Suncor Energy Inc. (SU): Remains preferred long term oil sands investment - Goldman Sachs - April 25, 2008
What's changed
Suncor reported mixed 1Q2008 operating and financial results. Adjusted EPS was US$1.66, above our estimate of $1.54 and the First Call consensus of $1.64. Without a favorable inventory accounting adjustment in the downstream business, EPS would have been $1.49. Oil sands operating performance was somewhat weaker than expected, with unit operating costs of $38.29 per net barrel versus our estimate of $33.23 per bbl. Gross oil sands production of about 248 Mb/d had been pre-announced, though net production was slightly below expected due to higher royalties. We have updated our 2008-2012 EPS estimates to $6.34, $8.54 and $9.51.
Implications
Suncor (Buy rated) remains our preferred long term oil sands investment, though we see better near-term catalysts for Buy-rated OPTI Canada. Suncor has experienced operational volatility in recent quarters which appears mostly related to the difficulties inherent to bringing a large expansion on stream in the current inflationary cost environment. We continue to believe that Suncor’s returns will be advantaged for the long term, and many of the operational issues the company is now experiencing will prove temporary. In particular, we expect Suncor’s unit operating costs to improve as volumes from Firebag, currently constrained due to environmental regulatory issues, ramp up in 2H 2008. In the very near term (2Q 2008), we see few company-specific catalysts and expect Suncor shares to trade largely with oil prices.
Valuation
We see 24% upside potential to our $140 DCF based 12 month target price for Suncor shares versus 18% for large-cap E&Ps. We continue to rate Suncor Buy relative to an Attractive coverage view.
Key risks
Commodity price volatility, oil sands cost and operating pressures, and government pronouncements are key risks. |
