Morningstar | Raising Our U.S. Dollar FVE for Suncor; Stock Continues to Trade in 3-Star Range
We are increasing our U.S. fair value estimate for no-moat Suncor Energy to $36 per share from $35 to reflect changes in foreign exchange rates. We are maintaining our CAD 47 fair value estimate. With the stock trading near $32 (CAD 44), we see only modest upside in the 3-star name. We think the market appreciates Suncor’s downstream business, which provides stable cash flows when oil prices are low or differentials widen and hedges against the company’s upstream production. The stock also offers investors a 3.9% dividend yield. We are maintaining our no-moat rating.Suncor's fourth-quarter results were below our expectations. The company reported fourth-quarter funds from operations of CAD 2 billion, down from CAD 3.1 billion in the third quarter and below our expectations. The lower results were driven by worse-than-expected refining results and significantly lower upstream price realizations.
During the quarter, Suncor’s refineries processed 468 thousand barrels a day of crude oil, a 102% utilization, in line with our expectations. Despite the high utilization levels, the refining segment generated only CAD 990 million in EBITDA compared with CAD 1.4 billion in the prior quarter, below our expectations. The lower EBITDA was driven by a FIFO loss associated with higher prices paid for older inventory.
Suncor’s upstream operations also suffered more than we expected, despite record-high quarterly production. Suncor reported production of 831 mb/d, up 12% from the third quarter and in line with our expectations. The increased production was driven by higher reliability at Syncrude and the continued ramp-up at Fort Hills. However, bitumen realizations were hit hard again. Bitumen and Fort Hills crude realizations declined 80% and 50%, respectively, from the third quarter compared with a 40% decline in heavy oil pricing.
On a positive note, Suncor continues to return cash to its shareholders. The company announced a first-quarter dividend of CAD 0.42, which represents a 17% increase from the prior quarter’s dividend. Suncor expects to complete its CAD 3 billion share-buyback program by the end of February and added CAD 2 billion over the next 12 months.
For a detailed look at Canadian crude and pipeline trends, please refer to our January Energy Observer, "Pipeline Expansions Are Canada’s Lifelines."
Suncor Energy is an energy company. Co.'s operations include oil sands development and upgrading, onshore and offshore oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand. Co.'s segments include: oil sands, which develop and produce synthetic crude oil and related products through the recovery and upgrading of bitumen; exploration and production, which include offshore activity, and the exploration and production of crude oil, natural gas, and natural gas liquids; and refining and marketing, which include the refining of crude oil products, and the distribution and marketing of these and other purchased products, as well as a lubricants plant.
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