A Big Winner from Oil's Rebound

03/25/2009 1:00 pm EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of The Energy Strategist, says a major Canadian oil sands producer would be an early beneficiary of a rebound in crude prices.

I suspect we’ve seen the lows for [crude oil] this cycle and could easily see prices touch the $60 to $70 area by mid-summer if these trends persist. This also means energy-levered stocks have likely seen their lows, and could experience a significant rally over the next few months.

The signs are still tentative, but I’m more bullish on the energy patch and commodity prices than I’ve been in many months. And I’m boosting exposure to crude oil by recommending one of the most oil-levered producers, Suncor Energy (NYSE: SU).

Suncor is the most experienced player in the Canadian oil sands. The company’s total production was approximately 265,000 barrels of oil-equivalent production per day in 2008. Of that, 86% was production from the oil sands.

The oil sands are among the few major North American plays with the potential to see actual growth in production in coming years. And Suncor approved a nearly C$21 billion capital spending plan in early 2008 that was designed to more than double its current production to about 550,000 barrels a day by the end of 2012.

Oil sands are essentially a semi-solid, tar-like form of oil known as bitumen that’s mixed with sand and rock. Crude oil prices would need to be at or above the $70 to $80 range to make major new oil sands production projects economically feasible. This high hurdle tends to make oil sands-focused producers the most leveraged to the fate of crude oil prices.

Suncor produced about 230,000 barrels a day from its oil sands assets last year and actually intends to increase that figure to closer to 300,000 this year.

The firm had originally expected to spend C$7 billion this year on capital spending, [but] in October Suncor cut its spending plans to C$6 billion, and in January yet again to C$3 billion.

In other words, Suncor is hunkered down to weather the storm of low oil prices. But the company has C$3.5 billion in unused credit facilities with a large consortium of Canadian banks. And Suncor doesn’t need to rollover any of this financing until 2011.

Suncor also benefits from a weaker Canadian dollar. Most of its costs are priced in Canadian dollars, and its revenues are primarily in US dollars: Oil is priced in US dollars, and the primary end market for its oil would be the United States.

Suncor remains one of the only companies in North America with the potential to significantly grow production in coming years. When oil prices do recover, the firm will be in an excellent position to take advantage of rising prices.

(Suncor has agreed to acquire Petro-Canada (NYSE: PCZ) for $15.5 billion, in a combination that would be the largest energy company in Canada. PCZ also has substantial holdings in the oil sands in Alberta—Editor.)

Buy Suncor Energy under $30. (It closed Tuesday above $23—Editor.)

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