Suncor Energy Inc (SU) 2009 Q2 法說會逐字稿

Welcome to Petro-Canada's second-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.

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.

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

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

Thank you, Ken, and good morning.

Well, we are now on the final leg to completing our merger with Suncor, and I know that your interest and ours is as well is probably more focused on the future right now than on the past.

So I do want to thank you all for joining us for this last quarterly call.

Not surprisingly, our strategy for this quarter has been to stay the course that we charted for ourselves at the beginning of this year so that we are in a strong position heading into the merger.

Our first priority was to achieve operational excellence in our base business.

Strong reliability at our major upstream facilities in Q2 kept our production on track with guidance.

MacKay River operations remain excellent in the second quarter with reliability at 96%, production averaging over 28,000 barrels a day.

Turnover reliability was 93%, and reliability at our natural gas operations in Western Canada continued in the 99% range.

Our second priority was to maximize cash flow in order to preserve our strong liquidity position.

And we were also able to achieve this in the second quarter.

Our East Coast, international, and downstream businesses all generated reasonable cash flow in Q2, despite the current downdraft in the economy.

This, together with reductions in our capital spending below what we indicated in April, has us in a strong liquidity position going into the merger.

Our third priority was to maintain growth by appropriately pacing our three sanctioned projects -- White Rose extensions, the Libya EPSAs, and the Syria gas project.

White Rose drilling has been slightly delayed because of weather.

It has been a late iceberg season off the East Coast.

And we have curtailed some spending in Libya because of OPEC cutbacks.

But the Syria gas project remains on track for startup in the middle of next year.

I'm going to pass it over to Harry now for a word about our financial status and an update on merger planning.

Harry?

Thanks, Ron.

Petro-Canada was able to maintain its strong liquidity position during the second quarter.

We did not draw on our committed bank lines in the second quarter, and our unused credit facility totaled about CAD4.7 billion.

With a strong balance sheet, low debt ratios, and diverse businesses, we are able to generate stable cash flows, we are in a good financial position heading into our merger with Suncor.

Before moving on, I wanted to give you a quick merger update.

I have had the opportunity to co-lead the integration planning needed to bring Petro-Canada and Suncor together when the merger becomes effective August 1.

I am pleased to report that plans are proceeding well.

We are on track to ensure safe, reliable operations on the first business day immediately following the merger close.

Moreover, we are working on the 100-day plan, as we call it, for the merged company, which includes planning for capture of merger synergies.

Back to you, Ron.

Thanks, Harry.

We are now intending that the merger will become effective on August 1, which is the Saturday.

And as Harry mentioned, a lot of planning work has been done to enable the new company to move very quickly after the deal is completed.

Petro-Canada's track record of reliable and safe operations has led to this terrific value-creating opportunity.

Underpinning it all is our successful strategy, which focused on, first, improving base business profitability and driving for first quartile performance; second, taking a disciplined approach to profitable growth by accessing new opportunities with a focus on long-lived assets; and third, by maintaining a very strong balance sheet through a range of business environments.

I want to thank employees for executing this strategy successfully.

They have exhibited the operational and financial discipline in the company that has led to this next step in Petro-Canada's evolution.

The merger announcement clearly unlocked some of the value the market was not attributing to Petro-Canada shares, and there is more value to be realized for shareholders who choose to stay with this new premier company.

Just before we go to questions, I would like to say how much I've appreciated our relationship over the past 9.5 years, with our shareholders for your support, and with analysts and media for your coverage.

We didn't always agree, but we were listening, and your comments were certainly helpful in providing an external perspective.

Back to you, Ken.

Thanks, Ron.

I would like to ask callers to keep their questions at a strategic or operational level.

After the call, Lisa McMahon and I would be happy to answer any of your modeling questions.

Operator, we would now be pleased to take analyst questions.

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

(Operator Instructions).

Brian Dutton, Credit Suisse.

Looking at the downstream, I was wondering if you could give us some insights on two fronts -- one, where you saw or see the downstream business going over the next several months; and two, if you could also give us some insight into the opportunity that you think your Petro-Canada downstream business brings to the new merged Suncor.

