Oil stocks are on a roll, and investors are wondering which names should be on their buy lists today.
Let’s take a look at Suncor Energy Inc. (TSX:SU)(NYSE:SU) to see if the stock deserves to be in your portfolio right now.
Integrated business structure
Suncor is primarily known for its massive oil sands operations, and that part of the company is still the core driver of revenue and growth, but Suncor also owns international and offshore oil assets, four large refineries, and more than 1,500 Petro-Canada retail stations.
The oil sands assets represent 6.9 of Suncor’s 7.7 billion barrels of oil reserves and 18.8 of the 23.2 billion barrels of contingent resources. Oil sands mining takes place at the Fort Hills and Syncrude locations, while Suncor’s MacKay River and Firebag operations use steam-assisted gravity drainage techniques. Cash operating costs in the oil sands operations came in at $23.80 per barrel in for 2017, representing the lowest level the company has achieved in a decade.
The four refineries are located in Edmonton, Montreal, Sarnia, and Colorado. Combined, they have the capacity to refine 460,000 barrels of crude oil per day into end products such as gasoline, diesel fuel, jet fuel, kerosene, asphalt and feedstock for lubricants. Suncor recently invested $1 billion in the Sarnia refinery and more than $500 million in the Colorado facility.
The refineries and retail stations provide a nice hedge against tough times in the upstream segments and are a big reason the stock held up so well during the oil rout.
Growth
Suncor pushed ahead with large organic projects through the downturn and finally completed its Fort Hills and Hebron development projects in late 2017. As the two sites ramp up production, investors should see a nice boost to revenue and cash flow.
Suncor also added strategic assets through acquisitions in the past few years, taking advantage of its strong balance sheet at a time when many other companies struggled under heavy debt loads. The most significant purchase was probably Canadian Oil Sands, which gave Suncor a majority position in Syncrude.
Dividends
Lower cost, higher oil prices, and reduced capital expenditures bode well for Suncor’s dividend-growth outlook. The company recently raised the payout by 12.5%, and investors should see generous increases continue, especially if oil prices hold extend their recovery.
Should you buy?
Suncor has enjoyed a nice rally in the past seven weeks, rising from $41 per share in early March to the current price of $49. More gains could be on the way, especially if oil extends its run and the big money starts to move back into the energy sector, but I wouldn’t back up the truck today, as I suspect the market might be getting ahead of itself.
However, if you like the oil story long term, Suncor deserves to be on your buy list. The company offers a conservative way to play the oil recovery, and you get paid a solid 3% yield to ride out any additional volatility.
