Historically, the extraction of oil from sand has been a costly business, so investors have tended to favor larger integrated oil and gas companies like Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS-B) which use more traditional, low-cost methods of oil extraction, over relatively small, unconventional oil sands companies such as Suncor (NYSE:SU).
However, as integrated oil majors fall out of favor with investors due to poor returns and uncertainty over future growth, Suncor is starting to look like the better investment.
One of Suncor's most attractive qualities is the company's long-term production clarity. At a time when Shell and Chevron are grappling with spiraling costs and rising levels of expenditure to maintain output, Suncor knows exactly where its oil is going to come from and how much it is going to cost to get it out of the ground.
Now, when I say long-term, I mean really long-term. At present the company has enough proved and probable resources to last for 30 years of production at current rates. Additionally, Suncor's Fort Hills project, which is expected to start up late 2017, is expected to generate a strong stable cash flow for up to 50 years. In the near-term, Suncor is targeting production growth of 250,000 barrels of oil equivalent per day, and the company knows exactly how it will do this.
Specifically, around 50,000 barrels of daily capacity will come from the start-up of new offshore fields. Another 50,000 will come from the increased utilization of oil sands production facilities. 50,000 will come from the reduction of bottlenecks in the company's operations, and the rest will be a result of additional production from the company's existing mine. All in all, if Suncor manages to keep its production cost per barrel of oil below $35 as it is currently then this additional production will add approximately $15 million a day to Suncor's bottom line -- around $5.5 billion annually.
But while Suncor has its production planned out for the next decade or so Chevron and Shell are struggling.
Indeed, Chevron recently lowered its production guidance for 2017 by around 6%, from 3.3 million barrels of oil per day, to 3.1 million barrels of oil per day. Chevron's management has cited project overruns and rising costs as a reason for this drop in expected output. The company has also slowed development of its holding in the Marcellus shale formation due to low natural gas prices.
Still, alongside this lower production forecast, Chevron revealed to investors that it plans to divest $10 billion of uncompetitive asset during the next three years, mostly in the company's oil and natural gas exploration and production business.
Meanwhile, Shell is struggling for growth, instead targeting cash returns as a way of pleasing investors. Shell has been splashing the cash during the past few years with very little to show for it, spending $4.5 billion search for oil in the Arctic only to scrap the exploration program last year. This year the company plans to slash its capital spending budget by $9 billion to $37 billion for the full year with a target to divest $15 billion of non-essential, low-return assets during the year to fund spending.
Suncor's ability to accurately forecast future production allows the company to distribute excess cash to investors at an impressive rate, and this is probably the company's most attractive quality. Over the past five years Suncor's dividend payout has risen at a combined annual growth rate of 35%, and the company has increased its payout for 12 consecutive years. Aside from this payout growth, Suncor has devoted a total of $3.8 billion to repurchase its own shares at what management describes as "opportunistic" prices. Since September 2011 the company has reduced its number of shares outstanding by 7% with this $3.8 billion allocation; a further $1.7 billion remains in the authorization.
What's more, it would appear that these returns are set to continue as Suncor exercises capital discipline, spending only as much as it can afford on capital projects (funded with cash from operations) and setting a total-debt-to-capitalization target of 20% to 25% -- at present this ratio is 22%, but this excludes cash, and on a net-debt-to-capitalization basis the ratio drops below 5%.
So, while other oil companies flounder, trying to rein in high levels of capital spending, Suncor has plenty of cash and knows exactly what it plans to do with it. As a result, shareholders are set to benefit as the company ramps up production during the next few years, which should lead to further dividend growth and share repurchases.
Rupert Hargreaves owns shares of Chevron. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.