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The Biggest Problem With Suncor Energy Inc. Stock

By Matthew DiLallo – Mar 28, 2016 at 2:30PM

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Where does it grow from here?

Image source: Suncor Energy.  

Suncor Energy (SU -0.92%) has actually done quite a remarkable job during the downturn. Armed with a mountain of cash, the Canadian oil company has been able to make a number of strategic investments to fund growth that should pay off over the next two years. That being said, if there is one problem with the company, it's the fact that once its current slate of major projects are complete, it really doesn't have a visible path to growth.

Being opportunistic
Suncor Energy has been very opportunistic during the downturn to invest in both organic and acquired growth. Thanks to its large cash resources, it has been able to invest heavily to fund two major growth projects: the Fort Hills oil sand mine and the Hebron offshore oil project. In addition to that, the company has used its overall scale and financial security to make two very strategic acquisitions: an additional 10% stake in Fort Hills from one of its partners and the acquisition of rival Canadian Oil Sands, which boosted its stake in Syncrude.

These strategic investments really secure Suncor's growth for the next few years. Fort Hills, for example, is expected to deliver first oil in the fourth quarter of next year, eventually ramping up to 180,000 barrels per day, half of which will now be attributable to Suncor. Meanwhile, the Hebron project led by ExxonMobil (XOM -0.35%) is also expected to deliver first oil next year, with Suncor receiving 21% of that facility's expected daily output of 150,000 barrels. Finally, the company hopes that in boosting its stake in Syncrude to a more meaningful level, it will be able to make the changes necessary to increase the production reliability of that troubled asset.

Not much left in the cupboard
Beyond these three initiatives, however, there isn't a whole lot of visible production growth that Suncor Energy can quickly tap into. With oil prices weakening last year, the company chose to ax $1 billion from its capex budget and defer longer-term projects. This included deferring its Mackay River 2 expansion plans, pressing pause on a project that was initially expected to begin producing next year. In addition to that, the company also deferred its White Rose offshore expansion project, delaying a project that wasn't expected to start producing until 2018. Combined, those projects were expected to add 28,000 to 33,000 barrels per day to Suncor's production.  

Suncor's not alone in choosing to defer projects, with weak oil prices having kept a lot of oil projects from moving forward, especially oil sands projects in Canada, given the higher cost of these projects. While that made financial sense in the short term, over the longer term, it has the potential to lead to a huge gap in production growth for the company given the long lead time between a project being sanctioned and it delivering first oil. For example, ExxonMobil and its Canadian subsidiary Imperial Oil (IMO -0.04%) recently filed plans to build the $2 billion Midzaghe project, which would be a 50,000 barrel a day project. However, it's a project that wouldn't be sanctioned until 2019, assuming it gets all of the regulatory approvals in time, and still wouldn't deliver a drop of oil to ExxonMobil or Imperial Oil until 2022.

It's that long lead time that could cause Suncor Energy to be unable to organically grow its production for several years after its current slate of projects ramp up because it has avoided shorter cycle growth opportunities such as what's offered by shale plays. As a result, the company might have no other choice but to start making a more acquisitions to fill the gap between organic projects.

Investor takeaway
Suncor Energy has a potentially big problem looming on the horizon: No visible growth. It's a problem that might only be solved by the company becoming very acquisitive, even shifting its focus to short-cycle shale opportunities. That uncertainty could begin to weigh the stock down, especially if oil prices improve and Suncor Energy has no where to grow. 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. 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.

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Stocks Mentioned

Suncor Energy Inc. Stock Quote
Suncor Energy Inc.
SU
$35.41 (-0.92%) $0.33
ExxonMobil Stock Quote
ExxonMobil
XOM
$113.21 (-0.35%) $0.40
Imperial Oil Stock Quote
Imperial Oil
IMO
$57.32 (-0.04%) $0.02

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