BMO: Suncor will generate $60 billion in free cash flow over the next five years


Last week, BMO Capital Markets hosted Suncor Energy (TSX:SU)it is President and CEO Mark Little for face-to-face meetings in Toronto with investors. Subsequently, they reiterated their outperform rating and raised their 12-month price target to C$60 from C$54.

The stock is currently up nearly 60% year-to-date to CA$52.78 and has 20 analysts covering the stock with an average price target of CA$53. Of the 20 analysts, 2 analysts have a strong buy rating, 11 have a buy rating, and the bottom 7 analysts have a hold rating. The high street price target is CA$63, up about 20%.

In BMO’s note on the meetings, they say some of the key discussions focused on capital allocation, downstream performance, safety and reliability, and free cash flow initiatives.

Regarding capital allocation, the CEO of the company said that he plans to fully execute the repurchase of 10% of the company’s shares via a buyout and reiterated a plan to spend 100% of its cash flow available. Of which 50% will go to share buybacks and the remaining 50% will go to deleveraging.

They plan to do this until the debt drops to $12 billion, which is expected to happen in the second half of this year. Then they will allocate 75% of their free cash flow to buy back their shares. When the company reaches $9 billion in debt, it will allocate all of its free cash flow to buying back shares.

BMO expects the company to emerge from 2023 with $6.2 billion in net debt. They model that Suncor’s free cash flow will be $14.7 billion and $13.6 billion for 2022 and 2023, respectively. They expect the company to generate around $60 billion in free cash flow over the next 5 years and if strip prices increase by $20/barrel they believe it would increase free cash flow by $20 billion to $80 billion.

Regarding the downstream business, management said the segment’s profitability “will be well above the levels of 2018/2019”, which were record years for the company. Management believes that “it owns the leading retail business in Canada and that it offers a competitive advantage”.

BMO notes that the Canadian refining market appears to be better than the U.S. market, “due to geographic constraints that limit import competition as well as a tighter overall market due to streamlined capacity”, and that refiners Canadians also see lower feedback costs.

Finally, they say that historically Suncor shares have traded in the middle of its peer group, but recently traded at the lower end of the group. They believe that this “discount” is unjustified due to “its major downstream businesses, improvements to its free cash flow profile and its ability to return significant amounts of cash to shareholders”, and they s expect Suncor’s valuation to improve.

Below, you can see BMO’s updated estimates.

Information for this briefing was found via Sedar and Refinitiv. The author has no security or affiliation related to the organizations discussed. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author holds no license.


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