Suncor Energy Inc (SU) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Suncor's third-quarter conference call.

I would now like to turn the call over to Ms.

Helen Kelly, Investor Relations.

Ms.

Kelly, please go ahead.

Thank you, John, and good morning, everyone.

Thanks for listening in to our third-quarter conference call.

In the room with me this morning, I have Rick George, our President and CEO; Steve Williams, our Chief Operating Officer; Bart Demosky, our CFO; and from the Controller's Department, [John McKenzie] and [Jolene Gillimo].

Rick, Steve, and Bart will take turns to give us a prospectus on the quarter and then we'll open it up to questions.

We'd ask that you keep your questions to Suncor results and strategy only.

And with that, Rick, will you please kick us off?

Helen, thank you very much, and delighted to be here and good morning, everyone.

First of all, delighted to report third-quarter results, obviously very solid operating and a financial performance.

It was one of our strongest quarters in terms of oil sands production.

And what makes that even more important is that we reach these volumes while also completing major planned maintenance.

Again, I think it demonstrates a solid base for reliable production on a go-forward basis.

And when you think about that in terms of where we are in the merger, which I'm going to talk about more in a moment, you'll see that Suncor is getting ready here in terms of a long-term basis on which you can depend.

Production in the natural gas and the international offshore were both exceeded plans, when you take into account the asset sales that we did out of both of those businesses.

And in addition, we're very proud of our downstream assets, which continues to show very robust cash flow and earnings.

So we're on target to meet our production operating cost guidance for the full year.

I'll let Steve update you a little bit more on that in detail.

What I want to spend some time this morning on was really kind of a progress we've had and a kind of a progress report on where we are in the merger.

So, the merger closed some 15 months ago and I wanted to kind of give you an update item by item in terms of where we are.

First of all, on the divestiture of assets and debt levels, our sale of non-core assets is really nearly complete.

The transaction metrics we realized were solid.

It was executed very well, ahead of schedule.

And with that, our goal to repair the balance sheet, to pay down debt by the year-end -- we'll accomplish our goals.

We should be roughly, roughly at year-end debt levels of CAD11 billion.

And so with that, I would quickly say that our natural gas business continues to evaluate its long-term strategy and there may be some more asset sales.

That's something that we can talk about later on, although, certainly, our core program of what we'd plan to divest inside of the merger is behind us.

On synergies, I'm pleased to announce our final number on this.

If you'll remember, with the time of the merger, we said on an operating basis we had about CAD300 million worth of operating synergies.

We increased that about a year ago to CAD400 million, and I'm pleased to tell you that our current estimate and what we expect here is CAD800 million of synergies, about 2.5 times higher than our original forecast.

Almost all of that CAD800 million in savings has been triggered to date and you should start to see that in our results on a go-forward basis -- maybe not all at once, but over a period of time.

The key initiatives we've undertaken include supply chain management to optimization; improved inventory management; office and overhead rationalization -- just what you would expect out of a merger of this size.

I want to congratulate my team that's worked very hard at driving those efficiencies and will work hard on a go-forward basis as well.

And I think it's driven real value for our shareholders.

And I want to give our team full credit for doing exactly that.

If you think about our organization, I've been very proud about how it's aligned, how we've gotten behind the Suncor values, our strategy, and behind where this team is going.

We are close -- in the process of doing the final stages of closing down the London, England office at the end of this year.

By the end of this year also, all of the Calgary-based employees will be in one building here in Calgary.

And importantly -- and this has probably been the hardest part of the merger -- has been the integration of our ERP system.

So, by the end of 2011, we'll have the entire company on an SAP system, as Suncor was prior to the merger, and that will be the solid platform for driving even more efficiencies and effectiveness on a go-forward basis.

We've actually completed the roll-out of two of four phases.

The last two phases happened in August and October of next year.

And I can tell you that so far, so good, with those roll-outs and we're all looking forward to having that kind of solid foundation on a go-forward basis.

Then the fourth thing coming out of the merger is the rich portfolio of growth opportunities.

This Company has got growth opportunities that are unparalleled by many or any players in this industry.

Looking ahead -- and I know everyone out there is still looking -- when are they going to come out and talk about the exact sequence of these projects?

It's still our plan to come to the market before the end of the year with the strategic update.

For now, I think it's important to remember and recognize the value of some 27 billion barrels of resources.

In oil sands, in particular, beyond Firebag Stage 4, which is under construction, we have Firebag 5 and 6.

The Ford Hills project, the MacKay River expansion of Meadow Creek, and others that we haven't actually even talked about.

And virtually all the ones I listed above there already have their key regulatory environmental approvals in place.

Outside of oil sands, we also have a number of very attractive offshore opportunities, including the Hebron in the East Coast of Canada and Golden Eagle in the North Sea, the UK North Sea.

And we've got some kind of very interesting exploration currently going on in Norway and Hibernia South.

And so there's some real potential, particularly in the I&O business.

We also continue to assess and we actually expect to have some small amount of oil production next year out of Syria.

This is on an oil rim around the gas field we currently produce from, and we have an active exploration program ongoing in Libya.

