Suncor Energy (SU, Financial) has been among oil and gas stocks that have not witnessed deep correction in 2015. For YTD15, the stock has declined by 8.6%. The stock has limited downside potential from these levels, but a strong upside potential with a two- to three-year investment horizon. Suncor Energy is worth considering for your portfolio.
The first point that I like about Suncor Energy is the company has been investing within its means in difficult times. For 1Q15, the company’s operating cash flow was $1.5 billion, and the capital expenditure amounted to $1.3 billion. For 2Q15, the operating cash flow and capital expenditure was $2.2 billion and $1.6 billion, respectively.
Even for the remainder of 2015, the investments are in line with the company’s operating cash flow outlook. I must add here that Suncor Energy has $4.9 billion in cash and equivalents as of June 30 to support investments over the long term. In addition, $6.9 billion in undrawn credit facility translates into total liquidity position of $11.8 billion. Therefore, the company is fully financed for investments in FY15 and potentially in FY16.
While the company’s balance sheet has $14 billion in debt, it’s not a concern, as debt servicing will be comfortable. To put things into perspective, the company generated nearly $4.5 billion in EBITDA for 1H15, and the cash interest paid during the same period was $424 million. Therefore, the EBITDA interest coverage is robust and gives Suncor Energy the flexibility to leverage further for growth in the coming years.
From an asset perspective, Suncor Energy is equally attractive with the company having proved reserves of 4.7 billion barrels of oil equivalent and 2P reserves of 7.5 billion barrels of oil equivalent. This translates into a reserve life of 35 years and gives Suncor Energy a strong platform to boost production significantly once oil price trends higher.
Another big positive for Suncor Energy is the fact that the production cost from oil sands has been declining on a continued basis. This allows the company to increase production and report strong cash flows even in a low oil price environment. For 2Q15, production from oil sands increased by 45,000boepd from the prior year quarter, to 423,800boepd. While the cash operating cost in oil sands was $39.05 per barrel in 2011, the cost has declined to $28.2 in the first half of 2015. Therefore, Suncor Energy has done exceedingly well on the cost front, and this speaks volumes about the management efficiency.
The company’s low cost of operating, strong cash flows and management confidence is reflected in the point that Suncor Energy increased quarterly dividends to $0.29 per share, translating into a healthy dividend yield of 4.0% considering the current stock price of $29.04.
I expect the stock to move higher in addition to the robust dividend payout, and these factors make Suncor Energy an excellent stock to consider at current levels. I must also add here that Suncor Energy has an excellent debt maturity profile with no debt maturity coming before 2018. Therefore, there is no near-term debt refinancing pressure, and the company is well-funded for investments over the next 12 to 18 months.
With all these positives, Suncor Energy is trading at an EV/EBITDA of 5.9 and the valuation is certainly attractive. The fact that the stock has seen minimal correction in FY15 shows it is undervalued considering the big assets base, strong growth momentum, low operating cost and high financial flexibility.
As the energy sector is depressed and investors are generally avoiding the sector, this is a good chance to consider exposure to a value stock that has strong growth potential over the next three to five years.
