Friday, May 26, 2023

Canadian Oil Sands Earnings - Suncor and Cenovus ($SU $CVE)

[Previously regarding Suncor Energy and Cenovus Energy.]

Suncor Energy: the market capitalization is now $38 billion (fully diluted, at a $28 share price) and the enterprise value is $48 billion. They reported earnings [pdf] for the first quarter of 2023 of $1.5 billion (figures in USD), which means that shares are trading for just over six times net (annualized) earnings. Their adjusted funds from operations for the quarter were $2.2 billion, which gives an annualized AFFO/EV yield of 18%. This was with an average WTI crude oil price of $76/bbl for the quarter, a $24.75/bbl discount for WCS, and a $2.1 premium for Syncrude.

Suncor's earnings held up much better than the shale companies' earnings. Upstream earnings went from $1.6 billion in Q4 to $1.4 billion in Q1. Downstream (refining and marketing) earnings went from $1.1 billion to $725 million. Having a lower production cost and having downstream businesses reduces the leverage to the oil price. 

During the first quarter, Suncor spent $800 million on capital expenditures compared with $638 million on share repurchases and $500 million on dividends. That gives a shareholder yield (annualized) of 12% on the current market capitalization. From the end of Q1 through May 5th, Suncor repurchased more than 8 million shares which is 0.66% of the outstanding.

As we mentioned in the post about Marathon and Occidental, Suncor's oil sand production in the first quarter was down about 2% and total upstream production was down 3% versus the prior year. That was with total capital expenditures up 6%, oil sands capex up 21%, exploration and production capex up 66%, and total upstream capex up 26%.

In the most recent annual information form (PDF, 2022), Suncor gives the estimated net present value of its proved plus probable reserves, after income taxes and at a 10% discount rate, as $39 billion. This is lower than the estimate of $50 billion at the end of 2021, primarily because the commodity price has fallen. That ignores the value of the refining and market business, which earned an average of $3.1 billion/year over the past two years. Suncor also estimates that they have 5.5 billion barrels of oil equivalent of proved and probable reserves, which is an enterprise value of under $9 per barrel. (Note, that is a 20 year reserve life at the current production level of 270 million barrels per year.)

One last development that came out today is that ConocoPhillips has elected to exercise their right of first refusal with respect to the Surmont asset that Suncor is buying from Total. Suncor said that their agreement to close the transaction was conditional upon ConocoPhillips waiving its right of first refusal, and so they will be "assessing the transaction in light of this change."

Cenovus Energy: the market capitalization is now $32 billion (at a $16.70 share price) and the enterprise value is $37 billion. They reported earnings [pdf] for the first quarter of 2023 of $464 million (figures in USD), which means that shares are trading for just over 17 times net (annualized) earnings.

The company had a disappointingly weak first quarter. The upstream was hurt by the lower oil price and lower production volumes. Downstream margin was 30% lower than in the fourth quarter due to various refining problems. Their adjusted funds from operations for the quarter were $1 billion, which gives an annualized AFFO/EV yield of 11%.

During the first quarter, Cenovus spent $800 million on capital expenditures, $84 million on debt repayment, $29 million on share repurchases, and $146 million on common share dividends - a pitiful shareholder yield.

Capital expenditures in the upstream segment were $639 million for Q1 2023 versus $377 million in Q1 2022, an increase of 70%. (Downstream capex was flat.) The oil sands production was down about 1% y/y, liquids production was down 3%, and total upstream production was down 2.5%. The oil sands capex specifically was up 69% year over year. 

Cenovus did say that "oil sands production expected to be stronger in the second half of the year due to pad timing". However, if you look at slide 11 of the investor presentation [pdf], they give an estimated incremental production of 125k bbl/d from various growth and optimization expenditures in the upstream. That would be 16% growth, but it is expected to happen over a multi-year period.

We are going to be paying close attention in the second quarter to whether the big increases in capex at oil companies are having any effect on production volumes. So far, Suncor seems to be the best of the producers in terms of the capex required to maintain production. Overall, what we saw in results this quarter seems bearish for most producers and bullish for the oil price and for royalty companies.

1 comment:

CP said...

Going to tuck Canadian Natural Resources into the comments here, for now.

The current market capitalization (at a $56 share price) is $61 billion, and the enterprise value is $70 billion. They reported earnings of $1.4 billion for Q1, which means that shares are trading for 11 times annualized earnings. Adjusted funds from operations for the quarter were $2.5 billion, which is an annualized AFFO/EV yield of 14%. Adjusted funds flow less base capex was $1.7 billion for the quarter, which is a "FCF"-like yield of almost 10% on the EV.

Liquids production was up 2% Q1 2023 vs Q1 2022, and BOEs were up 3% thanks to strong natural gas growth. Capital expenditures in E&P were down 10% and in oil sands mining and upgrading were up about 8%. The total net capital expenditures were down 4% year over year. This is much better than we have seen at any other the producers we have looked at.

During the first quarter, they spent $680 million on dividends and $500 million on share repurchases, for total shareholder returns of $1.18 billion, which is an annualized shareholder yield of almost 8%.

The proved plus probable net reserves at the end of 2022 were 14.4 billion BOE, which includes 10.7 billion barrels of oil and the rest natural gas and NGLs. That is an enterprise value of $6.5 per barrel of oil alone.

The net present value at a 10% discount rate, after tax, of their proved and probable reserves is $103 billion. Another way to look at it is that their current enterprise value of $70 billion is about equal to the after-tax NPV of the reserves at a 15% discount rate. The pricing assumption is based on an oil price of WTI in the high $70s for the next five years.

Links -
2022 annual report: https://www.cnrl.com/content/uploads/2023/03/2022-Annual-Report.pdf
2022 AIF: https://www.cnrl.com/content/uploads/2023/03/AIF-March-22-2023.pdf
Q1 2023 report: https://www.cnrl.com/content/uploads/2023/05/Q123-Interim-Report.pdf
May 2023 deck: https://www.cnrl.com/content/uploads/2023/05/V_Corp-Pres_May.pdf