Suncor Energy Inc. Update

SU : TSX : C$37.85
Target: C$46.00

Suncor is the largest Canadian integrated oil company, also with the largest position in the Canadian oil sands industry. Key to its growth is expansion of its oil sands business. The company completed a merger with Petro-Canada in August 2009.
All amounts in C$ unless otherwise noted.

Energy — Integrateds
The key to SU’s guidance release last night, in our view, is that the company’s capex program, cash tax and oil sands operating cost expectations support the potential for another meaningful dividend increase in February 2013 as well as further share buybacks throughout next year. Additionally, on account of a sub $8 billion capex program, we believe the market will look favorably upon the release. As a result, we maintain our BUY rating and $46 target price for the following reasons:
 Still expecting massive free cash flow potential: We expect SU to generate $2.75 billion or $1.84/share next year of free cash flow in 2014 (assuming a $7.8 billion capex budget and US$104/Bbl Brent and US$97.25/Bbl WTI oil prices), which compares to the current $0.80/share of annual dividends. As such, expect another large dividend raise in early February. As shown in Figure 4, SU has by far the largest free cash flow potential next year amongst the Canadian Sr. E&Ps/Integrateds.

 Valuation still looks cheap Shares are trading at 5.9x 2014E DACF vs. the Canadian Sr. E&P/Integrated group average of about 6.3x; and vs. IMO at 10& CVE at 6.7x.
 Next catalyst: 1) Expect the December 4th investor day to be another share price catalyst. SU plans to provide more clarity on its mid-term growth plans including Firebag 5 & 6, which are expected to be low cost de-bottlenecks. We believe the market will be positively surprised by the return potential of these projects; because that is a key unknown. 2) The aforementioned expected dividend raise in February.


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