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WIKI ANALYSIS
Suncor Energy, Inc. is an integrated energy company that has oil production, natural gas, refining and renewable energy operations.[1] The company's primary operations are primarily developing oil sands in Canada's Athabasca region, which is one of the world's largest petroleum resource basins.[2] Of Suncor's 2008 net earnings, 95% came from operation related to the production of oil from oil sands.[3] The company's natural gas and refining segments were responsible for 3% and 1.5% of 2008 net earnings, respectively.[4]
Extracting oil bitumen, also known as non-conventional oil, is more expensive that typical oil production and requires technologically advance equipment.[5] As a result, the oil produced from Canadian oil sands is more expensive than West Texas Intermediate, and, in 2008, the price differential between the two averaged to $20.10.[6] When oil prices were high during the first half of 2008, oil extracted from oil sands was economically viable.[7] However, Suncor cut capital expenditures and overall production beginning in the third quarter of 2008 in response to declining crude prices and lower oil consumption.[8] In particular, Suncor's Voyageur and Firebag expansion projects, which are the company's two biggest expansion projects, have been halted.[9] In March 2009, Suncor announced plans to purchase Petro-Canada (PCZ) in an effort to expand its Canadian operations and reduce overall operating costs.[10]. The company announced the completion of its merger with oil and gas company Petro-Canada on August 1. The combined entity so formed is expected to contribute annual reductions of $1 billion in capital spending, in addition to expected annual savings of $300 million in operational expenditures. The company will operate corporately and trade under the Suncor Energy name and at the same time, will maintain the Petro-Canada brand for its refined products and national retail network, and as a partner of the 2010 Olympic and Paralympic Winter Games.
Business Segments
Oil Sands
The Oil Sands business segment is the core of Suncor's operations, generating 45% of revenue and the vast majority of net earnings. The company utilizes conventional surface mining techniques as well as steam injection technologies to recover bitumen from the Athabasca oil sands near Fort McMurray in Alberta, Canada. Bitumen is a highly viscous, sticky, black liquid that is the primary feedstock used for petroleum production in this region (it is also often used to pave roads among other things). The bitumen is then upgraded to refinery-ready oil products and diesel fuel. Suncor's oil sands segment produced 260,000 barrels of oil per day in 2006.
The process for extracting oil sands and ultimately obtaining crude oil requires a great deal of refining. These processes are expensive to operate and dramatically reduce the margin for gains in oil production relative to mining crude oil, such as that typically found in the Middle East. However, due to rising oil prices in recent years, this process has been able to remain profitable. Suncor was the first company to mine oil sands and as such they have the most experience in the business.
Natural Gas and Renewable Energy
- Natural gas: Operations are based in Calgary with locations in western Alberta and in British Columbia. Through this business segment, Suncor produces all the energy needed to run their main oil sands extraction and refining operations. As their other segments grow, the natural gas business will need to scale in order to meet the rising internal demand.
- Renewable Energy: Suncor manages investments in wind energy and other developing strategies in renewable energy methods to reduce greenhouse gas emissions. Suncor has also produced and marketed lower-emission ethanol products for over ten years. In 2006 Suncor, Canada's largest producer and marketer of ethanol-blended gasoline, completed construction of the country's largest ethanol plant. By year end 2007 Suncor plans to have four wind energy projects in operation.
Energy Marketing and Refining
This business is separated into two parts: one for Canada and another for the U.S. These operations market Suncor's oil products to both commercial and industrial customers in both countries.
- Canada: The downstream operations in Canada involve marketing Suncor's natural gas and a number of refinery-ready crude oil products from Suncor's Sarnia, Ontario refinery to Canadian and northwestern U.S. customers. Suncor owns more than 500 Sunoco-branded retail gas stations in Ontario.
- United States: Based near Denver, Colorado Suncor's Commerce City refinery operations connect their products to the Rocky Mountain region's oil market. Suncor sells their products through Phillips-66 branded retail gas stations in this region. Suncor is the largest refining operator in the Rockies and has announced intentions to expand their U.S. presence through either acquisitions or joint-ventures.
