Suncor Energy (TSX: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”SU.TO” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) unraveled spectacularly in the second half of 2018 as crude oil prices started heading in the wrong direction. The stock has lost 20% of its value in the past six months, closely mirroring the decline in West Texas Intermediate (WTI) crude.
As such, it wasn’t surprising to see Suncor’s financial performance take a big hit in the fourth quarter of 2018 despite a solid increase in the company’s upstream output. Let’s see how Suncor performed last quarter and what lies ahead for the company in this uncertain oil environment.
Suncor’s Upstream Operations Take a Big Hit
Canada’s second-largest oil producer delivered upstream production of 831,000 barrels of oil equivalent per day (boe/day), which was a new quarterly record. That represented a substantial jump from the 736,400 boe/day of production that Suncor had achieved in the same period last year. The company credits the addition of Fort Hills, better reliability, the ramp-up at Hebron, and an increase in working interest at Syncrude.
Additionally, Suncor’s refining and marketing segment delivered record quarterly throughput of 467,900 barrels per day thanks to a refinery utilization rate of 101%. But despite all these positive operational developments, Suncor’s operating earnings during the quarter fell to C$580 million from C$1.31 billion in the year-ago quarter.
The company blamed lower price realizations of oil sands operations and an unfavourable first-in, first-out (FIFO) inventory valuation adjustment in the refining and marketing segment on account of lower feedstock costs. In all, Suncor was negatively impacted by wider synthetic crude oil differentials, higher transportation costs, and low sales volumes in the exploration and production segment.
All of these headwinds led to a net loss of C$280 million in the fourth quarter, down from the prior-year period’s profit of C$1.38 billion. The majority of the decline was driven by the upstream segment, which reported an operating loss of C$285 million as compared to earnings of C$846 million in the prior-year period.
The downstream segment, on the other hand, benefited from lower oil prices and made up for the decline in upstream operations to some extent. The operating earnings in this segment came in at C$723 million as compared to the year-ago period’s C$746 million figure.
Oil Price Volatility Demands Constrained Spending
Suncor’s focus for 2019 is on countering the end-market volatility. As a result, the company expects its 2019 capital expenditure to remain flat year over year, while production is estimated to increase by 10% after taking into account Alberta’s government-mandated production cuts.
However, Suncor could struggle for the remainder of the year on account of the government-mandated production curtailment in Alberta, which has been enforced to boost oil prices. Suncor has been against this curtailment because it is leading to an increase in feedstock costs, which will ultimately hamper its refining margins.
Moreover, Suncor believes that the Alberta government’s objective of boosting oil prices won’t be achieved because shipping crude oil by rail is not profitable anymore (see how Imperial Oil is affected by these same challenges). According to Reuters, it costs around $15-$20 per barrel to ship crude oil by rail, and that’s significantly higher than the current differential between WTI and Western Canadian Select (WCS) crude oil prices.
The differential currently stands at $10.30 thanks to the recent rise in crude oil prices, which is why it isn’t economical to ship crude by rail. Not surprisingly, crude oil shipments by rail in Canada have come to a grinding halt, which will create further supply issues and hurt pricing.
So there’s a good chance Suncor Energy’s upstream and downstream segments will remain under pressure this year, though the company seems to be undertaking smart counter steps by following a disciplined capital expenditure program.
