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Summary

  • Suncor is offering visible production growth and is set to achieve a production growth target of 55-60% by the end of 2020.
  • The Fort Hills project is one of the best and undervalued oil sands mining assets and is expected to contribute 180,000 barrels per day after 2017 for next 50 years.
  • The Joslyn mining project will be contributing 157,000 barrels per day and is expected to be completed by 2017.
  • Due to its lower debt profile there is ample room for Suncor to raise its debt level to finance growth projects.
  • Suncor has been returning decent cash to its shareholders despite keeping the payout ratio at low levels.

The oil sands extraction has been a tough and costly business with comparatively thinner margins than other conventional methods of oil extraction, so investors are used to investing in large integrated oil and gas companies. However, with the recent developments in technology, oil sands extraction has become valuable. In addition, the lower returns offered by major integrated oil and gas companies in the past couple of years coupled with unclear future growth prospects has allowed Suncor Energy (NYSE:SU) to place itself as a better choice for investing.

Suncor is Canada's leading integrated energy company with operations that include oil sand development and upgrades, conventional and offshore oil and gas production and refinery operations. The company has proven and probable reserves of 7.7 billion barrels of oil equivalents with over 35 years of production at current rates. In addition, the company has measurable production growth. Let us discuss these projects in detail to construct an opinion about the company's future growth prospects.

The company's oil sands segment is the most important operating segment when it comes to operating earnings contribution; i.e. $2.1 billion and contribution in the cash flows from operations i.e. $4.6 billion. During 2013, the company produced 392500 billion barrels per day. Going forward, with major projects well-positioned the company is determined to increase the earnings and cash flow contribution of the segment supported by increasing production.

Suncor announced it would go ahead with the $13.5 billion Fort Hills oil sands project in northern Alberta. The area is recognized as one of the best and undeveloped oil sands mining assets in the region, and the company has a 40.8 percent interest in the project. Going forward, the company expects that the project will start yielding production by the end of 2017 and will ramp up fast, as it will achieve 90 percent of the planned production capacity of 180,000 barrels per day within 12 days. Suncor's portion of Fort Hills has proved and probable reserves of 1.2 billion barrels, and the company is determined to generate stable cash flows from the project for up to 50 years starting 2017.

Similarly, the company has been pursuing other oil sands mining projects such as the Joslyn mining project that is expected to have a production capacity of 157,000 barrels per day. The Voyageur South project is also of prime importance when constructing a longer term scenario of Suncor.The project extends the company's mining operations and is expected to produce 120,000 barrels per day of bitumen for an estimated life span of 40 years.

Dividends: Returning Cash to Shareholders

Over the last five years, the company has been able to grow its dividend payout at a CAGR of 35 percent. Although the historical growth does not ensure future growth, it provides insight into the management's policy of returning cash to shareholders. The figure demonstrates the company's performance with respect to returning cash to shareholders in the last 5 years.

During 2013, Suncor paid approximately $2.8 billion in cash through share repurchases and dividends. It paid $1.1 billion in dividends reflecting an increase of 54% from the previous year. Owing to the cyclical nature of the industry, the company has witnessed variability in the earnings. But despite the variability in earnings, it has managed to keep its payout ratio at lower levels (21.80 percent). Having a lower payout signifies that the company has ample room to increase the dividends, and it has been trading at a dividend yield of 2.54 percent.

Concluding Remarks

The ongoing projects will help the company to achieve production growth of around 350,000 barrels per day by the end of 2020, reflecting an increase of 55 to 60 percent from the current production level. The increase in the top line will be reflected in the generation of higher cash flows from operations and higher earnings per share.

Similarly, the lower debt profile of the company hinders it from higher interest expenses but ensures higher earnings. Shareholders are set to benefit from higher dividends and capital gains as the company is ramping up production during the next few years. Therefore, I recommend buying the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Suncor: Visible Production Growth For Growth And Value Investors