Suncor Energy Inc

Suncor Energy Inc (TSX: SU) is a Canada-based integrated energy company focused on developing Canada's petroleum resource basin, Athabasca oil sands. The Company operates in three business segments: Oil Sands, Exploration and Production (E&P), and Refining and Marketing.

Key Highlights

• Expecting CAD 2 billion of Free Funds Flow by FY2025: On the back of margin improvements, operating & sustaining capital cost reductions, & growth opportunities the management expects to garner healthy free funds flow. Approximately 1 billion of free fund flow is expected through projects implemented by FY2023 and another 1 billion through projects deployment by FY2024 – FY2025.

• Corporate Guidance for FY2021: The management has shared guidance ranges for production and targets for capital expenditures. The management expects total production in a range of 740,000 – 780,000 (boe/d), along with a total capital expenditure between CAD 3.8 – 4.5 billion.

Source: Company

• Optimizing assets through significant value-added projects: Despite the challenges during the year, the company executed its plans to optimize the existing assets through significant value-added projects. The interconnecting pipelines between Suncor’s Oil Sands Base and Syncrude were brought into service in Q4 2020, and transfers began in December 2020, reflected the enhanced integration and operational flexibility between these assets. We believe the interconnecting pipelines, debottlenecking at Firebag and AHS deployment would contribute significantly to the company’s incremental CAD 2 billion free funds flow target.

• Divesting interest in “Golden Eagle Area Development”: Recently the company reached an agreement to sell its 26.69% working interest in the Golden Eagle Area Development for USD 325 million and contingent consideration up to USD 50 million. This transaction is expected to close by Q3 2021.

Financial Overview of Q4 2020 (In millions of CAD)

Source: Company

• In Q4 2020, the company reported CAD 6.5 billion revenue, as compared to CAD 9.5 billion in the previous corresponding period. The revenue declined primarily due to lower crude oil and refined product realizations.
• Total operating expenses stood at CAD 7 billion in Q4 2020, against CAD 12.6 billion in the previous corresponding period.
• Operating losses in Q4 2020 were minimized to CAD 0.4 million against CAD 3.0 million in pcp. The decrease in depreciation cost, selling and general expenses associated with the company’s cost reduction initiatives played a vital role in bringing down the losses.
• The net loss stood at CAD 0.1 million, against CAD 2.3 million in the previous corresponding period. The lower net loss was primarily due to the reasons discussed above.

Risks associated with investment

The company’s performance is related to the demand and price of the crude oil. Any volatility in the crude oil prices or setback to demand would hamper the company’s performance. 

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The Company's reliable operations drove its refinery utilization to 95% in Q4 2020, compared to 87% in Q3 2020, is representing the sequential improvement in the operation and demand. The group also leveraged its strong domestic sales network and export channels, including integration with the retail network, within its downstream business to achieve higher utilization rates which continued to outperform the Canadian refining average in Q4 2020. Furthermore, the Company is continuously working to reduce the business's cost structure while increasing productivity. The Company also plans to pay down between CAD 1.0 billion and CAD 1.5 billion of debt and repurchase the Company's shares of CAD 500 million - CAD 1.0 billion in 2021, signifying the Company's ability to generate cash flow and confidence in the underlying value of the Company. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 22.48 on February 8, 2021. We have considered Canadian Natural Resources Ltd, Imperial Oil Ltd, Pembina Pipeline Corp etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Imperial Oil Limited

Imperial Oil Limited (TSX: IMO) is one of Canada's leading integrated oil companies, which operates in upstream operations, petroleum refining operations, and the marketing of petroleum products.

• Strong Technical Indicators: The stock of IMP closed above the long -term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. Moreover, the stock soared ~40% and ~18%, respectively in the last three months and six months, respectively.

Source: Refinitiv (Thomson Reuters)

• An Income Play: Historically, the company has paid consistent dividend to its shareholders, across economic cycles, which shows the company’s ability to generate consistent cashflow. Moreover, the stock carries an annualized dividend yield of ~3.41%, which is decent considering the prevailing interest rate environment.

Source: Refinitiv (Thomson Reuters)

• Record Production: During the fourth quarter of FY20, the group reported average production of 4,60,000 gross oil-equivalent barrels per day.This was higher from 398,000 barrels per day in Q4FY19, supported by strong production from Kearl bitumen due to the addition of supplemental crushing facilities.

• Improved Refinery throughput: The group reported a higher Refinery throughput of average 359,000 barrels per day,grew from 321,000 barrels per day in Q4FY19. The current capacity utilization stood at 85%, as compared to 76% in Q4FY19.

Q4FY20 Financial Highlights:

• IMO reported lower revenue and other income of CAD 6,033 million, lower than CAD 8,122 million in the previous corresponding period (pcp). The decline was primarily due to lower income from both upstream and downstream segments.
• Purchases of crude oil and products and Production and manufacturing expenses stood at CAD 3,318 million and CAD 1,437 million, as compared to CAD 4,990 million and CAD 1,609 million, respectively.
• The group reported a net loss of CAD 1,146 million, as compared to a net profit of CAD 271 million in pcp, primarily attributable to a net loss of CAD 1,192 million from the upstream segment due to the negative impact from lower realization prices, coupled with an impairment charge amounting CAD 1,171 million after-tax.
• Total capital and exploration expenditure stood at CAD 195 million, significantly lower than CAD 414 million in Q4FY19.

Q4FY20 Income Statement Snapshot (Source: Company Reports)

Risks: The group’s performance is correlated with the crude oil prices. Volatility in oil price or change in demand dynamics would affect the group’s performance.

Valuation Methodology (Illustrative): Price to CF based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

During the quarter, the group returned CAD 923 million to shareholders through dividends and share purchases. For FY21, the company expects total capital expenditures at around CAD 1.2 billion. Meanwhile, in FY20, production and manufacturing expenses were down ~CAD 985 million, supported by cost reductions initiatives. The group is expected to continue with cost reduction initiatives. Moreover, we expect the demand of oil to continue to recover, which would lend support to the oil prices and consequently, the company’s performance would improve. 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 Exxon Mobil Corp, BP PLC etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 25.90 on February 8, 2021.

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

Disclaimer

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