Suncor Energy Inc (SU) 2005 Q2 法說會逐字稿

Good morning ladies and gentlemen, welcome to Suncor Energy's Second Quarter Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. John Rogers, Vice President, Investor Relations. Please go ahead Mr. Rogers.

Good morning everyone and welcome to our second quarter conference call. I have the usual suspects with us today. We have Rick George who is actually phoning in from a remote site; Rick is down in Denver, kind of talking to our new acquisition and looking over the new amalgamation of that acquisition, so welcome Rick from Denver. Ken Alley, our CFO here in the room with me as well as Brenda Cherry and Rob Dawson.

We are going to follow the usual format. I'll turn it over to Rick to give a bit of an overview in terms of the quarter, kind of give you bit of an insight in terms of the financial aspects of the business, I'll have a few clean up notes and then we will turn it over to questions. So Rick why don't we start with you?

Okay, thanks John, and obviously I am pleased to be here with you this morning from sunny Colorado. You know that the quarter obviously was not a strong one. Our earnings were a 112 million and cash flow was 305 million; I mean kind of inline with our expectations. Obviously the big story of the quarter is the impact of the fire and of course that will be a continuing story here as we go through the year. Now what we are still seeing and are very confident of is returning to full production at our oil sands plant during the month of September. So we are making very good progress on the fire rebuild; we are down to the final strokes of mechanical completion, and getting ready turn it over to operations and of course there's a lot of steps between here and first of [oil] but again startup during the month of September is still very much where we are targeting and I believe we can do that.

And right behind that by the way the vacuum tower which is the next bit of expansion comes on line, and so as soon as we get the Upgrader number 2 lined up back out then we'll start working on bringing the vacuum tower up because the construction is really at mechanical completion here as we speak. And so you know while obviously the fire and the impact of the fire has been a very big event for us in 2005, you know we have accomplished a lot over the last 6 months. We have recovered from this major fire, the rebuild is going well, the construction of the vacuum unit is really nearly complete and will be turned over to operations in the next 30 days. We've successfully completed the turnaround; many of you will remember that we are planning to take the Upgrader number 2 down for a month in September and of course all of that work got done during this outage. And we have also made significant progress at Firebag, we had maintenance last month again working on issues on the above ground equipment, we have actually introduced two down hole pumps in two of the wells and those wells are achieving the kind of 2 to 2.2 similar ratio that we have talked about before.

So the reservoir actually is performing very well and we feel like we have got the above ground equipment and really what is a water handling system, we think we are making significant progress there as well. The other things we did during the last four, or five months is take the opportunity to pre-strip the mine, and so one other things we've done is built inventory. We do believe once we get U2 back up and the vacuum tower, obviously, volumes will be up, we'll need to have a very strong bitumen production period, particularly through this coming winter and pre-stripping the mine made a lot of sense to get that accomplished. So a lot going, on not just at oil sands but across the company as we -- as we get forward to, obviously, a great and a very strong finish to this year, but setting ourselves up I think for a very strong 2006 as well.

Now as we had expected the insurance coverage has given us the confidence to continue with our growth plans without jeopardizing the balance sheet. You know, you will see us continue, we've continued right through this whole period with construction projects; our applications for the Voyageur expansion plans which is that third set of cokers which takes us up to that 500,000 and 550,000 barrels a day is progressing well; we will begin commissioning the Firebag Stage 2 here in the third quarter of this year, so Firebag Stage 2 is also coming around towards mechanical completion and we will start seeing them in the ground here in the next few months. The MCU project is progressing on time and on budget for completion in 2008, and so everything there looks pretty good actually, considering that we did use some of the man power from the MCU project on the Fire rebuild.

So if you think about it when we went into this year, we had a capacity of about 225,000 barrels a day at the oil sands plant. By the middle of 2008, we will be at the kind of 350 range, and so a very strong kind of growth through this coming period, we obviously expect capacity at about 260,000 barrels a day at the end of this year and kind of moving forward from there. So the good news is the capacity is coming, the work is coming along quite well, we obviously are subject to the same things that other operators have in terms of increased pressure in that Fort McMurray, Northern Alberta area and that remains a concern, but I will say I am quite proud of the work that our group has done in terms of executing these projects and getting the work done largely on time and on budget.

