Last year was a good one for investors in Suncor Energy (NYSE:SU). Overall, the Canadian oil giant produced a total return of 15.8% including dividends. While that came up a bit short of the S&P 500's 21.8% total return, it was well ahead of the Canadian S&P/TSX Composite Index, which only rose 6% last year.
Fueling Suncor's strong performance was a combination of solid operational improvements, higher oil prices, and the start-up of its two biggest expansion projects. Those projects should deliver a growing stream of cash to investors over the next few years, which is why they should remember 2017 fondly.
Getting better as the year wore on
While Suncor Energy has yet to release its full-year financial results for 2017, the company did note last month that it finished well, producing 736,000 barrels of oil equivalent per day (BOE/D), which was in line with its record output from the third quarter. In addition to pushing production to a record level last year, Suncor drove down costs even as oil prices rebounded, which bolstered cash flow. In fact, during the third quarter, the company noted that the cash costs for its oil sands operations dropped to its lowest level in a decade. That enabled the company to produce 2.5 billion Canadian dollars ($2 billion) in cash from operating activities, up from CA$2 billion ($1.6 billion) in the year-ago quarter.
The company used its increasing cash flow to return more money to investors last year, including boosting its dividend 10% and authorizing a CA$2 billion ($1.6 billion) share repurchase program, buying back CA$578 million ($470 million) through the third quarter. It was able to do that even as it put the finishing touches on its two large expansion projects. Further, it had the resources to increase its stake in its largest project, Fort Hills, from 50.8% to 53.06% by purchasing an additional interest from French oil giant Total (NYSE:TOT). In exchange, Suncor agreed to fund CA$300 million ($244 million) of Total's capital expenses from the project. That deal gives the company an even bigger share in "what is arguably the best long-term growth project in our industry," according to CEO Steve Williams.
Set up for an even better 2018
That said, as good as last year was, 2018 should be even better. That's because the company's two major expansion projects, Fort Hills and Hebron, started pumping oil at the end of the year. In fact, Fort Hills produced 6,000 BOE/D during the fourth quarter as part of its commissioning process. However, that's just a drop in the bucket compared to what's ahead for those two facilities, which should ramp up throughout 2018.
In Suncor's estimation, production should average between 740,000 to 780,000 BOE/D this year, which at the midpoint is 10% more than last year. Further, the company can achieve that increased production even though it expects to spend CA$750 million ($611 million) less on capital projects. Those two factors, when combined with the fact that oil prices are much higher this year, suggest that the company could "generate significant free cash flow," according to its CEO. That led Williams to state, "as we look to 2018, with increasing production and reduced capital spending, we're well-positioned to return more free cash flow to shareholders through dividends and share buybacks." That wouldn't have been possible to the same extent if it wasn't for all of the company's accomplishments last year.
Ready to reap the windfall
There's no doubt that last year was one to remember. That's because the company completed two major expansion projects just as oil prices started recovering, which positions it to produce an absolute gusher of free cash flow in 2018, giving it a windfall to return to investors. Those rising shareholder returns should provide Suncor Energy's stock with the fuel it needs to continue heading higher as long as oil prices hold up.