We have upgraded integrated energy company Suncor Energy Inc. (SU) shares to Neutral from Underperform. The company’s impressive second quarter 2010 results, aided by the additional upstream production from the Petro-Canada merger and higher crude prices along with an updated guidance, give us enough reasons to be optimistic about the stock’s growth momentum for the remainder of 2010.
Suncor enjoys the benefits of significant oil-sands and conventional production platform, large oil-sands reserves and a remarkable downstream portfolio. Additionally, with an array of growth opportunities, unique asset base and double-digit return potential in the long run, we believe the company has a distinct competitive edge over its peers.
Following the second quarter results, Suncor increased its total production outlook to 610,000 barrels of oil equivalent (boe) per day from 608,000 boe per day for 2010. The East Coast Canada production outlook has been increased to 65,000 barrels per day (bpd) from 60,000 bpd while the International production outlook remained at 133,000 boe per day.
Although the Petro-Canada acquisition made Suncor one of the largest owners of oil sands in the world, the company remains under pressure due to a high debt level of approximately C$14 billion. In an effort to reduce debts, Suncor is engaged in the divesture of an array of non-core assets. The company has set an asset sale target of $2 billion to $4 billion for 2010. To date, the divesture program has reached approximately $2.8 billion.
Moreover, exposure to volatile oil and gas prices along with regulatory risks associated with the expansion of the oil sands operations might create headwinds in the path of Suncor’s progress.
Suncor’s deep oil sands technology, though proven, is still vulnerable to potential implementation delays, which will likely hamper the company’s production levels.
With an expectation that the stock will perform in line with the broader equity market, we currently retain a Zacks #3 Rank (short-term Hold rating).