DBRS Removes Suncor Energy Inc. from Under Review-Developing, Changes Trend to Negative

DBRS Limited (DBRS) has today removed all ratings of Suncor Energy Inc. (Suncor or the Company) from Under Review with Developing Implications and confirmed the Issuer Rating and the Debentures and Medium-Term Notes rating at A (low), while the Company’s Commercial Paper has been confirmed at R-1 (low). The Senior Notes rating of PC Financial Partnership has also been removed from Under Review with Developing Implications and confirmed at A (low). At the same time, all trends have been changed to Negative from Stable. PC Financial Partnership was amalgamated with Suncor in late 2014; however, PC Financial Partnership’s Senior Notes remain outstanding. Suncor Oil Sands Limited Partnership (SEOSLP) holds most of Suncor’s oil sands assets and indirectly is a wholly owned subsidiary of Suncor. As the Commercial Paper, Debentures and Medium-Term Notes of Suncor are guaranteed by SEOSLP and the Senior Notes issued by PC Financial Partnership are guaranteed by both Suncor and SEOSLP, DBRS assesses the credit quality of all ratings on a consolidated basis.

Removal of the Under Review with Developing Implications status follows (1) completion of the Canadian Oil Sands Limited (COS) acquisition, (2) a full review of the Company’s year-end results and (3) extensive stress test analysis of the Company’s financial position using a range of oil and gas price forecasts. The rating confirmation for Suncor reflects the Company’s highly integrated business model, long-life oil sands assets, capital flexibility, size and scale as well as the Company’s sufficient liquidity ($4.0 billion of cash and $7.0 billion of available credit facilities) and modest debt maturities over the next three years.

As a result of the steep decline in oil prices, Suncor incurred a free cash flow deficit (cash flow less capital expenditures (capex) and dividends) of $1.5 billion in 2015 and the Company’s key credit metrics weakened considerably. During 2015, Suncor’s lease-adjusted debt-to-cash flow ratio increased to 2.40 times (x; below the “A” threshold) from 1.59x in 2014 and the lease-adjusted debt-to-capital ratio rose to 29.9% (within the “A” category) from 26.0%. The net debt-to-cash flow ratio rose to 1.65x from 0.86x in 2014.

The Company’s financial metrics are under further pressure in 2016 as DBRS anticipates weak oil prices persisting through most of this year with no meaningful recovery expected until 2017. Based on Suncor’s 2016 capex guidance ($6.0 billion to $6.5 billion, which excludes capex associated with the COS acquisition and capitalized interest), DBRS anticipates a free cash flow deficit in excess of $2.5 billion in 2016. Because of the continued stress expected on the Company’s financial risk profile, DBRS has changed all trends to Negative from Stable. Levers that Suncor could employ to reduce the cash flow deficit and improve the financial risk profile include (1) asset sales, which the Company is considering; (2) reducing dividend payments; and (3) further capex reductions. Suncor has the flexibility to moderate its capex budget as 55% has been targeted to growth-related projects. If, within the next year, the Company takes steps to reduce its financial leverage and/or oil prices improve materially such that its key credit metrics are commensurate with an A (low) rating, DBRS will likely change all trends back to Stable. Otherwise, a rating downgrade is probable.

The acquisition of COS also has a modest negative impact on Suncor’s business risk profile because of the higher cost and poor operating performance of Syncrude Canada Ltd. (36.74% interest held by COS). The financial risk impact is minor as the acquisition of COS is to be completed as an all-share transaction and Suncor does not plan to guarantee COS’s Senior Unsecured Long-Term Debt of approximately $2.0 billion. With the additional shares to be issued, the Company’s dividend payments (based on the current payout) will increase by approximately $150 million (a 9% increase) to $1.8 billion annually.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The Commercial Paper and Debentures and Medium-Term Notes are guaranteed by Suncor Energy Oil Sands Limited Partnership (SEOSLP).

PC Financial Partnership’s Senior Notes 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 Support, which can be found on our website under Methodologies.