Suncor firing on all upgraders

The turnaround in Suncor (TSX: SU) after Rich Kruger took over has been remarkable. It has almost been like a Hunter Harrison story.

Financial metrics at Suncor have been as good as it gets, with 2024 generating about $9.5 billion in cash flow, or $8 billion if you make some adjustments for working capital.

Using the $8 billion figure, Suncor has 1.25 billion shares outstanding, so $6.40/share in free cash flow. Market value is around CAD$55/share at present.

The balance sheet is mostly de-levered with about $7 billion of net debt. They intend to keep it at around the $8 billion level.

The capital allocation after capital expenses is currently going toward an approximate $3 billion/year dividend and the rest of it dumped into a share buyback.

If Suncor was trading as an income tax-free income trust like in the old days where income trusts were freely traded, they’d be generating about 15% distributions on their cash flows. With a 23% combined federal-provincial tax, that goes down to about 11.6% net on market cap.

At $55/share, the buyback is an acceptable use of capital, especially when measured against the cost of their 10-year debt (5.6% pre-tax at present).

The risks are fairly well known – regulatory (although the pendulum is definitely swinging on the environmental policy front), geopolitical (Suncor is relatively better positioned than Cenovus with respect to potential US tariffs on crude), and the commodity market (will oil crash?).

The biggest risk is that they spend money on a really stupid acquisition. Their most recent large profile acquisition (consolidating the remainder of the Fort Hills oil sands project from Teck and Total Energies) was a remarkably good one.

On the flip side, the upside is fairly contained – the company is operating at capacity.

Hence the valuation dilemma – will there ever be a catalyst to warrant a valuation that takes the company from ~12% after-tax to 10, or 8%?

It is too cheap to sell, but since zero growth and volatile commodity companies tend to be out of vogue at present, too expense to purchase.

Still, in theory, if everything remains equal, by this time next year, the company’s shares plus the dividend distribution should take the total value of a share purchased today at $55 and turn it into roughly $61, a lot better than a risk-free 3% on short term cash.

From an engineering and operational perspective, Suncor is a very exciting company doing really amazing things with gigantic volumes of dirt and water – it is truly a modern version of energy alchemy they are performing. Few people appreciate the magic that is being performed with these energy companies.

Financially, however, they are starting to resemble REITs. Whether this is a good or bad thing, I do not know.

I remain long on a moderate position taken shortly after Kruger took over. I am not expecting fireworks from this position, but take solace in having some degree of exposure to perpetually rising prices and having something better than cash silently raking in those free cash flows.

Subscribe
Notify of

3 Comments
Inline Feedbacks
View all comments

As per Kruger, SU is actually firing upgraders above capacity, up to 105% utilization 🙂

Now CVE’s turn…

Sacha, correct me if I’m wrong:

Last Nov FFX issued 700m worth of bonds to redeem its prefs. Series C and D were redeemed in Dec (according to the schedule). Series E, F, G and H have redemptions dates in March and Sep 2025 accordingly. All of these are traded ~12% below nominal right now + yield 5% dividend.

Trading liquidity is an issue yes, but still: aren’t these the easiest ~15% (dividend included) gains in 2025?