Suncor High on Volume

A premier Canadian integrated energy company, Suncor Energy (SU - Analyst Report) reported bright first quarter 2011 results, aided by higher volumes, greater average sales prices and lower depreciation and impairment.

Earnings per share, excluding certain items, came in at 94 Canadian cents (95 US cent) in the quarter, way ahead of the Zacks Consensus Estimate of 58 cents and 24 Canadian cents earned in the prior-year quarter.

In the reported quarter, total revenue of C$9.84 billion ($9.97 billion) escalated 32.9% from the year-ago level and surpassed the Zacks Consensus Estimate of $9.34 billion.

Cash flow from operations increased 112.9% from the year-ago quarter to C$2.39 billion, buoyed by increased production volumes and higher realized prices.

Production

Upstream production during the quarter averaged 601,300 barrels of oil equivalent per day (Boe/d), up from the prior-quarter level of 564,600 Boe/d. The increased production was credited to greater contributions from the Oil Sands segment.

Excluding proportionate production share from the Syncrude joint venture, oil sands volumes upped to 322,100 barrels per day (Bbl/d) from 202,300 Bbl/d in the prior-year quarter, reflecting improved operational activities.

Syncrude operations registered a 19.2% year-over-year growth in production to 38,500 Bbl/d in the quarter.

Suncor’s newly formed Exploration and Production segment (consisting of International and Offshore and Natural Gas segments) recorded production of 240,700 Boe/d, as against 330,000 Boe/d in the prior-year quarter. The sale of non-core assets resulted in the year-over-year decline.

Product Sales

The company’s Refining and Marketing segment generated total refined product sales of 84,900 cubic meters per day, up 3.3% year over year.

Balance Sheet and Capital Expenditures

As of March 31, 2011, Suncor had cash and cash equivalents of C$3.46 billion and total long-term debt (including current portions) of C$10.15 billion. The debt-to-capitalization ratio was approximately 21.8%. The company incurred $1.60 billion in capital expenditure in the quarter.

Asset Sale Update

During the quarter, Suncor completed the sale of non-core North Sea assets in March for proceeds of C$164 million.

Dividend Hiked

Recently, Suncor announced a 10% increase in its quarterly dividend to 11 Canadian cents per share, or 44 Canadian cents per share annualized. The dividend is payable on June 24 to shareholders of record on June 3, 2011.

Guidance

For 2011, Suncor guided total production of 520,000–570,000 Boe/d, with East Coast Canada production expected in the range of 58,000–65,000 Bbl/d. International volumes are estimated to range between 80,000 Boe/d and 90,000 Boe/d, while production at North American Onshore will be in the band of 370–410 million cubic feet equivalent per day.

The company expects oil sands production of 280,000–310,000 Bbl/d and projects Syncrude production at approximately 35,000–37,000 Bbl/d.

Our Recommendation

Based in Canada, Suncor Energy displays an impressive portfolio of growth opportunities, a unique asset base and a high return potential for the long run. However, the company remains exposed to fluctuating oil and gas prices, risk of project delays and competition from peers such as InterOil Corporation (IOC - Snapshot Report) and Ecopetrol SA (EC - Snapshot Report). Hence we maintain our long-term Neutral recommendation.

Suncor currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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