Suncor Energy Inc (SU) 2009 Q1 法說會逐字稿

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

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 website.

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

Ken Hall, Senior Director of Investor Relations.

Please go ahead, Mr.

Hall.

Thanks, Valerie.

Good morning, everyone, and thanks for joining us.

On the call this morning are our President and CEO, Ron Brenneman, and our Executive Vice President and CFO, Harry Roberts.

For today's call Ron and Harry will provide their perspectives and then we will open up the lines for questions, first to investors and then to the media.

With that I will turn it over to you, Ron.

Thank you, Ken, and good morning.

You will have seen from our Q1 results that even though we had a great quarter operationally earnings were actually below market expectations.

I think it's worth pointing out that with the modest level of operational earnings that we are seeing the puts and takes that might otherwise be covered by a larger number are having a more noticeable effect on the bottom line.

And that was the case this quarter where two items depressed operating earnings and these are items that analysts may not have picked up on.

The first is the expense associated with the start of our exploration obligations in Libya and the second is related to inventory effects.

While our earnings were not strong, a key priority for us during these tough times is to maximize cash flow in order to preserve our strong liquidity.

This quarter was a testament to the quality of our asset base.

Our East Coast, International, Natural Gas, and Downstream business units all contributed reasonable cash flow even with lower commodity prices and cracking margins.

This combined with the reduction in our capital spend below what we indicated in December enabled us to maintain strong liquidity through a difficult first-quarter business environment.

Our continued focus on achieving operational excellence in our base business is what drove that cash flow.

Strong reliability in our major operating facilities in Q1 kept our production on track with guidance.

During the first quarter MacKay River operations continued to be excellent with reliability at 98% and production averaging over 30,000 barrels a day.

We also saw a 96% reliability at Terra Nova and 99% reliability at our operations in Western Canada.

So although we are cutting operating costs across our businesses we are doing so without compromising safety or reliability.

In the Downstream we successfully ramped up the Edmonton refinery conversion project during the first quarter, although we had to scale back throughput because of lower market demand.

In Eastern Canada we can take the demand downturn in reduced imports and keep our Montreal refinery running full out.

Along with a focus on operational excellence we also told you we were going to carefully manage our capital budget through the year.

During the first quarter our capital spending was CAD681 million.

That reflects lower spending and project costs in our North American natural gas and in our oil sands business.

Harry is going to touch a bit more on our capital spend for the year, but I would say that even at these low commodity prices we are looking to be in pretty good shape financially.

We are also realizing some impressive cost reductions in OpEx and G&A.

With fewer capital projects our people have been able to get under the hood and find some great cost-cutting opportunities in our base business.

This bodes well for us, not only in this tough business environment, but also by making us a stronger company when the market recovers.

Our third priority was to continue to maintain growth and shareholder value by appropriately pacing our three sanctioned projects.

At White Rose development drilling, procurement, and fabrication for North Amethyst progressed during the quarter and the project remains on schedule to deliver first oil in late 2009 or early 2010.

In Syria our Ebla gas project is on plan and was 60% complete at the end of the first quarter.

Our current focus in Libya is on working out key field development plans starting with the large Amal field.

Seismic operations for our exploration program are continuing and we expect to be drilling our first operated exploration well in the second half of 2009.

Our Q1 results included an after-tax charge of approximately CAD43 million for Libya's seismic program.

All-in we will expense about CAD50 million after-tax a quarter on seismic-related activities across the Company for the remainder of 2009.

This total seismic spend is accounted for in our 2009 plans and it includes part of our exploration commitment for our attractive Libya acreage.

For our three unsanctioned projects -- Fort Hills, the MacKay River expansion, and the Montreal coker -- we continue to work the cost down to make these projects attractive at prices more in the $60 a barrel range.

Given the slowdown at Fort Hills, we made the tough decision to let some of the project team go this month.

Our two oil sands projects remain essentially on hold as we look at operating and capital synergies from the proposed merger that will improve the economics even further.

Now I will pass over to Harry to say a little more about our financial flexibility.

Harry?

Thanks, Ron.

Our Q4 conference call in January I said that we would closely monitor the business environment and financial markets through the year to manage within our financial means.

Our goal was to prioritize our capital expending in 2009 so that we can fund most of it from cash flow and draw on liquidity if necessary.

During the first quarter, in light of the continuing tough economic environment we reduced our planned 2009 capital budget of approximately CAD4 billion down to CAD3.4 billion.

This CAD600 million reduction mainly reflects less spending in our natural gas business and our two oil sands projects at Fort Hills and MacKay River.

As Ron mentioned earlier, we have also worked hard on our operating costs so we expect some healthy savings there, approximately CAD200 million for the year.

Given this financial discipline our committed bank lines went untouched in the first quarter.

Our unused credit facilities total about CAD4.7 billion so we continue to be well-positioned should we need to access credit sometime in the second half of the year.

With a strong balance sheet, low debt ratios, and good cash flow we are in a solid financial position for this tough business environment.

Before moving on to questions let me just give you a brief update on the merger.

