Suncor Energy Inc.

Suncor Energy Inc. (TSX: SU) is a leading Canada based integrated energy company, which includes oil sands development and upgradation, onshore and offshore oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand.

Major Highlights:

• The Group issued two categories of unsecured notes, namely 2023 Notes and 2025 Notes with a coupon rate of 2.80% and 3.10%, respectively amounting USD 450 million and USD 550 million, respectively. The issued fund (USD 1,000 million) would be used for the repayment of short-term indebtedness and for general corporate purposes. 
• The Group declared quarterly dividend of CAD 0.21 per common share, payable on June 25, 2020. Meanwhile.
• The Company has collaborated with Mitsui & Co., a leading Japanese trading and investment company and investing CAD 15 million and CAD 10 million, respectively, to establish LanzaJet Inc. The new company will produce sustainable aviation fuel (SAF).

Q1FY20 Financial Highlights: Suncor declared its quarterly results, wherein, the Company reported its top line of CAD 7,756 million, significantly lower than CAD 9,397 million in the previous corresponding quarter. The decline in the income was primarily attributable to a major slide in the price realization due to considerable weakness and volatility in the crude oil prices. Loss before income taxes stood at CAD 4,350 million, as compared to a profit of CAD 2,006 million in Q1FY19. The loss was due to a rise in purchases of crude oil and products along with a higher depreciation, depletion, amortization & impairment expenses. The Company reported a net loss of CAD 3,525 million, as compared to a net profit of CAD 1,470 million. The Group exited the quarter with cash and cash equivalents of CAD2,226 million while total assets stood at CAD 85,266 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of SU corrected ~33% so far this year, as investors dumped the stock due to a steep fall in oil demand. The issuance of USD 1,000 million of unsecured notes will likely provide ample support to the near-term working capital and will ensure the liquidity of the business. We expect a recovery in oil demand in the coming days as easing lockdown restrictions are likely to result in higher industrial and manufacturing activities. Also, easing in travel restrictions would further provide support to the oil demand. To preserve the liquidity, the group has reduced its capital expenditure by another CAD 400 million and expect it fall between CAD 3.6 billion to CAD 4 billion. The group is also targeting to reduce the operating cost by CAD 1 billion in FY20. The group has reduced its dividend payment, which is likely to help the group in better management of funds. At the last traded price, the group’s shares were trading above its 20-days and 75-days simple moving average of CAD 24.51 and CAD 24.63, respectively, indicating a bullish- trend. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a target upside offering lower double-digit (in percentage terms). For the said purposes, we have peers like Imperial Oil Ltd (TSX: IMO), Exxon Mobil Corp (NYSE: XOM) and Cenovus Energy Inc (TSX: CVE) etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 28.43 on June 8, 2020.

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

Canadian Natural Resources Limited

Canadian Natural Resources Limited (TSX: CNQ) is one of the energy companies in Canada involved in the production, exploration & development of crude oil and natural gas. The company’s portfolio of assets is located in North America, the UK North Sea and Offshore Africa. The group operates across two segments, namely Crude oil and NGLs and Natural gas.

The group declared a quarterly cash dividend of CAD 0.425 per common share, payable on July 01, 2020.

Q1FY20 Financial Highlights:  CNQ declared its quarterly results, wherein the company reported revenue of CAD 4,500 million, as compared to CAD 5,248 million in pcp. The decline was primarily attributable to a decrease in income from both the segments. The quarter was marked by higher production costs, a rise in transportation, blending and feedstock expense along with higher depletion, depreciation & amortization expense. The company reported a loss before income tax of CAD 1,441 million, as compared to a profit of CAD 1,220 million in the previous corresponding period. Net loss, during the quarter, stood at CAD 1.282 million, as compared to a net profit of CAD 961 million in Q1FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of CNQ corrected ~31% year to date, owing to the lower crude oil demand and turbulence in international crude oil prices. We expect a rise in crude oil demand in the coming months due to easing lockdown restrictions across several economies which would result in an increase in industrial and manufacturing activities. At the last traded price, the group’s share was trading above its 75-days and 100-days simple moving average of CAD 22.61 and CAD 26.80, respectively, indicating a medium-term bullish- trend. The group has a strong financial position and has decent liquidity of more than CAD 5 billion to surpass the current challenging environment. CNQ has a robust balance sheet with easily manageable debt exposure, which reduces the balance sheet risks of the company as compared to many of its peers. Further, the group has a track record of free cash flow generation, which strengthen the liquidity position of the group. Further, a rise in the crude oil prices would comfort the cash flow and profitability of the company in the coming days. The stock is offering a lucrative dividend yield of 5.81%, which is lucrative amid current interest rate environment. We have valued the stock using Price/CF based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered peers like Suncor Energy Inc (TSX: SU), Cenovus Energy Inc (TSX: CVE) and Huskey Energy (TSX: HSE) etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 29.25 on June 8, 2020.

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

Disclaimer

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