International Banking and Finance Report: Suncor Energy Stock Analysis

This report provides an analysis of Suncor Energy's stock value change between August 31, 2017, and March 8, 2018. It examines the company's cash flow per share, revenue from domestic and international sales, and the strength of the US/CDN dollar. The report also discusses the types of exposures to exchange rate risk and the methods used to manage these risks, including the use of forward contracts. Furthermore, it calculates the required rate of return or cost of capital for Suncor Energy and explores the reasons behind the fluctuations in its stock price during the specified period. The report concludes by summarizing the key findings and highlighting Suncor Energy's focus on domestic operations and its strategies for managing currency exchange risks.

Running head: INTERNATIONAL BANKING AND FINANCE
International Banking and Finance
Name of the Student:
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Executive Summary:
The current report intends to evaluate the stock value change of Suncor Energy from 31st
August 2017 to 8th March 2018. Suncor Energy is an integrated energy organisation in Canada
specialising in the production of synthetic crude from oil sands. It has been evaluated that CND
is traded on the CME Globex futures market and the forex market through currency pairings.
However, the value of the currency has increased subsequently after the mid of January 2018,
since USD currency has increased in value. For managing exchange risk, Suncor Energy uses
forward contract, which is a non-standardised contract between two parties for purchasing or
selling an asset at a particular future time at an agreed price in today’s date.

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Table of Contents
1. Introduction:................................................................................................................................3
2. Analysis:......................................................................................................................................3
2.1 Change in the stock value of Suncor Energy from 31 August 2017 to 8 March 2018:.........3
2.2 Cash flow per share of Suncor Energy for the past five years:.............................................4
2.3 Percentage of revenue made from domestic and international sales:....................................5
2.4 Strength/weakness of the US/CDN dollar over the past three months in contrast to the
global currencies:.........................................................................................................................7
2.5 Types of exposures and way of managing these exposures to exchange rate risk:...............8
2.6 Required rate of return or cost of capital of Suncor Energy:.................................................9
2.7 Reasons behind the change in stock price of Suncor Energy from 31 August 2017 to 8
March 2018:...............................................................................................................................10
3. Conclusion:................................................................................................................................11
References:....................................................................................................................................12
Appendices:...................................................................................................................................14

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1. Introduction:
The current report intends to evaluate the stock value change of Suncor Energy from 31st
August 2017 to 8th March 2018. Suncor Energy is an integrated energy organisation in Canada
specialising in the production of synthetic crude from oil sands. In order to evaluate its
performance, the cash flow per share of the organisation has been considered for the past five
years. The revenue made from domestic and international sales have been taken into account as
well. The capability of the US/CDN dollar has been illustrated over the past three months
compared to the global currencies. The kinds of exposures have been described along with the
way of managing these exposures. The next segment of the report would focus on computing the
cost of capital for the organisation. Finally, the report sheds light on explaining the reason behind
the stock price change in the stated period.
2. Analysis:
2.1 Change in the stock value of Suncor Energy from 31 August 2017 to 8 March 2018:
The percentage increase or decrease in the stock value of Suncor Energy for the stated
period has been presented in the form of a table (Refer to Appendices, Appendix 1). It has been
observed that the stock price of the organisation has increased by 0.07% in this stated period.
However, fluctuations could be seen everyday due to change in the market forces. This denotes
that there is change in the prices of shares because of demand and supply (Avdjiev, McCauley &
Shin, 2016). In case, more investors prefer to purchase the stock of Suncor Energy rather than
selling, it would lead to rise in share price and thus, demand increases compared to supply. On
the other hand, if more investors prefer to sell the stock of the organisation, share price would
fall and thus, supply would be higher than demand.

