Suncor Energy Inc.
Q2 2017 Earnings Call Transcript

Published: 27 Jul 2017

[Operator:]

Good morning ladies and gentlemen, and welcome to the Suncor Energy Second Quarter 2017 Financial Results Call and Webcast. At this time all participants are in a listen-only mode, later we will conduct a question and answer session and instructions will follow at that time. As a reminder this conference is being recorded. I would now like to turn the call over to Mr. Steve Douglas, Vice President, Investor Relations. Mr. Douglas, please go ahead.

[Stephen Douglas:]

Thank you Michelle and good morning to everyone. Welcome to the Suncor Energy second quarter earnings call. With me here in Calgary this morning are Steve Williams, our President and CEO; along with Alister Cowan, our EVP and Chief Financial Officer. I'd ask you to note that today's comments contain forward-looking information that our actual results may differ materially from expected results because of various risk factors and assumptions described in our second quarter earnings release, as well as our current AIF. And both of these are available on SEDAR, EDGAR and our website, suncor.com. Certain financial measures that we refer to in these comments are not prescribed by Canadian GAAP, for description of these financial measures, again see our second quarter earnings release. Following our formal remarks, we will open the call to questions, first from members of the investment community, and then if time permits, members of the media. With that, I'll ask Steve Williams for his comments.

[Steven W. Williams:]

Thanks Steve, and good morning and thank you to everyone on the line for joining us. I think it's important right up front to acknowledge that our second quarter results were somewhat mixed both from an operational and a business environment perspective. The past few months of (1

[Alister Cowan:]

Thanks, Steve. And as Steve mentioned earlier in the call, in the second quarter we saw average benchmark crude prices fall by about US$3.50, and towards the end of the quarter we saw the Canadian dollar strengthened sharply against U.S. dollar. Nevertheless, we did produce solid financial results once again. We generated as Steve said over CAD 1.6 billion in funds from operations, approximately CAD 200 million in operating earnings. Notably, our E&P business produced well above expectations and generated approximately CAD 440 million in funds flow. And our Refining and Marketing delivered over CAD 500 million of funds flow, despite a negative FIFO impact as a result of falling crude prices. This is very consistent with last year's strong second quarter in R&M, after adjusting for (14

[Stephen Douglas:]

Well, thank you, Alister and Steve. Just a few things to note before we go to the questions. There was a falling crude prices, as Alister noted, and so there was a FIFO expense of CAD 38 million after-tax. And that brings year-to-date to very close to zero, a CAD 5 billion positive year-to-date. Our stock-based compensation during the quarter was an after-tax expense of CAD 19 million, bringing the year-to-date total to CAD 91 million after-tax. And the FX impact was actually a CAD 278 million gain in the second quarter, bringing us to a CAD 381 million gain year-to-date. There are, as Steve and Alister mentioned, a number of changes to our guidance. The updated guidance is available on our website, suncor.com. But a few of the highlights, we did, as mentioned increased the capital spending range up to CAD 5.4 billion to CAD 5.6 billion for the year, and we will be reducing our 2018 budget accordingly. Due to strong performance and outlook, the E&P production range has been raised by a further 5,000 barrels per day. And as a result of the extended outage at Syncrude, the production range there has been lowered by the same amount, 5,000 barrels per day. So the net impact is no change to our 2017 production range of 680,000 to 720,000 barrels per day. The Suncor Oil Sands cash cost range has been reduced by CAD 1 to CAD 23 to CAD 26 per barrel, as a result of a strong year-to-date cost management and Syncrude cash costs have been increased to US$42 to US$45 a barrel, reflecting the impact of the extended outage. Cash taxes have been increased by CAD 100 million, and that's primarily to reflect the higher cash taxes associated with increased North Sea production. And I should note that the range excludes the cash taxes associated with the lubricants and wind farms sales earlier this year. There's also a number of small changes made to the business environment assumptions, and those are simply based on year-to-date actuals and expectations going forward. With that, I'll turn it back to Michelle to take questions. Thank you.

