RE:RE:Irving Oil…Experienced:
Good information and analysis
Your point about how the refineries have dropped in value by 50% in the last 5 years was the key point imo. I disagree with the 50% valuation.
Last fall, Enbridge announced a deal to buy 3 natgas distribution companies in the States from Dominion for US$14 billion. Included in the deal was 78,000 miles of gas pipelines. The latest FERC numbers for pipeline construction cost is $10 million per mile. Multiplying 78,000 miles by $10 million per mile equates to $780 billion. Whoa!
SU provides 2 other examples of how hydrocarbon assets no longer have any value. First, SU couldn't find a buyer for its 4 refineries or for its 1,500 PC stations. Second, SU bought the minority interest in Fort Hills for a steep discount.
The market has decided that book values for hydrocarbon assets are irrelevent. Therefore, any acqusition of hydrocarbon based projects will be evaluated solely on Net Present Value of future cash flows. As such, accounting teams assign probabilities of how much cash flow a property is expected to generate each year into the future and then discounting the numbers back into today's dollars based upon a number of factors such as inflation and risk.
Suncor is clearly in a sunset industry (tar sands/refining/gas sales) whether shareholders like it or not. That is not a bad thing as opportunities can arise due to the fact that the market typically under values such companies.
I think the SU BoD made a smart decision when it hired Kruger. With SU being a sunset company, the goal is to squeeze out every nickle of profit as the company winds down. In order to maximize cash flow of a depleting asset, you need a good operator. Suncor has uner performed for years at operations, so Kruger was a great hire imo.