Suncor Energy Upgraded By Citi On Free Cash Flow Focus

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Citi analysts upgraded shares of Suncor Energy Inc. (USA) SU to Buy from Neutral citing the focus on free cash flow in the upcoming period. The brokerage also boosted its price objective by 10 percent to C$44 from C$40.

The analysts noted Suncor's acquisitions of Syncrude stake from Murphy Oil, as well as COS helped to boost its free cash flow sensitivity to WTI prices. The analysts believe the deal and debt buyback have lowered the leverage to an estimated 2.1x2016 net debt/EBITDA. Therefore, they were confident the move would bridge the gap to increased oil prices next year.

"SU does not expect to sanction greenfield projects before 2019. In the meantime, we expect smaller incremental investments at Syncrude to improve reliability and integration with SU's base mine and debottlenecking at MacKay River. SAGD projects have gone back to the engineering phase, with SU working on four pilot technologies to reduce capital and carbon intensity," the analysts wrote in a note.

The brokerage pointed out the impact of SU's Syncrude, Base Mine and MacKay River projects, which were all shut in May. As a result, the company revised oil sands production guidance down by 40kb/d for the year, which was partly compensated by an increase of a 10kb/d offshore E&P production.

However, the analysts reached their target price on three metrics: liquidation value of C$41 per share, discounted cash flows of C$42.5 per share, and EV/DACF valuation with the help of 6x 2018 estimates.

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