We are downgrading Suncor Energy (SU) shares to Underperform from Neutral, reflecting its weak near- to medium-term production outlook and the Petro-Canada acquisition-related risks.

Recently, the company informed that a fire at its largest oil sands project in Alberta would only be fixed by early April. This will cut Suncor’s production rates during February and March below the company’s earlier guidance.

Additionally, post the Petro-Canada acquisition (completed on August 1, 2009), we remain worried about Suncor’s high debt level (approximately C$14 billion) and significant anticipated capital expenditure requirements (C$5.5 billion for 2010). There are also operational and execution risks associated with the integration of Petro-Canada’s predominately conventional assets, which are of a type and in regions where Suncor lacks experience.

The current uncertain commodity price environment, vulnerability of the company’s deep oil sands technology to potential implementation delays, and environmental concerns regarding oil sand crude are some other negatives in the Suncor story.

Last month, the company reported weak fourth quarter results, adversely affected by higher expenses and royalty payments as well as less-than-expected production. Earnings per share, excluding certain items, came in at 9 Canadian cents (8 US cents), well below the Zacks Consensus Estimate of 39 US cents.

It was the company’s third negative earnings surprise in the past four quarters. Suncor has performed poorly during this period, with its average earnings surprise being approximately -35%. This implies that the company has missed the Zacks Consensus Estimate by roughly 35% over the last four quarters.

Calgary, Alberta-based Suncor Energy Inc. is Canada’s premier integrated energy company. Suncor’s operations include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand. Suncor’s business can be divided into five segments: Oil Sands, Natural Gas, East Coast Canada, International, and Refining and Marketing.

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