Suncor Energy Inc (SU) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Suncor Energy's first-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 thank you for listening into our first quarter conference call.

We have in the room with us today Rick George, our President and CEO, Ken Alley our CFO, and Rob Dawson, from our Controller's department.

We're going to start out in the usual format.

Rick is going to give us a bit of an overview in terms of his thoughts on the quarter.

Ken will give you a bit of a financial overview, and I will field on a few of your modeling questions, and then we will open it up to Q&A.

So why don't we with Rick?

Thank you, John.

Good morning, everyone.

Glad to be here.

I won't take too much of your time.

First of all we see this first quarter as a very good and solid start to 2006.

The first quarter is always the one I guess I am the most nervous about usually because it is the period which we always face our toughest temperatures.

Fairly mild winter this year, and a lot of hard work by people across the entire company, meant a very solid operational quarter for us, and obviously a great start.

I think it's one of the best starts to a year that we've had for quite a while.

The Oil Sands facility and the team there continued to meet our expectations with production rates so even a little bit above guidance, and the cost close to where we'd predicted them to be.

The Firebag volumes, Firebag of course is our SAG-D part of the production of bitumen side of that business.

Those volumes continue to ramp up.

This is the highest quarter they've had averaging about 27,000 barrels a day of bitumen for the quarter.

Although I will tell you that we are currently producing rates just over 30,000 barrels a day.

And we are continuing to see very good well productivity and our steam oil ratio levels dropping as we would have expected.

Of course Firebag stage 2 steam has started on that, and so we will start to see volumes from Firebag stage 2 mixed in that.

So you know Firebag is coming along probably a little bit slower than we would have predicted a couple years ago but on track and the reservoir performance which of course is a critical thing looks very good.

Our Natural Gas business continues to build volumes.

I feel quite comfortable with the guidance we have predicted production volumes of 205 to 210 mg cubic feet a day.

On the downstream first of all the Denver operation and you would have seen relatively low earns now.

The fourth and the first quarter in that business are always our lowest earning quarters.

We always do much better during the middle two quarters, and of course we had a very lengthy turnaround in that business as we did a lot of maintenance work but also got ready to tie in the hydrotreater and the other equipment that gets us down to low sulfur diesel.

They were out about 50 days.

So that is a considerable part of the quarter, and but that has come back up online and has operated very well the last little bit here.

And the upgraded refinery as we expect it to start running up to 15,000 barrels a day of sour production from our own Oil Sands operation as of course market conditions allow.

At the Sarnia refinery during first quarter we completed a lot of maintenance, and we again our upgrading connect our refinery to do two things, first of all to get to low sulfur diesel.

That project is kind of coming to a close.

We expect to have a lot of that work done in the next 30 to 45 days.

And then some work that will happen between then and the middle of next year, which would increase our ability to run sour production through that refinery.

Ultimately after about the middle of next year we expect to run about 45,000 barrels a day of our sour production through that refinery which will significantly decrease the input cost of that refinery and make it more profitable.

So everything is pretty much on schedule there in terms of timing, and it is good to have those low sulfur diesel projects behind us or largely behind us in the case of Sarnia.

As you know, I often talk about this company; it is not about quarter-by-quarter operational performance.

They are good yardsticks.

One of the things that I don't talk a lot about but we are also seeing pretty consistent improvement in safety performance which is always a good sign.

Save the Natural Gas business were the safety track record of the industry related to drilling because of the number of new rigs, the new crews and the green hands we have have been going the wrong direction, obviously the industry and Suncor taking steps to try to turn that around.

So with that, that is kind of a bit of a review of the quarter.

Let me kind of turn to the future for just a moment and kind of where we are.

I should first point out that we are experiencing the same labor pressures, cost pressures and schedule pressures that the rest of the industry is.

We certainly experienced all of those pressures at work that we are doing the two downstream refineries and work continues at both refineries to enable us to meet all of the product specs that we need to as we go forward.

There has been certainly a lot of challenges there but I would say that again a large part of that work is behind us.

Now on the Oil Sands, we have those pressures, but haven't really experienced the same extent on our Millennium Coker project.