The Sunoco work at the Sarnia Refinery is progressing well, we expect to be on target in terms of getting to low sulfur diesel by the middle of next year and then ultimately converting that to a sour refinery by early '07. And here in Denver work progresses very rapidly as well, and they've got a lot going on here between the Diesel Hydro - Treater to get the low sulfur diesel as required by June of next year, but also the consolidation of these two refineries into one. And so, there is a lot of work here going on as well. So, that integration is something that, obviously, I think will be very positive for us going forward, and really will make this a, the largest, and what our goal is to be the most competitive refinery in the Rocky Mountain region. So, listen across this company, we’ve got a lot going on, I am very proud of our experienced team, both, in the office, but also in the field. I think the people across Suncor have worked very hard here. We do expect that we’re going to have a good set of operations, once we get this fire rebuild done and that we will have a very solid period going forward.

So, I think John, that's about as much as I want to say. I'm quiet excited about the tail-end of this year, obviously, and everything to me looks very much on track. So, with that, maybe if I can turn it over, I think Ken Alley, you were going to have a few comments as well.

Thanks Rick and good morning everyone. I'm just going to make a few overview comments on the balance sheet and update you on the insurance claim process before I pass it back to John to go through the outlook. You know, as we expected debt is increasing during this period while we repair Upgrader 2. Debt at the end of the quarter was $2.9 billion, not unexpected. As Rick said, we continue to be very confident that the insurance policies will help us to substantially mitigate the impact on the balance sheet, and we have all of the financial resources and requirements we need to fund our ongoing capital program, as well as the growth plans that Rick talked about, and I think, also importantly, exit this period with a very strong balance sheet going forward.

We are pleased that the insurance proceeds we are receiving are starting to become material. Year-to-date we have received about $200 million Canadian on the business interruption policies and about $55 million Canadian again, on the property damage program. And we continue to work closely with our insurers to both ultimately settle the claim and also to arrange for appropriate ongoing interim payments. Now we can't give you a specific schedule or amount of those interim payments, but we do continue to work closely with the insurers to receive those amounts.

In terms of capital spending, year-to-date we are about $1.4 billion. We are revising our capital budget up slightly from the original $2.5 billion to $2.7 billion really to accommodate the U.S. refining acquisition as well as some increases in our natural gas drilling program and some minor sustaining capital investments in the Oil Sands business. But once again all of this is easily accommodated with our, -- within our financial capacity. So with that John, I think I'll pass it over to you for the outlook.

Okay, well thanks Ken and thanks Rick. I'll just give you a quick update in terms of the outlook. The outlook for Oil Sands has not changed from what we have had in prior quarters or really since the fire we are expecting that we will produce at a -- at the rate of about a 110,000 barrels a day which really is the capacity of U1, so 110 not including any Firebag volumes until we are up and running on U2. We do expect at some point in time in September we will have U2 up and lined up, and will be producing at the rate of 225,000 barrels a day. At that point in time, we'll begin to introduce volumes of the vacuum tower which should bring our capacity up to 260,000 barrels a day, which will be sometime in the fourth quarter. So that's about as close as we can get in terms of the outlook for the Oil Sands and again pretty consistent with what we’ve had for the last two quarters.

A slight change in terms of natural gas, the natural gas division, it’s not immune to the issues that have been taking place within the industry, the conventional E&P industry. We are expecting that we’ll probably average in the range about 200 million cubic feet per day in our natural gas division which is certainly flat with what would be average from last year. We do expect a strong finish however; probably we’ll exit the year somewhere in the neighborhood of 205-210 which was expected to be what our production was going to be for the year. So, it's really just a delay in volumes due to weather and some unplanned maintenance in one of our gas plants as opposed to lost production but we still are on that curve to grow that business at the rate of 3% to 5% a year.

I’ll give you a few of the parameters in terms of the modeling, the tech questions you might have, crude oil hedging losses for the quarter before tax were a $124 million so before tax during the quarter crude oil hedges loss being of 124 after-tax that translates into about $78 million. Year-to-date it's $232 million before tax and after-tax about a $143 million.

