Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Oil Stocks: Buyer Beware!

Thinking about buying an energy stock? Before you do, make sure that you understand three important risks – operational, capital and financial. Each company has unique exposure to these risks, so understanding the differences will help you understand your investment. I am going to compare Suncor (NYSE: SU  ) and Canadian Natural Resources (NYSE: CNQ  ) , two of Canada's largest energy companies, to illustrate the difference in risk exposure.

Source: Company reports

Operational Risk (CNQ > SU)

Suncor has more production from the oil sands, whereas Canadian Natural Resources produces more heavy oil, conventional oil and natural gas. Oil sands production is more costly than heavy or conventional oil, but production levels are more consistent. The table below shows how two generic energy companies make money – the oil price per barrel less the production costs per barrel. Notice how the company with higher production costs loses more money when oil prices decline. Given that Suncor has higher production costs, it may be considered the riskier investment from an operational perspective.

Source: Author's calculations

Capital Risk (SU > CNQ)

Many investors focus on production costs while placing less importance on the other risks. Capital spending is important, because if oil prices fall, a company may be obligated to make payments while having less cash available. As evident in Chart 2 below, Canadian Natural Resources has been spending a higher percentage of its "piggy bank" than Suncor on heavy and conventional oil projects. This is somewhat expected, given that Suncor is an oil sands company. However, notice the continued decline in oil sands spending for Suncor in Chart 3 below, now similar to Canadian Natural Resources' levels, which highlights Suncor's transition into a mature oil sands producer. Overall, the capital intensity ratios are higher for Canadian Natural Resources, which increases risk.

Source: Company reports

Financial Risk (SU > CNQ)

Suncor is an "integrated" company, which means that it has refining assets, whereas Canadian Natural Resources is "non-integrated." Refining assets generated significant amounts of cash over the past few years for Suncor due to the discounts in North American oil prices versus global prices. Not only did Canadian Natural Resources miss out on these refining gains, but weak natural gas prices also hindered cash flow growth. As evident in the chart above, Suncor has been using these cash flow to pay off debt, and return wealth to shareholders. Overall, Suncor has less debt and more cash than Canadian Natural Resources.

The Foolish bottom line
Energy companies are riskier investments than most, so knowing what risks you're exposed to is important. Through owning Suncor, an investor is more exposed to oil price risk, but should take some comfort in the company's disciplined capital spending program and relatively stronger balance sheet. Through owning Canadian Natural Resources, an investor is less exposed to oil price risk, but may not benefit as much if oil prices are strong.

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!


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 06, 2015, at 6:49 PM, captionguy wrote:

    so the moral of the story is to take risk with the one that is exposed to the oil price fluctuation and not the safer one which will probably keep your money safer but with a lot less gains.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2828802, ~/Articles/ArticleHandler.aspx, 9/3/2015 5:06:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matthew Stephenson

Today's Market

updated 7 hours ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:06 PM
CNQ $21.60 Up +0.13 +0.61%
Canadian Natural R… CAPS Rating: ****
SU $26.37 Down -0.72 -2.65%
Suncor Energy, Inc… CAPS Rating: ****