Suncor offers low risk long-term growth

Future projects could add several hundred thousand barrels per day, says equity analyst David McColl.

Ashley Redmond 7 October, 2014 | 5:00PM David McColl

 

 

Ashley Redmond: I'm Ashley Redmond for Morningstar.ca and I am here with equity analyst David McColl. He covers all the big Canadian oil and gas companies for us. David, thanks so much for joining me.

David McColl: Great, thanks for having me.

Redmond: Let's tackle Suncor first. They trade under the ticker SU on the TSX and they are Canada's largest oil producer and largest bitumen producer in the world. So David, what's going on with Suncor? Are there any new growth opportunities on the horizon?

McColl: We've always been big fans of Suncor and recently there's been a great sell-off in the stock. So, I think it's very attractive right now. Its growth projects, unlike a lot of its peers, has trajectory going out well over the next 20 years. So, I sit back and think okay what's in the horizon? Well near term debottlenecking of its existing operations—that’s a bitumen mine, oil sands mine, and some thermal in-situ projects (in oil sands recovery all non-mining methods use to collect bitumen deposits are called in-situ).The most well-known ones are Firebag and MacKay River.

Those projects together are going to unlock additional production. We throw on top of that future projects that they are only starting to explore and we have the potential to add several hundred thousand barrels per day of new production. That’s relatively low growth as well. It's still a great story for people who want low risk long-term growth.

Redmond: Okay, and what can they do to accelerate growth or maybe some hurdles that you see?

McColl: One of the challenges is that unlike a traditional E&P or exploration and production company that can accelerate growth by just bringing on new rigs and drilling more wells, the acceleration is more a multi-year strategy. So what Suncor is trying to do almost beyond 2018—so we think it's not coming in the next four years but after that—there is a replication strategy which is almost turning the whole oilsands idea on its head because we used to match the size of a plant to a reservoir. Now they are saying, well we'll build these plants offsite and just match the reservoir to the plant. And that could allow them to add 20,000 to 30,000 barrels per day every other year; a plop and drop design. It's a great idea to accelerate growth.

Redmond: So, what does that mean for evaluation right now?

McColl: We have a $50 target on the stock or fair value estimate and if they accelerate these projects that could add about $3 per share. So, that’d be $53. And what I'd like to point out is that these are relatively low risk options, this replication strategy. We don’t see a lot of hurdles to that evaluation and potential upside, aside from the [general] ongoing pipeline constraints.

Redmond: Okay, and do you see any other opportunities to accelerate growth in Western Canada, anything specifically?

McColl: One of the interesting opportunities is natural gas. Suncor has a massive resource of natural gas and we call it their unconventional gas in British Columbia. They sold off their conventionals to have this huge resource left. But the question is what to do with that? And we looked at what's kind of crazy scenario I think, but very possible and that is for them to buy the 50% interest in the Kitimat LNG project, liquefied natural gas and export natural gas from North America. Otherwise North America is just swimming in gas right now.

Redmond: Okay. And Suncor pays a quarterly dividend to investors. So how is the dividend looking this quarter and how has it looked all year?

McColl: Suncor used to not be a really strong dividend player, we didn’t think of them in that regards, but they pay about $1.04 per share dividend in 2014. And as we look out to 2018 we think they could increase that by 50%. What's really interesting with Suncor is that they have a share buyback program right now and that’s taking away some of the capital that could potentially be used for future dividend increases, so we are watching that as well.

Redmond: Great, thanks so much David.

McColl: Thank you.

Redmond: For more information on Suncor go to stocks page of Morningstar.ca.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Suncor Energy Inc37.04 CAD-1.91

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Ashley Redmond

Ashley Redmond  Ashley Redmond is a Vancouver-based freelance writer.