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Tickers in this Article: SU, CNQ
Canada's biggest energy firm and the largest oil sands outfit, Suncor Energy Inc. (SU) reported mixed second quarter 2012 earnings, reflecting volume growth and higher refinery margins along with a favorable production mix. These were partially offset by operational shutdown at Syria and steeper expenses.  

Earnings per share, excluding certain items, came in at 81 Canadian cents (80 US cents) in the second quarter, surpassing the Zacks Consensus Estimate of 75 cents. Comparing year over year, the results improved 30.6% from 62 Canadian cents earned in the prior-year quarter.

In the reported quarter, total revenue of C$9.72 billion ($9.62 billion) escalated 4.2% from the year-ago level but lagged our expectation by 5.8%.

Quarterly operating earnings of C$1.26 billion were up from C$980 million a year ago, while cash flow from operations increased to C$2.34 billion from C$1.98 billion in the second quarter of 2011.

Production

Upstream production during the quarter averaged 542,400 barrels of oil equivalent per day (BOE/d), up from the second quarter 2011 level of 460,000 BOE/d, mainly on the ramp up of activities at various units and steady progress with projects.

Excluding proportionate production share from the Syncrude joint venture, oil sands volumes were 309,200 barrels per day (Bbl/d), higher than 243,400 Bbl/d recorded in the prior-year quarter. The current quarter results were positively influenced by last year's planned maintenance works at certain units and higher volumes from Firebag.

Syncrude operations registered a 15.4% year-over-year decline in production to 28,600 Bbl/d in the quarter, due to maintenance activities at the facility.

Suncor's Exploration and Production segment (consisting of International and Offshore and Natural Gas segments) produced 204,600 BOE/d, as against 182,800 BOE/d in the prior-year quarter. The resumption of Libyan operations along with better reliability at Buzzard enhanced the performance of this segment.

Product Sales

The company's Refining and Marketing segment generated total refined product sales of 87,500 cubic meters per day, up 6.4% year over year. The result was aided by refineries running at full capacity in Western North America.

Balance Sheet & Capital Expenditure

As of June 30, 2012, Suncor had cash and cash equivalents of C$5.17 billion and total long-term debt (including current portions) of C$10.02 billion. The debt-to-capitalization ratio was approximately 20.4%. The company incurred C$1.6 billion in capital expenditure in the quarter.

Guidance

For 2012, Suncor guided total production of 540,000-580,000 Boe/d, with East Coast Canada production expected in the range of 50,000-55,000 Bbl/d. International volumes are estimated to range between 77,000 Boe/d and 85,000 Boe/d, while production at North American Onshore will be in the band of 310-340 million cubic feet equivalent per day.

The company expects oil sands production of 325,000-345,000 Bbl/d and projects Syncrude production at approximately 36,000-38,000 Bbl/d.

Suncor targets capital spending of almost $7.50 billion for 2012, of which 48% will be expended towards growth projects.

Our Recommendation

We are maintaining a long-term Neutral recommendation on the stock. Suncor currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

In our opinion, Suncor possesses an impressive portfolio of growth opportunities, a unique asset base and high return potential over the long run. Additionally, given our bullish outlook for the medium-term oil price scenario, we think Suncor is nicely positioned to benefit from its leverage to commodity prices.

However, we remain worried about Suncor's high debt level and significant capital expenditure requirements. We also believe that operational and project execution risks will keep the stock under pressure in the coming months.

Another prominent Canadian energy firm Canadian Natural Resources (CNQ) will report its second quarter results on August 9.
 

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