Warren Buffett has singled out Suncor Energy (NYSE:SU) (TSE:SU) as one of the few companies within the commodity space that he and Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) will invest in.
Suncor Energy analysis
Actually, when you study Suncor it is easy to see why, the company has a low production cost per barrel and 2P reserves in place to last the company for more than three decades at current production rates, more than both Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM). What’s more, Suncor Energy (NYSE:SU) (TSE:SU) has enough refinery capacity to refine the majority of its annual oil production and a fleet of tankers able to transport more than 100 million barrels of oil around the world annually.
Suncor Energy (NYSE:SU) (TSE:SU)’s cash generation is also highly attractive. In particular, during the second fiscal quarter the company produced a free cash flow of just under $2 billion and since 2011 the company has repurchased $2.5 billion in stock, more than 5% of its issued share capital. The company also authorised another $2 billion stock buyback earlier this year, which is expected to reduce the number of shares in issue by a further 4%.
Suncor cash generation
Suncor Energy (NYSE:SU) (TSE:SU)’s operations and cash generation figures are all highly impressive, you can read further about my thoughts on Suncor here.
However, what is really attractive about the company is its valuation. Specifically, the company’s EV/Reserves valuation in comparison to both its larger and smaller peers.
|Suncor||Occidental Petroleum||EOG||Chevron||Exxon Mobil|
|Billions USD||Enterprise value||$62.00||$81.00||$55||$229||$400|
|Billion BOE||Proved plus Probable Reserves||6.90||3.30||1.80||11.20||25.2|
Reserve figures taken at the end of 2012. Enterprise values as of 10/22/2013
On a EV/Reserves basis per oil equivalent barrel of reserves, Suncor Energy (NYSE:SU) (TSE:SU) trades at a figure less than half that of Occidental Petroleum Corporation (NYSE:OXY), EOG Resources Inc (NYSE:EOG) and Chevron Corporation (NYSE:CVX). Also bear in mind here that the majority of Suncor’s reserves are crude, whereas the reserves of its four peers above are a mixture of both crude and natural gas, which generally demands a lower valuation. Furthermore, both Exxon and Chevron, although two of the largest oil companies on the planet only have enough reserves in place to last less than 20 years. What’s more, both Exxon and Chevron are currently cash flow negative as they spend heavily in an attempt to ramp up production.
The only realistic reason that the market could be placing a lower valuation on Suncor Energy (NYSE:SU) (TSE:SU) and its reserves is the fact that the majority of Suncor’s reserves are in oil sand form. However, as I have shown above Suncor is highly cash generative and with more than three decades of reserves in place it is set to stay this way for a long time yet. With that in mind Suncor’s low EV/Reserves valuation in relation to its peers makes the company look highly attractive and cheap.