You will notice in the segmented statements that the corporate surges were a little higher this quarter at about $71 million. This would include stock option and other compensation expenses of about $25 million and of course the cornerstone average is -- cornerstone is what we call the implementation of SAP within our business here and that charge was about $8 million so, we have a run rate at our corporate office of about $40 million and we have those two other incidental costs. One, parameter you can use for every dollar increase in our stock price, it translates into about $1 million in terms of extra charges to the corporate account.

And the final piece is actually in the statements but I will just reiterate it for you. The capitalized interest in the second quarter was $31 million; and year-to-date it's about $57 million. So that's all I was going to comment on, in terms of the outlook and the few detailed things.

I will now turn it back to Lisa for questions. You know again in the tradition of our conference calls, and I know this is I think the second for many, of you many, second of the conference calls, I would ask that if we could try to keep the questions to the strategic nature; you've been very good about doing that in the past, and I know we will be able to do that again this quarter and Brenda and Rob and I will be around right after the conference call to more effectively handle your detailed following questions. So with that Lisa, why don't we open it up for questions?

Thank you. If you have a question please press "*" "1" on your telephone keypad. If you are using a speakerphone, please lift the handset and then press "*" "1". If at any time you wish to cancel your question, please press the "#" key. Please press "*" "1" at this time if you have a question. And there will be a brief pause while the participants register and we thank you for your patience.

The first question is from Brian Singer of Goldman Sachs. Please go ahead.

Good morning. When you look at in-situ opportunities, what if anything, do you need to see from Firebag to gain greater confidence in larger scale in-situ developments? And on a similar vein, what are your options and current thoughts in sourcing the 2010 to 2012 expansion in terms of mining versus in-situ versus the third party upgrading?

Okay. Thanks Brian it's Rick here. I think listen, I am very confident about how this SAGD technology is going certainly on our lease, and I am not an expert on how other people are doing. But you know the industry in general is moving towards that $100,000 barrels a day mark form in-situ across, there has been lots of learnings. I think the one thing that I certainly have heard from our fellow SAGD kind of developers is the learning curve has been there and there has been a real learning curve. I think the way to think about this is, this is kind of an emerging technology and so you've got to expect a little bit of that. So, no, I don’t think we need anything else from the reservoir itself, I think we've got a good information, these wells are flowing very well, we've got a number of wells that are producing in that 2,000 to 3,000 barrel a day of bitumen alone and so it's really the reservoir is performing very well. It is an under-balanced reservoir which means you got to have some lift on it to get the bitumen up to the surface, but, and we are a little bit surprised about the [under-balanced-ness] but there are solutions to that, whether it's gas lift or pumps as I mentioned earlier. So I think we are feeling great about that. Of course the other thing with SAGD is the gas price, so it's directly related to gas prices in terms of how your operating costs go with this and as you know there has been some sympathy between gas prices and oil prices, I would guess, sympathy is probably as good a word as any at the moment. So if we look forward to 2010, 2012, 0.5 million barrels a day, we would say the predominant increase in bitumen productions that feed that plant, our current plan is to have the vast majority of that call it 75% to 80% to come from SAGD. But I will tell you this, we have real flexibility in the sense that we are doing a lot of core-hole drilling this winter on one of our leases that could be the next mine sight and we continue to discuss longer term arrangements with third party bitumen. So I wouldn’t rule out anything at this point. Kind of predominance is SAGD, but Suncor is one of the few companies that has real optionality around bitumen supply into that upgrading complex. So Brian I hope that answers the question.

It does, thanks. And if I could also just quickly ask, to the extent that you can answer -- do you have a sense of where per barrel costs in the oil sands business would have been without the fire, just in some of the secular -- cyclical changes in the industry as opposed to the one-time related expenses?

Yeah I mean -- I might look to John to help with this, but listen we would have been heading right -- I know Suncor would have been heading right in that $12 to $13 barrel range, all other things being equal, save this interruption that we had. So we haven't seen -- you know we are seeing inflationary pressure certainly on capital costs and on these projects that we have going forward; we are certainly lacking manpower in terms of a number of the construction trades periodically. So we are seeing real, real pressure inflationary and to get enough people in the Fort McMurray area. But on the operating side the -- that kind of inflationary pressure isn’t as significant as it is on the construction side.

