Should You Follow Warren Buffett Into This Energy Stock?

The Oracle of Omaha is looking north of the border for investment opportunities. Last week, Warren Buffett revealed through a regulatory filing that he has accumulated a stake of 17.8 million shares in Canada's largest energy producer Suncor Energy (NYSE: SU  ) . Yet in spit of shares rising sharply in recent months, it's not too late to follow Buffett into this high quality oil and gas company.

There's a new sheriff in town
Above all Warren Buffett demands that his business managers be good allocators of capital. In this respect, Buffett likes what he sees in Suncor's new chief executive Steve Williams. Mr. Williams is shifting away from his predecessor's aggressive growth philosophy in favor of creating a more disciplined company.

Among Mr. William's first acts was to abandoned his predecessor's production target of one million barrels of oil equivalent per day by the year 2020. Management followed this up by scrapping its $11.6-billion Voyageur Upgrader plant and selling $1 billion worth of conventional natural gas properties as these investments didn't provide sufficient returns for shareholders. 

Rather than bold projects, Suncor is looking for cost effective growth. Williams is targeting to grow production by 100,000 barrels of oil per day over the next three to four year through de-bottlenecking initiatives - industry slang for wringing out the kinks in its operations. The benefit of these types of projects is that they can produce high returns on investment with relatively low risk. 

It's a complete shift from the Suncor of old, Williams is no longer interested in growth for growth sake but rather maximizing shareholder value.

Brighter days ahead for the oil sands
On top of this positive development at Suncor, the prospects for the entire oil sand industry is starting to brighten. Earlier this year a shortage of pipeline capacity resulted in Canadian Western Select to trade at a $40 per barrel discount to West Texas Intermediate. But today, that discount has narrowed sharply as Canadian oil finds new ways to access the market. 

Rail has emerged as a key player in this respect. Canada will export 200,000 barrels per day to the United States by the end of 2013. That's four times more than the average 46,000 barrels per day shipped in 2012.  

Meanwhile Enbridge (NYSE: ENB  ) , responsible for transporting two thirds of Canadian oil exports to the United States, has been silently expanding its capacity. Some of the company's major initiatives include twinning its Seaway and Spearhead pipelines, eliminating bottlenecks in the Chicago area, and reversing its Line 9 route. Management projects that these efforts will boost Canadian oil exports by more than one million barrels per day by 2015. 

And while pipeline routes appear blocked to the west and the south, TransCanada  (NYSE: TRP  ) announced earlier this month that it will proceed with its Energy East proposal. If approved, the pipeline will ship 1.1 million barrels per day from terminals in Alberta to refineries on the Canadian east coast by 2018. The project already has the support of oil producers but still needs approval from the National Energy Board and several provincial governments. But if given the green-light, Energy East will single handedly replace the controversial Keystone XL pipeline. 

The bottom line is that Canadian crude will access the market. That bodes well for both Suncor and other oil sand players. 

A reasonable price
Finally, Suncor has obvious appeal for those hunting for inexpensive energy stocks as it trades at a discount to most of its peers on several metrics. Given that Suncor is one of the cheapest oil producers in Canada, it should be no surprise that an investor like Buffett would view it as an opportunity. 

Company EV/EBITDA Price/Book Price/Cash Flow Yield
Suncor Energy 4.77 1.27 5.87 2.29%
Imperial Oil 6.19 1.35 9.78 1.13%
Husky Energy 4.91 1.47 5.55 4.03%
Cenovus Energy 5.72 2.23 6.33 3.29%
Canadian Natural Resources 4.71 1.40 5.80 1.59%

Source: yCharts.com

Expect Suncor's multiple to grow going forward as spending discipline increases shareholder returns while freeing capital for dividend hikes and share buybacks. These could all serve as catalysts to close the valuation gap. 

Foolish bottom line
Suncor has a smart management team implementing a straightforward turnaround: invest only in projects that provide a sufficient return for investors and return the leftover capital to shareholders. Warren Buffett's purchase is a vote of confidence in this new strategy. And with the stock is still trading at a discount to its peers, there's still good reason to join the Oracle of Omaha.

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