[Operator:]

Thank you. Our first question comes from the line of Greg Pardy with RBS (sic) [RBC] (21

[Greg Pardy:]

Thanks. Thanks. Good morning. Steve, really just want to dig into a couple of areas not surprisingly, probably the Syncrude and Fort Hills, but maybe just before that, in terms of the capital increase that you've got this year, how much of that is related to call it the Syncrude repair work, and it sounds as though you'll be able to recover a bunch of that through insurance. Is that right?

[Steven W. Williams:]

Yeah, I mean we haven't been explicit about the breakdown. But, yes, in excess of CAD 100 million has to do with the work at Syncrude, of which a large proportion of that is CapEx, and we would expect to get a recovery. We can't be absolutely sure of the timing of the recovery. So, we've been prudent in the allowance. So, the CAD 500 million is the balance of Fort Hills and Syncrude. As Alister said, the Fort Hills piece is really just timing. We're still anticipating on Fort Hills that we will come in towards the top end of the range we guided on earlier in the year.

[Greg Pardy:]

Okay great. And just with Syncrude. Can you touch maybe on just what's going right, what's going wrong, and just how you're thinking about the ramp-up coming into August?

[Steven W. Williams:]

Yeah, I mean, first of all, perhaps it's worth just giving a snapshot of where we are operationally today, and I'll do it a little bit broader than just Syncrude. I mean Syncrude is already up at – between 70% and 80% of its nameplate capacity this morning. So, we're already exporting well in excess of 250,000 barrels a day, and (22

[Greg Pardy:]

Thanks for that. And maybe just the last one is, you touched on the – just the commercial discipline (25

[Steven W. Williams:]

I mean it's a little bit early. Literally, we're only a few days into the discussion, so it's too early for me to comment in detail on the dispute itself. What I would say is, the plant is 92% complete as of today. So we're really on the final stretches. Suncor and Teck remain completely aligned in our approach to the project, and I am not anticipating any impact on cost and schedule. So, if anything, there is what we discussed today about the – because we get within (26

[Greg Pardy:]

Thanks, Steve.

[Operator:]

Thank you. And our next question comes from the line of Neil Mehta with Goldman Sachs. Your line is open, please go ahead.

[Neil Mehta:]

Good morning guys. First question is related to the FX strength, the CAD-USD. And we recognize that you lowered the cost guidance here today as part of the release. Could you just talk about how that exchange rate change can – makes you think about the cost structure going forward? And I have a follow-up.

[Alister Cowan:]

Yeah Neil, I mean, the change in the operating cost guidance we gave on the Oil Sands operations is really just – it's got nothing to do with the FX, it is all to do with us driving cost out of the business in a sustainable manner. I mean on the FX, with the pluses and minus, we take some negative impacts on the oil prices that translated back into Canadian dollars. But you saw the FX gain offsetting that as we translate our U.S. dollar debt. So, on a net-net basis, we manage it through the balance sheet. And so we don't typically go forward (28

[Neil Mehta:]

That's great. Second is the strengthen E&P has surprised us over the course of the year. Can you just talk about where you're seeing that strength, (29

[Steven W. Williams:]

Hi, yeah, I mean we are very pleased with both the production and operating costs in that offshore business. And Neil, as you know it is a highly cash generative business. We have been investing albeit at not very material levels to Suncor, but we have been investing in a very selective targeted way, and we're starting to see the strong returns from those investments. So you will see us continue to do that. It's all of those if you like. So it is broadly across the operations. They've done exceedingly well. And as we move towards the end of this year, you're going to see the ramp up of Hebron as well. So although it's not – it's a very important part of our business, we've always – I often get questions about the divestment of that business, and I said, we do see it as a part of our integrated business, it gives us some diversity, so when we see some trends in other parts, it's a very robust cash generator for us. So, I'm pleased that strategy has been working and (30

[Neil Mehta:]

Great. Last question for me is just around share repurchase, just going back to your comments Alister. It sounds like if I'm interpreting what you're saying is, if oil stays around US$50 a barrel, we should assume that you continue to execute the program, if it falls to the lower end of a range of call it US$45, you take your foot off the pedal a little bit, and if it goes above US$50, you get a little bit more aggressive. I might be putting words in your mouth, and I am trying to create a formula where there might not be one, but any comments there would be great?

