For many of the stocks that comprise Warren Buffett's Berkshire Hathaway (NYSE:BRK-B) portfolio, it's extremely easy to understand why they are there. One that may not be so obvious, though, is Suncor Energy (NYSE:SU). Unless you are an ardent follower of the oil and gas market, you don't see this Canadian-centric oil and gas producer's name on your everyday products, or plastered on advertisements. So what makes this oil and gas producer so special that it's one of the select few energy companies that have received the Buffett blessing? Let's take a look at Suncor's rather unique position in the world of oil and gas and why its so valuable to Berkshire Hathaway.
Oil, oil, everywhere, and one company owns it
While all the media attention over the past few years has been showered on the discovery and subsequent boom in shale oil here in America, Canada has been slowly, quietly plodding along with its own massive oil source: oil sands. With so much attention going to shale recently, we have a tendency to forget that Canada is sitting on the world's third largest proved reserves of oil at 174 billion barrels, close to four times America's proved reserve totals.
With more than 23 billion barrels of potential resources Suncor believes it can extract economically, it has one of the largest resources base in oil sands. Based on today's production levels, it has enough in contingency to produce for well over 100 years. That is the kind of long term certainty that Warren Buffett loves.
What makes those numbers even more spectacular is that these potential resources will not require the high costs of going around the world to explore. These resources are right in Suncor's backyard and can be reasonably estimated. While the development costs are considerably higher for this kind of oil production -- think of it more like mining than drilling wells -- the exploration aspect of the business is much lower than almost all of its oil and gas producing peers.
Turning bounty into beautiful economics
It's one thing to have a lease hold on a massive oil sands position, it's another to make it as lucrative as Suncor has over the past couple of years. Traditionally, the product of oil sands mining, bitumen, has sold for much less than what it costs for a traditional barrel of oil. To alleviate that issue, Suncor has developed an integrated value chain that ensures the company gets top dollar for its product. Between its upgrading facilities and refining complexes, it is able to sell all of its oil at global benchmark prices for traditional oil rather than the less valuable bitumen product.
When you combine an easily accessible oil source, a mining-type operation that doesn't require the capital that traditional oil exploration and production needs, and a vertically integrated system that ensures premium pricing for a lower value product, you get a company that churns out gobs of cash. In fact, Suncor has repeatedly been a top five oil and gas producer in terms of free cash flow generated per barrel for the past three years. If we have learned anything about Buffett's investing style, it's that he loves companies that can generate lots of excess free cash flow from its operations.
What a Fool believes
There will be lots of people who will get turned off from owning Suncor Energy for various reasons. Perhaps its the perception that has been cast on oil sands as a dirtier source of oil, or maybe someone is afraid of a company that makes its hay from selling a cyclical commodity like oil, or some other reason. It's a shame if those things detract you, though, because despite the inherent weakness of being in a commodity business, Suncor Energy has proven that it can rise above the fray and produce spectacular results in even less than awesome environments. That's why Buffett owns it, and why it should be on your radar as well.