Suncor Energy Inc.                                                                                       Pramod Jindal, MB...
Suncor Energy Inc.                                                        Pramod Jindal, MBA CandidateFebruary 22 2013    ...
Suncor Energy Inc.                                        Pramod Jindal, MBA CandidateFebruary 22 2013                    ...
Suncor Energy Inc.                                             Pramod Jindal, MBA CandidateFebruary 22 2013               ...
Suncor Energy Inc.                                                  Pramod Jindal, MBA CandidateFebruary 22 2013          ...
Suncor Energy Inc.                                          Pramod Jindal, MBA CandidateFebruary 22 2013                  ...
Suncor Energy Inc.                                         Pramod Jindal, MBA CandidateFebruary 22 2013                   ...
Suncor Energy Inc.                                        Pramod Jindal, MBA CandidateFebruary 22 2013                    ...
Suncor Energy Inc.                                                 Pramod Jindal, MBA CandidateFebruary 22 2013           ...
Suncor Energy Inc.                                        Pramod Jindal, MBA CandidateFebruary 22 2013                    ...
Suncor Energy Inc.                                               Pramod Jindal, MBA CandidateFebruary 22 2013             ...
Suncor Energy Inc.                                            Pramod Jindal, MBA CandidateFebruary 22 2013                ...
Suncor Energy Inc.                                                    Pramod Jindal, MBA CandidateFebruary 22 2013        ...
Suncor Energy Inc.                                        Pramod Jindal, MBA CandidateFebruary 22 2013                    ...
Suncor Energy Inc.                                    Pramod Jindal, MBA CandidateFebruary 22 2013                        ...
Suncor Energy Inc.                                    Pramod Jindal, MBA CandidateFebruary 22 2013                        ...
Suncor Energy Inc.                                   Pramod Jindal, MBA CandidateFebruary 22 2013                         ...
Suncor Energy Inc.                                           Pramod Jindal, MBA CandidateFebruary 22 2013                 ...
Suncor Energy Inc.                                          Pramod Jindal, MBA CandidateFebruary 22 2013                  ...
Suncor Energy Inc.                                           Pramod Jindal, MBA CandidateFebruary 22 2013                 ...
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Initiation coverage Suncor Energy (NYSE:SU)

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Initiation coverage Suncor Energy (NYSE:SU)

  1. 1. Suncor Energy Inc. Pramod Jindal, MBA Candidate February 22 2013 pramod.jindal13@rotman.utoronto.ca Initiation Coverage:Ticker: SU (TSX, NYSE) Investment thesisIntegrated Oil and Gas I am initiating coverage on Suncor Energy with a $42 target price and 40 Suncors share price and trading volume 35% upside. The target price was arrived at using DCF-NAV for 1800 Suncor’s oil sands and upstream business, 4.2X EV/EBITDA for its Trading volume (000s) Suncor share price ($) 35 1400 refining and marketing, and 13X EV/EBITDA for renewable energy 30 1000 business. 25 600 Suncor Energy is trading at a significant discount on both the absolute 20 200 and relative terms as compared to its peers. While the Canadian oil Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 and gas industry is struggling with high price differentials and all-time low price for natural gas, Suncor is relatively well positioned toRecommendation Buy weather these concerns more so than its peers due to the following:Current Price: 31.72Target Price: 42.00 Suncor is oil rich: Suncor’s production contains 88% crude oil and its52 Week High: 37.37 proven and probable reserves contain 95% crude oil. This is amongst52 Week Low: 25.95 the highest in the industry. In fact, Suncor is expected to divest more of natural gas assets due to prevailing low prices.Market Cap ($MM): 48,310Shares Outstanding: 1.52BDividend / Yield% 0.13/1.65 Not hostage to heavy/light differential: Suncor’s oil-sands integrated upgraders (Capacity: 355,000 barrels per day) allow it to captureNet Debt ($MM) 8,981 heavy/light differential. In FY 2011, Suncor upgraded 92% of low-value oil sands bitumen into SCO, which traded at a premium to WTI.Production per day 2011 2012 2013(000’s bpd) Increasing demand for SCO due to growing diesel demand:Oil sands 304 346 357 Increasing diesel consumption and reducing gasoline demand in theUpgrader 280 276 328Refineries 407 431 440 US will increase demand for Canadian SCO as refining a barrel of SCOConventional 128 136 144 yields more diesel. This trend would also sustain the premium thatSyncrude 34.6 34.4 34.8 Suncor’s SCO gets vis-à-vis WTI.