Suncor Energy: Market situation is favorable for oil sands production (NYSE: SU)

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In the third quarter of 2023, Suncor Energy Inc. (NYSE:SU) reported adjusted funds from operations (“FFO”) of $4,473 million, compared to $2,641 million in 3Q 2021 and $5,345 million in 2Q 2022. Due to higher oil prices in 2022, SU could increase its dividend from $0.21 per share in 3Q 2021 to $0.47 per share in 3Q 2022. As the EU embargo on Russian oil begins in December and OPEC+ cut production, Oil prices are supported and SU will continue to benefit from the market situation. However, it is unwise to expect the company to release Q4 2022 and Q1 2023 quarterly results as strong as Q2 2022 and Q3 2022. The stock is a buy.

Quarterly results

According to its Q3 2022 financial results, Suncor Energy’s free funds flow increased from $1,420 million in Q3 2021 to $3,094 million in Q3 2022. SU reported total production volume of 724 mboe/d in the 3rd quarter of 2022, compared to 699 mboe/d in the 3rd quarter. 2022. In the oil sands segment, SU’s operating revenue (net of royalties) increased from $4,473 million in Q3 2021 to $6,706 million in Q3 2022.

Additionally, in the oil sands business, Suncor’s adjusted operating income decreased from $635 million in 3Q 2021 to $2,195 million in 3Q 2022, due to higher oil prices and the higher sales volumes, partially offset by higher royalties and operating and transportation expenses. Suncor Energy reported a net loss of $609 million in the third quarter of 2022, compared to net income of $877 million in the third quarter of 2021, due to a non-cash impairment charge of $3,397 million on the share of the company in the Fort Hills assets.

In the exploration and production segment, SU’s operating revenue (net of royalties) increased from $590 million in Q3 2021 to $637 million in Q3 2022. Additionally, earnings The company’s adjusted operating income increased from $369 million in Q3 2021 to $555 million in Q3 2022, driven by higher sales volumes and higher realized prices, partially offset by royalties and higher operating and transport expenses:

“As we focus the business on operational execution, we delivered $4.5 billion in adjusted operating funds in the third quarter, the second highest in company history, driven by a strong downstream refining throughput, to delivery of strong upstream production as we executed planned maintenance, consistent with what we previously communicated, and a strong business environment,”

said interim CEO Kris Smith.

“We returned approximately $1.7 billion of shareholder value during the third quarter, and the recently completed tender of approximately $3.6 billion represents a structural reduction in long-term debt.” ,

He continued.

Market outlook

Due to the embargo on Russian crude oil imports which will come into effect in December 2022 and the OPEC+ production cut of 2mb/d, I expect oil imports from European countries from the United States and Canada will increase in the coming months. Figure 1 shows that the price of Brent crude oil fell from $81 per barrel on September 26 to $97 per barrel on November 7.

Additionally, the Energy Information Administration (EIA) expects global production and consumption of oil and other liquids to increase in 2023 (see Figure 2). Total world production and consumption of oil and other liquids for all quarters of 2023 is expected to exceed 100 million barrels per day. Canadian oil and other liquids production was 5.65 mb/d in Q3 2022. It is expected to increase to 5.90 mb/d in Q4 2022 and 5.95 mb/d in Q1 2023. Canadian oil and other liquids production will increase to 6.10 mb/d in the fourth quarter of 2023. On the other hand, Canadian oil and other liquids consumption is expected to increase to 2.31 mb/d in 2022 to 2.34 mb/d in 2023.

Figure 1 – Brent Crude Oil Price

Figure 1 – Brent Crude Oil Price

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Figure 2 – International production and consumption of oil and other liquids

Figure 2 – International production and consumption of oil and other liquids

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Figure 3 shows that the price of Brent crude oil in the fourth quarter of 2022 will be lower than that of the third quarter of 2022. However, the EIA expects the price of Brent crude oil to increase and reach $97.65 per barrel in the 4th quarter of 2023. In addition, the price of WTI crude oil will decrease from $93.07 per barrel in the 3rd quarter of 2022 to $85.67 per barrel in the 4th quarter of 2022. In the first quarter of 2023, the price of WRI crude oil will be of $87.67 per barrel and is expected to rise to $91.65 in Q4 2023. Additionally, retail heating oil and diesel prices are expected to be above $5 per gallon for the remainder of 4Q22. Due to the EU ban on maritime imports of petroleum products from Russia, fuel oil and diesel prices will remain high in 2023.

Depending on crude oil production levels and prices, global demand for North American oil resulting from the EU embargo on Russian oil imports and the energy crisis in Europe, as well as the increased consumer spending on heating fuels during the winter season in the U.S. and Canada, SU’s Q4 2022 results will be stronger than Q4 2021. However, the company’s financial results will not will not be as strong as in the 2nd quarter of 2022 and the 3rd quarter of 2022.

Figure 3 – Crude Oil Price Outlook

Figure 3 – Crude Oil Price Outlook

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Performance outlook

The debt ratio is one of the important calculations that measure the debt capacity of the company. This ratio indicates the proportion of assets financed by debt. The higher the ratio, the higher the degree of indebtedness and financial risk. The company’s debt ratio fell from 0.19 in 2018 to 0.20 in 2019 and jumped to 0.26 at the end of 2020. However, as oil prices rose and demand for oil was rising, SU’s debt ratio was falling.

The company’s debt ratio was 0.22 at the end of 2021 and 0.23 as of September 30, 2022. Additionally, SU’s debt ratio, which determines the probability of default, has increased from 8.99 at the end of 2020 to 1.55 at the end of 2021 and 0.93 as of September 30, 2022. The company’s debt to EBITDA ratio as of September 30, 2022 is below its pre-pandemic levels . Finally, SU’s asset/equity ratio fell from 2.04 at the end of 2018 to 2.37 at the end of 2020.

Due to better performance resulting from increased energy demand, SU’s asset-to-equity ratio fell to 2.29 at the end of 2021 and to 2.23 on September 30, 2022. The decline of the asset-to-equity ratio over the past few years indicates that the company has used reduced debt to finance its assets. “To support its debt reduction and annual capital allocation objectives, the company reduced its net debt by approximately $1.8 billion in the third quarter of 2022,” the company announced. Therefore, Suncor Energy’s debt ratios show that it can meet its current and future obligations (see Figure 5).

Figure 5 – SU leverage ratios

Figure 5 - SU leverage ratios

Author (based on SA data)

Summary

In terms of market conditions, due to rising oil prices, SU will continue to sell its SCOs and products at significant premiums. The company’s adjusted operating cash flow and adjusted operating income this winter (October 2022 to March 2023) will be better than last winter. I am bullish on the stock. However, keep in mind that with current oil prices and the outlook for the energy market, Suncor Energy Inc.’s future results will not be as strong as the previous two quarters.

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