Suncor Energy Inc (SU) 2012 Q2 法說會逐字稿

Good morning and welcome to the Suncor second-quarter 2012 conference call and webcast.

I will now like to turn the call over to Mr. Steve Douglas, Vice President, Investor Relations.

Mr. Douglas, please go ahead.

Thank you, operator, and welcome to all participants for Suncor's Q2 2012 call.

I am here in Calgary along with the Controllers team and the Investor Relations team, and joining me by conference call from Fort McMurray is our CEO, Steve Williams, and our CFO, Bart Demosky.

Just before we begin I should make a legal note.

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

Actual results may differ materially from expected results because of various factors and assumptions described in our second-quarter earnings release and also in our AIF.

Both of these are available on SEDAR, EDGAR and our website, Suncor.com.

Certain financial measures referred to in our comments are not prescribed by Canadian GAAP and for a description of these, please see our second-quarter earnings release.

With that, I will hand over to Steve Williams.

Thanks, Steve.

As everyone knows, this was my first quarter as CEO of Suncor and it was certainly an eventful three months.

We saw crude prices drop by CAD25 per barrel in the quarter and large swings in price differentials for our basket of Oil Sands crude as other markets reacted to the volatile supply and demand dynamics in North America and a very uncertain macro economic global situation.

Through all of that, I am pleased to say that Suncor's integrated business model and our focus on operational excellence enabled us to produce strong results once again through the quarter.

Despite crude prices that were on average CAD9 or CAD10 lower this quarter than in quarter one, we actually produced very comparable operating earnings and cash flow.

That speaks to the strength of our integrated model as our three inland refineries took advantage of the discounted feedstock costs to generate what were exceptionally profitable results.

Our overall production remained within the range of our guidance, thanks to the steady ramp-up of Firebag and increased volumes from the North Sea and Libya.

And we were able to complete a substantial amount of the maintenance at our Oil Sands plant that we expect will position us well for the second half of the year and some reliable production.

On the capital project front, Firebag 4 is now over 90% complete and we expect to begin steaming the formation in the fourth quarter, and that will lead to first oil very early next year.

Work continues on our other growth initiatives, with a relentless focus on cost and quality rather than on schedule.

For the Oil Sands joint venture projects, that has resulted in timelines extending from the original estimates.

However, we are quite comfortable with taking the necessary time up front to ensure these projects can deliver strong value for our shareholders.

At this point, we are anticipating that in 2013 we will present a development plan for each of the three projects to Suncor's Board of Directors for a sanctioning decision.

Finally, I would like to talk about operational excellence and what we call our Journey To Zero, or our continuous effort to reduce workplace injuries.

Conventional industry wisdom tells us that safety performance is an excellent indicator of overall operational discipline and operations excellence.

Now, we do have to keep in mind we have been on this journey for a number of years and we have already come a long way.

So it gets harder to improve on past performance.

But I am delighted to say that year-to-date in 2012, total injuries across the Company are down by 26% versus 2011.

And high-risk incidents, which are a leading indicator of safety issues, are also trending down versus last year.

So, all in all another very good quarter, and we are well-positioned for a strong second half to the year.

That said, it is not just business as usual here at Suncor.

The most frequent question I have been asked the past few months is what is going to be different at Suncor under a new chief executive.

I'd like to take maybe just a few minutes to answer that question.

Given the fact I joined Suncor over 10 years ago and I was one of the architects of our strategy, you shouldn't expect to see Suncor take a sudden left-hand turn.

Our strategy is well-established and we will be working hard to execute it effectively.

However, you can expect to see some important changes.

First off, as I said, I am not focused on getting to a million barrels a day of production by 2020.

That said, I have no doubt we will eventually get to that level of production and beyond.

But what I am focused on is achieving strong returns for our shareholders.

Growth for the sake of growth doesn't interest me too much.

What interests me is profitable growth.

So that leads me to my second point, a rigorous scrutiny on capital discipline.

Together with the leadership team, I will examine our spending to ensure that we are laying down that capital effectively and we are achieving our desired returns for shareholders.

We plan to spend within our means and we plan to spend efficiently and effectively.

Thirdly, I believe that when it comes to growth, big capital programs are not the only means of increasing production.

I believe we can achieve significant growth simply by running our assets better.

Our operational excellence management systems will drive steady increases to reliability and establish Suncor as a world-class operator.

