Suncor Energy

Suncor Energy (TSX: SU) is one of the largest integrated energy companies in Canada. The group operates in western Canada, east coast Canada, the United States, and the North Sea. The company holds ~7.4 billion barrels of proven and probable crude oil reserves. The Group operates across four major segments, namely oil sands, exploration & production, refining and marketing and corporate & eliminations.

Key Updates:

• On August 17, 2020, the company reported fire occurred in the secondary extraction area of the Base Plant mining operations impacting mined bitumen production. 
• The company has provided revised guidance for 2020. The group is expecting total production of 680,000 bbl/day to 710,000 bbl/day for FY20. The company’s refinery utilization is expected within 84% to 91% during FY20. Refined Product Sales are estimated at 5,00,000 bbls/day to 5,30,000 bbls/day.

Q2FY20 Financial Highlights: Suncor announced its quarterly results, wherein the company’s performance was severely affected by lower crude oil prices and crack spread benchmarks which plunged by 50% on y-o-y basis due to the impacts of the COVID-19 pandemic and OPEC+ supply issues. The company’s revenue stood considerably lower at CAD 4,245 million, as compared to CAD 10,098 million in Q2FY19. Total Oil Sands sales volumes stood lower at 559.5 mbbls/day compared to 694.3 mbbls/day in Q2FY19. The Company reported an operating loss of CAD 1,489 million, against an operating profit of CAD 1,253 million in Q2FY19. The quarter witnessed a decline in purchases of crude oil and products, a slide in operating, selling & general expenses and a lower exploration expense. Suncor reported a net loss of CAD 614 million versus a net profit of CAD 2,729 million in the previous corresponding period (pcp). The company reported cash and cash equivalent of CAD 1,846 million, while total assets are reported at CAD 83,829 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s performance is directly related to the price and demand of oil and gas. Any volatility in the prices or any setback to the demand would affect the group’s performance.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of SU corrected ~58% so far this year, due to a significant fall in the crude oil prices on account of COVID 19 pandemic. The company has reported lower cash costs of CAD 25.80 per barrel as compared to CAD 27.80 per barrel, supported by cost reductions and lower unplanned maintenance activities. A lower structure is likely to provide cushion to the margin. To ensure enough liquidity, the Group has reduced its capital expenditure and operating costs by CAD 1.9 billion and CAD 1.0 billion, respectively. In order to enhance the liquidity, the company took prompt strategies by issuing CAD 1.25 billion of 5.00% senior 10-year unsecured medium-term notes, USD 450 million of 2.80% senior 3-year unsecured notes and USD 550 million of 3.10% senior 5-year unsecured notes. Thus, the company seems to have ample liquidity to withstand the current challenging time. The company is planning to reduce its debt component as commodity prices are improving aided by the resumption of manufacturing and industrial activities across the globe. We have valued the stock using EV to Sales relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Oil & Gas) median on the next twelve months (NTM) basis. Considering the aforesaid facts, we recommend a ' Buy' rating on the stock at the closing market price of CAD 17.96 on September 16, 2020.

SU Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Cenovus Energy

Cenovus Energy (TSX: CVE) is an integrated oil company and is engaged in the business of developing, producing and marketing crude oil, natural gas liquids and natural gas in Canada with marketing activities and refining operations in the United States.

Recently, the company has completed a public offering in the United States amounting USD 1 billion in 5.375% senior unsecured notes due in 2025. The above funding would be used to reduce the company’s debt component.

Q2FY20 Financial Highlights: Cenovus announced its quarterly results, wherein the company reported revenue of CAD 2,174 million, as compared to CAD 5,603 million in the previous corresponding period (pcp). Due to the steep correction in the international crude oil price, the company witnessed a fall in the realization prices which resulted in a sharp decline in the oil sands and refining and marketing segments. The average Brent and WTI crude oil benchmark prices declined 35% to 40%, as compared to the first quarter of FY20 and were responsible for the weak performance of the business. Refining and Marketing revenues slide 62%, during the quarter, which further contributes to the overall downfall. The quarter was marked by higher operating costs which include purchased product, transportation and blending expense, general and administrative expense, finance costs, and depreciation, depletion and amortization expense, partially offset by lower other operating cost and a higher foreign exchange gain. The company reported a net loss of CAD 235 million, as compared to a profit of CAD 1,784 million in the previous corresponding period (pcp). The company reported cash and cash equivalent of CAD 152 million, while total assets were reported at CAD 33,919 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s performance is correlated to the demand and prices of crude oil. Any jolt in oil demand or volatility in oil prices would dampen the group’s performance.

Valuation Methodology: EV to Sales Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CVE corrected ~57% so far this year following a sharp correction in the crude oil prices. Most of the oil-producing companies have witnessed significant challenges due to the current slowdown in the international crude oil prices along with soft global demand. The company reduced the volumes at its oil sands operations and storing the mobilized oil in its reservoirs for production when the price declined in April. The company ramped up the production when Western Canadian Select (WCS) prices increased almost tenfold from April to an average of CAD 46.03 per barrel (bbl) in June. As a result of this decision, the group reached record volumes at its Christina Lake oil sands project in June and achieved free funds flow for the month of more than CAD 290 million. Further, the company mentioned that its low-cost structure would help it to withstand a continued period of low prices if necessary. The stock of CVE made a sharp pull-back rally and soared ~65% in the last six-months supported by a price recovery in the international crude oil. We expect with the gradual recovery of the economy, coupled with acceleration in the manufacturing and industrial activities which would lead to higher demand and increase in the international crude oil prices would support the company's overall performances. We have valued the stock using the EV to Sales multiple based illustrative relative valuation method and have arrived at a target upside of double-digit (In percentage terms). We have taken peers like Suncor Energy Inc, Devon Energy Corp etc. for the purpose. Considering the current trading levels, and aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 5.74 on 16 September 2020.

CVE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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