So listen, with that kind of a portfolio, we've got a rich, rich set of assets in terms of growth opportunities; 27 billion barrels of resources that are already on the books; unparalleled by any of the peers of our size; and I think with the ability to deliver on growth profitably on a go-forward basis.

The other point that I wanted to make -- and I know Steve will emphasize this as well, is -- our integrated strategy as an integrated Company is a key component of this strength of this growth.

If you look back to this last quarter, with maintenance, with pipeline interruptions, and you look at how we've managed through this quarter, I'd say that kind of integrated strategy with a balance of bitumen, upgrading, refining capacity, storage, pipeline movements, gives us the flexibility to deliver great results in the future.

The one last thing I want to talk about is something that's very important for a company, especially our size, is improving return on capital.

If you think about it, when you go through a merger -- and almost all mergers of these kinds of companies -- when you take into account accounting for goodwills and other various accounting and other adjustments, companies that go through these large mergers usually see a few years where you have a poor return on capital.

At the bottom of the market in 2009, and a result of a merger and some assets that we put into safe mode when the floor fell out in the fall of 2008, we still have significant capital in progress, including the Voyageur upgrader at Fort Hills.

Those kind of unproductive assets on our balance sheet does mean that we have a lower return on capital than we have historically delivered.

As we bring these projects out of safe mode, as we deliver the next phases of growth, and as we improve our efficiency and effectiveness, one of the things that I'm very excited about is you're going to see this return on capital number move up -- not all in one quarter, but over a period of time here over the next two years.

One of the things that I really want to portray is, listen, first of all, I'm very proud of the work that's gone on here.

It does look like we're coming out of the merger in really good shape, with a company, to be honest with you, that is unmatched here in Canada or in North America, and even compared against the European companies.

This is going to get to be fun again.

So, with that, I'm going to turn it over to you, Steve.

Okay.

Thanks, Rick.

So, strong operating results despite a number of maintenance programs during the third quarter is probably the headline.

In oil sands, production was 307,000 barrels a day, a solid production number, particularly given the plant maintenance at Unit 2 and both Firebag and MacKay River, which together reduced production by roughly 20,000 barrels a day.

We just reported our October production of 330,000 barrels a day -- a very strong number, particularly, as I say, given that six-week turnaround at Unit 2, which does continue into the fourth quarter for three weeks into that October number.

So, year-to-date, including October, that's 275,000 barrels a day.

So, on target for our guidance.

The turnaround was accomplished ahead of time and on budget and you'll hear us using that phase quite a lot for this quarter.

It was smaller in scale compared to the one in the last quarter, lasting just six weeks and involving 700 contractors.

That's Part 2 of the largest turnaround ever conducted at our oil sands operation.

And as I said in the last quarter, the strategy to break the turnaround into smaller segments, smaller pieces of work, in order to be more planful and tactical in the execution, has clearly paid off.

There is some remaining work on Unit 2 and we'll carry that on in 2011, with a full unit shutdown that's planned for roughly seven weeks in the second quarter.

In situ operations, both Firebag and MacKay River also underwent three weeks and one week of annual maintenance activities respectively during the quarter.

Overall, we continue to work on operational excellence and the reliability of all of our assets.

During the third quarter, we appointed a Vice President of Operations, Integrity oil sands, whose sole job is to maximize reliability of the upgrading assets.

It is still early days, but we're already seeing significant progress.

This is a journey we're deeply committed to and that will take us to the world-class operations we're striving to achieve.

So let me quickly move on to natural gas.

Natural gas production during the quarter was 564 million cubic feet a day, with the previously announced divestiture program there complete.

We anticipate exiting the year at roughly [380 million - 400 million] cubic feet a day.

Shifting gears again into international and offshore, quarter three production was 206,000 barrels a day.

East Coast Canada continues to benefit from strong performance with the new wells drilled at Hibernia.

During the quarter, we undertook a three-week plant turnaround at Terra Nova that also came in on time and on budget.

While Libya continues to be restricted under the production quota, Syria continues with its strong performance since the plant became commercial in April.

And finally, a few comments on refining and marketing.

Reliability in the Downstream division continues to be very strong.

We were able to mitigate the productions and earning impacts of the Enbridge pipeline altitudes, particularly on [signing] through sourcing of alternative crudes and rerouting our oil sands production through Edmonton and Denver.

So, as Rick said, that integrated strategy has certainly paid off for us during those difficult times.

Now let me hand over to Bart.

Thanks, Steve, and good morning, everyone.

Consistent with our strong operating performance that both Rick and Steve highlighted, and a favorable crude price environment in the quarter, we delivered very solid financial performance, with our operating earnings coming in at CAD645 million and operating cash flow of CAD1.63 billion.

Looking at production overall, very strong across the Company.

We averaged 636,000 barrels per day during the quarter.

And that was in a fairly -- a quarter which saw a fairly heavy amount of plant turnaround activity that Steve has highlighted.

As we stand today, with the exception of roughly 20,000 barrels per day of non-core asset sales that are left to close over the next couple of quarters, we're now getting right down to -- very close to a base production number that we plan to grow from here.

