DBRS Confirms Suncor Energy at A (low) and R-1 (low), Stable Trends

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 at A (low), based on the guarantee of Suncor and SEOSLP. The Stable trends are based on DBRS’s expectations of a restored financial profile, with adequate cash flow to support the Company’s debt load within the next 12 months. DBRS also expects considerable debt reduction in the near term, with no incremental debt going forward. DBRS’s expectations are based on management’s plans and commitment to de-leverage, prioritize its growth projects, improve its operating and capital efficiencies and plant reliability, grow production, reduce its high cost structure for oil sands and manage its credit metrics within the parameters of the current credit rating categories.

The Company has publicly stated its intention to reduce its net debt from $13.3 billion at year-end (YE) 2009 to approximately $10 billion, using largely divestiture proceeds mostly expected in 2010. Its targeted net debt-to-cash flow ratio of 2.0 times at the lower end of the commodity price cycle is acceptable and comparable with its peers. Should crude oil prices fall materially below current levels, this ratio may not be achievable in 2010 due to the recent upgrader fire, which affected cash flow and production (see the DBRS press release dated February 22, 2010). The foregoing re-confirms DBRS’s action on October 22, 2009 to remove the Under Review with Developing Implications status initiated on March 23, 2009, following approval of the merger with PC (the Merger), which closed August 1, 2009, through a share exchange, with no cash component or incremental debt incurred. The Merger has resulted in Suncor’s improved business risk and credit profiles, with greater financial resources to support substantial growth opportunities. With proved reserves of 3.6 billion barrels of oil equivalent (boe – about 84% oil sands), 633,000 boe/day (80% crude oil with oil sands at 51%) of proforma production and 433,000 barrels per day (b/d) of refining capacity at YE2009, Suncor ranks as the largest integrated oil and gas producer in Canada and the fifth largest in North America. On a proforma basis, it also has one of the longest proved reserve life among its peers of about 15.4 years, predominantly from oil sands reserves (25 year reserve life). The Company’s continued oil sands focus should be augmented by fairly strong cash flow from its more integrated downstream and offshore East Coast and U.K. North Sea assets acquired from PC.

The Company’s high debt load is due to the $7 billion investment associated with its Voyageur oil sands program (Voyageur), which was shelved and put in safe mode in late 2008 and early 2009. The Company’s non-core divestiture program (primarily natural gas, Trinidad and Tobago and non-core North Sea assets) for estimated proceeds of $2 billion to $4 billion, to be concluded mostly in 2010, will be deployed for debt reduction. Sale proceeds totalling approximately $1.5 billion are expected to close by Q2 2010. This coupled with Suncor’s strategic move to re-allocate capital to more modest sized projects with high return and near-term cash flow potential should result in improved credit metrics. DBRS believes that the Company’s more sustainable business model, based on more scalable staged growth, should be achievable over time. The Company will proceed with Firebag Stage 3 (about 50% complete) and potential sanctioning of Firebag Stage 4 in 2010, highlighting its focus to build bitumen production and cash flow in the near term. Higher production levels should also improve its per unit cost structure as most of the oil sands operating costs are relatively fixed. In addition, targeted annual savings of $400 million in operations should more than offset merger costs ($151 million spent in 2009 and similar expenditures expected in 2010), with $1 billion in capital synergies enhancing its cost base. Further improvements are anticipated from the Firebag sulphur reduction and Steepbank extraction improvement projects (approximately $1.4 billion total cost) completed in 2009.

Based on the Company’s February 2010 guidance (before the February 2010 upgrader fire), production is expected to remain at the 2009 proforma level of about 630,000 boe/d before divestitures of about 75,000 boe/d, with oil sands volumes at about 285,000 boe/d. Adjusting for the impact of the fire, production could be at the 570,000 boe/d level, assuming half of the planned divestitures are achieved. Cash operating costs for oil sands (excluding Syncrude) will likely be at the high end of the Company’s guidance range of $33/b to $38/b on a normalized basis (excluding fire related one-time charges).

The Company’s near-term challenges include operational issues in its oil sands operations, such as the two unrelated upgrader fire, in December 2009 and February 2010 (restarted on February 4, 2010, and April 1, 2010, respectively), that affected production and cash flow. Plant reliability remains an issue, although internal and external reviews are in process. The potential impact of future plans to resume the full Voyageur program could also put pressure on the Company’s balance sheet, although the scale and scope of the project would likely be more moderate than the $21 billion previously estimated (about $7 billion spent). Potential partnering in upgrading could also alleviate some capital cost pressure.

On a positive note, Suncor maintains substantial liquidity through its committed credit facilities, totalling approximately $8.2 billion (mostly expiring in 2013) with approximately $4.2 billion undrawn at YE2009. There are no debt maturities until 2011, with $300 million to $500 million annually thereafter, which should be readily refinanced. DBRS expects the projected capex in 2010 of $5.5 billion (DBRS estimated proforma $5.8 billion in 2009, including the cost of putting Voyageur in safe mode) to be fully covered by cash flow based on WTI price in the US$70/b to US$75/b range (WTI averaged about US$78/b in Q1 2010), despite the impact of the February 2010 fire. Approximately $1.5 billion (27%) of capex is directed toward growth projects, primarily Firebag Stage 3 ($900 million) and East Coast and international assets ($390 million), with $4 billion (73%) for sustaining current operations. International spending includes commitments in Libya and investments planned to bring the Ebla gas field in Syria into production in Q2 2010 (started on April 19, 2010). About $2 billion, or 50% of the sustaining capex, is allocated to Suncor’s 100%-owned oil sands projects, including the Upgrader 2 turnaround ($360 million) and tailing reduction operations ($450 million), with $670 million (12% of total capex) for downstream. Firebag Stage 3 with production capacity of 62,500 b/d (estimated cost of $3.6 billion), about 50% complete before being deferred in early 2009, is expected to come on stream in Q2 2011. Firebag Stage 4, of similar production capacity is anticipated in Q4 2012. Capex at a more normalized level of $5 billion to $6 billion is estimated for 2011, excluding one-time safe mode costs associated with suspended projects, capital synergies from the Merger and asset divestitures.

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. ratings are guaranteed by Suncor Energy Oil Sands Limited Partnership (SEOSLP).

PC Financial Partnership rating is guaranteed by Suncor Energy Inc. and SEOSLP.

This is a Corporate (Energy) rating.