Suncor Energy Inc (SU) 2007 Q4 法說會逐字稿

Welcome to Petro-Canada's fourth-quarter earnings conference call.

I would now like to turn the meeting over to Mr.

Ken Hall, Senior Director of Investor Relations.

Please go ahead, Mr.

Hall.

Good morning, everyone, and thanks for joining us.

On the call this morning are our President and Chief Executive Officer, Ron Brenneman and our Chief Financial Officer, Harry Roberts.

Please note today's comments contain forward-looking information so actual results may differ materially from expected results because of various risk factors.

These factors are described in our quarterly release and in our annual filings, which are available on SEDAR, EDGAR, and our own website.

As in prior quarters, the format for the call will be that Ron and Harry will provide their perspectives and then we will open it up -- open up the lines for questions first to analysts and then to the media.

With that, I'll turn it over to you, Ron.

Good morning and thanks for joining us for our first call in 2008 where we will close out 2007 and share our priorities for this year.

Today I'm going to briefly highlight our 2007 performance and then focus on our international business, in particular the success that we have had in our exploration program.

Harry will then speak about our financial plans.

Q4 was a solid quarter capping off an overall excellent year from financial, operational, and strategic perspectives.

Our diverse portfolio helped us deliver great results.

A large part of our success was following through on our two priorities, to increase upstream production by 15% and to advance our five major projects.

I'm pleased to say that we achieved both.

Production was actually up 21%.

This was largely due to solid reliability in most of our major facilities, in particular Terra Nova, which had a much improved year.

As well, the Buzzard project came on stream successfully and we saw full-year production from Syncrude Stage 3 and White Rose.

In addition, as promised, U.S.

Rockies production ramped up to 100 million cubic feet a day by year end.

In 2007, we also advanced our five big projects.

Major milestones including moving Fort Hills to FEED and completing over 60% of the construction on our Edmonton refinery conversion project.

Moreover, we added to our list of projects with the Libya concession development and White Rose expansions.

As 2008 gets underway, we remain focused on delivering profitable long-term growth.

A big part of this growth is underpinned by our encouraging reserves picture.

Consistent with our strategy of adding long life assets, our overall objective is to replace 2P reserves over a rolling five-year period.

At year-end 2007, we have replaced 127% of our 2P reserves over the previous five years.

This is significant because the Veba acquisition dropped out of the five-year cycle.

That means we have been successful in growing our overall reserve base at higher production levels, and absent the reserve addition from Veba.

A highlight in this year's reserve additions is MacKay River, where our delineation program doubled 2P reserves to 600 million barrels and bumped the total contingent and prospective resource estimate from just under 1 billion to 2.3 billion barrels.

This will support considerable expansion potential even beyond the MacKay River expansion project we are currently working on.

So overall, Petro-Canada has an even stronger reserve picture to develop into the future.

Our international business is becoming an important contributor to our future growth, so I'd like to spend a couple of minutes putting this business into perspective.

In 2002, we set out to establish our international footprint with the acquisition of the upstream assets of Veba Oil & Gas.

Our strategy was to use this as a platform for growth by building on the acquired assets and putting together a balanced exploration program.

Five years later, I believe we've accomplished what we set out to do.

We deliberately focused our efforts to have a material presence in four areas, the North Sea, Trinidad, Libya, and Syria.

These areas are now collectively delivering free cash flow in the range of C$600 million to C$700 million a year, a significant contributor to the Company's bottom line.

As I mentioned, part of our strategy was to build a balanced exploration program, an effort we started back in 2004.

We knew we had our work cut out for us if we were going to assemble a quality portfolio starting essentially from scratch.

Today we are beginning to see some real success from those efforts.

Last year in our biggest exploration program to date, we finished 15 wells.

Seven of these were completed as discoveries and another three we were shot in and our awaiting evaluation.

We recently made a nice oil discovery in the Moray Firth area of the North Sea, where we are operator with a 50% interest.

We believe the find can be commercially developed but it will need further appraisal before can we determine its size.

We will evaluate this discovery once a drilling rig can be secured.

Last year we also had a couple of gas discoveries around the Ruyter on the Dutch side of the North Sea.

