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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Investors Benefit In Surprise Move From Canadian Oil Major

Oil

While many oil companies doubled down on debt to maintain or even increase dividends while profits were hard to come by in the ‘lower-for-longer’ oil price world, Canada’s biggest oil producer—Suncor Energy—is winning the hearts and minds of investors and stock analysts by not making capital investments in new projects in its core business: Canada’s oil sands.

“We’ve decided to let the shareholders see the cash,” Suncor’s chief executive officer Steve Williams told The Wall Street Journal in an interview. “We can continue this model for a lot longer,” the manager noted.

Suncor is currently finishing two major growth projects, Fort Hills and Hebron, slated for first oil at the end of 2017, but following years of investment in oil sands projects, Suncor is now pausing spend into new company-built projects, and is channeling more of its cash into shareholders’ pockets.

“Let me be clear - for us, having cash available to invest doesn't mean we're going to run out and spend it. We remain steadfast in our commitment to exercise discipline in allocating that capital,” CEO Williams said in the Q4 investor presentation in February this year.

At the conference call following the Q4 results release, Williams said: “We have no plans to be going ahead with major capital investment in either mining or in situ in the foreseeable future.”

“Mining investments are coming to an end not just for Suncor but for the industry I believe for a considerable period probably in excess of 10 years,” the manager noted.

Several oil majors have recently sold assets in Canada’s oil sands, as they are prioritizing other less cash-consuming and quicker-to-return projects in the current oil price environment.

In March of this year, Shell said it was selling its oil sands interests to Canadian Natural Resources for around US$8.5 billion as part of its strategy to focus on free cash flow and higher returns on capital, and to prioritize businesses such as integrated gas and deep water.

At the end of March, ConocoPhillips announced the sale of oil sands assets in Canada to Cenovus Energy in a US$13.3 billion deal, while Norway’s Statoil has sold its entire oil sands operations in Alberta to Athabasca Oil Corporation.

Although Canada’s oil sands were not the favorite investment of either major firms or the market, between June last year and May this year, Suncor’s shares outperformed every major North American oil company, according to The Journal. Related: The Downturn Is Over, But U.S. Oil Companies Face A Huge Problem

As of July 4, Suncor’s stock had gained 2.29 percent in the past year. This compares to a 47.49-percent slump in the stock price of Cenovus Energy, another Canadian company, whose shares took a hit following the deal with ConocoPhillips that turned out to be unpopular with Cenovus shareholders who feared the additional debt would sour the balance sheet.

Suncor, for its part, is a favorite with analysts. As of June 30 this year, the consensus forecast of 30 investment analysts covering the stock shows that the company will outperform the market. Analysts also see Suncor dividends for 2017 rising 11.38 percent over 2016.

In the past three quarters, Suncor has also beaten profit estimates, with actual earnings trumping analyst consensus and landing at the top end of the analyst range.

For Q1 2017, Suncor reported oil sands operations cash operating costs per barrel (bbl) down to US$17.44 (22.55 Canadian dollars), a 7-percent decline in costs over the prior year quarter and a 20-percent drop in costs over the first quarter of 2015. Cash flow from operating activities, which includes changes in non-cash working capital, was US$1.259 billion (1.628 billion Canadian dollars).

Suncor can further cut costs and reduce emissions in the oil sands, CEO Williams told The Journal. According to the manager, some of the firm’s oil sands operations would soon have carbon emissions comparable with other ways of extracting oil. Current regulation, even the strictest one, is equal to an additional cost of just US$1 a barrel, Williams said.

Costs down, cash up, and higher shareholder returns are now Suncor’s priorities, instead of investments in new projects in the expensive oil sands business at the current price of oil.

“And so, you’ll see us sustainably increasing the dividend as we grow and you’ll see us opportunistically buying share buybacks and those two will be our priority through the next few years,” Williams said at the February earnings call.

By Tsvetana Paraskova for Oilprice.com

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