Suncor’s diversity overpowers lower Canadian crude prices

 Canadian oilsands juggernaut Suncor Energy (SU-T, SU-N) beat analysts’ estimates and strengthened its cash position during the first quarter, as the company’s strategic integration of refining facilities offset a price divide between its Canadian crude output and benchmark West Texas Intermediate (WTI).

Suncor reported operating earnings totalling $1.3 billion, or 85¢ per share during the first quarter. The results were a decline from $1.5 billion, or 94¢ per share, reported by the company last year, with decreased earnings attributed to lower upstream production volumes, as well as higher royalties. Suncor’s results managed to top analysts’ expectations, however, and the company beat an 81¢ per share target, according to a Thomson Reuters survey.

Suncor increased its year-on-year cash-flow position as a result of higher upstream price realizations. First-quarter cash flows totalled $2.43 billion, or $1.55 per share, up from $2.39 billion, or $1.52 per share last year.

The company’s net debt sits at $6 billion, which marks a debt-to-cash ratio of roughly 0.6 to 1, with nearly $4.6 billion on its balance sheet.

“Clearly, the balance sheet is in excellent shape,” chief financial officer Bart Demosky commented during a conference call. “We’re in a very, very good position to continue to increase the amount of cash that we return to shareholders.”

Suncor announced an 18% dividend hike to 13¢ following its first-quarter results. The company also extended its $1-billion issuer bid in early February, raising its total buyback program to $1.5 billion. Suncor bought $500-million worth of its shares last year, and has purchased $300 million more shares in the past two months.

“The dividend increase and the share buyback program are a testament to our confidence in the long-term strength of our company,” Demosky said. “We have the ability to deliver sustained and profitable growth, while steadily increasing our shareholder returns.”

Canadian crude prices have been suppressed by oversupply conditions from surging domestic oilsands production, red-hot development in North Dakota’s Bakken shale region and a lack of suitable pipeline distribution. Suncor had originally projected its Canadian synthetic product would trade $4 to $5 lower per barrel than WTI, but has since widened that price discrepancy to $10 to $15 per barrel. 

Fortunately for the company, its integration of four refineries — located in Edmonton, Alta.; Montreal, Que.; Commerce City, Colo.; and Sarnia, Ont. — allows for a diverse production portfolio that includes a variety of marketable offerings, like jet fuel and diesel.

“The strength of our integrated business model shone through once again this quarter,” commented president and CEO Steven Williams. “We were able to put up strong results despite significant discounts on Canadian crudes, an unplanned outage in our oilsands plant and relatively soft downstream demand.”

Williams explained that while Suncor’s oilsands crude sold at a discount of almost $12 per barrel to WTI, its inland refineries benefitted from the lower crude prices, allowing the company to recapture nearly 90% of the spread by selling its finished products at market prices.

“Our refining and marketing group took full advantage of favourable feedstock costs, strong refining cracks and reliable operations to overcome softening consumer demand and produce exceptional financial results,” he explained.

In a bid to expand its refining capacities, Suncor has backed a plan outlined by Enbridge (ENB-T, ENB-N) that would reverse the flow of its Line 9 pipeline to carry more crude from Sudbury to Montreal.

“That’s the one we’re talking about in particular,” Williams told reporters on May 1. “It would give us access to our Montreal refinery, and of course the line used to run in that direction anyway. It makes absolute sense to do it. We’re strong supporters because it makes operations more economic.”

Outside of potential price sensitivities created by global oil markets, Suncor must guard against inflationary pressures that could suppress its operating margins and cash flows. Cash operating costs jumped to $38.10 per barrel during the first quarter, up from $35.45 per barrel over the same period last year. Average daily oilsands output decreased to 305,700 barrels, declining from 322,100 barrels during first-quarter 2011.

“Clearly, we’re watching very carefully what the inflationary -pressures look like,” Williams explained. “We’re not seeing the same inflationary pressures we were seeing in 2008, but that doesn’t mean there aren’t some there, particularly around labour. We are working hard with government to make sure we can get the right levels of labour into the region.”

Suncor’s 2012 guidance estimates remain unchanged following the first quarter, and the company expects to produce between 530,000 and 580,000 barrels per day, including an expected increase of 12% in oilsands production and 30% in sweet-synthetic crude. Capital expenditures aimed at refining and expanding Suncor’s oilsand operations are expected to total $5.1 billion.

Suncor is undergoing a change at the corporate level, too, as company-builder and CEO Richard George will retire after manning the tiller since Suncor went public in 1992. George oversaw the merger of Suncor and Petro-Canada in 2009, and managed the company as its market capitalization bloomed from $1 billion to the $50-billion range it enjoys today. 

Cost uncertainties and global market turmoil have taken a toll on Suncor’s share price over the past 52 weeks, with a 31% year-over-year decline dropping the company’s shares $13.40 to a presstime close of $30.22, on an average trade volume totalling 3.9 million shares per day.