I think we have only just scratched the surface on this front and I am quite excited about the future possibilities.

We gradually positioned this company as a unique investment opportunity.

For the first time in our history, we are in a position not only to grow production significantly, but also to steadily grow the cash we return to shareholders.

We have built a balance sheet that has demonstrated our ability to fund our growth program, while also funding significant dividend increases and share buybacks.

Of course, that is unprecedented for Suncor.

So it is not surprising I get quite excited about the future of the Company.

I believe we are uniquely positioned for success and the future is looking very bright.

Of course, the present is also very positive.

I am going to pass over to our CFO, Bart Demosky, now to get into a little more detail on our second-quarter results.

Great.

Thank you, Steve, and good morning to everyone on the call.

As Steve mentioned, this certainly was another quarter where Suncor's integrated model produced excellent results for shareholders.

Operating earnings came in at CAD1.26 billion, cash flow of CAD2.34 billion, and return on capital employed registering in at 14.3%.

I think it is important to note these are all very significant improvements over the second quarter of 2011.

Now, our net earnings this quarter were impacted by a one-time CAD694 million writedown of our Syrian assets.

That is an impairment and that is really due to the extended political unrest in that country.

The thing I would say about it is that while we never like to take an impairment, this was not unexpected, and it is important to realize that the Syrian operations do represent a very small part of our overall business at less than 2% of cash flow.

I also wanted to point out as well that CAD67 million of that breakdown, or about CAD0.04 per share was associated with accounts receivable.

It did go through our cash flow for the quarter, and that is a one-time item so it should be taken out of the run rate.

With that behind us and another strong quarter in the books, our financial metrics continue to look very good.

Net debt on the quarter was down to just over CAD5.6 billion.

Debt-to-cash flow is well below our target range and currently stands at 0.6-to-1.

And we now have almost CAD5.2 billion of cash on the balance sheet, again, at the end of the quarter.

We have worked very hard to build a strong balance sheet.

As the company moves forward, we will continue to take a very disciplined approach to managing our balance sheet and allocating our capital to drive shareholder returns.

As Steve mentioned, the management team of the company is putting our capital program under the magnifying glass, and that is to ensure we are spending wisely.

We are seeing some very positive results.

Recent projects such as the North Steepbank extension in oil sands and the gasoline benzene reduction project in Commerce City have been completed under budget and with very high quality.

We are expecting similar results from our single largest project this year, Firebag 4. Our cost focus is not limited to capital expenditures.

We are also working to drive costs out of the base business.

At oil sands, we continue to target cash costs of CAD35 or less per barrel, and we are making very real progress towards that goal.

Despite some significant maintenance and the added costs associated with working through a lean zone in the Millennium mine, we have managed to keep our cash costs year-to-date well within our guidance range of CAD37 to CAD40 per barrel.

And we are now well-positioned to reduce costs in the back-end of the year.

This disciplined focused on costs has contributed to a reduced capital spend year-to-date and the potential to reduce our total CapEx for 2012.

The net result is a very strong cash position on the balance sheet, which has enabled us to increase the rate at which we have been returning cash to shareholders.

During the quarter, we continued to aggressively execute our share buyback program, purchasing and canceling a further CAD549 million worth of shares.

And since initiating our first-ever buyback program last September, we have now invested almost CAD1.4 billion to purchase and cancel over 46 million Suncor shares.

And that represents almost 3% of the outstanding flow.

As I said before, we are value buyers and we very much believe today that buying Suncor shares at current levels is a very strong investment for our shareholders.

In addition to that, we will also be taking a recommendation to the Board once our current program expires in September.

We have now released updated guidance for 2012 and I would like just to take a second to highlight a few things for you.

The first point I'd note is that we remain on track to meet our overall production and cash costs targets.

However, due to the unplanned oil sands maintenance in the first half of the year, we have reduced the SCO volumes somewhat and increased the projected bitumen sales.

We have reduced the expected realized price on the oil sands basket of goods as a result of the continued discounting of Canadian crudes.

But again, it is important to reiterate that Suncor has effectively hedged against these crude discounts because we are able to recapture the majority of this spread through our inland refining operations.

On that point, year-to-date in 2012, over 96% of our crude production has realized Brent-level pricing.

There are a few other small changes to the guidance but I think the key take-away message that I would want to leave with everyone is that we are on track to meet or beat our commitments, and we are very well-positioned for strong second half to the year.

