Morningstar | Suncor Reports a Steady First Quarter; Stock Remains in 3-Star Territory. See Updated Analyst Note from 02 May 2019
No-moat Suncor Energy reported a steady first quarter. The company reported funds from operations of CAD 2.6 billion that exceeded our results. The better-than-expected results were driven by higher price realizations from the company’s upstream operations that rebounded nicely from the fourth quarter of 2018. Bitumen and Fort Hills crude realizations increased by 500% and 100%, respectively, from the fourth quarter compared with only a 70% increase in heavy oil pricing. Suncor reported production of 764 mbbl/d, down 8% from the fourth quarter and below our expectations. The lower production was driven Alberta’s mandatory production cuts.Suncor’s refineries processed 445,000 barrels a day of crude oil (96% utilization) in line with our expectations. The refining segment generated CAD 1.2 billion in EBITDA compared with CAD 990 million in the prior quarter. The higher EBITDA was driven by a FIFO gain associated with lower prices paid for older inventory during the prior quarter.
We are decreasing our U.S. fair value estimate for no-moat Suncor Energy to $35 per share from $36 to reflect changes in foreign exchange rates. However, we are maintaining our CAD 47 fair value estimate. With the stock trading near $32 (CAD 43), 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 3.8% dividend yield. We are maintaining our no-moat rating.
Suncor continues to return cash to its shareholders. The company announced a second-quarter dividend of CAD 0.42, which is consistent with the prior quarter’s dividend. On an annual basis, the stock is yielding 3.8%. The company also purchased another CAD 514 million in common shares during the quarter. As a reminder, management announced plans to purchase another CAD 2 billion in shares, bringing the three-year total to CAD 7 billion.
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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