DBRS Morningstar Changes Trends on Suncor Energy Inc. to Stable from Negative, Confirms Ratings at A (low) and R-1 (low)

DBRS Limited (DBRS Morningstar) changed the trends on Suncor Energy Inc.'s (Suncor or the Company) ratings to Stable from Negative and confirmed its Issuer Rating and Debentures and Medium-Term Notes rating at A (low) and Commercial Paper rating at R-1 (low). 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. Because Suncor’s Commercial Paper and Debentures and Medium-Term Notes are guaranteed by SEOSLP, DBRS Morningstar assesses the credit quality for all of Suncor's ratings on a consolidated basis. The trend changes reflect DBRS Morningstar's assessment that the Company's key credit metrics will improve considerably through 2023 on the basis of an expected recovery in crude oil prices and downstream returns, coupled with Company plans to reduce leverage.

Suncor's ratings are underpinned by the Company’s (1) significant size (production of 785,900 barrels (bbls) of oil equivalent per day and refinery throughput of 428,400 bbls per day in Q1 2021), (2) highly integrated upstream and downstream operations, (3) long-life, low-decline oil sands assets, (4) capital flexibility and operational efficiency, and (5) favourable liquidity profile. Suncor's ratings are constrained by its (1) exposure to lower-margin nonupgraded bitumen production, (2) high concentration of oil-producing assets in Western Canada, and (3) rising environmental cost pressures.

The Company's credit metrics weakened significantly in 2020 because of the steep decline in crude oil prices and the significant compression in refined product margins. In previous downturns, Suncor benefitted from its integrated business model, as lower cash flow from the upstream operations was typically counterbalanced by relatively more stable cash flow from the downstream operations. This was not the case in 2020 because of the Coronavirus Disease (COVID-19) pandemic. In response, the Company cut costs, lowered capital expenditures, suspended share buybacks, reduced dividends, and curtailed production at various sites, including the Fort Hills project.

Although Suncor incurred a free cash flow (FCF) deficit and higher indebtedness in 2020, DBRS Morningstar expects Suncor to generate FCF surpluses through 2023 based on (1) DBRS Morningstar's base-case commodity price assumptions of USD 53/bbl over the balance of 2021 and USD 52/bbl in 2022 and 2023 for West Texas Intermediate oil, and (2) Suncor's plans for a disciplined allocation of capital directed to sustaining the base business, optimizing the integrated value chain, cost improvements, and decarbonization initiatives. Suncor plans to allocate up to two-thirds of this year’s FCF surplus to repay debt and plans to reduce debt further in 2022 and 2023. As a consequence, DBRS Morningstar expects Suncor's key credit metrics to improve materially and support an A (low) rating. DBRS Morningstar notes that crude oil prices are currently well above DBRS Morningstar’s base-case assumptions, and an improvement in credit metrics could exceed DBRS Morningstar’s assumptions.

If the Company's lease-adjusted debt-to-cash flow ratio is consistently below 1.5 times, DBRS Morningstar may consider a positive rating action. On the other hand, should oil prices and the Company’s key credit metrics drop materially below DBRS Morningstar’s expectations for an extended period, DBRS Morningstar may take a negative rating action.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 17, 2020; https://www.dbrsmorningstar.com/research/365808), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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