Following the second quarter earnings miss, we have downgraded Canada’s biggest energy firm and the largest oil sands outfit Suncor Energy Inc. (SU) to Neutral from Outperform.
Calgary, Alberta-based Suncor is Canada’s premier integrated energy company. Suncor’s operations include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand.
Following the Petro-Canada acquisition in 2009, Suncor has become one of the largest owners of oil sands in the world – worth as much as 22 billion barrels. The company has gained new oil sands properties to supplement its existing operations in northern Alberta, making it the dominant producer in the region where reserves are second only to Saudi Arabia.
Additionally, Suncor explores, acquires, develops, produces and markets crude oil and natural gas in Canada and internationally, and it transports and refines crude oil and market petroleum and petrochemical products primarily in Canada.
Suncor recently reported lower-than-expected EPS for the June quarter – 62 Canadian cents (63 U.S. cents) versus the Zacks Consensus Estimate of 66 cents – adversely affected by lower volumes and operational hiccups, along with higher depreciation and impairment.
We remain worried about Suncor’s high debt level (approximately C$10 billion) and significant anticipated capital expenditure requirements (C$6.7 billion for 2011). This is expected to substantially increase Suncor’s leverage and deteriorate its credit metrics. We also believe that operational and project execution risks will keep the stock under pressure in the coming months.
Nevertheless, Suncor’s impressive portfolio of growth opportunities and unique asset base provides a high return potential in the long run. Embarking on a series of divestitures, Suncor, which competes with other Canadian behemoths like EnCana Corp. (ECA), Canadian Natural Resources Ltd. (CNQ), etc. – is getting back on track following its merger with Petro-Canada.
However, we prefer to remain on the sidelines at this point until we get a better proof of the company’s sustainable operational efficiency. Our new long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).