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Suncor (SU) Shares Up as Warren Buffet's Berkshire Buys Stake

Zacks Equity Research

Suncor Energy Inc. SU moved upward by 2.9% in after-market trading, following the news of Warren Buffett's Berkshire Hathaway Inc. buying more than 10.8 million stocks in the Canadian integrated energy company in fourth-quarter 2018. The acquired stake by Berkshire reflects 0.7% of Suncor's total outstanding shares. Notably, Berkshire previously bought stake in Suncor in 2013, which it sold in 2016.

Suncor, one of the biggest energy companies in Canada, has an integrated structure that supports diversified business mix. The company's operations include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining, along with product marketing under the Petro-Canada brand. Following the Petro-Canada acquisition in 2009, Suncor has become one of the largest owners of oil sands in the world. The company has gained new oil sands properties to supplement its existing operations in northern Alberta, making it the dominant producer in the region where reserves are second only to Saudi Arabia. Suncor explores, acquires, develops, produces, and markets crude oil and natural gas in Canada and internationally. Additionally, it transports as well as refines crude oil, and markets petroleum and petrochemical products, primarily in Canada.

Latest Quarterly Results of Suncor

In fourth-quarter 2018, Suncor reported operating earnings per share of 27 cents, lagging the Zacks Consensus Estimate of 38 cents. The bottom line also deteriorated from the prior-year earnings of 75 cents per share.  The weaker-than-expected results can be attributed to weakness in oil prices and widening Canadian differentials, which impacted the upstream segment of the company to a large extent.

Quarterly operating revenues of the Canadian integrated giant totaled $6,506 million, lagging the Zacks Consensus Estimate of $8,130 million. Moreover, the top line decreased from $8,569 million in the year-ago quarter.

Price Performance and Zacks Rank

Before the news of buying a fresh stake in Suncor came on Thursday, the Canadian energy company has lost 5.8% in the past year compared with 4.8% collective decline of its industry. Suncor currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


How Will the Move Impact the Canadian Energy Sector?

To understand the repercussion of the move, we need to delve deeper into the Canadian energy sector’s state of affairs.

Dearth of pipelines and takeaway capacity created a bottleneck situation in the country. Lack of infrastructures led to storage build up and lower profit levels for the producers. It also created a huge difference between the Canadian benchmark, Western Canadian Select (WCS) and WTI. In October, the differential between the Canadian benchmark, Western Canadian Select (WCS) and WTI amounted to $50 per barrel. Crude prices in Canada fell to $14 per barrel in November.

To improve the situation, the Premier of Alberta, Rachel Notley announced a decision of reducing the production of heavy crude by 8.7% from the beginning of 2019. This has resulted in an improvement in WCS, as well as narrowed the differential between WCS and WTI.

Global investors have been leaving the Canadian energy sector over the past few years, in a bid to get rid of carbon-intensive oil sands. Delays in infrastructure approvals from the government also played a crucial role in this regard.

Notably, the move from Berkshire will likely boost investors’ confidence in the Canadian energy sector.

Other Developments

Berkshire bought 4.2-million stakes in Red Hat, Inc., a software company. In the fourth quarter, Warren Buffett's conglomerate added more than 20 million stocks of General Motors Company GM in its portfolio.

The conglomerate got rid of 3 million shares of Apple Inc. AAPL, with its current holding being 249.5 million. Also, it disposed 22% stake of Phillips 66 PSX or 3.5 million shares.

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