(Idea) Suncor Q4 Analysis
Note: Dollar references are to Canadian dollars unless otherwise specified.
There were two main takeaways from Suncor Energy’s (SU) fourth-quarter results: management continues to execute, and the shares are too cheap.
Fourth-quarter financial results blew past consensus expectations. The company’s $2.74 per share of funds flow from operations exceeded expectations of $2.96 per share by 8%. Both the upstream and downstream segments drove the quarterly beat. Upstream posted higher oil sands production and strong oil price realizations. Downstream saw higher-than-expected utilization and improved refining margins during the quarter. Overall, the results showed the company firing on all cylinders.
Management is Outperforming Our Expectations
In his first quarterly earnings conference call as CEO on May 9, 2023, Rich Kruger outlined his goals, namely, to improve Suncor’s safety culture, make its operations more efficient, slim down its workforce, and reduce operating costs.
The company’s fourth-quarter results showed he is succeeding in every category—after a mere ten months on the job. Frankly, the improvement is stunning. The following are some highlights.
Suncor went from being the most dangerous place to work in the Canadian oil patch to one of the safest. Last year was the safest in the company’s history. It was the first year since 2015 with no life-threatening injuries.
Operations have improved dramatically, increasing productivity and efficiency. Upstream, Suncor produced 746,000 bpd, its second-highest annual total in the company’s history. November and December, which included a 100% contribution from Fort Hills—were the highest-producing months ever. In December, production stood at 904,000 bpd. Suncor’s bitumen upgraders, which drive the profitability of its bitumen operation, had their first year in which utilization averaged more than 90%. Meanwhile, downstream, crude unit utilization was a middling 90% for full-year 2023, but what was notable was the improvement throughout the year. Utilization averaged 82% in the first half, rising to 99% in the second half.
During 2023, Suncor underwent a 20% headcount reduction. The $275 million of associated severance has brought forth $450 million of annual savings. The company also restructured its senior management and operational teams.
The headcount reduction was one of several measures that sustainably reduced costs. The company also invested significant sums of capital in its mining operations to lower unit operating costs.
In addition to these improvements, Suncor disposed of $1.9 billion of non-core assets, acquired the remaining 30% ownership interest in Fort Hills oil sand operation for $1.5 billion, and repurchased 9% of common shares outstanding.
This is an impressive list of accomplishments to have made over three quarters.
Net debt ended the year flat, as the company issued $1.5 billion of debt in the fourth quarter to fund its Fort Hills acquisition.
Kruger’s efforts have borne fruit for shareholders. In 2023, Suncor generated $13.3 billion of adjusted funds from operations and $7.5 billion of funds from operations—on both counts, the second-highest in company history—despite WTI averaging US$77.60 per barrel during the year.
We expect management’s superb execution to continue.