Suncor Energy, Inc. (NYSE: SU) is an integrated energy company that has oil production, natural gas, refining and renewable energy operations. 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.
Suncor's operations are divided into Oil Sands, Natural Gas, International & Offshore, and Refining & Marketing. The company's largest segment is its oil sands operations. As a result, the discount on Suncor's heavy crude products versus light crude has the potenial of having a signifcant impact on the company's financial performance.
In 2010, Suncor fully integrated its merger with Petro-Canada, which was acquired in 2009. According the company's annual report, the merger has the potential of producing annual capital efficiencies of an estimated $1 billion. For 2010, Suncor reported net earnings of $3.571 billion versus 2009 net earnings of $1.146 billion. The rise in net earnings not only reflects the financial benefits from the merger in 2009, but also the improved demand for and price of crude oil. Suncor's synthetic crude realizations are influence by the benchmark price of WTI crude at Cushing and other alternative light crude prices.
The Oil Sands business segment is the core of Suncor's operations. 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 an average of 318,200 bpd in 2010 compared to 2009 production of 306,700 bpd.
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's synthetic crude realizations are influence by the benchmark price of WTI crude at Cushing and the price of other alternative light crude prices. On average, WTI prices were US$61.80 per barrel in 2009 versus to US$79.55 per barrel in 2010. As a result, the discount on Suncor's heavy crude products improved versus light crude, which made Suncor's products more attractively priced. While the differential represented an average price discount S$9.70 per barrel in 2009, the differential averaged US$14.20 per barrel in 2010.
For 2010, Suncor reported a 167.8% increase in net earnings compared to net earnings in 2009. While production rose by 3.7% compared to 2009, average sale price per barrel rose 12.8% year-over year. Production levels were partially offset in 2010 due to planned and unplanned maintenance. Cash operating cost on a per barrel basis rose from $33.95 in 2009 to $38.85 in 2010.
In August 2010, Enbridge, a Calgary-based pipeline company, announced its plans to build a $370-million pipeline to connect a Suncor Energy oilsands plant to Enbridge's system in the oilsands region of northern Alberta. The pipeline is likely to run parellel to Suncor's current pipeline and has the potential of increasing the distribution of oilsands. Enbridge expects the pipeline to be operational in 2013.
While total net earnings were $229 million in 2010, these earnings were offset by several write downs. Suncor reported an operating loss from continuing operations in 2010 of $137 million, compared to an operating loss of $173 million. Gross production, which includes natural gas, NGLs and crude oil, was 432 mmcfe/day in 2010 versus 282 mmcfe/day in 2009. The rise in production is primarily a result of the Petro-Canada merger in 2009. However, the merger also contributed to the increase in operating costs. In 2010, Suncor reported operating costs of $2.18 per mcfe compared to the 2009 level of $1.98 per mcfe. In 2010, Suncor divested a number of natural gas assets deemed as "non-core."
In March 2011, Suncor reported its plans to double its St. Clair plant's production capacity. Suncor plans to boost production to 400 million litres per year, a production level which would make the plant Canada' largest biofuel production facility. The expansion is expected to cost $120 million. As oil prices continue to rise, biofuels and other alternative energy sources have the potential to become more attractively priced.
Suncor's East Coast Canada segment and its international segment include primarily offshore production facilities. Suncor engages in production and exploration activity offshore Newfoundland as well as in the North Sea. Suncor also operates in Libya, Syria, and Norway.
Operations from this segment reported total net earnings of $1.491 billion in 2010, verusus to $277 million in 2009. Primarily due assets acquired in the merger with Petro-Canada, total production rose from 58.0 mboe per day in 2009 to 170.9 mboe per day in 2010. Higher production levels and rising commodity prices drove the rise in operating earnings for these operations. Suncor reported operating earnings of $993 million in 2010, compared to $362 million in 2009. In 2010, Suncor completed three major divestments of non-core assets from this segment.
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.
For 2010, Suncor reported net earnings of $801 million, which is almost double net earnings reported for 2009. In part due to the merger, sales of refined products rose 60% year-over-year. Operating earnings were $782 million in 2010, which was $309 million increase compared to 2009. While refining utilization remained constant, gross margin rose due to improved refining crack spreads.
Overall, the company's 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. As a result of weak natural gas prices, Suncor plans to devote less capital investment to its natural gas operations.
In an effort to restructure Petro-Canada's operations, Suncor plans to sell between $2 billion and $4 billion in assets acquired through the merger. The sale has both strategic and financial benefits. Not only does Suncor plan to refocus on its sizable Canadian oil-sands operations, but the sale of assets has the potential of paying off much of Petro-Canada's debt.
Extracting oil bitumen, also known as non-conventional oil, is more expensive than typical oil production and requires technologically advanced equipment. As a result, the oil produced from Canadian oil sands is more expensive than West Texas Intermediate. As a result, oil extracted from oil sands is more economically viable when overall oil prices are high.
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. Additionally, imports from Canadian oil sands have the potential of accounting for 37% of U.S. oil imports by 2035. 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. 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.
In December 2009, Suncor reported fires at one of the company's oil sands upgraders in Alberta. The fire resulted in structural damage to the facility that will require two to four weeks of repairs. Although Suncor does not expect its 2009 annual production levels to change, the fire has the potential of reducing daily production by 120,000 to 150,000 barrels per day. Like many integrated oil companies, damages from fires and severe weather have the potential of severly impacting and reducing production. Although Suncor's quick response reduced the potential damage of the fire, its advanced production and oil sands refining equipment is capable of leading to more fires.
On May 12, 2011 Tony Clement, Canada's industry leader outlined his plan to bring key executives in the oil refining and retail sectors of Canada's petroleum industry to Ottawa where they will be forced to explain specifically the method they use to determine gas prices. As one of Canada's leading refiners and a key operator of gas filling stations (Petro Canada/Suncor) Suncor will be one of the companies directly involved and affected by decisions made by a special committee. One of the concerns raised by members of parliament (MP's) is that, although the price of oil is 31% lower than it was the previous year gas prices haven't fallen (remain near or above the Cdn$1.3, $1.4/L level, May 2011 versus May 2010). Federal taxes are a key component of the price of gas and so it was expected that the federal government might consider lowering them but Tony Clement initially didn't list that as an option; the fact that taxes on gas haven't changed but the price has indicates taxes might not be the problem.
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: Imperial Oil (IMO), Nexen (NXY)and Canadian Natural Resources (CNQ). Though it is currently the largest Canadian based petroleum company, Suncor trailed both Petro-Canada and Imperial Oil in sales as recently as the 1990's when it has even less market capital than Imperial Oil (currently Canada's number 3 oil company). 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.
Suncor along with Imperial Oil are Canada's leading refining companies (first and second and the difference between them is small) and also oversee the largest number of filling stations in every province with the exception of the maritimes (36% during the mid 2000-2010's). In terms of barrels of oil equivalent Suncor is virtually tied with Canadian Natural (was 10% in 2010 but the difference is decreasing) however Suncor has about twice as many proved reserves (but both companies have a very large and increasing resource base). As recently as 2009 another major producer of oil and gas Encana, was comparable in size to both but that changed when the company decided to spin off much of its natural gas segment, that move resulted in the formation of Cenovus Energy. Cenovus Energy is a major refiner of oil and gas and has a sizeable and growing heavy oil production and upgrading business, ironically at the expense of its natural gas business (natural gas production which was the former Encana's main focus, was down 11.1% to 738 MMcf/d in September 2010 (between 123 and 127 thousand boe per day).