With that, I would just leave with you that we do plan and will remain focused on operational excellence, our rigorous cost management, in order to maximize shareholder returns.

And with that I will pass it back over to Steve Douglas.

Thank you.

Well thank you Bart and Steve.

I would like to just follow up on Bart's reference to the guidance update.

The updated 2012 guidance is available on our website.

And I should note that the guidance takes into account a significant amount of maintenance which we have scheduled in the third quarter, primarily in our E&P group, but also oil sands base and in situ have scheduled maintenance.

All of these are taken into account in our projected -- in our guided production.

You can find details on page 21 of the updated IR deck and [either course] is also available as of this morning on our website.

A few further notes just before I open the line.

I know people are always interested in inventory adjustment related to FIFO accounting.

With falling crude prices and product prices, the inventory adjustment in the second quarter was an expense of CAD135 million, and on a year-to-date basis an expense of CAD128 million.

Stock-based compensation was an after-tax positive in the second quarter of CAD 41 million, but year-to-date an expense of CAD83 million.

The exchange impact -- the FX impact in the quarter, a negative, or an expense of CAD143 million, year-to-date a CAD15 million expense.

Just as I pass it along to the operator to open up the lines, I will note that the IR team and controllers will be available throughout the day today to deal with any detailed questions you may have, modeling-type questions.

So I will ask you to keep the questions for Bart and Steve on a little higher level.

With that, operator, I would ask you to open up the lines.

Thank you.

We will now take questions from the telephone lines.

(Operator Instructions)

Greg Pardy, RBC Capital Markets.

Thanks, good morning.

This question I think probably dovetails pretty well with some of your opening comments, but there are really two.

It comes back to Joslyn and Fort Hills.

Interested in how the decision-making process will work and what stage you are at on that.

And then secondly is, if indeed those projects do not meet your IR objectives, how complicated is it for you to disconnect from those projects given the debut with Total?

Thanks very much.

First of all, let me just comment on the health of the joint venture.

It is going very well.

And in order for it to be going well we have to test some of the first challenging debates around the group of projects.

We have been working very hard to make sure we get the best projects we can, so we are reviewing the scope, we are looking at the profitability of those projects as we speak.

And both, particularly Total, and ourselves are contributing to that and we are seeing significant progress.

I think we talked before about approaching a billion dollars of cost reductions on the Joslyn project.

The relationship with partners is very healthy.

You did pick up very well on the comments we were making there.

These are individual projects, although we have always said there is some benefit also by looking at them together, because obviously two of them are potentially the feed to the upgrade.

For clarity, they will be individual projects, individual Board approvals that we will take the opportunity to also review together.

In principle, there is the opportunity to not progress those projects.

We look at each of them, we have those conversations with our partners, and at least in principle it is possible to withdraw.

I won't go into the detail here, maybe next time we are on the road together, or we can talk it through with the team in more detail.

Each of the contracts are different and have different mechanisms for dilution.

But overall I would say at the moment, progress is healthy, we are engaged in those debates and pleased with the way the joint venture is working.

Okay.

Thanks very much.

Andrew Potter, CIBC.

First, just to follow up on Greg's question.

More specifically, when in 2013 is the decision expected to be?

I think initially you were saying mid-2013, but just wondering more specifically if that has moved.

And then just a question on the downstream.

Obviously you have been printing some pretty strong numbers from there.

Just wanting a little more color on Montreal and how that is impacted by any potential Line 9 reversal and how that would impact the cash flow profile.

We have nothing to say in terms of the update.

The time when we have advertised is the middle of next year, would be the sanctioning date.

If we stick to that plan, then we should have broadly the three projects approximately ready to take their reviews.

We are heavily involved in these profit improvement reviews at the moment.

And the indications are that some of these projects are moving backwards, not forwards.

I am not worried about them going back; I am not worried about that review date potentially slipping as long as we're seeing cost improvements and quality improvements, which lead then to better returns for shareholders.

We have indicated middle of next year; the reviews we are taking potentially could impact that.

On Montreal, the position is relatively clear.

We are in the midst of the Line 9 review now.

That process comes to a closure in September.

Suncor's objective is to have a share of the Line 9 operation.

And that will then enable us to get some of the Western Canadian crudes into Montreal and effectively start to move it toward the economics of the other three inland refineries we have.

