Why Now Is the Time to Buy Suncor Energy Inc.

Despite the doom and gloom surrounding oil, Suncor Energy Inc. (TSX:SU)(NYSE:SU) is well positioned to weather the storm and bounce back strongly once crude prices rebound.

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The Motley Fool

The sharp collapse in oil hasnโ€™t done Canadaโ€™s energy patch any favours. Companies have slashed investments and dividends as they struggle to shore up their balance sheets and preserve cash flow. These significantly weaker crude prices have triggered a savage sell-off of energy stocks, and the TSX Capped Energy Indexโ€”a weighted index of the 52-largest energy companies listed on the TSXโ€”plunging 29% since the start of 2015.

However, unlike many of its smaller peers, integrated energy major Suncor Energy Inc. (TSX:SU)(NYSE:SU) is well positioned to weather the current harsh operating environment and appears attractively priced. 

Now what?

There is no doubt that oil prices are having an impact on Suncorโ€™s earnings, but it is certainly not as severe as many of its peers. For the second quarter 2015, cash flow from operations fell by 9% year over year, but this is in stark contrast to crude benchmark prices plunging over 40% for the same period.

So, how did Suncor achieve this?

Key among Suncorโ€™s advantages over many of its peers are its refining operations. As oil prices have collapsed, the profitability of these operations has increased sharply. 

For the second quarter Suncorโ€™s refining operations had an operating margin of 12%, almost triple the 4.5% for the same period in 2014. As a result, Suncor markedly increased its refinery utilization rate for the quarter to 90%, an impressive 5% year over year, thereby refining 6.5% more barrels of crude than it had in the second quarter 2014.

The increased profitability of these operations coupled with higher refining volumes allowed Suncor to offset the diminished profitability of its downstream oil producing business.

Another facet of Suncorโ€™s operations that leaves it well positioned to weather the current harsh operating environment are the low breakeven costs per barrel for its existing oil sands operations.

At about US$30 per barrel, Suncorโ€™s oil sands operations have one of the lowest company-wide breakeven costs in the energy patch. This has allowed those operations to remain profitable despite the collapse in oil. With Suncor ramping up oil sands output by 11% year over year, it was able to benefit from these low breakeven costs.

These strengths will continue to benefit Suncor in the current difficult operating environment and when oil prices eventually rebound. More impressively, and as a sign of confidence in Suncorโ€™s ability to weather the current crisis, management hiked its dividend by 3.5%, bringing its yield to a juicy 3%. 

So what?

The oil rout has hit the energy patch hard, and while it and the extreme uncertainty surrounding the outlook for oil has made energy stocks unappealing investments, Suncor certainly appears attractive. Not only does it have low breakeven costs and the ability to offset diminishing profitability from its downstream refining operations, but it also has a high degree of liquidity.

These attributes, its juicy dividend yield, and its attractive valuation measures, including an enterprise-value of six times EBITDA, make it an appealing long-term investment at this time.

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This article represents the opinion of the writer, who may disagree with the โ€œofficialโ€ recommendation position of a Motley Fool premium service or advisor. Weโ€™re Motley! Questioning an investing thesis โ€” even one of our own โ€” helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

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