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Suncor Energy Inc.'s Most Brilliant Moves in 2017 So Far

By Matthew DiLallo - Jul 5, 2017 at 10:00PM

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While the Canadian oil sands giant hasn’t been in the headlines as much this year, it still made several smart moves that investors won’t want to miss.

After a busy 2016, the first half of 2017 has been relatively quiet for Suncor Energy (SU 0.37%). Unlike last year when it was very active in the mergers and acquisition market, the company hasn't made any notable deals. Instead, it has focused its attention on organic growth and increasing shareholder returns. Those moves are already paying off for investors and should continue to do so in the years ahead.

Tweaking Fort Hills to increase output

In February, Suncor Energy announced that it was raising the cost estimate for its Fort Hills oil sands mining project from 15.1 billion Canadian dollars ($11.7 billion) to a range of CA$16.5 billion ($12.7 billion) to CA$17 billion ($13 billion). While last year's wildfires in Canada were one of the culprits driving the increase, the other factor is that Suncor Energy made some construction design changes to boost capacity. As a result, the facility should produce 194,000 barrels per day when it reaches full capacity, up from 180,000 barrels per day. More importantly, even with that increased capital investment, the cost per flowing barrel would remain at $84,000. Because of that, the project's returns won't suffer.

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

Image source: Getty Images.

By investing that incremental capital, Suncor Energy and its partners, Total (TTE -0.29%) and Teck Resources (TECK 0.32%), will benefit from higher future production when the project starts delivering oil later this year. That incremental organic growth is worth noting considering the long lead time it takes to develop oil sands projects. In Fort Hills' case, Suncor started building it in 2013, but it won't deliver first oil until later this year, so the company's ability to make an inexpensive design change to boost capacity should pay off quickly.

Returning capital to shareholders instead of undertaking another buying binge

Over the past two years, Suncor Energy's primary focus has been on locking up majority stakes in two large oil sands assets. In late 2015, the company bought an additional 10% stake in Fort Hills from Total for CA$310 million ($239 million), boosting its ownership in the project to 50.8%. Meanwhile, it spent about CA$7.5 billion ($5.8 billion) last year to buy an additional 41.75% interest in Syncrude so that it now owns 53.74% of the entity.

This year, however, the company has been quiet on the M&A front despite the significant transaction volume in the oil sands. For example, Canadian Natural Resources spent CA$12.74 billion ($9.8 billion) to acquire a 70% stake in the Athabasca Oil Sands Project from Royal Dutch Shell and Marathon Oil. Meanwhile, Cenovus Energy spent $13.3 billion to buy out its oil sands partnership with ConocoPhillips as well as to purchase some of the U.S. oil giant's gas assets in Canada.

That said, those moves have not paid off for investors. Canadian Natural Resources' stock, for example, is down more than 11% since announcing its deal while Cenovus' is down more than 45%. Contrast that with the performance of Suncor Energy, which has only slipped 4% even though crude has declined more than 10%. Fueling that outperformance is Suncor's brilliant decision to return more capital to shareholders. Not only did the company raise its dividend 10% earlier this year but it announced plans to repurchase up to CA$2 billion (CA$1.5 billion) worth of its shares over the next year. In addition, it paid off $1.25 billion of debt to further shore up its balance sheet. Those smart capital allocation decisions are providing support for Suncor's stock at a time when both Canadian Natural Resources and Cenovus Energy flooded the market with new shares and debt just as oil prices were going lower.

One of the benefits of its steadier stock price is that Suncor could use its equity to make another deal if low oil prices cause valuations to crumble. CEO Steve Williams noted earlier in the year that the company is evaluating opportunities to make more acquisitions because several major foreign oil companies are looking to exit the country. He pointed out that Total, BP, and Chevron have all talked about selling their shares in various oil sands assets. That said, the company isn't in any rush to make another purchase because it has set a high bar for returns. However, if an incredible opportunity comes along, it has the financial resources to pounce.

Investor takeaway

While Suncor Energy has been relatively quiet so far this year, that has actually worked in its favor. Instead of making a splashy acquisition, the company increased spending on its largest growth project and started returning more money to investors. Because of that, its stock is outperforming oil and its peers, which positions it to make a deal later this year if valuations get too tempting to pass up.

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Suncor Energy Inc. Stock Quote
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