Asset Optimization At Firebag And Fort Hills Will Improve Operations, But Inflationary Pressures May Impact Costs

Key Takeaways

• Strategic production growth and operational improvements are set to boost revenue and enhance cost efficiency significantly.
  
• Accelerated buybacks and disciplined spending could drive substantial earnings per share growth and increased shareholder returns.
  
• Suncor Energy faces risks from volatile markets, regulatory changes, operational challenges, and potential cost escalations, impacting earnings, margins, and revenue stability.

Catalysts

Operates as an integrated energy company in Canada, the United States, and internationally.

• Suncor's strategy includes production growth objectives, aiming to increase upstream production by 108,000 barrels per day from 2024 to 2026, already exceeding the interim target for 2024. This growth is expected to positively impact revenue.
  
• The company has made significant progress in reducing its all-in breakeven costs, already achieving $7 per barrel out of a $10 reduction target, translating into improved net margins and earnings.
  
• Suncor has accelerated its shift to 100% buybacks after achieving its net debt target earlier than expected, potentially leading to substantial EPS growth from stock repurchases.
  
• The ongoing focus on operational improvements and capacity optimization, particularly at high-performing assets like Firebag and Fort Hills, aims to enhance production performance and cost efficiency, supporting both revenue growth and margin expansion.
  
• Initiatives such as a disciplined capital spending approach and strategic asset utilization are expected to yield a $3.3 billion increase in annual free funds flow by 2026, contributing to higher earnings and shareholder returns.

Suncor Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Suncor Energy's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.9% today to 9.7% in 3 years time.
• Analysts expect earnings to reach CA$5.2 billion (and earnings per share of CA$4.82) by about March 2028, down from CA$6.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$6.2 billion in earnings, and the most bearish expecting CA$4.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.7x on those 2028 earnings, up from 11.1x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 3.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Suncor Energy Future Earnings Per Share Growth

Risks

• Suncor Energy may face challenges in realizing expected free funds flow due to potential decreases in refined product demand or variations in price cracks, which could result in lower-than-anticipated earnings and cash flow.
  
• Upcoming planned maintenance activities, especially the significant U1 coke drum replacement, could lead to increased downtime and operational risks, negatively impacting production levels and potentially increasing operational costs, thereby affecting net margins.
  
• The future business environment, particularly crude oil and refining market volatilities, could adversely impact expected outcomes if crude prices depreciate or if refining crack spreads weaken further, creating pressure on revenue and profitability.
  
• Unpredictable regulatory changes, particularly related to trade and tariffs with the United States, may disrupt traditional market access and pricing dynamics, which could negatively influence revenue streams and earnings stability.
  
• Although there has been significant improvement in cost management, any unforeseen escalation in operating, selling, and general expenses due to inflationary pressures or supply chain constraints could impede margin improvements and the company's financial performance goals.

Valuation

• The analysts have a consensus price target of CA$63.525 for Suncor Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$71.0, and the most bearish reporting a price target of just CA$58.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$53.0 billion, earnings will come to CA$5.2 billion, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 7.2%.
• Given the current share price of CA$53.76, the analyst price target of CA$63.52 is 15.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.