DBRS Limited (DBRS Morningstar) confirmed Suncor Energy Inc.'s (Suncor or the Company) Issuer Rating and Debentures and Medium-Term Notes rating at A (low) and Commercial Paper rating at R-1 (low). All trends remain Stable. 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 Suncor’s Commercial Paper and Debentures and Medium-Term Notes are guaranteed by SEOSLP, DBRS Morningstar assesses the credit quality for all of Suncor's ratings on a consolidated basis.
Suncor's ratings are underpinned by the Company’s (1) significant size (production of 766,000 barrels of oil equivalent per day and refinery throughput of 436,500 barrels per day in Q1 2022), (2) highly integrated upstream and downstream operations, (3) long-life, low-decline oil sands assets, (4) capital flexibility and operational efficiency, and (5) favourable liquidity profile. Suncor's ratings are constrained by its (1) exposure to lower-margin nonupgraded bitumen production, (2) high concentration of oil-producing assets in Western Canada, (3) operational reliability and workplace safety performance at its oil sands operations, and (4) increasing environmental regulations and cost pressures.
The Company's credit metrics strengthened significantly in 2021 as crude oil prices rebounded and refined product margins recovered from the negative economic consequences of the Coronavirus Disease (COVID-19) pandemic. Suncor produced a free cash flow surplus (FCF; cash flow after capital expenditures (capex) and dividends) in 2021 of $4.1 billion ($5.9 billion when including working capital changes). The Company used its FCF surplus mainly to buy back shares and reduce total indebtedness by 15% to $18.4 billion. In 2021, the Company's key lease-adjusted debt-to-cash flow ratio improved to 1.79 times (x) from 5.60x in 2020 and the lease-adjusted EBIT interest coverage ratio increased to 6.46x. Both ratios were still outside the “A” range. Suncor’s lease-adjusted debt-to-capital ratio, which improved as well to 33.4% in 2021, was within the “A” range.
Based on DBRS Morningstar's average West Texas Intermediate oil price forecast of USD 74/barrel (bbl) in 2022 and USD 60/bbl in 2023, which is at the top end of DBRS Morningstar's long-term midcycle pricing band, combined with a disciplined capex allocation ($4.70 billion budgeted for 2022), FCF surpluses are likely over the next two years. Suncor plans to allocate up to 50% of FCF surplus to repay debt and 50% for share buybacks until net debt reaches $12 billion. When net debt falls between $9 billion and $12 billion, the Company plans to allocate 25% of FCF surpluses to debt reduction and 75% to share buybacks. Once net debt reaches $9 billion, the Company’s targeted floor for debt, 100% of FCF surpluses will go to shareholder returns. DBRS Morningstar expects Suncor’s key credit metrics to continue to improve and support an A (low) rating. Furthermore, crude oil prices and refinery margins are currently well above DBRS Morningstar’s base-case assumptions, and an improvement in credit metrics could well be stronger compared with DBRS Morningstar’s assumptions.
If the Company’s lease-adjusted debt-to-cash flow ratio is consistently near 1.0x, DBRS Morningstar may consider a positive rating action. On the other hand, should oil prices drop to USD 40/bbl or below and the Company’s key credit metrics weaken materially for an extended period, DBRS Morningstar may take a negative rating action.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
DBRS Morningstar considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Suncor. This factor is relevant because ever-increasing environmental regulations in Canada targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies in Canada and in particular for Suncor, which has greater exposure to more carbon-intensive oil sands developments. Suncor is in a stronger position today to face the challenges associated with reducing GHG emissions than it was a couple of years ago. Suncor has deleveraged the balance sheet to provide for much needed financial flexibility to navigate the energy transition path.
There were no social or governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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 16, 2021; https://www.dbrsmorningstar.com/research/383104), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).
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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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