[Steven W. Williams:]

I mean, yeah, let me just do it from me if you like. You've heard Alister speak, but let me just give you a slightly different cut. I think you've nailed in a sense. I mean the flex we have in our capital allocation is, we are committed to our dividend. We have capital expenditure on organic stuff, which is starting to come to an end. But you know those programs are disciplined and executed over a period, and we tend not to slow down or speed those up. So the piece of flexibility in our capital allocation is share buybacks and you know we've never given specific targets per se, but I think we were quite clear. We talked about CAD 2 billion in the range we were looking at, which was in that mid-50s type range. So you'll see us just be prudent and flex share buybacks up and down.

[Neil Mehta:]

Perfect. Thank you.

[Alister Cowan:]

I would just add to that Neil, we have bought just under CAD 500 million of stock in the last three months, when our prices were in the sort of certainly at the (32

[Neil Mehta:]

Perfect. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Roger Read with Wells Fargo. Your line is open. Please go ahead.

[Roger D. Read:]

Yeah. Thanks. Good morning.

[Steven W. Williams:]

Good morning Roger.

[Roger D. Read:]

Hopefully. Okay. Good. Yeah. I just wanted to kind of come back on some of the OpEx questions, but maybe starting with Syncrude as you know you had the downtime planned you had the fire, as you've gone through the restart process and then work. Is this something we can identify as an equipment issue? Is it a process issue within Syncrude or you know we are talking about too few or maybe not quite the right people in place?

[Steven W. Williams:]

No, this is a specific equipment issue, which is unlikely to be repeated. So, it's not something – that's what I'm confident (33

[Roger D. Read:]

Okay. And actually that kind of steps into my next question, as you think about the OpEx performance over the last year, I think in the press release some of that is obviously due to lower natural gas prices, but where do you think you are in sort of the – where you are today, where you want to be with OpEx as a sort of a percentile marker? And I'm thinking both the Oil Sands and the E&P side business?

[Steven W. Williams:]

Okay. I mean, let me just give you some general comments. I mean, clearly it is an industry we benefited from lower gas prices for a number of years now. But they haven't changed significantly through this period. So know the costs you're seeing quarter-on-quarter and year-on-year are not largely driven by reduced energy cost. They're primarily driven by a structured program of working hard to drive systematically cost out of the system. So both in Oil Sands and E&P, and in the downstream, you are seeing, in fact, in the corporate center as well, we have a program in each of those areas. In terms of the cost reductions, and I mean, we can be more specific off of the core (35

[Roger D. Read:]

Okay, great. I appreciate it. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Phil Gresh with JPMorgan. Your line is open. Please go ahead.

[John M. Royall:]

Hi. Good morning. This is John Royall sitting in for Phil. On the CapEx rates, could you tell us how much has already occurred in 2Q versus to come (37

[Alister Cowan:]

Sorry, John, could you repeat the question, I didn't quite catch that.

[John M. Royall:]

Yeah, the CapEx rates, just wanted to know how much of it is related to things that have occurred in 2Q versus raises for the second half?

[Alister Cowan:]

Yeah, we're pretty much on budget, as of today, our year-to-date, most of that will be an acceleration in the second half of the year.

[John M. Royall:]

Okay, great. And then I think you talked about driving towards longer term CAD 5 billion all-in CapEx number. Is that still a good number to think about, particularly in light of everything that's going on with Syncrude? And it would be as early as 2018 that you would think about that number?

