IN THE NEWS / Suncor Energy Steady, Boring - And Profitable
Thursday, September 24, 1998
ERIC REGULY - Globe & Mail
Calgary -- Rick George, the chief executive of Suncor Energy, has bad news. His remarkable winning streak has come to an end. This year, for the first time since 1992, the company will fail to report record earnings.
Don't panic. Mr. George, an affable Coloradan who became Suncor's boss in 1991, has not turned into another management burnout. His company, one of the industry's largest oil and gas players, is still on a roll. While many rivals have killed their spending programs, Suncor is investing billions; while profits across the sector are vanishing, Suncor is still well in the black. And while stock prices are collapsing, Suncor is holding up well.
The shares, which traded yesterday at about $51, have lost only 8 per cent of their value since their May peak of $55.40. Many other oil producers have lost half to two-thirds of their value. Even mighty Petro-Canada, a company that is hardly sitting idle, is down by 30 per cent.
Plummeting oil prices made it impossible for Suncor to post a sixth consecutive year of rising earnings. In 1997, oil sold on average for $20 (U.S.) a barrel. This year's average will probably be less than $15, although the recent rally has pushed prices close to $16. "We won't report better earnings simply because of commodity prices," Mr. George says. "But we don't expect to be significantly off from last year." Profit in 1997 was $223-million (Canadian), up 19 per cent.
Suncor is riding high because it is unlike most other oil companies. It doesn't pump oil out of the ground, it mines it and it does so at extremely low costs. The bulk of its operations are in the vast oil sands deposits near Fort McMurray in northern Alberta. The tarry sands, which look like ground coffee, are scraped out of the ground with giant shovels and processed into light, high-quality oil. New technology and efficient mining techniques have allowed Suncor to reduce the cash costs of producing a barrel of oil from $19 (Canadian) six years ago to $12.50 today. When you realize this is about half of the market price in U.S. dollars, you can understand how Suncor can make small fortunes when gasoline sells for less than bottled water.
Costs will keep coming down as Suncor produces more, and this is pretty easy to do. The Fort McMurray reserves are estimated at 300 billion barrels, making it potentially more prodigious than Saudi Arabia. Exploration consists of sticking a shovel in the ground. The development part is more expensive. Suncor is spending $2.2-billion to more than double oil sands production to 210,000 barrels a day by 2002. It is also part of a consortium that is spending about $200-million on an experimental oil-shale project in Australia.
The Fort McMurray expansion is not risk-free. Falling oil prices could clobber Suncor's profit margins, although this scenario seems overly pessimistic. Mr. George thinks prices hit bottom earlier this year and will settle into the $16-to-$17 (U.S.) range in 1999 as OPEC's production quotas are trimmed.
A greater risk is finding buyers for all this extra oil. Suncor's strategy is to pump the extra production into the United States. Mr. George is gambling that American refiners will be eager buyers of "Suncor sweet," the industry's equivalent of Tuscan virgin olive, because it is easier to refine into high-margin products such as diesel fuel and gasoline than heavy oil. The latter leaves refiners with a lot of near-worthless asphalt. Suncor's challenge is to capture these refiners before Venezuela, another big source of light crude, does the same.
Suncor is not the most exciting company around. Living by the shovel instead of the drill-bit is not the stuff of romance. Great, gushing wells are not part of Suncor's history and probably never will be. Furthermore, Mr. George, as respected as he is, is not the sort of guy to bet the farm. In spite of the bargain prices in the industry, he says he has no intention of becoming a predator, although he likes the idea of owning a refinery in the United States.
The same goes for Sunoco, the company's refining and marketing arm in Ontario. It's small and profitable, but expanding means getting into a gas pump war with Esso, Shell and Petrocan, something he does not relish. "We don't see Sunoco as a national brand," he says, even though some analysts think the name is underexploited and would travel well.
Suncor, in short, is a solid, well-financed, well-managed company that knows exactly where it is going. It's safe to assume that, in five years, it will look pretty much the way it does now.
Don't complain. In this market, nobody needs cowboys. Safe and predictable are virtues to be cherished in a world of low oil prices. Under Mr. George, Suncor's market value has gone from $1.1-billion to about $5-billion. In 1997 alone, the shares rose 73 per cent and the dividend yield, at about 1.3 per cent, is respectable. "We have a pretty clear path on how to double shareholder value from here," he says.
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