Buffett bets on Suncor and oil sands

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Warren Buffett has finally deployed a sliver of his immense wealth into Canada, registering a vote of confidence in the future of the resource sector.

The head of Berkshire Hathaway Inc. and one of the world's foremost investors, Mr. Buffett revealed in a U.S. regulatory filing that he has accumulated a stake of 17.8-million shares in Suncor Energy Inc., Canada's biggest oil and gas producer. His investment is worth $620-million at the current share price.

"It demonstrates some faith in the future of the oil sands in the American mind," says Michael Smedley, chief investment officer at Morgan Meighen & Associates in Toronto.

Buffett watchers could not recall the Oracle of Omaha having ever invested in a Canadian corporation before. "If it's not the first time, it's definitely the largest stake he's ever taken in a Canadian company," said Barry Schwartz, a vice-president at Baskin Financial Services.

The famously patient investing guru first hinted at his interest in the Canadian energy sector five years ago, when he and fellow tycoon Bill Gates made a stealth visit to Canadian Natural Resources Ltd.'s Horizon project near Fort McMurray, Alta.

The mere whiff of Mr. Buffett's presence lifted hopes for the oil patch, then besieged by environmental criticism after 500 ducks died on a Syncrude Canada Ltd. tailings pond, and a mutated fish with two jaws was found in Lake Athabasca. But Mr. Buffett was cagey about the purpose of his visit. "I go to the movies, but I don't buy movie companies," he said a few days later on CNBC, explaining his visit was for educational purposes. "If I understand the tar sands today … I've got that filed away and I can use it at some later date."

Suncor is of obvious appeal to those hunting for cheap energy stocks. It is cheaper than most of its peers in terms of its share price to cash flow and book value.

"Suncor is one of the most heavily undervalued Canadian integrated oil producers," said David McColl, a Morningstar equity analyst. "It is no surprise that a value investor like Berkshire Hathaway would view it as a phenomenal investment opportunity."

Over the two years leading up to April, the company's stock lost 40 per cent of its value. A shortage of pipeline capacity, which limited its ability to deliver product to the best markets, contributed to the loss, as well as a glut of newfound U.S. shale oil, and a hefty price discount on Alberta crude compared to the U.S. benchmark.

The stock has rebounded in recent months as the price of oil patch crude shot up. Earlier this year, Suncor revisited its growth strategy, paring back spending on new projects in favour of boosting investor returns through increasing dividends and purchasing its own shares, all of which would have piqued the interest of Mr. Buffett.

"He looks to buy companies that generate enormous free cash flow and start returning that to shareholders," Mr. Schwartz said. "This company is just printing money."

Mr. Buffett is far from the company's biggest shareholder, but his involvement was enough to boost Suncor stock by 3.5 per cent on Thursday to close at $34.97.

Mr. Buffett's endorsement of Suncor can be seen as validation for other shareholders, some of whom have grown impatient with the company's stock. "We've held it forever, as probably have most institutional fund managers who hold large cap stocks," Mr. Smedley said. "For anyone who's had short to medium-term expectations, Suncor has been an extremely frustrating ride."

Of course, Mr. Buffett, the man who once declared his preferred holding period to be "forever," is renowned for taking the long view.

With files from Bloomberg