[Steven W. Williams:]

No, we're talking broadly CAD 5 billion, and we've talked about it – that's a good number to put into your multiple. We talked about that for 2018 and 2019. So they are good numbers. Of course what Alister said this morning, they are obviously approximate numbers, but you can expect the money we brought forward to come out of the 2018 budget. So you will see a decrease from that CAD 5 billion.

[John M. Royall:]

Okay, great. And I know you've touched on it a little bit, could you go into some more detail on the nature and the scope of exactly what you're doing in Fort Hills for the – related to the CapEx rates?

[Steven W. Williams:]

Sorry, John, your line just broke up slightly at the end. Could you repeat your question?

[John M. Royall:]

Yeah, if you could just give a little more detail on the scope of what you're doing at Fort Hills with the CapEx rates? I know you mentioned it a little in the remarks.

[Steven W. Williams:]

It's simply – we've got the opportunity. What we are finding is that the progress we are making on secondary extraction is above the targets we had in. So we have been able to see the opportunity by retaining the workforce more this year, to be able to get the major pieces of that project complete and all of the hydro testing complete this year. We'd always planned that for the first train. There are two other trains. It looks as though we're going to be able to do that with the productivity that we have this year. So it's simply bringing that from 2018 into 2017.

[John M. Royall:]

Great. Thank you.

[Operator:]

Thank you. [Operating Instructions] Our next question comes from the line of Frank McGann with Bank of America Merrill Lynch. Your line is open. Please go ahead.

[Frank McGann:]

Yes. Thank you very much. Yeah, if we could go back to the Total dispute. Just to get a little bit more clarity on. Is this primarily commercial, strategic, technical, is it primarily related to the CapEx increase? What is actually driving that? And, assuming that they were not to go along with all of the spending, does that – would that change the eventual ownership percentages as a result of a carry that you might undertake for them?

[Steven W. Williams:]

Yeah. I mean, as I said, it's too early for all of that. We're a few days into it. I mean, as I said, we're 92% complete. So this is largely – they're not very material conversations, in terms of the context of the project. It is a commercial discussion, not a technical discussion. And I think – I got asked several times last time on the call, are Total looking to sell parts of their project? We know that they have been looking at various strategies, but in this case, this is a commercial discussion between ourselves and Total, too early to talk about the detail. The reassuring message I would like investors to take away is, we're 92% complete, we're not anticipating this affecting either the cost or the schedule of the remainder of the project, so, frustrating at this stage, but not that significant.

[Frank McGann:]

Okay. Thanks. And if I could just follow-up, just in terms of overall cost trends, are you seeing any signs of pressure at any parts of your business?

[Steven W. Williams:]

No. Not particularly – I mean we're seeing, particularly operating costs and capital costs still continue to move in the right direction.

[Frank McGann:]

Okay. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Travis Wood with the National Financial. Your line is open. Please go ahead.

[Travis Wood:]

Yeah. Good morning guys. Just a question around the E&P business, it looks like results have been a bit better than expected. So, can you help us understand, as Hebron comes on and the ramp of that, and what that could look like to the aggregate E&P production profile over that ramp period?

[Alister Cowan:]

Yeah, Travis, I think we've been clear that it's a three-year ramp-up on Hebron, as we drill the additional wells or the production wells over the next few years from the platform, that will ramp-up in 2018 19, 20 (43

[Travis Wood:]

Okay. And do you think that more than offsets the other declining parts of the portfolio?

[Alister Cowan:]

Yeah, to a certain extent yes, we should see some increases in E&P production, but I would caution you, it's not the whole thing, there is some declines coming in over the period as well.

[Travis Wood:]

Okay, great.

[Steven W. Williams:]

Yeah, that sees that business remaining where it is, or maybe even slightly better, due to the middle, maybe slightly beyond, in the next decade.