So that is still our plan and that process comes to a conclusion in September.

Any color on what that would mean roughly in terms of margins or overall downstream EBITDA?

I think the way to think about it is, currently that refinery does source its crude offshore on a Brent basis.

And with a reversal of that line, certainly we are going to see more of their product being sourced at inland pricing, which is, as you know, quite a volatile spread but a positive contributor to cash flow.

So we would be very positive on it.

Sure.

And then very last question just on that project sequencing.

If we are in a scenario where Fort Hills or Joslyn or Voyageur or all the above do get pushed out, how are you thinking about SAGD?

Is there an opportunity to move McKay higher, Firebag 5 into 6 sooner or is that kind of stuck on the same timeline, or are you seeing the same cost pressures there that are challenging other projects?

At the same time we are taking the review of the major joint venture projects, we are also taking a review -- if you remember in the investor book there, there is that shopping list of projects which are potentially MacKay River, Firebag, Lewis and a few other in situ resources we have.

We do have some flexibility, if we choose to exercise it, to move some of those projects forward.

The other piece we have, and we are still doing the work to define exactly what it is -- we do have some interesting de-bottleneck projects as well, which are much smaller projects where, as we started to bring the mines up and the upgrader up and Firebag up, we can see some areas where there may be some relatively high-return projects where we can get some volume there.

Not of the same size, but we do have some projects there.

Perfect.

Thanks.

George Toriola, UBS.

Thanks and good morning, guys.

I have a couple of questions.

The first is just to follow on the questioner on sequencing of projects.

To the extent that your projects get moved back, what are you going to do with cash and how would you be deploying the cash that you have?

Bart had suggested that your balance sheet is probably -- where the debt stands is ahead of the metrics that you desire.

So just looking for color on how you spend your cash here to the extent that these projects get moved back.

Hi, George, and good morning.

Great question.

The first thing I would say is that having as much cash as we have and as much flexibility in the balance sheet as we have built up is a great problem to have.

That said, we do believe very strongly, as we have said many times, that our job is to drive shareholder returns.

So let me just reiterate the priorities for cash.

The first call is against obviously running the assets very, very well.

We want to make sure that we are investing properly in those assets.

The second call is on profitable growth.

And by that I mean the projects that Steve outlined will be the ones that are going to deliver the best overall returns for our shareholders, and that is how we see that playing out.

Then where there is excess cash or cash beyond the targets that we have for holding some cash on the balance sheet, we still plan to work on returning that cash to shareholders either in the form of dividends or buybacks.

And we have been growing our dividends certainly over the last five years well beyond our production growth and what you would expect to be growth and cash flow and earnings.

We view that as a positive step for shareholders.

It has been a CGAR greater than 21% and as well returning us cash back to shareholders through buybacks.

And as I mentioned earlier, with our upcoming expiring of our current buyback, we will be taking another recommendation to our Board for review at that time.

Okay, thanks.

That's helpful.

The second question I have is on Firebag.

Could you break out what Firebag 3 production is currently and when you expect Firebag 3 to be fully ramped up?

The simple answer is no.

Going forward, what we would -- and there are some really simple reasons for it.

We actually cross-connected the plant.

When we started there was Stage 1, 2, and then we have added Stage 3 and we are 90% complete on Stage 4 now.

The pieces of the plant we cross-connected, so currently we can put steam from any of the stages into any of the other underground facilities, and we can bring the returns from the wells back into any of the oil-water separation facilities.

We no longer have discrete stages, 1, 2, 3, and we will have 4. Having said that, when you look at the detailed filings we make with BRCP, you can see by individual wells.

And of course what is confusing at the moment is that at the end of the second quarter, we had nine producing infill wells on, so the infill wells are geographically located on the early stages, but the oil and water separation is being done in Stage 3 because we have the spare capacity there.

We have actually moved it up to 10, in fact 15 are on as we speak today.

We are on our way to 18 by the year-end.

That program is going very well.

Those wells are exceeding our expectations.

In fact they are the best in the industry bar none now in terms of the productivity of those wells.

But what it means, George, is there is no easy answer to the question about what Stage 1 is doing, what Stage 3 or 4 are doing.

We are doing a bit of work to simplify that and we will communicate that so the picture becomes much clearer before the year-end.

What I will say is Firebag Stage 3 itself is meeting or exceeding our expectations and we are we are very pleased with the progress we have made on the infill wells.