Maybe just as a bit of background, I can -- to help answer your question, give you a little insight into things that went on in the quarter that caused the results to come under what we would normally expect as a running rate.

And then I can comment on where those factors may unfold here over the next little while.

So normally in our downstream, we would expect about CAD100 million to CAD120 million a quarter.

And you will see that we came in at negative CAD18 million.

So we are off considerably from what we would have expected.

And a goodly portion of that, about CAD90 million of it, is actually because of lower cracking margins.

So this is really -- the supply and demand situation for products really in the whole North American refining market.

And you are seeing that across all of the refining businesses.

There is another factor in crude differentials, particularly here in Canada.

So we are talking about sour/sweet spreads and also the spread between WTI and Brent, which impacts our downstream.

And then we have a factor that is somewhat unique to us, and that is what I would categorize as lower refining yield.

And that is partly because we have had to turn down the Edmonton refinery because of reduced demand, particularly on distillate.

We have also had some operational issues, which you read about in the newspaper, that we are sorting through.

And also, the operational issues at Syncrude have impacted our ability to access our synthetic crude feedstock.

So any time we have to replace our normal running feedstock, we suffer a bit of a debit on that.

Offsetting that, we had much lower operating expenses.

We had a real push here in operating expenses across the company, and the downstream has really come through on that.

And we have had pretty strong retail and lubricants margins.

So there's a bunch of moving parts here in the downstream.

I would say that if you look for the remainder of the year here, there is no reason to expect that those lower cracking margins are going to turn around anytime soon or the crude differentials.

So I think that we could expect our downstream to continue to run below that CAD100 million to CAD120 million of run rate earnings in a quarter.

I think what you can expect is that we will get back some of these yield issues that we have had, particularly at Edmonton, and also at Syncrude over the course of the rest of the year.

So we should see something better than what we are running at right now, but certainly not up to the normal running rate.

And then the second part of your question, Brian, had to do with the integration of Suncor?

Yes, just how you see the value creation opportunity, then, with integrating your downstream assets into the Suncor business.

Yes, and I think the biggest opportunity there is at the Edmonton refinery, where, as you know, we have a processing agreement there now that is based on a fixed quality of feedstock, simply because it was a third-party deal.

We had to establish what is the feedstock that is going to be supplied.

That is not the ideal situation for a refinery.

You would much rather have more flexibility in the selection of feedstock.

So I think the big opportunity there is being able to produce what we would call cocktails of feedstock coming out of the upgrader at Suncor's site that would be more tailored to the yield pattern and the demand situation that we would see at Edmonton.

And again, any time that you can impact yield even by a percentage or two, multiplied by the volume of throughput, it makes a big difference, because it goes right down to the bottom line.

So I think there is a big benefit there we haven't really been able to establish, because we haven't been able to get together and really talk about details at that level yet.

So we haven't been able to establish what the magnitude of that might be.

But in my experience, that can be quite considerable.

And then the other opportunity is if the [line nine] were reversed and we were able to put Western crude and bitumen into the Montreal refinery and proceed with the remainder of the coker project, then there is a good investment opportunity there to see the same thing in Montreal.

So there is a couple of big ticket items that we can get at, one fairly quickly on the Edmonton feedstock side, and the other requiring an investment in Montreal.

And, Harry, if I can ask you a question, on the mechanics next week in the trading with the -- when does the new Suncor start trading in New York and Toronto?

I believe the new Suncor starts to trade in New York on Monday, August 3.

And I think the merged entity in Toronto actually starts trading after August 7.

But both shares will continue to trade through most of next week on the TSX.

So Petro-Canada will not be trading on New York next week, [but] on Toronto?

A few days into the week, Brian.

Which is a standard practice for the TSX in these situations.

Okay.

Well, thank you very much, and Ron and Harry, thank you for your insights over the past several years.

And I am sure your shareholders appreciate the value-enhancing opportunity here that you have entered with Suncor.

Best of luck.

(Operator Instructions).

Arjun Murti, Goldman Sachs.

Ron, on some of the recent conference calls, you have made reference to the general cost environment in the oil sands region.

