Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Suncor Energy Inc. really shouldn't be doing this well.

Suncor is the biggest producer in Canada's oil sands. And Canada's oil sands, which require various forms of upgrading and processing to be usable, aren't the cheapest barrels out there. Wood Mackenzie estimates the breakeven price ranges from about $46 per barrel at the low end all the way up to about $99. In contrast, U.S. shale basins top out in the low $70s and average about $50.

If Suncor's 2016 results are anything to go by, though, those averages don't really apply to it. It beat earnings forecasts for the fourth quarter handily, and oil sands production rose 9 percent for the year as a whole, despite the toll taken by Canada's forest fires.

And Suncor's cash cost for its oil sands business fell by 5 percent to C$26.50 (again, despite the impact of the forest fires). Even if you bump that up to account for a return on investment and unwind some of the benefit of a weaker Canadian dollar, it's clear Suncor's breakeven price is closer to $30 or $40 a barrel than $50.

Where this really shows up is in cash flow:

Sunrise
Suncor generated more than enough cash flow from operations to cover capex and dividends in the fourth quarter
Source: Bloomberg, the company.

That chart is worth dwelling on for a minute. Notice how, even during the boom years of 2011 through mid-2014, Suncor didn't ramp up spending or payouts to the point where it couldn't cover them from its operations. This is in marked contrast to much of the industry, which went all-in on the cycle and invested at precisely the time when costs were inflating rapidly and each dollar spent achieved less and less. Here, for example, is the same chart for Chevron:

Chevroff
Chevron's operating cash flow stopped fully funding its capex and dividends back in early 2013, when oil prices were still in triple digits
Source: Bloomberg, the company

Suncor's free cash flow did turn negative for much of 2016 -- but that's what you would expect for an oil producer in the middle of the worst crash in a generation. The point is that much of the hit was due to spending on an expansion project at a time when, with industry costs now falling, every dollar could actually go further.

This discipline also gave Suncor the wherewithal to buy out Canadian Oil Sands Ltd. early last year, giving it a much bigger stake in the Syncrude oil sands joint venture.

With a better balance sheet, Suncor's stock held up while that of its highly leveraged target collapsed, letting Suncor pounce in an all-stock hostile bid -- rare in Calgary's chummy environs -- and win.

It followed that up quickly with a cash buyout of Murphy Oil Corp.'s stake, giving it majority control. And having done so, Suncor just announced Syncrude's best-ever six months, with the project running at 97 percent of capacity in the second half of 2016. This is a case study in good timing and execution.

The result is that, with oil prices likely to be higher this year, Suncor feels comfortable raising its dividend by 10 percent with a promise of further "sustainable" increases. The implied yield of about 3 percent, with a clear path to growth, is attractive. And share buybacks, an endangered species in oil circles these days, are set to reappear later this year.

Suncor can afford it. Investment for maintenance -- as opposed to expansion -- plus the newly raised dividend adds up to C$4.1 billion. Even last year's C$5.7 billion of cash flow from operations, battered by low oil prices and those fires, could have covered that amount.

As it is, the consensus cash-flow forecast for this year is north of C$9 billion, according to figures compiled by Bloomberg. That embeds expectations of higher oil prices, of course. What really counts, though, is Suncor's self-help. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net