Suncor Energy Inc.: Understanding the Inherent Advantages of Integrated Energy Producers

With the price of WTI crude establishing support above US$60, find out if now is a good time to be buying integrated producers like Suncor Energy Inc. (TSX:SU)(NYSE:SU).

With the price of West Texas Intermediate Crude (WTIC) recently having established a firm foothold above the US$60 mark, and gasoline prices nearly 15% higher than where they say a year ago, it only makes sense to revisit a few of Canada’s largest integrated oil and gas producers.

Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Imperial Oil Ltd. (TSX:IMO)(NYSE:IMO) are the two largest oil and gas producers listed on the Canadian exchanges.

Suncor entered Wednesday’s trading with a market capitalization of $75 billion, the fifth largest of all Canadian listed companies. Imperial Oil, meanwhile, clocked in at a market cap of $32.7 billion — about half the size of Suncor but still a very significant part of the Canadian financial ecosystem and the 19th-largest publicly traded Canadian company.

Both Suncor and Imperial Oil are “integrated producers,” meaning that both companies facilitate the extraction, transportation and refinement of energy products — essentially taking energy from beneath the earth’s surface all the way to your gasoline tank.

The process of extracting crude oil and natural gas from the ground is referred to as an integrated producer’s “upstream operations.”

The process of transporting those liquid and dry energy materials to refineries is referred to as “midstream operations,” and when that energy is finally converted into finished products to be consumed by end markets — gasoline, diesel, jet fuel, and certain chemical compounds — this is referred to as a company’s “downstream operations.”

But integrated producers like Suncor, Imperial Oil, and Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) have a distinct advantage over exploration and production (E&P) companies that are only engaged in upstream operations, like, for example, Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) or Baytex Energy Corp. (TSX:BTE)(NYSE:BTE).

That’s because unlike companies engaged strictly in E&P operations, integrated producers get the added benefit of realizing cheaper input costs in their refining operations when crude prices are depressed relative to gasoline prices.

Essentially, when crude oil prices are low, E&Ps like Crescent Point and Baytex sell their product to refineries at a discount, and that’s the end of the story.

But in the case of the integrated producers, they sell the crude oil to themselves at a discount, which effectively lowers their input costs, or costs of goods sold, tied to refined products that are eventually sold to end markets.

So, the upstream profits are lower for the integrated producers just like the E&Ps, but these lower profits in upstream operations are often offset by improved profitability in the company’s downstream operations.

It’s as if the integrated producers have a built-in hedge — and it goes a long way to smoothing out these integrated producers financial performance relative to most E&P names.

Bottom line

While companies like Baytex and Crescent Point struggle to keep the lights on and maintain production at current levels, Canada’s integrated producers have been gaining strength.

Despite falling oil prices, Suncor has continued to increase its dividend over the past three years, and Cenovus recently executed a large acquisition to effectively double the company’s production.

Yet both Suncor and Cenovus have seen significant pullbacks in their respective share prices to begin 2018, making now the opportune time to initiate a position in the two blue-chip names or add to your current holdings.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — 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 Jason Phillips owns shares of Cenovus Energy Inc.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »