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Long-Term Investors: Is There a Better Integrated Energy Company Than Suncor (TSX:SU)?

Daniel Da Costa
Oil pipes in an oil field

Many investors consider Suncor Energy (TSX:SU)(NYSE:SU) to be one of their favourite investments. It’s a high-quality company that has built itself a strong competitive advantage and operates in a critical industry.

It’s also a favourite among investors because it’s one of the only Canadian stocks that Warren Buffett has consistently been invested in, and he clearly likes the prospects of it.

The integrated nature of it, which allows it to strengthen its operations and mitigate commodity price exposure, is what makes it so attractive, especially as oil prices stay lower for longer.

There are a number of other integrated energy companies in Canada though, such as Husky Energy (TSX:HSE) and Imperial Oil (TSX:IMO)(NYSE:IMO).

Husky Energy

Husky is one of the top integrated companies in Canada with exploration and production assets in the oil sands as well as midstream refineries and a downstream retail business.

The midstream and downstream business account for roughly a third of its earnings before interest, taxes, depreciation, and amortization (EBITDA), which gives its revenue strong diversification.

The nature of its structure allows it to not only mitigate its exposure to commodity prices but also lower its total overall costs through its vertical integration.

Similar to Suncor, Husky has a strong balance sheet, which is important for any company, but even more so with energy companies, since future commodity price collapses are virtually unpredictable.

The stability in its finances gives it a layer of safety, but with some of its growth challenges ahead, such as oil sands projects that are geographically isolated from Alberta’s main energy infrastructure, the company may have a hard time finding its footing over the next few years.

However, its dividend yields roughly 5.2%, and its payout ratio of earnings is less than 50%, giving it a tonne of sustainability going forward.

Imperial Oil

Imperial is a Canadian company that is a subsidiary of one of the top energy companies in the world: Exxon Mobil, which owns roughly 70% of the shares outstanding.

It is the largest refiner of petroleum products in Canada which is a positive; however, some of its oil sands assets aren’t economical in the current commodity environment, which has weighed on the company the last few years.

The company has responded to the headwinds by cutting capital spending, which is prudent and helps to keep it healthy today but is hurting the company’s future growth potential as a trade-off.

Like its peers, it has been focused on keeping its finances strong, which I think is the most important priority, and due to its relationship with Exxon Mobil, it has a strong connection to improved technology and better operations management.

The stock pays a dividend that yields roughly 2.6%, but its payout ratio is extremely low, so there is no need to worry about its ability to fund the dividend.

The stock currently trades just off its 52-week low, so there is some value there if you do decide to invest in Imperial.

Bottom line

If you need or want to diversify your investments within the integrated space, then selecting either of these companies can be a nice addition to a Suncor position in your portfolio; however, if you are looking only for the top company in the industry, I would just stick to Suncor.

Suncor has the strongest asset base, making it capable of shifting production to different regions to capture higher profits, it has strong midstream operations to mitigate commodity price risk, and its network of 1,750 retail stores give it full vertical integration and add another layer of stability.

It’s dividend and sustaining capital breakeven price of oil is extremely low at just $45 WTI, so unless there is another major oil price collapse, which would affect all companies in the industry, Suncor remains one of the best stocks you can own and the number one integrated energy company in Canada.

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Fool contributor Daniel Da Costa owns shares of SUNCOR ENERGY INC.

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