The world still faces challenging economic situation, but it does seems like there has been some stabilization here.

And I was just wondering, as things are sorting out, how you think the cost environment has changed since the particularly high-cost environment of last July.

Any sense of cost deflation, or where things may be leveling out from -- I guess, primarily capital cost question was my gist, but maybe from an operating cost perspective as well?

Thank you.

I haven't got a recent read on that.

The last read we had was what I would have reported at the end of the first quarter, which was the reassessment that we had done of the cost of Fort Hills, which looked like they were down about 30%, which is pretty substantial.

And that's pretty much across the board.

So we were talking about structural steel, pipe, even labor rates, because we were able to negotiate the removal of some future increases from the trades labor rates, and also an expectation on productivity just because of lower activity in the oil business.

I don't think that's changed a lot between now and then.

I think what has happened, though, is we have seen the cost of services come down considerably.

So EPC contracts, rig rates and drilling rigs, that sort of thing have continued to come down through the second quarter.

I don't have a number on that because we are not that active, to be honest.

We've only got a couple of rigs working.

So I can't give you a specific number.

But I do know that they have been coming down.

You mentioned the labor rates.

I presumably labor productivity plays a role as well in that.

Yes.

So there's two components there.

One is the hourly wage rate, and that's where I indicated we were able to negotiate the removal of some future increases in wage rates.

And then the productivity one, which is probably even more important because it is the kind of thing that can really balloon out of control.

And here, that's just a function of the reduced activity in the whole sector.

That's great.

Well, I, too, want to wish you all the best, and especially thank you for the fact that whether we had a buy or sell or neutral rating, the information flow was always very consistent, and access to management and investor relations always consistent, no matter what our view was.

So thank you very much for that over the years, and best wishes to all of you.

Barbara Betanski, UBS Global Asset Management.

I was just wondering if you could comment in terms of some of your international operations -- Syria, for example, the nature of the relationship, I guess, between Petro-Canada and the host government, and what sort of issues might come up in terms of this merger and the new Suncor?

And I guess the process of any potential asset sales down the road?

Barbara, we have a very good -- you are asking about Syria specifically?

Yes, I guess so.

Well, any of those countries.

But I would say that we have a very good relationship with those host governments.

And this goes back to Veba, the predecessor company that has been in-country there for 20 or 25 years in the case of Syria and Libya.

And we have carried on a very good relationship with our people out of London in particular.

So I don't anticipate that there would be any issues.

The first step that we need to go through is getting consents, which is pretty much a formality in this case.

We have applied for those consents, but we haven't actually had a formal response yet.

But I don't anticipate that there is going to be any issues there, regardless of whether we choose to stay in those countries or not.

Okay.

Thank you very much, and wish you all the best.

We will now take questions from the media.

(Operator Instructions).

Carrie Tait, National Post.

I just want to build on the last question.

You had said that you have applied for consents.

Consents to what?

To sell assets?

No, Carrie -- any transfer of ownership of those countries requires the consent from the government.

In essence, what it is -- it is really a practical issue that in those countries, the company investing actually provides a form of guarantee, a financial guarantee, for certain undertakings that have taken place in the country.

For example, we have a completion guarantee on the gas project in Syria.

And we have an exploration commitment on our programs in Libya.

So it is really quite understandable that if you are changing ownership, the host government wants to be assured that the financial backing for those commitments that you've made is still there.

And that is why I said I don't expect it will be a big issue in this case, because this is actually a stronger company than even Petro-Canada was.

What happens after you have merged on August 1, but if you don't have all of the consents?

How does that work?

Well, things carry on.

These things typically take time.

I think when we made the acquisition of Veba, the consent came through from Syria -- Harry, I am trying to remember -- fairly quickly.

I am going to say maybe with a month or two.

I think it was a matter of six months before we got the consents from Libya.

So that is why I say it is more of a formality, and it takes a little time to work its way through the system.

But life goes on regardless.

What if you don't receive those consents?

Well, if you -- we will receive the consents, so it is not really -- it is really quite a hypothetical question.

As I indicated, it is just a practical issue.