***Company reportsProfile: Capitalizes on WTI-Brent differential: Through its oil-sands integrated refineries (Capacity: 460,000 barrels per day), Suncor Suncor Energy Inc. (NYSE:SU, TSX:SU) converts low-priced crude into Brent priced refined products. In FYis an integrated Canadian energycompany. The company is engaged in 2011, Suncor refined 431,000 barrels of oil per day. Growth in both theoil sands development and upgrading, US shale oil and Canadian oil sands production would continue toconventional and offshore oil and gas depress WTI vis-à-vis Brent, increasing Suncor refineries’ profitability.production, petroleum refining, andmarketing of crude oil and natural gas. Montreal refinery to become more profitable by 2014: With theThe company operates primarily in reversal of Enbridge’s line 9, the Montreal Refinery will be able toNorth America and has some assets in refine low priced oil sands crude into Brent priced products.Libya, and Syria.Pramod Jindal 647-773-4032 In-situ production growth to reduce costs by 25%: Suncor’s oil sands production is moving towards 60% in-situ operations from 40%Pramod.jindal13@rotman.utoronto.ca currently, which would reduce Suncor’s oil sands production costs by 25% over next 2 years. Consequently, Suncor’s plan to realize 1 million Pramod Jindal 1
  2. 2. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca barrels of oil equivalent per day by 2020 would not need proportionate investment in upgraders. Suncor is especially a good buy at this moment for the following reasons: Big bath in 2012 Q4: Suncor took a huge hit in 2012 Q4 through the impairment charges of $1.487 billion when the EBIT would have otherwise been $0.9 billion, far lower than $2 billion from Q4 2011. Consequently, Suncor’s share price is depressed. However, I believe that the current price fully captures all the negative effects of impairment and its subsequent effects on 2012 earnings. Industry Peers Suncor is far undervalued as compared to Cenovus Energy (TSX: CVE), Suncor’s pure-play competitor. As natural gas price remains at all-time low due to cheap and abundant shale gas, comparisons based on MBOE of daily production or reserves are not accurate. EV/2P-Oil and EV/MBOED*Net-Back per BOE are more relevant besides EV/EBITDAX. In the light of these improved metrics (Table 1), it becomes evident that market is clearly underscoring Suncor, even though its reserves and daily production are more valuable than its competitors’ and despite capitalizing on the price differentials that industry is suffering from. Table 1: Relative Valuation EV/EBITDAX P/E P/CF P/B EV to 2P oil EV/MBOED*NetBack Cenovus Energy 8 16 7 3 12 2.7 Imperial Oil 8 10 8 3 13 0.5 Huskey Energy 5 15 6 2 14 0.6 Average 7 14 7 2 13 1.3 Suncor Energy 5 10 6 1 8 1.8 Reserves and Operations Suncor has the largest reserves among its peers with one of the highest oil content (Table 2). Suncor also has the highest exposure to oil sands and has a steady non-oil sands business. Suncor’s upgraders and refineries also have one of the highest capacities and this is truly a testament in Suncor’s highest EBITDAX margins. Table 2: Reserves and operational characteristics EBITDAX 1P & 2P reserves Oil Crude oil Natural gas Oil production (%) Capacity (000s barrels/day) Recycle ratio margin (%) (billion barrels) content (%) (000s barrels/day) (MMcf/d) Oil sands Non-oil sands Upgrading Refining Suncor Energy 8 29 6.77 95 431 387 70% 30% 355 460 Cenovus Energy 6 24 2.40 91 133 656 65% 35% 245 226 Imperial Oil 9 17 2.9 98 255 254 91% 9% 100 506 Huskey Energy 1 27 2.35 67 211 607 12% 88% 55 42 Pramod Jindal 2
  3. 3. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Business Description: Suncors operations are divided into four business segments namely Oils Sands, Exploration and Production (E&P), Refining and Marketing, and Corporate, Energy Trading, and Eliminations (Figure 1). Figure 1: Suncor’s revenue and earnings breakdown Oil Sands include the operation in northeast Alberta to develop and produce synthetic crude oil (SCO) and related products, through the recovery and upgrading of bitumen from mining and in-situ operations. Suncor also has 12% stake in the Syncrude oil sands mining and upgrading venture. Oil Sands average production was 304,700 barrels of oil equivalent per day (BOED) in FY2011. The company also owns and operates a pipeline that transports synthetic crude oil from Fort McMurray to Edmonton. Exploration and Production includes E&P of conventional crude oil, natural gas and natural gas liquids in Western Canada, offshore activity in East Coast Canada, with interest in Hibernia, Terra Nova, White Rose and Hebron oilfields, and the E&P of crude oil and natural gas in the UK, Norway, Libya and Syria. In FY2011 this segment contributed 206,700 BOED which included 128,459 barrels per day (bpd) of oil. Suncors Syrian assets (7.6 MBOE in FY2011) are still suspended as a result of the political unrest and international sanctions against Syria. Libyan assets are currently under operation and produce an average of 12,100 barrels of oil per day. Refining and Marketing includes the refining of crude oil, distribution and