Yeah Brian, we would expect that the $12 to $13 would be a good range certainly once we are back up and running, I would caution you about using that in the fourth quarter but as we go into 2006.

Thank you.

The following question is from Sam Arnold of Friedman Billings Ramsey. Please go ahead.

Good morning guys. Just a quick question on the damage that was actually with -- associated with the fire. Do you have an estimate on how much that actually has cost to-date, and what you expect it to cost total?

Ken, do you want to take that?

Yeah sure, I mean Sam, we would estimate that the repair costs in total could be in 250 million Canadian dollar range and that’s well within the policy limit from the property program which is 200 million US.

Okay, that shows the problem.

It's 250 US.

Okay, and then you had a second insurance; I guess a second policy that could be used for BI or actual facility damage?

Yeah. I mean -- but it's because the facility damage looks like it's going to fall within the property limit, but all of the other policies will be available for business interruption coverage.

Okay, great. And could you comment a little bit about the BI insurance as far as how that's actually calculated, what the insurance company -- how it actually is written as far as the revenues minus certain base cash costs, or how does that look?

Yeah. I mean it's intended to replace, essentially it's a profit replacement, so it's revenue minus kind of variable costs is a way to think of it.

Okay.

And the process is we have to estimate, kind of on a pro forma basis what our results would have been during the outage period and agree that with the insurers, so that the process we're undergoing right now.

Okay. And those discussions have been going fairly well?

Yes, they have. And as I'd say, I think that's reflected in the fact that we received a substantial amount of interim proceeds. You know, given that it's still relatively early and I would caution everyone, this takes a while with the claim of this magnitude to sort everything out. But we’re very pleased with the cash flow we’re receiving so far.

Okay, very good. Thank you, guys.

You're welcome.

Thank you. The following question is from Greg Pardy of Scotia Capital. Please go ahead.

Hi, good morning. Rick, you touched on just the submersibles you're using with Firebag right now. As the project stands in terms of water handling and water purification, is everything basically in shape now that as you get into the fourth quarter, it shouldn’t be too-too difficult to get up to the design of 35,000? And the second question is just a lot more strategic, I mean in the release, I know you're flagging that with sustained commodity prices, you're looking at increasing taxation in terms of Oil Sands, does that prompt your thinking, I guess in terms of the trust conversion at some point?

I'm going to let Ken handle the second one. I think first of all, the SAGD yeah -- I mean, where we would expect to be is, we would expect on this SAGD on Firebag Stage 1 is to kind of finish the year in the high 20,000 barrels a day, so still in the ramp up period we do not now expect to hit 35,000 barrels a day until some time next year. I will tell you this though that I mean we will have steam from Firebag Stage 2 that will start to go in those wells and actually we are going to first put that in to Stage 1 wells because we don’t have all of those up in terms of the steam in the ground and so you'll see it continue to ramp up.

We are fairly confident though we have come a long ways with these surface facilities. You know, you are always subject to some upset, but we feel relatively comfortable, with Firebag Stage 2 in, nearing mechanical completion and having that up, now you are going to have two sets of water handling facilities. So, what that means is you should see a little less volatility in our production from SAGD, because now you have got two trains as opposed to one, so when you have one down you are still going to be up at half rates, once we get this thing lined up. So, now I think you will see a steady build from here and, you know, one of my goals eventually is to make this SAGD kind of a non-news item, in the sense that all of the SAGD is going to be fed, almost all of it, costs will be fed directly to the plant, it will be just one more source of bitumen as is third party, as is the mining. Steepbank and fire -- Steepbank and Millennium mines, so what we are going to try to do here over the next year or two is turn that into a kind of a non-news event. That’s our goal and in terms of steady production reliable. We will certainly have operational issues from time-to-time, but to make those so that it doesn't really impact -- have a major impact on the operations overall. So now on the question of, you know, kind of cash taxes and the issue of us looking at some kind of royalty, Ken do you want to take that.

