TSX Commentary

Suncor Energy Inc. (SU) – $32.85 – Execution Will Driver Multiple
Outperform, Average Risk, Price Target: $49.00
Although RBC CM has trimmed its 2010 production outlook (prior to dispositions) by 4.5% to 640,000 boe/d, RBC CM’s revised operating EPS/CFPS estimate of $1.77/$4.88 is largely intact, reflective of lower expected cash taxes of $800 – $900 million. RBC CM anticipates 9% (vs. 5%) upstream growth in 2011, supported by base oil sands production of 325,000 bbl/d. Suncor is proceeding with the sale of roughly 250 mmcfe/d of western Canadian natural gas production with targeted proceeds of $1.5 – $2.0 billion, as well as 25,000 boe/d of international production. At current levels, Suncor is trading at a 2010E debt-adjusted cash flow multiple of 7.9x – roughly in-line with the Canadian integrated peer group at 8.0x, and a P/NAV ratio of 0.74x – vs. 0.83x for the peer group. While it seems clear that 2010 constitutes a transition year for Suncor, the company remains uniquely positioned and powerful with an oil sand resource base in excess of 22 billion barrels and a mid-single digit production growth profile as far as the eye can see. While Suncor remains a multiple revaluation story as its non-core assets are rationalized and its oil sands production weighting moves through 50% toward targeted levels of 70% over time, the need for much improved execution is equally central to RBC CM’s thesis. RBC CM is maintaining an Outperform rating on Suncor, but has trimmed its one-year target price by 2% to $49 per share, reflective of additional leverage on the balance sheet and a modestly lower multiple. RBC CM’s target price reflects a 60% weighting toward a multiple of 1.1x the Base NAV of $44.50 (down from $44.59) per share and a 40% weighting towards a 2011 implied mid-cycle debt-adjusted cash flow multiple of 8.6x (vs. 8.9x previously).