Nomura Securities Starts Suncor Energy (SU) at Buy

Nomura Securities initiates coverage on Suncor Energy (NYSE: SU) with a Buy rating and a price target of C$47.00.

Analyst Lloyd Byrne highlighted:

• Suncor is an integrated oil company, whose downstream operation has it well positioned for the current environment, with its upstream growth well positioned versus global integrated peers (such as XOM, CVX, and BP).
• An incremental positive for SU today is its exposure to the Canadian dollar. Going forward, its Brent-linked market access becomes an important differentiator during “basis” issues/blowouts (e.g., cushioning against the geographic distance/infrastructure bottlenecks that often lead to Canadian prices trading materially below WTI).
• When people hear “oil sands,” they think high cost. Based on today’s price environment and maintenance capital, we believe SU can earn a 4.5% free cash yield, with an option on oil prices. In addition, SU has ~5% p.a. pre-funded production growth tied to improved reliability, Golden Eagle, and brownfield debottlenecks. Moreover, in 2H17, the streaming of Ft Hills and Hebron (which are on time and on budget) provides some out-year visibility.
• We value our coverage using detailed corporate modelling and relative valuation to growth multiples (i.e., EV /DACF relative to DACFPS). We then fold in DCFs and/or NAV work and backtest these valuations against more traditional price to forward cash flow multiples to arrive at our relative ratings and price targets. In the case of SU, our C$47 target price corresponds to 6.6x our normalized CFPS estimate of C$7.10. Arguably, our 9% discount rate for SU punishes the company given its integrated structure, access to Brent linked markets, and balance sheet.

For an analyst ratings summary and ratings history on Suncor Energy click here. For more ratings news on Suncor Energy click here.

Shares of Suncor Energy closed at $32.50 yesterday.

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