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

DBRS has today confirmed the ratings of Suncor Energy Inc.’s (Suncor or the Company) Commercial Paper and Debentures and Medium-Term Notes at R-1 (low) and A (low), respectively, as well as the PC Financial Partnership Senior Notes at A (low), all with Stable trends. The Senior Notes of PC Financial Partnership are guaranteed by Suncor Energy Inc. and Suncor Energy Oil Sands Limited Partnership (SEOSLP). The rating confirmation is based on the Company’s strong financial profile, continued future growth prospects and integrated operations.

Although realized commodity prices were lower in the quarter ending June 30, 2012 (Q2 2012), Suncor’s financial profile remained strong among its peer group through the first half of 2012 (H1 2012) as a result of its highly integrated business model. Debt-to-capital fell to 21.6% and debt-to-cash flow improved to 1.13 times (x) at H1 2012; both ratios remain well within the rating category. Free cash flow was positive as a result of higher upstream production levels and strong refining margins combined with lower capital expenditure (capex).

Capex levels remained in line with DBRS expectations of $3 billion for H1 2012, as the Company continues its strategy to grow production through oil sand projects. While oil sands expansion remains on track through 2012, Suncor’s strategy exposes the Company to crude oil pricing volatility, potential project delays and cost overruns, all of which could negatively impact credit metrics. Suncor has mitigated some of these risks by using a more prudent, phased approach to project execution. This provides a level of financial and operational flexibility, allowing for the suspension of construction and the scaling back of capex should market conditions render projects uneconomic.

As a result of expansion in the oil sands, Suncor will increase the percentage of production tied to heavy oil. This will leave the Company more exposed to the light-heavy oil price differential, which could increase volatility of earnings and cash flow. However, Suncor’s integrated refining operations provide a natural hedge to pricing fluctuations, as the Company’s refining and marketing segment typically benefits from lower feedstock costs. This was demonstrated in H1 2012, when Suncor experienced high refinery utilization, refining margins and throughput (approximately 352 thousand barrels of oil equivalent a day (mboe/d)).

Notes:
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.