Suncor Energy Inc (SU) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Suncor fourth quarter 2012 conference call and webcast.

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

Mr. Douglas, please go ahead.

Thank you, Ann.

And welcome to everyone to the Suncor Energy Q4 shareholder call.

With me here in Calgary are Steve Williams, our President and Chief Executive Officer; Bart Demosky, our Chief Financial Officer; Jolienne Guillemaud, our Vice President and Controller, and Greg Freidin, Assistant Controller; along with Jenna van Steenbergen from IR.

Before we begin, I need to 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 Q4 earnings release, as well as in our current AIF, and both of these are available on-line.

Certain financial measures referred in to these comments are not prescribed by Canadian generally accepted accounting principles.

For a description of these financial measures, please see our fourth quarter earnings release.

After our formal remarks we will open the call to questions, first from members of the investment community, then to members of the media.

With that, I will hand over to Steve Williams, our President and CEO.

Good morning, and thank you for joining us.

The fourth quarter was an eventful one for Suncor, both from an operations and a strategic position.

I would like to start with an overview of our performance in the quarter, and for the year as a whole.

Then I will take some time to talk about our key priorities as we turn the page on 2012 and look to the new year.

So a record production month at our Oil Sands plant in December helped us reach new highs for both quarterly and annual Oil Sands production, and stage 4 of our Firebag in situ facilities commenced operations well ahead of schedule.

At the same time, our refineries continue to run reliably and prove the benefits of our integrated model.

In particular, the Edmonton refinery has performed so consistently that as of January 1, we officially upgraded the nameplate capacity of the plant from 135,000 barrels a day to 140,000 barrels a day.

Now, Q4 presented its share of challenge, as well.

In connection with maintenance, with our Oil Sands upgrading operations and the Terra Nova offshore project.

At Oil Sands, our average production reached record levels of 343,000 barrels a day for the quarter, enabling us to reach the lower end of guidance range for the year of 325,000 barrels a day.

However, planned and unplanned maintenance reduced the amount of sweet upgraded material that we could produce, putting some downward pressure on the value of that sales mix.

Additional pressure came from a deteriorating price environment for Oil Sands crudes and mid-continent petroleum products as a result of supply/demand imbalances and take-away capacity issues.

However, during the quarter we made good progress towards addressing those issues by developing new infrastructure to enhance the take-away capacity and marketing flexibility around our Oil Sands operations.

These included the Wood Buffalo pipeline connecting our base plant to third-party pipeline infrastructure, as well as new storage tanks in Hardisty, Alberta, which will connect to the Enbridge mainline pipeline later this year.

So, these investments support our planned production growth in situ and provide additional flexibility for our Oil Sands based operations.

Our Refining and Marketing group continued its industry leading performance as our refineries ran at 96% of capacity in Q4, and we took advantage of the healthy refining cracks to generate strong earnings and cash flow.

The Refining and Marketing group had an outstanding year, both operationally and financially.

Moving forward, we expect to continue to capture value and mitigate the impact of a volatile crude pricing environment.

In our E&P group, maintenance was also a factor in the fourth quarter as Buzzard and Terra Nova were delayed in coming back from major turnarounds.

But despite those challenges, production for the year finished up in the middle of our guidance range.

At Terra Nova, a number of problems with flow lines and risers have hampered our return to operations, but we're working to resolve those issues, and I will give you an update later.

To provide a little more context on our performance, I'd like to take a few minutes and look back to the goals we established at the beginning of 2012.

Each year we put together a scorecard for the Company to track our top priorities.

For 2012, we set five key goals.

Number one was continuous improvement across our Suncor operations.

Number two was rigorous cost control, particularly in the Oil Sands operations.

Number three was to steadily increase production at Firebag.

Number four was the superb execution of capital projects.

And number five was to drive value through the strategic partnerships.

So let me look now in a little bit more detail about how we performed versus the key priorities.

So, number one, continuous improvement of our operations.

Operational excellence has been an absolutely relentless focus for Suncor for several years, and we are definitely making progress.

I've always said this would be a multi-year journey involving changes to our culture, changes to our business processes, and changes physically to our assets.

In looking at the Oil Sands operations, I fully expected it would take us two full turnaround cycles to get to the world-class operations we're pursuing.

In quarter four and in 2012 as a whole, I was disappointed with our Oil Sands upgrade and reliability as we dealt with several unplanned outages that reduced both our production and our profitability.

However, I see many indications of progress, and I'm confident that we'll take another step forward on the operational excellence journey in 2013.

Number two priority, cost control.

And simply, a company that is operationally excellent is, by definition, amongst the lowest cost competitors.

And I'm very pleased with the progress we're making on cost control.

We're driving costs out of the business through improvements in productivity, reliability, and technology.

Lowering our Oil Sands cash cost per barrel by a full CAD2 in 2012.

Oil Sands cash cost guidance for 2013 reflects this trend as we fully expect to achieve average costs in the CAD35 per barrel range.

Number three priority was grow Firebag at production.

Clearly this is an area where we've exceeded expectations.

During 2012 we not only saw Firebag 3 ramp up to full capacity faster than expected, but we also achieved first oil at Firebag 4 under budget and well ahead of schedule.