Okay, thanks.

So Firebag, just to reiterate that, so Firebag 3, the ramp-up on those wells are going as expected?

Yes, it is going as expected, and if anything it is slightly exceeding expectations and we expect that to factor forward into Stage 4. Everything we are seeing on Stage 4 is very encouraging at the moment.

The costs are slightly below our expectations, the schedule is slightly ahead, and we are optimistic because it is exactly the same team of people that are going to move over onto starting up.

It will follow a very similar path to Stage 3.

Okay, thanks.

And last question.

You talked about full capacity utilization on your Western refineries.

Did this just happen?

Is there something that happened this quarter that we should expect could repeat itself over the next several quarters?

We have -- other than planned turnaround, the refineries have been operating very well and we have a -- one of the secrets to the integrated operation is we operate those at very high rates.

So they operate full all of the time.

Okay, thank you very much.

David McColl, Morningstar.

Yes, thank you.

Two questions for you guys.

The first goes back to the JV agreement with Total.

I am wondering if there is some sort of a path within that agreement that could allow a tie into the Montreal refinery if the Voyageur upgrader is basically scrapped?

Can Total get in on a refinery if you use something there?

The next question builds off those infill wells.

I'm just wondering if you can give any comment on the average production you are getting per well at Firebag, and whether you are implementing any of these wells at MacKay River and if not, are there plans to?

Thank you.

The project between the Voyageur upgrader and the connection into Montreal with Line 9, a couple of comments.

I would view them for simplicity as totally separate projects and totally separate debates.

We could make the choice to do the Voyageur upgrader or not do the Voyageur upgrader.

Similarly, we could make the choice independently to connect into the Montreal refinery either with synthetic or light crudes, which we source probably from over on the west side of Canada.

Or not to do.

And those projects, independent, will stand on their own merits.

The second question, production-per-well, I would not go into the details on production per infill well, but I will give you a few clues around your question.

It is not quite appropriate for this call for us to go into that level of detail.

The individual wells are registered and it is recorded on the public record what the flow rates from each of those infill wells are.

And they are all at different stages, which is why I can't give a simple answer.

In general, they are of very high productivity, which is a characteristic of the Firebag resource, and they simply are the highest producing in infill wells.

We have some more opportunity on Fireback, so by the end of this year we will have put the first 18 in.

Next year, we are moving into starting to progress to the next phase, and then later we will put those in on Fireback.

There may be some potential in MacKay River, but it is different.

The early Fireback Stages 1 and 2 had a big spread between them, so the pairs of wells had a big gap between them that lends themselves to infill drilling.

So you pick your priorities first.

Stage 1 and 2 were the first place to go, and then we will look at the ability to put infill wells through the rest of Fireback and into MacKay River as we progress.

So there is a good opportunity there.

Okay, thank you.

Paul Cheng, Barclays.

Hey guys, good morning.

I have actually four questions that hopefully, all of them are relatively short.

First, Steve, when you are looking at the current North American's crude [defense-so].

And that your downstream is a natural hedge as your production increased that hedge become less.

So when you are looking at your refining system, is there a relatively low-cost opportunity to extend the capacity?

Think of it as effectively we have a spare refinery which is not integrated.

So we have a spare 140,000 barrels a day in Montreal, which we can add to the integration model.

As Bart said, for this quarter we were hedged at effectively and 96% of our production to a Brent price.

We have the ability to continue that for some time without any contract or acquisition of further assets outside of our current ownership.

We continue to look how we want to grow that integrated model.

Every time an asset on this continent becomes available, we look and see if it will add value to our model.

How about your existing system?

Is there any low price, deep bottom-like expansion opportunities exist?

Yes.

The biggest one is Montreal --

Outside Montreal, I'm sorry.

Okay, yes, we still have some capability.

Edmonton is very highly integrated.

There is some scope in Denver and some scope in Sarnia, they are not fully integrated.

We look at that list and pick them off with the best returns.

Okay.

The second question, from a organizational capability limit standpoint using human resources, not financially, in '04 the Company informed the rates.

Steve and Bart, do you guys have a, say, rule of thumb saying that what is your limit no matter that how many different large projects or CapEx or 80-barrel capacity any kind of matrix that you can share with us that you can handle at one time?

Labor, skills, the organization of capacity to progress these projects is a very important consideration for us.