These are logical tie-ins to that platform.

This year we plan to drill a third prospect there as part of a 6-well exploration program in the North Sea.

The program includes drilling our first well in Norway.

Last year in Trinidad we made one gas discovery on Block 1A.

This along with a pre-existing discovery adds up to meaningful gas volumes that will enable us to move towards a sales negotiation and subsequent development for the local market.

We've also recently made a significant gas discovery in our deeper water Block 22.

We are the operator there with a 90% interest.

We're currently appraising this discovery, but at this point we see the potential of 0.6 to 1.3 trillion cubic feet of contingent resource.

This success confirms our seismic model for a number of similar prospects on that block, so our future exploration program will aim to see if the block can support material development.

We plan to drill five more wells in Trinidad this year.

In Libya last year, we continued our exploration efforts on Concession C-12 with the drilling of the well north of the currently producing Farigh field.

We discovered a 330 foot hydrocarbon column, and we are currently evaluating the results to fully understand its magnitude.

We're also evaluating a second well drilled on Farigh.

While still early in the appraisal phase, we believe this discovery could turn out to be a significant find.

We plan to drill another three exploration and appraisal wells in our concessions in 2008 as well as progress work on the extended concession agreement we signed late last year.

So our presence in Libya is looking very promising.

In Alaska, drilling by our partner, Talisman, successfully encountered oil in two wells in NPRA.

We plan to conduct further analysis on those wells during the 2009 or 2010 winter seasons.

In early 2008, we plan to drill three wells north of 60, two in the gas prone Brooks Range of Alaska and one in the Northwest Territories.

So basically be looking to test these prospects with developments still relying on the timing of building pipelines into (inaudible) these areas.

Now it has taken us a few years to grow and confirm our strategy of building a balanced exploration program, but our patience is paying off.

Following up on our exploration success, as well as -- along with our plans to advance our seven major growth projects, requires a clear financial strategy.

And Harry will describe our plans there.

Harry?

Thanks, Ron.

2008 will be an important year from a financing perspective as we start building capacity to fund significant growth over the coming years.

We will remain financially disciplined.

While a large part of our growth will be funded by cash flow from our businesses, we expect cash flow to be less than our capital requirements and therefore we anticipate needing to seek external financing [for] the debt capital markets.

Our balance sheet is very strong, so we have the capacity to take on additional debt in the future.

We expect to manage our leverage within our target ranges, but as we've said in the past, while there may be times when we move beyond our target ranges, our plan will be to get the measures back into the target ranges in the short term.

Due to our heavier capital requirements, we anticipate that share buybacks may be reduced or not used for some periods.

However, we do plan to keep dividends competitive.

You will recall that we closed out the hedged portion of Buzzard in Q4.

With higher oil prices and greater expected upside from the Buzzard platform, we no longer need this protection.

So we closed out the hedge before we began -- to begin our ramp up in our financial program.

Also we have provided additional disclosure on our Downstream business this quarter in the MD&A.

In our discussions with investors and analysts, we kept hearing that the Downstream was difficult to model.

So we expanded our disclosure in an effort to help.

We will also be providing more information in a separate Downstream background for some time in Q1.

While I'm talking about the Downstream, I should mention that starting in 2008 and consistent with Canadian GAAP, we have moved from LIFO to FIFO method for valuing the Company's crude oil and refined product inventories.

This change is expected to add volatility to our reported Downstream results.

To help with comparisons, we will provide a one line adjustment to net earnings to reflect the current cost of supply when calculating operating earnings for the Downstream starting in the first quarter.

Back to you, Ron.

Petro-Canada had a very strong 2007, exceeding our production targets and advancing five major projects while adding two more.

In 2008, we again have set two priorities.

First from a growth perspective, we will advance seven projects.

The highlights will be starting up the Edmonton refinery conversion near the end of the year and making final investment decisions for Fort Hills, the Montreal Coker, and the Syria gas project.

Second, we want to meet 2008 base business targets with production in line with our guidance and a continued focus on reliable and safe operations.

We're progressively building our organizational capability to execute on those priorities.

