Suncor Energy Inc (SU) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Suncor third quarter conference call and webcast.

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

Steve Douglas, Vice President Investor Relations.

Mr.

Douglas, please go ahead.

Thank you, Thomas, and thank you, everyone, for joining us this morning.

I have with me here in the room in Calgary our President and CEO Rick George; our Chief Operating Officer Steve Williams; our Chief Financial Officer Bart Demosky; our Controller Jolienne Guillemaud; our Assistant Controller Greg Freidin.

Just before beginning, I do need to give you a legal advisory.

Please note that today's comments contain forward-looking information.

Actual results may differ materially from expected results because of various risk factors and assumptions described in our third quarter earnings release and MD&A, as well as our current AIF, which is available on SEDAR and EDGAR, and our website.

Certain financial measures referred to in these comments are not prescribed by Canadian Generally Accepted Accounting Principles, and for a description of these financial measures, please see our second-quarter MD&A.

With that, I will hand over to Rick George.

Steve, thank you.

Thank you very much.

Good morning, everyone, delighted to be here with you this morning, and obviously very delighted with our third-quarter results.

Bart and Steve will get into the details a bit later, but the headlines are obviously very positive, and a real indication of where our Company is, and a lot of indication, I think, about where it's going.

If you look at the quarter, we had record oil sands production of over 325,000 barrels a day, record operating earnings of almost CAD1.8 billion, and a record cash flow of over CAD2.7 billion.

So, obviously our base operations are performing very well.

We came out of, if you'll remember, that significant turnaround quarter, the second quarter, and have produced very reliably through the third quarter.

We also managed to get to the bottom of our hydrazine issues that we experienced in the first quarter and a little bit in the second quarter, and started to maximize our higher value sweet production towards the end of the third.

We recently set a record production for in situ, and I'll let Steve give you the good news about that, which is terrific.

Continued also with outstanding performance in the downstream with 97% utilization rates and over CAD2 billion of cash flow from operations generated year to date.

We also had great strong contributions from our exploration and production group, which also passed the CAD2 billion year-to-date cash flow from operations.

At the same time, our growth projects are moving ahead in great, great shape.

Firebag 3 is ramping up, Firebag 4 is on schedule for initial production in the first quarter of 2013, the North Sea bank extension and the Millennium Naphtha unit are nearing completion and will provide us with increased flexibility to support continuous improvement on reliability.

A lot of that will start showing up in the first quarter of 2012.

We're still over a year away from sanctioning our new mines, that is Fort Hills and Joslyn, and the upgrader, but we are encouraged by the way the planning work is progressing and the synergies we are seeing in our joint venture with Total.

We really feel like we did de-risk the growth plan, spread out over a manageable timeframe, and clearly we're generating the cash flow to largely fund that program internally.

And most importantly, and I think a lot of people don't think of us this way, we're focused on investing this capital efficiency to get the highest return for our shareholders.

Obviously, if we cannot accomplish that because of a changing additions, we will not spend the capital.

Now, turning away from oil sands for a moment, I know investors are going to be asking questions or are interested in developments in the Middle East and North Africa, and how they may affect us.

It's important to remember that this is actually a relatively small part of our portfolio, and we're continuing to take a cautious approach.

The safety of our people, employees on the ground, is obviously always our first consideration.

Through this period, we maintained safe production and profitability in Syria, while complying with all sanctions.

In Libya, we have been encouraged by recent developments, obviously.

We are working hard with our joint venture partner, Harouge, as we work to establish reliable production again.

We are not in a position today to give you any numbers or any assumed levels of production in 2012, but just know that there is certainly more upside than downside from here, and we are working hard with our partners to move those things forward.

I just want to take a second and go back to strategy.

It is always something I love to talk about, and I know people have been very concerned about how volatile the crude oil prices are, what's going on in Europe, other conditions.

But I think this quarter really highlights what we have been talking about for a year or 2, or really since the merger.

The strength of this integrated strategy right across all of the business cycles that we see coming down the road.

Suncor strategy again is an integrated oil sands growth strategy.

It is a flexible operating model that allows us to optimize oil sands per barrel -- margin and to maximize cash.

