Canada-based Suncor Energy Inc. (SU) reported weak fourth quarter results, adversely affected by higher expenses and royalty payments as well as less-than-expected production. Earnings per share, excluding certain items, came in at 9 Canadian cents (8 cents), well below the Zacks Consensus Estimate of 39 cents. In the year-ago period, Suncor earned 38 cents. However, revenue of C$7.6 billion was up 9.8% from the fourth quarter 2008 level.
Estimate Revisions Trend
It was the company’s 3rd negative earnings surprise in the past 4 quarters. Suncor has performed poorly during this period with its average earnings surprise being -34.7%. This implies that the company has missed the Zacks Consensus Estimate by 34.7% over the last four quarters.
Keeping in mind Suncor’s history of underperformance, estimates for the current quarter (first quarter of 2010) have been trending down over the past month, with the quarterly Zacks Consensus Estimate falling by 4 cents (from 51 cents to 47 cents). Overall, 1 out of 4 analysts covering the stock has reduced their first quarter projections during that time, while there have been no upward revisions.
As such, our short-term recommendation on the stock is Sell (Zacks Rank #4), meaning that Suncor is expected to underperform relative to the overall market during the next 1-3 months. Therefore, the company should most likely be sold or avoided over this time period.
Operating Statistics
The company reported operating earnings of C$323 million, as against C$14 million a year ago, while cash flow from operations went up from C$231 million in the fourth quarter of 2008 to C$1.1 billion. The significantly positive comparisons reflect increased upstream production and refined product sales volumes on the back of Petro-Canada merger and higher crude realizations.
Production
Upstream production during the quarter averaged 638,200 barrels of oil equivalent per day (BOE/d). Of this, 325,600 BOE/d came from the Petro-Canada acquisition. During the fourth quarter, volumes from Suncor’s legacy oil sands and natural gas operations averaged 312,600 BOE/d, as against 279,400 BOE/d in the year-ago period.
Excluding proportionate production share from the Syncrude joint venture, oil sands volumes rose 14.4% year over year to 278,900 barrels per day (Bbl/d), mainly reflecting improved operational reliability, partly offset by unplanned maintenance activities.
Post acquisition, Suncor holds a 12% share in the Syncrude oil sands joint venture (located near Suncor’s existing oil sands operations in Alberta). Syncrude operations contributed an average 39,300 Bbl/d of sweet crude production for the fourth quarter of 2009.
Suncor’s natural gas business produced an average 764 million cubic feet equivalent per day (MMcfe/d), of which, 562 MMcfe/d came from the acquisition. Production from the company’s legacy natural gas operations averaged 202 MMcfe/d in the final three months of 2009, as against 213 MMcfe/d a year ago. This decrease was on account of production shut-ins and the sale of certain non-core assets in the second quarter of 2009.
East Coast Canada production contributed an average 63,600 Bbl/d, while volumes from Suncor’s international segment contributed an average 129,000 Bbl/d – both lower than capacity as a result of planned and unplanned maintenance and OPEC production quota constraints in Libya. 2010.
Guidance
Looking ahead to 2010, Suncor guided towards international production of 138,000 BOE/d, while East Coast Canada production is expected to be 55,000 Bbl/d. Natural gas volumes are anticipated to be 680 MMcfe/d. The company expects oil sands production of 300,000 Bbl/d. Total upstream volumes are expected at 644,000 BOE/d.
Plans asset sale to cut acquisition-related debt
In 2010, Suncor is targeting to divest a number of non-core assets, including certain natural gas properties in Western Canada and the U.S. Rockies, all Trinidad and Tobago assets and certain non-core North Sea assets. Towards the end of last year, the company entered into an agreement with Houston-based Noble Energy Inc. (NBL) to sell bulk of its Rocky Mountain oil and gas fields for $494 million. The transaction is expected to close in March 2010.
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