Suncor Energy Inc. Downgraded To 'BBB+' From 'A-' On Deteriorating Cash Flow And Profitability

  • S&P Global Ratings lowered its West Texas Intermediate (WTI) and Brent crude oil price assumptions on March 19, 2020.
  • Updated cash flow forecasts for rated oil and gas exploration and production and integrated oil and gas companies have materially decreased as a result of our lower price assumptions.
  • Having updated its 2020-2022 forecasts for Suncor Energy Inc. to reflect the revised price assumptions, S&P Global Ratings lowered its long-term issuer credit and senior unsecured debt ratings on the company to 'BBB+' from 'A-'.
  • Although the forecast near-term liquidity sources to uses ratios has weakened from our previous estimates, we are maintaining the liquidity profile assessment at strong, as the company's large credit facility availability and reduced discretionary and nondiscretionary spending more than offset our decreased projected funds from operations (FFO) during the 24-month liquidity assessment period.
  • The stable outlook reflects our expectation that Suncor will maintain its five-year (2018-2022), weighted-average FFO-to-debt ratio at the upper end of the 30%-45% range. Within this range, Suncor's weighted-average FFO-to-debt ratio adequately supports the 'BBB+' rating, and accommodates the discretionary spending we have factored into our forecast.
TORONTO (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above. With Suncor's oil sands operations (both mining and in-situ) accounting for about 80% of upstream production, these operations' high fixed costs dramatically weaken operating cash flow and profitability during periods of low crude oil prices. With the oil sands operations and Fort Hills' 2019 unit cash operating costs of C$28.20 and C$26.15, respectively, these projects rely on both sustained high production levels and stronger crude oil prices to generate competitive returns.
Our downgrade reflects the dramatic deterioration of projected funds from operations (FFO) under our reduced price assumptions, particularly in 2020. Our estimated 2020 FFO is about 55% lower than our fully adjusted 2019 FFO for the company. Although we expect FFO to rebound in tandem with our increasing crude oil price assumptions in 2021 and 2022, and we are projecting relatively stable downstream operating cash flow throughout the 2020-2022 forecast period, the upstream segment's largely fixed cost structure weakens forecast total FFO over our forecast period. As a result, our weighted-average FFO-to-debt ratios have weakened below our previously published downgrade trigger.
The stable outlook reflects our expectation that Suncor's fully adjusted weighted-average FFO-to-debt ratio should remain in the 30%-45% range. The company's moderate financial policies, which include maintaining large cash balances, largely undrawn credit facilities, and positive discretionary cash flow generation should ensure its FFO-to-debt ratios remain comfortably within this range.
We would lower the rating to 'BBB', if our estimate of Suncor's five-year (2018-2022), weighted-average FFO-to-debt ratio fell below 30%, and the company's total spending (discretionary and nondiscretionary) exceeded cash flow generation on a sustained basis.
As illustrated with the estimated deterioration of near-term cash flow ratios, due to our reduced crude oil price assumptions, the oil sands operations' largely fixed cost structure amplifies cash flow volatility as hydrocarbon prices fall. To accommodate this inherent volatility, we believe Suncor's fully adjusted weighted-average FFO-to-debt ratio would require incremental cushion, relative to that of its industry peers focused on conventional oil and gas development to support an 'A-' credit rating. Specifically, we could raise the rating to 'A-', if Suncor's fully adjusted FFO-to-debt ratio increase above 60%, and we believed its cash flow metrics would remain above this threshold.
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