DBRS Comments on Suncor Energy Inc. Following an Agreement with Canadian Oil Sands Limited

DBRS Limited (DBRS) today notes that Suncor Energy Inc. (Suncor or the Company) has now reached an agreement with Canadian Oil Sands whereby the board of Canadian Oil Sands supports an amended and enhanced all-equity offer for the acquisition by Suncor of all the shares of Canadian Oil Sands Limited (COS; rated BBB (low) by DBRS). Under the terms of the amended agreement, Suncor has agreed to provide an increase in the share exchange ratio for COS shareholders to 0.28 (from 0.25) of a Suncor share for each COS share. The amended offer is for a total aggregate transaction value of approximately $6.6 billion, including the assumption of COS’s estimated debt of $2.4 billion. COS is a single-asset oil sands mining entity through its 36.74% equity interest in Syncrude Canada Ltd. (Syncrude). Pro forma 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 13% of pro forma consolidated production volumes (based on the nine months ended September 30, 2015). The amended offer is open to COS shareholders until February 5, 2016.

On October 5, 2015, DBRS placed the ratings of Suncor Under Review with Developing Implications, noting that the rating action reflected the uncertainty as to (1) whether the takeover bid will be accepted, and (2) how Suncor plans to ultimately deal with COS’s debt and the potential impact on Suncor’s key credit metrics. Upon completion of the acquisition and final review, if the Company’s key credit metrics do not deteriorate significantly, DBRS will likely remove Suncor’s ratings from Under Review with Developing Implications, and the ratings will likely remain unchanged. DBRS also noted that the acquisition could have a negative impact on Suncor’s business risk assessment, while the impact on the financial risk assessment is expected to be only modestly negative, considering that it is an all-share transaction (limiting the impact to credit metrics).

With the announcement today, DBRS acknowledges that with the support of the COS board and a significant shareholder supporting the amended offer, the likelihood of the tender condition not being met is relatively low. However, at this time it remains uncertain as to how Suncor plans to ultimately deal with COS’s debt. As such, DBRS will continue to review Suncor’s financing plan (assuming success) as new information becomes available and will take an appropriate rating action if needed in the future.

As of September 30, 2015, DBRS acknowledges that the Company has one of the stronger financial metrics in the oil and gas sector, with net debt-to-capital at 18.8%, a 1.36x net debt-to-cash flow and EBIT interest coverage of 3.37 times for the 12 months ended September 30, 2015 (LTM 2015). Furthermore, available liquidity was strong, with $5.4 billion of cash and unutilized credit facilities of $6.9 billion at September 30, 2015. DBRS believes Suncor is one of the better positioned among its domestic peers to ride the challenging commodity price environment. However, DBRS does note that the company’s financial metrics have eroded since the end of September due to the pressure on oil prices through year-end and early 2016.

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

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.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.