This is a project that gets us to 350,000 barrels a day in 2008.

And of course there we are about 35% complete on construction.

The materials are largely purchased.

In fact, a lot of the (indiscernible) are already placed.

Right now that is -- that project was initially announced is a $2.1 billion project, and it is still on time and on budget.

We have about as I mentioned 35% of construction complete and about 50% of the money is actually already been expended on that.

So one is I really like and I often use the term internally is that project seems to us to be under really good control.

And so very proud of the work that our major project group has done on that, and it does show you even in spite of all of the pressure that we have in the system, our ability to execute that side of the project is something that I am obviously very proud of.

Now I don't want to leave you with any false impressions that there cannot be some form of cost overrun in the future.

I've been around this business a long time, and what I would say is everything is on track.

We watch it every day.

It is not something that I am guaranteeing at this point, and obviously have indicated those kind of pressures that most of the industry has also talked about as well.

The Firebag cogeneration so if you think about a Firebag stage 1 has been online now for almost two years.

Appeared Firebag stage 2 just ramping up.

The next is a Firebag cogeneration and expansion, still in the early stages but that project is going pretty well.

It will increase the bitumen production capacity to Firebag stages 1, 2 by about 35% so it move us up in the 100,000 barrels a day of capacity.

And again it takes you about 18 to 24 months to ramp that up.

And it includes a co-gen facility.

The other project that we are doing obviously a lot of work on is Voyageur, and that is the Voyageur is set that takes us from 350 to above 500,000 barrels a day.

We are expecting to probably appear in early in the third quarter and expect to have approval -- all the approvals lined up for that later this year or very early next year.

So everything kind of looks pretty well, construction and engineering on that as we speak.

Two other projects, although small I will mention very quickly.

First of all our windpower projects continue to progress.

We have our third windpower project which is called Chin Chute down in the southern part of Alberta, southeast of [West Bridge].

The foundations are in.

The equipment is all arriving and we expect to erect that here in the second quarter and have it on production before the end of the year.

And then of course we have a fourth project underway in Ontario, and so that is also progressing.

And we expect construction to start there towards the end of the year.

And then one other relatively small issue but it's kind of a fun one is our ethanol plant in Ontario.

And that project which is $120 billion investment is coming to a close.

On schedule and on budget; that is always good to report, and it is not often an oil person, an oil CEO can talk about first grind.

So first grind of corn is scheduled to take place in June, and this thing should come online relatively quickly.

It's a fairly simple process.

And we will obviously provide all the ethanol to all of our stations in Ontario.

And given the price of where corn is today and where the price of crude is, the economics behind that look rock solid.

So that should all come together pretty well.

So as you can see we've got a lot going on.

The future is still unfolding.

I often talk about internally what is really important for us today is to focus on execution.

That means obviously working these projects very hard, but on the operating side controlling all of the costs that we can control.

And that is where certainly internally our focus is.

There are challenges, and have always been challenges in this business, but our strategy remains the same.

It set, and we see continual progress towards reaching our ultimate goals here.

So that is it for me John.

What I would like to do now is turn it over to our CFO Ken Alley who will give you a further update.

Thanks, Rick, and good morning everyone.

We're pleased to announce earnings of $713 million and cash well in excess of $1.3 billion for the quarter.

Those results did include an accrual for the final settlement of our business interruption insurance claim that impacted earnings after-tax, and royalties to the tune of about $205 million but even looking through that excluding it, as Rick said, a very good quarter and a very good start to 2006.

With the fire behind us and with the strong cash flow we've experienced the fourth quarter last year, first quarter this year the balance sheet is in very good shape.

Especially when you also consider the final insurance settlement, net debt stands at about $2.8 billion for the quarter and we see a strong balance sheet going forward.

Capital spending expectation continues to be in the $3.5 billion range for the year.

And just a bit of an update on our hedge position, we currently have 50,000 barrels a day hedged using a costless calling structure and that is for 2006 and 2007.

Using a costless calling structure there is a (technical difficulty) and a ceiling of 91.70 so well positioned from a hedge strategy perspective, and we will continue to evaluate the crude oil markets to look at opportunities to hedge.