[Travis Wood:]

Okay. Thank you. I appreciate that. Thanks guys.

[Operator:]

Thank you. And our next question comes from the line of Dan Healing with The Canadian Press. Your line is open. Please go ahead.

[Dan Healing:]

Good morning. Thanks for taking my question. I'm just wondering if you can be a bit more specific on what the dispute with Total involves, you said it involves funding, is that funding for the portion of the capital costs that have been moved forward, or is that for funding farther down the line?

[Steven W. Williams:]

I mean no, it's very early stages of the dispute. It's inappropriate for me to talk in any more detail than I have done. The project is 92% complete. So, you know, we're very close to the end of – the end of the spend, it's a commercial discussion, which is not that unusual at this stage in a project of this size, and most of the spend is really set to the end of the project. We have 7,000 people on site finishing it off, and three quarters of the plant is in the hands of the operators and its being started up. So it's not unusual to have these discussions at this time.

[Dan Healing:]

Okay. If it's not unusual, and these kinds of things happen all the time, I guess I'm wondering why you're bringing it up on a conference call, Steve?

[Steven W. Williams:]

Because it's – we are very transparent about where we are, and we think it's important to keep our investors fully appraised of where the project is.

[Dan Healing:]

Okay. Thanks.

[Operator:]

Thank you. And our next question comes from the line of Jeff Lewis with the The Globe & Mail, Inc. Your line is open, please go ahead.

[Jeff Lewis:]

Hi, I just had two quick questions, one about the share buyback. Can you just clarify, are you suspending the share buyback now or just signaling that you have room to sort of tap the brakes on those?

[Steven W. Williams:]

No, we're not suspending the share buyback. As Alister said, we bought about CAD 500 million worth of our shares back over the last period. We anticipate – we're still buying, as we speak today, but we buy our stock back with our free cash, after all of our other commitments. And as that cash flow fluctuates, depending on our spend and the price of crude, we'll flex it back up and down. But no, we're still committed to the program.

[Jeff Lewis:]

So, still the CAD 2 billion, I believe it was level for the year?

[Steven W. Williams:]

That's our target, but it will depend on free cash flow.

[Jeff Lewis:]

Okay. And then just quickly, TransCanada has launched another open season for Keystone XL, do you see that project as still being necessary in today's market given some of the changes that we've seen?

[Steven W. Williams:]

I mean, we generally support all of the projects which are currently seeking access to markets that we support, Keystone support Trans Mountain we support the Enbridge Line 3 project. All three of them seem to be making steady progress, which I'm encouraged by, and yeah I think you know, we certainly need these projects and it depends on you know what time they come into service. But no, I think the projects are still needed in the industry and Suncor is supporting them.

[Jeff Lewis:]

So are you a shipper on Keystone XL?

[Steven W. Williams:]

Yes. And we're already a shipper on the lower half of Keystone, which is already operational.

[Stephen Douglas:]

I think we can go to the next question operator.

[Operator:]

Thank you. Our next question comes from the line of Nia Williams with Reuters. Your line is open. Please go ahead.

[Nia Williams:]

Hi there. Can you give us a sense of what level WTI Suncor needs to breakeven in its Oil Sands operation? I know you've spoken about operating costs, but I'm just wondering once you put in G&A costs in transportation and blend in, what the breakeven number is?

[Alister Cowan:]

Okay, I think we've been very clear on this, but the breakeven cost for Suncor to cover its operating cost on sustaining capital is around US$30. If you add in the dividend it's US$40. So for you I would use US$30.

[Nia Williams:]

Okay. Thanks.

[Operator:]

Thank you. And I'm not showing any further questions. And I'd like to turn the conference back over to Steve Douglas for any further remarks.

[Stephen Douglas:]

Thank you Michelle, and thanks everyone for joining us today. If you have further questions or detailed modeling questions, of course, we're available and welcome your call. So thanks again. We will sign off.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.