Suncor's Recent Pullback Creates An Investment Opportunity

Aug.10.14 | About: Suncor Energy (SU)

Summary

Analysts at TheStreet.com initiated buy coverage for Suncor driven by several factors that include revenue growth, solid financial position with reasonable debt, and expanding profit margins.

Suncor continues to enjoy its lucrative position in the Canadian Oil Sands which is considered to be its primary growth driver.

Further investment in the oil sands will increase operational flexibility allowing the company to produce higher margin barrels.

Similarly, the combined integrated model coupled with improved market access allows Suncor to maximize the value of every barrel that it produces.

Suncor Energy (NYSE:SU) issued its 2Q 2014 report which conveyed a decline of 69 percent in earnings and a decline in its capital spending budget of 13 percent. During the quarter, net income fell to C$211 million ($194 million) or 14 cents per share compared to C$680 million or 45 cents last year. Net earnings for the second quarter of 2014 were negatively impacted as the company incurred after-tax impairment charges of $718 million related to its interest in the Joslyn mining project. Similarly, $297 million has been charged against the company's Libyan assets.

Oil Sands

Although the impairment charges have led to the decline in the bottom line the company was able to conduct impressive operations. The company was able to benefit from an impressive portfolio of assets that is comprised of 100 percent crude oil weighted production compared to 91 percent last year. The oil sands operation is considered the prime growth driver of the company. During the second quarter of 2014, the oil sands assets delivered production volumes of 378,000 barrels per day reflecting an increase of 37 percent from the same quarter of the previous year whose production volume was 276,000 barrels per day. Going forward, the company plans to ramp up its oil sands production to reach 550,000 to 590,000 barrels per day by the end of 2019.

Source: Second Quarter Presentation

In addition, Suncor was also able to decrease its cash cost in the oil sands by approximately 26 percent at an average of $34.10 per barrel from the previous year's $46.55 per barrel. A majority of the company's production comes from the oil sands which are expected to be Canada's greatest asset. Based on the current production the company has approximately 40 years of reserves.

Moreover, the company recently entered into agreements with General Electric (NYSE:GE). The agreements are to develop new technologies to facilitate lower water usage in the oil sands. The development of the Canadian oil sands, in which Suncor enjoys a strong presence, will further strengthen the resource base as the company will be able to conduct operations more efficiently.

In addition, Suncor has a significant refinery business. The company has been operating more than 1,500 retail locations and has a growing wind power business. These assets continue to complement each other because production from the oil sands is impressive.

Integrated Business Model Continues to be Beneficial

Suncor is well positioned to produce increasing volumes of oil. However, with the vertically integrated business model the company is able to get more revenues from production, refining and retailing oil products. This also allows the company to capitalize on the overall growth opportunities in the oil and gas sector as it provides a more balanced and diversified source of revenues. The integrated model allows the company to maximize the return on every barrel it produces.

Moreover, it also allows the company to gain additional return on its end products such as gasoline, diesel fuel, and lubricants. Car wash facilities and in-store restaurants such as A&W also contribute to the bottom line.

Concluding Remarks

Suncor enjoys a lucrative position in the oil sands, and also has enough varying assets to make it a diversified producer. It has a strong balance sheet and has been rewarding shareholders with both rising dividends and share buybacks. With the expected earnings per share of 3.48 the company has been trading at a forward P/E of 11.67. Going forward, the company is expected to continue growing its production as it has undertaken various projects. This will offer support to the company's top line especially during times of rising oil prices. The company's management is enacting effective strategies to strengthen the company's bottom line and cash flows. These factors indicate higher returns for the company's shareholder. Suncor's shares have recently pulled back and in my opinion investors who are looking for long-term income streams should consider taking a position in the stock.

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