And if you think about the guarantee situation, it is much better than it was previous.

Nathan VanderKlippe, Globe and Mail.

I am just wondering, Rick George has said that the Suncor culture will dominate in the new Suncor.

Is that an indication that the layoffs or whatever cuts might result will be disproportionately weighted to Petro-Canada people?

I think what Rick has indicated -- and really, this is again just a practical matter, when you are going into a merger situation like this, that there is -- there does tend to be one dominant culture that predominates.

So we are just acknowledging that up front.

As far as the selection process goes, we have gone through really two levels now.

The first one was the 16 or 17 senior executives that were announced shortly after the merger announcement.

And if you looked at that, it was a pretty proportional split between Petro-Canada and Suncor employees.

It wasn't designed that way going in; it's just the way it worked out when we looked at best candidates for the jobs.

And there was an announcement that went out late yesterday that indicated the next level of selections at the VP level, which is some 50 people, I believe.

And again, if you look through that list, you will see that it's fairly proportional between the two companies.

And again, that's just an outcome of having selected the best people for the job.

So the process we are going through is not weighted in favor of one company or another.

It is really weighted in favor of choosing the best people for the jobs.

Thank you very much.

Dina O'Meara, Calgary Herald.

I'm wondering if you can shed some light on the number of positions that will be eliminated further with the merger, leaving the senior VP level and more on the middle management and staff.

Actually, we don't have a number yet.

I know this is something that the media is particularly interested in.

But actually, our focus is more on working our way down through the various levels in the organization and trying to get people as quickly as we can and provide some certainty about where their future lies.

So we are kind of dealing with this on an individual basis.

And we haven't really established an overall number yet.

So I don't have an answer to your question specifically.

How are you targeting any specific area -- for example, your natural gas division?

Well, I think, again, this is just logically -- if you look at where the redundancies would appear where you have got overlap, it is typically in the corporate groups.

We will start with the CEO.

We only need one CEO, so that is a 50% redundancy.

And it kind of works its way down through the various levels to the point where when you get to a refinery, you are basically keeping everybody because you are running the same facility.

In the various businesses, there would be some overlap in natural gas because we each had a business there.

There would be some overlap in oilsands because we each have a business there.

There is obviously some overlap in the downstream.

And in the case of international and offshore, it is like a refinery, where effectively the organization stays intact.

So we could assume that there will be cuts as well, then, in the IT departments, in HR?

Yes, I mean -- finance, IT, HR.

Those are the corporate departments where you've got fewer jobs than people when you put two companies together.

That is where the redundancies tend to occur.

(Operator Instructions).

Linda Swain, VOCM.

Our interest here of course is in the offshore Newfoundland.

Can you give us a little brief overview of how that has been performing so far and what you expect now after the merger?

Well, Linda, the offshore, the East Coast has actually been performing exceptionally well.

We do have some turnarounds that are scheduled for this year.

We have taken one or two of them.

Ken can give you more details on this in the second quarter.

And we have one or two more of them coming in the third quarter.

Those, to some extent are to tie in new facilities.

White Rose, for example -- we are adding the extension facilities here later in the year.

But from an operational point of view, everything has been going quite well out there.

The only hiccup, as I mentioned, has been the icebergs, which has caused some delays in our drilling program on the White Rose extensions.

But we are sort of manipulating around that by finding locations that we can move onto and not be impacted.

But, no, things are going quite well there.

Now, post merger, Rick has made it quite clear that the East Coast operations and assets are really core to the new company.

And so I don't expect to see a lot of change there.

There are some investments -- investment opportunities in Hibernia South and in Hebron, and an exploration well the we are drilling later this year.

I would expect all of those to be funded by the new company when -- because the economics for those projects really stand up quite well against anything else you might see in the new Suncor.

There are no further questions from the media.

Thank you, operator.

Any further investor questions can be forwarded to me or Lisa McMahon.

Media are welcome to contract Andrea Ranson.

Once again, we are glad you could join us for our last quarterly call, and thank you for your interest in Petro-Canada.

The conference has now ended.

Please disconnect your lines at this time.

We thank you for your participation.