Suncor Energy Inc (SU) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Suncor first-quarter 2013 financial results conference call and webcast.

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

Please go ahead.

Thank you, Wayne, and good morning to everyone.

Welcome to the Suncor Energy Q1 shareholder call.

I'm here in Calgary and with me are Steve Williams, our President and Chief Executive Officer and Bart Demosky, our Chief Financial Officer.

Just before we start, I should note that there will be in the comments today forward-looking information.

Actual results may differ materially from expected results because of various risk factors and assumptions.

These are summarized in our AIF and are available on our website.

Certain financial measures that we refer to are not prescribed by Canadian Generally Accepted Accounting Principles.

And for a description of these, please see our first-quarter earnings release.

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

With that, I'll hand over to Steve Williams for his comments.

Good morning and thank you for joining us.

Since our last quarterly call just three months ago, our Company has taken some major steps forward.

In the past few weeks alone, we made two important announcements in support of our business strategy.

Our first-quarter release yesterday contained details of strong financial results.

We also announced a significant increase to our dividend and a new round of funding for our share buyback program.

In light of those announcements, I thought I would take a few minutes right at the start to discuss our commitments to capital discipline.

I've been very clear that Suncor will not pursue growth for the sake of growth.

I've also said we will rigorously manage our capital spending program to ensure strong returns for shareholders.

Today, I would like to be even more specific about our approach to capital discipline.

Suncor is a uniquely positioned growth company.

We possess a combination of resource, expertise, and balance sheet that is unmatched in the industry.

Suncor's integrated business model has generated almost CAD20 billion in operating cash flow over the past two years.

And as we put that cash to work, we are guided by some very clear principles.

First, we will target a meaningful, sustainable, and competitive dividend that will grow with our earnings and cash flow.

This most recent dividend increase, the largest in Suncor's history, will result in over CAD1.2 billion being returned to shareholders in the form of dividends over the next 12 months.

Second, we will invest in our base business to sustain and continuously improve performance.

This year, our sustaining capital budget is just shy of CAD4 billion, and as we grow our asset base, we will strive to maintain or even reduce that number.

Third, we will invest in profitable growth, but only if those investments deliver returns that are well above our cost of capital.

In the near term, our Oil Sands growth is largely made up of low cost, high return debottleneck projects that will significantly increase production from our existing operations.

Our growth CapEx budget this year is about CAD3.3 billion.

While that may increase in future years, you should not expect to see a spike in growth capital.

And finally, when we generate cash over and above what is required to fund our dividend, our sustaining capital, and our growth, we will look for opportunities to repurchase our common shares at attractive value.

We've bought back over 5% of the company in the past 18 months.

At current levels, we believe investing in our shares represent excellent value.

We will continue to carefully scrutinize our capital expenditures.

In 2012, we were able to deliver our capital program 12% under budget.

We are working hard to achieve capital spending reductions this year as well.

As we go forward, you can expect a continued focus on rigorous management of our capital spending program.

What we are really talking about is applying the same operational excellence principles to our capital management that we are successfully employing in our operations.

The rigorous, disciplined, repeatable set of processes to drive consistently positive results.

Speaking of operational excellence, let me turn my attention to our operational performance in the first quarter.

The first quarter, Suncor's oil production rose by 9% year-over-year.

The ramp up of Firebag production added over 50,000 per day, 50,000 barrels per day, and allowed us to set another Oil Sands production record for the quarter.

I was particularly pleased with the reliability of our Unit 2 operator.

It operated at over 95% of capacity and that's continued into April.

That enabled us to post our second best quarter of SCO production ever and, worth noting, we achieved that level even though the Unit 1 upgrader performance was declining as it approached its major maintenance turnaround that's now under way.

The flexibility and integration of our Oil Sands operations were also a highlight.

In January and February, we were able to move significant in situ bitumen to our upgraders to compensate for extraction maintenance that reduced bitumen production from our mines.

And whilst that resulted in lower overall sales early in the quarter, we were able to maximize higher value upgraded volumes when bitumen prices were depressed.

This improved our bottom line performance and is a good example of the value of a flexible, integrated model.

In our exploration and production business, oil production was stable and reliable as we came back from significant maintenance late in 2012.

Of note, we were successful in restoring production to all drill centers at Terra Nova in February, and that timing exceeded our previous expectations by several months.

In the refining and marketing group, our plants ran an average of 96% of capacity.

As a result, we took advantage of strong refining cracks and generated record earnings for the quarter.

To put this in perspective, the industry average utilization in quarter one was just under 84%.

Reliability and a business model that allows us to sell out more than 100% of our production and then trades to cover any shortfalls has made Suncor's R&M network the North American leader in profitability on a per barrel basis for the last three years.

Overall, operational performance was strong in the first quarter.

Our assets ran reliably.

