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Why Suncor's Biggest Quarterly Loss Ever Isn't as Bad as It Seems

By John Bromels - Updated Feb 11, 2020 at 4:10PM

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Massive after-tax charges and production issues combined to create huge underperformance.

It's been a rough 2020 so far for Canadian oil major Suncor Energy (SU 1.43%). The company's shares were already down 6.2% year to date, even before it reported its largest-ever quarterly net loss on Feb. 6. Adding insult to injury, the market proceeded to shave another 3.5% off of Suncor's stock.

That seems like a mild rebuke for its biggest-ever net loss, and there's a reason for that: Things weren't quite as bad as they seemed for the Canadian oil giant. Here's what investors need to know.

A man watches a floating oil drum spill its contents onto the floor

Even though Canada's top oil company underperformed, it wasn't quite as bad as it sounds. Image source: Getty Images.

By the numbers

Metric Q4 2019 Q3 2019 Q4 2018 Change (YOY*)
Revenue CA$9.6 billion CA$9.9 billion CA$8.9 billion 7.9%
Net income (loss) (CA$2.3 billion) CA$1.0 billion (CA$280 million) N/A
Earnings (loss) per share (CA$1.52) CA$0.67 (CA$0.18)
Funds from operations CA$2.6 billion CA$2.7 billion CA$2.0 billion 30%
Total production 778,200 BOE/D** 762,300 BOE/D 831,000 BOE/D (6.4%)

Data source: Suncor Energy earnings releases. CA$ = Canadian dollars. *YOY = year over year. **BOE/D = barrels of oil equivalent per day.

Total production during the quarter fell from the year-ago period, primarily due to an outage at Suncor's MacKay River facility and mandatory production curtailments. In spite of that, the company saw a modest increase in revenue, for two reasons.

First, as a result of the production curtailments, several Canadian oil price benchmarks increased substantially from the prior year. For example, the WCS-Hardisty sour crude benchmark soared 110.7% year over year, and the spread between WTI crude and synthetic crude narrowed by 96.8%, allowing Suncor to command higher prices for its bitumen-based synthetic crude from Canadian oil sands.

Second, the company's Canadian non-oil sands production saw not only a 45.3% increase over the prior year, but a 14.8% boost in realized prices over Q4 2018 as well. These gains were offset somewhat by lower refining margins and sweet crude prices.

However, Suncor still posted its worst-ever quarterly net loss, thanks to 3.4 billion Canadian dollars of non-cash after-tax asset impairment charges, primarily related to "lower forecasted heavy oil prices for Fort Hills and higher capital cost estimates for the West White Rose Project," two of the projects in the company's exploration and production (E&P) portfolio. Absent those charges, earnings would have improved year over year. You can get a sense of that by looking at the pre-tax operating income from the company's various business segments: 

A bar chart showing Suncor's operating earnings by business segment

Improved operating earnings from the company's two production segments (oil sands and E&P) were enough to offset a decline in refining and marketing. Data source: Suncor Energy earnings releases. Chart by author.

Highlights from the quarter

  • The company expects its MacKay River bitumen production facility -- which experienced an outage in Q4 that contributed to Suncor's production decline -- to return to operation early in Q2 2020. Suncor decided to reschedule planned maintenance into Q1 2020 to coincide with the outage.
  • The company's Fort Hills oil sands production facility completed planned maintenance in Q4, but is still not operating at full capacity thanks to mandatory production curtailments. The provincial government of Alberta, where Fort Hills is located, extended 2019 production curtailments into 2020, citing a lack of pipeline capacity. Unfortunately, Fort Hills is running significantly below capacity. When the government started setting and enforcing production curtailments in 2018, the facility was just starting up nowhere near its nameplate capacity. Management has suggested internally transferring production credits or purchasing third-party credits to bring additional Fort Hills production online. 
  • Q4 2019 refinery throughput was 447,500 barrels per day (B/D) of crude, down 4.4% from Q4 2018. Refinery utilization during the quarter was also down -- but still quite high -- at 97%, compared to 101% (not a typo) in Q4 2018. However, sales of refined products increased -- albeit by just 0.8% -- to 534,600 B/D, reflecting a strong retail environment.
  • Suncor repurchased 11.1 million shares of stock for CA$452 million in Q4, while paying CA$644 million in dividends. For the year, it returned CA$4.9 billion to shareholders in the form of dividends and share repurchases, or about 45% of total funds from operations. During the quarter, the board approved an additional CA$500 million in share repurchases, bringing the total authorization for 2019 to CA$2.5 billion. After the quarter ended, the board also approved a quarterly dividend increase of 11%, to CA$0.465/share, as well as additional authorization to repurchase up to CA$2.0 billion in shares beginning March 1, 2020. 
  • During the quarter, the company sanctioned the CA$300 million Forty Mile Wind Power Project in southern Alberta, a renewable power project. The two-year investment is expected to generate sustainable low‑carbon power and carbon credits to offset emissions from Suncor's upstream business. This investment brings the company about 33% of the way to its greenhouse gas emissions reduction goal.
  • In another green energy investment, Suncor purchased an additional CA$50 million stake in waste-to-biofuels producer Enerkem, bringing the company's total Enerkem investment to CA$73 million.

What management had to say

On the Q4 2019 earnings call, CEO Mark Little employed a classic technique used by corporate leaders after posting a net loss: talk about cash flow instead! He said:

Even though the commodity market continued to be volatile in 2019, Suncor generated quarterly funds from operations of [CA]$2.6 billion and ended the year with [CA]$10.8 billion of funds from operations, a new annual record, even with WTI [Crude oil spot prices] down nearly 12% year over year.

The last two years demonstrate the resilience of Suncor's business. 2018 highlighted the strength of our integrated model through market volatility, while 2019 built upon this foundation by focusing on value over volume as we operated in a production-curtailed environment. And so, for the second year in a row, we generated annual funds from operations in excess of $10 billion.

We continue to deliver on our commitment to increase shareholder returns. Suncor returned [CA]$1.1 billion in the fourth quarter and [CA]$4.9 billion in 2019 in dividends and share repurchases to shareholders. ... [The company has repurchased] over 9% of our outstanding common shares since May 2017, and with our board approving an 11% increase in our dividend, 2020 will be the 18th consecutive year of dividend increases.

Major headaches in the sector

Suncor is uniquely positioned in the energy industry thanks to its Canadian status. Alberta's production curtailments have limited the company's overall production, but have also helped it by boosting prices in some of the country's key oil markets. Unfortunately for Suncor, its refining and marketing segment is being hit by the same trends that have hurt other integrated oil companies here in the U.S. 

For now, Suncor may be of interest to dividend investors thanks to its 4.3% yield and ability to generate reliable cash flow. Other investors may want to wait until things stabilize in the sector.

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