When we announced this deal I said to all of you that Rick and I would be heading out to talk to shareholders and analysts.

Generally, I would say the feedback on the merger has been positive on both sides.

Last week you will have seen that we announced the executive team for the new company.

These individuals were selected because of their skill and fit with the new company and we are confident they will provide the strong leadership needed to guide the new organization.

Shortly we will be announcing the proposed Board slate to complete the picture.

Next week we expect to file the joint circular for each of Suncor and Petro-Canada shareholders with votes at the annual and special meetings held by each company on June 4.

With respect to other approvals, we have already received the okay from the US Federal Trade Commission.

We are engaged with the Competition Bureau and are assisting them with their review of the transaction.

Depending on the timing of the Competition Bureau's review we are still hopeful that we can close the merger in the third quarter of 2009.

So in summary, reliable business operations, prudent financial oversight, and our cash flow generation capability are helping us weather this downturn.

We continue to advance our sanctioned growth projects at a pace that matches our cash generation and we are advancing on the merger front.

All of this positions us well to deliver sustainable shareholder value in the future.

Back to you, Ken.

Thanks, Ron.

Operator, we would now be pleased to answer questions, first to investors and then to the media.

(Operator Instructions) Paul Cheng, Barclays Capital.

Good morning.

Ron, can you tell us that -- you are saying that the Edmonton coker you actually had to reduce the run comparing to what you were hoping for because of the market conditions.

Can you tell us what is the contribution from the Edmonton coker in the first quarter?

Don't have a number for that, Paul, but I will say that the operation now is running as we would have expected and according to design.

We actually did for a few days do a throughput test on it and demonstrated that we can achieve the kind of throughputs that we expected.

As I indicated though, we have had to back down a little bit from that just because of slackening demand in the western part of the country here.

But I don't actually have a number broken out for what the coker would have contributed.

I would say that if you look at the business environment we are in though, Paul, with narrower light/heavy spreads and somewhat narrower sweet/sour spreads it would be off a little bit from what we would expect the long-run run rate to be in terms of contribution.

Ron, there is a, I think, widely circulating some report or rumor, I don't know, considered CNPC maybe interested in buying your operations in Libya and Syria.

Any comment that you can share, whether that is true you would be interested in selling those?

We haven't had any approaches from CNPC or anyone else for that matter expressing an interest in those assets, Paul.

So I really don't have much to add to that.

Okay.

So the rumor is just totally false then.

As I say, we haven't been approached so I can't comment.

Okay.

If I am looking at the international effective tax rate, there is a huge jump in this quarter.

Harry, is that anything unique in this quarter, is there a special factor?

If not, does that mean that if oil price stay around in the $45 to $55 we should expect your international tax rate somewhere in the 80%, 85% for the remainder of the year?

Paul, when you look at the international tax rate it has to do primarily with Libya.

There are a number of puts and takes in there.

So what I would like to do rather than get into the level of detail here on the call is refer you to Ken or Lisa and they can give you some of the reasons for the movements that we saw there.

Other than what we have seen here in the first quarter I would say that the tax rate for the balance of the year would be, more or less, in line with what you mentioned.

I will call you shortly, Paul.

Okay, that is good.

And final one, on the 2009, Ron, is there any new update about your production guidance given that first quarter looked like it was better than we expected in terms of production front but on the other hand you are cutting some capital in the natural gas?

No, we don't have any update, Paul.

I think if you go back to the original guidance that we put out in December you will see that we have some major shutdowns on our four big offshore platforms coming up, mostly I think in the third quarter, so you need to factor that into your thinking.

But we did do a look forward, a two-plus-ten outlook, to basically convince ourselves that we were on track with what we expect to deliver this year.

On the basis of that we concluded we really shouldn't be changing our guidance at this point.

Okay, very good.

Thank you.

William Lacey, FirstEnergy Capital.

Gentlemen, with the announcement this morning that Total is walking away from its bid for UTS does this change your views on the Fort Hills project and potentially on your interest in increasing your ownership in that?

No.

This is late breaking news for us, William, so we haven't had a chance to think this through.

But at this stage I would say that we are still basically comfortable with our 60% position in that project and we will just have to see how this whole partnership thing unfolds.

Okay, thanks.

(Operator Instructions) Brian Dutton, Credit Suisse.

Good morning, Ron.

There was some commentary percolating out on Fort Hills and the costs that the partners were now seeing.

I was wondering if you could give us a little bit of insight as to where now you think the cost may stand on the mining side of the project question.

Good morning, Brian.

We have been working pretty hard at trying to incorporate the more recent cost estimate data into our original engineered estimate that we published I guess it was middle of last year now.

That number on a go-forward basis was CAD14 billion and change.

I have forgotten what the decimal point is now but we are seeing reductions in total of about 30% from that number.

This is a combination of lower steel prices, lower pipe prices, lower expected wage rates, less escalation in wage rates through the course of the project, somewhat better productivity just because of the improved construction climate in Alberta, and to some extent we have rescoped some of the details within the overall capacity of the project to eliminate some redundancies.

So we are at a number now that is under CAD10 billion from that CAD14 billion and change.