Our October oil sands production number, which was announced this morning, of 330,000 barrels per day is a very good start for the fourth quarter, and we do expect to meet our production target of approximately 280,000 barrels per day for 2010.

Now, Q3 was impacted by a couple of events.

First, our hydrogen unit outage at oil sands did impact our production mix during the quarter, but I want to emphasize it did not have an impact on our total production.

We have updated our outlook for production mix and realized price for 2010, though, to reflect a higher proportion of sour production.

We were also able to mitigate, as Steve highlighted, much of the impact from the series of Enbridge pipeline outages that occurred in the quarter.

We did reroute a lot of our crude.

Also, in our favor was the fact we were in turnaround, so we had less production coming into the market.

But really, I'd emphasize the integrated strategy the Company has; that was key to our mitigating any impact.

And overall, the impact in operating earnings from both events was minimal and we would expect that to be the case in Q4 as well.

We did increase -- or we have increased our full-year guidance for East Coast from 65,000 to 70,000 barrels per day to reflect the very strong performance coming out of that part of the Company.

And as well, the outlook for international has been revised to 110,000 barrels per day.

And that's really just taking into account the asset sales that have been completed to date.

We do have one block left to go; it's about 16,000 barrels per day.

That's the UK assets.

And we expect that to close some time towards the end of the year or into Q1 of next year.

On the cost front, I wanted to highlight a couple of things.

We continue to work to drive cost efficiencies in our base operations through increased reliability, energy-intensity reductions and continuous improvement.

And as Rick said, our final operating synergies' run rate is now -- we've now forecasted to be CAD800 million.

This achievement reflects an intense focus on driving efficiencies and overhead reduction.

I want to put that number into just a little bit of context.

In terms of merger costs and synergies realized, we have been cash flow positive since May of this year.

And our final tally of merger costs and synergies ratio is 0.9, which is first quartile for mergers of this type and size.

Full run rate will be in place by the end of 2011.

And to say that another way, the cost -- we expect the cost of the merger to be less than a single year's cost-savings benefit going forward.

And we will be realizing those benefits every year.

On the operations front, I'm particularly happy about our cash operating costs of CAD33.60 a barrel at oil sands.

And that's really a reflection of strong production out of that business unit.

And we have updated our cash operating costs forecast for oil sands to be now CAD38 to CAD40 per barrel, given our strong performance year-to-date.

And that's changed from previous guidance of CAD38 to CAD42 a barrel.

In the Downstream, Rick mentioned the strong -- continued strong performance there.

Whiter light/heavy differentials and stronger fraccing margins contributed to very strong earnings, slightly offset by a stronger Canadian dollar.

In that business, earnings are robust.

The Downstream continues to be a significant source of free cash flow for the Organization.

Year-to-date, they've delivered about CAD900 million of cash from ops, which is well above our sustaining capital requirements.

And that's without the fourth quarter having been reported yet.

As Rick mentioned, divestitures are essentially complete, and in total, we disposed of CAD3.5 billion of assets, right at the high end of our expectations.

And again, that program is ahead of plan and schedule.

So we've been able to pay down our debt more quickly than we had anticipated.

In the quarter, we received about CAD1.6 billion of cash from those asset sales.

We expect to receive about another CAD375 million over the next two quarters.

So, net debt now stands at about CAD11.5 billion, down from CAD13.4 billion at the beginning of the year, and we do expect to be below our target of two times debt to cash flow by year-end, and as Rick said, a net debt level of about CAD11 billion.

On the capital expenditure front, during the quarter, we had CAD1.4 billion of capital expenditures.

That brings our year-to-date total to about CAD4 billion.

The spend was largely related to sustaining production, although we continued to spend, of course, on Firebag 3 and on Firebag 4.

Firebag 3 construction is about 90% complete now and we are on track to meet our 2010 capital budget of about CAD5.5 billion.

I'd emphasize that that will be funded largely from the internally-generated sources of cash flow.

Looking forward, as we come into Q4 now, there are a number of maintenance programs I'll just highlight briefly, and then I'll turn it back to Helen.

As I mentioned -- or was mentioned, we had the six-week turnaround at U2.

Three weeks of that turnaround did carry into Q4.

We also have some annual coker maintenance ongoing right now in the quarter on U1.

That maintenance is expected to last about five weeks; but with U2 ramped up, overall production impact should be quite minimal.

In the international and offshore part of the Company, we have the enhancement project hook-up at Buzzard in the UK North Sea, which will impact production through Q4 and into the first part of 2011 as well.

A three-week maintenance program has already been concluded at White Rose.

So that concludes my remarks.

As Rick said earlier in his comments, we do still plan to come out before the end of the year with a strategic update, including our 2011 CapEx and production forecast.

I hope to be in a position to announce the timing and format of that some time towards the end of next week or early into the following week.

And with that, I'll turn it back to Helen.

Great.

Thanks, gentlemen.

It seems Steve and Bart have already covered both of the outlook; I won't go through again in detail, but I will point out the change in total production before remaining targeted divestitures from [610] to [590] reflects almost entirely the impact of our asset divestitures to date.

