Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Suncor Energy Inc. (USA) (SU): Warren Buffett’s Big Oil Bet Has a Safe 3.7% Dividend Yield

Warren Buffett only owns two stocks in the energy sector, and they both pay a dividend – Suncor Energy Inc. (USA) (NYSE:SU) and Phillips 66 (NYSE:PSX). SU’s dividend yield is 3.7%, and it has increased its dividend for 13 consecutive years.

Buffett first bought into SU in 2013, investing around $500 million at the time. He subsequently purchased more shares during the third quarter of 2015, making SU close to his 20th largest holding.

SU Dividend Stock

Depressed oil prices have most energy investors worried about the safety of their dividend payments, much less their future growth potential (which is expected to slow significantly in 2016).

However, much like Buffett hopes a new stock purchase remains stagnant or even declines so he can buy more, part of us hopes that today’s oil environment persists awhile longer to set up an even brighter long-term outlook for SU.

The downturn is demonstrating how a strong balance sheet, integrated model, and focused strategy can help a company weather a sea of change and emerge much stronger on the other side.

SU is uniquely positioned for this depressed environment given the strength of its cash flow generation, low-cost production assets, and excellent balance sheet. These factors are allowing it to act counter-cyclically (e.g. pursuing attractive acquisitions) when other companies can’t.

While we certainly cannot and will not begin to guess when oil prices recover and where they recover to, we are very comfortable owning SU in our Conservative Retirees dividend portfolio.

During the third quarter of 2015, Suncor registered a decline in popularity among the funds tracked by Insider Monkey. At the end of September, 28 funds held shares of the company worth $1.33 billion in aggregate, versus 32 funds with stakes worth $1.16 billion. Buffett’s Berkshire Hathaway owns 30.0 million shares of the company, according to its latest 13F filing. Cliff Asness’ AQR Capital Management and Ken Griffin’s Citadel Investment Group are two other investors with substantial positions in Suncor.

Business Overview

Suncor Energy Inc. (USA) (NYSE:SU) is an integrated energy company focused on developing Canada’s oil sands. Oil sands is a mixture of bitumen, sand, fine clays, silts, and water. Because it does not flow like conventional crude oil, it must be mined or heated underground before it can be processed.

SU Oil Sands

Since pioneering the first crude oil production from the oil sands of northern Alberta in 1967, SU has grown to become Canada’s largest integrated energy company with a balanced portfolio of high quality assets.

During 2014, the company generated 51% of its segment profits from upstream oil sands operations, 16% from upstream exploration & production activities, and 33% from midstream and downstream (refining & marketing) operations, which include four refineries, a lubricants plant, Canada’s largest ethanol plant, and over 1,500 Petro-Canada retail gasoline stations.

With the crash in oil, SU’s profit mix through the first nine months of 2015 was 6% oil sands, 6% exploration & production, and 88% refining and marketing.

Business Analysis

Despite its sensitivity to oil prices, we believe SU has several enduring competitive advantages that ensure it can outlast most other oil production firms. The company’s significant asset base, strong balance, and integrated model set SU apart from its peers and have helped it remain the low-cost competitor in its sector.

SU’s oil sands resource base is one of the largest in the world and has nearly 40 years of production left at current rates. The company also completed its first oil sands plant in 1967. For the most part, other energy companies did not begin investing in land and extraction infrastructure in that region for several decades.

This probably helped SU to claim ownership over the most attractive territories while also building up meaningful operational expertise to efficiently run complex oil sands projects.

SU’s integrated model serves as another competitive advantage. The company has a network of assets (e.g. thousands of kilometers of pipelines, over 7,000 rail cars, more than 11 million barrels of storage capacity at terminals strategically located across North America, etc.) that helps its take advantage of differentials that may occur between extraction of resources and selling them to the final customer. SU believes its midstream assets and expertise added an average of $2 to every oil sands barrel it produced in 2014.

Follow Suncor Energy Inc New (NYSE:SU)
Trade (NYSE:SU) Now!

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.