Our integrated model allowed us to post strong financial results, despite volatile crude pricing in Western Canada, of course including the extreme heavy crude discounts they were seeing in January and February.

During the quarter, we also made some significant progress in terms of overall business strategy.

As I said earlier, we're allocating our capital in a very disciplined manner to optimize our existing operations and profitably grow the business.

As part of that discipline allocation of capital, we regularly review our portfolio with a view to improving profitability.

As a result with this process, we made two very important decisions in the first quarter.

Firstly, after an extensive review with our joint venture partner, Total E&P Canada, we elected to purchase Total's interest in Voyageur and cancel the project.

It was clear that moving forward with Voyageur would be odds with our commitment to profitable growth.

So, we made the tough decision and I'm confident it was the right call.

In addition, we were able to acquire some very good assets that will add substantial value as we continue to grow our Oil Sands production.

And those include significant tankage, blending facilities, and supporting infrastructure.

And those were acquired at fair market value.

Second, during the quarter we negotiated the sale of our conventional natural gas business for the sum of CAD1 billion.

This deal has an effective date of January 1, 2013 and assuming it closes in the third quarter of this year as expected, we anticipate booking a gain.

This transaction reflects our commitment to focusing our investments in businesses that offer profitable growth and strong returns for our shareholders.

Given its decline in production and marginal profitability, the conventional gas business did not meet those criteria.

We have a wealth of growth opportunities that do meet our investment criteria.

In E&P, the Golden Eagle and Hebron projects have strong economics and are moving steadily towards oil in 2015 and 2017, respectively.

In Oil Sands, work is under way on a host of highly promising growth projects.

I'm pleased to announce today that we are investing in a series of low capital, high return debottlenecking and expansion projects that are expected to add a new 100,000 barrels per day of Oil Sands production over the next four years.

These include expansions that are already under way at our MacKay River In Situ plant and our mine extraction facilities.

Other projects such as the expansion of Firebag well beyond its 180,000 barrel per day design capacity, are still in the early stages of design but are moving steadily forward.

Looking further out, we are hard at work on a strategy to profitably develop our massive in situ resources.

These include the high quality Meadow Creek and Lewis deposits.

We envision a cost effective, modular replication approach that will allow Suncor to grow in situ production in a very consistent and economic manner.

We expect to be in a position to lay out more details on this plan by the end of the year.

And then, finally, our development team continues to work towards a sanction decision on Fort Hills mine later this year.

A point I would like to make in regard to Fort Hills and other future mining project, Joslyn, is that we have taken substantial financial risk out of these projects through our joint venture partnership arrangements.

It's important to understand that total Suncor expenditures on these projects would be quite small relative to Suncor's cash flow generation and overall capital spending program.

And, of course, we are applying the same rigorous economic criteria to these projects as we do elsewhere in our business.

Simply put, we will only invest in growth that delivers strong returns for our shareholders.

To sum up, it's been a good start to the year.

We're on track to meet our operational, financial, and growth commitments and deliver strong value back to shareholders.

I'm going to pass over now to our Chief Financial Officer, Bart Demosky, to provide some further details on key financial metrics and to talk about our plans to return cash to shareholders.

Bart?

Thanks, Steve, and good morning, everyone.

I would like to begin by echoing Steve's comments on creating shareholder value.

Suncor is uniquely positioned to generate strong and growing earnings from today's business and invest in tomorrow's profitable growth.

All while delivering meaningful cash back to our shareholders, and we can do this even in a challenging market environment.

The first quarter was a great example of a challenging environment.

We saw continued volatility in crude prices, bitumen netbacks dropped by as much as CAD50 per barrel from the previous quarter before rebounding in March and April.

This extreme cycling of crude differentials has become the norm in Western Canada, and we fully expect it to continue until such time as supply, demand, and take-away capacity are in balance which is likely to take several years.

Suncor's integrated business model buffers us against the unpredictable market swings, and once again this quarter we produce solid financial results.

Operating earnings improved to CAD1.4 billion, including a record CAD782 million from the refining and marketing business.

Cash from operations was CAD2.3 billion and that includes another record of CAD1.1 billion from refining and marketing, and that's despite a CAD93 million decrease as a result of the Voyageur decision.

With expanded crude price differentials driving down the Oil Sands average realized price, it's important to carefully manage costs and we are definitely on the right track.

Despite a very harsh winter in Northern Alberta that impeded our production at times, our Oil Sands cash costs per barrel dropped by almost 9% from the same quarter last year, to CAD34.80.

And this included a CAD32 per barrel cash cost in the month of March, which should give everyone an idea of where we can be when our operations are running according to plan.

In situ costs per barrel fell by more than 25% in the same period to CAD16.80, and that's including energy costs, as Firebag 4 production ramped up steadily.

With continued strong cash flows and careful cost management, our balance sheet is in great shape.

