Suncor Energy (SU), Canada’s leading integrated energy company with operations including oil sands development and conventional & offshore oil & gas development is growing at a robust pace and is undervalued. This article discusses the key investment positives related to the company.
Key Investment Positives
Big Resource Base
As of April 2014, Suncor Energy had proved reserves of 4.8 billion barrels, proved & probable reserves of 7.7 billion barrels and contingent resources of 23.2 billion barrels.
At a current enterprise value of $68 billion, Suncor Energy is trading at 8.8 times EV/2P, which is attractive in my opinion. Imperial oil (IMO) has an EV/2P of 14.1.
Suncor Energy also has 37 years of 2P reserve life and this ensures a stable production profile over the long-term. The reserve life is likely to improve over the next few years with the company having 23.2 billion barrels of contingent resources.
Suncor Energy has been doing well to monetise its huge resource base. The company’s production has increased from 456mboe per day in 2009 to 562mboe per day in 2013, representing a production CAGR of nearly 6% in the last four years.
During this period, the company’s production CAGR has been more robust at 6.4% for the oil sands as compared to conventional oil. Going forward, oil sands will continue to be a major growth driver for Suncor Energy.
Increasing Free Cash Flow
Over the last five years, Suncor Energy has invested heavily with a total capital expenditure of $27.1 billion. During the same period, the company has generated an operating cash flow of $36 billion. The operating cash flow per share has increased from $2.34 per share in 2009 to $6.27 per share in 2013.
The company’s free cash flow has improved from a negative of $1.25 billion in 2009 to a positive of $2.85 billion in 2013. The company’s excellent operating performance is indicative of the management’s efficiency.
Within the oil sands segment, the company’s cash cost per barrel has declined from $39.05 in 2011 to $37 in 2013 and this is another indication of cost efficiencies. Going forward, as the company continues to increase its production from oil sands, per barrel cost is likely to decline further.
Strong Estimated Earnings Growth For 2014
Suncor Energy’s stock has done well in the last one year with capital appreciation of 32% during this period. The capital appreciation has been backed by strong earnings growth, high free cash flow and strong dividends.
For 2014, analyst estimates peg the company’s earnings growth at 27.4%. This means that Suncor Energy is moving towards another excellent year and this should help the company’s stock to move higher.
In addition to the likely capital appreciation, Suncor Energy is also attractive from a dividend perspective. The company’s dividends have increased at a CAGR of 35% in the last five years and high free cash flow is the primary reason for strong dividends.
The stock looks attractive with a current dividend of $0.85 and a dividend yield of 2%. Considering another 35% increase in dividends for 2015, the company’s dividend is likely to increase to $1.15 per share, translating into a dividend yield of 2.8% at a current stock price of $40.95.
Suncor Energy Is Undervalued
Apart from the company’s strong fundamentals and strong production, undervaluation is the key factor for writing on this stock at this point of time. Suncor Energy is currently trading at a trailing twelve month EV/EBITDA of 5.65 and a forward (2015) PE of 10.4.
This is very attractive when compared to a close peer, Imperial Oil. The company is trading at a trailing twelve month EV/EBITDA of 11.0 and a forward (2015) PE of 11.5. Both the valuation metrics are attractive for Suncor Energy. I do consider EV/EBITDA as a better valuation metric for oil & gas companies and the EV/EBITDA for Suncor Energy does point to more upside for the stock.
Suncor Energy has strong production growth due to come from oil sands. The company has done well on the cost side and has also done well in terms of shareholder value creation.
Apart from the capital appreciation and dividends, Suncor Energy has also repurchased 8% of its outstanding shares since 2011. Therefore, the intent to create shareholder value is strong and robust free cash flows support the company’s plans.
Suncor Energy has also guided for over $7 billion in capital expenditure for 2014. With big investments continuing, the company’s growth will also continue beyond the strong expected earnings growth in 2014. With all these positive factors, I believe that investors can consider exposure to this undervalued value creator for long-term.