--- In
suncor_energy_and_canadian_oil_sands@yahoogroups.com, "bindlepete"
<bindlepete@y...> wrote:
>
> Very strong an detailed article on SU reported.
>

Suncor's Oil-Patch Advantage

By ANDREW BARY

WITH THE SHARP RISE IN OIL AND GAS PRICES, Canada's oil sands have
become one of the world's hottest areas for energy development. The
enthusiasm is based on huge potential reserves -- as much as 175
billion barrels of oil in a friendly region of the globe.

The oil-sands opportunity hasn't gone unnoticed by Wall Street and
Toronto's Bay Street, although the story isn't widely known by
individual investors.

Shares of the leading tar-sands companies, Suncor Energy (ticker:
SU), Canadian Oil Sands Trust (COS.UN.T) and Western Oil Sands
(WTO.T), have risen sharply in the past year. The recent pullback in
energy stocks could provide an attractive entry point for industry
leader Suncor, whose Big Board-listed shares trade around 50, down
from the record 62 hit last month.

The bull case is that Suncor, based in Calgary, Alberta, potentially
controls 11 billion barrels of oil reserves, enough to last for
decades -- and that the increase in energy prices makes lucrative
the formerly unprofitable production of crude oil from oil sands.
Back in the late 1970s, Canada's tar sands were touted as a North
American Saudi Arabia, but that hype ended with the crash in crude
prices in the 1980s.

Suncor projects a doubling in its oil production within five to
seven years, to more than 500,000 barrels a day. That lofty goal
sets the company apart from other energy companies. If it hits its
target, Suncor could be rewarded with a gusher of free cash flow.

IT COSTS ABOUT $20 A BARREL to transform bitumen, the tar-like heavy
oil found in abundance in northern Alberta, into conventional crude
oil that can be pumped to refineries in Canada and the U.S. When oil
prices stood in the $20-to-$30-a-barrel range, the oil sands had
limited appeal. But with crude trading above $60 a barrel, the
economics of the oil sands become compelling.

Suncor's fans say the stock, which has doubled since early 2004, is
worth $80-plus and that the company could become a takeover target
in a consolidating energy industry. Among potential buyers: BP (BP),
Italy's Eni (E), or an Indian or Chinese oil company. Suncor's
equity-market value is sizable at $22 billion, making it Canada's
eighth largest company by market capitalization. While Suncor has
said it wants to remain independent, it certainly would be
digestible for the industry's giants.

Bulls say Suncor's current share price discounts future oil prices
of $40 a barrel. Suncor now produces about 260,000 barrels a day
from its facilities in the Athabasca region of Alberta, the oil-
sands industry's center.

Suncor was hampered in January by a fire at one of its two
upgraders -- huge refineries that supercook the bitumen to transform
it into various grades of crude oil. But full production was
recently restored. Suncor is spending $2 billion a year to expand
its production to 350,000 barrels a day by 2008 and 500,000 to
550,000 barrels a day by 2010 to 2012 -- about double current
output. That's why Morgan Stanley energy analyst Lloyd Byrne finds
Suncor "a terrific long-term asset." He adds that Suncor is unique
among large energy and production companies because of its goal of
doubling production in the next five years.

Most energy companies are struggling to generate any growth in
production. Byrne says that assuming oil holds at $50 a barrel over
the long term, Suncor could fetch above $80 a share.

Suncor is one of Alberta's three major oil-sands producers; the
others are the Syncrude consortium, in which Canadian Oil Sands
Trust is the largest owner; and Athabasca, controlled by Shell
Canada, Chevron Canada and Western Oil Sands (see table, Oil-Sands
Operators). Among the projects under development are one by Canadian
Natural Resources and another via a partnership of Nexen and OPTI
Canada.

