Suncor Energy (NYSE:SU) recently announced that it plans to sell 71.5 million shares of its common stock for $2 billion. The company will primarily use the funds to finance a previously announced deal to purchase an additional 5% stake in the Syncrude oil sands joint venture. Suncor can sell an additional 10.5 million shares within 30 days of the initial offering.
The short run and the long run
The stock offering will have both short-term and long-term impacts. Stock dilution has already knocked the stock down two percentage points, as potentially 82 million shares flood the market. By raising equity through a share issuance, Suncor has essentially asked its shareholders to bear the pain of investing toward the future. Between the recent oil sands production stoppage and tough first-quarter earnings that were caused by low oil prices, it shouldn't come as a surprise that some shareholders and analysts have questioned the wisdom of the offering.
Long term, the stock offering might prove to be a much-more-savvy move. In addition to reducing debt and having flexibility for future growth opportunities, the move shores up Suncor's majority ownership of the Syncrude consortium by increasing its stake to 53.74%. This follows the purchase of Canadian Oil Sands earlier in the year that boosted its stake in Syncrude, from 12% to 48.74%.
Further, an oft-repeated criticism of Suncor is its lack of long-term growth potential. In addition to the stock offering, Suncor has significant cash reserves, and is planning asset divestments of more than $1 billion by the end of the year. Rising oil prices can only increase cash flow, but as an investor, you should pay attention to how Suncor is investing in projects that will come online in the three-to-five year time frame. The stock offering will help its short-term goals, but it also provides a great opportunity to focus a little farther down the road.
Foolish bottom line
This is not the first instance of Suncor utilizing share issuances to invest in operations. Suncor recently issued shares to pay for Canadian Oil Sands earlier this year. When taking into account the additional capital expenditures necessary for expanded production, this required an increase in the price of oil just to break even. These dilutive moves suggest a bullish opinion of oil prices, as its investments require a much-higher price to truly pay off for current shareholders.
Suncor is doubling down on the future of oil sands, attempting to increase its barrels-per-day production just as it set a record-low cash-operating cost per barrel in the first quarter. By shoring up its majority ownership in Syncrude, and removing debt from its balance sheet, Suncor can put itself on sound financial footing as it emerges from the Canadian wildfires and low oil prices.
David Lettis 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.