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We are maintaining a Neutral Rating on Suncor Energy (SU - Analyst Report), reflecting sound performing in-situ projects, a strong asset base and cost-saving initiatives, partially offset by unstable oil and gas prices, a high debt level and significant anticipated capital expenditure requirements.

In the recently completed fourth quarter, the company posted mixed results with earnings per share, excluding certain items, of 91 Canadian cents (89 U.S. cents), surpassing the Zacks Consensus Estimate of 88 cents. However, total revenue of C$10.13 billion ($9.81 billion) lagged our expectation by 19.2%.

Looking ahead, we believe that Suncor will be able to present an impressive performance based on the significant oil sands and conventional production platform, huge long-lived oil-sands reserves and robust 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 will provide free cash flow to fund future oil sands expansion.

We also remain optimistic about the performance of Firebag in in-situ projects. The company boosted the production at Firebag 3 and successfully completed the infill drilling program at Firebag 1 and 2. This resulted in in-situ production of above 110,000 barrels a day in 2011. We expect to see a steady improvement in production over the next couple of years, driving growth for the company. 

Additionally, 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 execution of cost saving initiatives throughout 2012.

However, our optimism gets somewhat dampened by the unpredictable oil and gas fundamentals, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flows.

In our view, Suncor’s deep oil sands technology, though proven, is still vulnerable to potential implementation delays. In particular, there are risks related to growth and other capital projects that depend wholly or partly on new technologies. The success of these projects remains uncertain. Moreover, the process of extracting crude from oil sand reserves is more expensive than conventional production.

Unforeseen operational disturbances, geo-political turmoil across foreign regions and stiff environmental policies also add to our negative sentiment.

Considering, these aspects we recommend investors to hold to the stock at current levels. Suncor, which competes with other Canadian behemoths such as EnCana Corp. (ECA - Analyst Report) and Canadian Natural Resources Ltd. (CNQ - Analyst Report), currently retains a Zacks #3 Rank, translating into a short-term Hold rating. 

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