Canada’s premier integrated energy company, Suncor Energy (SU) reported better-than-expected second quarter 2010 results, aided by additional upstream production from the Petro-Canada merger and higher crude prices. Earnings per share, excluding certain items, came in at 50 Canadian cents (48 cents), surpassing the Zacks Consensus Estimate of 31 cents and prior-year period result of 4 Canadian cents.
Suncor’s net earnings of 31 Canadian cents per share were significantly ahead of loss per share of 6 Canadian cents in the second quarter of 2009.
In the reported quarter, total revenue of C$9.00 billion ($8.69 billion) was up 89.7% from the year-ago level and was higher than the Consensus Estimate of $8.05 billion.
Cash flow from operations went up to C$1,758 million from C$295 million in the year-ago quarter, primarily due to increased production volumes added as a result of merger as well as higher realized prices.
Production
Upstream production during the quarter averaged 633,900 barrels of oil equivalent per day (Boe/d), up significantly from the prior-quarter level of 336,100 Boe/d, mainly due to additional upstream production on account of Petro-Canada merger.
Excluding proportionate production share from the Syncrude joint venture, oil sands volumes fell 1.8% year over year to 295,500 barrels per day (Bbl/d), mainly reflecting planned maintenance activities at one of two oil sands upgraders in the last two months of the quarter.
Syncrude operations contributed an average 38,900 Bbl/d of crude production for the quarter.
Suncor’s natural gas business produced an average 586 million cubic feet equivalent per day (MMcfe/d), as against 211 MMcfe/d during the year-ago period, based on the strength of the Petro-Canada acquisition.
International and offshore production contributed an average 201,900 Boe/d. Volumes were adversely affected by a planned maintenance at the company’s North Sea operations and limitations on production quotas in Libya . However, East Coast Canada assets performed better and new production from the Ebla gas project in Syria somewhat counterbalanced the negatives.
Balance Sheet
As of June 30, 2010, Suncor had cash and cash equivalents of C$455 million and total long-term debt was C$13.63 billion. The debt-to-capitalization ratio was approximately 28.2%.
Asset Sale Update
Keeping up with the target of divesting an array of non-core assets, Suncor sold assets, Rosevear and Pine Creek, for net proceeds of C$229 million and entered into an agreement to sell non-core natural gas properties in Alberta to TAQA NORTH for gross proceeds of C$285 million. The transaction will be completed in the latter part of the third quarter of 2010.
Moreover, Suncor agreed to sell all of its Petro-Canada Netherlands B.V. shares to a British company Dana Petroleum plc for an estimated net cash consideration of approximately €445 million, or C$582 million including hedging gains. The deal is also expected to close in the third quarter of 2010.
To date, Suncor reached agreements to dispose of assets for an aggregate consideration of approximately $2.4 billion. Remaining proposed divestments comprise certain natural gas assets in Western Canada and non-core North Sea assets. While the timeline for the divestment of assets remains flexible, the company expects most of the remaining sales to occur during the second half of 2010.
Guidance
Looking ahead to 2010, Suncor guided toward international production of 133,000 BOE/d, while East Coast Canada production is expected to be 65,000 Bbl/d. Natural gas volumes are anticipated to be 580 MMcfe/d. The company expects oil sands production of 280,000 Bbl/d. The company estimates Syncrude production to be approximately 36,000 Bbl/d. Total upstream volumes are expected at 610,000 BOE/d.
Our Recommendation
Suncor is currently rated as Zacks #3 Rank (Hold), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months.
However, taking into account Suncor’s high debt level, operational challenges and risks related to the Petro-Canada acquisition, we remain bearish on the stock in the long run, reflected through the Underperform rating.
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