In late June, we highlighted Suncor Energy as one of our favorite credits to own, with high conviction on Suncor 2026 bonds. The published note can be found here. In not too many words, their capital framework showed that 25-50% (tiered) of Adjusted Funds From Operations (AFFO) was to go towards debt reduction, until they reached a net debt target of $9bn. With record levels of buybacks in the first half of 2022, they were falling behind on their allocation framework towards debt. As of August 31st, they had bought back ~$4.2bn of their equity YTD, while net-debt was only $500mil lower. Simply put, they had a lot of wood to chop on debt reduction.
On the Q2 Earnings call, an interesting discussion between a bank analyst and Suncor’s CFO ensued in Q&A. Alister, Suncor’s CFO said:
“If you look at the second quarter, we focused on the buybacks. Our capital allocation policy is really on an annual basis. We’ll pick and choose whether it’s debt or reduction in our buybacks in any particular month or quarter. We made the decision to focus on buybacks in the second quarter.
You’ll see it move strongly in the third and fourth quarters to taking debt down. It’s just really a function of cash flow generation and where we think the opportunities are from an economic perspective. We felt they were strongly in the buybacks area. With the rising interest rates, obviously, the second half will make bond redemption cheaper than in the first half, so economically better.”
Today, Suncor announced a tender offer to take-out up to $1.75bn of debt for ten of their bonds outstanding at a 40-55bp premium.
This tender includes all the positions we own in Suncor, our single largest issuer holding in notional and risk. Being patient with a good yield and now a premium redemption price to take out the bonds early, our investors have benefitted from this trade.