Most large integrated oil companies make money from a variety of oil fields around the world. Not so with Canada's Suncor Energy (SU -1.24%). While globally diversified, collects the bulk of its profits from its leading position in the Canadian oil sands. It's a decision that has its share of benefits and drawbacks.

Drilling down into Suncor Energy's cash flow

In the first quarter of 2017, Suncor Energy generated 2 billion Canadian dollars ($1.5 billion) in funds from operations. More than half that cash flow, or CA$1.1 billion ($830 million), came from its oil sands operations, with the rest roughly split between its exploration and production and refining and marketing businesses. The reason why the company makes most of its money from oil sands is that more than 80% of its production comes from these assets.

An oil sands sample from a mine.

Image source: Getty Images.

Suncor Energy's oil sands business currently consists of its operated assets as well as its investment in Syncrude. Last quarter the operated assets produced 448,500 barrels per day, which was down slightly from the year-ago quarter. That said, Suncor more than made up for the decline by pushing cash costs per barrel down to $22.55 during the quarter, an improvement from $24.25 per barrel in the year-ago quarter thanks to the company's continued cost-reduction efforts. Given that crude averaged $51.85 per barrel during the quarter, Suncor generated substantial cash flow from this production.

Meanwhile, the company's share in Syncrude's production was 142,000 barrels per day during the quarter, up from 112,800 barrels per day in the year-ago quarter. That increase was due to Suncor's wise decision to take advantage of the oil market downturn and boost its interest in Syncrude by 41.74% last year after acquiring Canadian Oil Sands for its 36.74% stake in Syncrude and purchasing Murphy Oil's (MUR -0.50%) 5% stake in the entity. That said, production from the partnership would have been higher if it weren't for an explosion at a facility earlier this year, which forced the company to limit production while it addresses the problem and pulls maintenance projects forward. Because of that, and higher maintenance expenses overall, Syncrude's cash operating costs per barrel jumped from $31.35 to $45.15 last quarter, which put a squeeze on margins. That said, when costs are at more normal levels, Syncrude produces lots of money for Suncor Energy.

Oil sands open pit mining in Fort McMurray, Alberta, Canada.

Image source: Getty Images.

What does the future hold for Suncor's oil sands business?

The importance of the oil sands region to Suncor Energy's profitability is only expected to grow in the coming years. One driver of that is the company's Fort Hills oil sands mining project, which should start flowing oil later this year. Suncor Energy owns a 50.8% stake in the project, with French oil giant Total (TTE -1.08%) and Canadian miner Teck Resources (TECK -1.60%) holding the other share. It's a massive project that should supply Suncor Energy with 98,500 barrels per day when operating at full capacity. That's an increase from the company's initial estimate due to its decision to purchase an additional 10% stake in the project from Total in 2015 and recent construction changes designed to boost capacity.

The upcoming output from Fort Hills, along with the acquisitions of additional interests in Syncrude, should drive Suncor Energy's production up by a 10% compound annual rate through 2019. Furthermore, most of the company's post-2019 growth opportunities lie in the oil sands region. Because of that, the area crucial to its future growth.

That focus on the oil sands can be very beneficial because it allows Suncor Energy to drive out costs by enabling it to share services and expertise. For example, the company has had an immediate impact on Syncrude's reliability, which has risen from 71% to the mid-70s over the past year because the company had the power to force changes. That said, it's worth noting that reliability would have been even better if it weren't for the impact of last year's wildfires and this year's unplanned outages. 

Those issues serve as a reminder of how quickly Suncor's concentration in the region can turn into a disadvantage. For example, last year's wildfires in Canada cost the company nearly $1 billion in cash flow, or about 20% of the total, because it had to shut down such a large portion of its production. Meanwhile, this year's issue at Syncrude is causing similar problems for its profitability since it would have earned more money last quarter if not for the production problems and higher costs. Given those past issues, investors worry that Suncor might make less money in the future compared to its more diversified rivals if a major problem arose in the oil sands region.

Investor takeaway

Without a doubt, Suncor Energy's biggest moneymaker is its oil sands business. That focus on the area helps the company drive out costs, enabling it to make more than rivals would from these assets. That said, there's a downside to this concentration because outside factors such as wildfires, unplanned maintenance, and pipeline issues can have a noticeable impact on earnings from quarter to quarter. It's a risk Suncor Energy investors need to keep in mind since it could cause the company to underperform more diversified rivals.