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Oil Sands Giant Gears Up for Growth

By Chad Fraser on February 26, 2014

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Canadian oil sands stocks have had a rough couple of years.

That’s partly because Canadian crude is being crowded out of pipelines to key American refineries by competition from booming U.S. shale regions. Some refineries have also been shut down for maintenance.

The result? A supply glut that has contributed to a discount on heavy oil sands crude (as measured by the Western Canada Select price) to West Texas Intermediate (WTI) light crude. In late 2012, that differential widened to over $40, but it has since narrowed somewhat. It currently stands around $25.

There’s further price stability ahead for Canadian oil, according to an October report from commodity research firm FirstEnergy Capital, thanks to a wider array of shipping options, including new pipeline and rail infrastructure.

Moreover, FirstEnergy vice-president Ken King believes fears that the Obama administration will reject TransCanada Corp.’s (NYSE: TRP) Keystone XL pipeline are overwrought. Keystone XL would pump 830,000 barrels per day (bpd) of oil sands crude from Hardisty, Alberta, to Steele City, Nebraska. From there, an existing line would carry it to refineries on the Gulf Coast.

“This is a pipe that has been talked to death,” he said in an October 8 article in Canada’s Globe and Mail newspaper. “Will it be approved? I have no idea. But I think the market is already starting to look beyond that.”

Something else that should help narrow the gap is the long-delayed reopening of BP plc’s (NYSE: BP) Whiting refinery in Indiana, which has been upgraded to process heavy crude. Whiting will process up to 350,000 bpd of oil sands bitumen when it hits full capacity this spring.

An Oil Sands Leader

Either way, production from Canada’s oil sands is forecast to keep rising. Today, the country produces about 2 million bpd from the region, which covers a significant portion of northwestern Alberta. According to the Canadian Association of Petroleum Producers, that will rise to 5.2 million bpd by 2030.

Suncor Energy (NYSE: SU), Canada’s largest energy firm and the biggest player in the oil sands, is one of the outfits driving that growth.

In the fourth quarter of 2013, Suncor’s total production rose to 558,100 barrels of oil equivalent per day from 556,500 a year ago. Its oil sands operations accounted for 73.4% of that total and hit a record 409,600 bpd, up 19.5%. This year, the company plans to boost its oil sands production by 14% over 2013.

Suncor’s history in the oil sands stretches back to 1967. Back then, it was known as Sun Oil. It began operating under the Suncor name in 1979, after amalgamating with Great Canadian Oil Sands. Today, the company extracts bitumen from the oil sands near Fort McMurray, Alberta.

Oil sands projects are notoriously expensive and prone to delays and cost overruns. To try to mitigate some of that risk, the company enters into joint ventures with other producers. For example, it owns a 12% stake in the Syncrude oil sands operation, as well as a 40.8% interest in the development-stage Fort Hills project. France’s Total SA (NYSE: TOT) and Teck Resources (NYSE: TCK) own the remainder of Fort Hills.

In October, the partners announced that they will go ahead with the project, which is expected to produce 180,000 bpd starting in 2017, with reserves expected to last 50 years. Suncor’s share of the expected $13.5-billion price tag is $5.5 billion.

The company also operates the MacKay River and Firebag in situ projects, which use steam assisted gravity drainage (SAGD), a process that involves injecting steam into the well, which makes it easier to pump the bitumen to the surface.

Suncor also has conventional operations in the North Sea and elsewhere around the world and operates four refineries and 1,500 gas stations.

Dividend, Buybacks on the Rise

For the fourth quarter, Suncor reported operating profits of C$973 million, or C$0.66 a share ($1 Canadian = $0.90 U.S.). That was down slightly from C$988 million, or C$0.65 a share, a year ago and below the consensus forecast of C$0.78. Weaker Western Canadian crude prices were behind the decline, along with higher operating costs.

However, cash flow from operations rose to C$2.35 billion, or C$1.58 a share, from C$2.23 billion, or C$1.46. That marked the 10th consecutive quarter the company has generated over $2.2 billion in cash flow from operations.

Suncor also hiked its quarterly dividend by 15%, to C$0.23, for a 2.5% annualized yield. The move comes nine months after Suncor boosted its payout by 54%. The company also added $1 billion to its buyback program; it now has $1.7 billion available for repurchases under its current authorization.

Infrastructure Holds the Key

This year, Suncor plans capital and exploration spending of $7.8 billion, up about $500 million from 2013. About $4.2 billion of that will go toward growth projects, with that amount divided roughly in half between its oil sands and conventional projects.

Beyond the oil sands, it’s focusing on the Golden Eagle project in the North Sea, which is expected to produce its first oil in late 2014 or early 2015. As well, its Hebron project off Newfoundland is expected to start up in 2017.

At the same time, Suncor is taking steps to get better prices for its oil sands crude: in the fourth quarter, it finished a rail-offloading facility in Montreal and began shipping crude to its refinery in the city. By the end of the first quarter, it expects to boost these shipments to 30,000 bpd.

After the quarter ended, the company began shipping 50,000 bpd along the Keystone South pipeline to refineries on the Gulf Coast. These moves are part of Suncor’s plan to capture global prices for all of its production.

Suncor is one of the 150 stocks we keep under constant review in our Canadian Edge advisory’s How They Rate universe, a complete collection of the Canadian stocks our in-house expert, David Dittman, sees as ideally suited for investors like you.

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