We expect Firebag to grow steadily towards its 180,000 barrels a day capacity over the next 12 months.

The fourth priority was superb execution of capital projects.

And I've been very clear in earlier comments that what interests me is profitable growth, which requires a great deal of capital discipline and make no mistake, this is a very high priority for Suncor.

By bringing the same operational excellence principles that we've applied in our plants to the project development side of our Business, we're starting to see some very positive results.

In 2012 we brought a number of projects in under budget, notably stage 4 of Firebag, which is coming in about 15% beneath the announced cost of CAD2 billion.

So this contributed to the CAD1.1 billion reduction in our overall capital spending program, including almost CAD300 million in spending reductions since we last gave you a quarterly update.

The final priority for 2012 was to drive value through strategic partnerships.

Given the importance of our joint venture projects to our Oil Sands and growth plans, we've put considerable focus on driving value through partnerships.

2012 was a challenging year on this front, as we initiated reviews of Voyageur, Fort Hills, and Joslyn.

As mentioned on previous calls, we expect to announce a path forward on the Voyageur project at the end of the first quarter.

We're also making progress on Fort Hills, for which final investment decision is expected in the second half of this year.

We'll also provide an update on timing for a decision on Joslyn when it becomes available later.

So all in all, a solid year in 2012 with progress made on all of the priority fronts we highlighted.

But clearly we need to continue our efforts.

The industry is currently facing many challenges, and Suncor will need to work very hard to meet and exceed our goals for 2013.

Now, once again this year, I've laid out five key priorities for the Company, and let me briefly go through those.

The first one, to further advance Suncor's journey of operational excellence.

This will continue to be the foundation and driver of our performance as we progress to world-class operations.

Number two, improve maintenance and reliability across the Suncor operations.

And really, that's a subset of number one.

As we steadily improve reliability, we expect to see costs continue to fall and production and profitability to rise.

Number three, attract and engage employees in support of the Suncor business strategy.

There's a tremendous competition for talent out there, and we intend to remain the employer of choice in our sector.

Number four, generate and sustain industry leading returns.

As I think you have repeatedly heard from me, I'm not interested in growth for growth sake.

We'll make the tough decisions and focus on the high return projects that enable us to steadily grow our profitability, and of course this includes a continued focus on capital discipline.

And the fifth priority to achieve our long-term sustainability targets.

Suncor has established a leadership position in our industry in the area of sustainability, and I believe that this can continue to be a competitive advantage for our Company.

Obviously the Oil Sands industry continues to be the focus of much public attention, and Suncor's approach is to actively engage stakeholders as we work to responsibly develop the resources.

We've set aggressive public goals on air, water, land reclamation, and energy usage, and we will work very hard to meet and beat these targets as we continue to profitably grow our Business.

So, to sum up, we look back on a very successful year and chart our course forward.

We will continue to focus on operational excellence, profitable growth, a sustainable business model, and industry leading returns for our shareholders.

So with that, I'm going to pass it over to Bart to go into some detail on our financial results for the fourth quarter and for the year as a whole.

Okay.

Thank you, Steve.

And good morning, everyone.

The fourth quarter capped a year in which Suncor made some considerable strides forward on the financial front.

It was a year in which we were able to fund our profitable growth program, generate record free cash flow for the organization, and as well, strengthen our balance sheet and return significant cash to our shareholders.

It was also a year marked by great volatility in oil price differentials that certainly tested the strength and flexibility of our integrated operational model.

In Q4, we saw bitumen and heavy crude pricing heavily discounted due to large swings in the supply/demand balance and apportionment in the pipeline take-away systems.

And that dynamic has continued into the beginning of 2013 and will impact results across our sector.

For the fourth quarter, Suncor's operating earnings came in at CAD1 billion, which is down from our run rate over recent quarters, largely as a result of lower market pricing and a less optimal sales mix at Oil Sands where we experienced some unplanned maintenance in our upgrading complex, combined with reduced production from our offshore assets due to extended turn around activity at Terra Nova and at Buzzard.

These same factors reduced our cash flows for the quarter to CAD2.24 billion, but we still managed to generate total cash flow for the year of CAD9.75 billion, which equaled the record that we achieved in 2011.

Now, over the last couple of quarterly calls, we've talked about the economics for the Voyageur upgrader project as being challenged.

And as part of our year-end accounting activities, we completed an impairment test on the project and based on an assessment of fair value for Voyageur, we recorded an after tax impairment of approximately CAD1.5 billion.

Now with the impact of this impairment factored into our net earnings, our 12-month rolling return on capital employed did drop to 7.3%, but excluding the one-time impairment charge, it came in at 11.4%.

Our debt position continues to be very favorable as we finish the year with a net debt of about CAD6.6 billion and debt to capitalization of 22%, both of which represented reductions versus year-end 2011.

Now, once you factor in a cash balance currently of almost CAD4.5 billion and liquidity of over CAD7 billion, it's not hard to see that our balance sheet today is absolutely in rock solid position.

Now, building a fortress balance sheet through strong capital discipline and prudent cost management was a specific goal we set for the Company immediately after the Petro-Canada transaction, and today I'm very pleased with the progress that we've made.

