Suncor Energy Inc (SU) 2008 Q4 法說會逐字稿

Welcome to Petro-Canada's fourth-quarter earnings release.

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 Petro-Canada's quarterly release and annual filings, which are available on SEDAR, EDGAR, and the Company's websites.

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 Executive Vice President and Chief Financial Officer, Harry Roberts.

The format for our call will be that Ron and Harry will provide their perspectives and then we will open the lines for questions first to analysts and then to the media.

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

Thanks, Ken, and good morning.

Although commodity prices drove down Q4 results, we still had a good year, both financially and operationally.

A large part of our success was due to following through on the two key priorities we set at the start of 2008 -- to advance our major projects and to deliver on our base business targets.

On the project front, we completed construction of our Edmonton refinery conversion project, and in general, the startup has progressed quite smoothly.

In Libya, we signed the agreement for our new EPSA contracts and we're gearing up to start exploration drilling.

Our Syria gas project is now 50% complete and on target for a 2010 startup.

At White Rose, two successful wells were drilled in the North Amethyst and West White Rose areas of the field, and fabrication of subsea equipment for North Amethyst is proceeding on schedule.

In our base business, our production came in at the high end of our guidance range.

This was largely due to strong reliability at most of our major facilities.

Performance at Buzzard and Hibernia was excellent, and Terra Nova reliability further improved to 90%.

In Oil Sands, McKay River reliability averaged 97%, and we exited the year there at about 30,000 barrels a day.

Drilling success in our Natural Gas business produced better than expected results.

All this was helpful in producing exceptional financial results in 2008 and leaving us in terrific shape going into 2009.

Looking ahead from this point into the year, I'm really not prepared to make any predictions about how things might unfold.

And I'm certainly not prepared to base a capital program on any particular outcome.

So we have developed priorities for 2009 that will help us hunker down and ride this out, until the picture for commodity prices and financial markets becomes a lot clearer.

Our first priority is to continue our focus on operational excellence in our base business.

As part of this, we intend to reduce costs across all our businesses.

We are looking at all of our discretionary expenses, and encouraging everyone across the organization to reduce spending and lower our overall cost structure, but we will do this without compromising safety or reliability.

Second, we're going to use our financial strength prudently to manage our way through this downturn.

We are prioritizing our capital spending so that no matter how the year unfolds, we can fund most of our capital program from cash flow and a drawdown of cash if necessary.

As a consequence, we've already reduced spending in the first quarter from what we forecasted in mid-December.

The spending outlook at that time didn't impact near-term production.

But we've now had to dip into that layer of CapEx.

We're pulling back on some drilling in our Natural Gas business and we're having to respond to OPEC's quota reduction in Libya.

So overall, we trimmed our production guidance by about 10,000 barrels a day for 2009.

Our third priority is to maintain growth in shareholder value.

In the short run, this calls for appropriately pacing our growth projects.

We plan to move our three sanction projects ahead, as originally planned.

This includes the Libya EPSAs, the North Amethyst portion of the White Rose Extensions, and the Syria gas development.

We currently have rig commitments for all three of these projects, and we intend to follow through on our current plans.

For our three unsanctioned projects, Fort Hills, the MacKay River expansion and the Montreal coker, we intend to wait until we see a turn in commodity prices and the financial markets before moving ahead.

In the meantime, we're stepping back and reworking the costs to improve project economics, and we are looking at ways to further reduce execution risk.

Despite the downturn in prices, our cash flow should remain relatively strong because of the low cost of much of our production.

This production is supported by our continuing strong reserves picture.

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

At year end 2008, we had replaced 149% of our 2P reserves over the previous five years.

The highlights in this year's reserve additions include Buzzard, where development is proving that big fields get bigger, the impact of the new Libya EPSAs and an update to the Syncrude mine plan.

Our overall performance puts 2.5 billion barrels of 2P reserves behind our production outlook.

I'll now pass it over to Harry to say a little more about our financial flexibility.

Harry?

