There’s a virtual ocean of oil in Canada’s Athabasca region. Situated in Alberta, the site is one of the richest petroleum deposits on the planet. Locked within the sand and clay, the oil sands could hold more than 175 billion barrels of petroleum, according to analysts. Extracting it is expensive and dirty, but with demand and oil prices rising, this vast stretch of countryside could be an oily bonanza.
However, given the abundance of easily obtained shale oil and natural gas, the oil sand’s producers have come into hard times.
Take Suncor Energy (NYSE:SU) for example. Suncor is a premier producer and the first company to develop the oil sands, but 2012’s fourth-quarter earnings came in well under expectations. The company reported a net loss during the quarter, thanks to a $1.48 billion impairment charge for its Voyageur facility.
As one might have expected, shares of energy producer sold off pretty hard.
Nevertheless, for those investors with longer-term horizons, the recent selloff in Suncor marks one of the best energy bargains in the sector.
Betting On Bitumen
Back in 1967, Suncor pioneered commercial development of Canada’s oil sands — one of the largest petroleum resource basins in the world. Since then, the company has grown to become a globally integrated energy company with a balanced portfolio across various energy-producing regions. Yet, you wouldn’t know it by how the stock has reacted.
Truth be told, the bulk of revenues and production come from the firm’s big presence in the Alberta oil sands. Using both traditional open pit mining and cleaner, in situ techniques, Suncor achieved record production from the oil sands region in 2012 and pumped out more than 350,000 barrels a day. This, plus its 12% ownership stake in the massive Syncrude oil sands venture — which includes members like Murphy Oil (NYSE:MUR), Sinopec (NYSE:SNP) and Imperial Oil (NYSE:IMO) — accounted for roughly 60% of its total energy production.
However, it did receive a lower price per barrel for that bitumen.
We’ve talked before about the price differential between West Texas Intermediate benchmarked crude oil and the international standard Brent. Well, the price difference between Canadian Heavy crude and Brent is even more severe — at one point it was almost $42 a barrel. Similar to our own logistics issues with Bakken-based crude, much of the oil sands is lacking in pipeline systems, which negatively impacted Suncor’s earnings during the quarter.
Over the longer-term, the vast oil sands fields will be a winner for the firm. As more pipelines get built — like TransCanada’s (NYSE:TRP) much-maligned Keystone XL — that price differential will decrease. At the same time, production and demand from the region will surge. Analysts estimate that by 2035, production from the region will reach 7 million barrels per day.
And there will be plenty of demand for that crude oil. Experts at IHS CERA expect the U.S. alone to receive roughly 4.8 million barrels a day of that production by 2020, up from the current output of 2.2 million barrels.
So Suncor’s oil sands acreage is a long-term bet that will pay off for patient investors. The here-and-now includes traditional oil and unconventional gas wells across North America, exploration properties in Norway and the U.K.’s North Sea, as well as four refineries and a vast network of retail gas outlets — gained from its 2009 merger with Petro-Canada. Heck, it even owns a series of wind farms.
All of these provide good stable earnings, and production in the range of 312 million cubic feet of natural gas equivalent per day. (And, in the case of the refineries, huge margins.) Suncor has been able to take advantage of its own lower-priced heavy crude and transforming it into Brent-tied refined products to receive some of the best crack spreads in the biz.
Time to Buy
Given the long-term positives of its oil sands operations along with the rest of its more traditional integrated assets, Suncor could be one of the better picks for energy investors. However, they might not want to wait too long before snagging up shares.
According to Barron’s, Suncor could see gains of more than 25% over the next year. Driving those gains are the company’s strong cash flows derived from its vast asset base. The author suspects Canada’s largest energy company (by market value) could double its current 1.7% dividend yield and still have more than $977 million of excess free cash flow to buy back stock, cut debt or buy new exploration properties. Suncor already has a culture of raising its distributions to shareholders; dividends have increased by 21% annually for the past five years.
Despite this, the firm trades at a fraction of its 2008 peaks. At $31 a share, it currently can be had for only 9.5 times its projected profits for 2013. (Remember, this last quarter’s loss was driving by a hefty one-time item fee, and the rest of its downstream and upstream operations are quite profitable.) Additionally, Suncor can be had for cheaper than several of its oil sands rivals, such as Cenovus Energy (NYSE:CVE), even though it has the largest reserves among its peers with one of the highest oil contents, plus the other energy assets.
Bottom line: Suncor is currently on sale … but it won’t stay that way for long.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.