What to expect from Q1 numbersQ4 produced $3.1 billion of operating cash flow.
Oil prices are up about 20% so far in Q1 which seems sustainable through the quarter.
Fingers crossed that SU won't have any unscheduled shutdowns in Q1 from operation screwups like they had for the last two weeks of Q4. If operations continue to run smoothly, volumes should be up about 5% in Q1.
Without taking a look at specific numbers, the above estimates should generate about $4 billion of operating cash flow in Q1. My quick breakdown of the numbers generated about $4.2 billion.
On an annual basis, if oil prices remain at current levels, SU should generate about $16 billion of free cash flow. To put that into perspective, ENB has guided $15 billion and it has a market cap twice the size of SU's market cap. Different situations but still a big difference.
During the Q4 results conference call, mgmt guided for a 50/50 breakdown of spending on buybacks and debt repayment after dividend payments.
Let's look at how the breakdown might look:
* at the current dividend of $1.68 x 1.4 billion shares = $2.35 billion....that leaves $13.6 billion
* if SU ends up buying back another 5% this year, that amounts to 70 million shares at say $40 per share = $2.8 billion. That is a lot less than $6.8 billion (50% of $13.6 billion)
* if SU pays back another $2.8 billion in debt (as their guidance was for a 50/50 split), then the company will still have about $8 billion left over ($16 billion less $2.4 billion in dividends, less $2.8 billion in share buybacks, and another $2.8 billion for debt reduction)
The math creates a problem for SU, a good problem. The company is very unlikely to buy back more shares than they did in 2021 (84 million) which means 84 million x $40 = $3.4 billion. If they pay down debt by the same $3.4 billion, then they will still have about $7 billion left over (16 - 2.4 -3.4 -3.4) = $6.8 billion.
How will SU use the extra $7 billion?
An increase in the dividend seems like a logical choice, but the company will want to be very careful about raising the dividend unless they can be fairly certain that they can sustain a higher dividend going forward. Last fall, the company guided 25% CAGR of the dividend over the next 5 years. Given that they raised the dividend by 100% in Q4, my guess is that they raise the dividend by another 25% in 2022, likely beginning with a Q2 announcement of a raise.
If SU does raise its dividend by 25%, that would equate to $0.42 x 1.4 billion shares = less than $0.6 billion. That still leave the company $6 billion to pay down debt.
Given that the company has guided a lower cost per barrel by $3 to $4 per barrel by 2023 and by a total of $8 per barrel by 2025, and the fact that interest costs are going to continue to drop as the debt gets paid off, a decent dividend increase seems very doable.
If everything stayed the same for the next 2 1/2 years (which it won't), the company could be debt free by the second half of 2024.
Is zero debt a good thing? Not particularly as public companies are designed to take advantage of leveraging debt. However, by 2025, when SU has an all-in cost per barrel of about $37 and no debt, the existing 29 year reserve life (which would then be 26 years) would make for an awfully nice pension plan for shareholders as a worst case scenario.