Suncor Energy Inc (SU) 2002 Q2 法說會逐字稿

All participants please stand by.

Your meeting is ready to begin. Good morning,

ladies and gentlemen. Welcome to the Suncor

Energy second-quarter results conference call. I

would now like to turn the meeting over to

Mr. John Rogers, vice president of investor

relations. Please go ahead, Mr. Rogers.

Thank you, Stacy, and good

morning, everyone, and thanks for listening in to

our conference call on our second-quarter

earnings.

I have in the room with me Rick George, our

president and CEO, Ken Alley, our vice president

of finance, [inaudible] James, our corporate

controller, and John McKenzie, the manager of

investor relations, so we have a good group in

here today to talk about earnings for the second

quarter. Rick is going to give you a bit of an

overview, in terms of his thoughts on the earnings

and a little bit about what he's going to think

going forward. I'll go into some specifics on the

second-quarter earnings. And then go over the

outlook for you, and then we'll open it up for

questions. So I'll turn it over to you now, Rick.

Okay. Thanks, John. Good

morning, everyone. Delighted to be here and also

very pleased to discuss with you the results of

our second quarter.

I know that you have the press release, but just

to recap, the earnings in the quarter were

$229 million. That includes the - some

$34 million from the sale of our natural gas

marketing business. This is a business we started

up from scratch about four years ago, and just

decided it was not right for us for the long haul.

Now, that number, $229 million, is up from

$90 million in the first quarter of this year, and

obviously up significantly from a year ago.

Cash flow was $352 million, up from 181 million in

the first quarter of this year, and, you know, a

lot of this can be attributed to the investment

that we made in Project Millennium, the increase

in volumes at our oil sands plant and improving

operations there.

You know, we made significant progress in this

quarter on what is, you know, really our major

three priorities for the year, and that is, of

course, increased production, working on getting

our costs down, and also paying down the debt and

then, of course, after that, future growth.

So all of those issues, we are making progress on,

and quite proud of the efforts of the entire

Suncor team as we've gone through this journey.

First of all, at the oil sands plant, production

averaged about 208,000 barrels per day in the

second quarter. That's up substantially from the

180,000 barrels a day we averaged in the first

quarter.

You know, we always knew that we were going to go

through a learning curve with these new assets,

and I would say we're kind of right on track in

terms of - you know, I guess, a normalized kind

of learning curve. You know, we've still got a

lot of work to do. In fact, I often describe

these new assets as getting through the first

winter, which was the first quarter and then

preparing to get through the next winter, and I

think that's still kind of where we are. Still

have a few issues - a number of issues we're

working on to correct, trying to kind of get

things buckled down, getting ready for the next

time we go towards that minus 40-degree

temperature. But, you know, I think that there's

no doubt about the ultimate capacity of this

plant. There's no doubt about our ability to run

it. There's no doubt about the fact that the -

the mix we get out of it is as we designed, and

the fact that we're trying to - and are actually

resulting in driving shareholder value off of this

asset.

You know, I always consider this project that we

went through as being one of the biggest risks

that Suncor will ever have to take, and I think

we're feeling good about where we are with it.

It's not perfect, but obviously we're really

making progress, so I'm proud of the team that's

worked so hard on that.

We've also made progress and continue to make

progress in the area of reduction of cash

operating costs. $12.60 this quarter is a good

solid progress. It's much better than the first

quarter, which we told you was a big transition

quarter for us. We're not there yet in the sense

that we need to continue to work hard at getting

our volumes up, which will help get the - these

average costs down, and also working on the

underlying cost structure itself.

As many of you know, we have a program in-house

which we call 9 by 3, which is a really stretch

target, trying to get these operating costs down

in the $9 a barrel range by the end of 2003.

I'm not giving up on that target. I'm just

telling you it's going to be very difficult. I am

pretty confident that we will get in the $10

range, and that's - if I were modeling it, that's

probably would I would model for Suncor, kind of

2004 and beyond. But that doesn't mean I'm giving

up on the $9. I'm just saying that we realize how

tough that target is going to be.

And I'll give you - you know, we'll kind of keep

you abreast of how we do related to that.

I guess one other area I'm going to express a

little bit of caution is we had put out our

estimate of $12.50 target for the year, and, you

know, the first quarter we were at 12 - I'm

sorry, 16.25 in the first quarter, and with that

first quarter being so high, it's difficult to get

down to that 12.50 range. Again, I'm not giving

up on it. We'll see what kind of a continuous

improvement we can make, quarter over quarter, in

the third and the fourth quarters. Obviously, our

goal is to get below that. Whether we can

actually hit that 12.50 target, that's something

we have yet to prove, both to ourselves and to

you.