Our production outlook for oil sands, as Bart said, remains unchanged at [280], and in fact, we increased our East Coast outlook by 5,000 barrels per day.

Changes in natural gas and international outlook reflect our asset sale completion to date as well.

You'll find a summary outlook on page five of your quarterly release.

For our US analysts out there, the LIFO adjustment for the quarter would result in a CAD1.4 million increase to after-tax earnings.

So, with that, John, if you wouldn't mind opening up the lines, we'll be pleased to take your questions.

Once again, I'll ask you to please keep your questions to Suncor results and strategy only.

The Controllers and I will be available after the call for your detailed modeling question and any other matters you wish to discuss.

We'd be happy to entertain your questions now.

(Operator Instructions).

Andrew Fairbanks, Bank of America.

The oil sands reliability is looking strong, as you mentioned.

I was wondering if you had an inclination to talk about some of the independent reviews you've conducted this year, and perhaps some of the lessons learned and things you're doing to sustain the stronger reliability of oil sands operations?

Yes, Andrew, let me just brief on that.

Actually, you know, we did the full investigation following the events of the first quarter.

That included third-party experts to help us understand what the root causes were and what the best plan would be to get to those.

They highlighted a number of things to us.

I guess the clearest message was, you're on the right track with operational excellence; don't turn.

So -- and operational excellence was looking specifically at safety, environment, and reliability.

So we've taken those messages.

You've heard me say we put a full-time Vice President into there and we are implementing those recommendations at face.

So, the strong performance, the strong reliability we're seeing from oil sands is in part as a result of those recommendations being implemented.

And, as I said, we are firmly committed to finishing that program off.

Oh, that's great.

And I guess looking forward, would the things you need to do going forward be mostly around personnel or procedures or instrumentation?

I would pick three out to start with you.

One is around the maintenance program.

You've heard us talk about these turnarounds being broken down into manageable pieces and being completed on time.

That's one.

The second one I would pick out is around personnel, making sure that we have the right amount of competent people in there.

One of the benefits of the merger has been we've been able to move people from other parts of our operations into the oil sands and give it support.

So those will be the two I would pick out.

Oh, that's great.

Thanks, Steve.

[Joe Citarella], Goldman Sachs.

I understand you guys may want to wait a bit later into the quarter to talk about project sequencing, but in terms of some of your growth opportunities, any early thoughts you could offer in terms of capital intensity and your expectations for costs are going to come in?

I mean, I'm thinking from our early Fort Hills and MacKay, but really any thoughts in general would be appreciated.

Thank you.

Yes, Joe, it's Rick here.

So, yes, we're still doing our homework and working very hard in terms of taking a look at these projects, taking a look at their return on capital, taking a look at the sequence, the manpower required.

I know there's a lot of logistics to these projects as well.

And certainly, our expectation here is that -- and the expectation I would lay out to our group for sure is that, in terms of when we start Upgrader 3, we'd still expect to be probably the lowest cost increase of operating capacity when that happens.

And for certainly on mining things like Fort Hills or one of the other mining projects [we have] down the road, we'd expect to be on the low end of the cost curve there as well.

I think the other comment I would make on Firebag Stages 5 and 6, because you've got a lot of the infrastructure in when you did Firebag 3 and 4, again, I think those will be around the lower part of the cost curve as well -- something that we'll take a heavy look at.

And when we do come out with the sequence, we'll also give you an update in terms of how those things kind of benchmark it against other projects.

You know, they're never quite equal.

It's a little bit of apples and oranges.

But you'll see us as -- and what I'm hoping they'd be able to demonstrate here is that we'll be one of the low-cost constructors here, with a great long range program that will stretch out here over a decade in length.

That's great.

And then for 5 and 6, you mentioned -- you've mentioned before lower SORs and potential synergies from 3 and 4, and what you've got in there already.

Can you help us put some numbers around this, in terms of how that should benefit your capital intensity or --?

Yes.

Yes, I think that's a good question.

So, you'll see some of the other operators with lower SOR numbers and we're well aware of that.

We do a lot of benchmarking against that.

I think our current -- if you give us a daily -- remember, we just came out of some heavy maintenance in the third quarter here, but our daily SOR is about 3.1, something in that range.

We believe we can get this down to a 2.5, 2.6 kind of range with infield drilling and a lot of other small movements as we go forward.

And you've got to remember, this is a great reservoir.

It's an incredible reservoir in terms of in the sweet spot.

It is slightly under pressure.

And it's not directly comparable to some of this [ID] projects in the South where you're actually producing more of a heavy oil than a bitumen.

So there are differences in all that, but we will see continuous improvement from us on that front overall.

I guess the other thing, Joe, on a longer-term basis -- longer-term being the next four, five, six, seven years -- I think you're going to see technology in this SAGD space continue to improve.

It's pretty hard to identify whether it's longer run rates on downhole pumps, other ways to keep these reservoirs pressured, infield drilling -- there's just a whole sequence of things that are going to come in and help that continuous improvement as we go forward.

That's really helpful.

Thank you very much.

