Suncor Energy - A Safe Way To Ride The Rally In Oil

| About: Suncor Energy (SU)

Summary

Suncor has the best balance sheet in the oil patch.

It has efficient production methods and excellent refinery business.

Suncor is diversifying its business into renewable sources of energy.

Suncor Energy (NYSE:SU) has been very active in the current oil rout as crude has plummeted as low as $26 per barrel. WTI is currently experiencing resistance at the $40 level, as prices are hovering the mid-$30s. Suncor is doing just fine if oil stays at these levels for the long term, as it has one of the best balance sheets in the oil patch to go with one of the best operational efficiencies for both production and refinement.

Suncor might be one of the few beneficiaries of the current oil rout, as it acquired huge assets at a gigantic discount to intrinsic value in Canadian Oil Sands (OTCQX:COSWF) and Total's (NYSE:TOT) Fort Hills project stake. As oil continues to rebound back to historic norms, I believe Suncor will squeeze the synergies out of their acquisitions. The company will soar to historical highs.

Suncor - One of the Best Balance Sheets in the Oil Patch

Suncor has a very strong balance sheet; last year Suncor had over $4 billion in cash, which is one of the largest piles in the Canadian oil patch. This huge amount of cash to fall back on enabled Suncor to not only survive oil's crash, but allowed it to be able to acquire great companies with great assets that had stressed balance sheets. Suncor was able to acquire Canadian Oil Sands, whose credit rating was junk according to Moody's due to its horrendous negative cash flows.

Suncor now owns valuable assets in the Syncrude oil sands project, which are top-tier assets that will be better off in Suncor's hands as its management has a proven track record of driving operation efficiency. I suspect Suncor will be able to drive huge synergies out of the Canadian Oil Sands acquisition, as Suncor is known to drive their costs down, thus making them very profitable even with lower oil prices. This is what gives Suncor its durable competitive advantage, and why you should consider picking up shares.

Efficient Production Methods, Excellent Refinery Business

Suncor is a very efficient producer; its production costs have decreased drastically over the last five years, according to data in the annual report, as the cost to produce a barrel decreased from $33 in 2014 to less than $28 in 2015. Suncor has been cutting costs anywhere it can, while still managing to increase its production in times of turmoil. The operating costs are trending down year over year and, in 2016, I suspect the same will happen as the cost to produce a barrel could drop lower than $25. Suncor knows that low oil prices may be here to stay; in response, it has been investing heavily in making their production costs even lower.

Suncor's refinery business is their key cash flow producer when oil drops to extreme lows. The refinery segment raked in $2.2 billion in 2015 as oil continued plummeting. Suncor is able to refine over 500,000 barrels per day, which drives earnings in times of low oil prices.

Suncor Diversifying Its Business Into Renewable Sources of Energy

CEO Steve Williams has shown that Suncor is not just about pumping oil to make profit, but that there are significant opportunities in the renewable energy sector. Williams acknowledged the issue of climate change, as he stated that "climate change is happening, doing nothing is not an option we can choose." With the huge pile of cash sitting around, Suncor can definitely diversify its business into sources of renewable energy, such as solar farms that have proven to be significant sustainable plays that will steer attention away from oil, when the commodity goes down.

Although renewable energy doesn't generate the same profits as oil, it's still great to know that Suncor is keeping open mind to diversifying its business while creating better company morals. Suncor's renewable segment was able to generate $56 million of profit last year, as it produced over 400 gigawatt hours of renewable energy. Williams looks determined to grow its renewable energy business, and I think this is an interesting move as one day I believe renewable energy will surpass the burning of fossil fuels. You can be comfortable knowing Suncor will aid in this transition, as its business changes to go along with this shift.

Conclusion

Suncor is currently trading at $26.66, with a bountiful dividend yield of 3.24%, which Williams is determined to keep safe. I believe this is true due to the record levels of cash Suncor is holding, as well as its efficient projects that are still able to generate positive cash flow in times of crude weakness. Suncor is a great long-term pick due to its strong balance sheet, which allows it to lower production costs, acquire peers in the oil sands at a discount, and invest in renewable energy -- which is a relatively new segment for Suncor.

If oil stays lower for the long term, meaning under $30 for over five years, Suncor will definitely have to cut into its bottom line. If this worst-case scenario does happen, Suncor will have to cut its dividend along with every other company in the sector. While I do believe Suncor will not be affected as badly as its peers in this kind of environment, I do think such conditions will limit the company's ability to invest in its business; as such, growth might be limited if oil does stay lower for longer. However, if oil recovers to the $80-$100 range, I see Suncor reaching new highs as earnings will jump due to synergies being juiced out of its acquisitions, as it continues to unlock value in the oil patch.

Disclosure: I am/we are long SU.

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.