JPMorgan Resumes Suncor Energy, Downgrades To Neutral

JPMorgan’s Phil Gresh reinitiated coverage of Suncor Energy Inc. (USA) SU with a Neutral rating and a price target of C$34.

Bullish On Capital Allocation

“Through its capital allocation approach, SU has clearly demonstrated its longer term positive view on oil markets, having been one of the more aggressive companies in our coverage group on both M&A and organic growth capital, at a time when others have significantly pared back,” Gresh mentioned.

Highest Production CAGR

The analyst stated that this has led to the company maintaining the highest production CAGR amongst its peers for 2014-18 at 4.5 percent, while also being able to leverage its “relatively normalized” 2018 balance sheet, driven by higher debt and potentially lower downstream benefit.

Related Link: Goldman Updates Oil Majors Outlook, Likes Canada And Coastal Refiners

Growth Potential

Gresh believes that Suncor Energy’s approach highlights the company’s view that oil prices would need to rise in the longer term, given the “breakeven economics,” as well as the “multi-decade cash flow dynamics” of its Fort Hills and Syncrude assets.

“However, we also see SU as having taken a low execution risk approach to M&A, as the company knows both assets well,” the analyst pointed out.

Following the recent movement in the stock, Gresh believes that the valuation is now fair, with total return potential of -3 percent.