Low-cost offshore production and integrated downstream generate significant free cash flow for investment in future growth.

And that growth in our opinion is lower risk.

We have the resource.

We've obviously got the experience and the knowledge.

We've got very strong partners on the projects we have partners on.

And obviously have the balance sheet to make -- to execute on that.

So, the 2011 year-to-date cash flow from operations is higher than any full year in the Company history.

So, we made more money in the first 9 months than we have in any prior 12-month period.

I would also say, and maybe this comes out of our competitive spirit, Suncor generated almost the same amount of cash that the next 2 largest companies in Canada generated, virtually equal to the next 2 in terms of cash flow from operations.

We've also, and this is a very important thing to note, our return on capital has risen to 13.4%, as we come out of the merger and the re-rating of some of our assets, and I will guarantee you, we are going to continue to focus on achieving strong return on capital for our shareholders.

To sum up, listen, we are on track for the best year ever at Suncor, but we also know we can't get ahead of ourselves.

We remain very focused on the 5 key priorities I've been talking about -- operational excellence across the entire business; the improving performance of our Firebag in-situ projects, and you are going to see that, Steve will talk to that; reducing and managing our cash cost at oil sands and in situ; the effective project execution on our projects, particularly near-term, that's Firebag 3 and 4; and obviously the implementation of our Total joint venture and growth plan.

All in all, very exciting period for Suncor.

Steve, I'm going to turn it over to you to take over.

Okay, thanks, Rick, and I'm pleased to pick up on the back of Rick's report there, and say that the continued focus we've had on operational excellence is clearly starting to pay off now.

Of course, I'll remind us, the foundation of operational excellence is safety, and we continue to make progress on that journey to zero injuries.

In 2011 year to date, across all of Suncor operations, we have reduced the recordable injuries by 17%, and our lost time injuries by 45%, and the number of high-risk incidents by 74%.

The second pillar is environmental due diligence, and it's another foundational element of operational excellence.

And our results in that area have also been very positive.

Year to date in 2011 we've managed to reduce both our incidents of regulatory noncompliance and loss of containment by over 30%.

It's those steadily improving safety and environmental results that have laid the groundwork for the strong operational performance across the business that we have seen.

As Rick said, we came out of a very successful turnaround on unit 2 to generate record production at oil sands in Q3, and that's continued into October.

In August, we resolved our hydrotreating issues at the oil sands base plant.

So that's allowed us to improve our sweet/sour mix in September, and it's setting us up very nicely for improved production into the fourth quarter and then into 2012.

We set oil sands production records while safely completing the in-situ turnaround and some significant annual [coke] and maintenance in upgrading.

And in situ, with planned maintenance completed at MacKay River and at Firebag, and initial production from the in-fill wells starting from Firebag, we've recently talked the 100,000 barrels a day in-situ production for the first time.

And for exiting of 2011, we are now targeting total in-situ production of 110,000 barrels per day.

In the downstream, our refining and marketing group had another great quarter, as the refineries were able to run at a 97% utilization rate, so they took full advantage of the record-breaking crack spreads we have been seeing.

The E&P operations produced reliably with the exception of Buzzard, where we believe our joint venture partner has now resolved the operational issues, and expects to produce at full rate for the remainder of the year.

Of note, we are in the midst of a 4-week turnaround at Terra Nova, and so far that's progressing to plan.

Cost management remains a top priority, and we continue to target oil sands cash costs in the mid-CAD30 a barrel range.

Quarter 3 came in at CAD36.60 a barrel, as we experienced upward pressure in a number of areas.

Increased Firebag operations costs, because we're in the midst of the start up of Firebag 3, so we have very limited production at this stage.

The full plant is coming on.

Higher mining costs as we begin to work through a leaner ore grade in the Millennium mine, and we will be managing that carefully through the next 12 months.

And of course, the increased maintenance to successfully resolve the hydrotreating challenges we have had earlier in the year.

So, effectively managing the cost of both our base business and our growth programs is a huge priority for us, and we are making progress.

And I will give you a few specific examples.

The North Sea [bank] expansion is coming online in quarter 1 of 2012.

It gives us access to 600 million barrels of reserves.

