Ignoring Suncor Energy Inc Could Be an Expensive Choice

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

The Canadian oil sands produced an average of 1.9 million barrels per day (mmbpd) in 2012. This equates to a little more than 10% of America's 2012 oil consumption. Not only do the oil sands produce large amounts of oil, in 2013 their full cycle breakeven costs with a 9% after tax return were in the $60 to $65 per barrel range. If you look at investing as more of a marathon than a sprint, then it is hard to ignore the steady profits found in the oil sands.

The majors are already invested in the oil sands
Total (NYSE: TOT  )  has partnered with the experienced oil sands operator Suncor  (NYSE: SU  ) to help develop the Fort Hills project. The project is expected to start-up in 2017, eventually ramping up to 180 thousand barrels per day (mbpd) or 7.8% of Total's current production. Total also owns half of the Surmont 25 mbpd project with its production expected to increase to 136 mbpd in 2015. 

Growing at a slow and steady pace will eventually pay off for Total. These projects, combined with existing production, are an important part of Total's plan to boost its total production from 2.3 million barrels of oil equivalent per day (mmboepd) in 2013 to close to 3 mmboepd in 2017. Beyond simply increasing volumes it is also on track to bring its capex down from 2013 levels and boost its annual free cash flow to $15 billion by 2017.

Suncor is not a supermajor, but it is a major oil sands player with the oil sands expected to provide 76% of its 2014 upstream production. It has recently cancelled some big projects to maintain cost controls and make a more rational growth trajectory. Even with this new direction it plans to boost its oil sands output from 305 mbpd in 2011 to around 500  mbpd by 2019. Suncor is profitable with a net income of $3.7 billion and a return on capital employed (ROCE) excluding major projects in progress of 11.5% in 2013, and it hopes to boost its ROCE up to 15% in the coming years.

Royal Dutch Shell (NYSE: RDS-A  ) and Chevron (NYSE: CVX  ) are also big investors in Alberta, even if the oil sands are small portion of their overall production. The Athabasca Oil Sands Project produces 255 mbpd with Shell owning 40% and Chevron owning 20%. In absolute terms the Athabasca Oil Sands Project is big, but Shell's equity production works out to be 3.2% of its 2013 upstream production, and Chevron's portion of productions is 2% of its total 2013 upstream production. 

Chevron is doing better than Shell, thanks in part to the fact that Chevron is a smaller and more nimble company. In 2013 Chevron's total net income only fell 18% while Shell's profits fell 23%. Shell's new CEO is trying to transform the company into a leaner organization with $15 billion in asset sales planned for the 2014 to 2015 period, but he faces big challenges as upstream asset sales mean fewer reserves.  

Take growth plans with a grain of salt
Oil sands mining requires big capital investment followed by steady production. This means that existing facilities can be very cost effective with breakeven costs below some U.S. fields, but new oil sands developments are expensive. Recent estimations from Scotiabank peg existing oil sands mining full cycle breakeven costs around $60 to $65 per barrel, but new oil sands mining around $100 per barrel.

This big cost differential between existing and new facilities means that investing in companies with significant existing production is a good idea. Suncor is the perfect example as its oil sands operations are expected to produce 400 mbpd to 430 mbpd in 2014 and provide the majority of its production.

There are transportation constraints, but the situation is not dire
Lack of pipeline capacity is not a death sentence for Canadian oil. As U.S. midstream capacity keeps expanding, Canadian oil can be shipped via rail across the border and then sent down to refiners in pipelines or ships. Canadian producers have higher transportation costs, but with existing production's breakeven costs around $60 to $65 per barrel there is room to spare.

Follow the money
The oil sands have big upfront costs, but once construction is completed the profits roll in. Given the high decline rates of shale oil it is a safe bet that Suncor and Total's oil sands developments will be around long after the Bakken has peaked. With full cycle breakeven costs for existing oil sands facilities comparable to other North American plays, ignoring Suncor would be an expensive choice.

Good news for energy investors, not so much for OPEC
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 (2)

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 09, 2014, at 12:59 AM, garifolle wrote:

    I read this article, and it makes more mad against the Fool sending this add (probably only to Canadians):

    3 Reasons to Get Out of Canadian Stocks

    Canada has yielded its fair share of great companies. But unsuspecting Canadian investors could get ambushed by a glaring weakness in their portfolios. One basic investing principle holds the key to a rock-solid portfolio ... and it starts with our neighbors to the south, America.

    I could give you more then 3 reasons to get out of American Stocks and look to the North, but I think that lots of American have done that recently, considering that the low price of the Canadian dollar helps so many Canadian companies.

    I own stocks from both side of the border, but recently Canadian stocks have done much better on a average.

    If you think that this add will encourage Canadian to subscribe more to your expensive newsletter, you should at least word it differently

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: 2868681, ~/Articles/ArticleHandler.aspx, 8/27/2015 8:18:55 PM

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...

Joshua Bondy

Joshua Bondy works in the energy and materials sector. He works hard to bring to light the underlying forces that drive prices and move the market.

Today's Market

updated Moments ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

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

8/27/2015 4:01 PM
CVX $77.64 Up +4.55 +6.23%
Chevron CAPS Rating: ****
RDS-A $51.94 Up +2.45 +4.95%
Royal Dutch Shell… CAPS Rating: ****
SU $27.56 Up +1.59 +6.12%
Suncor Energy, Inc… CAPS Rating: ****
TOT $45.27 Up +2.61 +6.12%
Total (ADR) CAPS Rating: *****