Thanks, Ron.

Petro-Canada delivered solid cash flows in 2008, setting us up well for 2009.

If you take a look at our cash flow run rate for the first three quarters last year, you will see that it's about CAD2 billion a quarter.

That dropped to CAD531 million in Q4.

Part of that drop results from lower average prices, but a large part is due to two significant factors unique to the quarter.

First, the slide in prices through the quarter meant that the inventory lag in the downstream had us selling product at prices well below the cost of crude used to produce it, or as we would call it, the FIFO effect.

That took about CAD550 million out of our cash flow.

And secondly, the deferral of the Fort Hills investment decision resulted in onetime charge to cash flow of CAD120 million.

Without those two factors, our cash flow would have been in the range of CAD1.1 billion to CAD1.2 billion, which is more in line with the run rate that we would expect the quarterly Brent crude average price of US$55 a barrel.

Despite lower cash flow in Q4, however, our steady cash flow in the first three quarters has positioned us very well as we move into 2009.

We will be following the business environment and financial markets through the year to manage within our financial means.

As a result, we are actively prioritizing capital spending in 2009 so we can fund most of our capital program from our liquidity sources -- cash flow, cash and committed bank line.

If we need to access credit in the near-term, we're well-positioned with unused credit facilities of about CAD4.7 [billion].

Petro-Canada uses Brent crude oil and Henry Hub prices as our main markers.

Given what we know today, if Brent is in the US$40 to US$50 a barrel range and Henry Hub is around US$5 per MMBtu, we can manage our business well within our financial means.

If commodity prices are below this range for an extended period of time, we would look at further capital reductions beyond what we have already pushed out for the first quarter.

So as you can see, we're actively managing our spending and have both the financial strength and flexibility for these challenging times.

Our balance sheet is strong.

Our debt ratios remain low and our businesses generate strong and stable cash flows.

Back to you, Ron.

Thanks, Harry.

Solid operations and an excellent business environment for most of 2008 set us up well for a challenging 2009.

We entered the year with a quality portfolio of assets, a strong balance sheet and a lot of flexibility.

As Harry said, we are well positioned financially and will continue to manage our capital spend and our projects for the times.

Ken?

Thanks, Ron.

Operator, we would now be pleased to answer investor questions.

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

(Operator Instructions).

Andrew Fairbanks, Merrill Lynch.

You mentioned your strong liquidity position.

I was just curious if you did find any interesting acquisition opportunities during 2009, what percentage of the roughly CAD6 billion cash and credit facility ready liquidity position would you be willing to deploy to that?

Would it be half, 25%, 75%?

And then, the other question would be, is there anything particularly intriguing to you at this point or are you really more focused on concentrating on the organic projects?

Andrew, I had trouble understanding all of the questions that you had.

I think if you were asking how much of our credit facility were we prepared to use, if we look at the full amount of CAD4.7 billion that's available, if you will, as we go through the year, a lot will depend on the prices.

If we are towards the higher end of the range that I talked about, we will use very little of those facilities and also very little of the cash.

As we move to the lower end of the range, we're really dipping into the cash that we have on the balance sheet.

For us, though, it's the flexibility in terms of the capital program together with that cash we have and liquidity facilities that allows us to manage through the year.

But I guess what I was curious about is if there were any interesting acquisition opportunities that came along during the year, would you be willing to use some percentage of the credit facility for that as well?

Yes, Andrew, it's Ron.

We don't have any particular targets in mind or any particular amount in mind at this point.

What we would be interested in are opportunities that might come about as a consequence of this downturn that would be in and around our existing assets, so the kind of bolt-on things that we have been looking at and, from time to time, have taken advantage of.

But we don't have anything specifically targeted at this point.

Thanks, Ron.

Arjun Murti, Goldman Sachs.

Thank you.

My question really related to the three unsanctioned growth projects, and I suppose Fort Hills in particular.

You mentioned in the release and in your comments about the importance of seeing commodity and financial markets improve.

