The Canadian wildfires that ravaged the Alberta countryside last month and cut the province's oil production by nearly 1.4 million barrels per day continue to wreak havoc on oil producers. Even now that the fires have largely subsided, Suncor Energy (NYSE:SU) has struggled to restart its MacKay River oil sands facility because of a clogged Enbridge (NYSE:ENB) pipeline. Additionally, Suncor informed its employees that it expects the company to lose $778 million from lowered production.
Will this latest spate of bad news slow down Suncor's long-term momentum and growth?
How bad is the damage?
The Enbridge pipeline, which connects to Suncor's facility but is not owned by Suncor, got clogged when heavy oil, or bitumen, cooled inside of it. The bitumen, once extracted from the Alberta oil sands, has to be heated to enable it to flow through a pipeline. When the companies shut down operations, they were forced to shut down steam injections that heat the bitumen inside the pipeline, allowing it to solidify into an asphalt-like consistency. It is expected to take roughly 20 days to clear the pipe.
Besides the pipeline, though, Suncor sustained no damage to its facilities. This means that other facilities remain on target to ramp up production, and Suncor should return to normalized operations sometime in July.
Perhaps more importantly, the company will take an exorbitant hit on production revenues because of the shutdown, to the tune of $778 million. This will severely impact its second-quarter earnings.
This is where savvy investors need to take a deep breath and understand that this is a fluke occurrence. Suncor expects to return to a slightly lower, but still profitable, rate of production for the remainder of 2016, of between 585,000 barrels per day and 620,000 barrels per day. Furthermore, it continues to improve its financials and can retain strong growth into 2017. Here's how.
Steps to improve its outlook
Even as the fires were raging, Suncor was taking steps to improve its balance sheet and strengthen its long-term positions. Now that the fires have moved on, Suncor has continued to make bold moves.
The company is reportedly looking to find a buyer for its Petro-Canada lubricants division, seeking around $800 million. This deal seems to make perfect sense, as it falls in line with its 2016 expectations of divesting approximately $1 billion to $1.5 billion worth of assets. Additionally, it would remove a business that is not a core division, allowing Suncor to focus more exclusively on oil production.
The planned auction of Petro-Canada comes shortly after the announcement that Suncor is offering to repurchase about $1.2 billion worth of notes with maturities between 2019 and 2042 . The company is apparently willing to take advantage of its $3 billion in cash to reduce its long-term debt. In fact, lowering its debt load seems to be the prime focus for the company, after it went on a $7 billion shopping spree over the past nine months to improve its positions and bolster future production in the oil sands. Its decision to sell 71 million shares earlier this month was intended to both increase its stake in the Syncrude oil sands venture and pay down its debt.
When it comes to Suncor's balance sheet, debt is the only real red flag, as it currently sits at around $15 billion. However, at the end of the first quarter, Suncor's debt-to-capital ratio was 29%, which is high but manageable and falls within its 20% to 30% target range. For comparison, other large oil companies with both upstream and downstream production, such as Total S.A. (NYSE:TOT) and BP (NYSE:BP) have current debt-to-capital ratios of nearly 36%. With these aggressive moves to bring the debt-to-capital ratio further down to Suncor's target range, as well as its significant cash on hand, Suncor's leadership is signaling that it is serious about its long-term financial health.
The bottom line
The wildfires continue to give Suncor a headache, but unless additional issues are identified, all production should shortly return to normal. The loss of revenue is higher than expected and will adversely impact its second-quarter bottom line, but with the recent purchases and moves to lower its debt, the company should be able to improve its long-term outlook. The second quarter will hurt, but Suncor continues to put itself in a position to remain profitable.