We will produce 125,000 barrels a day of bitumen, and the project development cost of CAD500 million equates to about CAD4,000 per flowing barrel.

They are the sorts of costs you can have when you are debottlenecking existing facilities.

We're also excited about our learnings in in-situ, and the promise of new technologies to lower costs and increase production.

And, for example, the initial production from our infill wells at Firebag is proving very promising to us.

We are maintaining a relentless focus on cost management and keeping a downward pressure on inflation.

Looking forward, we are well-positioned for a strong finish to the year, and continued success in 2012.

The ramp up of Firebag 3, bringing on that North Sea bank expansion, and starting up the Millennium Naphtha unit, which is getting close to completion.

We will continue to focus on safe, reliable operations, and that gets us to this relentless downward pressure we're putting on costs in our business.

And we will leverage our flexible portfolio in oil sands to make sure we optimize the margin rather than simply maximizing production.

With that, I will hand over to Bart.

Great, thanks, Steve, and good morning, everyone.

As Rick already highlighted, just an outstanding financial quarter for the Company, with record operating earnings of CAD1.8 billion and cash from ops of CAD2.7 billion.

I think something to emphasize is that this really, I think, does highlight the profitability and the power of Suncor's integrated model, which I think is the essence of this quarter's results.

And let me give you a few examples of what I'm talking about from a margin perspective.

If we look at the upgrading part of the business, with bitumen prices having fallen into the mid-CAD40s range late in the quarter, we are now seeing upgrading premiums approaching CAD50 per barrel for our oil sands upgrading business.

At the same time, our in-land refineries, which ran full-out for the quarter, were able to capture crack margins that averaged over CAD30 per barrel in the quarter.

Those are in-land refineries.

And not to be outdone, our E&P operations, which leveraged their low operating costs and a Brent oil price that was over CAD110 for the quarter, they were able to generate average cash margins, and these are after-tax and after sustaining CapEx, of over CAD40 per barrel.

We also get the benefit of a very strong midstream in renewables business, and those assets and expertise help us to maximize the net backs on our crude production.

Earnings there are picked up in our corporate segment, and for the quarter they were CAD65 million, and year to date CAD171 million.

So that part of our business is a very strong contributor as well.

As we move forward from here, we believe our integrated portfolio approach to optimizing the oil sands barrels are really going to continue to produce superior results for the Company.

And those results are producing a lot of cash, and our balance sheet is in terrific shape.

Net debt today is at CAD7.7 billion.

We've got a debt to cash flow number now that is down to 0.8 versus a target for us of 1 to 2 times.

And we have cash on the balance sheet now in excess of CAD3.3 billion.

I think the message I would leave you with there is -- this Company has lots of capacity and dry powder to execute on its strategy, accommodate any kind of market volatility, and for other strategic uses as well, which obviously begs the question than -- what do we plan to do with that cash?

The first thing I'd say is it's a nice problem to have, but we do plan to stay the course and maintain our priorities.

First of which is to fund the base business, and clearly, we are doing that, and we are focused on relentless management of our cash operating costs.

Second is to fund our strategic growth plan.

And at current oil prices, and in fact, quite a bit below current oil prices, we are able to meet capital requirements from internally generated cash flow.

Continue to manage the balance sheet conservatively, and we look to maintain our conservative debt ratios and ample cash on hand.

And then subject to Board approval, return more cash to shareholders as well.

And our plan to date has been to do that through dividend increases in line with production growth, and those are regular increases.

But also opportunistic share buybacks as well.

And our current share buyback in the market is an example of how we plan to manage some of this excess cash, and use it to drive shareholder returns.

The strategy behind the current program is really to soak up dilution since the merger.

It is a CAD500 million buyback, and we feel it was well-timed to take advantage of what we believe is a very undervalued share price for Suncor.

We purchased in excess of CAD180 million to date since we started the program early in September, and we are now well over one-third of the way through the program only 2 months in, and we do plan to continue purchasing as we believe today the shares still remain very much undervalued.

Our capital spending program is right on track, and being fully funded from internal cash flows, CAD6.7 billion is the budget for the year and we are right on track with that.

And for next year, in 2012, we see a range of around CAD7.5 billion.

That's subject to Board approval, of course, which we will be meeting with the Board next week.

