Suncor Energy Inc (SU) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Suncor Energy Inc.

third-quarter results conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session.

Directions will be provided at that time for you to queue up for questions.

(Operator Instructions).

We would like to remind everyone that this conference call is being recorded on Wednesday, October 29, 2008 at 7:30 AM Mountain time.

I will now turn the conference over to Mr.

John Rogers, Investor Relations.

Please go head.

Thank you, Cheryl, and good morning, everyone, and thank you for listening into our third-quarter conference call.

I have Rick George, President and CEO, with us; Ken Alley, our CFO; Maureen Cormier, our VP, Controller, and Tim Maw from the Controllers department.

Just wanted to remind everyone we are dealing with us some forward-looking information and all of the necessary caveats around that.

So we will follow the normal format.

Rick will give you a bit of an overview of the quarter.

Ken will give us a bit of an update on finances.

I will talk very little about the outlook, and then we will open it up to questions.

Rick, why don't you take it away?

John, thank you very much.

We will try to make this relatively short because we did have a conference call last week around our capital budget for 2009.

Obviously pleased to announce a very clean quarter with earnings of about CAD815 million and cash flow just below CAD1.35 billion.

So obviously what helped us through the quarter was higher oil prices.

We also I can tell you are very focused on the path forward from here in terms of what we talked about last week in terms of prudence around managing our capital expenditures, flexibility in case oil prices go either direction from here, and also still plan for growth over the next two or three years.

I think it is a model that very few companies will be able to emulate through this.

Obviously, in this new environment, one of the focuses we have is how do we deliver both on the operating side and on the capital investment side in a much less expensive way.

I will say probably on the offering side it won't come quickly, it will be a little stickier coming down than it did coming up but something we will have a lot of focus on as we roll into 2009.

Our number one priority as a company is operational excellence.

We are very well aware that we have disappointed the market in 2008.

We're planning to rectify that here over the coming months and are actually looking forward to a much better run in 2009 to 2010 and beyond.

I am comfortable that we're making progress in this area.

I was actually up in Fort Murray last week and although it has not necessarily translated the volumes directly, I can tell you, from what I know of the operations and having walked the plant at some length, I do like what I see and the operation is being displayed with much reliability.

In fact, I have absolutely no doubt about our operating capacity reaching 350,000 barrels a day over time here.

I think where we are starting to see now is the bottleneck of the current limitation has started to move from upgrading to bitumen production.

Obviously, the Firebag ramp up through 2009 as we bring on the latest set of assets and 2010 when we bring on Firebag Stage 3 will both help that overall.

So, overall, we do know that is the area of focus.

We do know that we have got to deliver.

I can tell you our employees -- and we have some great employees -- are dedicated to reaching that and obviously have my greatest support.

So with the higher levels of production, we're also looking forward to lowering levels of our cash costs.

You will note, from the outlook, that if you go do the math, we are calling for an average in the low 30s, of I think it's actually 33 75 in terms of operating costs for Oil Sands in the fourth quarter.

Again, we will have to reship production rates of about 270 on average to do that for the quarter but are very hopeful we can get to that.

Now, I did spend a lot of time last week on the capital spending for 2009 and beyond, and I don't really have a lot to add to that.

What I can talk about for just a moment is our major project work that is currently ongoing.

First of all, the MCU project, which was about [CAD2.3 billion], is done, is complete, is behind us.

The Millennium NAFTA unit is about 45% complete on construction and expected to be onstream in the third quarter of 2009.

We will be glad to have that project done.

The Steepbank extraction plant is about 60% complete and again will come on middle of 2009 and again with another project we're looking forward to having done.

The Firebag sulfur plant is 85% complete on construction and expected to be on stream in the second quarter of 2009.

One of the other big legs here is Firebag Stage 3.

[Remember,] that 68,000 barrels a day of bitumen production is 40% complete with first steam in the first quarter of 2009.

So, that what you have to look forward to.

The Voyageur Upgrader is actually 10% complete and as you know, we are actually delaying that somewhat from the original schedule by about 12 months as we head into 2009.

So, I will say that good results from the downstream in this quarter -- very solid.

The operation there is very solid and obviously we are impacted by margins and volumes but very good performance by our downstream group.

The natural gas, in terms of volumes, has been very good.