In December, Moody's investor service formally recognized Suncor's strong financial position by upgrading our long-term debt to BAA1 with a stable outlook.

Our financial strength today affords us a great deal of flexibility as we consider key decisions around investments and the return of cash to shareholders.

One method of returning cash to shareholders is through our share buyback program.

During Q4 we continued to aggressively execute on the normal course issuer bid.

We closed the year having purchased and canceled almost 47 million shares, representing over 3% of Suncor's total shares outstanding.

Our weighted average purchase price was less than CAD31 per share, which we, of course, would see as excellent value given the much higher intrinsic worth of the Company.

Dividends are the other means for Suncor to return cash to shareholders.

And in 2012 we continued our strong dividend growth trend by increasing the quarterly distribution by 18%.

And that gives us a five-year compounded annual growth rate of over 20% on the Suncor dividend.

We will be conducting our annual dividend review with the Suncor Board of Directors shortly, and I'm very much looking forward to providing an update to all of you on our next call.

With cash flow from operations exceeding CapEx requirements and more than CAD4 billion of cash on hand, we will be looking for opportunities to put those excess funds to work.

So, with that, I would like to turn now to 2013 and highlight a few items from our guidance, which was released in Q4, and you can find that on our website, if you are looking for it.

First, we're focused on profitable growth through increased reliability and the continued ramp-up of Firebag.

The midpoint of our production guidance for 2013 equates to about a 12% growth in Oil Sands production, and an 8% overall growth versus our 2012 results.

A great example of reliability and increased production is our Edmonton refinery, where, as Steve mentioned, we've upgraded the nameplate capacity to 140,000 barrels per day.

In order to reflect this change, we've also updated the refinery utilization numbers in our guidance.

As everyone knows, cost management is a priority for Suncor, and we have continued to ratchet down Oil Sands costs.

The 2013 guidance range of CAD33.50 to CAD36.50 per barrel represents a significant but, in our view, achievable reduction from our actual 2012 average cost of CAD37.05 per barrel which was down a full CAD2 from our 2011 average of CAD39.05 per barrel.

On the CapEx side of things, our 2013 budget calls for CAD7.3 billion of spending, about 45% of which is on growth projects.

In managing the spending, we will continue to exercise strong capital discipline and make the tough decisions where necessary to ensure that capital is deployed efficiently.

A key area of increased investment for the Company in 2013 will be in growth capital for our E&P group where we will begin to ramp up spending on the Hebron project off the Canadian East Coast.

The project was sanctioned by all partners in December and represents a very attractive investment for Suncor.

It is expected to reach peak production net to Suncor of over 30,000 barrels per day with first oil coming in 2017.

And, of course, we were able to fund the 2012 CapEx program entirely from cash flow, while also accelerating the return of cash to shareholders.

And we would expect that to be the case once again in 2013, while we also pay down maturing debt of CAD300 million.

So, despite a difficult pricing environment and some operational challenges in the fourth quarter, we completed a very strong 2012 and we're set up well for continued success in 2013.

As Steve mentioned earlier, we will remain squarely focused on operational excellence, profitable growth, a sustainable business model, and industry leading returns for our shareholders.

And with that, I will pass the mic back to Steve Douglas.

Thank you.

Thank you, Steve and thank you, Bart.

I just wanted to reiterate that our 2013 guidance, which is updated, is available on the website, suncor.com.

Just a couple of notes about the financials, the LIFO/FIFO adjustment in the fourth quarter was a net negative of CAD104 million, or approximately CAD0.07 per share, and for the year, was a negative CAD154 million, or CAD0.10 per share.

Stock-based compensation in fourth quarter was a net cost of CAD33 million, and a net negative of CAD283 million for the year, CAD0.02 per share and CAD0.18 per share respectively.

Finally, the FX impact, the exchange, a negative CAD80 million in Q4, but a positive CAD157 million for the year.

We'll open the lines up now for questions.

I would ask you to keep these at a strategic level for the most part as our typical practice, again, is that the IR team and the controllers will be available throughout the day for any detailed modeling questions.

I would also ask that we queue the calls first to the investor community, followed by media at the end of the call.

With that, Ann, I will ask you to open the lines.

Thank you.

We will now take questions from the telephone lines.

(Operator Instructions)

Greg Pardy, RBC Capital Markets.

Thanks.

Good morning.

So, I will hit you with three quick ones.

First one is just for Steve.

In terms of Fort Hills, I hear everything you are saying in terms of capital discipline, just wondering if there are considerations other than returns on that project that would propel you to do it.

I don't know any other way to ask it.

But that's question one.

Second one is just on Oil Sands production levels for January.

It sounds like harsh weather impacted extraction, but I'm just wondering if you can give us a sense to how things are running currently, or levels currently.

Then the last question is on Montreal.

If the line 9b reversal does come through, what are the plans for the Montreal refinery?

Thanks very much.

Okay, thanks, Greg.

Let me just take those three questions.

So, the first one on Fort Hills, by far, the most important consideration around Fort Hills is economics.

There are some other minor considerations, but none of them really material to the project.

So, I think you are asking about sort of some of the regulatory and commitments we took about developing that asset.