Andrew Potter, CIBC.

Just looking into 2011, I mean, especially with these new cost synergies, it seems like there should be a lot of free cash coming, so maybe if you could just talk a little bit about what you plan to do with that free cash, how comfortable you are with the debt levels right now, and at what point might we start to see some dividend increases?

And then the second question just on Voyageur, maybe just some updated thoughts on how you're thinking of that upgrade or it seems you're signaling that we might see a deal or we might see that resurrected sometime soon.

Sure.

I'll maybe take the first couple of parts of that question, Andrew -- it's Bart here -- and then I'll turn it over to Rick or Steve.

Yes, we do look forward to a period here of, as we grow production, continued growth in cash flow from operations.

We've been, I think, quite clear that our plans are to utilize that cash for sustaining capital and as well for growth capital.

We do want to fund most of the capital requirements going forward from internally-generated cash flows.

So I think that's directionally where you would see most of the cash utilized.

On the dividend front or returning more cash to shareholders, we've been quite candid on that as well, that the first opportunity to really take a look at that is as we start to grow production again.

And the first growth in production coming off a rebase lining once we finish off all these asset sales is 2011.

So, shouldn't expect to see anything before that.

That's the first opportunity we'll be able to take a Tar Board and they'll have a look at it.

Now you had a question on Voyageur as well, so I'll give it back to Rick.

So let me take the Voyageur question.

I'll start at a very high level, but my view of this North American market is, we built a lot of upgrade capacity in the industry on refineries but predominately in the United States -- although even our Redman's refinery, the latest the Company built some cooking capacity on the front end of that Edmonton refinery.

Now what you're seeing mostly in growth here in Western Canada out of this basin is heavy oil from the [Site D] projects from other projects that have taken off.

And my own belief here is you're going to come to a point here where you fill up all that operating capacity that we've built over the last four or five years, and you'll come back to a point where you'll have wide differentials of justifying an upgrader.

If you look at the differentials today, you can justify it today.

The issue is, I think it's slightly distorted because of some of the pipeline issues.

But I've always been a bigger -- on these long-term cycles.

Our upgrader 3, we have the engineering 85% complete; construction is actually 15% complete when we shut it down.

It's like a very inexpensive option in terms of where one would pull the trigger.

So in my mind, it's not a question of if; the only question is when and the timing.

And this will come back and -- again, it goes back to the integrated nature that we talk about some this morning.

I think we still see Suncor as that integrated company that has a differentiator, that has more reliability and flexibility around our assets than most companies or all companies in our space.

Sure, that's great.

And then just one more question on Voyageur -- I mean, if it does get the go-ahead to restart construction, I mean, any thoughts in terms of what's happened in costs, inflation-wise, since the original sanction?

Yes, I think that is a great question.

It's one that concerns us a lot.

And so here's what I was saying.

Following the collapse of the markets in the fall of 2008, we did see a pullback in cost.

I think the estimate we gave earlier was kind of in the 15% range and we've not seen a great escalation of that yet.

But what I would say is, as you see the whole list of projects, I am getting more concerned about going back into a period here where there's lots of activities.

Today in the north, the industry has about 25,000 people in camps and construction workers.

That looks like that's going to increase; so, very worried.

Now, I think this go-around will be a little bit different in a couple of aspects.

First of all, you're not -- I don't think you'll see quite the material inflationary rates, partially because the building of offshore work in our industry and refinery work is probably not going to be at the same pace it was in that 2005 to 2008 kind of pace.

I think our challenge will be primarily around availability of labor.

The one side note on that, I think, is the one thing that makes this cycle a little bit different as I look forward is, you probably will be able to pick up some labor out of the United States where -- as you know the unemployment numbers as good as I do.

And the one thing about this is it's nearby, there's lots of really good work from good craftsmen.

You know the unemployment rates in the Gulf Coast and other parts of the United States, there may be some access to somebody we didn't have on that last cycle.

That's great.

Thanks a lot.

Brian Dutton, Credit Suisse.

Good morning, Rick.

I think you touched a little bit about on this when you're talking about Firebag, but much of your near-term growth in oil sands is really from your SAGD operations.

So what lessons have you learned from your current operations?

And how do you expect to apply those to your current expansion plans?

Yes, I think Steve is going to take that one on.

Yes, let me pick those up.

And of course, one of the great benefits of Firebag and the way it's been developed, Brian, was exactly that.

Because we did it in multi-stages, we could learn from those early stages and start to build it in.

So I would say the first ones I would start with are the surface facilities -- getting those to a very high reliability has been important to us.

And our ability to operate those this year have just steadily improved.

Exactly the same philosophy as we've been applying to the base oil sands, we've been applying to in situ.

So we've seen the reliability of steam raising and the water treatment and oil separation starting to approach 100% between turnarounds.

That's exactly the space we wanted to get into.

The second piece then around underground we've also been able to learn.

So, this year, we've had a very focused effort on steam oil ratios, what the challenges are there and what we can build into the subsequent programs.

So the length of the wells, the spacing of the wells, the speed with which we've put in infields, all of those are starting to be built into stages 3, 4 and beyond.