marketing of these and other purchased products through refineries in Edmonton, Montreal, Sarnia, and Commerce City in Colorado, with a total refining capacity of 455,000 bpd. Suncor also owns a lubricant plant. Suncors inland refineries (Edmonton, Sarnia and Commerce City) were very profitable due to wider discount for WTI compared to Brent. The integration with oil sands reduces the feedstock costs for refineries. Corporate, Energy Trading and Elimination includes third-party energy supply and trading activities and activities not directly attributable to an operating segment. It manages investment in wind energy projects and develops strategies to reduce greenhouse gas emissions. Energy supply and trading activities involve marketing and trading of crude oil, natural gas, refined products and by-products, and the use of financial derivatives. Suncors renewable energy interests include six wind power projects (255MW) and Canadas largest ethanol plant by production volume (400 million liters per year). Pramod Jindal 3
  4. 4. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Company Strategy Business Strategy: Suncor’s profitability is a function of high crude oil production, reliability of upgraders and refineries, and the existence of price differentials. A lack of any one of these factors would negatively impact Suncor’s bottom-line as it did in 2012 Q4 when its upgraders experienced operational issues. Suncor’s strategy includes leveraging its integrated model to capitalize on the price differentials and realize higher margins on each barrel of oil. The company upgrades (92% in FY2012) most of the mined bitumen into SCO, which has traded at premium to WTI. Suncor also refines the third party crude oil to realize the premium Brent Prices for its refined products. The company targets $35 production cost per barrel in oil sands in the short-term while increasing production to one million barrels of oil equivalent by 2020. Company’s corporate strategy includes focusing on crude oil production from oil sands and conventional means, and divesting non-core assets including excess natural gas due to prevailing low prices for natural gas. Harness low cost in-situ operations1 and reduce costs: Figure 2: Increasing production from low-cost in-situ operations Currently, about 60% of Suncor’s oil-sands production comes from open-pit mining and the rest from in-situ operations. In the medium term (Figure 2), in-situ operations will contribute about 60% of oil-sands production. In-situ operations typically cost 30% less and this will reduce overall oil sand production costs by 25%. Increasing in-situ operations is probably the basis of Suncor’s ambitious cost target of $35 per barrel in oil sands. 10 year growth strategy plan includes continued development of stages four through six of the companys Firebag in-situ project and development of a second stage of the MacKay River in-situ project. The ramp up in Firebag 4 project would drive Suncor’s in-situ growth in the short to medium term. Capture WTI-WCS and Brent-WTI differentials: Suncor upgraded over 90% of its oil-sands production to higher valued SCO. The refinery throughput was close to 100% of its upgraded and conventional crude, which in turn is about 94% of its total production. Hence, Suncor has been creating value by converting low priced oil sands oil into SCO and then into Brent priced refined products all in-house. With the reversal of Enbridge’s Line 9, even Montreal refinery will be able to capture the WTI-Brent differential, further increasing the profitability. 1 Suncor Annual Report 2011 Pramod Jindal 4
  5. 5. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Suncor’s profitability in different scenarios: Table 3: Suncor’s profitability = function (price differentials) Profitability of business segments vs Differentials High Differentials Low Brent-WTI Differential Low WTI-WCS Differential Oil Sands business High High Low Refinery business High Low High Suncor Highest High Moderate Probability High Low Moderate As long as the high differentials exist, Suncor’s current business model of close-knit integrated upgraders and refineries will continue to yield high earnings. Suncor upgrades majority of its oil sands production to SCO to realize premium to WTI. Suncor also refines an amount close to its total refinable crude to realize even higher Brent prices. Hence, Suncor’s profitability, all else equal, will be the highest during high differential scenario. In the low Brent-WTI differential scenario, which could happen with more pipeline infrastructure, stagnant/reduced US domestic production, and inhibited growth in oil-sand production, Suncor will still yield high sustainable earnings. During low price differentials, oil sands production would realize higher prices, and the refining spread would come down. However, this force will become prominent in next 2-3 years and by then Suncor’s oil sand production would have dwarfed its refining capacity. Hence, Suncor would gain more