Overall, the deciding factor will be around the economics of the project, and will set the normal sort of hurdle rates that we have.

Just the second one, a quick update on operations, and I'll take this opportunity also to briefly speak to Terra Nova.

In Oil Sands, the challenge we had in October and November was around the upgraders.

We've largely -- and those rolled through a little into December.

Those are behind us now.

None of them were major issues; none of them caused major incidents.

Frustrating, but we've moved through those.

The upgrading in January has been very good, so when you see the final numbers, you will see the proportion of material upgraded is much higher.

The challenge we've had in January -- again, nothing of any great significance.

January is actually a record month for us in terms of Oil Sands production.

The issues have been around the mine and extraction.

Simply, we've had extended cold weather, so nothing significant.

You just have to do more maintenance on those facilities as those weather conditions present.

So, we're working through those, and things are looking good in Oil Sands now.

Just literally, a very quick stop press update on Terra Nova.

We've had a bit of a breakthrough, this morning actually.

We've now got the second drill center on.

We're starting to -- which is very good news -- we're starting to ramp the production up, and over the next few days, if the weather cooperates, we'll start to bring that facility up to capacity.

So, with the two drill centers on, that will take us up to approximately 40,000, 45,000 barrels a day of the 65,000 barrels a day capability of Terra Nova.

So, good news, a little bit late relative to its timing, largely related to the closing of the weather window when we had the riser issues.

So, we now move on to the final segment.

As you know, we've got some issues there, so it will be longer before we're able to make progress on the third segment.

But good news that we're now getting Terra Nova back to approximately two-thirds of its design capability.

Your third question was on Montreal, and I will answer it in its simplest form.

There are opportunities with Montreal right now.

We've got a very cooperative relationship with the union, with government over in Quebec.

So, we've been pleased to keep our facility at the Montreal refinery is an important part of our business.

As line 9 starts to reverse, we get the opportunity then to look at other opportunities.

We have a matrix of opportunity from what I would call light integration right away through to restarting the projects that used to be there around putting cokers in.

So, we're right in the midst now of doing the economics and selecting between those projects.

But potentially, quite optimistic, because it's a good refinery.

It's got good assets.

It's got a very high-quality group of employees -- 400 employees there.

They've done very well in terms of being amongst the best.

It probably sits there right at the top of one of our best refineries.

So, great opportunity then to invest and take advantage of being able to get cheaper [crudes] in there.

Thanks.

Just one follow-up.

There's no reluctance then to build your growth strategy around in situ going on, because you are getting penalized for projects you're considering on the mining side, which are relatively modest in -- at least from a production standpoint -- in the context of everything else you have going on.

So, if you were to say no to Fort Hills, it still looks like you have a pretty strong growth profile, but there's no reluctance then to embrace Firebag and MacKay River and so forth, in terms of growth trajectory in Oil Sands, is there?

No reluctance at all.

What I would say is, we've always had the view that there is a balanced path forward for us.

And if you actually look at the opportunities we have ahead of us, and of course, with the cash flows we're talking about and the project portfolio we have, we have the opportunity to start to look at some projects.

I will briefly talk to those for you.

If we were -- and of course, we haven't made a decision on Voyageur yet, what's happened and what we've announced is an accounting impairment that's there.

We will have the decision made before the end of the first quarter.

But if there were a decision not to go ahead with that project, you have even more capital available.

So, in situ will play a significant part in our plans forward.

Let me talk to you briefly about the opportunities.

We have 12.5 billion barrels of in situ resource.

We're working right now on expansion opportunities for Firebag and MacKay River, both of which are below full-cost extensions.

We also have amongst some of the industry's best other resources in Lewis and Meadow Creek.

We're currently working on both of those projects.

We have what I would call debottleneck opportunities on the in situ plants that we have, extraction and upgrading the base plant.

So, we have a full suite of projects.

When we come out with the decision on Voyageur at the end of March, my plan is to talk in more detail about these other opportunities.

But in either case, whatever happens with Voyageur, you will see a rebalancing around in situ, because in situ projects are looking very attractive at the moment.

Thanks very much.

Guy Baber, Simmons & Company.

You all have specifically noted that in 2013 your Oil Sands growth capital will be at least partially dedicated to building new infrastructure to enhance marketing flexibility and take-away capacity.

I was hoping you could provide a little bit more color with respect to those specific initiatives you might be undertaking -- maybe what the timeline might be through the year.

Just trying to get a better sense and better appreciation of how those projects might impact reliability of operations going forward, and might drive any improvements and consistency of production output, especially given some of the unplanned downtime that we've seen here recently.

A lot in that question.

Let me take a step back, and put what we've announced today in context.

Maybe I will take one step even further back.

Right now, Suncor, relative to its competition, is in a good position with take-away capacity.

So, rarely does access to market or the large differentials that are in place have a significant impact on our performance.

And that's part of our integrated strategy.

When there are discounts around, particularly heavy products from Oil Sands, we're able to capitalize on that in our downstream because of the degree of integration we've had.

So, we are broadly supporters of access to multi-markets from Oil Sands to the industry.

That's east, that's west, that's south, and potentially -- there's some discussions now around north.