Quite clearly, we are very comfortable with what we have at the moment.

What limits our rates of growth going forward is not the availability of capital for us.

It is our ability to spend it wisely and end up with reasonable costs and high-quality projects.

So we made that judgment as we made the decision on the portfolio projects and what you are seeing is a reflection of that.

We believe we have built our joint venture capability and our major projects capability to be able to handle the suite of projects we currently have.

And we are comfortable that we have that capacity.

So, Steve, maybe I paraphrased it to make sure I understand.

So when you are looking at your next stack of major projects, such as Joslyn, Fort Hills and Voyageur, you believe that with the joint venture structure and your organizational capability that you and your partner will be able to handle all those three projects at the same time?

The answer is yes.

One of the advantages of the Total partnership and having the two mining projects is we are able to sequence them.

So if you go back a few years, those were competing projects where you've got the resource within the company, but the contracting labor you would be using outside we were competing for.

By bundling the projects within the partnership, we are now able to sequence them in a way so we're able to take the peaks out of the demands for those labors and skills.

So, at least in principle, part of the design concept around Joslyn and Fort Hills is that we will duplicate as much as we can from one of the projects to the next one so that we don't have to keep repeating all this stuff.

And that was one of the benefits of the joint venture.

Two final questions.

One, with the Petro-Canada, [an active sea author] has a loyal Western Canadian asset.

Do you guys have a lot of opportunity in the Shell Oil [tie-all] that the rest of the industry is now tracing?

That's one.

The second one is that with your new talk at your upgrader utilization rate for this year is about 80%, 84%, I think implied.

Do you have a talk for 2013 and 2014?

Thank you.

I will take the first one, if you like, which was about the Shell reserves we have.

Simply no, we don't have a great Shell capability that is not being tracked.

We do have some conventional resources we are very happy with.

Obviously the East Coast, North Sea, Libya, Syria, we have some of what I call step-out opportunities around those resources to spend some capital funds on maintaining those levels of production at the 10-year type horizon.

So we have some attractive projects there, but no great Shell resources.

And Bart is going to pick up the second one.

Thanks, Paul.

One thing I would just add to Steve's message is that for us, there is really no need to pursue those kinds of projects.

We have many been assets in our portfolio, but our focus is on developing the most profitable ones, and we see that as being the projects we have identified so far.

Paul, I think your second question was on the operating rate for our upgrader so far this year.

I would break it into two parts, the answer.

If you look at the first part of the year when we were running at very high rates, we were well in excess of 90%.

If you look at the better operating refineries around the world, including some of our own, that is the kind of target range that signifies a top quartile asset.

We did have one disruption, obviously the four-week outage that we had where we had to take some maintenance activity.

But aside from that, the upgraders are operating very well and close to that 90% range.

So if I was to look forward and say what do we want to achieve from here outside of our normal planned maintenance activities, it is continuous improvement.

We do have plans to continue to drive operational reliability higher.

We don't have a specific target, but it would be in line, again, with the better-run refineries that are out there.

Thank you.

Eric Busslinger, Marret.

Just to touch back on George's prior question on the ranking of the uses of cash.

Can you, or management, provide us thought on whether or not the Company can generate a better return on mine back stock versus reinvesting into the internal portfolio, and how you contrast the two of those levels?

Secondly, given the commentary that leverage is well below target, can you just refresh us on thoughts on where you would like balance sheet leverage on debt-to-cash flow, debt-to-enterprise value, or net-to-capitalization, or any other way you look at it?

To address your first question as to where we see driving better return, I think the answer is both.

The way we come at utilizing what we would consider to be excess cash is to look for the best opportunity for it.

And we always are looking for the best opportunity of where to invest our shareholders' cash.

Today we are blessed with having more cash than we need to retain a very, very strong balance sheet and to fund our growth projects.

And that gives us the luxury of being able to buy back shares as well.

Given the current pricing level of the shares, though, we see it as a very high return investment for shareholders.

We believe they are well under-valued relative to the net asset value of the Company and our prospects going forward.

So that is why we are utilizing excess cash to buy back stock today.

In terms of our metrics around our balance sheet, I did say that we are under-levered and we are, relative to our targets.

We do target over the medium to long term a debt-to-cash flow multiple of 1 to 1.5 times.

We are currently at 0.6.

And we also target debt-to-total capitalization of 20% to 25%, and we are down around 21% right now, so getting close to the bottom end of our range there as well.

