Investors in Suncor Energy Inc. are perplexed. 2011 was a blowout year for the oil giant, yet its stock is nowhere near its pre-crisis highs.
The following figures explain the frustration. Back in 2008, when oil soared north of $140 (U.S.) per barrel, Suncor churned out quarterly profits in the $800-million range, according to Capital IQ, and the shares traded around the $60 mark. Last quarter, profit hit $1.4-billion, and yet Suncor shares are now worth only $35.
Making the situation even more frustrating, last quarter was the second straight quarter of record oil sands production, and December was a record month with production of 345,000 barrels a day.
No doubt, the stock traded around the $60 mark before the crisis because of expectations about $200 oil and now no one is betting on that, at least not for some time. But today's profits should speak for themselves.
On the bright side, the stock has started a mini-recovery, up 18 per cent since January 1. However, investors appear to be holding back because everyone is worried about costs.
"The major task ahead for Suncor – and the avenue to a re-rating of its relative multiple – revolves around arresting the escalation in its base oil sands operating costs, and capital discipline as its relates to its oil sands expansion plans," RBC Dominion Securities analyst Greg Pardy wrote in a note to clients this week.
Costs are clearly on management's mind. On a conference call with analysts this week, outgoing Suncor chief executive officer Rick George tried to paint a friendly picture of his firm by noting that its undeveloped Fort Hills oil sands mine will have "significantly" lower costs than rival Imperial Oil's Kearl mine. As the Globe's Carrie Tait pointed out, "Suncor's unusually public comparison highlights how far energy executives are now willing to go to quell investors' fear about cost pressures in northern Alberta."
That pressures is particularly important for Suncor because the company's growth is rooted in Western Canada. "People tend to think of us as a big integrated, and it is true -- we have assets across the world," Steve Douglas, Suncor's vice-president of investor relations said at CIBC's Whistler conference a few weeks back. "But the reality is... we are an oil sands growth company. About 80 per cent of our capital and most of our growth as we go forward is in fact centred in the oil sands. What we have on top of that are assets to maximize the value of those barrels, and then of course, international assets that provide us very low-cost cash flow in order to fund that growth."
While Alberta's costs weigh on investors, some seem to forget just how strong Suncor's balance sheet currently is. The firm has free cash flow of $3.3-billion and Mr. Pardy noted the firm has "ample room" to raise its dividend or to buy back more shares, after already announcing plans to repurchase $500-million last August.
Will investors act on that? Right now, no one knows.