You know, the second objective we actually are

very hot on, both this year and next, is paying

down our debt, a reduction of our debt. During

the quarter, we paid down our debt by

approximately $90 million. This remains one of

our top priorities, and I'm optimistic we can pay

down our debt by three to four hundred million

dollars by the end of this year, and obviously our

target is $700 million by the end of '03 and is

still a high priority and one, I think, is

achievable, given both the improvement in

operations and in the oil prices as they are

today, the volumes that we're seeing coming, and

the things that we see on the plate.

Now, that doesn't mean that we've given up on

growth projects. This is a big year for progress

at our Firebag operation. As you know, we're

under construction with Phase I of Firebag, and

although we did have some impact from some fires

in the region and we lost between a week and two

weeks in terms of construction time, the project

overall remains on schedule and within budget.

About 20% of the on-site construction is now

completed. In terms of total project, we're about

25%. About one-third of the well pairs have been

drilled, and about $235 million has been spent

this year to date. In fact, we will spend the

majority of the money on Firebag this year.

Construction has also started on our vacuum tower

project, which is the millennium vacuum tower.

Ground-breaking is under way, and things are

getting started there as well.

So as much as we're kind of getting back to

operational excellence, the growth projects we've

talked about are also starting and underway and

we're feeling very good about those. And, you

know, the size of these projects, we're feeling

very much that we're much more in control and that

these will not run away from us in a cost sense,

as we go forward with these projects.

As I look into the second half of the year, my

priorities have not changed. It's really one, I

mentioned earlier, of getting volumes up,

operating excellence. With that, working on the

cost structure and trying to get our costs to come

down, making progress through the year on paying

down debt, and then also working hard on not just

the two growth projects I just mentioned but also

the next series of growth that leads us towards

that half a million barrels a day in that 2010 and

2012 kind of range. So, you know, the true

potential of these assets and this business model,

I think, is quite evident. It's good to be a hard

asset company in the kind of market we have today.

You know, it's - if you've ever seen a hard asset

company, I think it's this company. It's one

that's both transparent and one that really has

invested in steel, in resources, in energy needs

for our customers.

I know that the - at the moment, the financial

markets are going through a great deal of

uncertainty. I think in the long term and, you

know, Suncor over the last 10 years, even with

today's price, has delivered almost 1200%

shareholder value in terms of total shareholder

return over the last 10 years. I believe that

companies like Suncor, with a clear business plan,

hard tangible assets, a real vision about where

they're going, with good growth rates and high

return on capitals will continue to show good

shareholder returns.

So for us, it's not really a change of strategy,

just kind of keep pursuing what has really

delivered up to this point, and really kind of

looking forward to the next several years.

I think, you know, we've gone through some of the

toughest periods with this company over the last

couple years and the next several should actually

start to be a little bit more fun. That's really

the way I describe it with my team. So that's a

good summary, I think, on where we are. John, I

think I'll turn it back to you.

Great, great. Thanks, Rick, and

let me just go through a couple of things. We did

put the guidance out on July the 10th, and really,

the earnings were a little bit higher than the

guidance. The cash flow was right in line.

Production up at oil sands came in at about

207,000, you know, barrels, 600 barrels, right in

line with the projection of 208, so no big

discrepancy there. Sales came in at 197, well

within the range that we set out. The sales mix,

58% light suite diesel versus 42% light sour I

think was well within the range that we gave you.

Realizations of 3668 to on average was within the

range, and cash costs, we're delighted to say,

came in, you know, slightly under the range that

we gave you. So I think there's some good news

there.

Really, the earnings coming in slightly ahead of

the range was just subject to some finalization of

the numbers, and nothing more than that, so, you

know, we're delighted with the earnings at 229 and

with the cash flow at 352.

Let me just spend a minute, because I know you'll

be trying to do this, to go through a normalized

earnings and take out the adjustments. And I'm

happy to say that we don't have too many

adjustments, as we have had in the past. It's

getting a little easier from this side, I can tell

you, and hopefully it's getting easier from your

side.

Net earnings after tax were about 229. That did

include the sale of the natural gas division at

Sunoco so this was included in Sunoco's earnings

of about 34 million.

There is an FX gain, which we went over on the

guidance call with you, of about $32 million.

So if you look at normalized earnings after tax,

they're in the neighborhood of about 163 million.

So they contain the two adjustments, the sale of

the natural gas division of 34 million, and the FX

gain of 32.

After we take out the dividends and the gain on

the revaluation of the coffers, again, according

to the new accounting policies, we have normalized

earnings, net income of about $165 million.

So those were really the adjustments. Not many,

as I say. Mostly accounting adjustments, so we

can blame [inaudible] James in terms of doing

those, but, you know, the business is working

pretty good for us.

Let me just go over a couple of other things

before you ask. Hedge accounting. In terms of

the earnings impact in the second quarter, it was

about - about $40 million. Cash flow, about 58.

And year-to-date, it's about 50 million in

earnings and 75 in cash.

$5 million in capitalized interest during the

quarter was included, and if you look at the

corporate charges, there are about $38 million in

the interest line, so you'll see a positive number

there.

Mark-to-market as I mentioned on the preferred

shares was about 9 million. The other piece I was

going to mention is our statements did include an

adjustment to the income tax because of the change

to the Alberta rate by .5%, which became effective

in April of this year, and that was about

$10 million. So you'll have to include that in

your models also.

And let me just go over the new rates for you.

Oil sands is about 35%. 90 is deferred, 10 is

current. Natural gas is 48%. 95 is deferred, 5

is current. And EM and R, or Sunoco, is 37%,

about 10 is deferred and 90 is current.

The other piece I was going to mention is on DD and A.

In the - in the first quarter, we had DD and A of

about $6.13, up at oil sands. In the second

quarter, it was about 5.58. The second half of

the year should be somewhere in the neighborhood

of about 5.10. So we're seeing a continuing

decline in the DD and A as we get those volumes up,

and we should see some steady progress. Still

won't get down to the $4.75 till we get some of

the assets we're writing off over the next 12

months off the books, and we get production up to

225,000 barrels a day.

And the last piece I was going to mention, on the

quarter, is if we had produced at 225,000 barrels

a day, our cash costs would have been in the

neighborhood of about $11. So still some work to

do to get those down to 10, but obviously we're

making some pretty good progress.

So that's all the comments I think we're going to

make on the second quarter, subject to your

questions, and let me just quickly go over the

outlook for the third.

Production we're anticipating for the third

quarter will be in the neighborhood of about 200

to 205. Still have a 200,000 barrel a day outlook

for the year. Now, the 200 to 205 does take into

account the 8-day turnaround that we did on 5 C 9.

I think quarter to date, we're averaging in the

neighborhood of about 170 barrels a day. Hence,

we're going to get the 200 to 205. And the other

reason that we didn't want to change the yearly

target of 200,000 barrels. Sales will be in the

range of 200 to 205. Realization of crude oil

sales exactly the way it's been before. A little

wider range in terms of cash operating costs,

11.25 to $12, so we'll see where they unfold, but

I mean what you should take away from here is

obviously we're on a downward trend in terms of

this cash operating cost.

Nothing really new on the natural gas side.

Natural gas continues to improve with volumes

coming on somewhere in the neighborhood of 180 to

190.

That's really all I was going to mention. We did

give you a couple of other things, in terms of,

you know, what we're realizing today for crude oil

and natural gas refining margins. I'll let you

read that at you're leisure. And we did update

you in terms of the crude oil position, so really,

the - the third quarter is, you know, steady

improvement in terms of volumes, in terms of

costs, and, you know, really it's unfolding the

way that we had anticipated.

So that's all we were going to say on the second

quarter and the outlook for the third quarter.

Stacy, we'll be happy to open it up for questions

now and take them from the participants. 00:15:47

Thank you, Mr. Rogers.

If you are from the analyst community and you have

a question, please press 1 on your touch-tone

telephone. Fur using a speakerphone, please lift

the handset and press 1. And should you wish to

cancel your question, please press the number

sign. Please press 1 at this time if you do have

a question. And our first question from Tyler Dan

from Banc of America Securities. Please go ahead.

Good morning, gentlemen. How are

you.

Great.

The - just to drill a little bit

deeper into the cash costs in your commentary

there, could you go through a little bit on what

your assumptions are for overburden removal for

the third and fourth quarters, and I think that

will help us get a little bit of sense for what

the full year might end up looking like.

Sure. Tyler, we have a budget

for the full year of about $140 million for cash

overburden removal. We spent in the first quarter

about 55. In the second quarter, $32 million.

Okay.

So we've - what we've done is

averaged the final two quarters with the remaining

amount, and I can't do the math that fast in my

head, but - so we spent 55 in the first, 32 in

the second, so we'll send the remaining of the

$140 million budget in the third and the fourth

quarter.

The rest will be just right out of cash operating

costs, operating costs on the P and L, with the

volumes - actually, the sales volumes that we had

anticipated.

And does it look like about $13 for

the year would be appropriate, you know, just

to - to be aligning ourselves with some of the

caution that you'd outlined earlier in the call?

