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Suncor Energy Inc. Is Running Out of Room to Grow... What's Next?

Matthew DiLallo, The Motley Fool

Suncor Energy (NYSE: SU) recently put the finishing touches on two megaprojects that position it for significant production growth in the near term. However, the company's growth beyond this phase remains unclear because it can't sanction new oil sands projects until more pipelines come online, which won't happen anytime soon due to continued opposition. Because of that, the company needs to look elsewhere to drive future growth.

A gusher in the near term

Suncor Energy delivered first oil on both its Fort Hills oil sands facility and the Hebron offshore oil platform at the end of last year. Those two expansions position the company to produce between 740,000 to 780,000 barrels of oil equivalent per day (BOE/D) this year, up about 10% from last year. Meanwhile, as production ramps up from these projects, the company's output should head up toward 900,000 BOE/D by 2020, which implies 9% compound annual growth in production per share from the starting point in 2016.

An open pit oil sands mine in Canada.

Image source: Getty Images.

However, with those two large projects rolling off, Suncor expects to invest less capital in the coming year. Overall, it plans to spend around 4 billion Canadian dollars ($3 billion) on upstream projects in 2018, with about 30% of that spending marked as growth capital.

Meanwhile, total capital spending will be about 14% lower than last year. While that reduction will provide the company with more free cash flow that it can return to investors via a higher dividend and share buybacks, the lower investment rate will impact future growth.

Problems in the pipeline

Suncor Energy isn't eager to boost spending at the moment due to the currently hostile business environment in Canada. In the view of CEO Steve Williams, Canada is falling behind other countries "in terms of competitiveness when it comes to government royalties, taxation, and confidence in the regulatory system."

That lack of confidence has only increased now that the federal government had to step in and buy the Trans Mountain Pipeline and its associated expansion project from Kinder Morgan to ensure its completion. That move shows that the "normal processes didn't work very well," according to Williams in an article by the Financial Post.

In addition to problems getting that federally approved pipeline built in Canada, export pipelines to the U.S. continue facing delays. Enbridge (NYSE: ENB) still is waiting for approval from the state of Minnesota on its Line 3 Replacement project, which would double the pipeline's capacity to move crude from the oil sands to refineries in the Midwest. It's possible that the state could reject the project or force the company to take an alternative route, which would add $1.2 billion, or 16%, to its price tag.

Meanwhile, TransCanada (NYSE: TRP) has been working to revive its Keystone XL pipeline. After years of delay, TransCanada could start full construction next year, which would put the line into service by 2021. However, the hotly contested pipeline could face new delays or even another rejection.

Given the current uncertainty, Suncor doesn't plan to make any further major investments to expand its oil sands position. Because of that, it will need to look elsewhere to drive future growth.

Silhouette of an offshore drilling rig at sunset.

Image source: Getty Images.

Two potential avenues for future growth

The company has two options to drive its next growth phase: sanction expansion projects in other regions or make acquisitions. The company has a couple of offshore oil projects in the works that it could sanction in the future. One of them is the Rosebank field in the North Sea, which is under development by Chevron (NYSE: CVX). Suncor bought a minority interest in the project for $50 million last year, which gave it a stake in one of the largest undeveloped oil fields in the region.

After several delays, Chevron is slowly moving forward with the development of this multibillion-dollar project. It's one of several offshore expansion options for Suncor that could be a key driver of future growth.

Another growth option for Suncor is making acquisitions. The company completed several deals over the past few years including buying Canadian Oil Sands for its stake in the Syncrude facility. Suncor could acquire other oil sands producers with existing facilities or further diversify its offshore production base. With a top-tier balance sheet and excellent liquidity, the company certainly has the financial resources to grow by acquisition. 

It's not out of options

Given the current pipeline issues in Canada, Suncor can't sanction any new major expansion projects in the oil sands region. Because of that, the company needs to look elsewhere to drive growth until the country solves those problems. On the positive side, the company has several offshore projects in development and a top-notch financial profile to make acquisitions. While it might be running out of room to grow its oil sands business, the company has many other ways to expand in the future.

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Matthew DiLallo owns shares of Enbridge and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool owns shares of Enbridge. The Motley Fool has a disclosure policy.