While Canadian oil giant Suncor Energy (NYSE:SU) has increased its dividend for 14 consecutive calendar years, it has been more than four quarters since it last raised the payout. However, the odds are pretty good that Suncor does declare an increase before the year is out, and even more likely that the payout will go higher in 2017 and beyond.
2016: A year of investment
Suncor Energy spent the bulk of this year investing in its future, spending heavily on both organic growth projects and acquisitions. On the organic growth side, the company is investing 2.7 billion Canadian dollars on two major projects: the Fort Hills oil sands mine and the Hebron offshore oil field. In addition to that, the company spent CA$9 billion on acquisitions over the past 12 months to increase its stake in the Fort Hills project as well as to bolster its stake in Syncrude, which is a major oil sands production facility in Canada.
As a result of these investments, Suncor Energy's balance sheet has started to get a little bit stretched. For example, its total debt to capitalization was 28% at the end of the second quarter, which, while within its target range of 20% to 30%, was at the higher end of the range. It also hasn't helped matters that the wildfires in Western Canada earlier this year cut deeply into cash flow. This led the company to issue equity and sell assets to get its debt to a more comfortable level. Because of all this, the company has opted to maintain its dividend for the time being.
2017: A transition to cash flow
While Suncor made substantial investments this year, it should see those investments begin to pay off in 2017. That is because construction on Hebron and Fort Hills is expected to be complete by the end of next year, resulting in those two projects starting to contribute in the fourth quarter. Further, not only will the company receive some incremental cash flow from both projects at the end of the year, but with construction winding down, Suncor only expects to spend another CA$1.4 billion in capital to complete both projects.
In addition to that, Suncor Energy wants to drive improved utilization at Syncrude now that it's the largest shareholder in that facility. Last year, Syncrude's utilization was just 70%, which is below the 90% target. It is a problem Suncor Energy believes it can fix given its history of improving the reliability of its upgraders from 80% five years ago to more than 90% this year. The company is currently working with Syncrude operator Imperial Oil (NYSEMKT:IMO) to improve the project's reliability. Imperial Oil, which is majority owned by ExxonMobil (NYSE:XOM), has been managing the venture under a 10-year management service agreement that expires this November. Given the facility's poor performance in recent years and its high costs, it is ripe for a turnaround. The good news is that things already appear to be heading in the right direction since Suncor took a greater share in the project, evidenced by Imperial Oil reporting that August was the best month ever for production, while costs dropped by $10 per barrel, saving Syncrude shareholders $1.2 billion.
All of this sets Suncor Energy up for a much stronger year in 2017. The decline in capex alone means there will likely be substantially less demand for capital while its cash flow could receive an added boost from incremental improvements at Syncrude. Finally, cash flow should start to rise in the fourth quarter, and heading into 2018, as the company's two major projects come online. Needless to say, there's reason to believe Suncor Energy could deliver a decent dividend increase next year if oil stays where it is, and a hefty increase if oil moves meaningfully higher.