From RBC Target $32.00 1 year and $2.00 dividend by 2025May 26, 2021 Suncor Energy Inc.
Our view: Our constructive stance toward Suncor was reinforced by its investor open house, which conveyed a balanced approach toward free cash flow generation and financial stability, reduced GHG emissions, and shareholderreturnsthrough 2025. We maintain our Outperform rating and $32 price target.
Key points: Suncor Energy conveyed a comprehensive game plan at its investor open house aimed at free cash flow generation, reducing GHG emissions, and increasing shareholder returns over the 2021–25 timeframe. What stood out most to us was Suncor’s targeted dividend CAGR of circa 25% over this period. At this pace, Suncor’s dividend would stand at around $2.00 per share in 2025 vs. the current $0.84 per share. To be sure, the company emphasized that dividends and buybacks are subject to board approval.
Value Over Volume. One thing for certain is that free cash flow generation and value over volume are the mantras at Suncor. Indeed, the days of mega projects to fuel growth are over, with Suncor’s production rates targeted to remain steady at about 800,000 bbl/d from 2021 through 2025, supported by debottlenecking initiatives. This includes about 515,000 bbl/ d of upgraded synthetic oil and 215,000 bbl/d of bitumen production.
Framing the Plan. Suncor’s 2022–25 plan is built around a US$55 WTI price (US$0.76 FX rate) and realization of its annual incremental $2.0+ billion of free funds flow target by 2025. The company has placed a cap on annual investment of $5 billion through 2025 and also expectsto reduce its absolute net debtto $12–15 billion by 2025. In addition to dividend growth, Suncor also framed the potential for disciplined share buybacks.
Targeting Net-Zero. ESG-wise, Suncor is now targeting net-zero GHG emissions (company-wide) by 2050. In the interim, the company expects to reduce its emissions from 29 megatonnes in 2019 to 19 megatonnes by 2030. Suncor has a number of initiatives on this front, including reducing emissions in its Base oil sands segment and growing its renewable fuels, electricity, and hydrogen businesses over time. Suncor was adamant that it would not dispose of assets in order to meet emissions reductions targets and would leverage its existing expertise to generate attractive returns (targeting mid-teens) on incremental projects.
Relative Valuation—Middle of the Road. Suncor is trading at a debtadjusted cash flow multiple of 4.1x in 2021, vs. our global integrated peer group avg. of 5.2x, and at a free cash flow yield of 19% (vs. our peer group at 14%). We believe SU should trade at an average multiple vis--vis our global peer group given the company’s physical integration and balance sheet liquidity, partly offset by mixed operating performance in recent years