Best Dividend Growth for an Energy Stock

SU - Suncor Energy

Suncor Energy is one of the largest independent energy companies in the world and the largest oil producer in Canada. The company engages in oil sands operations, offshore oil and gas production, petroleum refining and marketing. In addition, Suncor is involved in energy trading and operates a renewable energy business.

Suncor owns international and offshore assets in key strategic geographic locations like the U.K. North Sea, Canada’s east coast and Norway which provides a steady and diversified cash flow. The company operates four refineries, an ethanol plant, wind farms, and over 1700 retail sites in North America. As Canada’s leading integrated company, Suncor owns 940 mbpd oil production capacity, 550 mbpd upgrading capacity, and 460 mbpd refining capacity.

The company has operations across the entire value chain, including resource extraction, upgrading, refining and marketing, and midstream logistics. A holistic presence across upstream, midstream and downstream cushions Suncor from price volatility in the energy market.

Investment Data

Revenue Growth & Market Exposure

Suncor Energy derives a majority of its revenues from its oil sand business, and holds one of the largest positions in oil sands. E&P is a reliable source of low-cost oil production and cash flow.

Suncor is strategically focused on developing Canada’s Athabasca oil sands, which is one of the largest petroleum resource basins in the world. The company deploys in-situ technology for mining and believes the next phase of growth will be in situ sites. The in situ process will result in structural savings and improved future designs. Suncor has received an approval for multiple in situ developments.

Over the 50+ years of its existence, Suncor has focused on operational excellence and has developed a balanced portfolio of high quality assets with significant growth prospects. Suncor’s long-life, low-decline reserve base with a proven life of 31+ years, sets it apart from peers. In addition, its offshore business provides geographic and cash flow diversification, while its midstream assets provide operational flexibility. The company is targeting driving utilization rate above 90% by 2020.

SU - Market Opportunities
Source: Suncor Investor Relations

As an integrated energy company, Suncor’s presence across the entire value chain insulates it against volatility in any one segment. The company’s focus on cost reduction as well as production growth should drive future profitability. Investment in projects such as Fort Hills, Hebron and Syncrude will add value for its shareholders while increasing long-term profitability for the company. Suncor is also growing through a series of divestments and acquisitions.

Suncor is poised to benefit from future opportunities with a growth potential of 10%-12% CAGR in oil sands business and 7%-8% overall until 2020.

Dividends

Suncor, a Dividend Achiever, is a shareholder friendly company deploying a combination of share repurchases and dividends to reward its shareholders. Suncor has been paying dividends since the last 26 years and 2018 marked the sixteenth consecutive year of its dividend increase. The company last raised its dividend by 12.5% and sports a dividend yield of 3.7%. Its dividend growth has been quite impressive with the last ten years showing a CAGR of 21%. Suncor has a $5 billion stock buyback program in place since May 2017.

SU - Dividend Growth
Source: Suncor Investor Relations

Suncor’s vertically integrated business model has made it a market leader both in terms of funds from operations and discretionary free cash flow per barrel. As Canada’s leading integrated energy company, Suncor Energy stands in a good position to benefit from rising oil demand and growing offshore businesses. The company is expecting production growth of 10% CAGR through 2018-19, from Fort Hills and Hebron projects as these projects ramp up. Its downstream integration business plays a major role in reducing the impact of wider heavy crude differentials.

Suncor leads the industry in terms of FFO per barrel. Suncor needs a price of $40-$45 per barrel in order to generate enough funds for sustaining its dividend. The company expects free FFO to increase at a 5% CAGR through 2020-23 and should comfortably increase its dividend payout in tandem with its FFO growth.

Competition

Suncor competes with other oil and gas companies, and companies that provide alternative sources of energy. The company faces intense pressure in virtually every aspect of its business. Suncor competes with the likes of Canadian Natural Resources TSE:CNQ which holds some of the best oil sands assets in North America, particularly thermal in situ properties. Another competitor is Cenovus Energy TSE:CVE, a large Canadian integrated oil and gas company which doubled its oil sands production after the acquisition of most of ConocoPhillips’ operations in Western Canada. Another large integrated energy company in Canada is Imperial Oil TSE:IMO. The company has a presence in both upstream and downstream businesses and is the largest refiner of petroleum products.

Bottom Line

Suncor is an industry leader with an integrated business model, strong balance sheet, capital discipline and proven operational excellence. The company should benefit from a growing demand for oil given its significant long-life reserves base, industry expertise in oil sands and economies of scale.

Continuous efforts towards increasing production and reducing costs and a history of strong FFO generation should aid future dividend growth.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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