I think those conversations are reasonably well understood, and I wouldn't propose here to go into detail other than to say Suncor has been supporting all of those projects to get access to multiple markets, and we think that's important.

The announcements we've made today are about local connections into the pipeline assets.

So, it's about how we get it from Fort McMurray away locally to Edmonton or Hardisty, so we can then get it into the bigger pipeline systems.

That is about flexibility and about being able to get the best margin for our projects.

So, it's good news.

It further consolidates Suncor's position in terms of making sure we don't have restrictions, and it puts us into the bigger systems, which I think you're very familiar with, and we're strong supporters of those projects.

Okay, great.

Then I had a refining question as well.

But obviously the refinery is incredibly profitable in this environment, thanks to the access to advantaged crudes.

Just wondering, aside from line 9b, are there any other initiatives underway or things you're doing to further optimize the feedstock slates?

Any opportunities perhaps to rail crudes incrementally into some of your western refineries?

Or at this point, are you pretty happy with the way those refineries are being supplied?

Very pleased with the quality of the operation, and the reliability of the refining assets.

Of course, very important is to be able to match that reliability to when the market offers margins around those business.

So, a very strong operation from those guys.

Yes, we continuously review.

We look at the assets we have in each of those refineries to see if we want to invest, and we're continuously doing that, and there are some real opportunities for us to do that.

Particularly on your question about rail, the answer is, yes, we are looking in detail at some rail opportunities, particularly around the Montreal refinery as well.

Because, again, it gives you a great deal of flexibility, particularly around some of the poorer-quality streams from western Canada, where you could get those in sooner than pipelines could be reversed.

And even if pipelines are reversed, you have an opportunity to make a good margin.

So, it gives you some flexibility.

So, you will see us talking about rail facilities, particularly into Montreal.

Okay, great.

I will leave it there.

Thanks, guys.

Thank you.

Arjun Murti, Goldman Sachs.

Thank you.

Just a follow-up question on the differentials in your strategy going forward.

You've highlighted and we've certainly agreed with -- you've been integrated, you've had the upgraders, you've had the refineries.

As we look out beyond 2015, both Suncor and certainly industry at large becomes increasingly long bitumen.

Do you have a strategy to want to continue to stay fully integrated?

And if so, how do you handle that?

I know there are a lot of announced pipeline projects, but when you look at Gateway, even on your estimates of 2019 and beyond, I think whether Keystone Excel gets approved within this President's administration or not is uncertain.

It may, it may not.

But you have been in control, and it's served you well.

How do you think about the desire going forward?

The question really is for the 2015 and beyond growth, which I know is some time away, but you and a lot of others are going to be more exposed to these ongoing differentials.

Just wanted to understand your thoughts around that.

Thank you.

Great point, Arjun.

Strategically, we've been very well positioned.

The simplest way I think demand at the moment is, effectively we have a spare refinery in terms of the integration model right now.

So, we have some runway ahead of us in terms of our ability to maintain the ratio of exposure to bitumen and exposure to these discounts that refineries are taking advantage of at the moment.

You're referring to Montreal, obviously.

To Montreal.

Correct.

So, I like our position.

We're very well integrated now.

We effectively have a spare refinery in the context of integration.

We're not necessarily comfortable with that, so we continuously ask ourselves this question.

How much integration do we want to maintain as we move towards the million barrels a day and probably beyond?

We keep asking it.

There's no need to make decisions right at this moment because some of the pipeline decisions are imminent and have a profound impact on the likely future of those margins.

So, every asset that's bought and sold on this continent we take a look at.

We have, in our minds, some ratios that we're comfortable with, and we will continue to have a point of view on what we think that market looks like going forward.

Clearly, we do not expect the type of margins and differentials we're seeing now to stay in the long run.

I think whether individual pipelines go ahead, I don't think they will constrain the growth of Oil Sands in the mid and long run, and I believe that these differentials will start to collapse over time.

How do you think about real and other stuff that you can control versus, again -- there's no question of sort of ultimately pipelines get built, but ultimate can be a long time away, especially if we're talking to the west coast of Canada.

I'm intrigued by your going-north potential.

And again, could be dependent on a US administration for approvals also.

A tricky thing when politics come into account.

It's really the idea of controlling other options, whether it's rail -- I guess rail is the -- kind of the one I'm asking about.

One of the things I would highlight is a strength of Suncor's strategy is our ability to play in that logistics arena.

So, we have a trading group, a strong trading group, probably an industry-leading trading group around heavies.

We have detailed involvement in the pipeline and tankage that occupies the middle ground.

We absolutely believe that rail has a part to play in there, particularly it gives you flexibility, it gives you pressure -- relief in the system, if there are any particular issues.

So, I think that rail has a part to play in the short term.

I think, if the industry is rational, then pipelines will be the solution in the long run.

There is no doubt that rail will have an important part to play in the mid-shore -- mid and long term through there as well, because, of course, once the rail facilities get built, then they have a life expectancy, so they will be used.

So, I think they keep a nice downward pressure on prices as we get into the 5-, 10-, 15-year type periods.

That's great.

Very quick follow-up for Bart.

There was a decent working capital outflow.

Would that reverse, or is that something that just happens and we should count on it going forward?

Hi, Arjun.

