DBRS Has Updated Its Report On Suncor Energy Inc.

DBRS has today updated its report on Suncor Energy Inc. (Suncor or the Company). The credit quality of the Company is based on (1) integrated operations, (2) strong financial profile and liquidity and (3) joint venture partnerships, helping to mitigate large-scale operational and financial risk. Despite these strengths, the Company’s rating is limited by (1) growing exposure to capital-intensive oil sands, (2) operations weighted heavily toward oil production and (3) continued reliability issues with oil sands operations.

For the first quarter ending March 31, 2012 (Q1), the Company’s financial profile improved marginally from 2011 as strong results were underpinned by a continued favourable liquids pricing environment, albeit declining toward the end of the quarter. Cash flow for the quarter continued to be strong and was sufficient to fully fund dividends and the Company’s capital expenditure (capex) program.

Based on results for Q1, DBRS expects operating cash flow to continue to be sufficient to fully fund annual capex ($7.5 billion) and dividends (approximately $750 million) in 2012. DBRS notes that capex for Q1 ($1.5 billion) is tracking slightly below the budgeted amount of $7.5 billion; however, full-year spending is expected to meet this target by year end. For the medium term, capex levels are likely to increase to fund production growth, which the Company intends to fund with internally generated cash flow. DBRS expects the company to manage this growth in a prudent manner.

Suncor benefits from above-average production growth opportunities (estimated to increase to one million barrels of oil equivalent per day (boe/d) by 2020 from 472,000 boe/d at March 31, 2012) driven by its increased capital expenditure. Suncor continues to focus on its oil sands operations through both in situ and mining operations in Western Canada. Large projects, such as Firebag Phase 3, continue to ramp up, with Phase 4 expected to begin production in 2013. As a result of the focus on oil sands operations, earnings should continue to improve, assuming strong liquids pricing. However, as with many oil sands operations, maintaining reliability has been a challenge – as seen recently in March 2012, with the unplanned maintenance at Upgrader 2 (U2) (maintenance completed in mid-April; production has resumed).

Notes:
All figures are in Canadian dollars unless otherwise noted.

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