DBRS Confirms Suncor Energy Inc. at A (low) and R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Debentures and Medium-Term Notes rating of Suncor Energy Inc. (Suncor or the Company) at A (low) and Suncor’s Commercial Paper rating at R-1 (low), all with Stable trends. Furthermore, the Senior Notes rating of PC Financial Partnership was confirmed at A (low) with a Stable trend. By way of background, PC Financial Partnership was amalgamated with Suncor in late 2014; however, the Senior Notes remain outstanding. Suncor Energy Oil Sands Limited Partnership (SEOSLP) holds the majority of Suncor’s interests in its oil sands assets and is indirectly a wholly owned subsidiary of the Company. Since the Commercial Paper and Debentures and Medium-Term Notes of Suncor are guaranteed by SEOSLP and the Senior Notes issued by PC Financial Partnership are guaranteed by both the Company and SEOSLP, DBRS evaluates the credit quality of all ratings on a consolidated basis.

The rating confirmations for Suncor reflect the Company’s highly integrated business model, long-life low decline oil sands assets, capital and operational flexibility plus size. The rating confirmations also account for Suncor’s favourable liquidity profile ($3.0 billion of cash plus $6.5 billion of available credit facilities as at December 31, 2016, after adjusting for cancellation of the Canadian Oil Sands Limited facility) and modest debt maturities over the next four years.

The Company’s weaker financial profile, caused by the significant drop in oil prices, was cause for DBRS to change all trends to Negative in March 2016, while maintaining an A (low) rating. With the improving price environment in late 2016, DBRS changed all trends to Stable from Negative and confirmed the A (low) ratings. Primarily as a result of the decline in oil prices, Suncor incurred a free cash flow (cash flow less capital expenditures (capex) and dividends) deficit of $1.5 billion in 2015 and $2.5 billion in 2016. In 2016, Suncor’s lease adjusted debt-to-cash flow ratio was 3.06 times (x) (below the “A” threshold) and the net debt-to-cash flow was 2.41x. However, DBRS anticipates the Company’s financial profile in 2017 and 2018 to improve considerably. In addition to the recovery in oil prices, Suncor’s key financial metrics are improving as a result of the Company’s cost reduction and cost efficiency measures, increasing production volumes and a reduction in planned capex. Furthermore, Suncor has plans for $2.0 billion of asset dispositions in 2017, targeted for debt reduction. The improvement in financial metrics in DBRS’s opinion lends support for Suncor’s ratings.

Based on budgeted capex of $4.8 billion to $5.2 billion for 2017, DBRS anticipates that the Company should be able to produce free cash flow surpluses at a West Texas Intermediate (WTI) oil price above USD 50/barrel (bbl). The 2017 capex budget includes approximately 60% for sustaining capital and the balance is for growth capital including the Fort Hills oil sands mining project and Hebron oil development offshore Newfoundland that are due for completion later this year. When completed, Suncor’s capital flexibility should strengthen further. Nonetheless the Company’s cash flow is sensitive to oil price changes. Should the price of WTI oil recede below USD 40/bbl for an extended period, Suncor’s financial metrics will be under considerable pressure again and DBRS may then have to take a negative rating action.

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 principal methodologies are Rating Companies in the Oil and Gas Industry (September 2016), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on www.dbrs.com under Methodologies.

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

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