This time last year, lots of investors were surprised to see that Warren Buffett's Berkshire Hathaway had bought a pretty sizable stake in Canadian oil sands producer Suncor Energy. At the time, it seemed a little odd. After all, Canadian oil sands operations were suffering from a wide array of issues that prevented them from realizing their potential. What many investors were missing by looking at this, though, were the spectacular business model and future prospects for Suncor.

I can't guarantee that shares of Suncor Energy will rise over a certain time period -- there are simply too many unknown variables to make a prediction that bold. However, there are plenty of reasons to believe Suncor's stock could rise. Let's take a look at three of these reasons to help you better understand the business and the future potential for this stock.

1. Massive resource potential

For any company that explores and produces oil and gas, the greatest challenge is that it is constantly looking to replace the reserves it produces. The best way to describe this is like taking two steps back for every three steps forward. Also, because of reservoir characteristics, well production declines over time. This also means companies need to spend large amounts of money replacing declining production with new sources.

For the most part, this isn't the case with Suncor. The first thing Suncor has that just about every other company doesn't is more proved reserves than it knows what to do with. At today's production levels -- give or take 500,000 barrels per day -- Suncor has a reserves to production ratio of 23.4 years. Even more impressive is its holdings of contingent resources, which are land holdings that contain oil sands but haven't been fully evaluated or developed for production. If all of these contingent resources were to be brought on as proved reserves, Suncor would be sitting on enough oil to produce at current rates for more than a century. 

Source: Suncor Investor Presentation.

Just to give you an idea of how massive Suncor's reserves are in relation to its production, just look at the reserve-to-production ratios between it and some of its peers. This large reserve of resources means Suncor doesn't need to spend as much on exploration costs to secure its future.

Company Proved Reserves (million barrels) Reserves to Production Ratio
Suncor  4,800 23.4 years 
Canadian Natural Resources  5,137 17.6 years
ExxonMobil  25,000 16.7 years 
Chevron  11,200 11.8 years

Source: Company Investor Presentations.

The other aspect that makes Suncor unique is its oil sands production. Unlike traditional wells that decline over time, oil sands production is much more like a mining operation: Once the infrastructure is in place, cash flows from that asset can last for years without worries from declining reservoirs. According to Suncor, its Fort Hills project will steadily produce oil at about 73,000 net barrels per day for 50 years or more without worry of declining production or cash flow from operations.  

Source: Suncor Investor Presentation.

With more than 80% of the company's production in oil sands, Suncor will have a much easier time maintaining and growing its overall production than much of the competition for decades to come. 

2. Robust cash flow business

Unlike the companies that masquerade as integrated oil and gas companies, but in truth are just a collection of assets in different business segments under one name, Suncor is a truly integrated oil and gas company. All of its pipeline, refining, and marketing assets are geared to handle its oil sands production.

This is incredibly important in the oil sands business because the price for unrefined oil sands -- called bitumen -- is considerably lower than the prices for traditional crude oil, and especially the cost of refined products. To ensure the company receives the best prices for its produced product, Suncor has the in-house capacity to refine or upgrade -- a process that takes bitumen and creates a synthetic crude oil -- 81% of its total oil sands production. So, instead of selling bitumen at a price of about $50 a barrel, Suncor currently nets closer to $100 per barrel of produced oil.

Source: Suncor Investor Presentation.

Because of its integrated systems, it gives Suncor a much greater control of costs across its entire operations. In turn, this means the company generates very impressive amounts of operational cash per barrel of oil equivalent produced. Over the past 14 quarters, Suncor has been in the top 5 all but three times on a cash flow per barrel of oil equivalent (compared to 24 of its peers), and has routinely netted free cash flow per barrel produced in excess of $14, enough to be one of the best in the business. 

Source Suncor Investor Presentation.

3. Shareholder-friendly management practices

When you combine stable, predictable production with superior free cash flow, it can be a wonderful recipe for shareholder returns. However, for that to happen, you also need a company that is focused on returns. Up until a few years ago, this was not really the case at Suncor. At the time, management's focus was purely on bringing new projects online within a reasonable schedule and looking to grow through production. The problem with this course was that it wasn't generating very attractive returns, so management reversed course, scaled back its project schedule, and dedicated more of its cash flow toward more shareholder-friendly initiatives.

Since this reverse in direction, Suncor has performed marvelously in generating value for shareholders. Since 2009, its dividend has grown at a compounded annualized growth rate of 40% (!), it has bought back close to 10% of all shares outstanding in less than three years, and it plans to buy loads more.

Source: Suncor Investor Presentation.

With such strong free cash flow generation and a nice quiver of oil sands projects to grow production over the next decade, Suncor should easily be able to continue to grow shareholder returns with a growing dividend and heavy share buybacks for years to come. 

What a Fool believes

Here's the catch with investing in Suncor: Don't expect huge earnings or production growth on a regular basis. Since so much of its business is tied to the more capital-intensive projects like oil sands mining and upgrading, its production has big jumps when new facilities come online and periods of flat production between start-ups. Instead, investors should focus on the more redeeming qualities mentioned above. These three elements should ensure Suncor remains a strong investment that creates share value growth over the long term.

Tyler Crowe owns shares of Berkshire Hathaway. You can follow him at under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

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