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.
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.
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.
