Is This Oil Company Becoming an Income Play?

Suncor's dividend rise looks attractive, but negative production growth prospects could put pressure on the stock.

Feb 6, 2014 at 9:20AM

For most independent oil and gas producers, dividend growth is not a top priority. They typically focus on bringing value to their shareholders through growing their production. Suncor Energy (NYSE:SU), whose fourth quarter production numbers were stalled in comparison with 2012 and down more than 6% consecutively, decided to take another path.

The company recently increased its quarterly dividend by 15% from $0.20 per share to $0.23 per share, taking the annual yield closer to 3%. Does this now make the company an income play?

Production is likely to decline in 2014
Suncor's production averaged 562,400 barrels of oil equivalent per day (boe/d) in 2013. The company expects to produce between 525,000 boe/d and 570,000 boe/d in 2014. It means that if Suncor doesn't hit the upper range of its guidance, its 2014 production will be lower than in 2013.

Back in November, Suncor was more optimistic and projected 2014 production of 565,000 boe/d to 610,000 boe/d. What happened since then? The company realized that its Syrian assets are worth nothing, as the civil war in the country has no end in sight.

What's more, production from Libya averaged 1,000 barrels per day in the fourth quarter compared to 44,400 barrels per day in the previous year as political unrest resulted in the closure of export terminal operations at eastern Libyan seaports. Suncor no longer counts on the fast resolution of Libyan problems.

The situation in Libya also hurts companies like Marathon Oil (NYSE:MRO) and Occidental Petroleum (NYSE:OXY). In its recent earnings report, Marathon stated that it had no liftings in Libya during the fourth quarter as a result of ongoing labor strikes at the Es Sider oil terminal.

Port strikes in Libya also influenced Occidental's production numbers, which were down more than 2% consecutively. In Occidental's case, severe weather conditions and plant turnaround in its Permian operations also contributed to the production decline.

Plenty of cash on the balance sheet could lead to more dividend increases
Suncor finished the fourth quarter with $5.2 billion of cash on its balance sheet. The company plans to increase its 2014 capital expenditures by 22%. This increase is likely to be funded with cash from operations if oil prices stay at current levels.

What's more, the company stated that it had no plans for large non-core acquisitions and no plans for significant exploration outside of existing operations in the next couple of years. This means that existing cash is likely to remain intact. As this cash must be ultimately put to work, it could mean more dividend increases and share buybacks.

Suncor has already decided to increase its share repurchase program by up to $1 billion and increase its quarterly dividend to $0.23 per share. The most notable increase happened in April of 2013, when the quarterly dividend was lifted from $0.13 per share to $0.20 per share. Given the current situation, I believe that the dividend growth trend will continue.

Bottom line
With a yield of just below 3%, Suncor could be on income investors' radar. The company has stable operational cash flow and a significant amount of cash on the balance sheet, which is likely to lead to more dividend increases.

The weakness of Canadian dollar is positive for the cost side of the story, as most of Suncor's costs are denominated in Canadian dollars. At the same time, Suncor's growth is likely to be subdued, and this could hurt its prospects for share price appreciation.

Bad news for OPEC could be good news for investors
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers