When investing in energy, there are two big trains of thought. You can invest in the giant companies in the industry that will weather the storms of commodity prices much better than smaller fish, or you can buy niche players that target a part of the business that is insulated from the larger industry cycles. Two stocks that embody each side of this argument are Canadian oil giant Suncor Energy (NYSE:SU) and marketing & retail specialist Sunoco LP (NYSE:SUN).
But for investors that want to make a decent return, which one is the better buy? We pitted two of our energy contributors on either side of the debate to argue which stock is the better buy. Here's what they had to say.
Ramping up into the rebound
Matt DiLallo: Canadian oil giant Suncor Energy entered the oil market downturn with a cash-rich balance sheet, which put it in the position to take advantage of opportunities that came its way. Boy did it ever, with the company spending $6 billion in the past year on acquisitions alone. On top of that, the company continued to invest in two key growth projects, which are poised to deliver first oil by the end of next year.
Because of these investments, Suncor Energy is poised to grow its production at a compound annual rate of 6% per share through 2019. That growth will come right as the oil market is projected to flip from a glut to a shortfall. With analysts at energy research firm Deloitte MarketPoint, for example, estimating that the world could be short by 1 million barrels of oil per day (bpd) by 2018, with that gap growing to 5 million bpd by 2020.
This looming deficit portends to much higher oil prices later in the decade. Given that outlook, it would appear that Suncor Energy is going to be ramping up its production at the perfect time, which could fuel enormous returns for long-term investors.
A high dividend with some earnings consistency
Tyler Crowe: The first thing that stands out when looking to invest in Sunoco is the fact that the company currently has a distribution yield of 10.8%. A yield that is higher than the average return of the stock market sounds awfully compelling, but it certainly raises a lot of concerns as to whether the company can actually sustain that payment. After all, there's no such thing as a free lunch. However, based on where Sunoco stands today, it does look entirely possible.
One thing that works very much in Sunoco's favor is that wholesale and retail fuel margins -- the bulk of Sunoco's earnings -- are relatively consistent despite the ups and downs of crude or gasoline. While we may see prices fluctuate rather wildly from time to time, the cut that wholesalers and retailers get remains remarkably stable. This should help Sunoco support that dividend over time as its cash flows will be predictable.
The other component that seems to suggest the company can keep this up for a while is that the company is still generating a bit of cash in excess to what it pays out to shareholders. This little extra cash should help management pay for what will likely be several small acquisitions over the years in order to consolidate the mature but very fragmented market of retail gas stations. Also, keeping a little cash around rather than fueling growth through debt or new shares will prevent it from getting into the same debt troubles that other master limited partnerships have faced in recent years.
All of this is predicated on one thing, though, and that is that Sunoco's management maintains a conservative approach to handling its balance sheet and payout to shareholders. While the numbers can look good today, all it takes is a few overambitious distribution hikes or one too many debt fueled growth initiatives to get a company in trouble. Hopefully management will heed the lessons that so many other companies learned the hard way.
If it can do this, though, then Sunoco's extremely high yield looks awfully attractive and could make it one of the better buys in the entire energy industry, even if it is one of the more unconventional investments for oil and gas.