Suncor Energy Inc.

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

Key Highlights:

• Enhanced performance from Synthetic crude oil segment: In Q1FY21, the group reported higher production of 519,900 bbl/day from Synthetic crude oil (SCO), as compared to 503,600/day in Q1FY20, driven by an increased in the upgrade utilization up to 97%, compared to 93% in pcp. Furthermore, internal transfers from Oil Sands Base to Syncrude through interconnected pipelines also supported the growth. In the meantime, the price of SCO and diesel stood higher at CAD 65.22/bbl in Q1FY21 compared to CAD 53.19/bbl in pcp, which supported the overall performance.

• Improved cost structure: The group has implemented several cost-saving initiative measures like the implementation of digital technology to improve productivity and reported impressive results from it. Notably, during the first quarter of FY21, the company reported a 20% reduction in oil sand operations cash operating costs/barrel, which stood at CAD 23.30. Additionally, due to the result of higher production and cost-efficient approach, the company reported a 10% y-o-y decline in Syncrude cash operating costs at CAD 32.25/ barrel.

• Impressive Guidance: For FY21, the group expects its total upstream production to remain within the range of 740– 780 mboe/day, higher than 695.1 mboe/day in FY20. The company expects its refinery utilization in between 90% to 96%, which looks encouraging. Capital Investment for FY21 is expected to be between CAD 3,800 to 4,500 million.

Q1FY21 Financial Highlights:

• SU announces its first quarterly result, wherein the group reported revenues and other income of CAD 8,636 million, higher than CAD 7,756 million in the previous corresponding period (pcp). The improvement was primarily supported by higher income from Oil Sands and Refining & Marketing segments.
• The period witnessed a decline in purchases of crude oil and products costs (CAD 2,583 million v/s CAD 3,180 million in pcp), a significant decline in depreciation, depletion, amortization and impairment expense (CAD 1,490 million v/s CAD 4,146 million in pcp), and marginally lower operating, selling and general costs (CAD 2,900 million v/s CAD 2,936 million in pcp).
• The corporation returned to profitability and posted net earnings of CAD 821 million, as compared to a net loss of CAD 3,525 million in Q1FY20. The difference was primarily due to the significant decline in the total expenses mentioned above.

Q1FY21 Income Statement Highlights (Source: Company Report)

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

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company leveraged its marketing and logistics capabilities and reported improved first quarter refinery utilization rates, outperforming the Canadian refining industry average by more than 15%, which is a key positive. Moreover, the group is focusing on reducing its supplier base to strategic suppliers, which would integrate across supply chains through regionalization of services and would subsequently lead to cost improvement. Notably, fund from operations surged to CAD 2.110 billion in Q1FY21, as compared to CAD 1.001 billion in the previous corresponding period (pcp). 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 30.31 on June 25, 2021.

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

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