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.
