Not everyone knows the name Suncor Energy (SU 1.12%), but the business the company deals in -- oil sands -- receives an awful lot of media attention, which is not necessarily the best thing, either. However, to investors, the important thing is that oil sands can be a very lucrative business, and Suncor has the numbers to back it up.
That isn't the only thing you need to know about Suncor, though. So let's look at five things that Suncor Energy's management wants you to know. All quotes below are from President and CEO Steve Williams.
We have more than enough oil
Suncor Energy has made some outsized bets on the development of Canadian oil sands. Like all bets, there are advantages and disadvantages. One major advantage for Suncor is that there is a lot of oil in these oil sands formations. Based on the company's proved reserves and its probable resources, Suncor already has over 37 years' worth of oil production. Even more astounding, estimates based on some of its unexplored licenses indicate Suncor could sustain current production levels for more than a century.
Source: Suncor Energy Investor Presentation.
With that much oil, Suncor will likely be around for many years as nations try to develop the resources necessary to accommodate a 40% increase in energy demand between now and 2040.
We don't "sell" oil sands
Through the combination of our integrated refining network and our strong midstream logistics we captured global pricing a 100% of our upstream production.
This probably sounds rather counterintuitive considering the company's largest oil source is in oil sands. However, Suncor has been one of the more successful oil sands producers because it has the facilities in place to upgrade oil sands -- also known as bitumen -- to a crude oil that more closely resembles the more traditional stuff that comes out of the ground.
Crucially, this enables Suncor to sell its crude at a price much closer to international crude benchmarks than bitumen benchmarks.
Source: Suncor Energy Investor Presentation.
This isn't just a couple of dollars per barrel were talking about here, either. During the past quarter, Suncor sold its entire oil production at an average price of $96 per barrel. By contrast, ConocoPhillips (COP -0.65%), which also has sizable production in oil sands, realized a price per barrel on the sales of straight bitumen of $68 per barrel.
We're getting very disciplined about capital allocation
[C]apital discipline is focused on profitable growth and is focused on more rigorous execution and we are spending the money more wisely.
Oil sands production is more like mining than traditional oil production. Upfront capital spending is extremely intense, but once the facility is online and producing it can generate positive cash flow for many years. To be profitable under this structure, a company must be very disciplined about spending its money. This is a lesson that Suncor learned the hard way.
Prior to the financial collapse of 2008, the idea of peak oil really took hold and had the price of oil at some of the highest levels ever seen. Between 2002 and the middle of 2008, Brent crude oil prices surged close to 600% to just over $140 per barrel. At this price level, there was almost no such thing as a poor investment when it came to producing oil, and Suncor ramped up capital spending to bring several oil sands projects online. However, when oil prices collapsed, Suncor was stuck with loads of capital still tied up in these projects.
Today, instead of focusing on ramping up production at any cost, Suncor is taking a much more measured approach that focuses on investing where profits and returns are highest, and spreading out the development of major projects over a longer period of time. This is a much more sustainable path that will give Suncor far greater financial flexibility over the long term.
We generate loads of free cash...
We are now into more than three years of generating cash on a quarterly basis above and sometimes significantly above [$2.02 billion] in the quarter.
Combine Suncor's ability to sell its oil at a higher price than most oil sands producers with its much more measured capital spending program, and you get a company that can generate gobs of free cash flow per flowing barrel. In fact, Suncor consistently posts free cash flow per flowing barrel figures that are the best in the business.
Source: Suncor Energy Investor Presentation.
... and we return it to shareholders
[The board of directors gave] approval of an immediate 22% increase to our normal dividend and this brings our quarterly payment to $0.28 per share and it pushes the five year compounded annual growth rate on the dividend to over 40%. We also renewed our share buyback program effective August 5. We are currently planning to repurchase and cancel a $1 billion worth of Suncor shares in the second half of this year.
Finally, Suncor can return its immense amounts of free cash flow to shareholders via a lucrative dividend and a large share buyback program. Since 2011, when management started focusing more on long-term cash flow than on production at any costs, Suncor has reduced its outstanding share count by more than 6%, and that pace will likely continue as the company buys back more than $1 billion in stock by the end of 2014.
What a Fool believes
Free cash flow generation, disciplined capital allocation, and shareholder-friendly initiatives such as dividends and share buybacks are a great combination to look for in the oil and gas industry, and Suncor has all of them. The company might be susceptible to commodity price swings like everyone else in the business today, but if Suncor can sustain this plan then it should do just fine as a long-term value generator. That is something that any management would want you to know.