Now, some of you may have expected a higher capital number, but one of the things that we are working very hard on is to both spend capital efficiently and to spend only within our means.

And those are objectives that we believe are reflected in next year's budget number, and will be reflected in the budget numbers in years beyond.

Our focus is going to remain strongly on cost and quality.

And we won't spend the capital, as Rick said as well, unless we can achieve a strong return for our shareholders.

With that, in summary, we are very well positioned to meet or exceed all of our targets for 2011.

There's no material changes to the guidance issued today.

We do plan to issue 2012 guidance next week following a review at our Board of Directors meeting, and again, our expectation is that capital will be in the CAD7.5 billion range, as I've already mentioned.

We should expect to see production increasing somewhat, as Firebag 3 ramps up, and we continue to see the benefits of operational excellence in our oil sands base business.

And as well, cash costs coming down modestly as we do not have any oil sands turnaround activity in 2012 -- or major activity.

But we will be carrying, of course, the full burden of Firebag 3 costs as those ramp up.

So with that, I will turn it back to Steve.

Thank you.

Thank you, Bart, and thank you, Rick and Steve, also.

Just before we go to Q&A here, I should reference that the updated 2011 guidance that Bart mentioned is now available on the website.

2012 guidance will be available next week.

And I want to provide you with a couple of numbers that are unusual items.

The LIFO/FIFO impact was a negative impact of CAD82 million in the quarter; that is an after-tax number.

And year to date, that puts it at CAD166 million positive.

A couple of others -- stock-based compensation was after-tax in the quarter an increase of CAD186 million, which puts it at CAD41 million positive year to date.

And finally, we had a negative after-tax impact of exchange rate on US-denominated debt of CAD533 million in the quarter for a year to date of CAD317 million.

Should note that as we go to Q&A here now, I would ask you to keep the questions that are detailed modeling type questions, if you would hold those and the IR group and the controllers group will be available throughout the day for those types of questions.

With that, I will ask the operator to open up the line to questions.

(Operator Instructions) Joe Citarrella from Goldman Sachs.

On the 2012 budget comments, if you are able, any rough split first there between maintenance and growth capital.

And second, can you update us on the capital cost environment more broadly speaking?

What if anything are you seeing today or building in next year in terms of inflation and can you give us some color on your cost containment efforts for your growth projects specifically?

Thank you.

Hi, Joe, it's Bart here.

I will answer the first part and then I will turn it over to Steve.

The CAD7.5 billion that we mentioned, it's broadly balance between -- sorry, I will turn over to Rick.

Broadly balanced between growth and then sustaining CapEx for the organization.

I will turn it over to Rick for the strategic part.

On the second part of that question around inflation generally, we always think about it in 2 buckets.

One is on the operating side and what I would say about that is our goal here is to eat our inflationary costs we are seeing on the operating side.

And now you may not see that quarter to quarter, but that's generally the trend that we hope to accomplish here over the next several years.

On the capital side, we have not really seen the kind of inflation I know the market is worried about.

What I can't do is promise you it's not going to come, I wouldn't do that.

But I would just say here in 2011 we haven't seen that kind of massive increase, if I said it was out there it's 3%, 4%, 5%, it's not double digit numbers.

We don't actually see a big push in 2012 certainly through the early part of the year.

And beyond that I can't actually give you a forecast other than to know that we, as well as a lot of the other operators, are working hard to make sure we don't go into that period back into that high inflationary period we had '05 to '08.

And again back to what both -- all 3 of us here have been talking about, is these projects we are going to do, we are going to be focused on quality and cost, not on schedule, and we are going to watch this thing extremely carefully.

And I think Steve, Bart and myself have all said it in different ways, but it's all the same intent.

Just to follow-up on that.

If you're not schedule focused, is there anything in terms of -- I think you were speaking to previously CAD8 million to CAD9.5 million per annum roughly in CapEx.

So is there anything that is getting pushed back in 2012 or is the growth plan, as it stands now, broadly on schedule on a track and the CapEx is merely lower for next year.

What I would say is I think that's gotten misinterpreted overtime here.

If anything we see these projects probably pushing out.

I'm not thinking here of Fort Hills, Joslyn and the upgrader.