In the quarter, they had more dry holes than they would have expected and that is obviously one of the challenges we have with that business.

So I wanted to just spend a moment on two items, because there seems to be a lot of confusion out in the marketplace about what is Suncor's real position and what does lower crude oil prices really mean for Suncor?

First of all, I want to go to, you know, let's just assume a $60 crude oil price, US WTI, and assume the kind of exchange rate of CAD0.78, which is kind of today's exchange rate.

So if you used WTI at $60, you would have a realized price in Canadian dollars of about CAD77, okay?

You would have to discount that by about CAD4 for the quality of crude on average that we produce.

You would have about CAD4 worth of royalties.

You would have operating costs -- just roughly use CAD35.

We actually think it should be lower, but use that as a rough number.

Then your DD&A, i.e.

non-cash charges, of about CAD6 means your earnings net back would be CAD28 a barrel, or just below CAD30.

By the way, your cash flow net back in that case would be about CAD34.

It isn't often a business that you have where 50% of your revenue is actually a net cash flow.

And so this is not a case of us not being able to make money at 60 dollars.

There seems to be a lot of misunderstandings and panic out there in the market on that.

Now, obviously you wish it were 140 dollars, and you had even higher margins, but that is not where we are.

The advantages that we have in our Oil Sands business on that is no decline curves.

You're seeing it, and you're going to see some big decline curves, I believe, worldwide, and no exploration costs.

So you have certain advantages and your other one is to just watch and make sure that we get to reliable production at the lowest cost we can.

That is really the goal line.

The second thing I wanted to do is maybe clear up a little confusion around Voyageur because, again, people kind of swap numbers between what today's return is versus what you plan on, on future development.

Obviously, we have the lowest installed capacity with the assets we have on the ground now.

Now, with Voyageur, it does take an $80 WTI number to get a 15% return on capital, but we still believe that to be very strong economics.

We think we can deliver on it for sure.

And of course, once that installed capacity is there, it's there for a century or more.

Now, we have already spent about one-third of the capital, about CAD7 billion out of the CAD21 billion at the end of this year.

As I mentioned at the call last week, I will be stretching the rest of that over '09, '10, '11 and '12.

Remember this stuff has been in progress already for over five years, so none of this stuff is near-term.

We don't really run future economics based upon today's crude oil price.

So listen, we think it is still a very strong, very viable project.

You can get people to say, "Oh, well, Suncor can't make money at 80 dollars." I would say that those people really have not done their homework around what the economics are here.

So, I think that is kind of where I want to leave it.

I want to turn it over to Ken to talk a little bit about the (technical difficulty) in the quarter.

Thanks Rick.

Good morning, everyone.

We did talk about the strength of the balance sheet on last week's call, but clearly, in the current economic environment, I think it is worth reiterating just how strong our financial position is today.

If I look first at liquidity, our liquidity position is excellent.

We have got about CAD1.4 billion of cash on hand.

We have a syndicated credit facility available to us.

It is undrawn.

It is CAD3.75 billion.

It does not mature until 2013.

I have complete confidence that facility is available to us, should we wish to draw on it as we go forward, so no concerns with being able to use that facility.

The debt we do have on the balance sheet is long-term.

Our average maturity is 2028.

We have no maturing debt over the next couple of years.

So overall, the liquidity position is very strong, no refinancing exposure in the intermediate-term and feeling very good about the strength of our financial position as we move forward now.

John, I am going to pass it back to you after that.

Okay.

You received the outlook with the quarterly release, so I'm not going to say too much on it, just a commentary, however, on the production that we're predicting for the year averaging 235.

You can be the math, but I will help you; it is about 270 for the quarter.

We do have to do a turnaround on the vacuum tower on U.

2 during the quarter, so that will reduce a bit of the production for a short period of time.

We still expect -- and that has been our plan the whole year -- we still expect that we will be exiting this year in the 300,000 barrel a day range.

So we are pretty happy with where things are going.

As Rick mentioned, we have had our struggles this year, but we're starting to see some pretty good progress there.

Cash costs, which are directly associated, for the most part, with reduction levels, we would predict in the fourth quarter we would do something in the neighborhood of about CAD33.75.

That will give you the full-year of CAD36.50.

So again, as production goes up, we do see those costs come down.

