Suncor Energy Inc. (USA) (SU), Devon Energy Corp (DVN), Berkshire Hathaway Inc. (BRK.A): Should You Follow Buffett Into This Energy Play?

It goes without saying that Buffett is one of the most imitated investors out there. What should never be forgotten though, is that Buffett is a long term buyer. He’s not in it for a quick flip. So, buying into one of his picks is not necessarily a short term slam-dunk. He’s willing to wait years. Others can lack the conviction to hold through temporary losses or even long-term periods of inaction.

If your perspective isn’t as long term as Warren, you may be disappointed. If you go in eyes wide open with similar objectives and discipline, chances are good you’ll do well.

Suncor Energy Inc. (USA) (NYSE:SU)

Buffett’s most recent addition in the energy sector is a case in point. Berkshire Hathaway Inc. (NYSE:BRK.A) reported just shy of 17.8 million shares of Suncor Energy Inc. (USA) (NYSE:SU) purchased in the second quarter of 2013 for about $524 million dollars . All in all, the purchase averaged out to $29.49 per share. Current buyers are paying roughly $34 a share; a 15% higher price. Buffett bought on the dip, and you’re not getting his deal unless you take his risk.

Is Suncor Energy Inc. (USA) (NYSE:SU) still a steal?
The price you’d pay for Suncor Energy Inc. (USA) (NYSE:SU) right now is a price that Buffett wasn’t buying at. He wasn’t buying in Q1, when prices were around current levels. Then he dropped half-a-billion on shares in the space of a couple months. It’s possible that he saw something on the horizon regarding oil prices. Since Suncor Energy Inc. (USA) (NYSE:SU) trimmed 15% of its market cap in that time frame, it’s more likely that value—Buffett’s favorite catalyst—drove the decision. He couldn’t tell you more clearly what he thinks Suncor Energy Inc. (USA) (NYSE:SU) is worth.

Suncor’s a half-billion dollar bet on continually higher oil prices.
It’s the purest bet on Canadian oil sands available to Buffett. Suncor Energy Inc. (USA) (NYSE:SU) operates the oldest bitumen mine in Canada’s Athabasca oil sands region. Bitumen is a form of heavy oil that’s so enriched in larger hydrocarbons that it’s naturally a tar. The bitumen is surface mined in most present operations, and these operations dominate Suncor’s current production.

Once mined, the bitumen is processed to thin it, and shipped like any other heavy oil for refinement. It’s very energy intensive, and Suncor burns about $35 to produce a single barrel of Syncrude. That makes high oil prices imperative for good margins. Buffett’s apparently a believer that oil prices remain higher in the future.

Despite that, it’s not a particularly risky bet. That’s because Suncor fits the Buffett mold in most every respect. Suncor’s the largest player in the Athabasca Oil Sands and has a dominant industry position. Its reserve base is huge: 3.5 billion barrels of proved reserves with over 23 billion of contingent resources . Suncor averages about 300 Mbpd (thousand barrels per day) of syncrude production. At this rate, proved bitumen reserves would hold out 29 years . Fold that in with Suncor’s superior experience in the space, and you have a pretty decent moat in an area of profound potential.

That leadership position is accentuated by a solid balance sheet. With only $10.5 billion in long term debt, $4.5B in cash and a market cap over $50 billion, this is a conservatively leveraged company. It’s 20% debt to equity ratio is considerably less than peers like Apache and Anadarko, and far less than smaller independents like Chesapeake. Operating profit runs about 8 times interest expense , and Suncor’s been profitable ten of the last ten years.

Suncor’s cheap relative to peers.
With the larger Indies, the peer group becomes smaller. This is middle ground between the true majors and independents.