Warren Buffett's recent entry into the oil sands market through a relatively small (for Buffett) holding of Suncor Energy Inc. (USA) (NYSE:SU). has attracted much attention. However, there is still much speculation as to why Buffett acquired this stake, as traditionally the Oracle does not consider commodity companies to be worth the risk. So why Suncor?
But first, some background Suncor is a vertically integrated oil producer, producing oil from Canadian oil sands (377,000 barrels/day) and offshore fields internationally (134,000 bbls/d). In addition, the company has capacity to refine 89% of its oil production and capacity to move 100+ million barrels of oil around the globe.
Production costs are around $35/barrel for the company. However, Suncor sells 93% of its oil at the Brent benchmark price, so realized prices are less affected by the U.S. oil boom, which has pushed down the price of WTI. Moreover, Suncor has enough oil resources to maintain current levels of production for 47 years, actually more than Exxon Mobil Corporation (NYSE:XOM), which only has enough reserves to last 16 years.
Cash is king As Suncor's production costs average $35/bbl and the price of Brent remains steady above $100/bbl, the company was able to pocket a solid 56% gross margin during 2012. The company's EBITDA margin was nearly 30%. This makes Suncor highly cash-generative, and a fiscally prudent management team is making the most of this.
For example, during fiscal 2012, the company generated $8.9 billion in cash, only $1 billion less than beverage behemoth The Coca-Cola Company (NYSE:KO). Nonetheless, despite this level of cash generation, management is keeping a lid on spending, ensuring that capital spending is wholly covered by cash inflows (during 2012 capital expenditure totaled $6.7 billion on cash generation of $8.9 billion, and management expects cash flow to cover capex again this year).
Furthermore, Suncor is returning free cash to investors. Since September 2011, the company has completed $2.5 billion in stock buybacks and launched an additional $2 billion share repurchase plan this year.
A comparison of Suncor to its peers on a free cash flow yield per share basis highlights how well the company is performing in relation to Chevron Corporation (NYSE:CVX) , EOG Resources Inc (NYSE:EOG) , and Occidental Petroleum Corporation (NYSE:OXY) :
|Suncor||Chevron||EOG Resources (NYSE:EOG)||Occidental Petroleum|
|Share in issue||1,510||1,940||272||805|
|FCF per share||$0.40||($0.30)||($3.44)||$0.45|
|Current Stock Price||$36||$118||$179||$96|
Free cash flow yield per share shows how attractive the investment is compared to its peers based on free cash flow, and here it would appear that Suncor wins