Well, you know, I think our

target still is 12.50, you know, for the year. We

are, obviously, putting a lot of caution around

that number. The only thing I can access - you

know, I can suggest that you do is wait - and

that's what we're doing, is wait until the end of

the third quarter. Let's see what we actually

realize in the third quarter in terms of those

cash operating costs, and, you know, we'll come up

with a value for the fourth quarter.

Should you choose to, in your model for - to be

conservative, move it up from 12.50 to $13 or that

range, you know, you should feel free to do that.

Obviously, the 12.50 is going to be a hard target

for us.

Okay. Thanks very much.

Thank you.

Thank you. Our next question is

from Paul Chen from Lehman Brothers. Please go

ahead.

Thank you. Hi, guys.

Hi, Paul.

Hi, Paul.

Several quick questions. Rick, I'm

wondering if you can share with us some of the

thinking behind when you decided to exit the

retail natural gas market, that business. I think

that's several years ago that you was having some

decent hope that because of your retail exposure

in that market, it will be a good business, so I

just want to see that - I mean, in the future, I

mean, how you decide which business to begin and

which business to be out.

Yeah, I mean that's -

And secondly, you haven't talked much

related to the Voyageur, Phase I and phase II

expansion project. I know you're still really

early. Can you talk about that? When are you

guys going to take a closer look in terms of the

economic and then when that you may decide if that

project is going to be definitely a go-ahead or

not and what is the current hurdle that's facing

you before you can make that decision?

Okay. Thanks, Paul. What you

started off as saying is a simple question, that

is not as simple as you might think it is.

Well, for you it must be a simple

question because you're thinking about it all the

day.

That's right. On the natural gas

business, you know, we - we do periodically have

very small kind of entrepreneurial startup kind of

little businesses that we take a look at. This

was one of those I think we initially got into

this business and we put about five or six million

dollars which we expensed when we went into the

business. We - we did take some losses as we

went through some startup phase of that.

What the initial thought was there was we were

going to try to make some ties with our customers,

between the purchase of natural gas for their

homes and also purchase of Sunoco gasoline. As

you know, we have about 20% of the retail market

share in Ontario between the Sunoco and the

pioneer brand. And what we found is we were

having a very difficult time making those ties for

the customer between those two commodities.

We also found that there was a lot of competition

in that particular business that really, to be

honest with you, was willing to take a lower

return on capital than we were willing to take.

We ended up selling it really into what is an

income trust, which, again, has a completely

different set of economics.

You know, I think we sold at a great time and it

was a great price for us. That's why you see the

earnings there. And, you know, it's kind of

typical of Suncor and the way I think about these

things. It's good to have some entrepreneurial

spots in a company like Suncor that you let run a

little bit. Now, I wouldn't put large amounts of

money in this kind of thing but we did learn a lot

by it as an organization. We learned we can't

make those ties. We learned a lot of things that

related to our customers and our database and

exited it, I think, at a good time. So I don't

know that this is a negative. In fact, you know,

it obviously returned great returns for our

shareholders. But having those entrepreneurial

spots, I think, is good.

We have one right now in our natural gas business

which we call prospect generation shop, and it's

very small. We haven't put much money into it.

It's been very interesting, though, and very

enlightening, and that's one that we could talk

about down the road and maybe kind of show you

some of the results out of that.

So I look at this a little bit as - especially a

company like Suncor, where the strategy and the

vision is so clear, letting people have a little

bit of rope around entrepreneurialism and trying

to look at their business differently and try to

drive returns. And what we're always looking at

is how do you get your return on capital up. Are

there ways that you can look at your business in

which you can invest less capital but still get

cash flow or drive shareholder value.

Both of those two examples I've just given you,

both the natural gas business and retail business,

and what this prospect generation shop, are both

kind of attempts at that same thing. So, I mean,

that's kind of the framework that I would put

around it. Obviously, exiting it at the right

time is just as important as when you enter it,

and hence, you see the positive results here. I

think it's been, overall, a good return for our

shareholders.

Certainly. Rick, in the overall

scheme of thing, when you're dealing with those

kind of a little bit more risky venture,

internally do you have a set - is target in terms

of how much carpet you will be willing to risk in

any particular one venture like that?

Yeah. I mean not a hard and fast

rule. I would say that the one thing that is

probably true of Suncor is, number one, we

spend - we have a very high capital budget in

this, and this industry in general does. I mean,

this year our capital budget was $900 million.

You know, on something like this, you know, three

or four million dollars a year would be a big

number. So if you think about it in percentage

terms, not a lot of money would I allow to kind of

run on that.

