While watching a re-run of Market Call tonight, one of the callers had a question about Suncor (SU-TSX) which has sold off recently from a high of a little over $40 in October to current levels close to $30. Suncor, of course, is in the oil business and has heavy exposure to the Alberta oil sands. Is the company worth a look at these levels?

(Every stock analysis will follow this pattern from now on)

Why Is It Cheap

Suncor recently became the largest oil company in Canada by acquiring rival Petro Canada by giving Petro Canada’s shareholder’s 1.28 Suncor shares for every Petro Canada share. The company issued 19.2 billion worth of new stock to pay for the merger. The company also saw an increase in long term debt.

While the new company was supposed to reap all sorts of cost benefits due to the merger, so far results have been lackluster. Recently, the company has had to deal with a fire in one of their upgraders in February. Even though the repairs are expected to be finished by April, the company has lowered their first quarter and full year production outlooks. Analysts responded by lowering their full year earnings expectations from $2.24 per share to $2.08. That puts 2010 PE right around 15. The company isn’t really that cheap on a P/E basis.

Industry Outlook

At the end of the day, Suncor is fairly well correlated to the price of oil and to a lesser degree, natural gas. Sure, they do get  the majority of their revenues from the  refining business, but at the end of the day the share price responds to the price of the underlying commodity. They don’t have a huge history of hedging prices, but they do have an active hedging program. I’d say that oil is about fairly valued at this point and until the economy improves we’re not likely to see a major move to the upside. Events around the world can easily change this, however.

Dividend

Suncor recently increased their dividend from 5 cents quarterly to 10 cents. 40 cents a year works out to a yield of a little over 1.3% on the current price. The dividend was first paid back in 2003, starting at 2.5 cents per quarter. A 300% increase in 6 years is pretty okay if you ask me.

Balance Sheet

The company is trading at 1.4 times book value. The average for the sector is 1.68 times book. A small discount compared to it’s (American) peers, plus oil and gas stocks are, on a book value basis anyway, as cheap as they’ve been in a while.

The company has 13.8 billion of long term debt. Debt has gone from a hair over 3 billion at the end of fiscal 05 to current levels. This is not a positive trend.

Earnings

2005- $1.23
2006- $3.16
2007- $3.17
2008- $2.27
2009- $0.95

This kind of earnings volatility is to be expected with Suncor for a couple reasons. First of all, they’re in the oil business. Secondly, the value of the Canadian dollar can affect earnings since the majority of operations are in Canada and oil is priced in U.S. dollars.

Like I mentioned above, 2010 earnings are expected to be a hair over $2.00 per share.

Price Appreciation

I’ll be honest, I have absolutely no idea of where this stock might go. I like to invest in stocks with a historical record of higher prices. Suncor does have a history of being above $50, albeit briefly. Everything gets thrown out the window because of the Petro Canada merger. If the price of oil goes up by say, 50%, would Suncor rise more than that? I think it’s unlikely. Price appreciation is hardly worth getting excited over.

Summary

First of all, congrats on making it through my very first stock analysis! You deserve a medal.

When it comes to investing, I generally take a very similar look as Contra the Heard. I look for companies that have potential for a large price increase, that the market has beaten down for whatever reason. I also like companies with low or non-existent debt levels and favorable book values. Suncor only has one of these going for it, that’s the book value metric. Compared to other major oil and gas companies, the P/B ratio is pretty good. Everything else about the company just doesn’t excite me.

Tell everyone, yo!