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Suncor: EPS Beats, Volumes Hurt

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Canada’s biggest energy firm and the largest oil sands outfit, Suncor Energy Inc. (SU - Free Report) reported mixed fourth quarter and full year 2011 results, reflecting higher average upstream price realizations, partially offset by operational disturbances at various facilities.   

Earnings per share, excluding certain items, came in at 91 Canadian cents (89 cents US) in the fourth quarter, surpassing the Zacks Consensus Estimate of 88 cents and 52 Canadian cents earned in the prior-year quarter.

For full-year 2011, the company earned C$3.58 ($3.49) per share compared with C$1.67 in the prior year. The reported results also breezed past our earnings projection of $3.40.

In the reported quarter, total revenue of C$10.13 billion ($9.81 billion) escalated 8.5% from the year-ago level but lagged our expectation by 19.2%.

Full-year revenue leaped 22.0% year over year to C$39.70 billion. However, the result lagged our forecast of $42.80 billion.

Quarterly operating earnings of C$1.42 billion were up significantly from C$808 million a year ago, while cash flow from operations went up from C$2.13 billion in the fourth quarter of 2010 to C$2.65 billion in the reported quarter.


Upstream production during the quarter averaged 576,500 barrels of oil equivalent per day (BOE/d), down from the fourth quarter 2010 level of 625,600 BOE/d, mainly on the disposition of non-core assets throughout 2010 and 2011, operational problems at Syncrude and reduced volumes from Libya.

Excluding proportionate production share from the Syncrude joint venture, oil sands volumes were 326,500 barrels per day (Bbl/d), up marginally from 325,900 Bbl/d. The current quarter results were aided by higher bitumen output from Firebag.

Following the Petro-Canada acquisition last year, Suncor holds a 12% stake in the Syncrude oil sands joint venture (located near Suncor's existing oil sands operations in Alberta). Syncrude operations registered a 20.1% year-over-year decline in production to 30,300 Bbl/d in the quarter, due to maintenance activities at a hydrogen unit.

Suncor’s newly formed Exploration and Production segment (consisting of International and Offshore and Natural Gas segments) produced 219,700 BOE/d, as against 261,800 BOE/d in the prior-year quarter. The sale of non-core assets and low production from Libya resulted in the year-over-year decline.

Product Sales

The company’s Refining and Marketing segment generated total refined product sales of 81,600 cubic meters per day, down 8.5% year over year. The drop was due to lower throughput at the Edmonton refinery plus weak demand for heating oil in Eastern Canada arising from warmer weather.

Balance Sheet & Capital Expenditure

As of December 31, 2011, Suncor had cash and cash equivalents of C$3.80 billion and total long-term debt (including current portions) of C$10.0 billion. The debt-to-capitalization ratio was approximately 20.6%. The company incurred C$1.8 billion in capital expenditure in the quarter.

Our Recommendation

We are maintaining a long-term Neutral recommendation on Suncor.

In our opinion, Suncor is one of the best positioned companies in the energy space given its access to abundant resources, rich operating experience and technical know-how. With a large portfolio of growth opportunities, unique asset base and high return potential in the long run, the company has a competitive edge over its peers.

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

Another prominent Canadian energy firm Canadian Natural Resources (CNQ - Free Report) will report its fourth quarter results on March 8, 2012.

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