Trends and Forces
After acquiring Petro-Canada, Suncor plans to sell gas assets and focus on oil sands production
With the completion of the Petro-Canada acquisition, Suncor has already announced 1,000 layoffs and has the potential of shedding both assets and jobs in the combined companies.[11] Overall, the company's 2010 strategy focuses more on oil sands production. To accomplish that goal, Suncor has the potential of selling some of its underperforming natural-gas production assets.[12] As a result of weak natural gas prices, Suncor plans to devote less capital investment to its natural gas operations.[13] Suncor's oil sands production has the potential of increasing to 65% of its 2010 total production through the sale of its natural gas assets.[14] As of September 2009, oil sands production accounted for half of Suncor's total production.[15]
U.S. report argues for oil sand output reaching 6.3 million barrels a day by 2035
According to the energy consultancy agency Cambridge Energy Research Associates (CERA), daily production from Canada's oil sands has the potential of reaching 6.3 million barrels of oil by 2035.[16] Additionally, imports from Canadian oil sands have the potential of accounting for 37% of U.S. oil imports by 2035.[17] In the report, analysts at CERA argued that technology made extracting crude oil from oil sands more economically viable in 2008 and has the potential of playing a significant role in the future of Canada's oil sands production. Analysts argued that, for investments in oil sand production equipment to increase, the price of crude oil must increase from its first quarter 2009 levels and the the global economy must recover from the recession that began in 2007.[18] While productions levels are capable of reaching 6.3 barrels of oil per day, analysts at CERA believe that production is likely to increase to 2.3 million barrels per day if oil prices do not increase.[19]
Low Crude Prices and Weak Demand make Oil Sands less Profitable
Energy companies that had been eager to invest in oil sands when oil rose higher than $70 per barrel have since canceled or delayed proposed investments in 2009.[20] Since crude oil prices dropped in mid-2008, Canadian oil sands operations have become less attractive to refiners and integrated oil companies operating in the U.S. Due to declining consumption of refined petroleum products, oil sands companies, like Suncor, have had to stop expansion due to rising costs, falling oil prices, and less through-put.[21] In the fourth quarter of 2008 cash operations fell to $551 million from $1.2 billion a year earlier. Daily production in the fourth quarter fell 4% from its 2007 levels to 279,400.[22] With less cash coming in from oil sands production, Suncor has cut its 2009 budget from $6 billion to $3 billion, with $1 billion of that budget going to expansion projects.[23] By 2009, spending on Suncor’s Voyageur and Firebag expansions, which aim to upgrade their equipment to more efficient and environmentally friendly equipment, had stopped, leaving Suncor’s two biggest construction projects unfinished.[24] But cutting both production and expansion projects, Suncor aims to reduce production costs and increase profits.[25]
For Suncor, profits fell in the second quarter of 2009 as a result of lower oil prices and higher production costs. Suncor experienced a net loss of $45.9 million in the second quarter, compared to a profit of approximately $746 million a year earlier.[26] Both production and sales increased for the second quarter of 2009, but the price of oil remained low.[27] In addition, Suncor has continued to use its capital expenditures budget to fund two projects during a time when many oil majors have cut 2009 projects. The cost of Suncor's Firebag sulfur plant and the Steepbank extraction plant projects have increased from their 2009 estimates due to labor shortages and productivity problems.[28]
In the third quarter of 2009, Suncor resumed production and expansion projects at the St. Clair Ethanol Plant. The $120 million construction project has the potential of doubling the plant's production capacity to 400 million liters of ethanol per year.[29] Earlier in 2009 the plant's expansion had been delayed until January 2010.[30] However, construction is beginning ahead of schedule as a result of improved crude prices in the second and third quarters.[31]
To Reduce Operating Costs, Suncor plans to acquire Cash-Strapped Petro-Canada
On March 23, 2009 Suncor announced plans to acquire Petro-Canada for close to $15 billion in stock. The all-stock deal would allow two of Canada’s largest companies, in terms of both market value and production, to merge without using extensive amounts of either company’s cash.[32] Since the plunge in oil prices beginning in July 2008, Canadian oil producers have cut capital spending in an effort to conserve cash and reduces cots (many analyst predict Canada oil-sands will be economically viable at $75 US to $100 per barrel).[33] Prior to the merger, both Petro-Canada and Suncor were expected to cut capital spending by about a third in 2009 and postpone building on many oilsands projects.[34] This merger would allow the two companies to save close to $1.3 billion in annual costs through reduced capital spending and job cuts.[35] With respect to operations, the combined company is expected to operate more efficiently and reduce operating costs up to $300 million per year.[36] As a result of the merger, Suncor and Petro-Canada have the potential to operate more efficiently and prevent Canada’s oil sand from foreign takeovers.[37] Suncor completed its ownership of Petro-Canada (PCZ) on August 1, 2009.
