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Will Suncor Trend ahead of Its Peers in Its Q2 Earnings?

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Suncor Energy (SU) plans to post its second-quarter earnings results on July 24. Before we dive into its second-quarter estimates, though, let’s recap its first-quarter performance compared to estimates.

In the first quarter, Suncor’s revenue missed Wall Street estimates by 1%. However, the company’s first-quarter adjusted EPS stood at 0.77 Canadian dollars, surpassing the estimate of 0.53 Canadian dollars by ~45%. Also, Suncor’s first-quarter adjusted EPS stood 28% higher than its adjusted EPS in the first quarter of 2018.

Suncor’s adjusted earnings rose from 985 million Canadian dollars in the first quarter of 2018 to 1.209 billion Canadian dollars in the first quarter of 2019 due to rises in the earnings of its Oil Sands, E&P (Exploration and Production), and R&M (Refining and Marketing) segments.

Wall Street analysts expect Suncor to post EPS of 0.88 Canadian dollars in the second quarter—21% higher than its adjusted EPS in the second quarter of 2018 and 15% higher than its adjusted EPS in the first quarter of 2019. Suncor’s revenue is estimated to be ~10.3 billion Canadian dollars in the second quarter, ~1% lower than its revenue in the second quarter of 2018.

Suncor’s peers Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP) are expected to post 7%, 12%, and 1% YoY (year-over-year) rises in their EPS in the second quarter. However, Total (TOT) and ExxonMobil (XOM) are expected to post 2% and 4% YoY falls in EPS in the quarter.

In the second quarter, Suncor’s upstream earnings may be positively impacted by higher volumes, though this could be partially offset by lower oil prices. Suncor’s downstream earnings could rise due to better refining cracks.

Will Suncor’s upstream and downstream earnings rise in the second quarter?

Before we proceed with Suncor Energy’s second-quarter outlook by segment, let’s review its previous quarter.

Suncor’s Oil Sands earnings rose 95% YoY to 189 million Canadian dollars, contributing 16% to Suncor’s total earnings in the first quarter due to better realizations and higher volumes. Suncor’s hydrocarbon output rose due to better upgrader usage in its Oil Sands and Syncrude operations and ramped-up volumes at Fort Hills partly offset by compulsory production cuts implemented by the Government of Alberta.

Suncor’s E&P earnings rose 93% YoY to 492 million Canadian dollars due to higher realizations partly offset by lower volumes. The segment contributed 41% to Suncor’s total earnings in the first quarter compared to 26% in the first quarter of 2018. In the first quarter, its R&M earnings rose 28% YoY to 1.009 billion Canadian dollars due to better distillate cracks.

Suncor’s peers saw falls in their upstream earnings in the first quarter. ExxonMobil’s upstream earnings fell from $3.5 billion in the first quarter of 2018 to $2.9 billion in the first quarter of 2019. Total’s adjusted E&P operating earnings fell 5% YoY to $1.7 billion in the quarter. Chevron’s adjusted upstream earnings fell from $3.4 billion to $3.3 billion. For more on integrated energy companies’ first-quarter performances, read Beats and Misses in Q1 2019: XOM, CVX, RDS.A, and BP.

Suncor could see earnings rises in its Oil Sands and E&P segments led by higher volumes. According to Suncor, in 2019, it expects to achieve 780–820 Mboepd (thousand barrels of oil equivalent per day) of production. In the second quarter of 2018, the company produced 662 Mboepd of hydrocarbons. Thus, it’s expected to see a YoY rise in volumes in the second quarter.

Suncor’s total production rose 11% YoY to 0.76 MMboepd (million barrels of oil equivalent per day) in the first quarter of 2019. In the quarter, while ExxonMobil’s, Chevron’s, and BP’s hydrocarbon productions rose YoY, Shell’s production fell. Chevron saw the highest rise in output in the quarter. ExxonMobil’s, Chevron’s, and BP’s volumes stood at 3.98 MMboepd, 3.04 MMboepd, and 2.66 MMboepd, respectively.

However, in the second quarter, Suncor could also see lower realizations led by lower crude oil prices. WTI, which averaged $68 per barrel in the second quarter of 2018, fell to $60 per barrel in the second quarter of 2019. The company could see higher upstream earnings led by better volumes partly offset by lower realizations in the quarter.

Suncor is likely to see better earnings YoY led by wider refining cracks in the second quarter. For instance, the US Gulf Coast WTI 3-2-1 crack, the benchmark crack, widened 9% YoY to $20 per barrel in the second quarter.

Now let’s take a look at how analysts are rating Suncor ahead of its earnings.

Where analysts’ ratings stand ahead of the second quarter

Suncor is covered by a total of 12 Wall Street analysts. Of this total, 11 (or 92%) have given it “buy” or “strong buy” ratings, and one has given it a “hold” rating.

Most analysts call Suncor a “buy” because of its expanding upstream portfolio, growing earnings, and sound financials.

Suncor has an expanding upstream portfolio. The company is expected to see a ~10% rise in its hydrocarbon volumes this year. In the first quarter, its hydrocarbon output rose 11% YoY despite production curtailments imposed by the Government of Alberta. This higher production also came with lower costs. Suncor’s cash operating costs at Fort Hill decreased from $54 per barrel in the second quarter of 2018 to $30 per barrel in the second quarter of 2019. Costs at Syncrude fell from $51 per barrel to $37 per barrel.

Analysts expect Suncor’s earnings to rise 25%, the highest among its peers, this year. Royal Dutch Shell and Total are expected to post 9% and 11% earnings growth, respectively. However, BP, Chevron, and ExxonMobil are expected to see earnings falls of 11%, 6%, and 20%, respectively.

In the first quarter, Suncor’s net debt-to-adjusted EBITDA ratio was 1.4x, just above the peer average of 1.3x. Its debt-to-total capital ratio of 30% was also higher than the peer average of 29%. Further, 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’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.

Given the expected rise in Suncor’s earnings and cash flows, both its debt ratios could decline and move below the peer averages—a highly possible and desirable outcome. Suncor could also easily switch to a cash flow surplus in the upcoming quarters given optimal capex and higher earnings.

BP, PetroChina (PTR), and Petrobras (PBR) have been rated as “buys” by 45%, 67%, and 67% of analysts, respectively. Chevron, ExxonMobil, and Royal Dutch Shell have been tagged as “buys” by 74%, 27%, and 100% of analysts, respectively.

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