Suncor Is an Oil Gusher With Limited Risk

| About: Suncor Energy (SU)

By Jack Barnes

If you are looking for a mining company that generates energy with its own diversified refinery division, wholly owned pipelines, and a retail gas station network, then Suncor Energy Inc. (NYSE:SU) should be at the top of your list.

Here are just a few reasons why:

  • Suncor offers diverse and reliable production at a time when civil unrest in the Middle East has increased uncertainty in the energy market.
  • It's leveraged to higher oil prices.
  • It's transparent
  • And it's reducing its debt.

There's no question about it: Suncor Energy Inc. is a "Buy."

Lots of Leverage, Little Risk

Suncor Energy Inc. was founded in 1953 and is headquartered in Calgary, Canada. The company has a market cap of $70 billion, with an enterprise value of $82.75 billion once net debt and cash are accounted for. Suncor has refineries, wholly owned pipelines and specialty lubricant products. It sells gasoline in retail locations in Canada under the Petro-Canada brand and in the United States under the Phillips 66 and Shell brands.

But most importantly, it boasts strong and reliable crude oil production from its oil sands operations. So already we're talking about a company that is vertically integrated (with its wide array of refineries, pipelines, and gas stations) and horizontally integrated (with its U.S. and Canadian retail outlets). This is Suncor's greatest strength: Diverse and reliable production and revenue.

That's particularly important in light of the civil uprisings in Egypt, Libya and Yemen. If you're anything like me, you're following the revolution in the Middle East with one eye while the other watches the price of gasoline regularly increase. And if you're looking for stable energy companies capable of leveraging higher oil prices, but not susceptible to the violence in the Middle East, you might consider this Canada-based company.

Energized by Oil Sands

Suncor produces bitumen in the Canadian oil sands, which it expects to account for 90% of its 2011 crude oil production. Furthermore, Suncor has built the necessary refining capacity to convert the tar sands' synthetic oil into refined gasoline and oil products. This process allows the company to capture the profits of the full hydrocarbon supply chain.

Suncor has refining capacity of 443,000 barrels of oil equivalent per day (boe/day), with roughly half of that capable of running on oil sand feeds. That refining capacity is spread out over both eastern and western Canada. The company also has a small refinery outside of Denver, CO, giving it U.S. domestic refining exposure.

Currently, oil sands production accounts for 330,000 barrels of oil equivalent per day (boe/day). But Suncor expects that to grow to about 800,000 boe/day by 2020.

The company expects to grow at a compounded annual growth rate (CAGR) of 8% over the next decade. Suncor often highlights that fact to show that it expects to grow its oil sands production at a CAGR of 10% and its conventional and international CAGR production at 4%. Of course, that growth is predicated on regulatory approval, due to a strategic oil sands partnership Suncor formed with Total S.A. (NYSE:TOT). This relationship includes the development of new oil sands mines and upgrades, as well as asset ownership swaps between the two firms.

This new partnership will provide Suncor with $1.75 billion in the first half of 2011. The extra liquidity will allow the company to focus on mining as its engine of growth. Suncor also has divested some of its natural gas-specific projects, allowing it to pay down its debt load over the last year. This deleveraging process already has reduced Suncor's net debt to $11.1 billion from $13.3 billion a year ago.

Finally, transparency is another big reason to like Suncor. The company posts its monthly mining results, making it easy to follow its average daily production. Investors almost never have access to that kind of data intra-quarter. Suncor investors do, and with it they can prepare for what the quarterly results should look like before they are released.

That said, it's time to "Buy" Suncor Energy. Suncor closed Friday at $46.65 a share, just shy of its 52-week peak of $48.53. That gives the stock a Price/Earnings (P/E) ratio of 26.18.

Disclosure: None

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