I mean, you got to remember what really drives

shareholder value in this company is that set of

cokers and that whole - and you probably see the

vision work that I've shown you on 2010 but it's

really - I think it's really how do you get cheap

bitumen into those [inaudible] to separate the

light product. That's really - that's really the

driving force behind this company, so I would make

no mistakes about that overall.

Let's talk about Voyageur a minute because this is

something I know we haven't announced anything,

and really aren't in a position to announce

anything, but we are working extremely hard as a

senior management group, working on what Voyageur

looks like. And although it would be quite simple

for us to go out and just say, listen, we're going

to add a third and a fourth set of cokers,

hydro-treating, it's going to look just like

millennium did only we're going to do it better

and in smaller packages and life will be sweet and

that's it, I think what we're trying to do is

optimize off of that. And that's why you've heard

me talk about looking at refining assets. I mean,

if I could joint venture or buy a refine reap that

has hydro-treating so I could hydro-treat south of

Fort McMurray instead of doing it all at Fort

McMurray in one spot, definitely looking at this

that.

What I would expect around Voyageur is that we'll

get more definition over the next year. I would

expect a year from now that I'll be able to give

you a pretty good definition. Now, you've got to

remember, Firebag, stages 1 and 2 is very set.

The vacuum tower is set. The next set of cokers

is very clear. So the next four years, we know

exactly what pots and pans we really are going to

put in place.

And that is, you know, Firebag, stages 1 and 2,

maybe even 3 and 4, the vacuum tower, which is -

construction has already started this - is

getting started this month, and then the next set

of cokers. Now, what we do beyond that is the

thing that we're working so hard on now. We're

trying to optimize it. Again, I think extreme

flexibility and a real emphasis on return on

capital is what's driving this.

Rick, please, on your - I know this

is a little bit premature. Based on your -

Paul.

Yeah.

Paul, there's probably about 40

other people that want to ask questions. Okay.

Sorry, I don't mean to cut you off but maybe we

can have this discussion at another time.

Okay. That's fine.

Okay.

Thank you. Our next question is

from Andrew Fairbanks from Merrill Lynch. Please

go ahead.

Hey, good morning, guys.

Good morning.

In looking at the reduction costs,

reduction targets as you move into the third

quarter, could you give us some flavor of kind of

the character of things that you're going to be

working on to bring the op costs down. Is it

procurement or, you know, just what sub-segments

are the regions that should drive that.

Yeah. Okay. One of the drivers

in the short range is increase of volumes.

That's - you know, number one, that's always

going to help you because of the nature of this

operation, which is really a manufacturing plant

with high fixed costs, low variable costs, so

volumes up is obviously number one.

The number two thing that - and we're working on

broad sets of teams across that business. One of

the things I would, you know, remind people is

just after a huge expansion phase, after putting

3-and-a-half billion dollars in that business,

right behind that what you've got to do is steady

down and get excellence in operations and then

start working on cost structure. And it's

something that we haven't had the time to rework

on over the last four or five years because of

Project Millennium. When you're spending, you

know - we were spending at one point over

$5 million a day on construction, it's really hard

to get people to focus on the pennies. So I think

what you're going to see is just across the plant

kind - and we are experiencing across the plant

exercise in process and reducing costs and looking

at-an elimination of wastes. Obviously

subcontractors is a big target area for us,

suppliers and looking at every single supply

contract we have.

It's also looking at the very fine points that

if - for example, if we have a service where we

require two pumps to run at a hundred percent

capacity, but we have one pump out, the history in

this company has been, because production rate has

been so important, is we would actually call

people out on overtime to fix that third spare

pump, even if we didn't really need it, and we're

doing statistical analysis, for example, on all

those systems to say, well, no, listen, you can

wait till Monday morning, you can do this on a

regular shift, you don't have to pay overtime. So

it's down to the details. I'll give you another

example. And I do review this monthly in terms of

the progress because we have these study teams

looking at every single slice across the oil

sands, both kind of vertically and horizontally.

But one of them is a detailed analysis of if we

improve the roads in the mine, we can reduce both

energy consumption, wear on tires, speed, and,

therefore, increased productivity. And then we

also, with a review of what we can do to do that,

is the markers, and we'll be measuring against

that.

So very detailed kind of analysis on every part.

It's almost a time and motion productivity kind of

study we're doing here, and it takes a long time.

This is a very complex plant now, and, you know,

you're dealing with 2,500 employees. So, you

know, and lots of ideas, so we're trying to keep

it very creative and really across the board

review.

That's excellent. Thanks a lot.

Thanks, Andrew.

Thank you. Our next question is

from David snow from energy equities. Please go

ahead.

