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Suncor Energy (NYSE: SU) is upping the ante on its Canadian oil sands bet.
On Sept. 21, the company agreed to purchase an additional 10% stake in the Fort Hills oil sands project in Alberta for CA$310 million. That put it into a controlling position on the project with a 50.8% stake.
Suncor bought the 10% share from one of its partners in the proposed 180,000-barrel-a-day project, Total SA (NYSE: TOT). The sale lowered Total’s stake to 29.2%. The remaining 20% is owned by Teck Resources (NYSE: TCK).
This deal is a perfect reflection of the vastly diverging bets on the future of Canada’s oil sands.
Oil Majors Pulling Out
Many of the world’s major oil companies are saying goodbye to Canadian oil sands.
Total had already decided to not proceed with the proposed 157,000-barrel-a-day Jocelyn North oil sands project in Alberta, where it was also partnered with Suncor.
Earlier this year, Royal Dutch Shell PLC (NYSE: RDS-A) opted to withdraw its application to build a 200,000-barrel-a-day oil sands mine, also in Alberta.
And there are other examples I could cite.
The reason is the ongoing oil market share war started by Saudi Arabia. Its objective apparently is to knock out as much long-term, higher-cost oil projects as it can.
The result is a huge amount of cutbacks in spending on oil projects worldwide. According to the energy consultancy Wood Mackenzie, $220 billion in cuts have already occurred. It added that, in total, $1.5 trillion in cutbacks could possibly occur.
Canada’s oil sands were an easy and obvious target.
Rystad Energy estimates that any new oil sands project would need $100 a barrel of oil just to break even. The Canadian Association of Petroleum Producers (CAPP) now estimates that Canada will produce 5.3 million barrels of oil per day in 2030. That is down from its forecast of just a year ago of 6.4 million barrels a day.
Suncor Says It Got a Bargain
Of course, oil sands projects already underway can get by with cheaper oil.
That may be the reason behind the optimism of Suncor CEO Steve Williams on the deal.
He pointed out that Suncor got a discounted price on the 10% stake. Williams stated, “We consider this project to be one of the best opportunities for long-term sustainable growth in the industry today, thanks to the quality of the resource and our disciplined project execution.”
Buying something on the cheap borrows a page from the playbook of Warren Buffett and Berkshire Hathaway (NYSE: BRK-B).
Suncor is Berkshire’s biggest energy holding. It owned about 22.3 million shares at the end of the first quarter of 2015. One attraction no doubt is the fact that the company has the highest gross margins of the world’s 18 largest oil and gas firms, according to Bloomberg. Its reserves-to-production ratio also ranks as the best.
(You can find other great Buffett bargains right here.)
Political Headwinds
The good news for Suncor with regard to Fort Hills is that 90% of the engineering is complete, as is 40% of the construction. The first oil is expected to flow in the fourth quarter of 2017.
And Suncor knows how to cut costs. The costs across all its projects are in the CA$28-a-barrel range. The industry, as a whole, has lowered costs by as much as 25% on oil sands projects.
Suncor is also a technology leader in the sector. In July, the company announced a $34 million project using technology that someday may replace the steam-assisted gravity drainage (SAGD) method of extracting oil. This new method employs electromagnetic waves, beamed underground, to melt oil deposits. The deposits are then diluted with a recyclable chemical solvent.
But Suncor can’t control everything.
Politics has become a sore spot in Alberta for companies operating there. The new leftist government is raising corporate income taxes and wants to get more royalties from companies operating there. It also wants to double carbon levies on the industry.
CAPP estimates that these measures will add CA$800 million dollars in costs for oil sands companies just over the next two years.
That means Suncor now has to fight Alberta’s politicians, as well as the Saudis trying to knock out Canadian energy.
It looks to be a cold, harsh “winter” for Suncor, possibly lasting for years. That leaves strong doubts in my mind as to whether now is the time to place a further bet on oil sands.
Assets could get cheaper yet.
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