That's why you hear Rick speaking with confidence that we'll see some improvement as we move through those.

Okay.

Thank you.

Stephen Richardson, Morgan Stanley.

A quick question I guess for Steve is just -- if I look at the October production numbers that you released this morning, and considering what you mentioned that the September turnaround rolled over into the beginning of October, can you give us any indication of where production was, other -- last week or even today?

It's interesting -- as this year has gone on, I've gone under pressure to move from annual forecast to quarterly forecasts and monthly forecast now to daily ones.

Let me just give you a few comments.

We've seen very strong performance at the plant.

There are signs of -- they are a reflection of the program of work we've been doing.

Bart reiterated guidance.

We will meet or beat guidance at current rates.

So, overall, the news from the plant is very reassuring and very good.

I do want to keep people's expectations grounded about what we can achieve.

We are producing a natural resource and it does vary from month to month.

So we are confident that we will meet or beat guidance.

And just back on that, I understand the guidance, but are we still confident in that [340] exit rate from oil sands this year?

I mean, the number I would point to is, if you look at the last seven months, five of them, we've been up in the [300's] and four of the -- three of the last four, we've been up above [320] and two of the last three, we've been up above [330].

So, excellent performance.

I wouldn't let our imaginations get too carried away.

Understood.

Maybe just a quick question for Rick, just back on the Voyageur upgrader.

Can you remind us what the original budget was back in '07 for that project, for just the upgrader piece?

And how much was spent before the project was put into safe mode?

Yes, hi, Stephen, it's Bart here.

The original budget was -- just for the upgrader part, was about CAD11.6 billion and we're at about CAD4 billion spent to date.

Thank you very much, guys.

Mark Polak, Scotia Capital.

You mentioned in the release and touched on earlier about reviewing the strategy around the natural gas business.

You're still long production quite a bit relative to your consumption.

Is that still a big focus?

Would you like to sort of match those up?

or what's sort of a lower, longer-term outlook for gas prices or are you less concerned about having that natural hedge internally?

Yes, Mark, it's Rick here.

So I think it's an excellent question and it's one that we wrestle with all the time.

So here's where I would start with that is, again, the focus is on return of capital.

This Company's got an unbelievable suite of growth opportunities.

They happen to be almost 100% in oil.

And I think you've got to give [Dale Comarda] a great kudos for how he's moved that group around, the assets he's sold in a relatively short period of time.

And you cannot build what I would call a high return on capital on our natural gas business without good assets.

And so we're going to get this down to a good set of assets that we believe are there for the long-term, with a good return on capital.

And so, rather than worry as much about size and the natural hedge kind of this go-around, trying to keep the real focus on return.

When this gas price -- cycle, I mean, my own belief is, at some point here we'll go back towards a CAD6 gas price -- not a CAD10 gas price we saw at the last peak; but this looks like a very long cycle.

So I would say important to us, very important.

Really like the job that the teams there have done in terms of getting the portfolio down -- or heading it down to some assets that we're proud to have in the portfolio, that fit us long-term, and then we'll take a good look at the growth rates.

But we've got to grow in a way that with low gas prices, we could still have a return on capital.

And so this is one that -- it's a tough business right now; I don't need to tell you guys on the phone that, and it's one that you'll see us continue to work on but with some degree of caution.

And one more, if I could, on Firebags.

As Firebag 3 comes on next year, I believe the first two stages in the expansion are generally short steam is one of the factors there.

Is there some incremental steam from 3 that will -- that we might see some benefit to the existing phases in terms of production rates there?

Yes, Steve here; just a quick update.

Yes, if you remember, we had -- there are four steam generators on each of stages 1 and 2.

We also put co-generation in after that (technical difficulty) [and got] some additional steam.

We're also bringing on what we call Steam Gen 9, which is additional steam purely recognizing that opportunity.

Steam Gen 9 nine will come on sometime towards the end of the first quarter, so we start to get more steam available.

One of the great advantages of Stages 1, 2, 3 and Steam Gen 9 being there is that we have a lot of flexibility to direct that steam to where we can make best use of the resource.

So, in summary, more steam and the ability to direct it where we want to use it.

Is that about 25,000 barrels a day of steam -- that Steam 9 unit?

We'll have to get back to you on that one, Mark.

Great.

Thank you.

George Toriola, UBS.

Two questions.

I'll start with reliability of the oil sands business.

I just wonder if you are able to talk about the parts of the components that really drive reliability here.

Are there certain components of the upgrader or the mining business -- what are the drivers of reliability?

And to the extent that you can identify those drivers, how have they performed differently from the past in the very recent past here?

Yes, it's Steve here again.

Let me just talk briefly to those.

So I tend to look at -- I mean, first of all, I'll break it up into the components of the plan and then I'll talk about the competencies necessary to operate them.

So I tend to look at it as mining extraction upgrading.

The operational excellence program we've had has been focused on all three of them, and we've seen significant and material improvements in all three of those areas.

So we produce more tonnage from the mine; we put more tonnage through extraction; and the upgraders are operating reliably at higher levels than we've historically seen.

