DBRS Places Suncor Energy Inc. Under Review - Developing Following Offer to Acquire Canadian Oil Sands Limited

DBRS Limited (DBRS) has today placed the A (low) Issuer Rating, the A (low) Debentures and Medium-Term Notes rating and the R-1 (low) Commercial Paper rating of Suncor Energy Inc. (Suncor or the Company) as well as the A (low) Senior Notes rating of PC Financial Partnership Under Review with Developing Implications. This rating action follows the announcement that the Company has formally commenced an unsolicited offer to acquire all of the outstanding shares of Canadian Oil Sands Limited (COS; rated BBB (low) by DBRS) in an all equity transaction for approximately $6.6 billion, including the assumption of $2.3 billion in net debt (the Acquisition). COS is s single-asset oil sands mining entity through its 36.74% equity interest in Syncrude Canada Ltd. (Syncrude). Pro forma for the Acquisition, Suncor’s equity interest in Syncrude would be 48.74% (up from the current 12.00%). COS’s production volumes would be meaningful to Suncor, as COS’s production volumes would account for approximately 14% of pro forma consolidated production volumes (based on the six months ended June 30, 2015). The takeover bid will remain open for a minimum 60 days unless withdrawn. The timeframe for closing will be determined on investor interest in the transaction and the timing of regulatory approvals.

The rating action reflects DBRS’s view that the Acquisition would have a negative impact on Suncor’s business risk assessment (BRA), while the impact on the financial risk assessment (FRA) is expected to be only modestly negative, considering that it is an all-share transaction (limiting the impact to credit metrics) and Suncor’s strong cash on hand.

CURRENT BRA AND FRA ANALYSIS
Suncor’s BRA has remained commensurate with the current A (low) rating, underpinned by its strong track record in steadily increasing its low-decline, long-life production. In addition, Suncor’s highly integrated and efficient downstream operations remain a stabilizing factor for the Company in periods of prolonged weak oil prices.

Suncor has continued to maintain a strong balance sheet, with all key credit metrics remaining reasonable for the current rating category, considering low oil prices and high levels of cash on hand. DBRS acknowledges that the Company has one of the strongest financial metrics in the oil and gas sector with net debt-to-capital at 18.2% as at June 30, 2015, and net debt-to-cash flow and EBIT interest coverage at 1.24 times and 5.0 times, respectively, for the 12 months ended June 30, 2015 (LTM 2015).
Furthermore, available liquidity was strong at $11.8 billion as at June 30, 2015.

In light of the above-average BRA and FRA, DBRS believes Suncor is in one of the best positions to ride the challenging commodity price environment among its domestic peers.

BRA AND FRA POST-COS ACQUISITION
The net effect of the Acquisition on Suncor’s BRA is expected to be negative. One of the primary BRA benefits is that Suncor’s size and business integration would improve, with a larger percentage of equity interest in Syncrude, one of the largest producers in the oil sands. The Acquisition aligns with the Company’s core strategy to increase exposure to a long-life reserve base, sustainable non-decline production and premium-priced synthetic crude oil. However, the positive BRA factors would be more than offset by COS’s weak cost competitiveness, largely driven by chronic reliability issues at Syncrude. Suncor’s BRA would strengthen if Syncrude’s reliability improves on a sustained basis.

Pro forma for the Acquisition (based on LTM 2015), overall key credit metrics would weaken only modestly and are expected to remain well above average in the oil and gas sector.

Currently, it is uncertain (1) whether the takeover bid will be accepted or a competing bid may arise that could result in a bidding war, and (2) as to how Suncor plans to ultimately restructure COS’s debt. DBRS will further review the Company’s financing plan. Upon final review, if the Company finances the Acquisition in such a way that key credit metrics deteriorate significantly, then negative rating action is likely to occur when the Acquisition is finalized. Otherwise, DBRS will likely remove Suncor’s ratings from Under Review with Developing Implications, and the ratings will likely remain unchanged.

Notes:
The Commercial Paper and Debentures and Medium-Term Notes of Suncor Energy Inc. are guaranteed by Suncor Energy Oil Sands Limited Partnership (SEOSLP). The Senior Notes of PC Financial Partnership are guaranteed by Suncor Energy Inc. and SEOSLP.

All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Oil and Gas Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.