Summary
- Warren Buffett doubled down on his Suncor investment towards the end of 2014, while selling off most of his other energy holdings such as Exxon.
- Several variables have combined to cause Suncor to reach 52-week lows on the NYSE, and Suncor is available for cheaper than Buffett's buy-in price.
- This article looks at why Buffett may have purchased more Suncor, based on his traditional investment style and practices.
SU data by YCharts
Introduction
In Q4 2014, Warren Buffett made another large investment into Suncor Energy Incorporated (NYSE:SU), increasing Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) stake to over $500 million USD as of December 31st, 2014. Despite divesting his entire stake in Exxon Mobil (NYSE:XOM) and generally pulling away from the oil sector, he chose to buy more Suncor, making it Berkshire Hathaway's largest energy holding at over 22 million shares. Buffett's purchases have been analyzed for years as he is largely regarded to be the most successful investor of the twentieth century, and seems to be in the running for this century as well. What makes his style particularly interesting, is that he tends to buy stocks when everyone else is saying to avoid them. In addition to this, he takes an incredibly simple and straight forward approach to investing that is easy to understand, yet rarely done.
This article is not meant to be a complete detailed analysis on Suncor Energy, nor is it meant to be a complete article on the Buffett style of investing. Rather, this article attempts to look at why Suncor meets all of Buffett's traditional investing criteria, based on his historical purchases, and why Suncor seems to be a good purchase at this time. It may be necessary to have some understanding of the Canadian energy environment right now before making an investment, and I would recommend reading a recently publishedintroductory article to the Canadian oilsands.
Why Now Is The Time To Start Building A Position
The biggest problem with Suncor is that most people generally agree that it is a bulletproof company that will survive in any environment, and is likely to grow in the future; therefore, much of this stability has been valued into the share price. This is why Suncor has never "crashed" in the last few months like some of their peers, nor likely ever will. I would never recommend buying on margin, but if you had to buy any energy company in Canada on margin, this would likely be it. Also note the Buffett Effect on Suncor has been quite pronounced, as shares started outperforming their peers after the SEC announcement in February announcing that Buffett purchased shares. However, it seems over the last few months, this effect has been diminished, and it no longer looks to be more expensive than their peers.
I want to make it clear that I am recommending building a position, and not a large investment at this time. This is because I believe that Suncor still has some downside as oil could easily break new lows temporarily in the next few weeks as once again panic has hit the oil industry, and the world is seemingly ending. In addition, the last time when oil was trading in the low 40s, Alberta had a conservative government; since the NDP (left wing) was elected in May, Alberta based Energy companies (the vast majority) seem to have valued in a 5-10% drop in market cap to accommodate this, which could suggest Suncor could hit new lows without oil breaking new lows.
Keep in mind that I wrote this article now, instead of in February, because this is the first time since Buffett's SEC announcement that Suncor's price has become so attractive, and may become even more attractive in the next few weeks.
The US Dollar
Fortunately for American investors, or investors with a lot of US currency, Suncor is now trading at their 52 week low on the New York Stock Exchange due to the strengthening US dollar; this has created an even larger opportunity for using the US dollar, as Suncor is still 10% above its 52 week low on the Toronto Stock Exchange. We can see that the CAD/USD is approaching decade long highs, as evident in the chart below.
(click to enlarge)
Q2 Earnings Release
Suncor is set to release their Q2 earnings on July 30th, and this will be an extremely important quarterly report as we will finally start to see how management's aggressive changes have been implemented with respect to costs. Q2 is historically the most difficult quarter for Canadian energy companies as it is 'breakup season'. What is interesting about Suncor's estimated earnings, is that they are extremely varied; the average analyst predicts $.29 EPS, while the range is from $.07 to $.54. If Suncor is able to achieve at least around average estimated earnings, then they will be poised to be a strong buy as they have shown to be robust at the 'worst of the worst'.
Buffett Principles
Easy to Understand
Suncor is a fairly straightforward company in that is a diversified oil company that operates in the Athabasca oilsands. There is nothing complicated about Suncor's operations that are confusing, or requires highly industry-specific knowledge. It can be easily compared to other companies, and produces a large amount of data on their very thorough financial statements that allow an informed investor to get a clear picture of their operations. Their financial information is easy to read and straightforward.
Consistent Growth
Suncor has been around for a while, and has proven to be robust in almost all environments. Suncor not only survived the 1980's and 1990's, but they emerged stronger; this is a trend that they have capitalized on throughout their history, and are expected to do so in the current downturn.