We have nothing to announce.

Again, we are going through this very methodically where we're, again, we do not make schedule the primary issue.

So what I would say if anything you will probably see these capital costs flatten out, not increase from where we are or the expectation.

But we still have a lot of work to do and until we sanction these projects, which is still a year away, we will not be able to actually give you that number.

Just know it's a big focus of ours.

We do not want to peak on manpower on-sites in construction projects.

We are very well aware that we can create our own firestorm here and so these things are going to be very carefully managed as we go through the next 2 or 3 years.

And quickly following up on the comments on uses of cash.

Should we think about an upsized repurchase program as a potential use of cash beyond funding CapEx and the dividend in the event that oil prices remain high and you're generating free cash flow or do you see potential for any other uses?

Just trying to think about prioritization beyond CapEx and dividend in the current repurchase program.

Joe, it's Bart here again.

Couple things.

First, to go back to your earlier question on the capital budget for next year.

I think the CAD8 million to CAD9.5 million that you were referring to was a comment we might have made last quarter or a couple of quarters ago.

That was really for the 2013 and forward period.

2012 we had always tended to have a lower capital number because the projects are really starting to ramp up after next year.

The big focus next year is Firebag 3, of course, and getting that project completed.

The CAD7.5 million is consistent with what our plans have been.

On the use of cash, I would not see a big ramp-up right now.

We are focused on executing on the buyback that we have in place and then, of course, as I'd outlined in my priorities, though, for uses of cash, once we've accomplished those first few things, we will look at dividend increases and buybacks, but they will be strategically positioned.

Appreciate the clarifications, thank you.

Okay, thanks, Joe.

Andrew Potter from CIBC.

Just looking for a little bit more color on the infill wells at Firebag.

I don't know if you can talk to any rates just yet and maybe a little bit more color in terms of plans, how many wells in 2012 and what is the -- how many infill wells could you drill on the Firebag 1 and 2 sites?

I can give you little bit of color, Andrew, but I will limit the detail I go into for this call.

We have the opportunity to drill in excess of 15 wells.

The first 4 or 5 are in their very early stages of going into operation.

They are producing very well versus our expectations.

Don't want to talk about specific numbers at this stage.

And, of course, numbers for Firebag going forward will be quite difficult to segregate because we integrate the parts of the plant next.

Just to say when we add all of those effect up, infill wells, Firebag stage 3 coming on, it's exceeding our expectations as we go into this first stage of the start up.

Sure.

Then just one related question.

Can you talk at all about any plans to look at solvents or test solvents on Firebag?

Yes, we have a comprehensive technology program in place.

We are working on approximately 10 projects and a number of those are solvent projects and we will talk to those in the future.

Thank you.

George Toriola from UBS.

Thanks and this question is for Rick.

It pertains to the Keystone pipeline.

There's reports that to the extent that that pipeline has to be rerouted, the scheduled impacts here.

So just wondering how you're thinking about your growth projects and the possibility that Keystone is delayed and how you would be addressing this.

George, actually, I knew that question was likely to come up.

What I would say is, listen, Keystone XL is a TransCanada pipeline project.

You really should talk to them.

Obviously, we are very supportive of the project, of it going through and for the purposes of both North American energy security supply and jobs, we are hopeful that the politicians make the right decision here.

There are lots of plan B's and I don't want to go through them in great detail, but it's reversal line 9 ultimately Gateway.

But there's also a reversal of lines between Cushing and the Gulf Coast that are available and a number of other options.

This industry is very inventive, if you see a differential large enough we will get the crude moved around one way or the other.

So, I don't want to go into great lengths about all that plan B, but there is and there will be a plan B in case this does not go forward.

And then just a quick question on the -- wonder if you can quantify the impact of the hydrotreater that you will be putting in service here.

What would be the impact of that to 2012 and beyond cash flows and production mix.

I'll talk to it just in operational terms, not specifically in cash [code] terms, because it's heavily dependent on what the margins are at the business.

So what the deferentials are between sweet and sour products.

We've designed operational flexibility deliberately into the plant and that's the reason that we are bringing the hydrogen plant on in the fourth quarter this year rather than next year with the hydrotreater itself.