Sure, I'll pick that up Rick. You know, Greg, I mean -- I think, income trust structure is one capital option, that's kind of always available. I mean, taxes are a consideration but, as you know it’s not the only consideration in terms of, you know, what’s the best value for Suncor's free cash flow in the hands of our investors. And that's something that we look at on an ongoing basis and as we look at our current growth plans and the amount of capital that we continue to profitably reinvest in the business we currently don’t see that as the most effective option for our shareholders in terms of how we use our cash flow; but it's something we will continue to look at as we do with all options.

Yes, thanks very much.

You are welcome.

Thanks, Greg.

Thank you. The following question is from Martin Molyneaux of First Energy Capital Corporation. Please go ahead

Rick, we know you are in Denver today; what are your thoughts now that you’ve had the new asset under your belt for a couple of months here, what does 2006, 2007, 2008 entail for the combined 90,000 barrel a day refinery?

You know, listen they had a very strong second quarter as you’ve seen so, you know we were blessed with very good diesel margins so, you have got to say that. But really -- really here is what's going on here in Denver and that is -- the combination of these two refineries should have happened a decade ago, long before Suncor ever got involved in this. The refineries as you know, Martin are right across the street from one and other and so right now course we've got a big challenge in just getting the construction done here on this diesel hydro-treater. We certainly have a lot of issues going on. Right now we cannot move for example, some of our workers between what we call the East plant and the West plant we’ll get that straightened out here in the next six months. And what we really -- then what we will be doing is optimizing it. By optimizing, I mean optimizing between the whole refinery, we'll be looking at what investments if any we need to do and those should be great opportunities for us and then we’ll be optimizing in terms of feed as well, something that's never been done here because thee have always been operated as two separate refineries. And so you'll be optimizing feed from local crude oil sources as well as from our oil sands plant. And so listen -- what I would say is over the next year to two years, huge opportunities here in terms of dramatically changing how these assets have been run for 40 or 50 years and what I would see is a period here of continual improvement. Now of course refining margins have a lot to play with how much of that falls through the bottom line but pretty optimistic, if you think about it in a kind of a 7 or 8 [seed] area, this is by far the largest refining complex, fits well with a direct shot from Fort McMurray from us and it's a good -- it's a good solid market, it obviously is very seasonal. We tend to make most of the money in this part of the business in the second and third quarter and much less in the first quarter and a little bit more in the fourth quarter. So that seasonality will be something we have to get used to, but I am quite optimistic about the team here and their efforts to really pull things together.

Great. Thank you.

Thank you. Once again please press "*" "1" at this time for any questions or comments. The following question is from Andrew Fairbanks of Merrill Lynch. Please go ahead.

Hi, good morning guys. Just two questions, I guess one, just to continue to clarify the Firebag issues; as you look at the incremental volumes going from 225 to 260 out of the Upgrader over the next say 6 to 8 months. Would the majority of that bitumen be then sourced from the mine as opposed to incremental Firebag or --?

It's some of both Andrew. So we have a project we call the Steepbank expansion project that will add capacity to the mine and I don't have the number with me here but that should add about 20,000 barrels a day of added capacity on to the mine and then of course Firebag Stage 1 and 2, the way to think about that is in that 70,000 barrel a day range of bitumen. So, you know, it's a combination of two predominantly SAGD again that’s what Stages 1 and 2 were really designed to do was to feed that vacuum tower and so it's predominantly SAGD, but we also have the mine expansion project, which by the way, will be done here in September, early October so we will have more facility than we ever had to produce bitumen certainly through this winter period.

That's great and then if you look out at the next stage of Firebag, are you at the point now where you have enough learnings through Firebag 1 that you can incorporate some design changes going forward that hopefully will address some of these issues?