Our net debt is CAD6.8 billion.

Our net debt to cash flow from operations is 0.7 to 1 and we have ample liquidity to fund our capital priorities for 2013 and beyond.

As a result of our strong balance sheet and positive earnings outlook, we announced an increase in the quarterly dividend of 54% to CAD0.20 per share.

As Suncor's CFO, I am particularly pleased with this decision as it underlines our commitment to capital discipline.

It sends a clear vote of confidence in the Company's ability to continue generating strong and growing earnings.

And, of course, today's announcement of 100,000 barrels per day of new, low cost Oil Sands growth will certainly contribute to growing those earnings.

In a further show of support for management's capital allocation strategy, our Board of Directors has also authorized a CAD2 billion increase to the normal course issuer bid that Suncor initiated in September of last year.

This comes in addition to the CAD1 billion expended on the current program to purchase and cancel over 31 million Suncor shares, and the CAD2.5 billion invested since September of 2011 to purchase and cancel over 81 million shares.

Returning cash to shareholders is a key priority for Suncor as we move the Company towards a unique investment niche that combines profitable growth with competitive and growing cash returns for shareholders.

With these most recent decisions, the five-year compounded annual growth on Suncor's dividend now exceeds 30%, and we are on our way to repurchasing and canceling approximately 10% of the outstanding shares of the Company.

This delivers compelling value for Suncor shareholders.

Now, our growth program is another way we're delivering value to shareholders.

This year, we are forecasting an 11% increase in oil production and the bulk of that comes from Firebag 4.

Final closeout of the project is anticipated by the end of the second quarter, and it is on track to come in by more than 15% below the budgeted CAD2 billion cost.

This equates to approximately CAD27,000 per flowing barrel.

Production has been steadily ramping up and is expected to reach full capacity by early next year, and that will bring total Firebag production to approximately 180,000 barrels per day.

Now looking forward, we are very excited about the prospect of further Oil Sands growth at very competitive costs.

Steve talked about the various debottlenecking and expansion projects that are under way at Oil Sands.

These projects are extremely attractive because they leverage existing infrastructure to create operating efficiencies, and they can be delivered at a cost well below greenfield development.

We currently estimate we can add 100,000 barrels per day of new capacity at an average cost of between CAD20,000 and CAD30,000 per flowing barrel.

And we are excited by the potential impact these types of projects will have on our overall returns.

With our demonstrated commitment to capital discipline and continued strong operational and financial performance, it is our firm belief that Suncor represents a superior investment opportunity.

We intend to continue to meet and beat our commitments, with full confidence that the market will reward our performance.

Thank you very much, and with that, I'll pass it back to Steve Douglas.

Well, thank you, Bart.

And just a couple of notes before we open up for questions.

I wanted to just reference our updated guidance which is available on the website.

There are a handful of changes including a decrease in capitalized interest, and the impact of natural gas asset sale is also reflected.

As I said, available on our website.

And then impact of a few other things, the LIFO/FIFO impact for the quarter was an increase to earnings after tax of CAD117 million.

The stock-based compensation impact was a reduction of CAD36 million in the quarter.

And the FX impact was a reduction of CAD146 million in the quarter.

With that, I'll open it up to the Operator.

Wayne, I'll just say, if you could keep your questions to a strategic level primarily, we will be happy to deal with detailed modeling questions, we'll be available throughout the day with the controllers group.

Wayne?

(Operator Instructions)

The first question is from Greg Pardy from RBC Capital Markets.

Hi, thanks, good morning.

Three questions for me.

I guess, first, could you elaborate a little bit more on the debottlenecking initiatives?

Second question is just, I think I've answered it, answered my own question, but in terms of your CapEx, annual CapEx into 2020, looks as though if the growth capital is about CAD3.3 billion and the maintenance is about CAD4 billion, that you're really going to spend no more than CAD7 billion to CAD8 billion over the next several years.

And then the last thing is, just want to be -- actually, if you can talk just a little bit more about your dividend policy going forward, should we not be looking for any stepwise increases like we saw today?

In other words, should we be looking for dividend growth more in line with cash flow going forward?

Thanks very much.

Okay.

Thanks, Greg.

Let me pick up a couple of those and then I'll hand off to Bart to give you a bit more detail around the policy around dividends that the Board had signed off on.

So first, let me answer the easy one on CapEx through to 2020.

I think you've taken the right message.

You should expect, I don't want to be committed to specific numbers, but you should expect in that CAD7 billion to CAD8 billion range through the foreseeable future.

So, not the big spikes in capital that were previously anticipated.

Of course, we do have, and we are uniquely positioned as a growth company, we have a long list of very attractive projects.

So, you will see us as profit and cash flow growth increasing the capital expenditure on growths, but not the sort of spikes that were previously anticipated.

