Canada’s biggest energy firm and the largest oil sands outfit Suncor Energy Inc. (SU) reported strong third quarter results, helped by higher output in its oil sands business and robust downstream performance.
Earnings per share, excluding certain items, came in at C$1.14 (U.S.$1.10), ahead of the Zacks Consensus Estimate of 81 U.S. cents. Suncor’s adjusted earnings per share almost tripled from the year-ago level of 39 Canadian cents (38 U.S. cents).
Operating earnings of C$1.8 billion were up significantly from C$617 million a year ago, while cash flow from operations went up from C$1.6 billion in the third quarter of 2010 to a record C$2.7 billion.
Revenues of C$10.7 billion (U.S.$10.3 billion) were up 39.2% from the third quarter 2010 level but failed our expectation by 3.2%.
Production
Upstream production during the quarter averaged 546,000 barrels of oil equivalent per day (BOE/d), down from the third quarter 2010 level of 635,500 BOE/d, mainly on account of the sale of non-core assets throughout 2010 and 2011, operational problems at the Buzzard platform, and the suspension of operations in Libya. These factors were partially offset by record oil sands output.
Excluding proportionate production share from the Syncrude joint venture, oil sands volumes rose 6.5% year over year to a record 326,600 barrels per day (Bbl/d), mainly reflecting operational enhancements at the company’s mining and extraction units, and the impact of planned maintenance activities in the year-ago period.
Following the Petro-Canada acquisition last year, Suncor holds a 12% share in the Syncrude oil sands joint venture (located near Suncor's existing oil sands operations in Alberta). Syncrude operations registered a 13.3% year-over-year increase in production to 35,900 Bbl/d in the quarter, helped by the availability of upgrading facilities.
Suncor’s newly formed Exploration and Production segment (consisting of International and Offshore and Natural Gas segments) recorded production of 183,500 BOE/d, as against 297,200 BOE/d in the prior-year quarter. The sale of non-core assets, production freeze in Libya and operational issues at Buzzard resulted in the year-over-year decline.
Product Sales
The company’s Refining and Marketing segment generated total refined product sales of 90,700 cubic meters per day, up 2.0% year over year. The improvement was on account of an overall combined utilization rate of 97% in Suncor’s four refineries.
Balance Sheet & Capital Expenditure
As of September 30, 2011, Suncor had cash and cash equivalents of C$3.3 billion and total long-term debt (including current portions) of C$10.2 billion. The debt-to-capitalization ratio was approximately 21.3%. The company incurred C$1.5 billion in capital expenditure in the quarter.
Guidance
For 2011, Suncor guided towards a total production of 530,000–560,000 BOE/d. The company expects oil sands production of 300,000–310,000 Bbl/d and projects Syncrude production at approximately 35,000–37,000 Bbl/d.
Suncor targets to expend $6.70 billion on capital programs for 2011.
Our Recommendation
Suncor, which competes with other Canadian behemoths like EnCana Corp. (ECA), Canadian Natural Resources Ltd. (CNQ) etc., currently retains a Zacks #3 Rank, translating into a short-term Hold rating. We also maintain our long-term Neutral recommendation on the stock.
In our opinion, Suncor is one of the best positioned companies in the energy space given its access to abundant resources, rich operating experience and technical know-how. With a large portfolio of growth opportunities, unique asset base and high return potential in the long run, the company has a competitive edge over its peers.
However, we remain worried about Suncor’s high debt level and significant capital expenditure requirements. We also believe that operational and project execution risks will keep the stock under pressure in the coming months.
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