We think those ranges afford us, if we stick with a considerable amount of flexibility, to be able to sustain our growth programs and our assets, and deliver free cash back to shareholders as well.

Alright, thank you.

Darren Campbell, Alberta Oil magazine.

Hi, thanks.

This is a question for Steve.

You are couple months into taking over as CEO for Suncor.

I wanted to get some color, some thoughts on how you feel that transition has been going, and what your views are on -- where do you want to take the Company, where do you want to take Suncor in the next few years?

I would say, reference my opening words.

I have been an architect of the strategy, so you are not going to see major turns.

We will be concentrating very hard on the base business to make sure we are absolutely the best in class in terms of operating and sweating the current asset.

And every indication is we are making significant progress against that.

To generalize on the major projects going forward, you will see an increased focus on making sure we get the returns for shareholders as high as they can possibly be.

So you will see us working hard on cost and the quality of those projects and I am less interested in hitting schedules for schedule's sake.

The transition -- of course, I'm interested in other people's comments on that as well.

From my perspective, it has gone very well.

It was well-advertised, well-planned and has been seamless in terms of our various stakeholder groups.

I spent a lot of time with our employees; I have seen 20%-plus of our shareholders in the last three months, and I'm delighted with the way the transition has gone and I'm very grateful to Rick as to how we handled that.

Okay, thank you.

Ben Hobratsch, Argus Media.

Hi, my question is about the low pricing of Oil Sands crude and bitumen.

It was mentioned earlier that the main way in which Suncor is hedging this is by sending it to inland refinery operations.

I'm wondering if there is any secondary ways that the Company has been hedging the low price of Oil Sands crude and bitumen.

For example, has Suncor been railing any of it to the Gulf Coast or maybe utilizing the Western stock to send it to Brent pricing?

Let me tackle this.

We have an integrated model which enables us to take real advantage of the pricing differentials, and we work very hard to make sure we keep that model balanced and keep the right assets operating through it.

Hugely successful, as Bart said, 96% of our production by volume was related to Brent price-ramp and WTI price.

That is a best-in-class model in terms of integration.

We also have an active trading department, so we do look at all of those midstream logistics as well, ran pipelines around tanks.

And there will be occasions when we trade in that market as well.

We really like our position and we wouldn't want to go into too much more detail than that.

But we haven't been trading significant volumes to the Gulf.

Thank you.

Guy Baber, Simmons.

I wanted to stick to the whole downstream integration theme, so I had a follow up on Montreal and the potential Line 9 reversal.

Can you help us think about what type of crude slate you think would be most optimal at that refinery?

How much Canadian-heavy you think that plant could accommodate?

And what type of capital investment on a preliminary basis you think might be necessary to make that happen?

I will give you a few comments, Guy, and what I would say is if that you want any more detail, don't hesitate to follow up with us later.

The answer to the question can be quite complex.

We can take material in there right now and then we have a whole matrix of opportunities in front of us.

Depending on the quality of product we choose to put in there, and that would depend on the alternatives available and differential prices of the day.

Right now if we reversed Line 9 we could get light synthetic crude is very high quality so that is easy to put in there.

Then you have varying degrees of heavy, depending on -- first of all, you could potentially put some in there at zero cost and then you have a list of investments you can make which enables you to increase the proportion of material you put in there.

So if we reverse the Line 9 tomorrow, we could already put some volumes in there, and then we are looking at all of the options beyond that.

If you want it in more detail, give us a call and we will follow up with you.

Okay, great, very helpful.

And then my follow up is, capital spending obviously through the first half of the year has been trending below the implied run rate from the annual guidance and you all have been emphasizing capital discipline.

Is the plan more back-end weighted this year?

Can you comment on some of the key drivers as to why CapEx has been below expectations?

I think you touched on them in your prepared remarks, but some elaboration would be appreciated.

And then, are you going to plan to give any new guidance on 2012 CapEx?

Thanks.

It's interesting, you have highlighted a lot of the answers in your question there.

The year is slightly asymmetrical, so we are always going to spend a little bit more towards the end of the year than the beginning of the year.

But you correctly picked up that we are actually below the run rate, even adjusting for that.

We are in the process of doing a detailed CapEx update, and we normally come out after the November Board meeting with our 2013 capital budget.

We will include alongside that an update on how we are doing in terms of the 2012 spend.

