Energy | Canada
WSD Target Price
Annualized Return Since Publication
Target Equity Value (Δ)
Source: Bloomberg end of day market data; not adjusted for dividends (October 5, 2016).
Returns assume a short investment position on the date that WSD Capital Management published its thesis, and an exit on the date that the WSD Target Price is realized.
Returns do not reflect any taxes, fees or dividend and interest expenses related to short sales.
The returns are hypothetical and do not reflect the actual results of WSD Capital Management’s investment activities, nor is it necessarily indicative of future results of WSD Capital Management’s investment activities.
Suncor Energy (“Suncor”) is an integrated energy company focused on developing Canada’s petroleum resource basin, Athabasca oil sands. The company operates in four business segments: Oil Sands Development and Upgrading, Exploration and Production, Petroleum Refining, and Product Marketing.
WSD Capital Management announced its short position in Suncor on October 6, 2016. As the oil sands exodus continues and international energy companies cut their exposure to the high-cost region, we believe the company’s limited end-market diversification and the persistent global oil glut as well as the risk of proposed taxes/environmental regulations will weigh on its upstream segment.
In November 2016, it was disclosed that Berkshire Hathaway had exited its Suncor investment in the third quarter, signaling that more trouble might be ahead for the Canadian energy sector. Suncor continues to double down on the normalization of crude oil prices as it seeks to acquire assets unrelated to oil sands by investing in major oil and gas projects even as its competitors decline to do so.
Despite OPEC’s first production cut in 8 years, the crude oil supply/demand backdrop shows very frail signs of normalization. In January 2017, U.S. gasoline consumption fell to as low as 8.2 million barrels a day, nearly matching a 15-year low while February’s data showed that U.S. gasoline storage levels reached their highest level since the EIA began tracking the data back in 1990.
We expect this trend to intensify and adversely affect Suncor’s future financial performance as the company boosts its quarterly dividend and plans to buy back up to C$2 billion in shares over the next year.