Image source: Suncor Energy Inc.
While this past year has been a tough one for the oil sector because of persistently weak prices, it has turned out to be a pretty good year for Suncor Energy (SU +1.78%). Not only did the company finally win over Canadian Oil Sands and close that merger, but the company completed a series of smart moves that bolstered its portfolio, improved its balance sheet, and set it up for future growth. Here's a look at its best moves this year.
Securing a majority stake in Syncrude
Suncor spent the early part of 2016 working hard to complete the acquisition of Canadian Oil Sands, which boosted its stake in the Syncrude joint venture to 48.74%. While that larger stake would give the company a bigger seat at the table to make decisions regarding how to operate the partnership, Suncor still wanted to own a majority stake in the venture to ensure that it could push through much-needed change. It secured that majority at the end of April after agreeing to buy Murphy Oil's (MUR +2.06%) 5% Syncrude interest for 937 million Canadian dollars. Doing so not only bolstered Suncor's stake in Syncrude up to 53.74%, it increased its oil production capacity by 17,500 barrels per day, which provided it with even more upside to a future oil price recovery.
The move to acquire Murphy Oil's stake in Syncrude really paid off because it enabled Suncor to push for meaningful change. The company was able to work quickly to remove production constraints, which led to a significant improvement in Syncrude's operating costs and reliability. Meanwhile, Suncor sees potential future synergies with its adjacent Base Mine, which could result in future improvements.
Taking a flyer on future growth
In addition to taking advantage of the downturn to bolster its oil sands portfolio, Suncor also bolstered its offshore assets in the U.K. by acquiring a 30% stake in the Rosebank project in the North Sea. The company made an initial $50 million payment upon closing for what's considered one of the largest remaining undeveloped oil resources in the U.K. North Sea. It will make another $165 million payment in the future if the project's partners approve the development of Rosebank.
U.S. oil giant Chevron (CVX +0.69%) is the operator of the project. Initially discovered in 2004, Chevron and its partners had planned to move forward with development in 2012, but high costs forced them to hold off and reevaluate the project. Chevron continues to defer the project and recently canceled an order for a floating production and storage offloading vessel as it continues to work with partners to improve Rosebank's economics. That said, this project represents a significant future growth opportunity for Suncor given the resource potential, which it acquired at an exceptionally low valuation.
Image source: Suncor Energy.
Cashing in on non-core assets
Not only has Suncor taken advantage of the downturn to bolster its oil portfolio, but the company has taken advantage of stronger market conditions for more stable assets to cash in on some of its non-core businesses. Those robust market conditions led it to announce two meaningful transactions this year that will improve its financial flexibility going forward.
In September, the company agreed to sell a 34.7% stake in the East Tank Farm Developments to the Fort McKay First Nation for CA$350. The company is constructing this tank farm to serve its Fort Hills oil sands development. One month later, the company signed a similar agreement with the Mikisew Cree First Nation for a 14.7% interest in the development for CA$147 million. These deals will not only bring in cash that Suncor can use to fund future growth projects, but they strengthen the company's partnership with these First Nations.
In addition to that, Suncor agreed to sell its Petro-Canada Lubricants business to HollyFrontier (HFC +0.00%) for CA$1.125 billion. The company noted that the sales process of this business generated significant interest from buyers, which meant HollyFrontier had to pay a very fair price to close this deal. As a result, Suncor will receive a large cash infusion when the transaction closes next year, which it can use to create more value for investors.
Investor takeaway
Suncor Energy has been very busy this year. The company made significant changes to its portfolio by taking advantage of market conditions. These conditions enabled it to buy stakes in several oil assets at low valuations while also cashing in on the higher values of several non-core assets. Because of these smart moves, Suncor Energy enters 2017 with a stronger portfolio and balance sheet than it entered 2016, which positions it to take advantage of improving market conditions in the years ahead to grow shareholder value.
