Seeking Alpha
Value, growth, hedge fund analyst
Profile| Send Message|
( followers)  

In order to improve its oil production from oil sands and reduce costs, Suncor Energy (NYSE:SU) is testing the feasibility of the Autonomous Hauling System, or AHS. AHS is a comprehensive fleet management system for mines that allows truck drivers to be replaced with automated technology. Suncor has employed fully equipped robotic trucks for hauling dirt and bitumen at a mine near Fort McMurray as a part of a pilot project to test AHS.

The Fort McMurray area in Wood Buffalo has faced challenges finding enough skilled labor to meet their transportation requirements. Success of the AHS could help Suncor address its staffing challenges. Another benefit of AHS is the cost reduction. Heavy hauler drivers could charge as much as $150,000 per year, so this automated technology will really help Suncor reduce costs. AHS also helps to save costs on fuel maintenance, in addition to improving efficiency, as stoppages and malfunctions decline. The automated trucks do not need breaks and can work tirelessly as opposed to a human driver.

Suncor could achieve a reduction of 15% in its operating costs by employing this technology. The company has provided a guidance of 365,000 barrels per day, or bpd, (at the midpoint) of production from its oil sands in 2013. The average operating cost for Suncor at its oil sands is approx. $35 per barrel. Just to give a perspective on the utility of the AHS, if Suncor were to replace all of its skilled manual labor with AHS, it could result into a net savings of $1.92 million per day, or about $700 million per year at the current production rates.

Rio Tinto (NYSE:RIO) is realizing the benefits by deploying the AHS developed by Komatsu at its mines in Australia. By April this year, the automated trucks used in Pilbara mines in Western Australia had moved 100 million tons of rock, and traveled more than 1 million kilometers. It controls the automated trucks through a remote operations center about 1500 kilometers away from the sites. Rio Tinto claims the advantage of automated trucks over human drivers is that they offer a much higher level of safety and can work tirelessly all day without getting distracted. The company has achieved a 10% improvement in time utilization rates by employing AHS at Pilbara. Rio Tinto aims to have more than 40 AHS trucks operational across three sites in Pilbara early next year.

Fort Hills project

One of the features of Suncor is its capital discipline, which is reflected in its ability to fund its capital expenditures through its cash flow from operations. Having long-term projects capable of providing stable cash flows will aid the company's strategy of maintaining its capital discipline. The Fort Hills oil sands project is one such project that will be an important source of cash flow for Suncor in the future. This project is a joint venture between Suncor (40.8% stake), Total E&P Canada (39.2%), and Teck Resources (NYSE:TCK) (20%). The capital investment in the project is $13.5 billion, out of which Suncor will contribute $5.5 billion. The project, which was held up for five years, has recently received the approval from its three joint venture partners to proceed with the oil sands project.

The Fort Hills project suits Suncor's diversified production portfolio, and it is considered one of the best undeveloped oil sands projects in the Athabasca region. This project is planned to achieve a total production capacity of 180,000 bpd. The estimated reserve in this oil field is 3.3 billion barrels of bitumen. The project is expected to generate strong, stable cash flows for 50 years, which falls right in line with Suncor's aim of maintaining capital discipline. The operating and sustaining cost per barrel for this project is $27 per barrel, which is $8 less than the $35 cost per barrel for Suncor at present. This could result into a cost saving of $193 million per year for the company. Additionally, the Fort Hills project could generate a gross revenue of approx. $4 million per day, or $1.46 billion per year, for Suncor.

Conclusion

Suncor Energy is a compelling investment for investors with a long-term outlook. It has 6.9 billion of proved and probable reserves in its oil fields, which have an estimated life of over 30 years. Success of its AHS program could move the needle for the company. It could help reduce the high costs associated with manpower as well as remove the bottlenecks associated with the challenges of finding enough labor. The Fort Hills oil sands project is expected to provide Suncor with sustained cash flows for 50 years, which should help its capital discipline. I suggest investors add this stock to their portfolio for long-term gains.

Source: Suncor Energy: Add This Winner To Your Portfolio