Up to 30% of our production if we see opportunities to lock in a good solid floor without giving up too much of the upside given the strong commodity prices that we're seeing.

So that's all I was going to cover, John, I will pass it over to you.

What I will try to do is just give you a few of the nuts and bolts to help you a bit with your modeling and of course Rob and I will be available after the call to individually deal with your modeling question.

First thing I would like to point out is that in case you didn't see it, we did put out our production numbers for April along with the quarterly release this morning.

You will see that April production was 269,000 barrels a day, 257 was upgraded and about 12,000 was bitumen from Firebag that was sold directly into the market.

So total sales available would be about 269,000 barrels a day.

Turning to the outlook, the production guidance for the remaining part of the year is unchanged at 260,000 barrels a day; diesel component would be about 11% the sweet component 45% and sour about 44%.

No change in terms of realization on our crude. $5.50 to $6.50 per barrel continues to be the differential that we are looking for, and think that that continues to be good guidance for the remaining part of the year.

Cash operating costs you will notice at $18.75 to $19.50 is maybe a little bit higher than you had expected.

The primary cause, the sole cause of that now is that as noted in the statements, we are now expensing overburden removal -- I should point out and I think a couple of you noticed it, that when we put our financial statements out, our annual report out, in the MD&A was clearly pointed out that we would beginning to look at expensing overburden removal in I think compliance with the way the accounting treatment is suggesting that we go.

So we are now going to expense overburden removal.

That is about $2.50 to $3.00 a barrel in that range.

That offsets with the DD&A charge that has dropped -- if you remember it was around $6.75 a barrel.

It is now down to about $4.00 a barrel.

There is absolutely no effect for the most part on EPS, and it is just an increasing cost and increasing component in our cash costs and a decreasing component in DD&A.

For the first time in five years I'm happy to report we had no hedge loss this quarter, which actually it's kind of nice to report, and I think Ken illustrated that we have some pretty good hedges going forward.

So we should continue to be in pretty good shape.

Stock based compensation is in the corporate charges; this quarter was actually $50 million with the performance of the stock.

As you know, you do now have to account for the expense or the projected expense for your stock options, and that is about $50 million in the quarter.

And that is in the corporate charges.

And the other thing I was going to point out in the MD&A I think we gave you some guidance in terms of royalty rates and cash tax horizon and the potential rates there.

And I suggest you do have a good look at the MD&A because I think there is pretty good disclosure in there in terms of projected royalty rates and cash costs.

So that's all we were going to deal with this morning on our conference call with detailed modeling questions.

Rick and Ken and myself are available for any strategic questions you may have and Rob Dawson and myself will be available after the call and we can deal with you individually for your modeling questions.

So Jenny, we will open it up to questions.

(OPERATOR INSTRUCTIONS) Brian Singer, Goldman Sachs.

Good morning.

Alberta and Denver are obviously different markets but what is driving higher cost overrun to the Denver refinery that seems to be more impactful there than in northern Alberta?

Are there any lessons learned their towards future Oil Sands expansions or refinery expansions?

I think a number of lessons learned.

I think and generally we saw that as a relatively small project and probably didn't necessarily put the resources to it that we probably should have at the front end.

So there were some definite lessons learned.

I think it's really important to remember Denver is not an industrial town and so lots of the labor that you have to use in there especially around specialty welders and a lot of that stuff comes from outside that community.

And so lots of lessons learned there about Denver specifically in terms of that.

And of course in the middle of that we had the hurricanes and then that meant a lot of shifting of labor as well.

And of course there was plenty of work down in the Gulf Coast which is normally where we attract the workers that come into Denver.

So a little bit of it is we are the only refinery in Colorado, and so obviously we're only going to have periodic needs for this kind of work so you're always going to be pulling people (inaudible) subject the same thing or even worse than outside, these (indiscernible) are going to work close to home.

You can't really blame them for that and there's plenty of work around the industry as you know, so more lessons on that side than anything.

And I think as we do that in the future and we look at future modifications or expansions or anything we will certainly take some lessons learned away from that as we go forward.