REFLECTING GROWING INTERNATIONAL INTEREST in the oil sands, French
oil giant Total has a $1 billion deal to buy Deer Creek Energy Ltd.,
which controls an oil-sands deposit. BP, which sold its oil-sands
property to Canadian Natural Resources in the late 'Nineties, is now
without a presence in the region. This has helped spur talk that BP
may be interested in Suncor.

Suncor's appeal is that, assuming it can successfully double its oil
output, it should be able to produce a copious amount of free cash
flow starting around 2010, while exploiting a resource with a
potential life of 50 years. Unlike traditional oil companies, Suncor
doesn't need to spend billions a year on exploration. And its
reserve base in Alberta's oil sands looks more valuable as the cost
and difficulty of finding new sources of conventional oil and gas
continue to grow.

Tables: Oil-Sands Operators
Long-Term PlayAmong the risks for Suncor: a sharp drop in crude
prices, construction delays on upgrading facilities and
environmental issues. And Suncor still needs government approval for
a third upgrader. To address the risk of lower oil prices, Morgan
Stanley's Byrne suggests that Suncor use crude-oil options. A
multiyear put option struck at $50 a barrel -- which would protect
Suncor against a price drop below $50 -- might cost a few hundred
million dollars a year.

An options or futures hedging strategy would ensure Suncor ample
cash flow for its heavy capital-spending program in the next few
years and additional cash that could go toward raising its currently
meager dividend yield of 0.4%, or for repurchasing stock. The
company has a modest debt load of $2.5 billion. And it has resisted
hedging strategies, saying that it doesn't need them.

Producing crude from oil sands is dirty: The bitumen typically is
strip-mined, then separated from the surrounding sands in a process
that produces waste water that sits in giant pools. Suncor is
starting to use a more environmentally friendly technology that uses
steam to liquefy bitumen that's too deep to be strip-mined. Once
separated, bitumen needs to be heated, usually with natural gas, to
produce crude oil. Environmental critics decry the strip-mining, its
ugly aftereffects and the energy-intensive upgrading process, which
produces greenhouse gases and other emissions.

THE BOTTOM LINE

The stock, which has doubled since early 2004 to 50, may be worth
80. And in a consolidating energy industry, Suncor could become a
takeover target by, say, BP.The bullish scenario: If Suncor produces
500,000 barrels of oil a day in 2010 and oil stays at $60 a barrel,
the company could produce after-tax income of $30 a barrel, or $5
billion-plus annually. We're assuming operating costs of $20 a
barrel, including royalties to the Alberta government, and
depreciation. We've also factored in a $5-a-barrel discount to
benchmark crude for Suncor's oil and $5 a barrel in taxes. Coming
technology improvements could cut these costs.

Most of that $5 billion would be free cash flow, since Suncor's
capital spending largely would end once its third upgrader is
completed. Maintenance capital-spending could run at $500 million
annually. Suncor's torrent of cash probably would support a high
dividend to shareholders. The cash flow could be further enhanced if
Suncor converted to a tax-advantaged royalty trust, as has a large
chunk of Canada's oil industry. This could boost Suncor's value by
30%, according to a research note from Scotia Capital analyst Greg
Pardy.

Bulls caution that Suncor isn't a 2005 or 2006 story. "You shouldn't
focus on next quarter's earnings. It's a multiyear play," one large
investor tells Barron's. Suncor shares do look rich relative to much
of the industry based on projected 2005 and 2006 profits. Suncor
trades for more than 30 times estimated 2005 profits of $1.60 a
share -- earnings depressed by the early-year fire. Suncor fetches
about 12 times projected 2006 earnings of $4 a share.

Suncor's price-earnings multiple is high relative to those of
integrated oil companies like Chevron and BP, as well as U.S.
exploration and production outfits like Apache and Burlington
Resources, which have 2005 P/Es of 10 or less. Yet Suncor is
possibly trading for just four to five times 2010 or 2011 profits,
with reserves that could last well into the 21st century.

Suncor stock may bounce around based on gyrations in energy prices.
Yet if oil remains above $50 for a prolonged period, there are few
better energy plays.