Suncor Energy Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Suncor Energy Inc. is a Canadian integrated energy company that explores, develops, and produces crude oil and natural gas in a variety of geological locations, mostly in oil sands.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Suncor is a Canadian integrated energy company focused primarily on developing and extracting resources from Canada’s oil sands, a uniquely energy-intensive process which presents challenges and opportunities.

Business Overview Suncor operates across various segments of the energy industry:

  • Oil Sands: This segment is the core of Suncor’s business. It involves the mining and in-situ extraction of bitumen, and its subsequent upgrading into synthetic crude oil. This is a large-scale, capital-intensive operation, and Suncor has been working on improving operating efficiency, particularly as this segment comes with high emissions.
  • Exploration and Production (E&P): Beyond the oil sands, Suncor also engages in conventional oil and gas exploration and production. This segment is more geographically diverse, and more prone to price volatility.
  • Refining and Marketing: Suncor refines crude oil into gasoline, diesel, and other petroleum products, which are sold to retail consumers via a network of Petro-Canada branded stations.

Suncor’s retail brand, Petro-Canada, adds a level of vertical integration that may improve profits.

  • Renewables: Suncor also participates in renewable energy projects, but in a small scale compared to other divisions.

Industry Trends

  • Energy Transition: The global push towards renewable energy and reduced carbon emissions is an undeniable trend. Suncor, along with other oil and gas companies, will have to adapt to changing market conditions and new regulatory environments.

This will require significant strategic changes as the oil and gas industry will face a decline over the long run due to climate change.

  • Volatile commodity prices: The energy market is notoriously cyclical and prone to price volatility. Suncor, like all other energy companies, is subjected to such price swings that makes forecasting more difficult.
  • Increased Competition: Competition is intensifying in the oil sands, mostly from the lower cost areas of the middle east.

Competitive Landscape Suncor’s competitive landscape includes:

  • Integrated energy companies: Exxon Mobil, Chevron, BP, Shell and other major oil companies have similar, but more globalized, operations.
  • Oil sands competitors: Other Canadian players like Canadian Natural Resources, and Cenovus are very big oil sands operators.
  • Renewable energy companies: While Suncor is involved in renewable energy in a limited scale, they are not considered competitors.

What Makes Suncor Different? Suncor’s competitive advantages includes:

  • Established Operations: As an integrated oil producer, Suncor enjoys a diverse revenue stream that is not solely dependent on one product, or one part of the chain.

Suncor has the ability to profit from multiple aspects of the energy market, from oil exploration to refining. This might provide a unique opportunity.

  • Long History in Oil Sands: As one of the earliest movers in oil sands, Suncor has significant knowledge and infrastructure that give it a slight advantage.
  • Strong brand: Petro-Canada is a very strong brand and one of the largest gasoline retail brands in Canada.

Financial Analysis

Suncor has large and variable revenue, which changes dramatically from quarter to quarter due to fluctuations in oil prices. Suncor reported CAD 10.77 billion in revenues for Q4 of 2023, a figure that had been drastically different in previous years due to oil price volatility. Profitability at Suncor is also affected by oil price and operating costs, particularly amortization of oil sands reserves. While the company aims to cut costs in general, some cost areas are completely out of their control.

One of the main risks for the company is a big downward shift in oil prices. In Q4 2023, the cost of producing a barrel of oil for Suncor was around $50, and thus at current prices, the company’s operations are highly profitable. But the company needs to have very precise forecasts of costs and prices so that the returns from projects can materialize and justify the investment.

Suncor’s profits are highly correlated with oil prices, creating a lot of volatility in the cash flows. In 2023, the company had a record total production, driven by higher oil sands production and a record production at the White Rose extension project.

  • Profitability: Suncor’s profitability is highly dependent on the volatile price of oil, but the company aims to be profitable in a volatile oil price market. For example in Q4 2023, the company had an EBITDA margin of 39.8%. The margins change drastically from quarter to quarter. The company also has plans to reduce costs by $1 billion by 2026.

  • Leverage: Suncor’s balance sheet is moderately leveraged, with a debt-to-capital ratio of 23.9%. The company maintains a moderate level of debt and a high enough liquidity to service its debts.

  • Capital Expenditures: Suncor is investing in both sustaining capital expenditures to maintain production levels and growth capital expenditures for new projects, and as well as to implement carbon capture and emissions-reduction technologies.

Moat Rating: 3 / 5

Suncor possesses a narrow moat that is not very resilient, based on these factors:

  • Scale and resources: Suncor’s size and scope of operations, especially in oil sands, create some advantages over small competitors. However, scale advantages can be easily overcome.
  • Branding: Suncor’s retail brand, Petro-Canada, provides it with some pricing power that most of its smaller and unbranded competitors do not have.
  • Technology: Suncor also attempts to create a moat using its technical knowledge and expertise.

However, these competitive advantages are not very strong and are being challenged from many sides. The oil business is not a business where a single company can dominate over a long period of time, because of competition from other players and innovation from startups. As such, a three rating is the most appropriate.

Risks that Could Harm the Moat and Business Resilience

  • Volatile commodity prices: As discussed, prices are highly unpredictable and can dramatically affect Suncor’s profitability and ability to generate cash flow.
  • Political and regulatory risks: Suncor is heavily subjected to political risks that can affect their projects (such as pipeline approvals or regulatory hurdles), and higher taxes that can decrease profitability. The Canadian government is working to reduce emissions so that they meet their targets. Suncor has plans to reduce carbon emissions by using carbon capture and other technologies, all of which cost money and take time.

Suncor may be required to shut down its high polluting operations early, which would cost the company billions of dollars in investment losses.

  • Technological obsolescence: Suncor might see some of its technologies and processes becoming obsolete, and will need to maintain its R&D in order to survive over the long run. A key part of the energy transition is the speed of development and market penetration for electric and renewable energy sources, which can make oil assets uneconomical in the longer-term.
  • Operational risks: Given the scale and complexity of its operations in oil sands and refining, Suncor is subject to a range of operational risks such as delays in production, equipment breakdowns, and safety incidents.
  • Global economy: Suncor is a commodity producer, and as such, is highly subjected to global demand which is tied to macroeconomic factors.

Understandability: 2 / 5 Suncor’s business is quite difficult to fully understand, mostly because of the oil sands segment. While there are not that many ways to create gasoline or other refined products, there are many ways to extract and get oil. Oil sands extraction is a technical industry with many different geological considerations. Most individuals may understand how a gas station or a retail business might operate, but they may find it harder to understand how a company extracts bitumen and turns that into fuel, or how they explore for new oil deposits.

Balance Sheet Health: 3 / 5

Suncor’s balance sheet shows signs of both strength and vulnerability:

  • The company’s current assets can service current liabilities relatively easily.
  • Suncor has a moderate amount of leverage, putting it in a relatively safe position to handle economic downturns.
  • However, like most commodity producers, its profitability and returns on capital are highly unpredictable, which leads to some risks for the company in a downside situation.