Many Canadian oil companies have been deeply affected by the downturn in oil prices because oil in that country often sells for a discount to global oil prices because of its lack of pipeline capacity. Despite those issues, Suncor Energy (NYSE:SU) has actually thrived during the downturn. It has been able to generate robust cash flow, which it has used to bolster its position. As such, the case could be made that Suncor is the safest of the Canadian oil stocks.
Cash is king
As of the end of last year Suncor Energy boasted of a cash war chest totaling $4.05 billion, which was the second largest cash pile among the top five Canadian oil producers, and only a half billion behind the leader. It's a cash pile the company has used to strategically fund growth during the downturn.
For example, last year the company paid $360 million to buy an additional 10% working interest in its Fort Hills oil sands project from Total (NYSE:TOT), which is one of its joint venture partners in the project. In doing so it increased its stake in the project to 50.8% and agreed to take on the remaining capital funding requirements for that stake, which amounted to roughly $700 million in future capex. It's spending that French oil giant Total wanted to avoid because it's seeking to cut its spending outlays due to the impact of the oil market downturn on its own financial situation. Suncor Energy, however, saw a rare opportunity to acquire an additional interest in one of its major growth projects at a discounted price.
In addition to having the financial capacity to make strategic acquisitions during the downturn, Suncor Energy has been able to fund growth projects like Fort Hills, which is expected to cost the company $2.25 billion this year alone. Overall, Suncor Energy plans to spend $6 billion to $6.5 billion this year on capex, with more than half of that investment geared toward growth projects. That's pretty remarkable because most of the industry can't even afford to spend what it would take to keep near-term production flat, let alone fund growth-focused investments.
Cash flow is strong
Suncor Energy actually doesn't need much of that cash pile to fund its 2016 capex budget because it continues to generate very solid cash flow despite much weaker oil prices. Last quarter, for example, the company generated $1.3 billion in cash flow from operations, which wasn't that far off from the $1.5 billion it generated in the year-ago quarter. The company was able to do that thanks to the strength of its refining assets as well as its ability to significantly reduce the operating costs of its oil sands assets. This has enabled the company to generate strong cash flow during the downturn, and for the full year the company generated enough cash flow to fully cover its capex budget with $139 million to spare. Its ability to generate free cash flow in this environment is a rarity.
With that combination of free cash flow and its cash balance Suncor Energy has been able to continue to grow its dividend, invest in growth-focused capex, and make strategic acquisitions. On the acquisition front, not only did the company boost its stake in Fort Hills via the Total transaction, but it recently closed its all-stock acquisition of Canadian Oil Sands. In doing so, it was able to take advantage of that company's troubling financial situation after its credit rating was cut to junk because it was projected to generate negative cash flow during the downturn. Suncor Energy saw an opportunity to swoop in and acquire a company that would enable it to boost its stake in the Syncrude oil sands consortium to a much more meaningful position in hopes of turning around that struggling project. It's a bet that few others in the industry had the financial wherewithal to make.
With a cash rich balance sheet and ability to generate solid cash flow, Suncor Energy is one of the safest oil stocks in Canada right now. This has enabled the company to thrive during the downturn because it can afford not only its dividend, but to invest in growth, both organic and acquired. Suffice it to say, Suncor Energy will likely emerge from this downturn as an even stronger company than the one that entered.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Total (ADR). 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.