Great investments usually have three key things going for them. First, they have long-term business models in place.
Secondly, they are highly cash generative and have a history of remaining that way. And lastly, all great investments have management teams behind them that know how to look after shareholders.
Suncor Energy (NYSE:SU), one of the worlds leading producer of oil from tar sands, meet's all three of these key criteria.
One of Suncor's most attractive qualities is the company's long-term plans for growth. At a time when oil majors like Royal Dutch Shell (NYSE:RDS-A) and ExxonMobil (NYSE:XOM) are grappling with spiraling costs and rising capital expenditure to maintain current output, Suncor knows exactly where its oil is going to come from and how much it is going to cost to get it out of the ground.
Now, when I say long-term, I mean really long-term. At present the company has enough proved and probable resources to last for 30 years of production at current rates. Exxon's reserves life at current production rates is 16 years.
Additionally, Suncor's Fort Hills project, which is expected to start up late 2017, is expected to generate a strong stable cash flow for up to 50 years.
In the near-term, Suncor is targeting production growth of 250,000 barrels of oil equivalent per day, and the company knows exactly how it will do this.
As shown in the table, Suncor is planning to ramp up production through a combination of operational improvements and production ramp-ups.
All in all, if Suncor manages to keep its production cost per barrel of oil below $35 as it is currently, then this additional production will add approximately $15 million a day to Suncor's bottom line -- around $5.5 billion annually.
Once again, Exxon and Shell lag Suncor when it comes to production growth. Exxon's production is expected to tick up slightly to 4.3 million barrels per day by 2017, a 3% increase. This tiny expansion in production comes as Exxon has more projects coming onstream during 2014 than in any other year in its history. Yet these projects are only going to offset declining production from mature fields and the loss of the company's share in the foreign companies' oil concession in Abu Dhabi, which expired in January.
Meanwhile, Shell is trying to restructure and is targeting cost savings over output growth for the next few years.
Plenty of cash
Oil production from sand is a relatively high-cost method of producing oil. For example, Suncor stated that the cost of extracting oil from sand was around $35 per barrel on average during 2013. In comparison, based on figures from 2011, ExxonMobil average cost of production was around $11 per barrel.
Nevertheless, as the price of oil remains around $100, Suncor was able to pocket a solid 60% gross margin during 2013, and there is no reason why this should change soon.
What's more, technological developments have driven the cost of oil production from sand lower during the past few decades, and this is set to continue.
Indeed back in 1967, when Suncor became the world's first oil sands operation, the company's technology of choice for production was the drag-line and bucket wheel. The drag-line and bucket wheel, allowed Suncor to produce 45,000 barrels of oil per day.
By 1992, the drag-lines were replaced with trucks and hydraulic shovels, allowing the company to ramp up production to 100,000 barrels per day.
Now Suncor is introducing a new technology, the Autonomous Haulage System, which involves operating autonomous trucks in a continuous fashion. The greatest advantage for using this system is lower costs, realized from greater fuel efficiency, less wear and tear, and more volume hauled.
Apparently the company won't save on manpower costs, however, as it seems the same number of operators are required in other roles.
Suncor's ability to accurately forecast future production allows the company to distribute excess cash to investors at an impressive rate, and this is probably the company's most attractive quality.
Over the past five years Suncor's dividend payout has risen at a combined annual growth rate of 35%, and the company has increased its payout for 12 consecutive years.
Aside from this payout growth, Suncor has devoted a total of $3.8 billion to repurchase its own shares at what management describes as "opportunistic" prices. Since September 2011, the company has reduced its number of shares outstanding by 7% with this $3.8 billion allocation; a further $1.7 billion remains in the authorization.
What's more, it would appear that these returns are set to continue as Suncor exercises capital discipline, spending only as much as it can afford on capital projects (funded with cash from operations) and setting a total-debt-to-capitalization target of 20% to 25% -- at present this ratio is 22%, but this excludes cash, and on a net-debt-to-capitalization basis the ratio drops below 5%.
So all in all, Suncor has many attractive qualities and it looks as if the company is in if for the long-term. With production expanding, the company's dividend growing and planet of cash for additional shareholder returns, Suncor looks like a long-term, get rich slowly investment.
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Rupert Hargreaves 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.