Oil derricks copyright Comstock, Corbis
By Elliott Gue, Energy & Income Advisor

Our neighbor to the north boasts some of the world's largest oil reserves -- from Alberta's vast oil sands to emerging shale basins and a series of heavy-oil plays across western Canada.

Suncor Energy (SU) is one of our favorite stocks. It has been involved in the Alberta oil sands dating back to the 1960s, when the company pioneered the first commercial-scale mining operation. It became Canada's largest integrated oil company after its 2009 merger with PetroCanada, a blockbuster deal that included additional acreage in western Canada's oil sands, as well as refineries and a portfolio of international upstream assets.

Suncor's oil-sands segment posted record quarterly production of more than 340,000 barrels of oil equivalent per day in the three months ended Sept. 30, 2012. The company also achieved the goal of reducing its average production costs in the oil sands to less than $35 per barrel.

Suncor Energy has amassed about 7.1 billion barrels of oil equivalent in proved, probable reserves -- a resource base that equates to about 35 years of output at the company's 2011 production rate.

Factor in the company's estimated 21.9 billion barrels of oil equivalent in contingent resources, 19.2 billion barrels of which are in the oil sands, and you get a sense of Suncor’s potential to grow production over the long term.

In a conference call to discuss the company's second-quarter earnings, CEO Steven Williams said, "For the first time in our history, we're in a position not only to grow production significantly, but also to steadily grow the cash we return to shareholders."

Williams added, "We've built a balance sheet that has demonstrated our ability to fund our growth program, while also funding significant dividend increases and share buybacks, and of course, that's unprecedented for Suncor."

Although a higher dividend payout wouldn't transform Suncor Energy from a growth story to an income play overnight, such a move could serve as an upside catalyst for the stock.

Suncor is also uniquely positioned among oil-sands operators to weather oil prices -- a quality that’s likely to find favor with investors in these uncertain times.

Suncor Energy's impressive asset base in Canada's oil sands provides plenty of long-term growth potential, while the company’s refinery assets insulate its cash flow from lower oil prices. None of the other integrated operators in Canada's oil sands can match this natural hedge.

Meanwhile, the option to ramp up production offshore Canada and in international markets provides a near-term alternative to outsized investments in major oil-sands projects.

Well-positioned to weather the inevitable fluctuations in North American oil-price differentials, Suncor Energy remains our favorite play on Canada's oil sands -- and the potential for a dividend increase sweetens the deal and provides a near-term upside catalyst. Buy up to $35.

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