DBRS Confirms Suncor Ratings at A (low) and R-1 (low), Trends Stable

DBRS has today confirmed the long- and short-term ratings on Suncor Energy Inc. (Suncor or the Company) and PC Financial Partnership at A (low) and R-1 (low), with Stable trends. The confirmations reaffirm DBRS’s actions on December 17, 2010, following Suncor’s announced strategic agreement with Total E&P Canada Ltd. (Total), a subsidiary of Total S.A. (rated AA with a Stable trend by DBRS), to enter into certain oil sands joint venture transactions (the Transaction), which closed on March 22, 2011. Apart from teaming with a world-class integrated operator with substantial financial strength, Suncor benefits from a modestly improved business risk profile through increased diversification, a near-term benefit for credit metrics and an enhanced capital management capability. The Transaction is also key to the strategic development of Fort Hills and the Voyageur upgrader (both suspended in late 2008) for start-up in 2016. It further underpins Suncor’s fairly aggressive ten-year plan to grow oil sands production by an average of 10% per year, and overall volumes to over 1,000,000 boe/d by 2020. The completion of these projects (by 2018) should enhance the Company’s ability to balance bitumen production with upgrading capability to better capture the full value chain; however, typical of the industry, potential cost overruns and delays remain concerns.

The rating confirmations also reflect the Company’s restored financial profile, following its merger with PetroCanada (PC) in August 2009 (the Merger), with adequate cash flow support and improved operating metrics as expected by DBRS. The Company has also made progress in reducing its environmental footprint, particularly in its oil sands operations. Further de-leveraging has been achieved with divestiture proceeds mostly deployed for debt reduction (about $3.0 billion by Q1 2011 since the Merger), also helped by strong crude oil prices. Total debt-to-capital of 23% and net debt-to-cash flow of 1.14 times (x) at March 31, 2011 (Mar/11, or 1.52x for the last 12 months to Mar/11 (LTM)) is within management targets of 20% to 25% and less than 2.0x, respectively. The debt ratio is among the most conservative targets of its peers. Furthermore, Suncor maintains substantial liquidity through its committed credit facilities (approximately $6.1 billion available at Mar/11), expiring in 2013. Debt maturities are minimal until 2018, when three bond issues totaling about $2.55 billion come due, which should be partially repaid, or refinanced.

However, during Suncor’s renewed substantial growth phase, annual capex could rise to the $8 billion to $9 billion range between 2012 and 2015 (operating cash flow of $7.4 billion for LTM) as indicated by the Company. Potential cost overruns and project delays as experienced in some of the Company’s oil sands projects in the early 2000’s (also seen in its peers’ projects), could pressure the balance sheet. DBRS expects Suncor to continue to exercise capital discipline and financial prudence to maintain its current credit ratings. The Merger was a case in point where the Company took drastic remedial actions to mitigate balance sheet and cash flow issues. Similarly, the Transaction allows the Company to monetize its Voyageur assets and expand its oil sands footprint with a high-quality joint venture partner. Previous major ventures were all conducted by the Company alone. Cash flow from the low-cost and high-return international and offshore operations, and downstream (close to 60% of cash flow combined in Q1 2011) should continue to augment growth projects in oil sands (over 40%) over the near to medium term.

DBRS expects Suncor’s 2011 capex of $6.7 billion (+15% over 2010) to be mostly covered by cash flow. Additional funding is available by way of $1.8 billion (net) upfront payments from the Transaction. The 2011 capex should be manageable, even if crude oil prices fall somewhat below the Company’s May 2011 guidance of WTI of $95/b (AECO gas price of $3.48/mcf assumed). Cash operating costs projected at $39 to $43 per barrel (gross before royalties (Gross)) should be achievable at the higher end (estimated $41.62/b in 2010). About 80% of the budget ($5.45 billion) is earmarked for upstream, while the total budget is split 42%/58% for growth and sustaining existing operations, the former primarily in Firebag 3 and 4 oil sands projects (expected to start up in mid-2011 and Q1 2013, respectively), and, to a lesser extent, in advancing Fort Hills and Voyageur. More than one-quarter of the sustaining capex is non-recurring in nature, mainly to upgrade the tailing technology. Normalized sustaining capex could be in the $2.5 billion to $3.0 billion range, going forward.

Despite its accelerated growth plans to 2020, the Company has revised its average production guidance in 2011 to 545,000 boe/d gross (down 5% - before targeted divestitures of 37,000 boe/d) or down 10% from Q1 2011 levels to reflect the suspension of production in Libya (estimated 5% to 6% of 2011 planned production) due to political turmoil in that country. DBRS expects 2011 volumes at the 530,000 boe/d level, given Syria’s political situation. Despite the upheaval in Libya, international and offshore operations (expected average output of about 146,000 boe/d) should continue to generate surplus cash flow to support oil sands developments, while natural gas output will decline as a result of further disposals (370 mmcf/d to 410 mmcf/d expected in 2011). Potential write-downs of some of the Libyan assets (BV of approximately $900 million at Mar/11) are likely, pending developments in the country, although this is not expected to have a material impact on the balance sheet.

Note:
All figures are in Canadian dollars unless otherwise noted.
Suncor Energy Inc.’s Commercial Paper and Debentures and Medium-Term Notes are guaranteed by Suncor Energy Oil Sands Limited Partnership (SEOSLP).

PC Financial Partnership’s Senior Notes are guaranteed by Suncor Energy Inc. and SEOSLP.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.