Other than that, I think that's all we were going to talk about before the Q&A.

Again, with the Q&A.

if we could keep our questions to the strategic nature, we would be happy to deal with your specific modeling questions after the call.

It is a little easier, one-on-one, to deal with those questions.

So, Cheryl, why don't we open it up to questions?

Certainly.

(Operator Instructions).

Paul Cheng, Barclays Capital.

Gentlemen, I actually don't have any specific question, maybe (inaudible) or someone that you can just email me after the call.

I want to know what is the FIFO impact for this quarter for the Oil Sands and the Company.

You, in your press release, talk about the (inaudible).

Also if you can break down for us what is the stock-based compensation.

Then the final one is that the fourth-quarter Oil Sands sales (inaudible) should we assume is going to be higher than the production given the third quarter is substantially (inaudible)?

Thank you.

Paul, let me answer the last question and Tim, if you could email those other two things to Paul, that would be great.

We would expect, over time, production sales actually equal each other.

We got a little behind this quarter in terms of sales because of the inventory of sour product, but as we get to move more and more of that, we will find that the sales will probably or could potentially exceed production in the fourth quarter.

Thank you.

Ryan Todd, Deutsche Bank.

Good morning, gentlemen.

Just a quick question -- you talked about the bottlenecks in bitumen production.

In order to fill the 350,000 barrel a day upgrading facilities next year, I may have just heard incorrectly, but do you need Firebag Stage 3 to get there?

Can you fill the 350,000 barrels a day before Firebag 3?

Ryan, it's John.

We are actually on a path to move towards the 350 probably very late next year.

To get there, we would need a number of things.

We need Firebag 1 and 2 to be up to full production which will probably be somewhere in the 80s where that will eventually land.

We do need the Petro-Canada volumes to come in.

We do need the volume to be working at its full capacity.

Any shortage from any of those three will have to be made out by Firebag 3, which we are going to start steaming late next year.

Great, thanks.

The other question was, just from a general perspective, I know you have talked some about how cost could potentially come down on the long-term in project development in a lower oil price development.

How much -- if we were at $60 oil next year, could you expect to see very much relief on a cash OpEx basis, or do you still kind of stay in that CAD33 to CAD35 a barrel range?

I would leave it there.

I do think we are going to see some cost advantages, maybe not earlier in the year.

It is probably going to take us some time to drive that.

We have a lot of work with new assets coming on, as I mentioned on the product project side in the first, second, early third quarter.

So, I think it will come.

I just think, Ryan, it will be a little bit stickier than it was on the way up, which is pretty typical in this industry.

Great.

Thank you very much.

Brian Singer, Goldman Sachs.

Actually, just following up on the previous question first on cash operating cost side, I think, Rick, in the margin numbers you went through at a $60 oil price environment, it did imply a meaningfully lower cash operating cost.

Correct me if I'm wrong, but can you just talk about the path to getting there and maybe a little bit more color on how long that takes ultimately.

Actually, Brian, the number that we quoted, the CAD35 was the cash operating costs, which basically are where they are today.

We actually had not made any projection in terms of lowering those costs.

Okay.

Do you not mention -- maybe I wasn't writing this down -- a CAD35 net back in a $60 oil world?

Maybe I wasn't taking notes correctly.

Maybe, we didn't say it right, so let me make sure that you have it.

We talked about a CAD77 price in terms of realized, a CAD4 discount, CAD4 royalties, CAD35 operating cost, and CAD6 DD&A, which will give you a CAD28 net-back.

I think what we did do is say that was the net-back on an earnings basis.

If you look at it on a cash basis, of course you have to add the DD&A of CAD6 back, and that is where you got a CAD34, maybe CAD35 net-back.

Again, in Canadian dollars.

Again, in Canadian dollars.

I got it.

Then on the capital cost side, how long until one should expect the impact of lower steel prices to translate into the ability to buy things more cheaply from a Suncor perspective?

Yes, that is a good question.

I think it will take some time.

You've got to remember, we are rejigging in terms of our corporate or capital plans.

Obviously, we have a number of projects to finish where the steel would have already been purchased, and we have actually stop buying bulks and things in the current environment and with our capital plans.

So we probably won't be back-purchasing in a major way until sometime in 2009.

By that time, I would expect to see some of these lower prices roll through.