The sources of under-spend are two-fold.

It is actually really good news.

One is, as part of the increased focus on profitability, we are letting some of the schedules slip on these projects, and that is a very conscious decision as long as we are improving the economics and returns for shareholders.

So that is one piece of good news.

The second piece of good news is, and I think Bart highlighted it, we now have a handful of projects which are actually coming in below their cost.

So we are completing the projects and they are coming in under the numbers we budgeted.

An example would be Steepbank.

Another example would be benzene down in Denver.

And all indications are that our biggest investment this year, Stage 4 at Firebag, is also coming in under its budget.

They are contributing as well.

So we are going to do the work in the third quarter so we can update you when we come out with our numbers.

Thanks for the update.

Brian Dutton, Credit Suisse.

Good morning, Steve.

I was wondering if you could revisit for a moment your messaging today on the timelines of your major projects.

Are you indirectly saying that Fort Hill, Joslyn and Voyageur are not economically viable in today's market environment?

Or are you actually saying you are looking at ways to improve the returns on projects that are already economically viable?

The second case, Brian, is what I am inferring in my messaging here.

Which is, we are looking as to how we get the best economics for those projects.

And if you just take the two mines, I will just give you a few general principles.

To the extent that we can replicate the designs from one to another, clearly that is going to significantly reduce the engineering and construction costs.

So it makes sense to make sure you take the full opportunity to get that replication.

We are making sure the projects are not schedule-driven, and normally schedule-driven means that you incur extra costs in order to hit a date.

So instead of saying -- here is a very specific date we guarantee, we are going to ramp production up -- what I'm saying is, spend the money in the best way to maximize the returns of those projects.

So it is very much about improving the returns on those projects.

Okay.

Along that line as well, then.

What is your thinking specifically on Voyageur?

You have got several billion dollars already sunk there.

And, again, are you actually thinking or are you actually prepared to walk away, or are you looking at ways to improve the returns of the project?

Our first focus is looking at the ways we can make that project very viable.

As you rightly say, we are already several billion dollars into the project.

Of course, the way we look at it is when we look at the best allocation of capital going forward, so we do it on a forward capital-spend basis.

We are reviewing very hard the economics of that project.

We are reviewing very hard because the world has changed quite significantly since we initially approved it.

So together with Total, we are right in the midst now of seeing what we can do to improve the economics of that project, because the continental balance has changed.

If you look at when we approved that project a number of years ago, the mid continent light sweet crudes were not being produced, so the heavy-light balance was different.

As I say, jointly with Total we are right in the midst of revisiting that to see what we can do to increase the returns on that project.

Is there a hard timeline on Voyageur given that, from an accounting point of view, you are carrying that asset on the books?

No.

We factor in to the economics, because the shorter time you can be spending -- having that project in flight and the faster you can get -- because of the capital intensity, then the faster you can start it up.

Those two decisions have the most significant impact on the rates of return of the project.

So we factor that in as we look at the economics.

Okay, thank you very much.

Nathan VanderKlippe, The Globe and Mail.

Yes, Steve, just wondering if you could talk a little bit about the motivation for this review on capital costs?

Is it a concern about rising costs in the future, especially future big capital projects like mines and the upgrader, or is it more an uncertainty about commodity prices going forward, or how much of each?

No, neither of those, to be honest.

It is about making sure we get the best returns for our shareholders.

So it is all about how do we manage that mix of cost, quality and, last, schedule, so that we maximize the returns for our shareholders.

Because what we are actually seeing on the ground right now, as I say, is a significant number of our projects which are being completed are coming in under budget.

So, it is not to say there are not inflationary pressures out there, but right now we have been able to manage those.

Do you have with regard to the new mining projects a ceiling, dollars per flowing barrel, that you are looking at?

Is there a number you are trying to stay away from?

No, we don't have a number I would want to use here.

But clearly, the cost of the project and the cost-per-flowing barrel is one of the metrics we use to make our judgments as we give our recommendation to the Board.

Operator, mindful of the time, I would ask you if there is one further question, we could take it.

We have no further questions at this time.

Perfect timing.

Thank you very much.

As we close then, I would remind folks that the IR team, along with controllers, are available throughout the day and very happy to follow up with any detailed questions you might have.

With that, I will thank everybody for taking part and sign off.

Thank you.

Thank you.

The conference call has now ended.

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