DBRS Limited (DBRS Morningstar) removed the ratings of Suncor Energy Inc. (Suncor or the Company) from Under Review with Negative Implications, where they were placed on March 26, 2020. At the same time, DBRS Morningstar confirmed Suncor’s Issuer Rating and Debentures and Medium-Term Notes rating at A (low) and Commercial Paper rating at R-1 (low). All trends are Negative. Suncor Energy Oil Sands Limited Partnership (SEOSLP) holds the majority of Suncor’s interests in its oil sands assets and is indirectly a wholly owned subsidiary of the Company. Because the Commercial Paper and Debentures and Medium-Term Notes of Suncor are guaranteed by SEOSLP, DBRS Morningstar assesses the credit quality for all ratings of Suncor on a consolidated basis.
When DBRS Morningstar placed all ratings of Suncor Under Review with Negative Implications on March 26, 2020, it was in response to the extreme price declines and heightened volatility in crude oil markets largely caused by the rapid spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between OPEC (led by Saudi Arabia) and Russia. Subsequently, DBRS Morningstar revised its commodity price assumptions on May 15, 2020, to factor in (1) the impact of the coronavirus on crude oil demand as lockdowns ease, (2) the significant buildup in global oil inventories, (3) the impact of production cuts recently implemented by OPEC +, and (4) measures taken by the Company to adjust for a much weaker price environment. The rating actions follow DBRS Morningstar’s review of the Company’s business risk profile and financial forecast under the revised commodity price assumptions.
Suncor's ratings are supported by the Company’s (1) considerable size (production of 772,000 barrels of oil equivalent per day and refinery throughput of 438,900 barrels (bbl) per day in 2019); (2) highly integrated upstream and downstream operations; (3) long-life, low-decline oil sands assets; and (4) capital flexibility and operational efficiency. Suncor's ratings are tempered by the high exposure (86% of production volumes in 2019) to higher-cost, lower-margin oil sands developments in Western Canada and the associated market access challenges.
Suncor has benefitted in previous oil price downturns from its integrated business model, as a lower cash flow contribution from upstream operations was buffered by relatively more stable and typically stronger cash flow contribution from downstream operations, including refining. However, the current crisis has exposed the Company's cash flows to both weak pricing and a significant decline in demand and refined-product margins at the same time. In response, Suncor is taking several measures to maintain liquidity and protect its financial profile. The Company has (1) cut dividends by 55% for an approximate savings of $1.6 billion annually; (2) reduced planned capital expenditures to a range of $3.6 billion to $4.0 billion in 2020 from the original plan of $5.4 billion to $6.0 billion (a reduction of approximately $1.9 billion at the midpoint of Company guidance); (3) targeted operating cost reductions of $1.0 billion for 2020; and (4) suspended the share buyback program. With these revisions, the Company indicates that it can cover operating costs, sustaining capital and the current dividend at an overall breakeven price of West Texas Intermediate (WTI) at USD 35/bbl down from the USD 45/bbl previously guided by the Company.
Suncor has sufficient liquidity to navigate through the current weak price environment. As at March 31, 2020, the Company reported a cash balance of $2.2 billion and available credit lines of $5.9 billion (net of borrowings and Commercial Paper). Included in the available facilities is a two-year $2.5 billion committed credit facility that was secured during the first quarter. After March 31, the Company enhanced its liquidity with the addition of a two-year $300 million committed facility and the Company issued $1.25 billion and USD 1.0 billion of unsecured notes.
DBRS Morningstar expects Suncor’s key credit metrics under its base-case commodity price assumptions (see DBRS Morningstar’s May 15, 2020, commentary “As Coronavirus Lockdowns Ease, DBRS Morningstar Resets Outlook for Oil and Natural Gas Prices”) to be extremely weak in 2020. While cost-saving measures will help mitigate the erosion in the Company's financial performance, DBRS Morningstar nonetheless projects a modest free cash flow (FCF) deficit in 2020. The deficit is expected to be funded with incremental debt. With an anticipated return to FCF surpluses in 2021 as the price of WTI oil recovers (based on DBRS Morningstar's forecast), the Company's credit metrics are projected to gradually improve in 2021 and strengthen further in 2022. When the business environment stabilizes, the Company’s priority is to deleverage the balance sheet and target a debt-to-capitalization ratio in the 20% to 35% range (this ratio was 35.0% as at March 31, 2020). DBRS Morningstar assumes a more normalized operating environment will be reached by 2022 and anticipates WTI recovering back to the USD 50/bbl level, the bottom end of DBRS Morningstar’s midcycle pricing scenario.
In assessing the Company’s credit risk profile, DBRS Morningstar’s approach is to rate through the cycle and give due weight to projected credit metrics when DBRS Morningstar anticipates a return to more normalized market conditions. On this basis and considering DBRS Morningstar’s base-case pricing scenario, the Company’s credit profile supports an A (low) rating. The risk, in DBRS Morningstar’s view, is that a recovery in crude oil prices falls short of DBRS Morningstar’s base-case price assumptions and that Suncor's overall financial risk profile will not support the current ratings. The Negative trends are a reflection of this risk, which DBRS Morningstar considers to be at an elevated level.
DBRS Morningstar will likely change the trends to Stable if the demand/supply fundamentals in crude oil markets continue to improve, leading to greater confidence that prices and, consequently, the Company’s key credit metrics recover in line with DBRS Morningstar’s base-case assumptions. Conversely, should oil prices and the Company’s key credit metrics drop below DBRS Morningstar’s expectations, DBRS Morningstar could take a negative rating action.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 23, 2019); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020); and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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