DBRS Comments on Suncor Energy Inc.’s Bought-Deal Common Share Financing for $2.5 Billion

DBRS Limited (DBRS) notes that after the equity markets closed on June 7, 2016, Suncor Energy Inc. (Suncor or the Company) announced an agreement to sell 71.5 million common shares from treasury (on a bought-deal basis) at a price of $35 per share for total gross proceeds of $2.5 billion. The net proceeds of the offering will be used (1) for the previously announced acquisition in April of an additional 5% interest in Syncrude from Murphy Oil Corporation’s Canadian subsidiary for approximately $937 million and (2) to reduce indebtedness.

DBRS notes that based on the Company’s capex guidance for 2016 ($6.0 billion to $6.5 billion) and the recent reduction in 2016 production guidance (585,000 to 620,000 boe/d on June 6, 2016, compared with 620,000 to 665,000 boe/d on April 27), largely to account for the impact of the Fort McMurray wildfires, the company is expected to incur a sizable free cash flow deficit (cash flow after dividends and capex) in 2016. The company was expected to fund the deficit with cash on hand ($3.1 billion as at March 31, 2016) and by drawing on its credit facilities plus possible asset divestitures. The $2.5 billion equity raise, in addition to funding the purchase of an additional 5% interest in Syncrude, will mitigate the extent of the expected cash flow deficit in 2016. The reduction in debt will also provide Suncor with ongoing balance sheet flexibility, enabling the company to consider opportunistic growth transactions it may identify in the future.

When considering the acquisition of an additional 5% interest in Syncrude, net debt (pro forma) was $15.8 billion as at March 31, 2016. DBRS estimates (pro forma the additional 5% Syncrude interest and assuming the Canadian Oil Sands acquisition occurred March 31, 2015) the company’s net debt-to-cash flow ratio was 2.37 times and net debt-to-capital was 26.9% for the 12 months ended March 31, 2016. Pro forma the equity offering, and assuming net proceeds of approximately $2.4 billion, DBRS estimates the net debt-to-cash flow ratio declines to 2.01 times and net debt-to-capital declines to 22.8%. DBRS views the impact of the equity issue as modestly credit positive.

Overall, the equity issue has no immediate impact on the Company’s Issuer Rating of A (low) and no immediate impact on the rating of A (low) with respect to the Debentures and Medium-Term Notes of Suncor and the Senior Notes of PC Financial Partnership. Additionally, the rating on Suncor’s Commercial Paper remains at R-1 (low). All trends remain Negative.

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.

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.

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