5 Things Suncor's Management Thinks You Should Monitor This Quarter

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Even though oil prices haven't been cooperating that much for producers in recent months, Suncor (SU 1.08%) has had a pretty good run as it has been wheeling and dealing to become an even bigger player in the Canadian oil market. While the company's line hasn't been the most impressive thing in recent quarters, Suncor's management has its sights on things that will most likely lead to better days ahead. Here are several quotes from Suncor's most recent conference call that lay out what investors should be focusing on as we get closer to the company's next earnings report.

Keeping an eye on costs

As is the case for so many other oil and gas producers, cutting costs has been the name of the game for Suncor. Over the past couple of years, the company has done a decent job of keeping spending in line, but CEO Steven Williams thinks the company can do even better this year:

A year ago, we committed to reducing operating costs by $600 million to $800 million over a two-year period. By the end of 2015, we'd actually delivered almost $1 billion in savings. And this year, we've set a target of a further $500 million in reduction, and we're on track to achieve that goal.

Now that we're a little more than halfway through the year, it would be a good time to see if the company is on track to meet these goals.

Syncrude

Suncor has been one of the most aggressive acquirers in the oil and gas industry as of late. Two of its most important acquisitions have been its increased stake in the Syncrude project. Now that Suncor is the majority owner and primary operator, Williams is intent on increasing the reliability and profitability of the joint venture:

In the past few weeks, we've been working closely with other Syncrude owners and the operator to chart the best path forward toward improved performance and profitability. And we believe there is significant potential to reduce cost, improve reliability and capture the synergies between Syncrude and Suncor's operation. It's still very early days in what will be a multiyear performance improvement journey, but we have considerable reason for optimism. The very strong first quarter provides a glimpse into the potential of Syncrude. Now, we expect it will take both time and effort to reach a point where the operation can sustain this level of performance, but we have the knowledge, the experience and have no doubts we are definitely up for the challenge.

This was a pretty newsworthy acquisition, so investors can likely expect to get some updates on it this coming quarter.

Getting the next big thing up and running

While the company has been very conscious of spending as of late, Suncor has kept moving full steam ahead with two of its major projects: its Fort Hills, Alberta, joint venture with Total (TTE -0.58%) and Teck Resources, and its Hebron, Newfoundland and Labrador, offshore platform. According to Williams, these have so far remained on track:

At Fort Hills, all critical milestones continue to be met. Engineering is substantially finished, and construction has now surpassed 55% complete. And the low oil price environment has allowed us to contain our contracting cost, improve the construction productivity and attract very high-quality labor. And as a result, we remain on target on both cost and schedule, and we continue to expect first oil in the fourth quarter of next year.

Meanwhile, on the Hebron project, construction of the gravity-based structure and topsides continued in the first quarter. Like Fort Hills, Hebron continues to target production of first oil by the end of next year.

Chances are there hasn't been any major changes to the timetable for these two projects, but investors should check in anyway with their progress, just in case. 

Big production jump

With our increased stake in Syncrude and the Fort Hills and Hebron projects on target for first oil next year, Suncor expects to profitably grow production by over 40% versus 2015. We now forecast our production -- our total production to exceed 800,000 barrels per day by 2019.
-- Williams

Suncor is a unique investment opportunity right now. As an integrated oil and gas company, it offers the stability that comes with having assets in all parts of the oil and gas value chain. At the same time, though, it has much more production potential compared to the traditional Big Oil companies.

Data source: Company investor presentations.

Williams thinks Wall Street has focused too much on Suncor's integrated business model and not sufficiently on its ability to grow, and that it makes the company a bit undervalued:

Our integrated model is widely recognized as providing a hedge against low oil prices, which has made us a good defensive investment over the past 18 months. However, many people are under the mistaken impression that the integrated model somehow limits our upside as oil prices recover. Nothing could be further from the truth.

Saying that all production will come on line and it actually happening are two completely different things. This will be a good long-term target for investors to check up on in the coming quarters. 

Staying balanced

As much as the CEO wants you to think about the growth potential at Suncor, CFO Alister Cowan is much more focused on keeping the company's financial house in order: 

With prices at the low end of the cycle and peak growth spending on both Fort Hills and Hebron, 2016 does present a funding gap. However, we believe that gap is manageable, given the strength of our balance sheet. Our net debt to cash flow is running at 2.5 times, and our total debt to capitalization is just over 29%. We have almost $10 billion in liquidity, including over $3 billion in cash. And importantly, we continue to attract a strong investment-grade credit rating, while many others in the sector have endured multiple-notch downgrades.

That debt-to-capital ratio is a little higher than that of most of its integrated oil and gas peers, but that can also be expected during a long downturn in oil prices. As the oil market improves and Suncor wraps up some of its projects, it would be worth it to see the company cut its debt load a little to ensure more stability when the next crash comes.