Suncor Energy (OP/A):Continue to recommend following field trip, meetings in Calgary
Goldman Sachs June 07, 2005
Our recent visits with company management in Calgary and field trip to Suncor Energy's oil sands operations underscore our bullish view on Suncor and oil sands, and we continue to see potential for Suncor shares to reach US$55, implying 36% upside from the June 7 close. We have renewed confidence that Suncor will achieve full production from its down upgrader in September, which could add upside to our 3Q 2005 estimate. We also believe that Suncor continues to receive insurance proceeds, more quickly than we have anticipated. Our bullish long-term view remains intact, and we continue to believe that Suncor management will remain disciplined in evaluating appropriate project startup dates in a labor market that could remain tight. We rate Suncor Outperform relative to an Attractive coverage view.
For more details on our view on Suncor and its competitive advantage, please see our report "Inflated concerns over oil sands cost inflation," published May 31.
UPGRADER ON TRACK TO BE FULLY OPERATIONAL IN SEPTEMBER
In the short term, we have greater confidence that Suncor will get its upgrader back to full production by September, with startup expected in August. The upgrader has been down since the January 4 fire. Our visit to the oil sands facility seemed to indicate that reconstruction is in the final stages. We are currently assuming no production from the upgrader in 3Q 2005. We expect that it may take three weeks to bring the facility to full production. While there may only need to be modest upward revisions to 3Q 2005 consensus estimates, the lost production surrounding the fire has been a drag on the stock in our view, and as the Street increases confidence that production will come on schedule (we believe potentially ahead of schedule), Suncor could be revalued higher in our view.
INSURANCE REPAYMENTS COULD BE HAPPENING SOONER THAN EXPECTED
We believe there could be greater insurance proceeds received this year than currently being considered. We are currently assuming about US$800 million to be received in 2006. However, the company indicated that it is receiving healthy proceeds now and expects to receive about 70%-80% this year. We do not believe that current Street consensus is considering significant insurance repayments this year. While we believe that the Street fully expects the company to be repaid, a quicker repayment of the bulk of the company's claim could ease what we believe to be another upgrader fire-related overhang on the stock. An additional $600 million in pre-tax proceeds would have an estimated US$0.83 impact to 2005 EPS. If oil prices remain high, the company believes it could near claiming the full US$1.15 billion in its insurance policy, part of which covers reconstruction in addition to business interruption.
CONTINUED CONFIDENCE IN CAPITAL DISCIPLINE DESPITE TIGHT LABOR MARKET
In the longer term, each of the oil sands managements we have met with so far (SU, CNQ, PCZ) is very concerned about the sources of additional construction labor in the 2007-09 time period. As we stated in the report, industry expansion delays are likely. However, we believe there is the Street expectation for both project delays and cost overruns, to the point where delays without overruns for companies with existing production would not be perceived as negatively. We continue to believe that Suncor management will remain disciplined and that further cost inflation will be a likely function of continued strong oil prices, meaning that Suncor would receive better-than-expected cash flows to offset cost pressures.
VALUATION: GROWTH POTENTIAL NOT BEING FULLY REFLECTED
Suncor shares trade at about 1.3x 2007 enterprise value/gross cash invested (EV/GCI), a premium to other oil and gas companies but not at a premium to other manufacturing-oriented cyclicals with an 8%-10% secular growth rate. In the near term, we believe the return to full production can be a short-term positive catalyst to the stock. Longer term, we believe that as concerns over cost inflation abate (which could be a function of increased cash flows due to continued high oil prices, capital discipline, and/or a decline in underlying cyclical drivers of higher costs) Suncor shares can reach a US$55 estimated traditional peak value.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti. |
