Canada’s biggest energy firm and the largest oil sands outfit, Suncor Energy Inc. (SU - Analyst Report) reported lower-than-expected fourth quarter 2012 earnings, reflecting lower price realization in oil sands operations along with lower production from offshore assets, which completed planned maintenance.
Earnings per share, excluding certain items, came in at 65 Canadian cents (65 US cents) in the fourth quarter, far below the Zacks Consensus Estimate of 76 cents. Comparing year over year, the results dropped 28.6% from 91 Canadian cents per share.
In the reported quarter, total revenue of C$9.50 billion ($9.56 billion) fell 4.3% from the year-ago level and missed our expectation by 12.8%.
Quarterly operating earnings of C$1.0 billion were below C$1.4 billion a year ago, while cash flow from operations decreased to C$2.2 billion from C$2.7 billion in the fourth quarter of 2011.
Upstream production during the quarter averaged 556,500 barrels of oil equivalent per day (BOE/d), down from the fourth quarter of 2011 level of 576,500 BOE/d.
Excluding proportionate production share from the Syncrude joint venture, oil sands volume was 342,800 barrels per day (Bbl/d), higher than 326,500 Bbl/d recorded in the prior-year quarter. The quarter’s results were positively influenced by higher volumes from Firebag, partially offset by the impacts of maintenance work at upgrading facilities.
Production from Syncrude operations moved up 18.5% year over year to 35,900 Bbl/d in the quarter, with the restart of a coker facility.
Suncor’s Exploration and Production segment (consisting of International and Offshore and Natural Gas segments) produced 177,800 BOE/d against 219,700 BOE/d in the prior-year quarter. The planned maintenance works at Buzzard and Terra Nova, freezing of activities in Syria along with the production declines in North America Onshore posed as roadblocks for the segment’s performance.
The company’s Refining and Marketing segment generated total refined product sales of 87,000 cubic meters per day, up 6.6% from the prior-year quarter. The result was aided by lesser feedstock costs for Suncor's inland refineries and strong refinery usage.
Balance Sheet & Capital Expenditure
As of Dec 31, 2012, Suncor had cash and cash equivalents of C$4.4 billion and total long-term debt (including current portions) of C$10.2 billion. The debt-to-capitalization ratio was approximately 20.7%. Also, during the quarter, the company incurred C$2.2 billion in capital expenditure.
Suncor targets capital spending of almost $7.3 billion for 2013, of which $3.3 billion will be expended toward growth projects.
The company currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.
Suncor has significant oil sands and conventional production platform, huge long-lived oil-sands reserves and an impressive downstream portfolio. The company’s asset base includes substantial conventional reserves and production offshore Eastern Canada and in the North Sea, which generate strong margins and should provide free cash flow to fund future oil sands expansion.
Additionally, the company 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 cost saving initiatives throughout 2013.
However, Suncor’s deep oil sands technology, though proven, is still vulnerable to potential implementation delays, in our view. 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. Additionally, the process of extracting crude from oil sand reserves is more expensive than conventional production.
Meanwhile, there are certain other companies in the energy sector that are expected to perform well in the coming one to three months. These include Compressco Partners, L.P. (GSJK - Snapshot Report) with a Zacks Rank #1 (Strong Buy) and Hornbeck Offshore Services Inc. (HOS - Snapshot Report) and RPC, Inc. (RES - Snapshot Report) – both with Zacks Rank #2 (Buy).