Great, thanks, if I could ask secondly just on the conventional Natural Gas front where do you feel you stand in terms of owning the E&P side, the Natural Gas side of the business considering your future expansions; is that an area where you might look to do some additional acquisitions or are you kind of happy with the assets that you have today?

I am very happy with the progress that that group is making particularly on the exploration front.

It doesn't always show up in the quarter in the sense that lots of these are discoveries where a lot of pipe in some of the plants in Alberta here are relatively full.

So getting space to get that gas out of here, and so we have quite a bit of gas -- kind of what we call behind pipe that we really are working hard to get through plants.

So that is becoming a little bit more of an issue for us.

I'm very proud of where we are.

Listen, we will look at acquisitions.

I would just say that with the trust market looking at everything that pops with paying a huge price that doesn't sound like Suncor.

Ultimately on this natural hedge position for us because as you know we are relatively a good-sized consumer of gas as well as a producer of gas, ultimately coke gasification is what is going to provide that hedge.

And so luckily again Suncor has always got options around, and it is easy for us to do the math behind what is an acquisition cost and what is the return on capital on that versus a gasification project.

And at the end of the day you may do some or both before it is all over.

It is not something that you should be expecting us in terms of a Natural Gas acquisition any time in the near future.

Thank you very much.

Wilf Gobert, Peters & Co.

In the annual report you raise the topic of beyond 500,000 barrels a day and obviously have done some core hole drilling with respect to your resource definition.

Can you add anything further to what the next significant step might be in advancing your plans beyond 500,000?

Is this your last official question in your official capacity?

Is that the zinger -- this one?

That's it.

As everyone knows Wilf's just had a terrific career in this industry and it's not goodbye because we know that we will always see you around, but that's a good question here for one of your last questions to ask Suncor.

We are doing a lot of hard work.

I don't really want to get into any announcements until next year.

Suncor had a pretty good track record of delivering what we say we're going to do, and until I kind of get a much better beat on what that looks like, kind of not wanting to go there.

Just know that we are working on it absolutely. 500,000 barrels a day is not the end of the road, and so exactly what form that takes, how it looks, that is something the team and myself are working on.

What I would expect is about this time next year we will be able to give you a lot more detail about what that looks like.

Great.

Thank you.

Greg Pardy, Scotia Capital.

Good morning.

Just a couple.

Is there any issue with not hitting that June 1st desulfurization level at Sarnia?

And then secondly, just on the mobile crushers, that's picked up some press here in the last little while.

What are your thoughts in terms of how quickly you would diffuse that over the next few years?

Okay, great, a couple of great questions.

The real key deadline we feel like is the September deadline, and in Ontario.

September is a deadline in which you've got to have low sulfur diesel at the terminals and at your stations.

We do not see that at risk at all.

So what our current projection is we will meet that and so we do not expect -- and now you know you're always surprised but we do not expect there right now to be any significant issues related to us being slightly behind on the Sarnia side of this project.

On the mobile crushers side, first of all I have been very pleased with the results of that and you know we're working hard on new technologies on a number of fronts.

This is one of them.

We put in a little over $100 million into this technology.

We got it up and running in the latter part of the winter, so we got a chance to test it through the latter part of February into March through the hardest winter conditions we actually had this winter which wasn't that bad.

Operated very well, lots of small things that we've got to iron out but it is actually the unit is more or less considered on production and we just have one of our normal production runs already and so it looks good.

It looks good from increased productivity of labor.

And looks good from an operating cost, it looks good from a mobility standpoint.

What I would say is don't expect a quick turnover in terms of this -- we're right now doing a complete evaluation of how we continue to roll -- we had preliminary estimates and ideas, but as we see this thing operating we're going back to a mining plan to see if -- if we were to roll it out even on an optimistic basis, that is a four or five-year kind of journey.

And I've got to quickly say it does not mean a reduction in jobs at Suncor.

I've got to quickly say that.

All this means is we will be able to use our labor force more productively as we continue to expand production.

So it's continuing to expand production here that is how do you increase productivity and utilize the manpower that we have in the best way?

So this is something that I know our employees understand it well, but I just want to make sure that I make that point.

This is not about -- because listen, we are short of workers as it is.

