Suncor Downgraded Due to Fears of Credit and Cash Squeeze

RBC Capital Markets has downgraded Suncor Energy Inc. (SU) from “outperform” to “sector perform” as a result of the stock’s relative valuation to oil sands peers, most notably Canadian Oil Sands Trust (COSWF.PK). With a price target of C$32 per share for Suncor, analyst Gordon Gee sees upside of roughly 17%. The closest large cap oil sands comparable is COS at 49%.

The analyst’s debt to free cash flow estimate of 2.7 times for Suncor is also higher than COS at 2.2x. While this is based on current guidance, Mr. Gee told clients that he recognizes that there is some financial flexibility in terms of Suncor’s C$6-billion capital expenditure plans this year.

RBC’s commodity outlook is somewhat bearish for the first half of 2009 with an average oil price assumption of $50 per barrel [WTI].

Mr. Gee said:

In the short term, with low commodity prices, oilsands producers such as Suncor will be squeezed in terms of low netbacks relative to current capex requirements, implying the need to access credit facilities or cash near term.