strong enough to be able to withstand the financial market conditions that forced last year’s interruption of Suncor’s oil sands expansion. Oil sands in Canada account for most of the new company’s 85% concentration on oil, leaving oil and gas properties outside Canada potentially available for sale. Some natural gas properties may be sold. Petro-Canada’s refineries are likely “keepers” as Suncor often looked at prospective downstream acquisitions.

Nonetheless, Chief Executive Rick George wants to be “long bitumen”, meaning he wants Suncor to produce more heavy oil sands crude than it upgrades to synthetic oil or refines into final products. That could mean that Suncor may be willing to part with its 12% ownership of Fort McMurray neighbor, Syncrude, which upgrades all of its bitumen. In any case, considering its minimal dividend, Suncor is our favorite oil sands stock for accounts which might not want taxable current income and might prefer equivalent appreciation on which taxes may be postponed.

Natural Gas Uptrend Proceeding
The current quote of $6.88 for six-year natural gas exceeds the 40-week average of $6.72 for the second straight week. The long-awaited break to the upside may be here. For oil, the average of the latest settlement prices of futures for the next six years at $79 a barrel continues above the 40-week average of $72.

Originally published on October 6, 2009.