As I wrote in early March, sustained higher oil prices should provide attractive investment opportunities in the oil sector. One of the companies that I highlighted was Suncor
Suncor's core business model is based on mining oil sands in Alberta, Canada. Oil sands are deposits of bitumen, a heavy, black viscous oil that must be rigorously treated to convert it into an upgraded crude oil before it can be used by refineries to produce gasoline and diesel fuels.
The business model is highly profitable. Over the last five years, Suncor has an average operating margin of 16% and a net profit margin of 10.5%. While the model is highly capital intensive, management estimates that with oil prices at $22 per barrel, it can maintain a 15% return on capital employed (ROCE). Higher oil prices significantly increase profitability -- in the last year, operating profits were 29% and net margin jumped to 17.5%.
The company is able to maintain this level of profitability despite its rapid growth. Suncor is still a relatively small company ($4.4 billion in revenues) with an impressive track record of growth and consistently high profit margins. Over the last five years, it has grown revenue 18% per year and earnings per share 23% per year.
The company estimates that from 2004 to 2008, it will be able to grow production about 10% per year. That is significantly faster than industry giants BP
Despite the company's high level of profitability and anticipated growth, the stock still trades at a relatively modest forward price-to-earnings ratio of 14. At 0.7%, its dividend yield is not as high as companies such as BP (which yields 3.7%), so the stock is probably not appropriate for income-seeking investors (who can refer to the Fool'sIncome Investor for ideas on high dividend-paying stocks). But for investors who are not focused on current income from their equity holdings, Suncor remains attractive based on strong fundamentals and a modest valuation.
Fool contributor Salim Haji lives in Denver and does not own shares in any of the companies mentioned.