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How Suncor has weathered the oil rout storm

Suncor is in the driver’s seat thanks to a solid balance sheet

Jody Chudley is is a contributor to Agora Financial’s Outstanding Investments and Real Wealth Trader.

Jul 13, 2016

by Jody Chudley

The Play

There are many companies that will never recover from this oil crash. And, from what I can tell, the vast majority of publicly traded oil and gas producers will come out the other side of this mess having lost a significant amount of shareholder value.

There are a few exceptions: companies that had management and board teams smart enough to build a business that could withstand a major storm. Why there aren’t more of them, I don’t know. It isn’t like there wasn’t a major oil crash in 2008 to remind us that this can be a dangerous business.

While the companies that fed too greedily at the debt trough are dying or are already gone, the high-class management teams with solid balance sheets are now in the driver’s seat. They find themselves looking across an industry where assets are available for sale at a fraction of the price they were two years ago and having the financial means to take advantage of the situation.

The Pick

Suncor (TSX: SU)

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It’s hard to know what the oil sands business is going to look like 30 years from today. I once would have told you oil sands operators would be gushing cash while producing oil into $200 per barrel oil prices that far out in the future.

Now, with the environmental movement really gaining traction globally and alternative fuels showing progress, my crystal ball is cloudy.

“Right now, I can buy, on the market, facilities that are operating for the same or less price than we could build ourselves.” – Suncor CEO Steve Williams, April 28

In the present day, though, it’s not hard to admire Suncor and what the company has done since oil prices crashed. With its reliable, low-­decline oil sands production, refining diversification and excellent balance sheet, Suncor has been able to not only survive the crash but take advantage of it. With an entire industry backpedaling, Suncor has gone on the offensive.

Earlier this year, Suncor struck two transactions that allowed the company to take its interest in Syncrude up from 12 per cent to 54 per cent. That was accomplished by acquiring all of Canadian Oil Sands interest and Murphy Oil’s small piece.

As you can imagine given the environment, the price paid by Suncor was pretty darn sweet. To acquire 42 per cent of Syncrude, Suncor paid $7.8 billion when the assumed debt is factored in. By way of contrast, in 2010 Sinopec paid $4.65 billion to acquire ConocoPhillips’s nine per cent of Syncrude. In effect, Suncor paid one-third the price Sinopec did.

This is the beauty of having the means to acquire when faced with a “buyer’s market” of extreme proportions. Suncor found itself with a two-thirds off sale.

The company has also been able to avoid cutting its dividend. There aren’t many producers that can say that. In fact, just because the company could, Suncor raised that dividend by a penny per share in the fall of 2015.

This isn’t the first time the company used an oil crash to make a significant acquisition. In 2009, Suncor snagged Petro-Canada in a major deal. And it isn’t a coincidence that Suncor is again the strong hand at the table. It is due to a leadership group that has positioned it to be able to do so.

The Postscript

I started taking a look at Suncor because of the share price reaction to the Fort McMurray fire. This reminded me of the BP Macondo spill that temporarily knocked the share prices of all Gulf of Mexico operators for a loop.

As far as I can tell at the time of writing, Suncor’s assets are not going to be impacted in any meaningful way by the fire. The worst the company is likely to experience is a short-term cash flow curtailment which it is more than able to handle.

When it comes to Suncor, I am much more concerned about the potential for environmental tariffs emerging over time. GMO’s Jeremy Grantham says the long term future of the oil sands is bleak because of the potential for carbon taxes (and alternative fuels). I don’t know if he’s right, but I know I can’t dismiss it as an impossibility.

Jody Chudley doesn’t own shares of SU

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