in oil sands than it could lose in refining. Therefore, Suncor’s profitability would still remain high. SWOT Analysis: Strengths  Upgrading capacity of 355,000 barrels per day capturing heavy-light differential  Refining capacity of 460,000 barrels per day capturing Brent-WTI differential  Crude oil rich reserves and production  Cost discipline and experienced leadership Weakness  Unreliability of upgraders and other operational issues  Dependency of oil sands segment on upgraders  Policy of reducing leverage destroying shareholder value  Ineffective share-repurchase policy  High finding and development (F&D) costs Opportunities  Contingent reserves and cost discipline  In-situ operations  14 exploration licences in Norway  Increasing US domestic production and demand for Diesel  Increased pipeline capacity Threats  Oversupply of upgraded SCO from oil sands could decrease the SCO premium  Contracting Brent-WTI differential would hurt refining crack spread  Labor shortage and CAD/USD swings Pramod Jindal 5
  6. 6. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca  Regulations and environmental concerns Competitive Advantage: Suncor’s competitive advantage is a function of  Crude oil rich (95%) oil reserves  Oil-sands integrated Upgraders  Oil-sands integrated Refineries  Economies of scale It is highly capital and time intensive to replicate Suncor’s model, which has the best at every stage of the value chain. Hence, Suncor’s competitive advantage is sustainable. Industry Overview The Canadian oil and gas industry is being driven by the continued growth in the oil sands production in the land locked Western Canada. The US has been the single biggest customer of Canadian oil; however, the trends pertaining to US domestic production, pricing and imports of Canadian crude oil are alarming at the moment. Canadian crude oil crowd in the US2 enables Suncor to capture Brent-WTI differential: Figure 3: US domestic production and net imports trend The US Midwest (PADD-2) is currently Canada’s largest market (2.7 million barrels per day) due to its close proximity, large size and established pipeline network. However, this historically attractive market is now saturated as evidenced by the large buildup of inventories from growing domestic production and imports from Western Canada. As a result of strong production in both the US and Canada, pipeline capacity has become a bottleneck. As shown in figure 3, since September 2012, domestic production in the US has increased by over 11%, net imports by the US have reduced by over 23%, and the Canadian exports to the US have declined by over 8%. These trends will continue to put downward pressure on West Texas Intermediate (WTI) and widen the gap between WTI and Brent prices. This augurs good for the companies that upgrade bitumen and for those that refine crude. Suncor is in unique position to 2 Source: Department of Energy data sourced from Bloomberg Pramod Jindal 6
  7. 7. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca capitalize on this opportunity by realizing premium to WTI for its upgraded SCO and realizing Brent prices for its refined products. Suncor’s upgraders help capitalize on the widening WTI-WCS differential3: Figure 4: Widening Canadian crude differential As shown in figure 4, Canadian heavy crude oil, benchmarked by Canadian Western Select (WCS), has always traded at discount to WTI). The differential has grown from $5.5/barrel (2009) to $42/barrel (2012). The discount as a percentage of WTI has also risen from 15% in 2009 to 36% today. While the incremental costs associated with processing the heavier and sulphur-rich Canadian crude is approximately $6 per barrel, the prevailing differential demonstrates the departure from the fundamentals. This trend also justifies upgrading bitumen to SCO, which trades at a slight premium to WTI. Rising shale oil production in the US to increase Suncor refineries’ profitability: Permits are being issued in the US shale plays (Bakken formation, Permian Basin, Eagleford shale play, Ohio, and Utah) in large numbers. If the track record of Bakken formation is considered representative, US shale formations can contribute up to 2.8 million barrels of oil4 per day in short to medium term. This will likely put downward pressure on already depressed WTI prices. The more depressed WTI vis-à-vis Brent, the greater the profitability of Suncor’s refineries. Moreover, since Suncor upgrades most of its oil sands production to SCO, its oil sands business will be less impacted by the depressed WTI compared to its peers. Overall, Suncor’s profitability will be higher than its peers even with more shale oil coming to market. 3Source: Bloomberg 4Regression of oil produced on the permits issued, wells dug and producing wells. Data source: Bloomberg. Pramod Jindal 7
