Suncor Energy Inc.

Suncor Energy Inc. (TSX: SU) is one of Canada's largest integrated energy companies, which operates in western Canada, the east coast Canada, the United States, and the North Sea. The upstream portfolio comprises bitumen, synthetic crude, and conventional crude, which helps to offset higher-cost oil sands production.

Key Highlights:

• Surge in funds from operations: The company reported a strong operating performance in Q2FY21, which is the best in the last four quarters. The company reported a revival in its production aided by an improvement in demand due the lifting of many restrictions during the month of July 2021. Notably, in Q2FY21, the company’s total upstream production increased to 699,700 boe/day versus 655,500 boe/day in the prior comparable period, supported by strong Oil Sands operations production. Funds from operations stood at CAD 2.362 billion in Q2FY21, as compared to CAD 488 million in pcp.
• Ample Liquidity: The company reported cash and cash equivalent of CAD 2.035 billion in Q2FY21, which is higher than CAD 1.762 billion in Q1FY21, supported by an increase in cash flows. Excluding the above, the company also has available credit facilities of CAD 2.877 billion. The above is sufficient to fund the company’s short-term and long-term capital requirements.
• Decline in borrowings amidst the challenging times: The company reported a lower total debt of CAD 20,716 million in Q2FY21, as compared to CAD 21,699 million in Q4FY20. The business model of SU is capital intensive in nature, and a decline in borrowing indicates higher operational excellence. Notably, the company’s net debt stood at CAD 18,681 million in Q2FY21, as compared to CAD 19,814 million in Q4FY20.

Q2FY21 Financial Highlights:

• SU announces its quarterly result, wherein the group reported revenues and other income of CAD 9,093 million, jumped from CAD 4,245 million in the previous corresponding period (pcp). The improvement was primarily driven by a strong performance from Oil Sands and Refining & Marketing segments.
• The period witnessed a surge in purchases of crude oil and products costs (CAD 3,247 million v/s CAD 1,419 million in pcp), a marginal decline in depreciation, depletion, amortization and impairment expense (CAD 1,512 million v/s CAD 1,522 million in pcp), and higher operating, selling and general costs (CAD 2,720 million v/s CAD 2,129 million in pcp). Total expenses stood at CAD 8,005 million, as compared to CAD 5,314 million in pcp.
• The company turned profitable and posted net earnings of CAD 868 million, as compared to a net loss of CAD 614 million in Q2FY20.

Source: Company Filings

Risks: Volatility in crude oil prices would affect the business prospects. Moreover, demand-supply mismatches in crude oil are likely to drag down the sales volumes of the company.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The group has a proven track record of dividend distribution, and the stock carries a dividend yield of ~3.6%, which is decent considering the current interest rate scenario. The group is focusing on its long-term strategies of strengthening its logistics and supply-chain segment, mine optimization, adoption of digital technologies to generate roughly ~CAD 1.30 billion free funds flows by 2023. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Imperial Oil Ltd, MEG Energy Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 23.54 on August 25, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 25, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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