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3 Big Surprises From Suncor Energy Inc This Quarter

By Matthew DiLallo - Feb 5, 2016 at 11:46AM

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In an otherwise tough quarter, the Canadian oil company did have some noteworthy successes.

Image source: Suncor Energy. 

With a renewed plunge in the price of oil, the fourth quarter was pretty tough on oil companies. That was clear from Suncor Energy's (SU -1.46%) recent report after the company unveiled a number of surprises. It revealed that even the strongest oil companies are struggling amid the worst downturn to hit the sector in decades.

Surprise! We lost money this quarter
Heading into the quarter, analysts expected that Suncor Energy would be one of the few oil companies to remain profitable due in part to an expected lift from its refining operations. However, it was its refining arm that was a problem during the quarter after it recorded a C$77 million loss due to first-in, first-out accounting. That led the company to report an operating loss of C$26 million, or C$0.02 per share, which was C$0.15 per share below what analysts were expecting.  

That loss aside, the company actually performed pretty decently during the quarter. While it was hurt by weaker oil prices, its refining margins were strong. Meanwhile, the company's oil sands production was higher while its operating costs fell. In fact, cash operating costs per barrel in the oil sands fell to C$28 per barrel, which is down from C$34.50 per barrel in the year-ago quarter. These factors helped the company to deliver pretty solid operating cash flow of C$1.3 billion, which wasn't that far off from the C$1.5 billion it produced in the year-ago quarter.

Surprise! Syncrude had an unplanned outage
This one might not be all that surprising given Syncrude's history of problems, but it experienced an unplanned outage during the quarter. This caused Suncor Energy's share of production to fall to 30,900 barrels per day, which was down from the 35,100 barrels per day it averaged in the fourth quarter of last year.

It's issues such as this that drove Suncor to bid on top Syncrude stakeholder Canadian Oil Sands so that it could boost its stake in Syncrude from 12% to 49%. The company hopes that once the deal closes it will have greater say in how Syncrude is managed, which it believes will lead to improved reliability.

Surprise! We're cutting capex again
With oil prices continuing to remain weak, Suncor Energy is once again cutting its spending in an effort to maintain its financial strength and flexibility. The company is reducing its 2016 capital budget to a range between C$6 billion to C$6.5 billion, which is down from its previous guidance of C$6.7 billion to C$7.3 billion.

This reduction isn't expected to impact the company's production guidance in 2016 of 525,000 to 565,000 barrels of oil equivalent per day, or BOE/d because the company is deferring some planned maintenance at its Firebag oil sands project until 2017. That being said, production in 2016 is expected to decline from the average rate of 577,800 BOE/d last year.

Suncor Energy's production decline, however, is pretty minor compared to other Canadian producers. At the mid-point its production will be down 5.7% year over year, while smaller rival Penn West Petroleum (NYSE: PWE), for example, is expecting its production to decline a whopping 19.5% from its fourth-quarter average to its expected average in 2016. That's because the cash-strapped Penn West Petroleum only expects to spend C$50 million in 2016 on capex, which is 90% less than it spent last year. That's about all the company can afford to spend with its business only generating about C$40 million in cash flow at the current low-$30s oil price. The reason why Suncor's production won't decline that steeply is because its refining operations and lower decline asset base takes some of the volatility out of its cash flow and production.

Investor takeaway
On the surface, Suncor Energy had a pretty tough quarter, but that was to be expected given how weak oil prices have been. Overall, the company is doing its best to weather the downturn, which is easier for the company to handle because of its scale, diversification, and asset base. It might not be delivering robust results, but it's not in survival mode like a lot of its smaller peers. 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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