I was just wondering on the cost side, target may not be the right word, but is there some amount of reduction you would like to see on the cost side?

And given that so many of your peer companies have also canceled or delayed the expansion projects, what might be the timing where you think you can have confidence that the costs have come down and you might be willing to again move forward with the project?

Thank you.

Arj, actually there's two or three things that need to come into play.

In addition to the market circumstances that you mentioned, first of all, we need to complete our discussions with the province on the extension of the lease.

That's progressing quite well, but we haven't yet got that nailed down.

The second thing is the one you mentioned, which is the cost, and we are working that.

We are making a lot of progress on it.

I've been reluctant to set any kind of a target because so far, I've been surprised at the kind of progress we have made and I don't want our guys to give up.

So we're going to see where we end up.

I think we've got time to do that.

I think it's going to be a little while yet before we see a turn in the markets that gives us that kind of confidence.

So we're just going to keep plugging away at the costs here.

And we just keep finding more and more ways that between trimming away at the scope a little bit, not in terms of the magnitude or throughput, but in terms of some of the facility redundancy and that sort of thing that we built into the original design, for example.

We are finding ways to lower the costs.

And of course, we're finding that commodity prices structural steel and pipe have come down and we are also finding that the EPC contractors are a lot hungrier today than they were six months ago.

So you put all that together, we're making some pretty good progress on the cost, but we're not finished yet.

And I guess part of the question relates to the fact that you do have a very strong balance sheet position.

And if commodity prices turned and we all felt better about the world, these projects are long leadtimes, so the startup might not be for four or five years into the future.

And who knows, maybe the next hole-up cycle will have played out by then.

Is there the potential to really start moving forward with this before the commodity price turns if you can get the cost to where you feel good under sort of a reasonable long-term pricing assumption scenario?

Well, I think we'd also want to have some confidence that financial markets have opened up, Arj.

And we would want to feel that we have either gone into and done a bond issue or were certainly able to do that.

And today, although that may be possible, I don't think we would like the pricing.

So there's a number of things that have to come into play here.

We're just going to watch this and see how it plays out and make the decision at the appropriate time.

That's great.

Thank you very much for your comments.

Paul Cheng, Barclays Capital.

Thank you.

Good morning.

Harry and Ron, when you are talking about reviewing all the cost structure, is headcount reduction as part of that review or that's not really?

No, not really, Paul.

We have trimmed back a little bit on the contract -- I call them employee contractors -- people that were on contract to Petro-Canada on the project side they were associated with the upgrader.

But beyond that, no, we haven't contemplated any employee reductions at this point.

Okay.

In 4Q, you have about CAD156 million charge-off related to the deferral.

Is that all we're going to see or there is some additional charges that may come through in the first quarter?

Well we given that a pretty good scrub, Paul.

We basically, most of that is related to cancellation fees that we paid for material or long-lead items that we chose not to take delivery of.

Most of it is associated with the upgrader because we've got that on hold for some indefinite period of time.

And so from a value point of view, that is clearly when you are paying a cancellation fee, it's pretty hard to justify that that has some enduring value even if you go ahead with the project.

So (technical difficulty) as we just said, we given a pretty good scrub so I don't expect to see anything more in the first quarter.

Okay.

You have indicated in the international side that you said addition is coming from [FASA] in Libya.

Can you maybe elaborate a little bit more in terms of Libya on the PSC changes, how much is that reserve addition?

I think Ken has that number.

We've put that out at the time that we signed the agreement and even announced it back a year ago, Paul.

It's in our disclosure somewhere.

It's in the order of 150 million barrels, I think.

Is that right, Ken?

On the proved, it's about -- of the total 127 total increase, the proved -- Libya made up about 70% of that, Paul.

So I can give you a call and give you some more details later.

Okay, that would be great.

2P was about twice that amount.

That's what I was thinking of.

Right.

And I assume that even at the US$40 oil, since then you've then indicated MacKay is still [possible], that's why you don't need to take any impairment charge?

