Such pessimism looks unwarranted. The country hosts some of the most efficient producers in the world, many of which sporting best-in-class extraction costs coupled with a strict adherence to the most stringent ESG standards. Examples include natural gas-focused E&Ps like Peyto and Tourmaline, both already discussed in this section, as well as large producers like Canadian National Resources and integrated heavyweight Suncor.
Albeit unpredictable, oil price has remained solidly anchored above $60 per barrel, notwithstanding an endless pandemic and OPEC+ easing production curtailments. Gloomy headlines have little impact on consumption so far, with demand at all-time highs and storage at 5-years lows. The peak oil narrative has been going on decades and seems to have nothing to envy to the peak coal narrative — which usage is itself at all time-highs despite all the bad press.
For those who hold the view that oil will remain a staple of modern civilization and a key energy source in the future, but do not want to bet on junior producers with stretched balance sheets and limited reserves, Suncor offers an interesting alternative. The Canadian major may not sport as much upside as other leveraged names in the sector, but it has a highly resilient business plus a valuation that embeds a sound margin of safety.
With its fortress balance sheet and integrated business model — from production to refining, transport, storage and distribution — the company owns a unique, non-replicable infrastructure across Canada and North America. Among its prize assets are the Syncrude and Fort Hill production sites, the 380,000 barrels-per-day refining capacity, the giant Western Canada storage facilities and the Petro-Canada gas stations network.
Upstream, the company is milking its long-life oil sands assets with over 30 years of reserves and an annual production of about 800,000 barrels per day — i.e almost 1% of worldwide production. For newcomers, oil sands have the advantage of low decline rates, low production costs and close to zero geologic risk. The cons are the very high initial upfront investments — but at Suncor those are now amortized — and low price realizations if their operator does not have advanced integration and refining capabilities.
Fortunately, Suncor has them all — huge feedstock access, refineries geared for heavy crude processing and dedicated, fully-owned midstream and sales channels. This allows for synergies along the value chain, industry-leading utilization rates and high margins. With its assets concentrated in the world's safest jurisdiction and limited exploration investments going forward, Suncor is capable of keeping its average production cash cost under $30 per barrel and — at least on paper — should break even at USD$35 (WTI).
For the record, the previous management — under Steve Williams' leadership — executed the highly opportunistic takeover of then publicly-listed Canadian Oil Sands during the downturn — in fact, right at the bottom. Combined with capex roll-off at their other sites, this well-timed, ambitious acquisition deserves mention and should prove highly accretive over the next decades.
Now that its oil sands assets are fully developed, and that the company has acquired operatorship of Syncrude, significant synergies are expected ahead. This is leading management to forecast $53bn in funds from operations over the 2021-2015 period, while their focus has now shifted on returns of capital to shareholders. As such, under a $55 WTI base scenario, Suncor intends to return $21 per share — $8 in dividends, $7 in share buybacks and $6 in debt reduction — over the next five years. This, for a current share price of $23!
Like all other majors, Suncor is actively developing "clean" energy production sources and runs some of the largest wind power projects in North America. Though still in their early innings, and trivial in the overall business mix, these projects have the potential to deliver above-average returns due to their scale and proximity with the U.S. market.
The company is actively buying back its own shares and insiders are themselves avid acquirers on the open market. So what's not to like? Suncor has had chronic operational issues in the past, including a fire at its Fort Hill facility last year; a new drop of oil price cannot be ruled out; and financial institutions, spooked by the rampant ESG mania and anti-oil narrative, may keep shunning the oil and gas industry for a while.
Suncor scores the highest marks on MarketScreener's quantitative ratings.