So, the program, once we focused on upgrading because of the challenge we had, we've actually applied across the complete operation.

The competencies there are around that ability to have a disciplined, controlled operation and maintenance program, and have the people in place to do that.

So we've taken significant steps to make sure we've got the right quality of people in there.

And it's the combination of those which is paying off now.

Okay, then, George, if I could just add one thing to that maybe kind of on a broader basis.

It's really important to remember that Suncor has the assets on the ground that has much more flexibility than other operators.

We have two mines, Steepbank and Millennium; two stages of Firebag; and MacKay River, all that feed into this complex.

Our ability to export bitumen; export sweet product; export sour products; export to our own refineries, is much higher than other people's.

And so in support of what Steve was saying there, what you've got to remember is this is a large complex but we're not one mine with one upgrader kind of company.

And that's one of our competitive advantages.

Okay, thanks.

And -- but in looking at those three pieces, would the upgrade increase be the weakest link amongst those three?

Interestingly -- well, in terms of reliability, I would say, historically, yes.

In terms of materiality going forward, the answer is -- not quite so important.

Because right now and through next year, we have not been -- we've been bitumen-short.

So the need for 95%-plus reliability hasn't been there because we've been short of bitumen to feed them.

So, overall, I would say they are, all three of them are approaching world-class practice now.

So they're setting the standards in our industry around all three of those.

Okay, thanks.

And then I guess the follow-up to that is, obviously, you have very good cash costs this quarter.

So what should we be expecting or how are you guys looking at cash costs going forward, based on the liabilities you expect and volumes on all of that?

I mean, I'll just make a simple comment and then I'll hand over to Bart on guidance.

One of the keys to getting good operating costs is sustainable, reliable operation.

That's what we've achieved and that's why we've seen our costs coming down to where we've been expecting.

And we're planning to guide --

Yes, we'll be guiding when we come out with our strategic update, George.

Okay, then.

Mark Gilman, Benchmark.

Wondering vis-a-vis the synergy number -- how much of that CAD800 million, Bart, was captured in the third quarter or reflected in the third quarter results?

So, yes, we went positive run rate, Mark, around the middle of the year.

What we said earlier was we would expect that full run rate to be achieved by the end of next year, and we're probably past the two-thirds there now.

I think the key is, Mark, that we have triggered all of those synergies.

What we mean by that, Rick mentioned that in his comment, is we've already taken the steps necessary to actually capture all of that cost savings.

So none of the CAD800 million is stuff that we have to continue to work on to get.

We've done the things we need to do and it will -- the run rate will continue to rise as we move through 2011.

Okay.

If I could just go back to the gas question a little bit -- Rick, part of the ability to maximize returns is associated with when you divest.

I don't think it takes a degree in rocket science to see that divesting gas properties right now probably isn't a high return option.

How does that factor into your thinking on where you want to go with that portfolio?

Well, first of all, I think we're relatively pleased with the prices we've gotten for our gas assets.

I mean, my own view of this is this is a pretty long trough out here.

And so back on a strategic basis, what I would say is you've always got to watch this -- the E&P industry because it tends to be -- I don't know if a lot of my colleagues will kill me, but it tends to be an industry where they use a lot of their shareholders' money to drill holes and kind of keep recycling the cash flow.

So, return on capital, which is absolutely prime for us, is not necessarily prime for some of the people who compete in that space.

So I guess that's my point.

And so you've got to be really careful about how you look at that.

I do think there may be an opportunity at the bottom of this cycle to invest.

Picking the bottom of that cycle, that's -- you know, you'll know as much about that as I will.

I think you've got to really look at those drilling rates in the US, you've got to look at what the cost curves are in these tight gas, shale gas basins.

And you've got to look at what happens to gas demand.

So it's not a single dimensional picture; those things are all on our radar screen.

Okay.

One final one for me.

You had, I guess, earlier in the year, some exploration disappointment in Libya.

And I'm wondering whether there's any reconsideration that you're giving to whether or not you want to retain that asset?

Well, I don't know what disappointment you're talking about.

We've actually had some success wells on our first couple -- first few wells in Libya.

Now we're on to a 40-well drilling program, so -- 42 is the actual number.

So we've also drilled a couple of dry holes.

But we're just in the front end of that; still working hard on interpreting 3D seismic.

We're almost done with running 3D seismic.

I like where we are in the basin.

It's an oil basin.

It's one we're onshore.

These are relatively shallow wells, I mean, relatively on a world context.

And we're moving ahead to fulfill our commitment and to see what those assets we've got.

And so, there are no plans to divest of Libya.

So that's where we are.

Okay, thanks, Rick.

Barbara Betanski, Addenda Capital.

The question is about bitumen production.

That segment that's currently coming from your mines, though, the Steepbank and Millennium mines.

And I was wondering what is the maturity of those mines or whether there's a timing of a phase-out of any of the mines or portions thereof?

And if you could talk about the North Steepbank mine extension and, as well, I think Voyageur sells the expansion within the plans at some point?

I'd just make a couple of comments and then defer to the strategy review we're going to do later this year.

So we have some flexibility.