No, you are thinking of the reserve breakdown?

Yes.

I'm sorry.

No, it was fine.

It passed the test, Paul.

Okay.

A final one.

I think there some noise talking about Libya -- Kadafi talking about nationalization.

I presume that you guys have not been contacted by any government official or any discussion there?

No, we haven't.

And I think if you follow the press on that, Shukri Ghanem, who is the current head of the National Oil Company, came out subsequently and clarified that comment and said that that really wasn't being contemplated.

So I really don't think that's an issue.

Okay, very good.

Thank you.

Ryan Todd, Deutsche Bank.

Good morning, gentlemen.

A quick question on -- so you've talked a little bit about near-term CapEx reductions and the production guidance.

The range has widened a little bit understandably because of the obvious uncertainty.

Going forward, what areas would you think are the most exposed to the uncertainty?

Where would we expect to see -- what parts of the portfolio would we expect to see the next layer of cuts come if that were to come?

Well, realistically, the most flexibility that we have is in our western Canada program.

But I wouldn't try to second-guess what more OPEC might choose to do.

So I think there is a couple of areas of vulnerability there.

I would also point out we've got four big shutdowns on our -- a shutdown on each of our four big offshore platforms, that we talked about in our CapEx release in December, that are planned and programmed into that production guidance.

And of course, those can vary in length.

We'll, obviously, try to keep those as short as possible, but when you take these platforms down, sometimes you get surprises.

So that's really why we've kind of widened the range there, Ryan.

Okay.

And in terms of managing the cash flow as well, it's obviously been alluded to that your great balance sheet strength that you have right now and the cash that you have on the books, is there a floor in terms of -- will you err on the side of drawing down your cash to be able to manage some of the CapEx so that you don't have to cut production too much?

Or how do you see the trade-off there?

Well, that's the kind of trade-off that we're going to make as we go through the year.

We are in a mode that I've described as kind of real-time management of our capital program.

So we're going to look at it basically quarter by quarter as we did for this quarter and make that judgment whether we want to maintain the program, if that means drawing down on our cash balances, for example, or whether we feel we might want to trim a little more capital.

So that will just be an ongoing exercise from our point of view.

Okay.

And then obviously you have a new partner -- potential partner with Total there on the Fort Hills project.

Would you consider diluting your stake any further with them in the project, or are you happy with your 60%?

We're quite happy with our 60%.

We have said that, I think, fairly consistently in the past and we haven't changed our mind on that.

So we're just going to wait and see how this plays out.

Okay.

That's good.

And then one last question if I could.

On the Oil Sands business, the business lost money here in the fourth quarter and the environment is certainly a little more challenging now than it was then.

Can you talk a little bit more about the current Oil Sands environment from an earnings and cash flow perspective out there right now?

Well, I think if you look at the disclosure of some of the pure Oil Sands players, you'll see that at today's prices, these operations are pretty close to break even, and ours would be similar to that.

Is that the sort of thing you were thinking about, Ryan, or --?

Yes, just in terms of -- I mean from a cash-flow prospective, what are you seeing right now from a mining versus in situ, is one striking you as more profitable than the other right now?

Well, I can only speak for our own operations comparing Syncrude against McKay River, for example.

And in the fourth quarter, they were each marginally profitable, both in terms of earnings and cash flow.

Okay.

That's great.

Thank you.

Thanks.

Robert Kessler, Simmons & Company.

Good morning.

A question on the Fort Hills CapEx.

Your press release referenced some long lead-time items that were going to still be purchased and just stocked up for the future.

I was wondering if you had a materiality on that, how much in sort of millions of dollars terms does that amount to?

I don't have that with me, Robert.

Maybe Ken could get back to you on that.

Okay.

Fair enough.

Thank you.

(Media portion not transcribed.)

There are no further questions registered, Mr.

Hall.

Thank you, operator.

Any further investor questions can be forwarded 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.

Thank you.

The conference has now ended.

Please disconnect your lines at this time and thank you for your participation.