  8. 8. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Price of Suncor’s SCO would increase with increasing US demand for Diesel5: Figure 5: Growing diesel demand in the US Diesel demand has been increasing whereas gasoline demand has reducing in the US (Figure 5). The refineries in the US are designed to yield more gasoline than diesel. Increasing demand for diesel has been creating a shortage of diesel. Since refining a barrel of SCO yields more diesel than WTI, it is likely that demand for SCO would increase. This will sustain or increase the premium that SCO commands over WTI. This trend will continue to benefit Suncor that upgraded 92% of its oil sands production into SCO. New markets for Canadian crude: Midwest refineries to increase capacity for heavy oil: A number of refineries have announced projects designed to increase the heavy oil processing capability; however, there have been some delays in their start-up due to the growing availability of domestic light oil. Eastern Canada: In 2011, Eastern Canadian refineries imported over 680,000 bpd (85% of requirement) from offshore foreign suppliers at Brent prices. US Gulf Coast: In 2011, the U.S. Gulf Coast refineries, designed for heavy crude oil, imported over 2.4 million barrels per day (MMBBLD) of heavy oil from Mexico, Venezuela, and Columbia at a premium to WTI. Imports from Mexico and Venezuela have been reducing due to declining production, increasing refining capacity and exports to China. Deliveries of western Canadian crude oil to this market totaled just 112,000 bpd, almost all of which was transported through the ExxonMobil Pegasus pipeline. US Gulf is in desperate need of fairly priced and consistent supply of heavy crude. Western Canada will be able to export up to 1.2 million barrels per day to the US Gulf in the medium term. Seaway Pipeline became operational in Jan 2013 and has increased capacity from 100,000 to 400,000 bpd. Permit Express pipeline will add 90,000 bpd by 2013. Keystone XL, whose southern part is already in construction, will bring a minimum of 700,000 bpd to Gulf Coast. These pipelines will reduce the oversupply in the Midwest, and put upward pressure on WTI. Access to the US Gulf coast is strategic for Canadian oil companies because even with US’s becoming energy independent, Gulf Coast could act as a conduit for Canadian oil to Caribbean countries. China: In 2011, China imported about 5.7 MMBBLD of oil. The Kinder Morgan project would allow for the shipment of another 890,000 barrels a day between Edmonton and Burnaby, B.C., where it connects to a dock that stands to be an important outlet for Canadian oil to find new buyers in California and Asia. 5 American Petroleum Institute data taken from Bloomberg Pramod Jindal 8
  9. 9. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Suncor’s profitability will increase with more pipeline capacity6: Figure 6: Suncor’s oil sands production and refining throughput When the Canadian crude finds access to alternate markets, the glut in the US Midwest would reduce and WTI will experience an upward pressure vis-à-vis Brent. While this would result in higher price realization for SCO and potentially bitumen, refineries will make slightly less as the gap between Brent and WTI would contract. All else equal if the proposed pipeline capacity comes online today, Suncor would gain $1 per barrel in oil sands business but would lose $1 in refining. Since Suncor currently refines more crude than it produces in oil sands (Figure 6), contracting gap between Brent and WTI would hurt the bottom-line even though the overall profitability would still remain higher than its peers. However, this force will take at least 2-3 years to become prominent and by then Suncor’s oil sands production would have exceeded its refining capacity. Hence, increasing WTI would make oil sands relatively more profitable and refineries slightly less profitable; Thus, Suncor’s overall profitability would further improve. The differential between WTI and WCS would reduce and this would reduce the incentive for other companies to upgrade bitumen and any oversupply of SCO from Canada would potentially be contained. Risks Figure 7: Suncor’s oil sands’ profitability relies on its upgraders The biggest risk to Suncor is the unreliability of its upgraders. During upgraders’ downtime, Suncor has to sell at oil sand production at WCS (discount to WTI). In Q4, 2012 downtime in Suncor’s upgraders led to huge decline in oil sands’ profitability (Figure 7). The opportunity cost of not upgrading is about $5.5-$8M7 each day. Oversupply of upgraded Bitumen (SCO) from oil sands could also reduce SCO-WTI differential. Unfunded defined benefit pension plan: Suncor’s underfunded defined-benefit pension plan is not of significant concern as short-term risk defined as (Plan Obligations-Plan Asset)/market cap is only 2% 6 Suncor Annual Report 2011 and estimates 7 Suncor Annual Report 2011 and 2012 Q4 Report Pramod Jindal 9
