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

• Elevated upstream production: The company’s total upstream production increased to 698,600 barrels of oil equivalent per day (boe/d) in the third quarter of 2021, compared to 616,200 boe/d in the prior year quarter, due to continued strong performance from the company’s In Situ assets and increased production volumes at Syncrude.

• Rise in funds from operations: The company reported a strong operating performance in Q3FY21, 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 Q3FY21, the company’s total upstream production increased. Funds from operations stood at CAD 2,641 million in Q3FY21, as compared to CAD 1,166 million in pcp.

Source: Company

• Increase in dividend distribution: Given the strength of the company and confidence in the execution of its strategic plans, the Board of Directors has approved the acceleration of increased returns to shareholders by the reinstatement of the dividend to 2019 levels. The company increased its quarterly dividend distribution to CAD 0.42 per common share from CAD 0.21 per share, which is a 100% increase and key positive. Furthermore, the stock carries a robust dividend yield of 5.116%, which look impressive in current scenario.
  

Financial overview of Q3 2021 (Expressed in millions on CAD)

• SU announces its quarterly result, wherein the group reported revenues and other income of CAD 10,213 million, jumped from CAD 6,457 million in the previous corresponding period (pcp). The improvement was related to higher crude oil and refined product realizations reflecting the improved business environment.
• The period witnessed a surge in purchases of crude oil and products costs (CAD 3,891 million v/s CAD 2,356 million in pcp), a marginal decline in depreciation, depletion, amortization and impairment expense (CAD 1,218 million v/s CAD 1,738 million in pcp), and higher operating, selling and general costs (CAD 2,768 million v/s CAD 2,235 million in pcp). Total expenses stood at CAD 8,899 million, as compared to CAD 6,694 million in pcp.
• The company turned profitable and posted net earnings of CAD 877 million, as compared to a net loss of CAD 12 million in Q3FY20.
  

Risks associated with investment

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 company’s funds from operations surged to CAD 2.641 billion in Q3 2021 as compared to CAD 1.166 billion in pcp. The funds from operations bolstered by solid performance from the Refining & Marketing sector, which included the large, planned turnaround at Oil Sands Base. The company increased its quarterly dividend payout to CAD 0.42 per common share, a 100% increase and hold a decent dividend yield of above 5% is also a significant positive. Since the start of 2021 it also lowered net debt by CAD 3.1 billion, indicating considerable progress in strengthening the balance sheet. The company is also increasing its total upstream production, which is a key positive. Furthermore, it is focusing on its long-term strategies of strengthening its logistics and supply-chain segment, adoption of digital technologies to generate roughly ~CAD 1.30 billion free funds flows by 2023. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 32.84 on November 08, 2021. For the said purposes, we have considered peers like Imperial Oil Ltd, MEG Energy Corp, Cenovus Energy Inc, etc.

*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 November 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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