As importantly, the real competition among suppliers and contractors will help as well.

So I think you kind of one to wait this out as long as you can through that.

If there is any saving grace, a lot of the equipment we bought for Firebag Stages 3 in particular but also the Upgrader, at least were purchased back when the Canadian dollar was closer to par.

There is a combination here of some of the commitment you bought when the Canadian dollar was very strong; that is good.

Then we were going to try to wait as late as possible to buy the bulks of things until you see those commodity prices roll back.

Now, listen.

Exactly how the future unfolds it is hard to tell here.

But I think we will be able to play that as we see it, as 2009 rolls out and we see how the economy around the world kind of responds to the current financial crisis.

Thank you.

William Lacey, First Energy Capital.

Ken, I was just wondering if you could maybe give a little bit more color.

I know it is sort of flogging a dead horse, and John, we've talked about this in the path, but I'm assuming you have obviously been talking with your bankers of late regarding the credit lines [net].

Can you sort of give some more color on those discussion, what their thoughts are, what have you?

I can do that, Will.

So just to reconfirm for everyone, it is CAD3.75 billion and it matures in 2013.

We have had conversation with the banks.

That credit is available for us to draw on.

All of the banks in the syndicate have the capacity to fund their share.

It is a syndicate; it is not one or two banks; it is probably about 10 or 12 banks in this group.

It is led by a very strong group of banks really around the world but the core are strongest Canadian banks.

So all in, I feel very confident, and through those discussions and my knowledge of the status of those banks, that this facility is available for us to draw as we need it.

It's not like we're going to be taking it all down at once.

Remember, it is flexible.

It is a revolving credit facility.

We don't have to draw it all down at once.

We draw it as we use it.

We repay it.

It is available fully for us, but we don't have to draw it down as a term loan.

Yes, no, and it is comforting hearing that in this market.

I think people just like reaffirmation that those discussions are ongoing and people have had positive response.

So that's --

Thanks for asking your question, Will, because it is top-of-mind.

I would like to give people comfort on that front, as would our bankers, I am sure.

Absolutely.

Just on Firebag, obviously you have been having pretty good numbers of late.

It looks like you're just over 43,000 in July and just under 44,000 in August.

As far as for the ramp-up profile now, can we expect, now that the limitations are off on this facility, that we should see a pretty quick positive response on the production front from this facility going forward?

Yes, I don't know if it is quick, but I think it is slow and steady, Will.

I think we did mention, back in August when the control order came off, it would probably take a couple of months before we saw meaningful changes, and we're starting to see them.

I would still expect that, by the end of the year, we will exit in the 50,000 barrel a range, and we will be moving up to that 70,000 to 80,000 range.

Maybe you could incrementally about 5,000 barrels a month.

It will be slow and steady.

The good thing about it is, once it gets up to that full rate, it consistently produces at that rate for ten years or so.

Yes, it is going in the right direction, so good.

Thanks.

It's going in the right direction, you bet.

Perfect.

(Operator Instructions).

Gill Alexander, Daffodil Associates.

Are you still hoping to produce an average of 300,000 barrels per day?

Hi, Gill.

It is John.

We are expecting that we will exit this year at 300,000 and a preliminary look at 2009 would say we would be producing about 300,000 next year, yes.

Thank you.

Do you get to about 350,000 at the end of the year or is that open?

We're moving towards a 350,000 capacity.

As I mentioned earlier, there are three or four things that have to kind of work towards getting up to 350,000.

We will have upgrading capacity of 350,000, and now it's a matter of filling that capacity and that is our job lunger in 2009.

Thank you very much.

Thank you.

Mr.

Rogers, there no for the question at this time.

Please continue.

Well, that's great.

Thank you, Cheryl, and thanks, everyone, for listing into our conference call.

I am actually traveling right now, so if you do have follow-up questions, the best way to get a hold of me, and I think everybody knows it, is get through to me at my e-mail, which is simple -- jrogers@suncor.com.

If you've got any questions at all, just send them by e-mail and as you know, I will get back to you real quick.

So that would be great if you would do that.

Other than that, I hope everybody has a great day and I will see you later.

Bye.

Ladies and gentlemen, this concludes the conference call for today.

Thank you for participating.

Please disconnect your lines.