  10. 10. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca whereas long-term risk defined as (Plan obligations/market cap) is only 7%. These risks levels are way below risky levels. Other Risks: Royalty increases, Labor shortage, depressed differential (WTI vs. Brent), Environmental concerns, and, Currency Risk Valuation: Figure 8: Segment’s contribution to Suncor’s valuation Suncor has been valued using Sum-of-Part methodology. The valuation methodology involved DCF-NAV approach for the upstream and oil sands production business, and the trading comparable approach for the remaining parts of the business. Suncor derives most of its value from its oil sands business, and refining and marketing business (Figure 8). Valuation assumes long-term commodity forecasts for $90/bbl WTI, $95/bbl SCO, $103/bbl Brent, $80/bbl WCS, and AECO of $4/mcf. The model assumes that Suncor’s oil- sands upgraders operate reliably with no major downtimes so that Suncor continues to command a small premium to WTI for the upgraded SCO. The growth in in-situ operations would stabilize the average cash operating costs to $32 per barrel, $2 more than Suncor’s 2012 average cash operating costs. Industry standard after-tax discount rate of 10% is used because most of Suncor’s assets are in stable jurisdictions. Suncor’s $50 billion in CAPEX since 1992 and its $7.5 billion of 2012 CAPEX were anchored in the costs to develop its proven and probable reserves. Since only 31% of Suncor’s proven reserves are undeveloped, $28.35 billion was taken as the costs to develop its proven and probable reserves. Contingent reserves were not factored in the valuation due to high certainty in the production costs and reserves. Public Comps: For valuing refining and marketing segment, comparable companies were found based on the capacity, throughput, geography, revenue and EBITDA (Table 4). For valuing renewable energy business, a TSX-V listed company was considered a proper comparable based on the similar asset base (wind farms) and jurisdiction (Table 5). Table 4: Public compos for Refining and Marketing Pramod Jindal 10
  11. 11. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Public Comps: Refining and Marketing Price/Tang Revenue EBITDA Number of Market MMBBLD EV/EBITDA Book Value ($M) ($M) Refineries Cap ($M) Geography Delek US Holdings, Inc. (NYSE:DK 140 4.8 2.8 8,543 462 2 2,223 US HollyFrontier Corporation (NYSE:HFC) 443 3.9 3.5 20,810 2,842 5 11,397 US Tesoro Corporation (NYSE:TSO) 675 3.8 1.8 32,132 2,110 7 7,487 US Suncor (SU) 455 25,713 2,823 4 Canada and US Average 428 4.2 3 21,800 2,059 5 7,036 Table 5: Public compos for Renewable Energy Assets Public Comps: Wind and Renewable Energy TEV/EBITDA LTM Shear Wind, Inc. (TSXV:SWX) 13.0x Company Valuation Sum of Parts NAV from 1P and 2P reserves only ($M) $ 65,006 Other Business Segments: Renewable Energy Prior Year EBITDA($M): 72 Assumed EV / EBITDA Multiple: 13.0 x Estimated Enterprise Value: $ 936 Refining and Marketting Prior Year EBITDA($M): 2,823 Assumed EV / EBITDA Multiple: 4.2 x Estimated Enterprise Value: $ 11,857 Enterprise Value for Entire Company: $ 77,799 Plus: Cash & Cash-Equivalents: 3,072 Plus: Equity Investments: - Less: Debt: (10,779) Less: Asset Retirement Obligation: (5,362) Implied Equity Value ($M): $ 64,730 Total Shares Outstanding (M): 1,558 Implied Share Price: $ 42 Pramod Jindal 11
  12. 12. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Appendix: Financial Model: Proven and Probable Reserves by Type Assumptions Oil Sands (MMBbls): 5,816 Discount Rate: 10.0% Natural Gas Liquids (MMBbls): 34 Effective Cash Tax Rate: 30.0% Natural Gas (Bcf): 1,899 Development Costs($M): $ 28,350 Bitumen(MMBbls): - Development Years: 20 Light and Medium Oil(MMBbls) 767 Barrels of Oil Equivalents (MMBOE): 6,934 Oil Sands Production: Realized Price $/Bbl: $ 90 % of Upgraded Oil Price Production cost($/Bbl) 32.00 Sweet SCO 34.0% 95 Previous Year: 4.0% Diesel 7.0% 80 Current Year: 7.0% Sour SCO 45.0% 80 Current Year Volume: 130 Bitumen NA 80 Year 1 Growth Rate: 10.0% Royalty/Revenue 6.0% Syncrude SCO 13 Yearly Growth Rates: Years 2 - 5: (2.0%) Years 6 - 9: (4.0%) Year 10 and Beyond: 0.0% Cost after 5 years ($/bbl) 35 Upgraded 102 Pramod Jindal 12
  13. 13. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Oil Sands Production Beginning Annual Sweet Sour SCO Syncrude Revenue Total Operating Total Operating Operating Profit Reserves Production Upgraded SCO and Diesel SCO Bitumen Net of Royalty Cost Cost Net of Royaty (MMBbls) (MMBbls) (MMBbls)(MMBbls) (MMBbls) (MMBbls) (MMBbls) ($M) ($/barrel) ($M) ($M) Year 1 5,816 215 130 44 86 25 60 17,079 32 6,864 10,215 Year 2 5,602 210 130 44 86 25 55 16,758 32 6,727 10,031 Year 3 5,391 206 130 44 86 25 51 16,442 32 6,592 9,850 Year 4 5,185 202 130 44 86 25 47 16,133 32 6,460 9,673 Year 5 4,983 198 130 44 86 25 43 15,830 32 6,331 9,499 Year 6 4,786 190 130 44 86 25 35 15,237 32 6,078 9,159 Year 7 4,596 182 130 44 86 25 27 14,667 32 5,835 8,832 Year 8 4,413 175 130 44 86 25 20 14,120 32 5,601 8,518 Year 9 4,238 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 10 4,070 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 11 3,902 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 12 3,734 