Yeah. Hi. I was going to say put

Tim on, he was on a tear there. I wanted to ask

about what other projects or projects you might be

thinking about launching in the period coming up.

You touched on Voyageur. Is there something else

that you're contemplating, or have you not really

formulated anything beyond that?

No, David, it's John. We haven't

really looked beyond that. You know, I think we

understand our business pretty clear. As you

know, one of the other step-outs that we did make

is we - you know, we looked at possibly taking

the technology down to Australia, and, you know,

we worked pretty hard on that for a couple of

years but I think we came back and we realized we

have such a - just a great business model here in

Canada. You know, that effectively we can grow at

15% a year and mid-cycle pricing get about a 15%

return on capital. We're not going to stray too

far from that business model. So there will be

little things here and there, but, you know, I

think we understand pretty clearly what our

business is and really fundamentally where we're

going to go with it.

Well, you mentioned your goal of half

million barrels a day by 2010, 2012. Is - and

you must be looking at different heavy oil

applications. Do you have any other projects

beyond Firebag that are in your thinking at this

point?

Yeah. It's Rick here. You got

to remember, Firebag has over 9 billion barrels of

recoverable oil in today's technology, so that -

you know, that's almost the equivalent of what

Kuwait has so we don't - although we have other

leases and other things, we're going to start on

the best lease that we have, and move from there,

which is obviously Firebag, so -

How does that compare with your

existing oil sand area that you're doing? More in

place reserves than you had when you began your

surface operations?

Yeah. I mean, our open-pit

mining operations today have reserves currently of

about two-and-a-half billion barrels, and so, I

mean the total company is in the 12 barrel

dollar - 12 billion barrel range, and you can see

the size and the scale.

Yeah.

But, you know, the one thing I'd

say is that, you know, I believe the technology

around in situ recovery, which is really the

Firebag technologies, and the technologies that we

and the rest of the industry are working on with

regard to that, I think, will really help us

reduce costs of producing heavy oil over the next

5 to 10 years.

Do you think the in situ will get

below the open-pit costs?

Yes, I do. What I can't really

predict is how quickly, but absolutely I do

believe that.

And so you're probably by the time

you got to 2010, 2012, you would be getting a big

slice, maybe 40 or 50% of the total, out of

in situ?

Absolutely. That's the game

plan.

Okay. Terrific. Thank you.

Thanks, David.

Thank you. Our next question is

from Brian Dutton from UBS Warburg. Please go

ahead.

Yes. Hi. John, I was just wondering

if you could clarify your caution on the 12.50 for

the year. Is that caution just really related to

the expected extra costs coming from the

turnaround in the first part of July?

No. Yeah. I mean that's part of

it Brian is, you know, we did - did experience,

you know, some costs with that turnaround with 5 C

9 during July. I think it's just overall

cautiousness. We're pretty comfortable that each

and every quarter we're driving those costs down,

and as I mentioned earlier, if we had run at 225,

we would have been in the $11 range, and we know

there's, you know, this room to go well below

that. But to try to hit - hit the average of

12.50 for the year is, you know, a difficult thing

because I think if you do the math, you'll find

that we, you know, probably have to be somewhere

in the $10 range in the third and fourth quarter

to do that. That will be very hard to do. I

think, you know, we are predicting for the third

quarter 11.25 to 12, so what you will see and I

think what our goal is, is each and every quarter

to drive those costs lower and lower. It's just

with that 16.25 that we did experience in the

first quarter, it makes it pretty tough right out

of the starting blocks. So I think that's where

the cautiousness comes from. It's not from our

belief that we can drive those costs down each and

every quarter.

So does the 11.25 to 12 include

incremental costs because of the turnaround in

July?

Yes, they do.

Could you quantify those costs?

I don't have them. I think that

turnaround was about $5 million, in that range,

Brian.

Okay. Great. Thanks a lot.

Okay.

Thank you. If you are from the

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At this time, there are no further questions

registered from the media community. Mr. Rogers,

did you want to take further questions from the

analysts?

Sure, if there's any further

questions, Stacy, that will be great.

Thank you. Louis Gorgardi from John

S. Harold. Please go ahead.

Hi, Rick and John. Nice job,

considering the environment.

Just have a couple of really quick questions.

John, I didn't catch it and it's my fault. Did

you say an overall tax rate? Did you give that?

Yeah. The overall tax rate for

the company is 37%.

Okay. And you said the DD and A for

2002, I think you - did you give a per-unit

number estimate?

I think it's going to average -

given where we are today and given what we're

expecting - somewhere around the mid-5's, 550, in

that range.

