DBRS Limited (DBRS Morningstar) confirms the Issuer Rating of Suncor Energy Inc. (Suncor or the Company) and the rating of the Company’s Debentures and Medium-Term Notes at A (low), Stable trends. Furthermore, the Company’s Commercial Paper rating was confirmed at R-1 (low) with a Stable trend.
Suncor's ratings are underpinned by the Company’s (1) size with production of 755,000 barrels of oil equivalent per day (boe/d) projected (based on the midpoint of Company guidance) in 2023 and refinery capacity of 466,000 barrels per day (bbls/d), (2) highly integrated upstream and downstream operations that enable the Company to capture margin throughout the entire value chain, (3) long-life, low-decline oil sands assets, (4) capital flexibility and operational efficiency, and (5) positive liquidity profile. Suncor's ratings are tempered by its (1) exposure to lower-margin nonupgraded bitumen production, (2) concentration of producing assets in Western Canada that are 100% weighted to crude oil, (3) operational reliability and workplace safety performance issues at its oil sands operations, and (4) mounting environmental regulations and cost pressures.
The Company's credit metrics strengthened materially in 2022 as crude oil prices and refinery margins rose to exceptionally high levels. Suncor produced a free cash flow surplus (FCF; cash flow after capital expenditures (capex) and dividends) before working capital changes in 2022 of $10.38 billion ($8.0 billion when accounting for working capital changes). The Company employed the FCF surplus largely to reduce total indebtedness by 15% to $15.62 billion at YE2022 and repurchase shares. In 2022, the Company's key lease-adjusted debt-to-cash flow ratio improved to 0.86 times (x), and the lease-adjusted EBIT interest coverage ratio increased to 17.3x, the strongest in several years.
Based on DBRS Morningstar's average West Texas Intermediate oil price forecast of USD 65/barrel (bbl) in 2023 and USD 60/bbl in 2024 and 2025, a more normal level of refining margins and Company plans to maintain capital discipline ($5.60 billion capex budgeted for 2023 based on the midpoint of guidance), FCF surpluses are anticipated to be close to $2 billion or less per year through the period. Suncor plans to allocate up to 50% of FCF surpluses to repay debt until net debt reaches $12 billion and then 25% until net debt reaches $9 billion. DBRS Morningstar expects Suncor's key credit metrics to continue to support an A (low) rating.
If the Company can consistently achieve, historically and looking forward, a key lease-adjusted debt-to-cash flow ratio at 1.0x or below, DBRS Morningstar may consider a positive rating action. On the other hand, should oil prices fall to USD 45/bbl or less, and the Company’s key credit metrics weaken materially for an extended period of time, DBRS Morningstar may take a negative rating action.
ENVIRONMENTAL, SOCIAL, 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 and downstream assets. Suncor is in a stronger position today to face the challenges associated with reducing GHG emissions than a few years ago. Suncor has an action plan to reduce its GHG emissions by 10 megatonnes/year through 2030 and it has the financial flexibility and resources to navigate the energy transition path.
There were no social or governance factors that had a significant or relevant effect, i.e no notching impact, on the credit analysis. However, DBRS Morningstar does note the Company’s workplace safety performance issues over recent years at its oil sands operation. DBRS Morningstar also notes that the Company has made it a key priority and taken a number of measures to improve its workplace safety performance.
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/416784 (July 4, 2023).
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: 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 credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
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 credit ratings are under regular surveillance.
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