Over the past few weeks, shares of Suncor Energy (SU) have fallen precipitously, along with the price of oil and the broader market. At the end of last week, shares were down 8.95% over the trailing four-week period. The shares began to recover on Monday and continued to trend upward on Tuesday, along with an uptick in oil prices (and the broader market) over those days. This is roughly in line with its big oil peers, a fact that I illustrated in my most recent weekly performance report.
Suncor has one quality that its fellow big oil peers lack, however. This is the size of its reserves. In the middle of March, I published an article "Suncor Energy Appears Undervalued at Current Levels" in which I discussed the company's reserves. As of December 2011, Suncor Energy had net proven and probable reserves of 5.847 billion barrels of oil equivalent. The company's gross proven and probable reserves totaled 7.107 billion barrels of oil equivalent. This provides the company with approximately 35 years of reserve life at its last reported production rate of 546.0 mboe per day. This compares favorably to many of the company's peers. For example, Total (TOT) has sufficient reserves to maintain production for 13 years at its production rate as of the last annual report. Eni (E) has sufficient reserves to maintain its current production for 12.4 years, according to its last annual report.
Suncor is the largest player in the development of Canada's Athabasca oil sands and this provides a strong source of growth potential for the company. Suncor's decade-long growth plan is to generate 8% annual production growth from now until 2020. It will do this by growing its average daily production to 1.0 million barrels of oil equivalent over the same time frame. This represents a total increase of 83.15% production growth over the company's 2011 average production rate.
The actual profit growth that this increase in production will produce is somewhat uncertain, as it is highly dependent on oil prices. If oil prices remain above $100 on average for the rest of the decade, then Suncor's profits should grow at a respectable pace. There will likely be some volatility in this price between now and 2020. Overall though, I do expect that the price will be, on average, high enough to allow Suncor to deliver strong growth.
The market seems to be completely ignoring this growth potential. I stated in the introduction to this article that Suncor's recent share price decline has been in line with the share price declines of its big oil peers. However, these companies do not have the same growth potential that Suncor does. This provides investors with an opportunity here as it has resulted in the stock being dramatically undervalued.
Suncor stock closed at $31.69 on Tuesday, April 17. The stock closed at $30.43 in after-hours trading on Friday, and so increased about 4.14%. This is relatively in line with the market and its peers, although it is a greater return than some peers managed to deliver over the same time frame. This increase accompanied an increase in oil prices but, once again, Suncor's share price gain was larger than the percentage increase in crude prices. According to Zack s Investment Research, Suncor trades at a PEG ratio of 0.63 at present levels. This reinforces my conviction that the company is undervalued relative to its growth potential.
Suncor stock appears undervalued at the current price. We could see another fall in the market and oil prices if any more bad news comes out of Europe, Iran, China, the BLS, or elsewhere in the near future. Should that happen, Suncor's stock will almost certainly retreat like it did over the last month and this would provide an even more attractive entry price.
Disclosure: I am long SU.