That's a good question.

It's largely due to pipeline and tankage [filled] at Oil Sands, the Wood Buffalo line.

I got it.

Thank you.

Thank you.

Paul Cheng, Barclays.

Bart, I think in your press release you were talking about a dispute between you and the Federal Government on the [Buzzard diverse PIK notes].

Can you just give us a little bit more detail in terms of what was the dispute, and what they are disagreeing with you guys?

Yes, thanks, Paul.

So, quick background on it.

This relates to -- actually it's going back almost 10 years now, when Petro-Canada was looking at investing in the Buzzard field, and chose at that time to put on some forward-price hedges on future production in order to make the bid at that time.

In hindsight, it's always 20/20.

Prices, of course, went up, and Petro-Canada chose to unwind those hedges in 2007.

And the loss at that time was booked against income on a tax basis.

So, that's essentially where we're at.

The accounting treatment for those losses, we view as being an absolute standard approach, one that typically would be applied to any similar derivatives transaction, so there's nothing exciting there from our point of view.

It was supported at that time, and continues to be supported by our third-party experts and advisors.

The only thing I can say about it -- the only distinguishing aspect of this particular transaction appears to be the size of the loss.

So, we're very confident in our position, and believe the matter ultimately will be settled in our favor.

In order for us to appeal, if there is a reassessment against us, and go through that process, we will have to post some form of collateral or cash.

Given our strong views on it, it would likely be the minimum.

And when you look at that amount of cash relative to the cash on our balance sheet and our cash flows, we wouldn't expect this would have any impact on our plans for returning cash to shareholders.

Thank you.

Maybe this is for Steve.

Steve, in the press release, you guys are also saying that you are doing some more in the Cardium oil formation.

How should we look at it?

As a company, do you look at it as just that maybe a one-off opportunity, or do you think you may open as a second late in addition to Oil Sands?

The tight oil opportunity could be another focus area for the Company longer term.

And that also, if you can tell us what kind of land position that you may have at this point.

Okay.

Yes, let me just make some broader comments rather than around specific reserves.

We do have some reserves -- obviously, significant reserves other than Oil Sands.

We are looking at the opportunities they present to us.

Some of those are particularly strong around unconventional gas.

So, part of our strategy, and we talked about a couple of calls ago was, as we were selling down our conventional gas business immediately post the merger with Petro-Canada, very successful, we got good prices, we sold somewhere between CAD2 billion and CAD3 billion worth of those assets.

We still have some of those left as a small [run] of operations now.

We're looking at the opportunities around that going forward.

And then we have an opportunity to move more to an unconventional gas business where this tight gas is a real opportunity.

And all of the opportunities then downstream of that are there.

So, it's a significant material resource.

We have the possibility to look further down the road of producing from that.

If you were going to do that, we would have a similar debate to the debates that are going on at the moment about -- do you forward integrate that to an LNG plant to different markets?

So, lots of opportunities there.

Nothing particularly that we have to enact at the moment.

Steve, on Cardium, is that an oil formation or are you looking for oil or you are looking for gas?

Sorry about that, Paul.

It is oil.

But I would not characterize this as material.

So, really not something we're highlighting at this point.

Happy to take that one off-line with you and some of our E&P folks.

Okay.

A final question.

Steve, you talk about you are not totally happy with the upgrader reliability.

Can you share with us what kind of initiatives you may be taking to further improve the reliability there?

And at this point, when you look at that, is the issue that we have seen in the last year or so, is it hardware related, or is it more of a process issue or is it a [cultural] personnel issue?

Thanks, Paul.

It's important, because upgrading is something we are clearly focusing on.

So, let me just step back and remind you of where we've come from, and it will help in contexting where we're going to.

So, some big issues.

Most of our reliability issues around upgrading, interestingly, have been around the new upgrader, not the old upgrader.

Unit one actually operates very reliably.

So, we know how to do it.

It's a question of getting upgrader 2 into a similar position.

Largely, operational excellence is about people, the hearts and minds, the procedures, and the assets themselves.

The first two pieces, still working on it.

It's a journey; you never get there in terms of the culture and the protocols and procedures.

Those are working very well, still some progress to make.

The issue has been around some of the hardware.

The good news is that because of the people and the processes, these have been minor events.

They're frustrating, but they haven't led to fires or major upsets on the plant.

They've been controlled shut downs to do unplanned maintenance.

The last ones were about cracks in metallurgy, and ahead or downstream of the upgraders.

We were aware of it, we were watching it.

It was in the next turnaround to put a different design in.

Because we could see some things happening, we took a controlled shut down and did the work pre-emptively.

I'm really pleased.

That's why I say, underneath, I can see significant indications of improvement.

That's what it takes, to the second turnaround, to fix some of these things, because there are some hardware.

Most of -- all of the issues that we've identified and have designs for, we've started the work on those.

So, we've either gone in and already done the repairs on them, or we will plan to do them at the next turnaround.

So, I see it as a decreasingly important issue.

I just can't get there quickly enough, if you know what I mean.

We're seeing it improving.

We're having less events.

The events that are happening are not quite so material.

We won't get, I don't believe, world-class on these upgraders until we get to the other side of the next turnaround.

