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Analysis

Discuss about International banking and liquidity risk.

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. 

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.

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. 

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

Change in the stock value of Suncor Energy from 31 August 2017 to 8 March 2018

(Source: Suncor.com, 2018) 

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).           

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

                           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). 

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

(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.

Cash flow per share of Suncor Energy for the past five years

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 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.

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

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)

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 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).

Percentage of revenue made from domestic and international sales

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.

References:

Avdjiev, S., McCauley, R. N., & Shin, H. S. (2016). Breaking free of the triple coincidence in international finance. Economic Policy, 31(87), 409-451.

Buch, C. M., & Goldberg, L. S. (2015). International banking and liquidity risk transmission: Lessons from across countries. IMF Economic Review, 63(3), 377-410.

Chinn, M., & Kucko, K. (2015). The predictive power of the yield curve across countries and time. International Finance, 18(2), 129-156.

Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage learning.

Finance.yahoo.com. (2018).  Retrieved 9 March 2018, from https://finance.yahoo.com/quote/su.to?ltr=1

Foley, C. F., & Manova, K. (2015). International trade, multinational activity, and corporate finance. economics, 7(1), 119-146.

Frankel, J. A. (2015). International finance and macroeconomics. NBER Reporter, (2), 1-9.

Fratianni, M., & Savona, P. (2017). Governing global finance: New challenges, G7 and IMF contributions. Routledge.

Frieden, J. (2015). Banking on the world: the politics of American international finance. Routledge.

Melvin, M., & Norrbin, S. (2017). International money and finance. Academic Press.

Scheubel, B., & Stracca, L. (2017). Macro, Money and International Finance.

Suncor.com. (2018).  Retrieved 9 March 2018, from https://www.suncor.com/investor-centre/financial-reports/annual-disclosure

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and practice. John Wiley & Sons.

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