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 Highlights:

• 2021 Production Outlook: Suncor released its 2021 corporate guidance which reflects its capital allocation framework and includes:
  • average upstream production of 740,000 to 780,000 barrels of oil equivalent per day (boe/d)
  • expected debt repayment of CAD 500 million to CAD 1.0 billion
  • a capital program of between CAD 3.8 and CAD 4.5 billion (sustaining capital of CAD 2.9 to CAD 3.4 billion which includes In Situ well pads)
  • CAD 500 million share repurchase program for the fiscal year 2021.
• Principal Operator of Syncrude project: The company collaborated with Imperial Oil Resources Limited, CNOOC Oil Sands Canada and Sinopec Oil Sands Partnership for Syncrude joint venture. The company announced that other partners have agreed in principle for Suncor to become the operator of the Syncrude project by the end of 2021. The Management highlighted that the above agreement would allow the company to improve its competitive strength by achieving a Syncrude cash operating cost per barrel of CAD 30/bbl and attain ~90% capacity utilization through interconnect pipelines. Moreover, the above collaboration would aid in the improvement of operating performance and efficiencies.
• Integrated Business model: The company has an integrated model which allows the business to capture margin by processing & moving energy across the value chain. The group derived 15% and 10% of its funds from operations from offshore and bitumen segments, while 25% and 50% of its funds from operations are derived from synthetic crude oil and refined products, respectively. The above dynamics are likely to lower the company’s risk profile.

Source: Company Reports

• Consistent dividend distribution: Despite the challenging operating environment, the Board of Directors approved a quarterly dividend of CAD 0.21 per share, payable on December 3, 2020. The company has a decent track record of dividend distribution, and the stock is offering a decent dividend yield amid low interest rate environment.

Q3FY20 Financial Highlights:

• Suncor announced its quarterly results, wherein the company reported revenue of CAD 6,457 million, as compared to CAD 9,896 million in the previous corresponding period (pcp). The decline was majorly attributable to lower production of 616,200 boe/day during the third quarter of FY20, as compared to 762,300 boe/day in the previous corresponding period (pcp).
• Operating loss, during the period, stood at CAD 302 million, as compared to an operating profit of CAD 1.114 billion in the previous corresponding period (pcp).
• The group posted a net loss of CAD 12 million, versus net earnings of CAD 1.035 billion in Q3FY19.
• Cash flow from operating activities stood at CAD 1,245 million, as compared to CAD 3,136 million, a year ago, primarily due to a net loss in Q3FY20.
• The company reported cash and cash equivalent of CAD 1,489 million, while total assets were recorded at CAD 83,502 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Volatility in the crude oil prices on account of several macro factors would affect the realization price and as well as the overall performance of the company.

Valuation Methodology (Illustrative): Price to CF based valuation

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

Stock Recommendation:

The group’s performance was affected by lower oil price and demand destruction scenario so far this year. However, lately the demand for oil started picking up, and oil prices witness a relief rally which would provide support to the group’s performance in the coming quarters. We expect oil demand to increase further as industrial activities are back on track, which would support the oil price in the international market. We have valued the stock using P/CF based relative valuation method and have arrived at a lower-double-digit upside (in percentage terms). For the said purposes, we have considered peers like Imperial Oil Ltd, Exxon Mobil Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 20.77 on November 30, 2020.

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

Fairfax Financial Holdings Limited

Fairfax Financial Holdings Limited (TSX: FFH) is a holding company which operates in property and casualty insurance and reinsurance and the associated investment management.

Recent Development:

Recently, the company announced that it is selling off majority interests in Vault Insurance to Cornell Capital and Hudson Structured Capital Management Ltd. However, the company would continue to hold a stake of 10% in Vault Insurance.

Key Highlights:

• Ample Liquidity: The company has strong liquidity of USD 2.0 billion unsecured revolving credit facility and is further supported by strong cash flows from operations, which is a key positive. We believe the above seems sufficient to surpass the current downturn.
• Prudent Cost Management: The company has successfully maintained its total expenses at USD 14,209.9 million for 9MFY20, at par with USD 14,206.2 million, a year ago. Despite an increase in the revenue component, the company manage to contain the cost, due to strict commissions, coupled with a slide in the other expenses (USD 3,403.8 million in 9MFY20 versus USD 3,880.5 million in pcp). We expect the continuation of the above trend in the foreseeable future, which would likely to support the company’s margin.

Q3FY20 Financial Highlights:

• FFH declared its quarterly results wherein the group posted improved net premium written at USD 3,735.2 million, against USD 3,318.3 million in the previous corresponding period (pcp). The company reported stable top-line of USD 4,992.6 million, at par with USD 4,925.9 million in Q3FY19, supported by an increase in the net premium earned, while a lower interest and dividends and a decline in the other revenue remained a drag.
• The company reported its total expense at USD 4,913.1 million, marginally increased from USD 4,856.0 million in pcp, due to an increase in higher loss on claims.
• The company reported lower net earnings of USD 41.8 million, against USD 74.4 million in Q3FY19, mainly due to an increase in the provision of income taxes of USD 37.7 million versus recovery of income taxes of USD 4.5 million in the previous corresponding period.
• The company posted its cash and investments of USD 1,153 million, higher than USD 975.5 million in FY19. The group’s total assets stood at USD 71.340 Billion at the end of Q3FY20.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s performance is exposed to volatility in the financial markets, change in interest rates and currency fluctuation.

Valuation Methodology: Price to Book Based (Illustrative)

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

Stock Recommendations: Amidst the current slowdown, the corporation has been consistent in making payments relating to interest expense, corporate overhead, preferred share dividends, income taxes and other investment-related activities, which shows operational resiliency. In the recent past, the stock appreciated ~27% and 14% in the last one month and three months, respectively. At the last closing, the stock traded above the support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend.

We have valued the stock using Price to Book-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Financials) median on NTM basis.  Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 445.4 on November 30, 2020.

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.