Okay. Great. And just this is like

my - more or less a question. On the natural

gas, I was looking at - I'm trying to understand.

I'm not trying to nitpick. I'm just trying to

understand why - what's going on in the natural

gas sector. Purchases of crude oil and products

was up, both for the quarter and for the half.

And why that expense is up.

Gene speaking. We have some movement of

gas back and forth between different pieces of the

business. Or downstream with the sale of that

natural gas business and we've been supplying that

business out of our natural gas business in the

upstream, and as we got out of that business, we

just started to intercompany, if you want to call

it that, transfer that gas back to that business.

So it's just the accounting, tracking those

[inaudible] going back and forth between different

segments.

You say this is between refining and

marketing segment and natural gas -

Refining and marketing segment. You'll

see that drop off going forward here, given the

sale of that natural gas business.

Okay. All right. Thanks have much.

Thanks.

Thank you. Our next question is

from Greg party from Goldman Sachs. Please go

ahead.

Hi. Good morning.

Hi, Greg.

Couple of yes, sir just on - Rick,

where is your current production rate at the oil

sands, given now that the shutdown is over.

It's around 200,000 barrels a

day, plus or minus. In that range.

Okay. And the other quick question

was just in terms of - I know your debt reduction

is a pretty key priority for you. How much

underneath the 900 million in capex that you'd

originally budgeted for this year do you think

you'll come? Do you think you'll need to spend

anywhere near that, or - and if so, is all of

that going to go to debt reduction?

That's a great question, and I

got Ken Alex sitting next to me so if I say

anything different, he'll kick me. I know that.

But my current guess is that we will not spend all

of the 900 million. My - you know, if you had a

good number, it would be 850, and, yeah,

everything that doesn't go to capital is going to

debt reduction. I can promise you that.

Okay.

And, you know, that really -

really, it isn't because - we have a very good

solid credit rating, A low in Moody's and S and P. We

obviously want to keep that. But it's really

around flexibility for the future. And, you know,

we're enjoying quite solid oil prices currently.

What we want to do is take advantage of this time

period, get this down so that as we go through

future growth plans, we've got an excellent

balance sheet to do whatever we need to do.

Thanks a lot.

Thanks, Greg.

Thank you. Our next question is

from Brock winterton from RBC Capital Markets.

Please go ahead.

Thank you. Rick and John, perhaps

you can just discuss your light sweet crude oil

price realizations because just looking back over

the last couple of quarters, they've moved around

a fair amount in terms of the differential off

what I'd call Edmonton light. Q1 it looked like

your differential was about 30 cents and Q2 here

it's about 3.50. Now, can you give us some

guidance as to what you would expect going

forward?

You know, a lot of that has to do

with some of the bitumen sales. We are seeing,

you know, a tightening of heavy/light

differentials, but we did ship about - I think it

was about 8 or 9,000 barrels of bitumen, Brock,

and I think you could probably anticipate that

into the third and the fourth quarter.

The other thing, of course, that, you know, did -

isn't quite getting us to where we want in terms

of price is we still have a little more sour in

that mix than we had hoped, so, you know, going

into the third quarter, if we can get it up to

two-thirds/one-third, you're probably going to get

that WTI Chicago equivalent that we have in the

guidance, and then the bitumen, that's just going

to do what differentials do in terms of the heavy

oil market, so that's probably the thing that

maybe is skewing you a little bit is the bitumen

sales that are picking up a little bit.

Actually, no, because I'm looking at

the light sweet crude oil price realization of

3707. Now, according to most numbers, the

Edmonton par price was like, you know, over $40,

40.50. So I don't quite understand why that is so

far off the Edmonton light price as compared to

previous quarters.

Yeah.

Now, is this - is this something in

the market or is it something in the production

side of your light sweet?

No, it's actually in the - you

know, where we're actually selling that product,

Brock. And, you know, the transportation into

that market.

So I don't think that that is significantly

different than what we had anticipated. I think

we're only about a dollar off, on average, of WTI.

But you know what? I'll be happy to re-look into

that question, and if I, you know, can kind of

come up with something different, I'll be happy to

get back to you on.

Great. I guess what I'm really

getting at is that the manufacturer of your light

sweet is in line with the specs that you were

hoping for and there's been nothing - there's

been no change in that.

No, sir.

Right. Okay. That was the key

issue.

Okay.

Thank you. Our next question is

from Robert plexman from CIBC World Markets.

Please go ahead.

Yeah. Good morning. The natural

guess production costs, better in the second

quarter than the first quarter but still turning

higher and anything you can do about that, or want

to do about that, or is that just life in the

natural gas business today?

