Suncor: Take a LEAP

06/25/2015 7:00 am EST


Jim Powell

Principal Analyst, Global Changes & Opportunities

Even if oil drops back a few dollars near-term—as seems likely—the great number of exploration and development projects that have been cancelled should lead to a new shortage as soon as 2017 and prices will climb again, forecasts Jim Powell, editor of Global Changes & Opportunities Report.

Rising oil prices will have the biggest impact on the highest-cost producers whose profits plunged when the declines began. At the top of that list are the leading Canadian oil sand companies.

In my opinion, the best of that group is Suncor Energy (SU). The company pioneered the first commercial oil sand extraction technology in 1967 and made it profitable.

It is now the world’s largest oil sand processor and has contributed greatly to North America’s growing energy strength. Suncor sends much of its oil to the US. Suncor also has some natural gas, biofuel, and wind power operations.

Because it is expensive to process oil sand, the recent plunge in energy prices caused Suncor to lose money in the first quarter of this year. I think the company will also show a loss in the second quarter.

However, the oil price lever will swing both ways for Suncor. If oil remains above $58, the company can become profitable again and the stock should perform well for us.

A good way to increase your profits in the energy sector—at the same time you limit your risks—is to consider buying LEAPS options (Long-Term Equity Anticipation Securities) rather than the stocks.

I don’t usually recommend options because most of them expire too quickly. However, some LEAPS remain in force for as long as three years. They can be an ideal way to profit from a fallen angel that’s likely to make a recovery during that period.

Let’s look at Suncor Energy again. The stock is currently selling for about $29.50. I believe Suncor will rise to at least $40.00 within 18 months and possibly quite a bit more.

Instead of buying Suncor’s stock for $29.50 a share (or $2,950 for 100 shares) there is a LEAPS option available with a $40 strike price that costs just $1.65 a share (or $165 for 100 shares). The option doesn’t expire until January 20, 2017, which is 20 months from now.

If you buy the stock for $29.50 and it goes to $40.00, you will make $10.50 per share or 35.6%. If you buy the LEAPS option instead, and the stock goes to $40 at any time before January 2017, you should make at least 100%.

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