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Suncor Energy has made few acquisitions in 2017 and these acquisitions of assets have
considerable ability to make considerable amount of money. This denotes that the organisation
has the potential for future streams of revenue to the shareholders, which have encouraged the
investors to pay a specific price for the shares (Buch & Goldberg, 2015). Hence, the future
earnings of the organisation, the expected future growth and time to realise the business goals are
the factors that influence the stock price of Suncor Energy in the stated period.
2.2 Cash flow per share of Suncor Energy for the past five years:
Particulars Details 2014 (in
million
CND)
2015 (in
million CND)
2016 (in
million CND)
2017 (in
million CND)
Operating cash
flow
A
8,936 6,884 5,680 8,966
Preferred
dividends
B
- - - -
Common shares
outstanding
C
1,462 1,446 1,610 1,661
Cash flow per
share
(A-
B)/C
6.11 4.76 3.53 5.40
Table 1: Cash flow per share of Suncor Energy for the years 2014-2017
(Source: Suncor.com, 2018)

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In the words of Chinn & Kucko (2015), cash flow per share is the income made after tax,
which is added with depreciation on per share basis for gauging the financial strength of an
organisation. This measure is provided greater emphasis than earnings per share, as the latter
could be manipulated easily. On the other hand, it is difficult to alter cash flow per share; thus
resulting in correct valuation of the sustainability and strength of a specific business model
(Frieden, 2015).
In case of Suncor Energy, the cash flow per share of the organisation has fallen from
CND 6.11 in 2014 to CND 4.76 in 2015 and the decline is inherent further to CND 3.53 in 2016.
On the other hand, the earnings per share of the organisation have fallen from CND 1.84 in 2014
to (CND 1.38) in 2015. However, it has increased to CND 0.27 in 2016 and it has increased
considerably to CND 2.68 in 2017. Thus, the increased earnings per share of the organisation
have been supported by rising cash flow per share, which denotes the potential of the business to
provide adequate returns in future to the shareholders (Damodaran, 2016).
2.3 Percentage of revenue made from domestic and international sales:
Particulars 2014 (in
million CND)
2015 (in
million CND)
2016 (in
million CND)
2017 (in
million CND)
Domestic revenue
31,894 23,147 21,555 25,629
International revenue:
USA
5,651 4,246 3,695 4,252
Other foreign nations

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2,317 1,815 1,557 2,170
Total international
revenue 7,968 6,061 5,252 6,422
Total revenue
39,862 29,208 26,807 32,051
Percentage of domestic
revenue
80.01% 79.25% 80.41% 79.96%
Percentage of
international revenue
19.99% 20.75% 19.59% 20.04%
Table 2: Percentages of domestic revenue and international revenue for the years 2014-
2017
(Source: Suncor.com, 2018)
According to the above table, it could be observed that Suncor Energy has earned
maximum revenue from its domestic operations compared to that of the global operations. Thus,
it could be stated that the organisation has focused more on its domestic segments by acquiring
assets in the nation. The income earned would be used for future expansion projects in the global
nations (Ehrhardt & Brigham, 2016).

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2.4 Strength/weakness of the US/CDN dollar over the past three months in contrast to the
global currencies:
Figure 1: Change in US/CDN dollar over the past three months
(Source: Finance.yahoo.com, 2018)
Figure 2: Change in US dollar/Pound over the past three months

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(Source: Finance.yahoo.com, 2018)
Figure 3: Change in US dollar/Euro over the past three months
(Source: Finance.yahoo.com, 2018)
The above three figures mainly depict the change in USD to CND, pound and Euro over
the past three months. According to the first figure, it could be observed that the CND has
decreased to 1.07 in contrast to USD. This is because of the declining power of the USD in the
global market, while CND is one of the most stable global currencies (Foley & Manova, 2015).
In addition, the intraday speculators and long-term investors trade this currency in large volumes.
Furthermore, CND is traded on the CME Globex futures market and the forex market through
currency pairings. However, the value of the currency has increased subsequently after the mid
of January 2018, since USD currency has increased in value. On the other hand, pound and Euro
currencies have remained more or less stable over the three months and these currencies are
stronger in contrast to USD and CND.
2.5 Types of exposures and way of managing these exposures to exchange rate risk:
Suncor Energy is exposed to foreign currency exchange risk on capital expenditures,
revenues and financial instruments, which are denominated in a currency in contrast to the