We have also been able to reduce the operating costs by a couple of dollars a barrel.

Now I would caution you that these are not reengineered numbers.

These are just taking estimates of input costs, like I have described on steel and labor, for example, and inserting them into the original estimate that we have.

We are not going to reengineer the project as it now sits, because if the merger goes through we would expect to see some further opportunities in infrastructure sharing and that sort of thing that we would want to incorporate before we did any further engineering work.

So it's a pretty rough estimate at this point, but it's, to us, pretty encouraging because it says that even based on a stand-alone basis we can probably generate a double-digit return at $60 dollars with those kinds of numbers.

We can look forward to improving on that with the synergies we will see from the merger with Suncor.

You may not want to address this question, but on a hypothetical basis on a stand-alone where would you see the timetable for Fort Hills being at this point if the merger was not being undertaken with Suncor?

Well, I think if we were undertaking this on our own, Brian, what we have said is that we would want to see commodity prices come back in to line with what we would see as threshold prices for the economics of the project.

We would also want to see some opening up in financial markets so that we were confident we had a cushion of being able to go to the market if we needed to for financing.

So it's a bit up in the air at this point and it's not one that we have -- we are basically in a very low-cost, almost no-cost kind of holding pattern right now.

So we can wait out the conditions as long as we need to until we are comfortable that we should pull the pin on this or fire the gun on this and get it restarted.

Just one last question if I may.

The lubes business; marketing looks strong again.

Lubes were pretty good last quarter.

Is the lube burning still holding up?

Yes, our lubes business is doing quite well.

We are being hit here by a couple of different factors.

One is the downturn in the economy, of course, when manufacturing and particularly auto sales and manufacturing fall off.

We are a big supplier to General Motors for transmission fluid, for example.

We do see some reduction in demand, but on the other hand margins have held up pretty well in that business and we have been able to continue to push our product, our very high-quality product into higher-margin markets.

So our folks in the lube business have really done a terrific job in compensating for the downturn in demand.

Great.

Thank you very much.

Ross Payne, Wachovia.

Two quick questions.

First, has the Company considered any asset sales --

Sorry, Ross.

We are having trouble hearing you.

How about now can you hear me?

A little bit better.

Okay.

Has the Company considered any assets sales in the near or medium term?

And, second of all, are you still comfortable with your original production guidance for 2009?

Ross, on the production guidance I indicated earlier that we are quite comfortable with the numbers that we have out there now.

We have looked consciously as the rest of the year and concluded there is no reason to change that.

On the question of asset sales, normally we are always looking at opportunities for asset sales at the margin.

But right now I would say the market isn't particularly conducive to that.

I wouldn't expect that we would see a lot of interest.

Clearly not the type that we would like to see if we were in the market, so we are not particularly active right now.

There are no further questions from analysts and investors.

We will now be taking questions from media.

(Operator Instructions) Linda Swain, VOCM Radio.

Good morning.

I am calling from St.

John's Newfoundland and I am curious if you could outline some of your plans for East Coast Canada?

Well, Linda, we have a pretty big project underway there now with the extensions to the White Rose project.

I talked about the North Amethyst project, for example, which is well underway and targeting start up either later this year or early 2010.

We are also in discussions with our partners and the province on the kind of fiscal terms that would apply to some similar extensions for the Hibernia platform.

We have quite an interesting exploration prospect that we are anticipating drilling in the latter half of the year called [Ballacatters].

We are also involved in what is right now certainly early development of the Hebron project, so we have got a lot of activity underway off the East Coast, I would say, at various stages of development.

Now you are planning some shutdowns as well.

Can you tell us about that?

So each of our three big platforms off the East Coast will be undergoing some fairly major turnarounds in the latter -- I think, Ken, it's mostly in the third quarter?

We have talked about the timing of those earlier.

Terra Nova is the second and third quarter at 28 days, Hibernia at 21 days in the second quarter, and White Rose is at 28 days in the third quarter, Linda.

And there is going to be a 40-day shutdown to do some work to tie in with North Amethyst as well?

No, the 28-day shutdown accounts for that.

But there will be a period of reduced production?

Correct.

Thank you.

Hyun Young Lee, Dow Jones.

Good morning.

I just wanted to clarify those numbers, Ron, that you mentioned earlier about Fort Hills, the cost savings that you mentioned.

The CAD14 billion plus change which has now come down to under CAD10 billion is that for the mine?

I was just trying to figure out what they actually referred to in terms of the project.

Yes, that is for the mine only.

We deferred the upgrader back in the latter part of last year, so we have only been working on the mine since then.

Okay.

And those costs you feel are at the moment under CAD10 billion as they stand now?

You just have to be a little careful with that number.

As I indicated, that is not an engineered number.

That is simply a revised estimate based on just pumping the different input costs into the estimate we currently have.

Okay, that is great.

I just wanted to clarify that.

Thanks very much.

(Operator Instructions) There are no further questions registered at this time.

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

Hall.

Thank you, Valerie.

Any further investor questions can be forwarded to me or 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.

Thank you for your participation.