News of Warren Buffett's $524 million investment in Suncor (SU) in August received a lot of news coverage. However, a quiet news release last week regarding its 2014 guidance and capital spending did not get so much attention. However, it contained a very positive outlook that will help to push the stock price higher. The stock is down slightly since it released earnings on Halloween.
2014 Capital Expenditures:
Suncor announced that it will spend $7.8 billion in 2014 as capital expenditures and its total production will grow about 10%. The $7.8 billion of capital expenditures can be funded entirely from Suncor's internal cash flow. For the last 12 months, cash flow from operations was $9.3 billion and I expect it will increase to around $10 billion in 2014.
$4.2 billion (approximately 53%) of the $7.8 billion is allocated for growth projects, which includes the following:
- $1.925 billion is allocated for the Fort Hills Oil Sands Mining Project (Suncor has 40.8% working interest and is the operator of the project) and the MacKay River 2 project.
- $1.88 billion is allocated for growth projects in its E&P division such as the Golden Eagle project in the North Sea and the Hebron project in Eastern Canada
- $220 million is allocated for its Refining and Marketing division. Most of that amount will be used to support projects regarding its Montreal refinery, which will start to receive in-land crude supplies from Alberta.
Graph 1: Suncor's 2014 Capital Spending Plan
Source: November 20 News Release
Regarding the capital spending, Steve Williams, Suncor's CEO, said:
Our 2014 capital plan demonstrates our continued commitment to capital discipline. As evidenced by our debottlenecking initiatives and the recent Fort Hills project sanction, we will be diligent in pursuing only those projects we believe will deliver long-term shareholder value. This approach applies not only to how we view oil sands investments, but also to other opportunities in our rich suite of growth projects
2014 Production Guidance:
Suncor expects overall production to grow about 10% in 2014. Oil Sands production is forecasted to increase 14% in 2014.
Table 1: Production 2012-2014
|Total Production (Mboe/d)||549.1||545-590||565-610|
|Oil Sands (Mbpd)||324.8||350-380||400-430|
|Syncrude Canada (Mbpd)||34.4||32-33||32-36|
|E&P Canada (Mbpd)||46.5||55-60||53-58|
|E&P International (Mbpd)||89.5||72-79||80-86|
Regarding its 2014 production guidance, Steve Williams said:
Our focus on operational excellence continues to deliver results. With no major turnarounds planned in our oil sands business in 2014 and further debottlenecking opportunities, we're set for a strong year of continued production growth. In addition, we expect to drive our oil sands cash operating costs below $35 per barrel as we continue to focus on reliability and cost management
Below are 4 important catalysts that will carry the share price higher in 2014. There are also long-term drivers such as the Fort Hills project but I will mainly focus on the drivers for the next fiscal year.
(1) Operating Efficiency
One of Steve Williams's key goal was operational excellence. A year after he was appointed as CEO, there is tangible evidence of improvement at Suncor's operation. When he was appointed as CEO, cash costs per barrel in its Oil Sands business was approximately $40. In the third quarter, cash costs per barrel declined to $32.60. It will trend lower to near $31 per barrel in my opinion. Since many of Suncor's operating costs are fixed in nature, increasing production (see table 1 above) will decrease the costs per barrel. Hence, the positive effect from operating leverage can be beneficial for Suncor's shareholders.
(2) Oil Sands Growth
Oil Sands production is expected to hurdle past the 400 Mbpd mark (See graph 2 below). Suncor expects Oil Sands production to increase 14% in 2014, a remarkable growth rate if it can achieve its goal. As stated in Mr. Williams's remarks in the guidance section, the 14% production growth is possible due to limited maintenance and no major turnarounds.
Graph 2: Monthly Oil sands Production (in Mbpd)
Source: Suncor's Investor Relations
(3) Improvement in Its Downstream Business
The recent rise in the WTI/Brent and WTI/WCS spreads will benefit Suncor's refining business. When the WTI/Brent spread was near 0 in Q3, Suncor's refining profit experienced a 50% year over year decline. The WTI/Brent spread is now around $15.
(4) Return of cash to Shareholders
Investors should look forward to the Q4 earnings release in February when Suncor plans to announce revisions to its payout policy. Suncor will increase its dividend but the big question is by how much. The dividend increased 54% after the previous review conducted in April. Although the next increase won't be as gigantic, I still expect an increase of 10-20%, to bring the annual dividend per share to $0.88-$0.96 from the current $0.80. Suncor has ample of capacity to increase the dividend given projected free cash flow of 2.2 billion (projected cash flow of $10 billion minus the expected capital expenditure of $7.8 billion). The current dividend payment is only $1.2 billion and a 20% increase to $1.44 billion is very reasonable because of the large free cash flow available. In addition, Suncor still has $1.45 billion left in its share repurchase program. Any weakness in the share price will present an excellent opportunity for Suncor to accelerate its share repurchase program. Suncor's share repurchase was $343 million in Q3 and $1.5 billion in the past year.
The 2014 guidance represents a positive outlook and will propel the share price higher. (see my prior article on valuation). Suncor is likely to finish near the $45 level at the end of 2014.
Additional disclosure: This article is for informational purposes only and does not constitute an offer to buy or sell any securities discussed in the article. The stock mentioned in this article does not represent financial advice. The target price presented in this article is based on current information and are subject to change without further notice. Investors are recommended to conduct further due diligence before committing capital to any investment.