Morningstar DBRS Confirms Suncor Energy Inc.'s Issuer Rating and Debentures and Medium-Term Notes at A (low) and Commercial Paper at R-1 (low), Stable Trends

DBRS, Inc. (Morningstar DBRS) confirmed Suncor Energy Inc.’s (Suncor or the Company) Issuer Rating and Debentures and Medium-Term Notes credit rating at A (low) and Commercial Paper credit rating at R-1 (low), all with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The confirmations and Stable trends reflect Morningstar DBRS’ view that no material changes to Suncor’s credit fundamentals are expected in the near term. The Issuer Rating is based on Suncor's (1) superior size as one of Canada’s largest integrated energy companies; (2) large, long-life, low-decline oil sands developments; (3) integrated upstream and downstream operations enabling it to capture margin across the entire value chain; (4) diversified refined product mix; and (5) significant financial and capital spending flexibility. The key business risk factors affecting the credit ratings include (1) dependency on a high concentration of heavy crude oil-producing assets in Western Canada; (2) exposure to lower-margin, nonupgraded bitumen production; and (3) escalating compliance and cost pressures related to expanding environmental regulations.

CREDIT RATING DRIVERS
Morningstar DBRS does not expect to take a positive credit rating action in the near term. However, Morningstar DBRS may consider an upgrade if, in combination with a strengthening of Suncor's business risk profile, the Company reduces gross debt and improves its lease-adjusted debt-to-cash flow ratio to consistently less than 1.0 times (x). Conversely, Morningstar DBRS may consider a negative credit rating action if oil and gas prices, or Suncor’s operating performance and/or credit metrics, materially weaken to a level that is inconsistent with the Company's A (low) credit ratings.

EARNINGS OUTLOOK
Looking ahead, Suncor expects about a 6% increase in total upstream production to 790,000 barrels of oil per day (bpd) in 2024 (midpoint of its guidance) from 745,700 bpd reported in 2023. The forecast increase in production will largely be driven by organic growth at the Fort Hills oil sands mining operation in Alberta and the incremental addition of the remaining 46% interest there, purchased in 2023; organic growth from the Firebag in situ oil sands operation in Alberta; ramp-up of the Terra Nova offshore project in Atlantic Canada; and ongoing efficiency gains across other Company upstream projects. Morningstar DBRS forecasts Suncor’s consolidated gross revenue to sequentially decline by 3% to 4% to between $50.0 billion and $51.0 billion in 2024 because the increase in annual production that is incorporated is offset by a lower crude oil price assumption. Despite this, Morningstar DBRS expects ongoing efficiency gains to support the EBITDA margin at about 31% in 2024, a slight increase from 2023. Morningstar DBRS’ base-case commodity price assumptions can be found in the commentary “Record-High Temperatures Boost Power Demand but Ample Gas Inventories Prevent a Bigger Jump in Prices” dated June 21, 2024.

FINANCIAL OUTLOOK
Suncor’s 2024 total capital expenditure (capex) guidance is $6.3 billion to $6.5 billion. Based on its base-case commodity price assumptions, Morningstar DBRS forecasts Suncor to generate a significant free cash flow (FCF) (i.e., cash flow after capex and dividends) surplus in 2024. At March 31, 2024, total debt was $12.0 billion. Although Morningstar DBRS expects Suncor to allocate the majority of its FCF surplus to share repurchases, Morningstar DBRS forecasts the Company to maintain a lease-adjusted debt-to-capital ratio of around 25% through 2025. Suncor’s liquidity is strong with $2.5 billion of cash and cash equivalents and available committed credit facilities totaling about $4.8 billion as at March 31, 2024.

CREDIT RATING RATIONALE
Suncor’s upstream segment has holdings in large, long-life, low-decline oil sands operations and upgrading facilities with low sustaining capital requirements. Reinforcing that, the Company continuously focuses on cost-reduction measures, including the ongoing pursuit of operating and capital efficiency improvements—for example, implementation of mining autonomous haul truck and fleet upgrades—in an effort to maximize the value from its existing assets. Suncor’s downstream operations often achieve higher margins during times of low oil and gas prices, partially offsetting the decline in upstream income. As a large domestic refiner with significant Canadian retail market share in fuel products, the Company is highly advantaged from integration.

These credit rating confirmations follow several operational accomplishments by Suncor in 2023, including increased mine equipment productivity and improved upstream and downstream turnaround performance; record output at the Firebag in situ operation; high refinery utilization of 90% supported by heightened focus on work processes; and progress on construction of a new cogeneration facility to replace coke-fired boilers at the Oil Sands Base, which is expected to be in service in late 2024, among others.

Morningstar DBRS forecasts Suncor to maintain a lease-adjusted debt-to-cash flow ratio at around 1.5x, commensurate with the A (low) credit rating range and supporting the Stable trends. The Company’s liquidity position should remain strong, with available committed credit facilities totaling $4.8 billion forecast to remain largely unchanged through the forecast period.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Morningstar DBRS considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Suncor. This factor is relevant because ever-increasing environmental regulations in Canada targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies in Canada and in particular for Suncor, which has exposure to more carbon-intensive oil sands developments. Suncor’s balance sheet strength and ongoing emission reduction initiatives provide it with the financial flexibility to navigate the energy transition path.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Suncor, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Suncor, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Suncor, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (April 15, 2024), https://dbrs.morningstar.com/research/431177

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186,
which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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