Sunday 22 September 2019

Jun 11, 2019: It Makes Sense to Buy Suncor Energy (TSX:SU) Stock

Suncor Energy has a $60 billion valuation. Suncor Energy (TSX:SU)(NYSE:SU) has become one of the largest energy companies in Canada. The path was long and difficult. In 1967, Suncor was the first to commercially develop Canada’s oil sands. These expensive oil sands remain some of the largest oil reserves in the world. The company has become an oil sands giant with controlling interests in mega-projects like Fort Hills and Syncrude. It is likely than Suncor has even better days ahead. Recently the company raised the dividend and continued a share-buyback program. The richest investors are attracted to this company. After a small decline, Suncor’s dividend is now up to 4.2%. That is above the industry average. It is also one of the most sustainable. Suncor currently has an investment-grade rating because of $1.9 billion in cash and $3.4 billion in available credit lines. Even at oil prices low as US$45/barrel, the company can break even. That breakeven level includes the dividend payment, so there’s a lot of cushion. Growing the payout is one of the most important objectives of the company. As long as oil prices are good, expect this dividend to grow in future years. In 2014, the dividend was $1.02 per share. Suncor has increased the payout each year since, hitting $1.68 per share in 2019. This happened even though oil prices went up and down unpredictably. Growth would have been even higher if the company hadn’t opted to buy back shares through a repurchase program. Repurchasing shares is one of the best methods a company can use to create shareholder wealth. In not exactly the right moves, some companies buy back stock at expensive prices, which ultimately destroys value. Suncor does not do this. If the management plans and expectations can be indeed real, production growth and cost cuts should boost cash flows by 5%. This company has a great rich balance sheet. A low breakeven price point is one of the main advantages of Suncor. Suncor is predicting that over the next five years fund flows will grow by 4-5% per year. Management repurchased $5 billion in stock since 2017, nearly 10% of the entire company. This year, the company expects continuing the repurchases. In February, Berkshire Hathaway’s Warren Buffett revealed a 10.8 million share stake in Suncor, roughly 0.7% the float. Suncor produces oil. It also has refining that can process its output into marketable products. Because it owns its own refineries, Suncor can get a global price for its output without ceding value to a middleman. This helps Suncor take advantage of rising oil prices.

On May 22, 2019 Suncor announced that it would issue $750 million of senior unsecured Series 6 Medium Term Notes due on May 24, 2029. The Notes had a coupon of 3.10% and have been priced at $99.761 per $100 of Notes to yield 3.128%. Suncor intended to use the net proceeds from the sale of the Notes to refinance or repay existing debt of Suncor and its subsidiaries. The Notes were offered through a syndicate of dealers led by CIBC Capital Markets, RBC Capital Markets, and TD Securities Inc. under Suncor’s short form base shelf prospectus dated June 8, 2018 and a related pricing supplement dated May 22, 2019.

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