Suncor Energy Reports First Quarter 2022 Results

[Previously regarding Suncor: Goldman Sachs on Suncor and Cenovus, Canadian Oil Sands Earnings (Suncor and Cenovus) - Q4 2021, Suncor Energy Inc..]

Suncor (SU) reported results last week. Highlights from the results:

• "In the first quarter of 2022, Suncor generated the highest quarterly adjusted funds from operations in the company's history of $4.1 billion, or $2.86 per share, including record adjusted funds from operations from our Oil Sands assets, as commodity prices increased," said Mark Little, president and chief executive officer. "Our increased cash flows enabled us to reduce net debt by $728 million and return over $1.4 billion of value to shareholders through $827 million in share repurchases and payment of $601 million in dividends."
• In the first quarter of 2022, Oil Sands delivered its highest quarterly adjusted funds from operations on record of $3.414 billion, compared to $1.527 billion in the prior year quarter, supported by strong production from the company's In Situ assets, including Firebag, which produced its 750 millionth barrel of oil during the quarter, and the ramp-up of production at Fort Hills, allowing the company to capture strong upstream pricing. 
• Refining and Marketing generated $1.597 billion in adjusted funds from operations in the first quarter of 2022, compared to $1.172 billion in the prior year quarter.
• In the first quarter of 2022, the company returned over $1.4 billion of value to its shareholders through $827 million in share repurchases and payment of $601 million of dividends. As at May 6, 2022, since the start of the year, the company has repurchased $1.3 billion of Suncor's common shares, representing approximately 33 million common shares at an average share price of $39.70 per share, or the equivalent of 2.3% of its common shares as at December 31, 2021.
• During the first quarter of 2022, in alignment with Suncor's strategy to maximize value through its core business, the company announced that it is taking steps to optimize its asset portfolio through the planned divestment of its Exploration & Production (E&P) assets in Norway. Subsequent to the quarter, based on interest received in the company's E&P assets in the U.K., the company is exploring the sale of its entire U.K. portfolio, and has also announced plans to divest its wind and solar assets to focus on areas of energy expansion that are more complementary to its base business, with an emphasis on hydrogen and renewable fuels.
• The company also reduced net debt by $728 million in the first quarter of 2022, reaching net debt levels of $15.4 billion, nearly achieving its 2025 targeted net debt range of $12-$15 billion. In the current business environment, the company expects to achieve the lower end of its 2025 targeted net debt range during the second half of 2022.
• A combination of operational improvements and strong market conditions over the past year have driven stronger free funds flow than the scenario presented at Suncor's 2021 Investor Day. This has enabled the company to significantly increase shareholder returns and the pace of debt repayment, and as a result, the company plans to accelerate its capital allocation plan. Looking ahead, management plans to continue to allocate excess funds equally towards debt repayment and share buybacks until net debt levels have reduced to $12 billion. Then, the company expects to allocate excess funds 75% towards share buybacks and 25% towards debt repayment. Once the company's net debt balance is at its $9 billion floor, the company expects to allocate excess funds fully towards shareholder returns.
  

Some highlights from the Q1 conference call: 

• In the past, the integrated model gave Suncor and its shareholders downside protection. Today, it gives us upside opportunity. Crude oil and refined product markets gained strength in Q1, which accelerated in late March and early April, on the back of a global energy shortage. Cracking margins are responding to low inventory levels, refinery rationalizations and significant crude feedstock shortages throughout the system. Record diesel cracks are providing an additional pricing uplift to our sweet synthetic crude oil due to its significantly higher distillate cut relative to other supply options.
• We are seeing significant value capture on both ends of our integrated model under current market conditions. Putting this together, approximately 60% of our enterprisewide production is weighted to SCO and distillate, both of which are trading at significant premiums and with a strong macro demand outlook for both. A combination of operational improvements and strong market conditions over the past year have driven free funds flow that is much stronger than the scenario presented at our 2021 investor day. This has enabled us to significantly increase shareholder returns and the pace of debt repayment. Specifically, in the quarter, we bought nearly one and a half percent of the outstanding shares for $830 million and reduced net debt by $730 million.
• At current strip, we fully expect to execute the full 10% share buyback program and achieve our $12 billion net debt level by later this year.
  

Another interesting development is that activist investor Elliott Management L.P. has taken a stake in Suncor, and has urged the company to enhance its board and explore opportunities to unlock the value of its assets:

• Enhanced Capital Return: Increase capital returns from 50% to 80%+ of discretionary cash flow after capex and dividends to provide Suncor’s shareholders an industry leading annual cash return yield.
• Strategic Review: Explore opportunities to unlock the value of high-multiple assets outside of the core Oil Sands business, including a strategic review of retail.
  

The market cap of Suncor is $49 billion and EV is $62 billion. They have proved and probable reserves of 5.8 billion barrels, so that's an enterprise value of $11 per barrel. The PV-10 of their proved and probable reserves was $50 billion at year-end, which was calculated based on the $66.56 average WTI price last year. So, the present value of the reserves at a much lower oil price than current WTI covers most of the EV and leaves $12 billion EV for the refining and marketing operations which earned $2.2 billion after tax in 2021. Their adjusted funds from operations in Q1 were $3.2 billion, which amounts to a ~20% AFFO/EV yield. The capital allocation is great - they returned $1.1 billion in the quarter via buybacks and dividends.