Suncor (SU) One Dad Stock Analysis
Suncor One Dad Stock Index Analysis.
With the recent big news in the Canadian oil patch I thought a good second choice for the One Dad Stock Index Analysis would be Suncor (SU). Obviously the big news was about Canadian Naturals (CNQ) transformative acquisition, however an analysis on CNQ at this time would be problematic. I will do an analysis on CNQ after the transaction closes which should be this coming summer. I am long both SU & CNQ.
I look for iconic, quality companies that are financially sound and pay a quality dividend. I only look at the dividend after the quality and fundamental analysis is verified. I want to own companies that if someone were to say they went bankrupt in a conversation, a lay person would be surprised and an informed investor would have their jaw drop. I believe in buy and hold investing which means I am partnering as a part owner for decades and hopefully a lifetime. I believe if more people invested this way we would all be collectively better off. The focus on the stock price does truly puzzle me and is literally a case of not seeing the forest for the trees. Its my hope that the One Dad Stock Index will help guide investors to making investments on what is important to them.
One of the safest ways to be financially independent is to have multiple sources of income – I think 30-40 high quality, dividend paying corporations is the way to do that and Suncor is for me one of those sources of income.
Please note that unless otherwise stated prices are in $CDN as Suncor is a Canadian domiciled company.
So, lets get to it – how will Suncor fare with the One Dad Index?
First up is the One Dad Quality Index. It is made up of 4 measures, Size, Moat, Quality & Management. This is the most subjective of the sub indexes but I also think may be the most crucial one to get right. A reminder is that each category has a possible value from 0 to 5 with 5 being the best possible score.
Suncor One Dad Quality Index (ODQI)
Suncor is a very large company so 4 is an appropriate score. Suncor has a market cap of ~50B
Suncor is a commodity company. I don’t think you can ever have a moat of a 5 if your chief product is, at the end of the day a commodity. That said Suncor’s product is from a long life, low decline massive resource which is the Athabasca Oil Sands. There is a short to medium threat from Shale Oil in the US and pipeline constraints force SU and other Oil Sands operators to depend on the US market too much. All said the Moat Score is 3.
Suncor is definitely a Quality company. They are a quality employer and are recognized as a progressive operator in every way. There is definitely an anti-oil sands narrative being pushed by determined groups based largely on ignorance and/or malice. All things considered Suncor is an above average company on the quality scale.
Quality Score is 4.
Suncor’s management is stellar and this oil downturn was a fantastic demonstration of that. Suncor transitioned from a ‘growth at all costs’ trajectory around 2011/2012 and concentrated on debottlenecking and deleveraging prior to the commodity downturn. When it struck Suncor was ready, buying up for cheap Canadian Oil Sands and increasing their daily production with their much larger ownership position in Canada’s largest Oil Sands mine – Syncrude.
An overall ODQI score is 4.00 is very good. Suncor is definitely a quality company.
Suncor One Dad Financial Index (ODFI)
Suncor has a D/E ratio of 0.41 – This is a very good score especially when you consider the recent transactions and the capital intensity demanded by the energy industry and the oil sands operations in particular. I was pleasantly surprised to see it this low. Suncor’s credit rating is BAA1.
The ROE is an important measure by any standard. Suncor’s ROE is 4.75% for fiscal 2016. With the oil price rout that is pretty impressive – but still it is 4.75%.
Revenue Growth: 1
Revenue Growth is negative. 2016 was less than 2015. This is more of a sector indication than a Suncor one, but the fact is, Revenue has been going down recently as a result of the oil price downturn. Production growth however has gone up and SU was able to add at great prices but the Revenue growth is what it is.
EPS Growth: 3
EPS in 2015 was negative. In 2016, SU managed to return to EPS growth.
A middle of the road financial score. I expect at the end of 2017 a lot of these metrics will be much improved.
Management is increasing the dividend and has a positive outlook on production growth and cashflow so I will be looking to management to deploy these funds to further deleveraging and buying back stock if it remains range bound in 2017 – which looks increasingly to be the case.
Suncor One Dad Dividend Index (ODDI)
Dividend Quality: 4
Suncor has a solid dividend. Was able to grow the dividend through the oil price rout. Something most of the Super Majors were unable to manage.
Dividend Growth: 4
Suncor has grown its dividend (in CDN$) for over 10 years. The 5 years dividend growth rate is an impressive 24.9%
Dividend Yield: 3
As of this writing, the dividend yield is a respectable 3.16%.
Payout Ratio: 2
Prior to the oil market downturn the payout ratio was quite conservative hovering between 20-30% for the preceding years. With recent negative cashflow and earnings, the payout ratio is temporarily above 100%. I do not expect a dividend cut and management has been sending positive signals as well by not only maintaining the dividend but continuing to increase it.
A good Dividend Index result.
All the One Dad Sub Indexes are good. There is definite commodity risk with Suncor, there is no getting around it. However, Suncor has handled the downturn about as well as one could imagine. The management deserves a lot of credit managing this huge shock to the industry. Oil demand is still growing and will continue to do so for the foreseeable future. According to the IEA world oil demand will soon cross over 100 million barrels per day. There has been a massive cutback in exploration and here is Suncor with a massive, long life resource that requires zero exploration risk. With the recent price coming up to ~$50 barrel in $US, a weakened $CDN that helps players like Suncor as their revenue is in $US and expenses are in $CDN. The transportation issues are also looking to be looking up with the recent Kinder Morgan Transmountain & Enbridge Line 3 approvals.
Suncor One Dad Valuation Index (ODVI)
Forward 5 Year EPS Growth: 2.5
2017 is forces to be a positive earnings growth year for Suncor. Consensus being 1.17 per share which is a marked improvement over 2016. I don’t think a forward 5 year EPS growth will be meaningful as I don’t think anyone in the oil industry can make anything but a best guess on the price of oil in 2022. Personally I do think it will be higher than now and SU is well positioned to take advantage of any oil price increases and are well positioned to weather a ‘lower for longer’ situation as well.
Trailing 12 month P/E: 2
Because of on the books negative earnings, the TTM PE is over 100. That said I do think Suncor is fairly priced at the level it is range bound at now.
Suncor is a great company that operates in a tough segment. The industry segment is not a SWAN type investment category but within this segment, Suncor is as solid as they come.
I hope this analysis provided two things:
- Provided a comprehensive, easy to understand look at Suncor
- Explained the One Dad Stock Index and how it is used.
Please let me know what you think of both Suncor and the ODSI.
Doing this analysis for me – reminded me of the challenges facing the oil industry and once again eft me impressed with Suncor’s management. There is a good chance that both Suncor & Canadian Natural Resources (CNQ) are on their way to taking the next steps to being globally important oil producing companies.
Please, let me know your thoughts in the comments