So, we'll take the hydrogen, we will put it into a common header and then we can take that hydrogen and put it to unit 1 hydrotreaters, unit 2 hydrotreaters or into the MNU hydrotreaters.

So it gives us a great deal of flexibility to start to take full advantage of the margins in the prevailing market conditions.

But we don't plan to talk about specific numbers for that unit.

Thanks a lot.

Greg Pardy from RBC Capital Markets.

Maybe just as a follow-up to George's question.

Synthetic sour production has been a bigger proportion of the mix this year, but once that third hydrotreater is on, what would you expect as a run rate in terms of the synthetic sweet versus sour mix?

All I would say is if you could hold on to that, Greg, next week we are actually going to give specific guidance, including the Millennium Naphtha unit online.

So we will give you some clear indications following the Board meeting next week.

But clearly, the percent of sweet is going up.

We will definitely get to that next week.

When is the budget coming out then?

After close of business on November 8.

On November 8.

Maybe just a couple of other questions.

You talked about the CapEx, how should we be thinking of a base oil sands operating cost for next year?

Or is it just too early?

We've said we are targeting broadly in the mid-CAD30s as a long-term run rate and Rick mentioned that, that includes attempting to eat inflation, certainly for the next few years.

Next year there are going to be some impacts and I did talk about one of them, and we will clarify the size of those next week, and that is we are going through -- we've got 2 things going on in oil sands next week which will put upward pressure on that CAD35.

1 is we are going through a lean or a region in the Millennium mine where the concentration of bitumen to the volume of oil sands we have to move slightly decreases.

So we will be going through that lean patch for about 12 months.

And, of course, we've got the Firebag start up where we get into the most important part of the Firebag 3 startup and Firebag 4 starts to come on.

So those 2 things will put some upward pressure on the CAD35 and we'll give guidance next week But broadly speaking, in the long run we are targeting CAD35 or thereabouts.

And maybe just a last question for Rick, perhaps is, is your interest in syncrude still core?

You knew I was going to ask that.

Yes, Greg, you always ask that.

It's a good question.

First of all, we are proud of those assets.

We do see some synergy value in terms of exchange of ideas, of technologies and a whole bunch of things.

We have real faith that Exxon is going to do a much better job of operating this down the road.

And so our current position is those assets are not for sale.

Now, that does not mean that, that will hold forever, but it's 8% of our production or something like that.

It's an important piece.

Right now there no plans to sell.

Okay, thanks for much.

(Operator Instructions) Brian Dutton from Credit Suisse.

Just wanted to get a little more clarity on the downstream business.

And in particular, the rack 4 business being very strong, very consistent over the past 12 to 18 months and was wondering if we should be anticipating those kinds of earnings to be generated on a go-forward basis?

Maybe I will pick that up, Brian, it is Steve Douglas here.

We don't break those out to the nth degree, if you like, but I think what we do talk about an awful lot is obviously with the in-land refining network we are enjoying very, very strong profitability because of lower crude cost inputs and global finished product pricing.

And part of that is certainly a transfer, if you like, of profitability from the upstream to the downstream.

And so if at some point in the future, as we fully expect, WTI and Brent come back together, we would see some of that margin and profitability accruing back to the upstream.

In terms of the rack forward, you are correct, it has been very steady and that has been a phenomenon, if you like, of the last couple of years here where we stopped seeing the cycling of pricing that was so prevalent in the earlier 2000s.

And you are correct, there has been steady profitability.

Never predict the future though.

But certainly, it has been a steady source of income the last couple of years here.

Great, thank you.

The only comment I would add, Brian, is following the merger.

We did, as you know, restructure the retail network.

And that restructuring has proved to be very positive.

So we have seen volumes hold up very well, both on gasoline and on the other sales through the service stations.

Okay, great, thank you.

Thank you.

We have no further questions at this time.

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

Douglas.

Thank you very much, operator, and thanks for everybody who joined in today.

As mentioned earlier, we would welcome any further calls or detailed questions, both the controllers and the IR group will be available throughout the day.

With that, I will thank you again and sign off.

Thank you.

The conference has now ended.

Please disconnect your lines at this time.

We thank you or your participation.