In the past, I have been positive on Suncor Energy (SU, Financial) and I still believe that the stock is among the attractive names in the oil and gas space amidst carnage in the sector. With the company releasing its revised capital guidance for 2015 recently, this article discusses the reasons to be bullish on the stock with a medium to long-term investment horizon.
Before discussing more on the company’s revised capital expenditure and its implications, I would like to point out here that I am not expecting Suncor Energy to surge over the next 3-6 months as oil prices might remain at current levels. However, I certainly believe that the stock is worth accumulating gradually at current levels. I expect minimal downside risk from these levels and significant upside potential when considering a 3-5 year investment horizon.
The first thing that is attractive about Suncor Energy is its valuation. The stock is currently trading at an EV/EBITDA valuation of 5.0 and I believe that these are attractive valuations considering the company’s growth and investment prospects to be discussed in the article.
Coming to the company’s recent revised capital expenditure guidance, Suncor Energy has reduced its 2015 capital expenditure program by $1 billion as well as sustainable operating expense reductions of $600 million to $800 million to be phased in over two years.
The company has reiterated that the balance sheet position is strong and Suncor Energy is well positioned to see through the current difficult phase and I completely agree with the opinion.
With the cut in capital expenditure, Suncor Energy still expects full year capital expenditure to be in the region of Canadian $6.2 to $6.8 billion. Therefore, the investment remains robust and Suncor Energy expects 2015 production to be in the range of 540,000boepd to 585,000boepd.
The important point from the company’s EBITDA margin perspective is that Suncor Energy expects oil sands cash operating cost of $30 to $33 per barrel and the low cash operating cost is one of the reasons to be bullish on the stock besides the strong fundamentals and robust investment plan for 2015. In 2014, Suncor Energy's cash operating cost is likely to be in the range of $31.5 to $34.5 per barrel. Therefore, there is a continued improvement on the cost side.
Coming back to the point on production growth, Suncor Energy had a total production of 411,700boepd in the third quarter of 2014. Therefore, a production forecast of 540,000boepd to 585,000boepd is excellent for 2015. The strong growth in production is likely to somewhat offset the decline in cash flow that comes from lower oil and gas prices.
I must add here that the company’s reduction in capital expenditure by $1 billion for 2015 is in line with the strategy of funding the investments from internal cash flows. Therefore, for 2015, I expect no increase in leverage. In addition, Suncor Energy has a robust cash position of $4.6 billion and this provides an additional liquidity support.
Clearly, from a fundamental perspective, Suncor Energy has minimal concerns even when the company’s current debt stands at $9.9 billion. A net debt of $5.3 billion is manageable in difficult times with continued growth in the company’s production.
In conclusion, Suncor Energy is a stock worth considering and holding at current levels. The stock surged by 5.1% on Friday’s trade on bounce back in oil prices. While I don’t expect oil prices to trend higher in the first six months of 2015, Suncor Energy has largely discounted the current oil price environment. Therefore, I believe that there is minimal downside risk at these levels while the upside potential is significant.