Yeah absolutely. The next stage for a Firebag is actually a cogen plant as opposed to these recycle steam generators. So, our current plan is to put a cogen plant in and there is an expansion leg to that and you know, one thing I would tell you is obviously this is -- we are learning a lot, the learning curve is very steep, trying to take those learnings and apply them to the next set of investments is the key issue. [John Meyer] and his team work that hard every single day. Because this thing is moving relatively quickly, you are not necessarily going to catch all of them at every single stage but I will say that trying to incorporate those learnings is the key job for that team. You know, I think that with our learning on the surface equipment that’s going to be the predominant issue. I am not too worried about us finding ways to lift this bitumen out whether it's gas lift or these mechanical pumps. I think the most learning is how do you operate this, how do you get that water clean enough to send it back to the -- through the steam gens an I know we are moving a long ways up those learning curves.

And do you have a sense that the entire Firebag reservoir itself is under-balanced or might there be some pressure differentials in different sections at least?

No, I think the majority of that whole region up there is relatively under-balanced so, no, I think this is a phenomena that will be over most of Firebag itself.

No, it is great. Now I guess, finally one true strategic question, Rick just wondering what your thoughts were since you're in Denver on oil shale have the U.S. Bureau Land Management actually launching an experimental leasing program again after 30 years down the road, is that any thing that would be of interest to you guys long-term?

Yeah, listen I kind of made my run at that in Australia if you remember well and listen, we've got our hands full on what I would call our core business and I, you know, my own personal belief is I think oil shale is still a ways out, there's still plenty of issues and it is a much more difficult technology because the difference between the shale and the oil, of course, is that the oil is directed -- is bonded directly to the shale particles which means you have to heat that massive amount of rock up to a much higher temperature than we have to with Oil Sands. The oil Sands you get the sand, clay, and oil to separate at relatively low temperatures like 220 degrees. Oil shale takes much higher so, I think in -- where we are right now I think that’s not of much interest to us. I think we have got our plate full on going to the 550,000 barrels a day being kind of the largest and a dominant player in the Oil Sands which of course is one of the biggest as you know biggest and hottest investment areas in the oil patch worldwide. I think that’s our forte and where we want to keep the whole organization focused.

Oh, that's great, thanks.

Thank you the following question is from Robert Plexman of CIBC World Markets, please go ahead.

Good morning, first question is about another one regarding Firebag, just wondered if there are synergies that you would expect to realize Rick as you continue to expand because at some point there will be a Firebag 3 I mean, to get up to that 350,000 barrel a day level. And so, are these sort of compartments or are there synergies, as you keep adding at Firebag and of course related to that is when you start to scoop these things out, when would you see Firebag 3 underway?

Yeah. Okay. That's a good question Rob. Yeah. Listen. You are going to see some synergy in the sense that you'll be able to -- for example, we operate Firebag 1 and Firebag 2 out of the same control room. You will have some overlie in terms of maintenance and operating ability between the two plants, so you will see those kinds of synergies. We'll also have the ability to move steam from various stages. So you could move -- when we get this thing all set up, you'll be able to move steam from Firebag Stage 2 to Firebag Stage 1 wells, and the different paths. So, we’re designing that kind of flexibility. And then of course on the return side, when you're trying to clean this up, there is spare capacity in Stage 1 and Stage 2 to handle more steam and oil coming back at you, you know, or hot water and oil coming back at you. So you're going to see synergies there. I don’t know that I would put a big number behind that currently. I would have to tell you that in the sense that there's still going to be a learning curve to that. But you'll start to see synergies as you get more and more equipment on the ground, and your ability to kind of mix and match where you take steam in and where you take returns to. Now all that is not necessarily lined up on day 1 but that's certainly our goal overtime.

And then timing for Firebag Stage 3?

John, have you got that. I--

It's actually not going to. We're moving into that in 2008. So, to feed the plant to 350, it's going to come out of 1 and 2, and as Rick was saying the Steepbank mine, Phase 3 and 4 are actually the latter part of this decade, either 2008 and 2009.

Okay. Thank you.

Thank you. Once again please press "*" "1" at this time for any questions or comments. And there are no further questions registered at this time, I would like to turn the meeting back over to Mr. Rogers.

Once again thanks everyone for listening in to our second quarter conference call. Thanks for the questions. Again Brenda, Rob and I will be around and we will be very happy to deal with all of your modeling questions, so on behalf of everyone thank you very much and have a good day. Thanks.

Thank you, the conference has now ended; please disconnect your lines at this time. We thank you all for you participation and have a great day.