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 13 3,566 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 14 3,398 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 15 3,230 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 16 3,062 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 17 2,894 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 18 2,726 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 19 2,558 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 20 2,390 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 21 2,222 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 22 2,054 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 23 1,886 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 24 1,718 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 25 1,550 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 26 1,382 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 27 1,213 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 28 1,045 168 130 44 86 13 26 13,415 32 5,377 8,038 Year 29 877 62 28 9 18 13 21 4,935 32 1,972 2,964 Year 30 816 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 31 760 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 32 704 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 33 648 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 34 592 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 35 536 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 36 480 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 37 424 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 38 368 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 39 312 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 40 256 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 41 200 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 42 144 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 43 88 56 28 9 18 13 16 4,515 32 1,792 2,723 Year 44 32 32 28 9 18 - 4 2,504 32 1,011 1,493 Pramod Jindal 13
  14. 14. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca NGL Production: Price $/Bbl: $ 71 Production Cost ($/Bbl): $ 16 Previous Year: (37.0%) Current Year: 10.0% Current Year Volume: 2.2 Year 1 Growth Rate: (31.0%) Royalty/Revenue 22.0% Yearly Growth Rates: Years 2 - 5: 10.0% Years 6 - 9: (10.0%) Year 10 and Beyond: 0.0% Natural Gas Liquids Beginning Annual Net Revenue Cash Operating Total Operating Operating Profit Operating Profit Reserves Production NGL Price After Royalty Cost Cost Net of Royaty Net of Royaty (MMBbls) (MMBbls) ($/bbl) ($M) ($/bbl) ($M) ($M) ($M) Year 1 34 3 142 212 165 16 48 117 Year 2 31 3 142 233 182 16 52 129 Year 3 28 4 142 256 200 16 58 142 Year 4 24 4 142 282 220 16 63 156 Year 5 20 4 142 310 242 16 70 172 Year 6 16 5 142 341 266 16 77 189 Year 7 11 5 142 375 292 16 84 208 Year 8 6 5 142 338 264 16 76 188 Year 9 1 1 142 68 53 16 15 38 Pramod Jindal 14
  15. 15. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Natural Gas Production: Price $/Mcf: $ 4 Production Cost ($/Mcf): 2 Previous Year: 38.0% Current Year: (31.0%) Current Year Volume: 96 Year 1 Growth Rate: (31.0%) Royalty/Revenue 22.0% Yearly Growth Rates: Years 2 - 5: 5.0% Years 6 - 9: (10.0%) Year 10 and Beyond: 0.0% Natural Gas Production (Proven Reserves): Beginning Annual Gross Net Revenue ` Operating Profit Operating Profit Reserves Production Natural Gas Revenue After Royalty Cost Net of Royaty Net of Royaty (Bcf) (Bcf) Price ($/Mcf) ($M) ($M) ($/Mcf) ($M) ($M) Year 1 1,899 133 8 1 0 2 0.3 0.1 Year 2 1,766 140 8 1 0 2 0.3 0.1 Year 3 1,626 147 8 1 0 2 0.3 0.1 Year 4 1,480 154 8 1 0 2 0.3 0.2 Year 5 1,326 162 8 1 1 2 0.3 0.2 Year 6 1,164 145 8 1 0 2 0.3 0.1 Year 7 1,019 131 8 1 0 2 0.3 0.1 Year 8 888 118 8 0 0 2 0.2 0.1 Year 9 770 106 8 0 0 2 0.2 0.1 Year 10 664 106 8 0 0 2 0.2 0.1 Year 11 558 106 8 0 0 2 0.2 0.1 Year 12 452 58 8 0 0 2 0.1 0.1 Year 13 393 53 8 0 0 2 0.1 0.1 Year 14 340 53 8 0 0 2 0.1 0.1 Year 15 287 53 8 0 0 2 0.1 0.1 Year 16 234 53 8 0 0 2 0.1 0.1 Year 17 181 53 8 0 0 2 0.1 0.1 Year 18 128 53 8 0 0 2 0.1 0.1 Year 19 75 53 8 0 0 2 0.1 0.1 Year 20 22 22 8 0 0 2 0.0 0.0 Pramod Jindal 15
  16. 16. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Light and Medium Oil Price $/Bbl: $ 103.00 Production cost($/Bbl) 16 Previous Year: 157.0% Current Year: (31.0%) Current Year Volume: 18 Year 1 Growth Rate: (20.0%) Royalty/Revenue 22.0% Yearly Growth Rates: Years 2 - 5: 10.0% Years 6 - 9: (5.0%) Year 10 and Beyond: 0.0% Light & Medium Oil Beginning Annual Gross Net Revenue Cash Operating Total Operating Operating Profit Reserves Production Oil Price Revenue After Royalty Cost Cost Net of Royaty (MMBbls) (MMBbls) ($/bbl) ($M) ($M) ($/bbl) ($M) ($M) Year 1 767 29 206 2,947 2,298 16 467 1,831 Year 2 738 31 206 3,241 2,528 16 514 2,014 Year 3 707 35 206 3,565 2,781 16 565 2,216 Year 4 672 38 206 3,922 3,059 16 622 2,437 Year 5 634 42 206 4,314 3,365 16 684 2,681 Year 6 592 40 206 4,098 3,197 16 650 2,547 Year 7 553 38 206 3,894 3,037 16 617 2,420 Year 8 515 36 