We want to be sure that our base business continues to deliver value today while our suite of projects provides a visible path to growth in the future.

Thanks, Ron.

Operator, we'd now be pleased to answer investor questions.

When these are done, we will take questions from the media.

(OPERATOR INSTRUCTIONS) Andrew Fairbanks, Merrill Lynch.

I wanted to ask you what the status is of your plans around the LNG importation location facility, given the success you've had in Trinidad?

And I guess just a corollary to that, any progress with Gazprom as well in mining sources that apply to that terminal?

Your first part of that question was related to the regas terminal at Cacouna?

Yes, exactly.

Essentially we have -- we're sitting, waiting on the some confirmation of supply and as I've indicated before, the logical and first candidate for that would be the Baltic LNG project from Gazprom.

They have not yet made a decision either on the project itself or the partners that would be involved.

So that is essentially where we sit on that one.

As far as Trinidad is concerned, we still need to prove up the critical volume that we would need to support an LNG or even a commercial project of any kind from that resource base.

So it is a bit premature to start planning on that.

But it could be a candidate if we chose to go ahead with Cacouna.

But I would say that we would want to see Cacouna baseloaded with some volumes most likely coming from the Baltic LNG project if we were going to go ahead with it.

So we are basically sitting in much the same position that we have been in for the last few months or so.

Great, thanks, Ron.

Terry Peters, Canaccord Adams.

I just wonder if you could talk about the write-down of your CBM reserves and maybe clarify that event and then reflect upon whether your UK North Sea or your Trinidad and Tobago results are also included in your year-end reserves?

Let me answer the second part there, Terry.

And then I will turn it back to Harry.

We don't have any booking for either the North Sea or the Trinidad results in our bookings for the year end.

They don't appear in 2P until we actually are starting to proceed with some kind of development, and we're just not quite there yet.

We still need to do some delineation on both of those.

Understood, okay.

And on the CBM?

This is Harry.

As you know, we use successful efforts accounting and as a result of that, we are required to perform a cost recovery test on all fields or areas in the portfolio at least annually.

So coal bed methane assets in this case are treated as one cost center for purposes of the test and they did not pass the test because of some write-downs that we've taken over the last couple of years on probable reserves.

And as well when you combined that with lower prices that we are seeing, it resulted in the impairment, which we then took, which was C$150 million before tax, C$97 million after.

And it shows up as a onetime item in DD&A.

Right, and did you itemize the quantity of reserves that you wrote down or what the price level was that you used to do the test?

No, we haven't provided that information.

Okay.

That's it for me.

Thanks.

I think though the reserves were -- most of them were written down last year, were they not, Harry?

That's correct.

So you might check our disclosure last year, Terry, and see what we said about that.

I just can't recall.

Okay, thank you.

That's it for me.

Mark Gilman, The Benchmark Company.

A couple things.

First, can you give us an update on where things stand in your mind regarding the development potential of the Far Eastern Block of Terra Nova?

The Far East Block at Terra Nova, we're looking to drill I believe it is one more delineation well in that block.

And you may be aware we released the rig from Terra Nova in the middle of last year.

So essentially until we bring another rig back in, which is not likely to happen for some time now, there won't be any further development on the Far East Block.

Okay, one more if I could.

I want to be sure in the context, Ron, of your comments regarding Trinidad, exactly what the objective is in terms of either a commerciality threshold sufficient for an additional train in Atlantic LNG or whether your efforts are focused entirely on lower a commerciality threshold that potentially could exploit the domestic market?

Well, I think there's a couple of outcomes possible three, Mark.

The lower threshold, as you indicate, could either supply the domestic market or it could be a portion of an LNG train, because there are other reserves that could be brought into the next train of the LNG development there.

So what we are looking at is a number of prospects that are on this block that have essentially the same seismic signature as the Cassra prospect that we drilled successfully.

And so the program through the course of '08 will be aimed at I think we've got another three wells.

So one is a delineation well on Cassra and the other two would be new prospects.

So essentially that's what we're aiming for in our '08 program.

Okay, Ron.

Thank you.

Robert Kessler, Simmons & Co.

