Experienced wrote: Obscure1 wrote: SU generated $2.4 billion in cash flow from operations ($1.57 per share). The number dropped to $2.1 billion ($1.39) when they accounted for changes in working capital, which is basically just timing issues.
The MD&A provided insight for me on the following:
Short term factors:
1) they returned $1 billion to shareholders in the form of dividends( $315 mm) and share buybacks for the balance which represents 40% of the cash flow.
2) they expect to buy back another 41mm shares in the second half (H2) of the year as long as oil prices remain strong. I expect they will have bought back 7mm in July as that is the rate they have been buying back at
3) they expect the second half (H2) results to be stronger as they mentioned "robust" conditions and they have completed the turnarounds at their refineries which implies high utilization rates
4) the South Slope at Fort Hills repair is significant (lower production and higher per barrel costs) which will negatively affect cash flow in H2 but in the big picture is just a delay in ramping up as they eventually expect Fort Hills production to be 180,000 bpd vs 45,000 bpd in H2
5) they will use a $1 billion tax return in H2 to help pay down debt with the implication being that they won't limit themselves to only paying down short term debt
6) they didn't dwell on environmental goals
Implications:
1) If they end up returning 40% of the cash flow to shareholders going forward, it likely means a return of about $5 billion per year going forward. With the share price at $25 per share, the ROI for shareholders should be about 20% which is awesome for a mature company.
2) It seems like SU has determined that they expect a significant percentage of institutions are going to continue to sell until the those who are distancing themselves from oil are done. SU appears to be content to take advantage of the selling as part of their business model until the transition is complete
3) SU is continuing its path of reducing debt and costs which should place the company in a steadily improving position as time passes.
4) The pending completion of the Line 3 replacement, the construction of the Line 5 tunnel, and the completion of TMPL should provide cost effective egress going forward that should provide SU with a similar gameplan to Saudi Arabia's "last molecule"
5) The only missing piece for me is that I don't see their plan on how SU is going to transition to renewables over then next 20 to 40 years, which is key to their long term survival.
If SU continues to pay down debt and utilize a NCIB (5% per year) at a ratio of 2:1, the implication is that the company will be returning 15% per year (10% debt and 5% NCIB). On top of that, the company is currently paying dividends at a 3% yield and they intend to increase the dividend.
It isn't a coincidence that the 18%+ percent (debt reduction/NCIB/dividend) is similar to the 20% ROI mentioned above.
If a 20% annual return for a mature company with a long future ahead of it isn't good enough to meet your investment objectives, you should definitely sell and move on.
Nice analysis
I would add a few considerations and underline some of your points.
1.....there has been a lot of discussion here about the SP being affected by the fact that SU didn't raise their dividend. While I wouldn't disagree that this is a factor, from my experience, as a general rule, when a company goes heavily into a buyback plan which was expanded in the 2Q report. The Street generally takes a dim view of this. Why? Because the messaging is that that they have no growth ideas or in simple terms a better place to invest the company money. IMO this is a big factor in the SP action yesterday and in some sense, since this is not new information it accounts for the lagging SP over the past months.
2.....following on Point 1, I think the conventional wisdom regarding SU is wrong in that we are seeing a massive redistribution of the shareholder ownership. Perhaps we will get an insight into this when the next round of Rule 13 disclosures become available. The company itself will have much better knowledge of the sentiment of its major shareholders as this is what companies do. So I suspect that the decision to buyback shares is a good thing for shareholders as it is opportunistic by management to do so. Once the redistribution is complete and it would be unusual for it to extend beyond next February (the date the NCIB expires) we should see a shift in strategy by management to pay more in dividends since there would be little advantage to continuing in a big way. We could potentially see a significant raise in the dividend announced at the end of Q1 next year.
3....IMO and I mentioned this in an earlier post, I think something which is reflected in the SP and one which needs to be addressed by management is to put a plan together to use the company's significant FCF and get into the renewable energy business either alone and/or with partners such as the Brookfield group or even companies like ENB which moving in that direction. If management doesn't do this sometime in the next year and a half then the SP will languish. Alternatively, if they do we will see a SP approaching the "good old days" as such a plan is executed.
Sooo...what does all this mean for investors?
If you have confidence that SU managment will migrate to a renewable energy business over the next 20 years then we are seeing a great buying opportunity. If you don't think they will then you are better off selling and moving your money elsewhere.
What am I doing?
I have an underweight position which I might add a bit to if the price keeps going down. But will not take a full position until it becomes clear that the company has a sensible plan to migrate to a renewable enrgy company. If it appears that they are not planning to do this then I will be out.