Suncor Expands Plant Capacity

Canadian integrated energy company Suncor Energy (SU - Analyst Report) announced the completion of the development of St. Clair Ethanol Plant, resulting in doubling the plant's production capacity to 400 million litres of ethanol per year from the previous level of 200 million litres. Suncor had invested approximately $120 million in this expansion project.

St. Clair Ethanol Plant, which commenced operations in June 2006, forms a significant part of Suncor’s biofuels portfolio. With the higher operating capacity, the company targets to capture the growing demand for renewable energy in Canada.

Calgary, Alberta-based Suncor’s operations include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand.

We believe that Suncor boasts impressive oil sands and conventional production platform, huge long-lived oil-sands reserves and lucrative downstream portfolio. The company’s asset base includes substantial conventional reserves and production at offshore Eastern Canada and in the North Sea, which generate strong margins and should provide free cash flow to fund future oil sands expansion.

In addition, Suncor enjoys the benefits of crude oil price leverage and lower operating costs.  We believe the company will remain focused on improving its operational efficiency and executing its cost saving initiatives throughout 2011.

However, we remain worried about Suncor’s high debt level and significant anticipated capital expenditure requirements. We also believe that unstable oil and gas prices along with operational risks and project execution risks will keep the stock under pressure in the coming months.

We expect the stock to perform in line with the broader market and maintain our Neutral recommendation over the long term. Suncor, which faces intense competition from peers such as InterOil Corporation (IOC - Snapshot Report) and Ecopetrol SA (EC - Snapshot Report), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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