Just a quick clarifying question on your reserve bookings for bitumen in particular.

Can I confirm that all of the additions in 1P and 2P are SAGD and associated with MacKay River and that nothing associated with Fort Hills has hit the reserves yet?

That's correct, Robert.

Again, until we make the final investment decision on a project, we would not book any reserves from Fort Hills into even 2P.

So essentially all of what we added was into the MacKay River existing development.

Okay, then I can extrapolate that as well to say that nothing for the expansion at MacKay River is booked either, right?

That's a little fuzzier because what we've done is we've done some delineation work and we've even done some predrilling for the MacKay River expansion that even though we haven't made the final investment decision on that project, those are reserves that if we chose for some reason not to proceed with the expansion, in fact those wells can still be tied into the original MacKay River development.

So I hope that explains it.

Sure, either way you are producing the barrels.

Just depends on which facility.

Exactly.

That's right.

Great.

Thanks, Ron.

(OPERATOR INSTRUCTIONS) Kam Sandhar, Peters & Co.

Quick question on your Western Canada gas revisions.

If you could just comment on what specifically that's related to?

And then similarly on international business?

On the Western Canada side, Ken, these are revisions that relate to performance at near end of life in our fields.

So essentially what we have happening in some cases is we are starting to get liquid loading in the wells that essentially cuts back on the gas production typically.

And so this is not really a surprise, I would say, and as we are dealing largely with the maturing fields, this kind of thing I think we have to expect some of, maybe not of this magnitude, but some of as we go forward as well.

And it's not really possible to predict this in advance.

In essence you have to wait for the performance to show up before you can actually make an assessment on the reserves themselves.

So it's not anything unusual.

It's really just a function of the maturity of our fields at this point.

I'm not sure what the background was on the international.

I think it was fairly minor, wasn't it, Ken?

I'm just looking at the P plus P revisions, so -- it's about 31 million barrels.

Maybe Ken could get back to you.

Yes.

I could call you after the call (multiple speakers) and we can go through some of the detail.

Okay.

Robert Plexman, CIBC World Markets.

Have you been able to make any progress trying to advance the South Hibernia and Hebron projects, Ron?

We're making some progress, Robert.

On the Hibernia side -- or I'm sorry -- Hebron you mentioned?

Both, yes.

You mentioned both.

Okay.

On the Hebron side, we're working with the province in putting together some definitive agreements around the MOU though we struck back last year.

So once we get that definitive agreement in place, then we will be able to proceed to start putting the team back in place and start doing some front-end engineering and working the project specifically.

So that's about where we're at on that one.

On the Hibernia South project, because the province has been essentially tied up with the White Rose definitive agreements, which we've just completed, we have not been able to get at Hibernia South, but we're just starting now to engage on Hibernia South.

Okay, thanks.

If I can just ask you another quick one, on the U.S.

gas program, you have been able to double production, but can you give us an idea where that program is in terms of how mature it is?

Are you approach in a plateau or do you see more upside or do you see declines starting to set in?

First of all, the guidance that we've got for 2008 I think is close to 100 million cubic feet a today, so we're basically going to maintain our current rate of production through 2008.

We've got -- I can't remember how many drilling locations left.

There's some in the CBM area, but many more in the DJ Basin.

So we can see ourselves continuing to push this now for a couple more years.

We are working a couple of exploration plays that are still early days, but are part of our growth thinking in the whole U.S.

Rockies area.

Thanks, Ron.

I think we're in good pretty good shape for the next couple of years anyway, Robert, and then it is more a matter of exploration success filling in for us.

Okay.

Bruce Dutton, Credit Suisse.

Ron, I was wondering if you could give us a little more detail or color behind the dynamics impacting the Downstream business and in particular noticed that there's an $18 million charge in onetime items.

You note there that they include some Alberta Greenhouse Gas Tax and Quebec Green Levies.

I was wondering if you could expand on that?

Actually the onetime items did not include the Quebec Green Levy and the Alberta Greenhouse Gas Levy because those are ongoing.

So I hope the wording was clear there.

