DBRS Confirms Suncor Energy’s Ratings, Trends Now Stable

DBRS has today confirmed the Commercial Paper and Debentures and Medium-Term Notes ratings of Suncor Energy Inc. (Suncor or the Company) at R-1 (low) and A (low), respectively, guaranteed by Suncor Energy Oil Sands Limited Partnership (SEOSLP). DBRS has also confirmed the Senior Notes of PC Financial Partnership (PC) at A (low), guaranteed by Suncor and SEOSLP. All ratings now have Stable trends. This removes the Under Review with Developing Implications status initiated on March 23, 2009, and maintained on August 1, 2009 (see separate DBRS press releases for details); the latter following the closing of the merger with Petro-Canada (the Merger) through a share exchange, with no cash component or incremental debt incurred.

In addition to the strong strategic, operating and financial rationales, resulting in improved business risk and credit profiles associated with the Merger, the rating actions follow DBRS’s comprehensive review of the Company’s future plans with management. DBRS’s review focused on, among other items, the Company’s financial and operational plans to address its balance sheet leverage, prioritization of growth projects, high cost structure for oil sands and plans to grow production and enhance stability of cash flow, while managing its credit metrics within the current credit rating categories. The Stable trends are based on DBRS’s expectations of a restored financial profile with adequate cash flow support for its debt load (approximately $14 billion pro forma at June 30, 2009) within the next 12 to 18 months. DBRS expects considerable debt reduction in the near term with no incremental debt going forward, as publicly stated by the Company. DBRS’s expectations are premised on an oil sands focused operation with strong cash flows from its more integrated downstream and offshore East Coast and U.K. North Sea assets, and management’s commitment to the following:

1. Suncor’s near-term focus on de-leveraging, potentially using proceeds from disposal of non-core conventional oil and gas assets for debt reduction, should restore its financial profile to be more consistent with its current credit ratings, over time. This will also reduce capex requirements, which contributed in part to Suncor’s levered position, pre-merger. The Company’s net debt-to-cash flow ratio, targeted at 2 times at the low end of the commodity price cycle, is acceptable and comparable to its peers.

However, the net debt-to-cash flow ratio will likely be over 3 times at year-end 2009 and remain above 2 times for the next year based on the average commodity pricing to date as a result of debt run-up in 2008, following the build out of the Voyageur oil sands project (Voyageur) now shelved (put in safe mode), and the sharply lower commodity prices since Q3 2008. Debt-to-capital ratio estimated in the low 30% range at year-end 2009 is satisfactory for the credit ratings.

2. The Company’s focus on operating and capital efficiencies (savings of $300 million and $1 billion per year, respectively) with capital directed to projects with high return and near-term cash flow potential should result in improved credit metrics supported by a more sustainable business model based on staged growth. In this regard, DBRS expects projects of more modest scale and capex requirements, such as subsequent stages of Firebag, may proceed, highlighting the Company’s effort to build bitumen production and cash flow near term. Higher production levels should also improve its cost structure as most of the oil sands operating costs are relatively fixed. Mega projects, principally Voyageur and Fort Hills, will be postponed, or re-profiled in the medium- to longer-term.

3. As a proxy for improved plant reliability, substantially higher oil sands production was achieved in the second quarter of 2009 by Suncor, pre-merger, with total volumes up 30% to 325,000 barrels of oil equivalent boe/d for the first half of 2009 ended June 30, 2009 (H1 2009) versus H1 2008. Further improvements are expected as the Firebag sulphur reduction and Steepbank extraction improvement projects (approximately $1.4 billion total cost mostly spent to date) are completed.

4. The Company maintains sufficient liquidity through its committed credit facilities, totalling approximately $8.2 billion (mostly expiring in 2013) with approximately $5.0 billion undrawn as of June 30, 2009 on a combined basis. This is more than sufficient to supplement operating cash flow to cover 2009 planned capex of under $7 billion. Capex at a more normalized level of $5 billion to $6 billion is estimated for 2010, eliminating spending incurred in 2009 to put Voyageur in a safe mode and based on capital savings resulting from the merger and planned divestiture programs. There are no debt maturities until 2011 and at $300 million to $500 million per annum levels thereafter, which should be readily refinanced.

Post-merger, Suncor is expected to limit its hedging requirements, counting on an improved balance sheet and greater financial flexibility. However, DBRS expects the Company to take steps to address the net debt-to-cash flow ratio, which is inadequate at present, through measures outlined above, and to secure hedges in a substantially lower commodity pricing environment, if required. Suncor is about 25% hedged through puts and fixed price contracts for the remainder of 2009 and 8% hedged in 2010 through puts and collars based on the combined June 30, 2009 volumes.

Post-merger, Suncor has proved reserves (after royalties) of approximately 3.6 billion boe (about 40% larger than pre-merger) with oil sands which bears little or no exploration risk accounting for 84% of the total. Production (after royalties) of approximately 657,000 boe/d (almost doubled) is weighted 80% toward crude oil (90% for Suncor as of June 30, 2009) with about 53% in oil sands as well as approximately 430,000 b/d of refining capacity. These measures rank Suncor as the largest integrated oil and gas producer in Canada and the fifth largest in North America, providing greater economies of scale, enhanced diversification/integration and geographic scope than Suncor, pre-merger. Further, Suncor’s reserve life of nearly 16 years is among the longest of its peers.

Suncor’s commercial paper limit has recently been increased to $2.5 billion from $1.5 billion in order to meet short-term funding requirements of a much enlarged operation, post-merger. Petro-Canada had a $1 billion commercial paper limit, which was discontinued on closing of the Merger.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil & Gas Companies, which can be found on our website under Methodologies.

Suncor Energy Inc. is guaranteed by Suncor Energy Oil Sands Limited Partnership.

PC Financial Partnership is guaranteed by Suncor Energy Inc. and Suncor Energy Oil Sands Limited Partnership.

This is a Corporate rating.