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functional currency of the organisation. Since the price of crude oil is in USD, any fluctuation in
USD/CDN exchange rates might have considerable effects on revenues. Such exposure is offset
partially by issuing the US denominated debt. 1% increase of CND in contrast to USD as on 31st
December 2017 would raise earnings related to the debt of the organisation by approximately
$142 million in 2017, which was $129 million in 2016.
For managing exchange risk, Suncor Energy uses forward contract, which is a non-
standardised contract between two parties for purchasing or selling an asset at a particular future
time at an agreed price in today’s date (Frankel, 2015). When the organisation enters into
forward contract in case of acquisition, it expects the other currency to appreciate and in case of
selling, it expects the other currency to depreciate. If it expects huge amount of money to be
received in the form of foreign currencies as payment from the customers, it undertakes the risk
of future currency depreciation and it would go short in a currency forward contract (Fratianni &
Savona, 2017). If Suncor Energy intends to make payment via foreign currency to its suppliers, it
would go long.
2.6 Required rate of return or cost of capital of Suncor Energy:
Particulars Details Amount (in CND)
Equity A 45,383
Debt B 15,784
Total debt and equity C=A+B 61,167
Weight of debt D=B/C 25.80%
Weight of equity E=A/C 74.20%
Risk-free rate F 1.92%
Beta G 1.06

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Market risk premium H 6%
Cost of equity I=F+(G*H) 8.28%
Interest expense J 246
Cost of debt K=J/B 1.56%
Tax rate L 15%
Weighted average cost of
capital
(E*I)+(D*K)*(1-
L) 6.49%
Table 3: Required rate of return or cost of capital of Suncor Energy
(Source: Finance.yahoo.com, 2018)
2.7 Reasons behind the change in stock price of Suncor Energy from 31 August 2017 to 8
March 2018:
It has been found out that the stock prices of the other competing organisations in the oil
and gas industry of Canada has moved in tandem with each other (Melvin & Norrbin,
2017). This is because the market forces have identical impact on the organisations falling in the
same industry in the same manner. However, the additional product lines have helped the
organisation to gain competitive advantage in the market. As a result, there is positive increase in
the share price of the organisation in this stated period (Scheubel & Stracca, 2017).
In addition, the fluctuations in the interest rates have caused the share price of Suncor
Energy to fluctuate in the Canadian market. As the interest rates are slightly higher in the first
quarter of 2018, the stocks of the organisation have been attractive to the investors and hence, it

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has issued additional shares in the market along with providing greater returns. As a result, there
is overall increase in the stock price of the organisation (Vernimmen et al., 2014).
3. Conclusion:
Based on the above discussion, it could be found out that Suncor Energy is an integrated
energy organisation in Canada specialising in the production of synthetic crude from oil sands.
Suncor Energy has made few acquisitions in 2017 and these acquisitions of assets have
considerable ability to make considerable amount of money. This denotes that the organisation
has the potential for future streams of revenue to the shareholders, which have encouraged the
investors to pay a specific price for the shares. In addition, Suncor Energy has earned maximum
revenue from its domestic operations compared to that of the global operations.
It has been evaluated that CND is traded on the CME Globex futures market and the
forex market through currency pairings. However, the value of the currency has increased
subsequently after the mid of January 2018, since USD currency has increased in value. For
managing exchange risk, Suncor Energy uses forward contract, which is a non-standardised
contract between two parties for purchasing or selling an asset at a particular future time at an
agreed price in today’s date. When the organisation enters into forward contract in case of
acquisition, it expects the other currency to appreciate and in case of selling, it expects the other
currency to depreciate.