What we were trying to say is that on top of that there were some onetime expense items that related to some maintenance that we had in the fourth quarter -- and I have forgotten -- there were one or two other things, Ken, that we listed there.

Yes, we had some employee incentives and also there was a capital tax adjustment for 2001/2002 I believe for several million dollars.

So there's four or five items in there that made up the onetime items.

I see, and how -- could you quantify the Alberta Greenhouse Gas Tax and then the Quebec Green Levy?

I think the Alberta was about one and the Quebec was five, but maybe, Ken --

I have those details in my office.

I will give you a call back.

-- we'll get back on those.

Sure, could you then perhaps just give us some feedback or color on how you see the Downstream market now evolving as we come into the first quarter?

Well, certainly through January, the cracking margins have stayed pretty much where they were in the fourth quarter of '07.

I don't see any reason why that would change for the remainder of the quarter.

Marketing margins seem to the hanging in reasonably good at this stage.

So the Downstream is a little more difficult to predict, but at least through January, it doesn't look like it has changed much from what we saw in the fourth quarter.

Okay, thank you.

William Lacy, FirstEnergy Capital.

Gentlemen, just two questions.

First of all, on MacKay River, you've got your supply agreement kicking in with Suncor at 27,000 barrels a day, but obviously the operations have struggled.

You had 14,000 in Q4 and you are back up to about 25,000.

Looking forward, do you think there is a need potentially for third-party purchases to make up any volume shortfalls or will you need to put some more wells into the project to make sure that you've got adequate supply?

We're doing a couple of things there, William.

First of all, the shortfall in Q4 was related to a specific incident.

We had a water hammer incident that took out one of our major steam lines going to the two pads, so that knocked us off for a period of time, took us a while to come back on.

So that was a self-inflicted wound, if you like, that we certainly don't expect to happen again.

We have the capacity clearly today to produce in around 25,000 barrels a day both the well capacity and the capacity in the surface facilities, the water handling.

And we are just now working through the commissioning of a debottleneck on the water handling system which we expect will give us capacity in the sort of 30,000 barrels a day range and we're bringing on another well pad.

We're just in fact converting Pad 23 from steam to oil that will give us 30,000 barrels a day of reservoir capacity to match up to the facility capacity.

So our target is still by the time we exit this year to have 30,000 barrels a day of both surface and well capacity in place that we would expect to be able to meet our supply arrangement with Suncor.

So no, I don't expect to be in the -- need to be purchasing third--party volumes.

Can you give an update on the labor market with respect to Montreal?

We are still in the same situation at Montreal in the lockout situation.

At this point, there are no ongoing discussions with the union, but we have maintained contact with them and made it clear that we are very open whenever they are ready to come back to the table and restart negotiations.

Great, thank you.

Mark Gilman, The Benchmark Company.

This is Aaron Strahl filling in for Mark Gilman.

I just had a quick question about the Cassra well, whether the intent was to hit a gas-water contact which would define the limit of the reservoir?

Do you have any color on that, please?

Yes, in fact that was why we drilled the well was located near the edge of the prospect.

We wanted to do two things with that well.

One was prove up the seismic signature that we were seeing and the second was to establish the gas-water contact.

So we accomplished both of those objectives with that one well.

Okay, great.

Thank you.

As there are no further analyst questions, we will now proceed to media questions.

(OPERATOR INSTRUCTIONS) Jeff Jones, Reuters.

Mr.

Brenneman, you mentioned briefly the Downstream for the first quarter.

I'm wondering if you might comment on your view for the Canadian economy for the year and how that will affect the Downstream?

Well, the economic outlook for the Canadian economy still seems to be quite robust.

The sense seems to be that we won't escape entirely if there is a U.S.

recession, which seems to be the consensus view now.

But that Canada is in a pretty strong position from an economic point of view and we would still see positive GDP growth through the year here.

The way that typically shows up in petroleum product demand is that demand increases have been ranging anywhere from 0% to 3% year-over-year if you look back over the last several years.

So we might see -- we are currently running around between 2% and 3% petroleum product demand year-over-year.

Maybe that drops down to between 1% and 2% but I do not think it will have a significant impact on our Downstream results.

