DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Debentures and Medium-Term Notes of Suncor Energy Inc. (Suncor or the Company) at A (low) and the Company’s Commercial Paper rating at R-1 (low), with Stable trends. Suncor has announced the acquisition of TotalEnergies EP Canada Ltd. (Total Canada) for an upfront cash payment of $5.5 billion (before closing adjustments) plus a variable payment of up to $0.6 billion. The variable payment will be capped at $0.6 billion and is a quarterly payment of USD 6 million for every dollar that the price of Western Canada Select oil exceeds USD 52/barrel. The variable payment expires after five years. The Company plans to fund the acquisition primarily with debt. Closing is expected in Q3 2023.
The acquisition includes a 50% non-operated interest in the Surmont oil sands project (ConocoPhillips (rated “A” with a Stable trend by DBRS Morningstar) operator with a 50% interest) and a 31.23% in the Suncor Operated Fort Hills oil sands project. The acquisition of the Fort Hills interest will increase Suncor’s interest in the project to 100%. Under the terms of the Surmont joint venture arrangements, ConocoPhillips has certain preemptive rights, including a right of first refusal (ROFR) on the 50% Surmont working interest. Closing is subject to waiver of the ROFR on the Surmont working interest.
The Company is adding, in aggregate, approximately 135,0000 barrels/day (bbls/d) of bitumen production capacity in Northern Alberta and 2.1 billion barrels of long-life proven and probable bitumen reserves. The acquisition is expected to address the Company’s long-term supply strategy to replace approximately 260,000 bbls/d of bitumen from the Company’s Base Mine when the Base Mine starts declining after 2030. The acquisition will enable Suncor to keep the Base Plant upgraders running full with bitumen supply from Suncor past 2030.
The acquisition increases the Company’s size and solidifies Suncor’s leadership position in oil sands developments, neither of which are of sufficient magnitude to move the ratings. However, the acquisition also increases asset concentration and adds more exposure to volatility in the light-heavy oil price differential. Both these factors present constraints to the ratings. The Company is also adding more carbon-intensive oil production, which will add further pressure (and costs) to the Company’s plans to decarbonize it operations.
It is expected initially that Suncor’s financial leverage metrics will rise moderately as most of the upfront payment for the acquisition is expected to be funded primarily with debt. Based on DBRS Morningstar’s oil pricing assumptions, the Company is expected to have excess free cash flow (FCF; cash flow after capital expenditures and dividends) through 2024 and the level of indebtedness can be reduced over the period. The Company is targeting debt repayment at 50% of excess FCF until net debt reaches $12 billion. DBRS Morningstar anticipates that the Company’s key financial metrics will remain supportive of the ratings. Given that the acquisition does not meaningful alter the Company’s business or financial risk profile, DBRS Morningstar confirmed Suncor’s ratings as noted.
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 of time, DBRS Morningstar maybe compelled to take a negative rating action.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
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 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
--Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 31, 2022) https://www.dbrsmorningstar.com/research/402196
--DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
--DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (Feb 24, 2023) https://www.dbrsmorningstar.com/research/410196
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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The rated entity or its related entities did participate in the rating process for this rating action.
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This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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