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 rating confirmations follow the Company’s announcement today on its ten-year growth strategy, its 2011 projected capital spending and its agreement with Total E&P Canada Ltd. (Total), a subsidiary of Total S.A. (rated AA with a Stable trend by DBRS), to enter into certain transactions (the Transaction) detailed below. The Transaction is strategic in Suncor’s plans to grow oil sands production by approximately 10% per year and overall production to more than 1,000,000 barrels of oil equivalent per day (boe/d) by 2020 (about 580,000 boe/d at September 30, 2010).

The Transaction includes the following key components: (1) Suncor to acquire a 36.75% working interest in Total’s Joslyn in-situ oil sands project (Joslyn) and to sell a 19.2% interest in its Fort Hills mining oil sands project (Fort Hills) to Total through an asset swap, and (2) to sell a 49% interest in the Voyageur Upgrader (Voyageur) to Total for consideration of approximately $1.75 billion. Suncor will retain the remaining 51% interest in Voyageur and 40.8% interest in Fort Hills (Total/Teck Resources Limited has 39.2%/20% interest) and remains the operator for both projects, whereas Total will retain a 38.25% interest and remain as the operator for Joslyn (Occidental Petroleum Corporation/Inpex Canada Ltd. holds the other 15%/10% interest). The Transaction is expected to close late in the first quarter of 2011 subject to regulatory and other approvals.

DBRS believes that the Transaction will have a modestly positive impact on Suncor’s business risk through increased diversification, and provide a near-term benefit for credit metrics, and is strategic in the development of Fort Hills and Voyageur in parallel for start-up in 2016. Voyageur was about 50% complete with approximately $4 billion capital spent, when the project was suspended and put in “safe mode” in late 2008 and early 2009 in the face of the sharp economic downturn. The Transaction allows Suncor to monetize a significant portion of its capital invested in Voyageur. The Joslyn interest (for potential start-up in 2017/2018) will expand the Company’s oil sands footprint and development efforts. The Transaction should also allow Suncor to better manage its capital spending requirements for the next few years, pending a review of the Company’s financing plans and strategies for these three projects, which have yet to be sanctioned. Further, the Transaction has the added benefit of teaming Suncor up with a world class operator in both the upstream and downstream sectors with substantial financial strength and technical know-how.

The productive capacity of Joslyn and Fort Hills is estimated to be 100,000 barrels per day (b/d) and 164,000 b/d, respectively, if sanctioned. Voyageur’s upgrading capacity is planned at 200,000 b/d. The estimated project costs have yet to be determined. However, the ultimate consummation of these proposed projects should enhance the Company’s ability to largely balance bitumen production with upgrading capability to better capture the value chain.

Suncor’s 2011 capital budget of approximately $6.7 billion will comprise the following: (a) about $2.8 billion for growth projects, primarily its oil sands operations in Firebag 3 and 4 (to come onstream in mid 2011 and Q1 2013, respectively), and to a lesser extent in Fort Hills and Voyageur, and (b) about $3.9 billion for sustaining existing operations. The capex plans, include approximately $1.1 billion for its offshore east coast Canada and international operations, which are low-cost and high cash flow sources of production, and about $630 million for its refining and marketing activities. Roughly 40% of sustaining capital is not expected to be recurring. The planned capex on natural gas is approximately $170 million, in line with the Company’s intention to continue to review this segment’s activities, following asset divestitures completed and/or announced to date. The Company projects average production in 2011, before targeted divestitures of 37,000 boe/d, at about the same levels achieved for the nine months to September 30, 2010 of approximately 575,000 boe/d or a 5% increase in production from the continuing operations.

On April 28, 2010, DBRS confirmed the Company’s ratings with Stable trends based on the expectation of a restored financial profile, with adequate cash flow to support the Company’s debt load within the next 12 months, and improved operating metrics going forward. DBRS also expected considerable debt reduction in the near term, which has continued. The Company publicly stated its intention to reduce its net debt from $13.4 billion at year-end 2009 to approximately $10 billion, largely using divestiture proceeds mostly expected in 2010. Net debt of about $11.5 billion was achieved at September 30, 2010, with approximately $3.5 billion asset sales closed or announced to date. Net debt-to-capital was at approximately 24%, with net debt-to-cash flow at approximately 2.0 times compared with below 2.0 times at the lower end of the commodity price cycle as targeted by the Company. While Suncor’s balance sheet leverage is within the current credit rating categories, DBRS expects further improvements in cash flow coverages for its debt load going forward based on current commodity prices, despite the substantial growth phase, with annual capex potentially rising to the $8 billion to $9 billion range in 2012 to 2015 as indicated by the Company.

Note:
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.