TSX Commentary

Suncor Energy Inc. (SU) – $31.85 – Fire in the Sands – Part II
Sector Perform (prev. Outperform), Average Risk, Price Target: $46.00 (prev. $49.00)
Suncor Energy experienced another fire in its oil sands operations – this time at its 125,000 bbl/d Upgrader I. Details are limited at the moment, but Suncor estimates that it will take a couple of days to assess the fire damage along with remediation measures. Predicated upon four weeks of repairs, RBC CM has modestly trimmed its 2010 (base) synthetic oil production outlook by 3.4% to 284,000 bbl/d and increased its oil sands cash costs by 4% to $38/bbl. At current levels, Suncor is trading at a 2010E debt-adjusted cash flow multiple of 8.0x (roughly in line with RBC CM’s Canadian integrated peer group at 7.9x) and a P/NAV ratio of 0.72x (slightly below the average of its Canadian integrated peer group of 0.81x). In RBC CM’s opinion, Suncor’s longer-term outlook remains favourable, underpinned by its improved operating cost structure, enormous oil sands resource base and ability to generate mid-single-digit production growth. At the same time, RBC CM’s has become increasingly concerned about its execution performance, recognizing full well that two oil sands fires within such a compressed a timeframe could be purely coincidental. RBC CM has downgraded Suncor by one notch to Sector Perform, and has trimmed its one-year target price by 6% to $46 per share. It is never easy to downgrade a stock once most of the bad news appears to be reflected in its valuation, but Suncor may trade in a sideways range in coming months pending improved oil sands operating performance and execution in general. In RBC CM’s view, investors seeking to retain oil sands exposure should switch into Canadian Natural Resources (TSX: CNQ, $69.75; O-Avg) – RBC CM’s favourite stock within its coverage group.