A premier Canadian integrated energy company, Suncor Energy (SU) reported better-than-expected third quarter 2010 results, aided by operational and financial optimization. Earnings per share, excluding certain items, came in at 42 Canadian cents (40 cents US), surpassing the Zacks Consensus Estimate of 38 cents and prior-year quarter result of 25 Canadian cents.
Suncor’s net earnings of 65 Canadian cents per share were behind third quarter 2009 result of 69 Canadian cents per share.
In the reported quarter, total revenue of C$8.64 billion ($8.31 billion) was up 4.6% from the year-ago level but below the Consensus Estimate of $8.57 billion.
Cash flow from operations went up to C$1.63 billion from C$574 million in the year-ago quarter, primarily due to increased production volumes as well as higher realized prices.
Production
Upstream production during the quarter averaged 635,500 barrels of oil equivalent per day (Boe/d), up from the prior-quarter level of 531,800 Boe/d, reflecting strong contributions from the International and Offshore segment and additional incremental production from the Petro-Canada acquired assets.
Excluding proportionate production share from the Syncrude joint venture, oil sands volumes upped slightly to 306,600 barrels per day (Bbl/d) from the prior-year quarter result of 305,300 Bbl/d.
Syncrude operations contributed an average 31,700 Bbl/d of crude production in the quarter.
Suncor’s natural gas business produced an average 546 million cubic feet equivalent per day (MMcfe/d), down 6.0% year over year, given lower production volumes following the divesture of non-core assets.
International and offshore business unit generated a 96.6% year-over-year growth in production, netting 206,200 Boe/d. Volumes benefited from additional production from Petro-Canada assets along with a higher production at White Rose offshore East Coast Canada, and new production from the Ebla gas project in Syria.
BalanceSheet and Capital Expenditures
As of September 30, 2010, Suncor had cash and cash equivalents of C$598 million and total long-term debt of C$12.05 billion. The debt-to-capitalization ratio was approximately 25.2%.
Suncor incurred a capital spending of 1.4 billion in the third quarter and expects capital spending in 2010 to be around $5.5 billion.
Asset Sale Update
During the quarter, Suncor completed the previously announced sale of its Trinidad and Tobago assets (for $378 million) and shares in Petro-Canada Netherlands B.V. (for €316 million). The company also divested two non-core natural gas properties of Alberta, known as Bearberry and Ricinus (for C$275 million) and Wildcat Hills (for C$351 million).
Moreover, Suncor signed a deal with a subsidiary of British company Dana Petroleum plc to sell a number of its UK offshore assets for £240 million (approximately C$390 million). The sale is expected to close during the first quarter of 2011.
To date, Suncor reached agreements to dispose assets for an aggregate consideration of approximately $3.5 billion. Remaining properties that are likely to be divested in the future comprise some natural gas assets in Western Canada.
Guidance
Looking ahead to 2010, Suncor guided toward international production of 110,000 Boe/d, while East Coast Canada production is expected to be 70,000 Bbl/d. Natural gas volumes are estimated to be 560 MMcfe/d. The company expects oil sands production of 280,000 Bbl/d. The company projects Syncrude production to be approximately 36,000 Bbl/d. Total upstream volumes are expected at 590,000 Boe/d.
Our Recommendation
We believe that Suncor is favorably positioned to benefit from the oil price recovery with the help of adequate growth opportunities, unique asset base and double-digit return potential.
However, considering the company’s high debt level, operational challenges and risk of project delays, we remain cautious on the stock in the long run, reflected through the Neutral recommendation.
Suncor currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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