Our production is concentrated on the Millennium mine.

The Millennium mine still has 10-plus years left in it, so you do move through good parts and bad parts of the mine, and that's part of what we build into guidance.

But overall, it's a good quality mine, 10-plus years for production from there.

For operating reasons, we've looked at the North Steepbank expansion.

We're still spending monies on that and later we will -- that will come back into production.

And then more generally, the balance between mining and in situ will be part of the strategy review we bring up the back-end of the year.

So at this point, would you be able to say whether you would expect production from the mine to remain at current levels or possibly increase or decrease?

Or can you determine that yet?

I mean, well, in the short-term, in the operating window, broadly, the production you see for Millennium will continue.

It can continue to produce at these rates for a long time.

So flat is the answer to your question.

Okay, great.

Thank you very much.

(Operator Instructions).

Paul Cheng, Barclays Capital.

Rick, a couple of questions -- and maybe that I joined late or you already covered, I apologize.

Have you given any kind of production guidelines for 2011?

No.

No.

And that you're not going to until your strategic plan coming up?

Yes, that's right, Paul.

Okay.

The second question is that -- going back into the gas business, Rick, if you looked at strategic [code] inspection, that do you actually have a competitive edge in that business?

If you do, what that may be?

Because I mean, when you're looking at whether you want to continue to invest and one question, of course, is the cycle; the other question is that do you really can do much better than your peers?

So do you believe that you actually can do much better than your peers in that business?

Paul, it's a great question.

I think the answer is when we get down to the assets that we have in our portfolio, we'll be very proud of those and those will compete.

We're trying to drive that business to a second quartile, first quartile business.

We -- you know, I wouldn't say that we can see ourselves as being a company that is absolutely top quartile in every single phase is a big, integrated company.

So what I would say is, if we can drive that business to have assets that are in the first quartile or top second quartile kind of performance, that I would be extremely proud of and something that would work for our shareholders.

What you can do is hold on to assets that are below the mid-term of asset base and continue that.

We have many more prospects than we've got capital budget for or the ability to execute, so we want to be very careful about where we put that capital.

Right, I presume that that means that you -- right now you're even on the third or the fourth quarter; is it a execution issue?

Or is this an [asset core to be issued] from your standpoint?

I think it's more around the asset base than it is -- one, you've got to remember, we went through a cycle here where gas prices were in that CAD8 to CAD10 range and then everyone can make money.

It's much more difficult when you get down into these ranges and for the range that we see on a go-forward basis.

I would say most of our assets are conventional, not unconventional type resources.

And as we've seen these unconventional tight gas, shale gas plays come on, that has been the game-changer in that sector.

Last question, when you're looking at costs, just broadly speaking, in the oil sands, you had mentioned earlier that the [setting at logic] you believe over the next several years is going to have a tremendous improvement.

In comparison to that, mining has been a very, I think status quo kind of operation or technology-wise.

The last time we see a major technology improvement is probably 15 years ago in the [Chapelline Chalk].

And mining costs that later is very important and labor costs is not coming down.

So with all that in mind, perhaps, strategically speaking, should we start shifting all the growth, forget about expanding any of the mining and just focusing on the SAGD going forward?

No, listen, I like having a foot in both camps.

I see technology going -- progressing very well on both fronts.

So if you think about the technology that we've developed on this TRO technology and the reclamation of ponds, you're seeing -- you will see, relative to other options, the cost of mining actually coming down on a longer-term basis.

And so that's one example.

And we're putting it, as you know, well over CAD1 billion towards that technology.

And it does result in a reconfiguration of mines and we will use that on future mines on a go-forward basis.

And so what I would say is, it's not a one-dimensional issue, Paul.

You'll remember, SAGD is higher in terms of energy intensity; it's higher in terms of CO2 output.

Mining is more people-intensive, although there is some technologies that are in the works down the road here that you can see, that might come along to help you reduce those costs.

Part of that's the efficiencies, and we're seeing great efficiencies out in the mine in terms of maintenance, in terms of a number of other issues.

So, here's what I expect, Paul.

I expect continuous improvement on both fronts -- SAGD and the open pit mine; and to be honest with you, given the size and scale of Suncor and our resource base with 27 billion barrels, you're going to see us advance technologies on both those fronts.

Okay.

Very good.

Thank you.

John, I think we have time for one more question.

Thank you.

We have one final question from George Toriola of UBS.

Please go ahead.

Just a quick follow-up question.

On the hydrogen reformer unit, how is that -- is the repair work done?

Is that back in service?

Where does that sit right now?

Yes, thanks, George; Steve again.

Yes, the work is complete.

The unit is back on and because of the way -- we nearly had some potential issues, so we have completely sourced the materials, completely mobilized a contractor prior to the event happening.

So it came back faster than we expected.

It's in full operation and it was a comprehensive repair.

So we've now returned it to a 20-year operating life.

Okay, thanks a lot.

Well, thank you, everybody, for joining us today.

I think this concludes our third-quarter conference call.

As I said earlier, the Controllers and I will be available afterwards for questions.

So thanks again for joining us today.

Thank you.

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