Suncor Energy (SU, Financial) has been among the relatively resilient energy stocks amidst carnage in the oil and gas sector. The stock has declined by 28% from its 2014 peak of $43.17 to current levels of $31.19. Year-to-date, the stock has moved sideways and declined by 1.9% for the first three months.
While I don’t expect energy prices to surge higher anytime soon, I am bullish on Suncor Energy for the long-term and I believe that investors can consider some exposure to the stock with a strategy of gradual accumulation. This article discusses some of the key positives related to the company with focus on the recent announcement related to the progress of the cost reduction initiative.
On April 11, Suncor Energy announced that the company has made significant progress on its cost reduction initiatives. The stock has already moved higher by 5.7% post the announcement and I believe that the near-term bullish trend is likely to continue. Even if the stock remains sideways, these levels are good for long-term accumulation.
Coming to the announcement, Suncor now expects that the $600 million to $800 million in operating budget reductions will be substantially realized in 2015, ahead of the previously projected two-year period. I believe this is an important development from a cash saving and EBITDA margin perspective. The accelerated cost saving program is also indicative of the company’s strong management efficiencies in difficult times.
In addition, Suncor Energy also expects achieve the $1 billion reduction in its 2015 capital budget. This will be done while maintaining strong progress on all the key projects of the company. Therefore, the impact on growth will not be very significant even with the capital expenditure reduction.
I must mention here that the company still has a $6.4 billion capital expenditure for 2015. However, the capital expenditure is likely to be covered through internal cash flows during the year and the company’s leverage will remain in control. With a total debt to capitalization of 24% for FY14, Suncor Energy is not significantly leveraged and the debt to capitalization is likely to remain at these levels at towards the end of 2015.
In addition to the near-term positives that have kept the stock resilient, I must add here that Suncor Energy has been an excellent shareholder value creator in the last 5 years. During this period, the company’s dividend has increased at a CAGR of 25% and the company has also repurchased $5.3 billion in shares. While low oil prices will moderate the pace of shareholder value creation, the stock is certainly worth accumulating for good times.
Keeping in mind a long-term investment perspective, Suncor Energy has 4.4 billion boe in proved reserves, 7.7 billion boe in proved and probable reserves and 23.2 billion boe in contingent resources. This provides the company will have a huge drilling inventory and a robust reserve life. As of December 2014, the company had a reserve life of 38 years based on its 2P reserves.
Considering all these positives, it is not surprising to see Suncor Energy stock showing strong resilience amidst a decline in oil and gas prices. While oil prices can remain depressed for longer, it would be a good strategy to consider some exposure to the stock at these levels and keep adding on any decline. An EV/EBITDA (trailing twelve months) of 5.45 looks attractive for a stock with excellent long-term potential.