206 3,699 2,885 16 586 2,299 Year 9 479 34 206 3,514 2,741 16 557 2,184 Year 10 445 34 206 3,514 2,741 16 557 2,184 Year 11 411 34 206 3,514 2,741 16 557 2,184 Year 12 376 34 206 3,514 2,741 16 557 2,184 Year 13 342 34 206 3,514 2,741 16 557 2,184 Year 14 308 34 206 3,514 2,741 16 557 2,184 Year 15 274 34 206 3,514 2,741 16 557 2,184 Year 16 240 34 206 3,514 2,741 16 557 2,184 Year 17 206 34 206 3,514 2,741 16 557 2,184 Year 18 172 34 206 3,514 2,741 16 557 2,184 Year 19 138 34 206 3,514 2,741 16 557 2,184 Year 20 104 31 206 3,228 2,518 16 512 2,006 Year 21 72 17 206 1,757 1,370 16 279 1,092 Year 22 55 17 206 1,757 1,370 16 279 1,092 Year 23 38 17 206 1,757 1,370 16 279 1,092 Year 24 21 17 206 1,757 1,370 16 279 1,092 Year 25 4 4 206 412 321 16 65 256 Pramod Jindal 16
  17. 17. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Total Cash Flows($M) Total Development Pre-Tax After-tax Operating Profit Expense Income Income ($M) ($M) ($M) ($M) Year 1 12,164 1,418 10,747 7,523 Year 2 12,174 1,418 10,757 7,530 Year 3 12,208 1,418 10,790 7,553 Year 4 12,266 1,418 10,849 7,594 Year 5 12,352 1,418 10,935 7,654 Year 6 11,895 1,418 10,477 7,334 Year 7 11,460 1,418 10,042 7,029 Year 8 11,005 1,418 9,587 6,711 Year 9 10,259 1,418 8,842 6,189 Year 10 10,221 1,418 8,804 6,163 Year 11 10,221 1,418 8,804 6,163 Year 12 10,221 1,418 8,804 6,163 Year 13 10,221 1,418 8,804 6,163 Year 14 10,221 1,418 8,804 6,163 Year 15 10,221 1,418 8,804 6,163 Year 16 10,221 1,418 8,804 6,163 Year 17 10,221 1,418 8,804 6,163 Year 18 10,221 1,418 8,804 6,163 Year 19 10,221 1,418 8,804 6,163 Year 20 10,044 1,418 8,626 6,039 Year 21 9,130 - 9,130 6,391 Year 22 9,130 - 9,130 6,391 Year 23 9,130 - 9,130 6,391 Year 24 9,130 - 9,130 6,391 Year 25 8,293 - 8,293 5,805 Year 26 8,038 - 8,038 5,626 Year 27 8,038 - 8,038 5,626 Year 28 8,038 - 8,038 5,626 Year 29 2,964 - 2,964 2,075 Year 30 2,723 - 2,723 1,906 Year 31 2,723 - 2,723 1,906 Year 32 2,723 - 2,723 1,906 Year 33 2,723 - 2,723 1,906 Year 34 2,723 - 2,723 1,906 Year 35 2,723 - 2,723 1,906 Year 36 2,723 - 2,723 1,906 Year 37 2,723 - 2,723 1,906 Year 38 2,723 - 2,723 1,906 Year 39 2,723 - 2,723 1,906 Year 40 2,723 - 2,723 1,906 Year 41 2,723 - 2,723 1,906 Year 42 2,723 - 2,723 1,906 Year 43 2,723 - 2,723 1,906 Year 44 1,493 - 1,493 1,045 Pramod Jindal 17
  18. 18. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Ratio Analysis (After reversing for the capitalized interest charges) Return on Equity 2010 2011 Operating ROA 8.5% 10.0% Leverage 37% 23% Spread (NROA-Borrowing Cost) 4.8% 5.4% ROE= Operating ROA+ Leverage*Spread 10.3% 11.3% Net Return on Operating Assets 2010 2011 Operating Asset Turnover 0.68 0.83 Operating Profit Margin 12.4% 12.0% Operating ROA 8.5% 10.0% Efficiency Ratios 2010 2011 Receivables Turnover(Sales/Avg Rx) 7 7 Inventory Turonver(COGS/Avg Inventory) 8 8 Payables Turnover(COGS/Avg Px) 4 4 Fixed Asset Turnover(Sales/LTA) 1 1 Days Rec 51 49 Days Inv 47 48 Days Pay 94 90 Cash Cycle 5 7 Risk Ratios 2010 2011 Current Ratio 1.0 1.4 Quick Ratio 0.6 0.9 Interest Coverage Ratio 8.5 11.5 Net D/E 37% 23% Big Bath suggesting better future earnings: Oil Sands without Impairment Oil Sands with Impairment Net Revenue 2660 2660 Purchase of crude oil 60 60 SG&A 1312 1312 Transportation 63 63 Exploration 18 18 startup costs 19 19 Depreciation and Amortization 1065 2552 Interest 33 33 EBT oil sands 90 -1397 EBT others 783 783 Total EBT 873 -614 Pramod Jindal 18
  19. 19. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca 2012 Q4 EBIT 2011 Q4 EBIT As Reported (with impairment) Without impairment (614) 873 2049 Share repurchase: Suncor’s open market share repurchase plan lacks the minimum materiality threshold8 of 5% to cause any appreciable share price appreciation. I believe that Suncor is doing this to just return money to shareholders and with no intention to boost the share price. These buy-backs were funded by cash, which increases the firm’s net leverage. 30-Aug-11 24-Feb-12 17-Sep-12 Size of repurchase 2.0% 2.9% 2.5% Target Share Price 40 42 44 Current Share Price 28 33 33 Discount 43% 27% 33% Initial # shares (B) 1.6 1.6 1.5 Final # shares (B) 1.5 1.5 1.5 Discount ($B) 27 18 23 Discount per share (initial) 17.14 11.45 14.67 Discount per share (final) 17.49 11.80 15.04 Materiality level 1.25% 1.04% 1.14% Suncor’s upgrader and refinery throughput Suncor Proven and Probable Reserves: 8 http://hbr.org/2001/04/is-a-share-buyback-right-for-your-company/ar/1 Pramod Jindal 19
  20. 20. Suncor Energy Inc. Pramod Jindal, MBA CandidateFebruary 22 2013 pramod.jindal13@rotman.utoronto.ca Reserves SCO(MmBbls) Bitumen(MmBbl) Light Oil(MmBbl) Natutal Gas(Bcf) NGL(MmBbl) Proven 2728 709 361 1266 19 Probable 1824 694 421 729 18 Total Beginning Proven and Probable 4552 1403 782 1995 37 Produced in FY 2011 130 9 15 96 3 Total Ending Proven and Probable 4422 1394 767 1899 34 Reserves by production categories Oil Sands Light Oil Natural Gas NGL 5816 767 1899 34 Pramod Jindal 20

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