Suncor Energy Inc. (SU): Voyageur costs in line with industry range; royalty pact positive - Goldman Sachs - January 30, 2008 Canada
News
Suncor Energy has released detailed cost estimates for the Voyageur oil sands expansion project. In addition, Suncor announced the outcome of negotiations with the Alberta government for a revised royalty agreement.
Analysis
Suncor's headline C$20.6 billion budget for the Voyageur project, representing C$103,000 per bpd of capacity, is generally in line with our view that Suncor would come in at the low end of the industry range of C$100,000-C$120,000 per bpd of capacity for mining and upgrading projects. When including startup and commissioning costs and the company's +/- contingency, the Voyageur budget is C$107,000/bpd with a C$97,000-C$122,000/bpd range. We view this budget as slightly positive for Suncor shares, considering the ever-rising steel and labor costs that have caused ~100% cost inflation over the past few years. We believe a US$50 per barrel WTI long-term oil price is needed to achieve an 8% internal rate of return, while $55 per barrel is needed to achieve a 10% IRR. We would note that C$2.5 billion has already been spent on
Voyageur, and that the company plans to increase its bitumen production in phases beginning in 2009, both of which contribute positively to present value. Regarding the royalty, Suncor had a contract to pay a 25% royalty on net bitumen margin through 2016, which the government sought to renegotiate after announcing a new industry-wide royalty regime of 25%-40% for industry starting in 2009. We believe anything from no change (i.e. 25% through 2016) to the full 25%-40% in 2009 was conceivable, and so a 25-30% royalty starting in 2010 is a modest positive.
Implications
We reiterate our Buy rating and continue to view Suncor shares are an attractive long-term oil sands investment. Our EPS estimates and target price are under review. |
