Canada’s biggest energy firm and the largest oil sands outfit, Suncor Energy Inc. (SU) recently declared that it is not proceeding with the $11.6-billion upgrading plant in Northern Alberta. The Voyageur upgrader project was a joint venture between Suncor and France’s Total SA (TOT).
The upgrading plant was intended to convert raw bitumen into refinery-ready synthetic crude oil. It was expected to have a capacity of 200,000 barrels per day.
The decision to abandon the project was made after the sales of synthetic crude oil from Alberta faced new competition from a flow in light oil production in the United States. After a thorough review of the project, management at Suncor found it unprofitable in the long run.
As a result of this cancellation, Suncor expects to incur a charge of $140 million in net income and $180 million in cash flow from operations during the first quarter of 2013.
Meanwhile, Suncor also acquired Total’s interest in the Voyageur upgrader project for $515 million to get full control over the partnership’s assets.
Suncor currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next 1 to 3 months.
The company has significant oil sands and a conventional production platform, huge long-lived oil-sands reserves and an impressive downstream portfolio. The company’s asset base includes substantial conventional reserves and production at offshore Eastern Canada and in the North Sea, which generate strong margins and should provide free cash flow to fund future oil sands expansion.
However, Suncor’s deep oil sands technology, though proven, is still vulnerable to potential implementation delays, in our view. In particular, there are risks related to growth and other capital projects that depend wholly or partly on new technologies. The success of these projects remains uncertain.
Meanwhile, there are other firms in the energy sector that are performing better and are worth considering at the current level. These include InterOil Corporation (IOC) and PBF Energy Inc. (PBF). Both these stocks sport a Zacks Rank #1(Strong Buy).
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