Competitive Edge
It can be really tough to find a company with a competitive edge in a commodity businesses, as the role of branding is much more insignificant. Suncor is still able to present a competitive edge by being the industry leader in Canada, and also having the largest amount of cash and oil reserves. Suncor's size has allowed them to get a piece of many of the more expensive mega projects; these projects are what make Suncor somewhat unattractive in the short term, yet very attractive in the event of an eventually rebound. Suncor is in the perfect position for this, because they are well insulated from losses with their diversified business operations, while also playing a huge role in the future mega projects. It's important to consider that unless there are dramatic new discoveries or changes in technology, Canada and Venezuela will be the two largest oil producers in the world 30-50 years from now, and Suncor is the largest company in Canada.
Long Term Outlook
Buffett has traditionally invested in companies that are likely to be profitable for several decades, which has been somewhat more challenging when investing in oil companies. Note that not only did Buffett buy Suncor, he sold off his enormous stake in Exxon Mobil. I believe that this is because there seems to be a vastly different picture when one looks at the world's largest oil producers versus the countries with the world's largest deposits; Canada currently has the third largest oil reserves in the world, yet produces much less oil than Saudi Arabia or even the United States. With the world's largest deposits existing in Venezuela, Saudi Arabia, and Canada, respectively, it makes sense that Buffett is looking towards Canada as Venezuela and Saudi Arabian governments would not be feasible. In forty to fifty years, the new middle-east will be in Canada and Venezuela as the easy oil will be all gone, and even Saudi Arabia should be drying up. As mentioned earlier, the diversified operations help keep Suncor profitable in all environments; this is because when oil prices are lower, their downstream profits tend to help compensate for their upstream losses.
Good Management
Buffett has frequently emphasized the importance of investing into companies with good management, and he seems to do a fair bit of research into who he may invest in. Buffett has always stated that management is one of the most important, yet most neglected, area of research. Steve Williams took the helm at Suncor in 2011, and has adopted a completely different style than previous management; Suncor has since given up on growth for the sake of growth, and has promised to return capital to shareholders through dividends or buybacks. Williams has emphasized the much more stringent criteria that must be met in order for a project to go forward with respect to expected costs and margins, and he has been diligent at keeping costs low in all environments. This is important because the oil industry has been notorious for overspending in the past, especially in the last few years. What is somewhat interesting about selling Exxon and buying more Suncor, is that Steve Williams used to work for Exxon before becoming CEO of Suncor.
Dividend Growth and Share Buybacks
Suncor currently has a dividend yield of 3.34%, which is attractive in the Canadian energy sector right now, and there seems to be no evidence of any dividend cut happening soon. Furthermore, Suncor has consistently grown its dividend over the last 10 years.
In addition to this, Suncor has bought an enormous number of shares back over the last few years, and will likely continue to do so if oil remains low. At the end of 2011, Suncor had 1.558 billion shares outstanding; at the end of Q1 2015, Suncor had 1.445 billion shares outstanding. This represents almost a 7.3% reduction in the share float in 4 years, which is very impressive for such a large company. What is even more impressive about the share buybacks, is that Suncor management seems to have a very good idea of Suncor's intrinsic value, and have been purchasing more shares when the stock price is trading lower; note that Suncor bought back significantly more shares in 2012 and 2013 than in 2010 and 2011, when the share price was not nearly as attractive. Suncor management has remained disciplined with their share buybacks. In Q4 2014, Suncor canceled their share buyback program due to the low oil environment, which suggests that management foresees better use for their money right now.
Trading Below Intrinsic Value
The best company in the world is not a good buy if the price is not yet right, therefore the final criteria for purchasing a stock should ultimately be within its trading price. Notice that Buffett only tends to purchase Suncor when the stock is not doing well, which tends to be when oil is performing poorly. This section in itself could be a full article, therefore this will not be explored in detail today. However, looking at some of the metrics suggest that Suncor is now currently trading below the intrinsic value. Suncor has a market capitalization of $47.8 billion, and shareholder's equity of $41.2 billion; this is remarkably close to the book value of the company considering Suncor is a diversified industry leader with strong consistent earnings. Furthermore, Suncor has traditionally not gone below a 1.2 price/book ratio before. However, a complete value analysis is beyond the scope of this article, and will instead be written after Suncor releases their Q2 results.
Conclusion
Suncor has once again broken new 52 week lows on the New York Stock Exchange, and seems like a very safe, stable, and well rounded company to invest in at a discount that is rare to find for Suncor. Although Suncor still seems like a fair value in the Canadian dollar, it seems to be a very good value on the American dollar. Buffett started purchasing Suncor in 2013, held off for a while, and doubled up on his investment in December 2014; when the SEC released this information in February, Suncor's share price became much less attractive. Since then, a change in government, a stronger USD to CAD, and another decline in the oil price has brought Suncor to 52-week lows on the New York Stock Exchange. Now is the time to start buying, especially if you want to hold for greater than 20 years.
Source: http://seekingalpha.com/article/3355675-why-warren-buffett-bought-suncor
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