The carnage in oil and gas stocks has resulted in some stocks trading at cheap valuations and these stocks can be considered for the long term. While the near-term outlook for oil still remains uncertain, investors can gradually accumulate some interesting names over the next 3-6 months.
Suncor Energy (SU, Financial) is one stock that deserves attention for the current valuation and for the long-term prospects that the company holds. Suncor Energy is currently trading at an EV/EBITDA of 4.6 and forward PE (December 2015) of 12.3. I believe that these are very cheap levels and the discussion to follow will elaborate on the reason for considering the stock very attractive at current levels.
The first reason to be bullish on the stock is the company’s operating cost. As oil prices remain lower, I am looking for stocks that have a low cash operating cost. A low cash operating cost will mean that strong production and decent profits can sustain even when oil prices remain at current levels of $60 per barrel. For Suncor Energy, the company expects the cash operating cost for 2014 to be in the range of $31.5 to $34.5 per barrel. The company has reduced the cash operating cost in the last few years and I believe that this trend is likely to continue in 2015. At around $30 to $35 cash operating cost, Suncor Energy will remain profitable in the coming year.
The second reason to be bullish on Suncor Energy is the company’s financials. As of September 2014, the company had a cash position of $4.6 billion and I believe that a strong cash position ensures that the company’s near-term investment activities are fully funded.
Besides a healthy cash position, Suncor Energy has generated a free cash flow of $2.7 billion in the last twelve months. I believe that this trend will continue with low operating cost and the company’s capital expenditure in the coming year will be adjusted downwards in line with the operating cash flow expectations. This will keep the company’s balance sheet robust even in difficult times.
I must mention here that Suncor Energy currently offers a dividend of $0.98 per share and the stock has a dividend yield of 3.5% considering the current stock price of $32.47. I believe that the dividend yield is healthy and the dividend payout is also sustainable through 2015.
Even if the company’s free cash flow generation declines by 40% to 50% in the coming year (worst case scenario), Suncor Energy will still be in a position to pay dividends comfortably. Therefore, a healthy dividend payout is also another reason to remain invested in the stock besides the capital appreciation prospects due to undervaluation.
Suncor Energy had released its 2015 investment guidance in November with an estimated capital investment plan of $7.2 to $7.8 billion (Canadian dollar). With oil prices having slumped in December, I expect a revised capital expenditure guidance to come towards the end of December or on January 2015. A cut in capital expenditure would be good as the company needs to maintain its financial health. However, even if the capital expenditure is reduced by 50%, the company will still be making a big investment in the coming year.
Considering the factors of attractive valuation, high level of cash, low cash operating expense and high level of expected investment in 2015, Suncor Energy is a stock worth considering on the current decline in oil and gas stocks. The company is well positioned financially to see through the current crisis and I expect the stock to surge when oil prices recover.
