Suncor Energy Appears Undervalued At Current Levels

 |  About: Suncor Energy Inc. (SU)
by: Power Hedge

One of the biggest growth areas in the energy industry over the next several years is likely to be in the production of crude from unconventional sources. These unconventional sources of crude include offshore drilling, shale oil and oil sands. Companies that have large presences in this growing segment of the energy industry are likely to deliver returns greater than their conventional peers. One such company is Canada's Suncor Energy (NYSE:SU).

Suncor Energy is a Canadian vertically-integrated oil and gas company headquartered in Calgary, Alberta. Suncor is one of the largest companies in Canada and is the largest operator in the Athabasca oil sands. Suncor also holds interests in all currently producing fields on the Canadian East Coast. This includes the Hibernia, Terra Nova, White Rose and Hebron fields. The company also has international operations in Libya, Norway, Syria and the United Kingdom, among others.

It is unlikely that many energy investors are unaware of the resource and growth potential of the Canadian Athabasca oil sands and I have written before on the topic. Suncor's leading presence in the oil sands positions it well to be a driver of and beneficiary of this growth. This presence in the oil sands also gives Suncor an advantage that most of their big oil peers cannot match: The reserve base.

As of December 2011, Suncor had proven net reserves of 3.392 billion barrels of oil equivalent. The company's net proved and probable reserves totaled 5.847 billion barrels of oil equivalent as of the same date. Gross proved plus probable reserves totaled 7.107 billion boe. At 2011's production rate of approximately 546.0 mboe per day, the company's gross proven plus probable reserves will last for roughly 35 years if it discovers absolutely no new sources of oil during that time (and does not increase its reserves in some other way). This is a significantly longer period of time than most of its peers and should give investors some comfort as the company will not be running out of oil anytime soon.

In addition to proven and probable reserves, Suncor had best estimate gross contingent resources totaling 21.865 billion barrels of oil equivalent as of December 31, 2011. This number is the company's best estimate of the oil equivalent that will actually be recovered from the company's contingent reserves (reserves which are not considered to be commercially recoverable due to one or more contingencies). Suncor defines these contingent reserves,

"Contingent resources are those quantities of petroleum estimated to be potentially recoverable from known accumulations using established technology or technology under development, but which are not considered to be commercially recoverable due to one or more contingencies. There is no certainty that it will be commercially viable to produce any of the contingent resources. Best estimate is considered to be the best estimate of the quantity that will actually be recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the best estimate. The best estimate of potentially recoverable volumes is generally prepared independent of the risks associated with achieving commercial production."

If we assume that all of Suncor's best estimate contingent resources will eventually be recovered then this will add more than 109 years of reserve life to Suncor's already substantial reserves. Even if we assume that only a small fraction of this will ever be recovered then Suncor still has a more substantial reserve base than any of its big oil peers, relative to production.

Suncor's massive reserve base can deliver another benefit to the company and investors in it: Growth. Suncor's decade-long growth plan is to deliver 8% annual production growth as the company ramps up production to 1 million boe per day by 2020. This represents an 83.15% increase over the company's 2011 average production rate. Assuming that oil prices do not fall substantially over the coming decade, the company should be able to grow their top and bottom lines at a respectable pace.

The market does not appear to be factoring this growth potential into the current stock price. At the time of writing, Suncor trades at $33.50 per share which gives the company a market cap of $52.32 billion. This is approximately $1.81 per barrel of proved, probable and best estimate contingent reserves. Admittedly, this is not the best way to value an oil company but it does put this market cap into perspective. According to Zack s Investment Research, Suncor trades with a forward P/E of 10.42 and a PEG ratio of 0.69. This is significantly cheaper than its peers and the company should deliver good value to investors at this level if it can execute on its growth plans.

Disclosure: I am long SU.