Thank you.

Ian McKinnon, Bloomberg News.

I think my questions are for Harry.

When you're talking about paring back stock buybacks and expenditures to seeing cash flow, were you all talking about 2008 or 2009 and beyond?

Certainly, Ian, for the foreseeable future anyway as we had mentioned in our call in December, our program for 2008 is C$5.3 billion and if we look beyond that into the C$6 billion and C$7 billion range, and so if you start thinking about that in a price context, say a little bit lower than where we are today, we will have to use the balance sheet to balance off the funding needs that we have.

So in the past when we've looked at share buybacks, it has always been based on the fact we were generating excess cash flow.

Right, but I'm just trying to get -- do you expect to do that in 2008 or are you only (inaudible) people for 2009?

I guess what I'm asking is if you have C$5.3 billion in CapEx this year, what do you expect for cash flow?

We don't provide a forecast for cash flow.

What we are, what we have told the market though is that we would anticipate having to use the debt capital markets to help fund that particular program.

Okay, on that side, any particular sort of size and scope on how much you want to tap of the debt market this year?

Those are items that we're working hard on right now and whenever the decisions are made, we will certainly let you know (inaudible).

I appreciate that.

Okay, that's it.

Gary Norris, The Canadian Press.

I'd like your views on the ethanol situation.

Do you have it in all your grades of gasoline now?

And what is the outlook in terms of price and availability?

To be honest, Gary, I'm not that familiar with the ethanol circumstance.

I believe that we have ethanol in some of our gasoline in Eastern Canada.

But maybe Ken could get back to you on that if you don't mind.

Yes, okay.

I will call you back, Gary.

Thank you.

Moira Baird, The Telegram.

Just had a question based on what you said earlier about the engaging with the province on Hibernia sales.

Can you give a sense of what kind of issues you still need to engage on?

Well, it is essentially the same sort of issues that we dealt with on the White Rose Extensions.

There's some analogies there on first of all, what all would be included in any, say, carve from the existing field.

And secondly, what would the fiscal terms be that would relate to that?

So still very early days, but essentially it's the same issues that we dealt with on the White Rose Extensions.

And sorry, when you said the carve out on the field, what does that refer to?

Well, there's a portion of the extensions that are part of the existing production license and there is a portion that is part of an exploration license.

So it's -- and we had that been circumstance also on the White Rose Extensions.

So part of it is determining how much applies to each of those circumstances.

So this is obviously not just a matter of submitting a development application for Hibernia South?

You're not ready to do that yet.

Well, we did submit an application about a year ago now for the development and at that point you may recall, the province came back with a number of questions that we answered through the course of 2007.

And so now -- and that had to do with the specifics of the development itself, and so now we need to engage on what the commercial aspects of the development might be.

Okay, so you've gathered all the information but it is not a simple matter of just submitting a new development application?

I am not real sure what the regulatory process is.

I am familiar with what the issues are that we need to deal with but I'm not sure what the mechanics are.

Okay, so you can't give a timetable of how long that will that I guess?

No, I don't have any timetable.

Thank you.

(OPERATOR INSTRUCTIONS) Carol Christian, Fort McMurray Today.

Just a quick question up here again on royalties.

As you know, Suncor has renegotiated its royalty agreement with the provincial government and Syncrude is currently in talks but apparently the multiple owners are bogging down the process.

What are your thoughts on the Syncrude negotiations and has Suncor's agreement set the bar for Syncrude's agreement?

Well, we continue to make progress on the Syncrude discussions, Carol.

I don't think it would be appropriate for me to comment because those are negotiations between the consortium and the province and at this point, I really don't have anything to add on that.

Okay, do you have any sort of anticipated financial impact on the expected increase at six year early or about six years early?

Again, it would be premature for me to speculate on that.

Okay, no problem.

Thank you.

There are no further questions registered at this time.

I'd like to return the meeting back to Mr.

Hall.

Thank you, operator.

Any further investor questions can be directed to me or my colleague, Lisa McMahon.

Media are welcome to contact Andrea Ranson.

Once again, we are glad you can join us and thank you for your interest in Petro-Canada.