This is one of the parts of the solution, and that is how do we get productivity up.

If you think about how would you roll this out, obviously in a new mine we would take a very serious look at going straight to it.

In the existing mine, it will be a four or five-year rollout.

Thanks, and maybe just one last one.

In terms of getting to $5 to $5.50, is the split between mining and it fits you pretty firm at this stage, or is there a fair bit of movement?

And what I'm driving at is are you anticipating additional phases at Firebag to get to those numbers?

What we're going to do is have phases I and II in the co-gen, and that is going to support the growth for 2008, along with additional mining capacity.

We are likely -- what we will do, at least Phase III and IV, a Firebag which will probably get us up in the range of around 150, and then we're going to look at where the cheapest source of bitumen is going to come subsequent to that.

And if it comes from mining, it's going to come from mining.

And if it's going to come from in situ, it's going to come from in situ.

So we have not been firm and, in fact, our application on the Voyageur that did go in did not specify where the bitumen was coming from.

Because simply what we're looking for is the cheapest source of bitumen.

Firebag right now needs to get to a scale that we could begin to work hard on those costs, and that is what we're doing with it right now.

So consider for now 150,000 barrels a day 2010 or 2011 from Firebag, and the rest is up in the air in terms of where that bitumen is going to come from.

Thanks very much.

Amir Arif, Friedman, Billings, Ramsey.

A couple questions, John, just following up on the Firebag question there, as your increasing production capacity on the first two phases up to 100 can you just let us know how you're doing that, are you simply drilling more well pairs or you changing the pressure profiles?

Yes, there will be more wells drilled but it is really just a matter of steam in; there is nothing changing in terms of pressure profiles or anything else.

We continue to work on R&D on this side of the business and particularly with downhole pumps and also with the injection of light hydrocarbons; still a little bit early to get into any details around how that is progressing particularly the latter part of that.

But this will be very similar; what we are doing is taking the learnings that we have from stage 1 and we will apply it.

That deals with well spacing, well length, other detail designs around well parameters.

And also the learnings from downhole pumps in terms of the value add that they bring to that system.

But not really a big change other than kind of a continuous learning kind of process.

And a very quick question on the hedging side as well.

You did add more hedging, you are up to 19% now, last quarter you had mentioned you might go up to 30%, any change on that target?

No, I think we're still looking at that kind of level.

As I say what will dictate that will be looking at the market and making sure that we can lock in reasonable floor, call it kind of $50 to $60 range but not give up too much upside here in a very strong crude market.

And that is why we've been looking at the costless collar structures but they are very wide range so we will continue to evaluate that.

And just one final quick question, a clarification on the Sarnia refinery.

Rick you had mentioned that September is the real deadline not June the in first.

But is there any issues for diesel specifications at the refinery level for June first?

I know there is in the U.S. but that is not an issue in Canada?

What you have to do is, there is kind of a transition period between June and September and basically what you have to do is begin to produce spec product and the date was September.

And you have to be able to bleed your non spec product out of your system and they've given us a couple months to do that.

In the event that you continue to produce some diesel that is off spec you basically have to look at markets that aren't the transportation markets, kind of the off-road diesel markets.

Thank you very much.

[Mike Hussey], Mid-Continent Capital.

Just one more follow-up on the hedges.

Could you reiterate for us what the average duration of those costless collars are?

The -- so it's 50,000 barrels a day that is for 2006 and for 2007.

Thank you very much.

Andrew Fairbanks, Merrill Lynch.

I was wondering if you can give us your latest thoughts on gasification as you get closer to Voyageur, is this something definitely that will be part of the design, or given the labor constraints and welding constraints would it be something that you would build the option to pursue later?

That is a good question.

It is definitely part of the Voyageur application and so what we're seeking and when we're seeking and expect to have by the end of the year, early next year includes gasification.

Now gasification in this case is very much a stand-alone unit in the sense that it is not an integral part of the operation.

Gasification in historic sense over the last twenty years had plenty of issues around reliability and efficiency.

And so that is one of the things that concerns me the most and I would not want to put it right in the middle of an operational unit.

So it is around optionality.

