IMAGE SOURCE: SUNCOR ENERGY.
It's difficult to find an oil company that has improved its standing during this two-year-long oil crash than it was before. It stands to reason, though, that some companies have survived better than others. Suncor Energy (SU +0.94%) appears to be one of those companies, and by some measures, it's in better shape than when the price of oil began to plummet in mid-2014.
Suncor displayed sound fiscal judgment before the crash, continued to lower production costs during the crash, and has set itself up for strong production growth in the future. Here's how it pulled it off.
Begin with the balance sheet ...
A common refrain in business parlance is to maintain a strong balance sheet in order to retain flexibility. Suncor is an excellent example of why that's an important concept. In 2013 and early 2014, when oil prices were at historically high prices, Suncor's cash flows from operations were well above its capital expenditures. This enabled it to build cash reserves while maintaining investment-grade credit status.
Even with this status, Suncor kept its debt levels in very reasonable territory. In 2013, its total debt-to-capitalization ration was 22%. In 2014, 2015, and through the first half of 2016, that ratio stood at 24%, 28%, and 28% respectively. Its cash on hand during that time, ranging from 2013 to mid-2016, was C$5.2 billion, C$5.5 billion, C$4 billion, and C$3 billion.
Yes, during that time, debt did increase and cash decreased. But because Suncor had built up such a strong balance sheet beforehand, its debt-to-capitalization ratio remains within its target range and its ample cash gave it plenty of flexibility to maneuver and pursue investment opportunities for future growth. As we'll see, this becomes important.
... and then reduce operating costs ...
Of course, one reason that type of fiscal discipline was possible is that Suncor continued to lower costs in its primary business, oil sands. Oil sands have always been crucial to Suncor's business model. Although it's an integrated oil company, its emphasis on oil-sands production has been notably front and center of its strategy.
Oil sands, though, can be a costly endeavor. It requires heavy investment up front and -- since this is Canada and key heavy-oil refineries are in Texas -- has to price in higher-than-average transportation costs. To combat this reality, it's critical that an upstream producer lowers costs of its production. That's exactly what Suncor did.
In 2013, Suncor's cash operating costs per barrel in oil sands was C$37. In 2014, this dropped to C$33.80, was reduced further in 2015 to C$27.85, and at the end of the first quarter of 2016 was just over C$24. These costs skyrocketed in the second quarter because the Canadian wildfires cut production in half, but let's chalk that up to a fluke and assume Suncor's cost reduction initiatives continue unabated.
... and then take advantage of others
This is really where Suncor jumped ahead of some of its peers. Because of its outstanding balance sheet, its available cash and flexibility, and its success at cost reduction, Suncor viewed the oil price crash as a growth opportunity. While a company like Canadian Oil Sands was suffering from heavy debt – particularly because of depressed oil prices – Suncor saw buying opportunities.
Beginning in 2015, Suncor made a number of acquisitions to take advantage of companies such as Canadian Oil Sands dealing with unprofitable or undesirable operations to scoop up assets in the oil sands region. Today, it has obtained majorities in the Syncrude and Fort Hills oil sands ventures. Some analysts believe it will look to make additional acquisitions in the future, but that is currently speculation.
With the increase in working interests, Suncor is expecting its current upstream production of around 600,000 barrels of oil per day to jump to 800,000 in 2019. Because most oil sands investment is up front, this should significantly increase long-term cash flows and return Suncor to profitability.
Foolish bottom line
It's difficult to say that any company is in better shape than before the crash, but Suncor can legitimately challenge that notion. The stock price is still about 40% lower than its 2014 peak, and low cash flows because of depressed oil prices could continue to challenge its strong balance sheet, but Suncor proved that maintaining fiscal discipline can help plan for unforeseen headwinds. Despite a large decrease in cash flows over the past two years, though, its balance sheet remains in decent shape and it continues to find ways to drive down operational costs of production. With production expected to increase 33% by 2019, Suncor really does look as if it's survived the crash and come out stronger than before.
