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

DBRS has today confirmed Suncor Energy Inc.’s (Suncor or the Company) ratings at A (low) and R-1 (low), with Stable trends. Suncor’s ratings are supported by its (1) integrated operations, (2) strong financial profile and (3) strong joint venture partnerships.

Suncor’s financial profile remained strong for the rating category in 2012. The Company’s downstream operations acted as a natural hedge against pricing volatility in upstream operations and kept operating cash flow relatively stable. Operating cash flow fully funded capex and dividends for the year, and resulted in positive free cash flow of approximately $2 billion, which was partially used to repurchase shares. With Suncor’s strong liquidity position, excess cash flow anticipated for 2013 is expected to be used for additional share repurchases, with minimal impact on key credit metrics.

Suncor’s ratings are, however, limited due to its focus on oil sands operations, which are typically high cost. The Company has taken a prudent approach to possible major oil sands expansions through its joint venture agreement with Total S.A. (Total; rated AA, Stable), which helps to offset large-scale operational and financial risk associated with oil sands projects. In addition, the Company faces concentration risk, with over 65% of production in 2012 focused in the oil sands, production from which is subject to volatile pricing differentials. The Company has typically been able to mitigate concentration risk through its upgrading capacity (currently 350,000 barrels per day (b/d)); however, the operational reliability of upgraders has resulted in increased bitumen production exposed to the light-heavy oil pricing differential, impacting upstream earnings in 2012. DBRS expects this trend to continue, with oil sands production potentially reaching 400,000 b/d in 2014. Despite these challenges, DBRS anticipates no near-term rating action given Suncor’s strong financial profile.

DBRS notes that the Company and its joint venture partner Total are taking a prudent approach to investment decisions with regard to their three major projects (Voyageur, Fort Hills and Joslyn) by deferring sanctioning decisions. DBRS views these decisions as prudent given the challenging economic conditions in Alberta. A decision on Voyageur is expected at the end of Q1 2013, with a decision on Fort Hills expected in the second half of 2013. A decision is expected on the Joslyn project prior to 2015. DBRS would expect that, should Suncor proceed with one or more of the projects, they will be funded in a prudent manner.

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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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