Canadian energy-industry player Suncor Energy (SU +1.64%) may not be a household name, like Sunoco LP (SUN 1.05%) or ConocoPhillips (COP 0.70%), but oil-and-gas investors will want to keep an eye on this stock, which has handily outperformed the other two over the past year.
Still, a past-outperformance trend doesn't necessarily make a top stock. Here are three things you need to know about Suncor before you even think about whether to buy.
Suncor is Canada's largest integrated oil-and-gas company, bucking the trend of moving away from oil sands. Image source: Getty Images.
It's not that kind of sun
The name "Suncor Energy" might make you think it's a solar company, but it's not. Suncor is a major oil-and-gas exploration-and-production company with particular emphasis on Canadian oil sands. It picked up the "Sun" part of its name way back in 1917, when the U.S.-based Sun Company -- the former parent of Sunoco LP -- opened up shop in Canada.
In 1963, Sun first began investing in Canadian oil sands. Suncor was created in 1979, when the Sun Company merged its Canadian operations with its Canadian oil-sands business. The company went public in 1992. Suncor still gets the vast majority of its oil from Canadian oil sands. In 2017, the company expects to produce about 700,000 barrels of oil equivalents per day, with between 555,000 and 600,000 coming from oil sands.
The company also has exploration and production operations around the globe in the United Kingdom, Norway, Libya, Syria, and elsewhere in North America, but these operations are dwarfed by the company's immense Canadian oil-sands presence. Canadian oil sands make up 6.9 billion barrels of the 7.7 billion barrels of Suncor reserves.
It's complicated
Some oil-and-gas exploration-and-production companies -- like the largest in the U.S., ConocoPhillips -- exclusively make their money drilling for oil and gas. Today's Sunoco LP, on the other hand, is a downstream oil company with no exploration-and-production assets. By contrast, Suncor is an integrated company -- Canada's largest, in fact -- with midstream (transportation and storage) and downstream (refining and marketing) assets. But describing those assets isn't exactly straightforward.
Suncor likes to talk about its wind-power business, but that -- along with its entire midstream operations -- only generated $15 million Canadian in revenue last year compared to $4 billion Canadian from its production operations in the oil sands and elsewhere. The company's downstream business also generates a big chunk of revenue: $2.6 billion Canadian in 2016.
This might sound strange since there are no Suncor service stations like there are Sunoco or BP (BP +1.18%) stations. Suncor brands its gas as "Petro-Canada" and owns more than 1,500 Petro-Canada retail and wholesale outlets across the country. But the company also has significant U.S. operations, operating under agreements with Royal Dutch Shell and ExxonMobil, which authorize Suncor to use the Shell, Exxon, and Mobil brands at its own retail sites and to its wholesalers. Suncor is particularly active in Colorado, where it supplies about 35% of Colorado's gasoline-and-diesel fuel demand, and has a refinery.
Lastly, because oil sands contain a large amount of bitumen, Suncor refines quite a bit of asphalt, in addition to fuel. The company sold off its lubricants-refining business earlier this year for $1.125 billion Canadian -- so it's a complex company with a lot of moving parts.
Sands trap
Suncor's primary business, though, is oil-sands production. Canadian oil sands have been especially hard hit by the recent weakness in oil prices. Petroleum locked in oil sands is notoriously difficult and expensive to extract and tends to be heavy crude, which is also expensive to refine -- so expensive, in fact, that many companies have been divesting themselves of their oil-sands holdings recently. ConocoPhillips is a prime example, having sold its entire oil-sands business to Canadian company Cenovus in April.
And yet, in spite of this, Suncor claims its cost of production is very low -- surprisingly low, in fact. In the company's 2016 annual report, CEO Steve Williams put the average cost to extract a barrel of oil from Suncor's oil-sands operations at $26.50 Canadian -- or less than $20 U.S.
Of course, there are additional costs besides extraction, and Suncor needs to make a profit on each barrel to keep its business afloat. But some analysts have speculated that, at those extraction prices, Suncor might be able to break even with oil prices as low as $30 or $40 per barrel. In the first quarter of 2017, ConocoPhillips saw negative cash flow, with oil hovering around $50/barrel, and BP recently stated its breakeven point would rise to $60/barrel. If Suncor can make a profit at far lower prices, then it bodes well for its future, even in an uncertain energy market.
Investor takeaway
Far from being a solar-energy company or a vulnerable exploration-and-production company, Suncor is actually a major integrated oil-and-gas company with surprisingly strong operations in an area -- Canadian oil sands -- that other companies are fleeing left and right. Investors looking for some stability in the oil patch will appreciate the company's robust downstream operations. And its 3.1% dividend yield isn't bad, either.
Smart investors will want to keep an eye on this unique oil industry player.
