Bmo news June 9, 2022 | 01:26 ET~
Suncor Energy
SU-TSX Rating Price: Jun-8 Target ↑ Total Rtn Outperform $53.33 $60.00 16%
Highlights from Investor Roadshow: Fully Fueled and Ready to Return
Bottom Line:
BMO Capital Markets hosted Suncor’s President and CEO Mark Little for in-person meetings in Toronto. Key areas of discussion included capital allocation, downstream performance, safety and reliability, and free cash flow initiatives. We believe that Suncor’s shares are currently undervalued relative to peers and that the growing returns to shareholders, improving operating performance and record downstream cash flow could act as catalysts for further appreciation. We maintain our Outperform rating and are increasing our target price to $60 from $54.
Key Points
Capital Allocation. Management plans to fully execute on the company’s full 10% buyback this year and reiterated plans to use 50% of free cash flow for share buybacks and 50% to debt reduction until net debt reaches $12 billion which is expected in H2/22; at that point, Suncor will direct 75% of free cash flow to buybacks and 25% to debt reduction, while at the company’s $9 billion net debt floor all free cash flow will be returned to shareholders.
Downstream Fueled Performance. Suncor operates the most profitable downstream business in North America. Based on current market conditions, we believe that financial results could be well above 2018/2019 levels, which were record years for the company due to soaring product cracks and Suncor's product mix. Management noted that it believes it has the premier retail business in Canada and that it provides a competitive advantage; that said, the company indicated that it is prepared to review different approaches to maximize value.
Safety and Reliability Paramount. Management spent considerable time highlighting third party reviews of its operations and recent changes the company has made at the senior management level. Suncor is leveraging technology to improve its safety and reliability, and expects to demonstrate better performance over the coming quarters. The company is holding an oil sands investor presentation on July 13 to showcase its new executive leaders, with a focus on mining operations and the changes Suncor has made to ensure safe and reliable operations.
Incremental Margin Capture. Management reiterated the continued acceleration and realization of its $2.15 billion incremental free cash flow target by 2025, with a further several-hundred-million dollars of benefits to come in from that in 2023, which will drive Suncor’s break-evens lower providing incremental capacity for dividend increases.