Suncor Stuck on Tar Sands

Oil sands sound kinda sexy at first -- like a really profitable trip to the beach or something. The reality is a bit less pleasant, but who would want to invest in "tar sands"? Whatever you call that gritty gunk, it's worth a lot to the investors in Canada's Suncor Energy (NYSE: SU  ) .

Second-quarter results were pretty gunky. A fire in January damaged some of the company's facilities and has impaired its ability to produce oil from the oil sands. Oil sands production averaged about 128,000 barrels per day (bpd) in the quarter, well below the nearly 226,000 bpd of a year ago. Total upstream production dropped from 264,000 bpd in the year-ago period to about 161,000 bpd this quarter. The company also produced less natural gas.

Oil prices were certainly higher for this second quarter, but not high enough to absorb that steep drop in production. As a result, net income dropped about 45%, and operating cash flow fell about 38%.

Luckily, the company had insurance and is working to return to normal capacity. Management hopes to achieve full rated capacity of 225,000 bpd in the third quarter. In addition, expansion programs underway should increase capacity to 260,000 bpd by year's end, with 350,000 bpd planned by the end of 2008.

For all of the hype and promise about oil sands, investors shouldn't forget that it's still an expensive and labor-intensive process. You can't simply grab a handful of tarry sand and wring out the oil into a bucket. Current oil prices are high enough to let these oil sands producers profit from the process, but investors shouldn't kid themselves about how easy it is.

Suncor hasn't traded like a normal energy company, and likely won't for some time to come. Instead, it's generally treated as a sort of normal energy / energy-tech hybrid. If you believe that Suncor can hit the prerelease analyst estimate of more than $4 for 2006, the stock might look pretty interesting.

Additionally, Suncor is not alone in the game. Entities such as Syncrude, ExxonMobil (NYSE: XOM  ) , and Shell (NYSE: RDS.A  ) are all involved in oil sands production. On a more positive note, there are plenty of oil sands to go around, so success will depend largely on operating efficiency.

Oil's fair in further Foolishness:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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