I think that's just life in the

natural gas business, Robert. You know, it is -

we are looking at those costs and trying to make

sure that we, you know, get them as low as we can.

And there always is variations in this business,

quarter to quarter, so it's hard to give you kind

of a trend, if you like, from one quarter to the

other. You kind of have to look at the six months

or the 12 months in total, due to accruals and

everything else. It's a little difficult to carve

this up. And also, there were plant turnarounds

that can cause that. That can swing around a

little bit.

Okay. Thanks, John.

Thanks.

Thank you. Our next question is

from will Goldberg from Peters and company.

Please go ahead.

Thank you. I wonder if you could

tell me when you think you might have a public

disclosure about your Voyageur plans.

Yeah. This is Rick here. I

wouldn't expect this to come anytime soon. Again,

the next four years is pretty well lined up, and a

lot of this depends on our - you know, this

downstream integration I've talked about in terms

of looking down - downstream and looking at joint

ventures or potential purchases that would

minimize costs upstream. I'd think the public -

any kind of a public announcement beyond what

you've already kind of told you, I'd even be 12

months from doing something like this, and the

pieces will unfold over that period of time. So

you'll see pieces of this and I'll try to make

this clearer over the next 12 months. And I'm had

not trying to be elusive. To be honest with you,

we have multiple options on which way to proceed

here, not all of which is within our control, and

so as we look at these over the next 12 months,

we'll narrow it down to which ones we pick that we

think will drive best value and which

opportunities we can capture.

Okay. And maybe just of interest to

you, Shell announced a 10% cost increase on Alaska

this morning.

Oh, is that right. Misery loves

company, you know.

Thanks Rick.

Thanks, will.

Thank you. We do have a follow-up

question from Paul Chen from Lehman Brothers.

Please go ahead.

Hey, John. Quick question. Other

than the fractionator that you are repacing, are

there any other units that currently are over 20

years old and they need replacement?

No. No. I mean the - the plant

itself is, you know, 35 years old and it's kind of

been in a continuous change mode there. The

fractionating tower at 5 C 9 has really been the

Achilles heal and it has been for about the last

two or three years and that's the kind that kind

of restricted production. I think this is about

the fourth turnaround we've done on it in the last

two years so it's effectively the problem area.

There really isn't anything else significant, you

know, that has to change.

Thank you.

Thanks, Paul.

Thank you. We do have a follow-up

question from Robert plexman from CIBC World

Markets. Please go ahead.

Oh, hi, John, again. When I look at

your gasoline sales, I see the retail side,

volumes going up a little bit, but losing ground

on the other, I guess, which is the wholesale

side, and is that giving up market share or are

there things going on with your contracts in that

part of the business?

Well, we've lost some - some

market share, particularly, you know, some of

the - the jets that we've been selling.

Yeah. This is just gasoline. I see

it with the jet fuel, but it's the other gasoline

that seems to be slipping a little bit, so is that

a market share issue in that part of the business?

I think part of this, rob - it's

Rick here. I think part of this also reflects the

fact that we did not have particularly good

operations in the first half of this year out of

refinery. We were actually purchasing some

gasoline to make up for that. And so they would,

you know, have done a really quick analysis about

how much do we want to supply to our regular

customers versus just let them buy from other

people. I think it's more that than a permanent

change. There's no question about it, supplying

both our Sunoco stations or pioneer, which we own

half of, and - but I think, you know, when we had

the refinery problems, which, you know, on a scale

of Suncor, haven't really reached kind of enough

of an issue to make it, but I think it's more

related to that than anything.

Okay. Thanks, Rick.

Yeah.

Thank you. At this time, there are

no further questions registered. I would now -

we do have a follow-up question from Greg party

from Goldman Sachs. Please go ahead.

Hi. Just to follow up on the - on

your realizations, your - John, your crude oil

hedging loss in 2 Q was, what, 3.25 a barrel? Is

that about right? So your realizations - the

numbers you're quoting, the $37 that you locate

for the light sweet, would have been after that

hedging loss, right?

Yes.

Yes.

Okay. So you would have realized

about $40 which would have been in line with

Edmonton par?

Yes.

Okay. Okay.

Sorry. I'm just looking up

statements here. Yeah.

Thank you. At this time, there are

no further questions registered. I would now like

to turn the meeting back over to Mr. Rogers.

Please go ahead, Mr. Rogers.

Thanks, Stacy, and thanks,

everyone, for listening in. If there's any

further follow-up questions, of course McKenzie or

myself will be around all day today to, you know,

take your calls. So thanks - thanks for your 00:45:16 interest, and we'll talk to everybody soon.