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Suncor Has Higher Chances of Strengthening Financials

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Suncor’s debt position

Suncor Energy (SU) has the third-lowest percentage of debt in its capital structure after ExxonMobil (XOM) and Chevron (CVX). In the first quarter, Suncor’s total debt-to-capital ratio stood at 30%, whereas ExxonMobil’s and Chevron’s ratios stood at 17% and 18%, respectively.

Suncor’s net debt-to-adjusted EBITDA ratio stood at 1.4x in the first quarter. Royal Dutch Shell’s (RDS.A) and BP’s (BP) net debt-to-adjusted EBITDA ratios also stood above the average at 1.2x and 1.5x, respectively. However, ExxonMobil’s and Chevron’s ratios were lower at 1.0x and 0.7x, respectively, in the quarter.

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In the first quarter, Suncor’s net debt-to-adjusted EBITDA ratio stood at 1.4x, above the peer average. The company’s debt-to-total capital ratio of 30% also stood above the peer average of 29%. Thus, the company’s ratios held marginally above the peer averages. With an expected rise in the company’s earnings and cash flows, both its debt ratios could decline and move below their peer averages—a highly possible and desirable outcome.

Cash flows

In the first quarter, Suncor’s cash flow from operations of 1.5 billion Canadian dollars fell 0.1 billion Canadian dollars short of covering its combined capex and dividend outflows. Suncor could easily switch to a surplus in the upcoming quarters via optimal capex and higher earnings and cash flows.

Suncor’s cash flow position was better than most of its peers’. Shell saw a $0.4 billion shortfall, while BP saw a $1.6 billion shortfall in the quarter.

Earnings growth in 2020

Suncor is expected to post a 6% rise in its EPS in 2020 following the highest rise of 26% in 2019. The company has an expanding upstream portfolio. In the first quarter, despite the production cuts imposed by the Government of Alberta, Suncor’s hydrocarbon output rose 11% year-over-year to 0.76 million barrels of oil equivalent per day. Suncor’s future earnings are expected to be supported by lower costs and higher upstream volumes.

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