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Suncor Cut to Underperform

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Taking into account Suncor Energy Inc’s (SU - Free Report) operational and cost issues, we have recalibrated our investment thesis on the energy explorer to Underperform from Neutral.

Calgary, Alberta-based Suncor is Canada’s premier integrated energy company. 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.

Following the Petro-Canada acquisition last year, Suncor has become one of the largest owners of oil sands in the world – worth as much as 22 billion barrels. One of the largest publicly-traded energy outfits in Canada along with the likes of Encana Corp. (ECA - Free Report) , Canadian Natural Resources Ltd. (CNQ - Free Report) , etc., the company has gained new oil sands properties to supplement its existing operations in northern Alberta, making it the dominant producer in the region where reserves are second only to Saudi Arabia.

Additionally, Suncor explores, acquires, develops, produces and markets crude oil and natural gas in Canada and internationally, and it transports and refines crude oil and market petroleum and petrochemical products primarily in Canada.

Our pessimistic outlook on Canada’s biggest energy firm is fueled by the ongoing suspension of its Syrian operations and high production costs. Post Petro-Canada acquisition, we also remain worried about Suncor’s elevated debt level and significant anticipated capital expenditure requirements. Further, there is execution risk associated with the integration of Petro-Canada's predominately conventional assets, of a type and in geographies where Suncor lacks experience.

Nevertheless, Suncor’s impressive portfolio of growth opportunities and unique asset base provides a high return potential in the long run. Embarking on a series of divestitures, Suncor is getting back on track following its merger with Petro-Canada.

However, we prefer to remain on the sidelines at this point until we get a better proof of the company’s sustainable operational efficiency.

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