It also deals a little bit, Andrew, with this issue of a CO2 collection distribution and then the use of CO2 for tertiary recovery and sequestration.

I see this all going kind of hand in glove if you will, and we are working -- we, Suncor and we the industry are working hard with both the federal government and the provincial government here on a CO2 backbone kind of infrastructure issues here in Alberta.

Probably one of the larger kind of CO2 solutions, certainly in Canada if not in North America, in the sense that we obviously have the ability -- will have the ability to collect CO2 needed transportation system but also we have the old oilfields where we can use it for tertiary enhanced oil recovery.

And so I think where this fits in a timeframe is somewhere after 2010 and that 2010 to 2016, 17 kind of timeframe.

Exactly where in there is what I can't kind of determine.

And of course there is a lot of things that can happen between here and there in terms of labor availability, commodity prices, gas prices for number one way.

Where the Mackenzie pipelines come in and what that does with gas prices and ultimately how much LNG comes into North America, which has a factor in this.

If you think you're heading to a $5.00 gas world then gasification is a little bit further out.

If you think we're going back to a $12 to $15 gas world, then of course, again it is not about what it is this quarter, you got to kind of look at what it is over the next five to ten years.

And so you got a few moving pieces here in that decision but it will be made really independent of Voyageur in the sense that it will be an economic decision, not an absolute guarantee in terms of when it goes in.

That's great, thanks.

And does the addition of the CO2 element change the breakeven analysis for that Natural Gas price to a large degree?

No, I don't see it to be an overly significant factor.

It is just that if you put this in, part of your advantage is the ability to design it with CO2 collection in mind and if you have the infrastructure in place, then you can kind of solve more than one issue at a time.

So but I don't see it as an overbearing issue on the gasification decision itself.

That's excellent.

Thanks, Rick.

Rob Plexman, CIBC World Markets.

You have a second stage of Firebag, now the commercial stage which I think means that we should see Oil Sands production capacity gradually increasing by another 30, 35,000 barrels a day.

But this would also mean selling bitumen into the market until construction of the next set of cokers is completed.

I am just wondering is this something that you're comfortable doing?

Yes, Rob.

I think the answer is yes, the short answer.

Again, it takes quite a while to build up these Firebag stages, so with steam going in it will be early to mid part of 2007 before you see those kind of rates up.

By the way some of the Millennium Coker unit project will be available in the latter part of 2007 into 2008, so you are going to have a little bit of capacity there.

We still want to stick with -- I am not giving new guidance here -- I will want to stick with 350 and in terms of in the middle of 2008.

But what I'd say pretty comfortable with that; it kind of fits us in a way.

If you look at the cycles we tend to have much higher light heavy differentials in the winter time, and of course that is always our most problematic time in terms of pitchmen feed.

If you have trouble in the mine or trouble anywhere it usually tends to be that.

We tend to be a little bit bitumen tight in the winter, and we tend to be bitumen long in the summer, so it kind of fits us in a way if you think about it.

And (indiscernible)differentials have tended to be narrower in the summer time when you got asphalt production and a number of other things going on.

So in a way I think we can ride through that cycles in pretty good shape.

An example is just the last month here where we saw the differentials narrow you see us starting to sell more bitumen, and so it is partially opportunistically driven.

It will also dependent on maintenance in both the mine and in Firebag.

But I think we will be able to work our way pretty healthily through that kind of optionality.

One thing I should point out is if and when we do sell some bitumen from Firebag into the market that would be incremental to the 200,000 barrel a day target.

The 260 is upgraded synthetic crude, so anything we do from Firebag would be incremental to that.

Okay.

Thanks a lot.

We will now take questions from the media. (OPERATOR INSTRUCTIONS) There are no questions registered at this time.

I would like to turn the meeting back over to Mr. Rogers.

Jenny, thank very much, thank you everyone for listening in.

Again Rob Dawson and myself will be available for your detailed modeling questions and more than happy to spend whatever time we need with you.

So you can call us at 403-269-8670.

Other than that I hope everyone has a great day.

Thank you.

Thank you, gentlemen.

The conference has now ended.

Please disconnect your line at this time.

We thank you for your participation and have a great day.