This year is a pivotal one for Suncor Energy (NYSE: SU). That's because the Canadian oil sands giant will finally see the fruit of its investment in two major growth projects. On top of that, the company should deliver further improvements at Syncrude after buying a majority stake in the legacy oil sands asset last year. These catalysts suggest that the best is still ahead for the company and its investors.
Ready to receive first oil at Hebron
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On the final day of 2012, Suncor Energy and its partners, which include oil giants ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), sanctioned the Hebron project off of Canada's east coast. The companies have since invested about $14 billion into the project, which should finally start producing oil later this year. What's worth pointing out is that when the partners approved the Exxon-led project, oil was in the triple digits. However, even though oil started crashing a couple of years ago, the partners made the tough decision to continue the development. It's a decision that will start paying off later this year when Hebron begins ramping up to its capacity of 150,000 barrels per day. Given Suncor Energy's 22.7% stake in the project, it will be a meaningful contributor to production growth in the coming year.
Finishing up Fort Hills
Not that long after sanctioning Hebron, Suncor Energy along with partners Total (NYSE: TOT) and Teck Resources (NYSE: TECK) approved the development of the Fort Hills oil sands project in Canada. At the time, the partners expected that the project would cost 13.5 billion Canadian dollars ($10.7 billion) and produce at a peak rate of 180,000 barrels per day after delivering first oil in late 2017.
However, several things have changed since that time. Oil prices collapsed, which provided Suncor with the opportunity to buy another 10% interest in the project from Total so that it now controls a 50.8% stake. Meanwhile, the project's price tag has run up, first to an estimated CA$15.1 billion ($12 billion) and more recently to a new projection of CA$16.5 billion-CA$17 billion ($13 billion-$13.4 billion), which will help boost its capacity up to 194,000 barrels per day. That said, one thing that hasn't changed is that Suncor Energy expects the project to be a key contributor to its production growth and cash flow in the years ahead, even at current oil prices.
Getting the most out of Syncrude
The third leg of Suncor Energy's near-term catalysts is its recently expanded stake in Syncrude. Last year, the company paid more than CA$7.5 billion ($5.9 billion) to buy another 41.74% interest in Syncrude, boosting its stake in the facility to 53.74%. By taking a majority stake in the facility, Suncor Energy had the ability to push for changes to improve its reliability and drive down costs. The company has already achieved some noticeable results, including improving its reliability from 71% in 2015 to 78% last year.
That said, the company is just getting started on its plan to improve the facility. For example, Suncor wants to share services with its adjacent base mining operations, which should reduce costs. Likewise, it intends to optimize the development of its oil sands leases to keep costs down. These initiatives should help improve Suncor's margins and boost the cash flow it can generate from these assets.
Adding it all up
Suncor Energy estimates that these three catalysts should fuel 10% compound annual growth in its production on a per-share basis through 2019. Because of that output growth and its margin expansion opportunities at Syncrude, the company is on pace to generate significant cash flow in the coming years. In fact, the company projects that cash flow from operations could be over CA$8 billion ($6.3 billion) this year, even though oil is only expected to average around $52 per barrel. That's not too far off its cash flow peak of CA$9.4 billion ($7.4 billion) in 2013 when oil averaged nearly $98 per barrel. With just a little bit more improvement in oil prices, it's entirely possible that Suncor Energy could set a record for cash flow as early as next year because of the ramp up of production at Hebron and Fort Hills, as well as continued progress in improving margin at Syncrude. Needless to say, it appears that the best is yet to come for Suncor, even if oil doesn't come close to its former peak.
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