The good news is, unit one is operating well and we understand it.

Within the Company, we have a real understanding of this.

We've just increased -- upgrading is part of the Edmonton refinery.

We've actually increased the upgrading capability there because of what we've learned and what we've executed.

And we've moved our very best people across from the downstream into upgrader term to accelerate this plan.

So, I'm comfortable with it.

We understand the issue, we've got the right resources on there, and I'm putting the pressure in to make sure we realize the benefits as quickly as we can.

Thank you.

Thank you.

Amir Arif, Stifel Nicolaus.

First on Voyageur.

Just trying to get a sense -- is this a simple go or no-go decision, or do you have a potential to change the size and scope of the project?

Instead of building a 200,000 barrel a day upgrader, is there a minimum size of 50,000 or 100,000 that you could envision doing, putting it in stages?

Let me make a few comments around Voyageur.

We're working diligently with our joint venture partner.

The relationship is in good health.

It's tough work because what's happened around Voyageur is the market has substantially changed through -- our view of the market has changed substantially as we've been developing the project.

So, as we take full account of the consequence of these mid-continent crudes coming on, then the light/heavy margins are being squeezed, in our view.

So, we're looking at all of the options going forward.

And without going into too much detail on the options we're looking at, the book ends are, at one extreme you could go ahead with the project as it is.

At the other extreme, you could cancel the whole project and go ahead with nothing.

And there are a whole range of options in between there.

The reason it takes a little bit of time for us to work through, of course, is because for the partners, the position is different.

For Suncor, because we have assets on the ground, we have the capability of marketing all of the bitumen from our growth plans without Voyageur.

We understand that market.

We have the [buildings] available, we have a marketing plan that we know can work.

So, the options for Suncor are relatively easy to look at.

For our joint venture partner, who we are working closely with, we want to help through some of these choices, more difficult because their assets on the ground aren't the same.

That's one of the benefits of the joint venture partnership.

We think we can work together to start to identify which is the best of the options, and help them with some of their challenges.

So, it is going to take us to the end of March to get through that review.

I'm very optimistic that we will come to a joint conclusion, but we haven't selected which one of the range of options we will look at, or come forward with that at the end of March.

There are not, at this stage in a project of this size, there is no easy way to go to a 50%- or 25%-size upgrader.

That helps a lot, Steve.

Just secondly on Fort Hills, the sanctioning in the second half, will we get a CapEx update with that, and should we be thinking of that as a 3Q event, or closer to year end?

Yes, it will be a normal -- the reason I have used the phrase second half is because it is bang in the middle, plus or minus a week or a month into the middle of that six-month period.

So, end of the third quarter, slightly behind.

And we'll do all the normal stuff.

We'll talk about our view of the range of costs, our view of the economics, and we will talk about schedule in detail.

Thank you.

Thank you.

David McColl, Morningstar.

Good morning.

Two kind of questions here.

First on Voyageur, then Fort Hills.

So, recognizing the fact that you are going to provide a decision in a few months on Voyageur, just wondering if you can give any details on to the financial or other implications if the project were to be canceled?

And if we could see some horse trading of other assets to deal with a cancellation of Voyageur.

And then related to Fort Hills and Joslyn, I'm just wondering, what requirements are in place right now or kind of going out, let's say, five-plus years in order to maintain the Fort Hills and Joslyn leases?

In other words, is there any commitments that have to be undertaken in the next five-plus years?

Thank you.

Okay.

Thanks.

In terms of horse trading, I wouldn't use that expression, but we have joint venture partners in there, and within the joint ventures, we have different partners in each of the ventures.

We have clearly the Voyageur upgrader, Fort Hills, and Joslyn.

These joint ventures were a coming together of partners who believe they have a longer-term future together.

Not just around these assets, but potentially other assets as well.

So, clearly, wherever we land, at the book ends, whether it's to go ahead with Voyageur as we've seen it, whether it's to -- at the other book end -- to cancel the project, there are all sorts of options.

And because there are different partners to play, Total being the biggest one, but other partners in there, Teck as well when we get into Fort Hills, clearly there are benefits that the partners bring.

So, there's still some deals to be done around how the final parts of those projects would progress.

There's also the opportunity, particularly with Total, to talk about other things as well.

And I met with Christophe just before Christmas, and we were both very optimistic about the long-term future of the joint venture.

Clearly, joint ventures are tested most when you have difficult times together, but both of us started from a position of -- we still support the joint venture, we still see it has value.

It has value around existing assets.

And in the future, there may be the potential to talk about other things, but we have nothing now, nothing in particular to talk about here and now, or that we're looking at in the short and medium term.

On Fort Hills and Joslyn, these regulatory approvals are complex.

In its simple form, there is nothing that I'm overly worried about.

Fort Hills has some timing constraints around it, but to be honest, that resource is going to get developed.

We've talked about -- when I spoke on the last call, we talked about the most likely case for the project is sanctioning towards the end of this year with a view to first production in 2017.

That is still the most likely case.

We take into account timing considerations, but, you know what, we will always be the best people to develop that project, so I don't see them being critical to the sanction decision itself.

The sanction decision will be made around economics.

And the good news is, of the three projects, this is currently the best one.

