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A spate of poor financial results on the back of softening crude prices, rising costs and low netbacks has seen investors lose interest in Canada's oil sand industry. This has driven down the share prices of some of Canada's largest energy companies to the point where they are now a compelling value. Even more so when a range of emerging positive catalysts, which have the potential to push their share prices higher are considered.
Suncor is Stands Out as Under-valued
The largest domestic participant in Canada's energy sector is Suncor (NYSE: SU ) , which reported some disappointing results for the second quarter 2013. These results included net earnings of $680 million or 45 cents per common share, which year-over-year is a twofold increase
But disappointingly operating earnings and cash flow from operations declined year-over-year by 25% and 4% respectively. The decline can be attributed to an 8% year-over-year decline in oil production for the quarter to an average of 500,000 barrels of oil per day. This was caused by a combination of planned maintenance outages as well as a number of unexpected outages. These included labor disputes in Libya, the indefinite suspension of its Syrian operations and flooding in Alberta.
However, Suncor' results for the remainder of 2013 and into 2014 should improve considerably. Primarily, because of higher crude prices combined with increased production on the back of the completion of the planned maintenance at Upgrader 1, the Edmonton refinery and Firebag . Improvements to hot bitumen transport and storage infrastructure at Firebag and Suncor's Athabasca terminal, have also unlocked constrained capacity . All of which increases operational flexibility, allowing Suncor to optimize its sales mix. Suncor appears particularly cheap, trading with an enterprise-value of five times its EBITDA and fourteen times it's proved oil reserves.
Another compelling aspect is that Warren Buffett-who is considered to be the world's greatest investor-has taken a bullish view on Suncor's prospects. By the end of June 2013, Buffett's Berkshire Hathaway had amassed almost 18 million shares or just over 1% of Suncor, valued at approximately $500 million. This makes Berkshire Hathaway the 16th largest share holder in the company.
ExxonMobil makes further unconventional acquisitions in Canada
The 'king of oil' ExxonMobil (NYSE: XOM ) continues to expand its interest in Canadian oil sands. It recently acquired Conoco Phillips interest in an oil sands project in Alberta Canada. This acquisition boosted Exxon's already significant Canadian presence, through its 70% controlled Canadian subsidiary Imperial Oil (NYSEMKT: IMO ) .
The deal has seen Exxon acquire 226,000 acres of undeveloped land, roughly 93 miles south of Fort McMurray, Alberta for around $720 million. The land is known as the Clyden oil sands leasehold. When the deal closes, Exxon will own a 72% interest in the land and Imperial will control the rest.
Already Exxon has invested $11 billion in unconventional oil sands development and production in Canada and this acquisition will boost its proved oil reserves and eventually production. Like Suncor, Exxon also reported some disappointing second quarter 2013 results.
Exxon's bottom line plunged by 19% year-over-year on the back of softer prices for crude and refined products, excluding a large one time item. This has seen Exxon's share price decline leaving it trading just above it 52 week low of $84.70. As a result Exxon is now trading with an enterprise-value of six times EBITDA and 16 times its proved reserves, making it appear cheap but not as cheap as Suncor.
Imperial Oil, Exxon's Canadian subsidiary continues to perform strongly, but like its peers its second quarter financial results declined significantly because of softer crude prices. Imperial Oil's bottom line plunged by almost 50% year-over-year to $310 million, despite revenue growing by 6% year-over-year for the same period.
Investors have yet to recognize the value in Imperial Oil with the company currently trading at some particularly cheap multiples despite its share price for the year-to-date remaining flat. Imperial Oil is trading with an enterprise value of eight times EBITDA and 11 times its proved reserves, making it better value than Exxon or Suncor.
Husky Energy Surprises the Market with Better than Expected Earnings
Husky Energy (NASDAQOTH: HUSKF ) , which for some time now has failed to deliver for investors, surprised the market with some particularly strong second quarter 2013 earnings. Despite softer crude prices Husky's revenue grew 8% year-over-year to $5.6 billion. Its bottom line also grew spectacularly with net income surging by 40% year-over-year to $575 million.
Husky's results were boosted by higher than expected realized pricing, as well as lower than expected operational, general and administration costs. In addition to which, unlike Chevron and Exxon, Husky reported higher margins in its refining segment. It is also expected that Husky's performance will continue to improve over the short to medium-term, with its Liwan project expected to commence production in late 2013 or early 2014. This will add substantial production and cash growth, boosting Husky's bottom line.
While Husky is trading with an enterprise-value of six times EBITDA making it appear cheap, its lack of proved reserves is of some concern. Currently, Husky is trading with an enterprise-value of 25 times its proved reserves, which is significantly higher than Suncor, Exxon and Imperial Oil.
Foolish Bottom Line
Exxon, the world's largest publicly traded oil company, has recently made considerable investments in unconventional oil, its latest being in Canada. This along with Buffett's $500 million foray into Suncor has brought spotlight back onto Canada's unconventional oil industry. Clearly there is considerable value to be found for investors in this sector and both Suncor and Husky are well positioned to reward patient investors.
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