Buffett And Pickens Love This Bargain Energy Stock

StreetAuthority Network

It's not often you find Warren Buffett and T. Boone Pickens owning the same stock.

Buffett has long been known to be focused on financials and consumer product companies such as Coca-Cola (NYSE: KO). But he also likes blue-chip chemical companies like Dow Chemical (NYSE: DOW), for which he's in a showdown with Dan Loeb.

In contrast to Buffett's diversified approach, Pickens made his fortune in the energy patch. Considered one of the top energy experts in the world, Pickens is regularly seen on CNBC and Bloomberg talking about his "Pickens plan" for energy independence.

Buffett's Berkshire Hathaway (NYSE: BRK-B) has the largest stake in this energy company, with 13 million shares, worth over $500 million. Pickens' stake is worth about $160 million. 

The company that has brought these investing legends together? 

Suncor Energy (NYSE: SU).

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The world's largest oil sands producer, Suncor also has conventional oil and gas operations in the North Sea, North America, Libya and Syria. It also has refinery operations and retail stations in Canada and Colorado, wind power projects and an ethanol plant in Canada, and an energy-trading operation.

Its conventional reserves generate high levels of free cash flow, which fund its oil sands projects and expansion. With conventional reserves becoming harder to find, Suncor's oil sands are becoming a key asset. 

Some of its key projects include the Golden Eagle development in the North Sea, which should start producing oil by the end of this year. Then there's the Hebron development off Canada's eastern coast, which is expected to be operational come 2017. But Suncor's bread and butter is its Fort McMurray properties in northern Alberta, where the company runs the world's largest oil sands operation. 

Over the years, oil sands production has gotten a bad rap from environmentalists over greenhouse gas emissions. However, there's no more reliable source of oil than the Canadian oil sands. 

Oil sands are typically able to maintain their output over long periods of time. For example, once Suncor's Fort Hills project in Alberta is completed in 2017, it's expected to provide 180,000 barrels of oil a day for close to 35 years.

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With its oil sands production capacity growing rapidly, Suncor expects to produce between 400,000 and 430,000 barrels oil equivalent (BoE) per day. That's well above the 360,000 barrels it churned out last year. Looking out further between 2017 and 2019, Suncor estimates it can get daily production up to 550,000 to 590,000 BoE. 

Suncor is also looking to address the environmental issues by collaborating with General Electric (NYSE: GE) to develop technologies to will lower water usage in oil sands production and reduce greenhouse gas emissions. If successful, it would also lower capital spending and operating costs for Suncor.

With a forward price-to-earnings (P/E) ratio of 11.2, SU look to be quite cheap compared with other energy companies. That forward P/E is below some of the supermajors, including Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). Shares are also trading well below Suncor's five-year average P/E of 21.

With a debt-to-equity ratio under 30%, Suncor has one of the best balance sheets in the industry. However, it's been a perennial underperformer over the past five years:

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With Suncor is positioned nicely from a reserve standpoint, with operations in northern Alberta (which is second only to Saudi Arabia in production among oil sands regions), its valuation should rise to be more in line with peers, especially as supermajors continue to battle it out for conventional reserves. 

While its dividend is not as high as some of the oil and gas supermajors, investors in SU do get a 2% dividend yield, which is only a 29% payout of earnings. Suncor has more than doubled its dividend since 2010.

Risks to Consider: Oil sands remain a controversial topic and a favorite target of environmentalists. The opposition to the Keystone XL pipeline is because the oil is produced from oil sands. Increased regulation on oil sands could have an adverse effect on Suncor. 

Action to Take --> Buy shares of Suncor with a price target of $53, which would put shares trading at 13.6 times next year's earnings, in line with the industry average, and represents upside of 30%.

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