However, the merger has the potential to create a company extremely dependent on oil production for revenue.[38] Although the merger is capable of producing the largest owner of oil sands, the company's revenue would be concentrated 85% on crude oil production.[39] As a result, the company's future revenue and profit depends heavily on the price of crude oil and the economic viability of oil from tar sands.[40]
Competition
Suncor Energy was the first company to mine oil sands in 1967. Since then their competition has been building and recently this competition has been building at a faster rate. Suncor's major competitors in the region include: Petro-Canada (PCZ), Imperial Oil (IMO), Nexen (NXY)and Canadian Natural Resources (CNQ). Suncor trails both Petro-Canada and Imperial Oil in sales, but is only behind Imperial Oil in Market Capital. As the first company to mine oil sands Suncor is well-established in the industry. Suncor's new Ethanol plant in Sarnia, Ontario is the largest Ethanol plant in the country. Suncor also owns the largest refinery in the Rocky Mountain region of the United States, in Commerce City, Colorado.
References
- ↑ suncor.com: Annual Report 2008
- ↑ suncor.com: Annual Report 2008
- ↑ suncor.com: Annual Report 2008
- ↑ suncor.com: Annual Report 2008
- ↑ suncor.com: Annual Report 2008
- ↑ suncor.com: Annual Report 2008
- ↑ suncor.com: Annual Report 2008
- ↑ suncor.com: Annual Report 2008
- ↑ suncor.com: Annual Report 2008
- ↑ suncor.com: Annual Report 2008
- ↑ WSJ: Suncor To Trim Gas Output To Raise 2010 Oil Sands Production, September 2009
- ↑ WSJ: Suncor To Trim Gas Output To Raise 2010 Oil Sands Production, September 2009
- ↑ WSJ: Suncor To Trim Gas Output To Raise 2010 Oil Sands Production, September 2009
- ↑ WSJ: Suncor To Trim Gas Output To Raise 2010 Oil Sands Production, September 2009
- ↑ WSJ: Suncor To Trim Gas Output To Raise 2010 Oil Sands Production, September 2009
- ↑ Financial Post: Oil sands output could rise to 6.3-million barrels a day: U.S. report, May 2009
- ↑ Financial Post: Oil sands output could rise to 6.3-million barrels a day: U.S. report, May 2009
- ↑ Financial Post: Oil sands output could rise to 6.3-million barrels a day: U.S. report, May 2009
- ↑ Financial Post: Oil sands output could rise to 6.3-million barrels a day: U.S. report, May 2009
- ↑ Yahoo! Finance: Canada’s oil sands giant Suncor slashes spending, January 2009
- ↑ The Street: Suncor Energy Posts Loss
- ↑ The Street: Suncor Energy Posts Loss
- ↑ The Street: Suncor Energy Posts Loss
- ↑ Fool.com: Suncor Slows Some More, January 2009
- ↑ Fool.com: Suncor Slows Some More, January 2009
- ↑ WSJ: Suncor Swings To 2Q Loss On Lower Commodity Prices, Higher Costs, August 2009
- ↑ WSJ: Suncor Swings To 2Q Loss On Lower Commodity Prices, Higher Costs, August 2009
- ↑ WSJ: Suncor Swings To 2Q Loss On Lower Commodity Prices, Higher Costs, August 2009
- ↑ WSJ: Suncor Energy Resumes Ethanol Plant Expansion Plans, October 2009
- ↑ WSJ: Suncor Energy Resumes Ethanol Plant Expansion Plans, October 2009
- ↑ WSJ: Suncor Energy Resumes Ethanol Plant Expansion Plans, October 2009
- ↑ WSJ: Suncor to Buy Oil Rival, March 2009
- ↑ cbc.ca: Suncor, Petro-Canada announce merger, March 2009
- ↑ WSJ: Suncor to Buy Oil Rival, March 2009
- ↑ cbc.ca: Suncor, Petro-Canada announce merger, March 2009
- ↑ Seeking Alpha: Petro-Canada / Suncor Offers Attractive Long Term Value, April 2009
- ↑ cbc.ca: Suncor, Petro-Canada announce merger, March 2009
- ↑ Seeking Alpha: Petro-Canada / Suncor Offers Attractive Long Term Value, April 2009
- ↑ Seeking Alpha: Petro-Canada / Suncor Offers Attractive Long Term Value, April 2009
- ↑ Seeking Alpha: Petro-Canada / Suncor Offers Attractive Long Term Value, April 2009
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