And we've been able to make some significant progress with the returns on that project, and we'll give you some more details when we get to the sanctioning stage.

That's great.

Thank you.

Thank you.

Mike Dunn, FirstEnergy.

Thanks.

My questions have been answered.

Thank you.

We will now take questions from the media.

Jeff Lewis, Financial Post.

Hi, there.

Steve, with the Montreal refinery, do you have a timeline for a decision on which direction you'd go, as far as the addition of cokers?

And can you also talk a little bit about what sort of criteria will that investment decision be based on, in terms of -- would a yes or no on Keystone Excel accelerate those plans?

Yes, let me talk first around Montreal and timing.

We like the Montreal refinery.

Very constructive relationships, as I say, with government and employees.

We have a range of investment opportunities there.

Clearly line 9 has a significant part to play in how far you go to integrate the refinery.

At the front end, we're already looking at flexibility around rail.

The decision to fully integrate clearly is partially dependent on line 9, and line 9 reversal.

I've stopped speculating as to when regulatory approvals get given for pipelines, because it's a very difficult call to make.

We've already, as you could imagine, in terms of the cokers in Montreal, not only do we have a relatively clear project, we have a lot of the assets already in our ownership because of the stage of development when Petro-Canada and Suncor merged.

So, we're in a very advantaged position in terms of how quickly we could make a decision, and then how quickly we could move.

I wouldn't want to make any more timing calls on that, other than it's partially dependent on line 9, partially dependent on the continued support, and we've seen great support from Quebec and from the unions.

Given we have those things, and that the cards start to fall in the right sequence, it's something we can move on relatively quickly.

Okay, thanks.

Thank you.

Scott Haggett, Reuters.

Hi, I'm wondering if you can give me any sense of what difference a large light oil line to the East Coast would make on your picking up of spreads between light and heavy over the mid-term?

Hi, Scott.

It's Bart.

So, question on a large light oil line to the East Coast.

Steve earlier mentioned that we're very supportive of all of the options and opportunities to bring access to other markets, whether it be west to east or south.

So, we would be supportive of that option as well.

To the degree that, that line could move, I think both light and heavy product, and open access up for markets from the west, we would see that as very positive.

And depending on the timing and size of that line, obviously it would work to resolve some of the constraint issues we have now, and tighten up those differentials.

So, we would see it as a positive.

Thank you.

I'm mindful of time here, operator, and I would ask that we take one last question.

Thank you.

Nathan VanderKlippe, The Globe and Mail.

I'll try to sneak in a double-barrel question then.

I'm just wondering if you might be able to provide a bit more detail on sort of your pessimism on upgrading economics.

I think you mentioned the factor of sort of rising light volumes out of the US, but if you could provide a bit more detail on that.

Is there any specifics you can point to on some of the things you're doing on the ground to bring down your cash costs at the Oil Sands that you could help describe for us?

Yes, the only thing I would add to upgrading economics is, I think everybody was surprised with the speed with which the mid-continent tight crude came into production.

What that's doing is, I think if you go out in the five-year and beyond time frame, clearly what that is starting to do is we have a mix challenge on the continent.

And what I mean by mix is that balance of light to heavy.

So, we have too much light, effectively sweet, crude, which is what upgraded synthetic crude effectively is.

And, if anything, we have too little heavy crude.

That's quite a change.

So, it's a bit of a moving feast in terms of how you make those judgments in point of view.

Our view is that that will cause a squeeze on upgrading margins and make it challenged.

And that what will happen in that world is upgrading -- or these light crudes will start to get exported from the continent.

So, that's our view on upgrading.

And then on the second question on cash costs, yes, it's really dead center on operational excellence.

So, it's all of the detailed stuff.

The most important piece around Oil Sands and in situ, because of the fixed costs associated with them, is that you have to -- you have to make sure you fully utilize your assets.

So, what you have seen is, as we're starting to more fully utilize the assets, the costs naturally come down, particularly important on in situ.

So, the fourth quarter for us was predictably a difficult time, because we brought Firebag stage 4 on.

We had all of the costs and none of the production.

So, we anticipated costs coming up in the fourth quarter.

Quarter three was much more of an indicator of where we go as we start to fill the assets.

So, you will see costs start to come down as Firebag stage 4 increases.

The second big macro effect on costs was, if you remember, we were working through what we call a lean patch in the Millennium mine.

We've been through the worst part of that, and that progressively gets better as we go into '13, so you will start to see those costs come down.

The final part, and actually it's one of the most important parts of this, is what I would call the nuts and bolts of the operation.

It's hard-core managing the real controllable costs in our business.

It's about our supply chain, it's how well it works, it's how well we plan work, and execute work, and that's where I'm very encouraged.

We are seeing the underlying costs, as the operation is becoming much steadier up there, we're able to focus our attention on good business.

And Mark Little and his team are making real progress on all three of those -- the mining costs, the in situ costs, and the grass roots of his business.

Thank you very much.

So, I would like to thank everyone for participating today.

And just a reminder that the IR team and Controller's team will make every effort to be available throughout the day if you have further questions.

With that, I will say thank you, operator, and pass it back to you to sign off.

Thank you.

The conference has now ended.

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