TSX Commentary

Veritas Research: Suncor Energy (SU) – $32.85 – Weak Q4 … Overshadows Suncor’s Core Value
Buy, Intrinsic Value Estimate: $45.00 (Oil at $80/bbl)
The market expected CFPS of $1.04 in Q4 but Suncor reached only $0.72 ($0.94 after working capital), about $500 MM short of expectations. Elevated oil sands costs ($38.70/barrel ex- Syncrude in Q4 vs. $32.25/barrel in Q3) added $165 MM in Q4, safe mode costs $120 MM and realized hedging losses $185 MM. Oil Sands volumes fell to 318,200 barrels per day (bpd), including Syncrude, down 8.7% from a pro-forma 348,600 bpd in Q3. Blame falls on a December Upgrader fire which has also dragged down January volumes and 2010 oil sands guidance, the latter to 338,000 bpd (+/- 5%). Veritas is lowering its estimate for Suncor’s 2010 CFPS to $4.75 on US$80 oil and $4.00 per share on US$70 oil. Suncor is hanging on to assets the market would like it to sell (Libya, Syria, Fort Hills, etc.), while reworking Voyageur and Fort Hills plans. Veritas was skeptical of the $300 MM of synergies promised when the merger was originally announced, and remains skeptical, pointing out that shrinking a company’s asset base can generate layoffs and cost savings, but that these are hardly ’synergies’. At least some of the $400 million in annual savings to be achieved by the end of 2010 are divestiture-related. Veritas estimates Suncor’s oil sands growth options are worth $10-$11 per share, which at the current price of $33 per share leaves its existing assets trading at less than 5.0x next year’s cash flow, an exceedingly low price considering 52% of 2010 volumes come from long life oilsands assets (60% after dispositions).