The stock price of Teck Resources Ltd (USA)(NYSE:TCK) plunged after Total SA (ADR)(NYSE:TOT) sold its 10% share in the Fort Hills oil sands venture to Suncor Energy Inc. (USA)(NYSE:SU). The negative reaction of market participants poses various questions for Teck, the 20% stakeholder. Its stake is valued at $620 million, depending on yesterday’s deal, while company’s net carrying value at the end of June stood at $2.3 billion.
The indications
The plunge in Teck stock doesn’t indicate that a write down is imminent, Greg Barnes, an analyst said that Total’s sale relied on its willingness to reduce capital spending, and not on the valuation of the project.
If Teck were to write down its stake, Barnes said the company’s debt contract would cause concern, resulting in a decline in its debt-to-capital ratio. Therefore, the odds of Teck Resources selling its stake in Fort Hills are “minimal” while acknowledging the company’s contribution in the project will stay out of favor with investors in the present macro environment.
The view
FBR analysts reiterated an ‘Outperform’ rating at FBR following Suncor reported deal to buy an additional 10% stake in the Fort Hills oil sands venture from Total. FBR analyst Lucas Pipes sees TCK’s share value at C$1.945B, with deal right in-line with their valuation when accounting the increase in Suncor’s incremental capital.
The analyst believes Teck’s stake in Fort Hills significantly lowers its overall risk profile, and is thrilled by Suncor’s continued commitment in the venture. He appreciates Teck for its low-cost exposure to zinc and met coal, two commodities viewed as better positioned in the existing market scenario.
The rating
Recently, Teck Resources Ltd (USA)(NYSE:TCK) credit rating was downgraded to junk by Moody’s, which then assigned a rating of ‘Ba1’, lower from Baa3. Also, Moody’s outlook remains negative. The firm said that the weakness in commodities prices and sizeable investment spending will prompt company’s financial leverage to stay in excess of conventional investment-grade limit.