Just a few words on the debottleneck and in situ projects.

These are new projects.

They do deliver in the next three or four years that additional 100,000 barrels a day we've talked about.

It's one of the benefits you have when you have extensive assets that we have on the ground.

You can start to spot the opportunities where small investments yield high returns.

So, you'll see those focused in a number of areas.

They will be focused on the extraction facilities in Oil Sands.

You'll see them focused around some of the in situ facilities and around infrastructure as we start to interconnect these facilities.

We have great flexibility just to push production and push throughputs up.

So, we have a mix of a number of very attractive projects.

They are low risk, high return, and we believe we can execute them effectively, quickly.

And if you need any more detail than that, don't hesitate to follow up after the call.

So, let me hand over to Bart on dividend.

Yes, thanks, Steve.

Sure.

Thanks, Steve.

And good morning, Greg.

Just a bit more on dividend.

As you look at our, the integrated business model that we have and the consistency of earnings and cash it can deliver, combined with the profitable growth that we are going to be implementing, it means growing cash flow and earnings for Suncor.

And it's our intention to allocate more of that capital and cash in returning it to shareholders.

It is a priority for us.

So, and that doesn't take into account yet our in situ business, where as we go forward here and start to develop more of our growth plans, we're going to look to that part of our business for more of our growth.

So it should be, again, very high profit.

So on the back of that, our board has endorsed a policy of framework that will underpin our approach to dividends.

And the first announcement was today with our 54% increase, so a few things I would leave you with.

First, is for that framework, dividends will be reliable.

They will be sustainable.

They will be meaningful in relation to the market.

And they are going to be competitive.

And our dividends are expected and the markets should expect them to grow with our earnings and cash flow as that grows as well.

We will conduct a dividend review annually and it will be part of our Q4 earnings release going forward.

That's a bit of a change.

We've always done it in Q1 in the past.

We're moving that up.

And just a little bit of a further bit of information.

The new dividend equates to about 25% of our 25, or sorry, 2012 net earnings when we adjust out one-time items.

And that puts us within the range of, or close to our target range going forward.

So, hopefully that gives you a bit more insight, Greg.

Yes, very helpful.

Thanks all.

The following question is from Brian Dutton from Credit Suisse.

Yes, good morning.

Steve, not only were the per unit cash costs at Oil Sands down year-over-year and quarter-over-quarter, but the total dollar costs were also down.

Could you give us some insight into that?

Is that the result of your operational excellence program?

And should we be expecting similar total dollar costs in the coming quarters ex the turnaround?

Okay.

Yes, Brian, let me talk to it.

So, the simple answer is yes.

As we focused on operational excellence and you know it's been a long-term, not a short-term program.

We've really been getting at the underlying fundamentals and the things that are driving costs.

We're starting to make real progress.

The first part of that initiative was around getting the reliability of the assets up.

And as you've seen, right away across the business that's happening now.

And we've taken the best people we have across the Company, where they have delivered those results in the downstream and put them together with our team in Oil Sands, and we're seeing the same sorts of results.

So, we're seeing reliability come up and costs coming down.

So, what you are seeing is an indication of what the future holds for us.

I would actually go slightly further and say what's not transparent is that the operating costs in March were CAD32 a barrel.

And as we start to drive reliability up, you'll see that those are the sorts of numbers that become possible.

So, we've made significant progress on operating costs.

You know, we're so confident now that in the budget this year, we committed at the middle of the range, was about CAD35 a barrel.

We expect to see that type of progress continue.

And what the initiatives are finding is that we've been able, as we expected, given the economic climate, to largely take inflation out around our operating costs.

So good news, and we see it continue.

So, is it fair to say then with the total dollar costs in the first quarter this year being lower than any total dollar cost last year, that there are hard dollars here being taken out, it's just not a per unit impact?

Absolutely.

There are real dollars being taken out.

One of the things that happens as you become more reliable is you can focus harder and harder on costs.

So, absolutely.

Real dollars coming out and per barrel decreases coming.

Of course, the one health warning I would give is don't let's forget, although April has continued very strong, we did shut down Unit 1 to plan in the middle of the month and we're into our turnaround now.

So, we would anticipate that volumes for quarter two will be down as per planned and costs will come up for that period.

But we are where we expected to be and we're still expecting to hit our guidance.

Great.

Thank you very much.

The following question is from Andrew Potter from CIBC.

Hi, guys.

Just looking for a little bit more detail on Firebag.

How much do you expect Firebag to be producing in around the 2020 timeframe?

When you look at all the different expansion opportunities and debottlenecking and all that kind of are stuff?

And how would that change since your previous plan?

Sorry.

So yes, let me talk about Firebag.

So, Firebag is going extremely well.

We are very pleased with how Firebag Stage 3 ramped up.

We're seeing a similar performance on Stage 4, and we would anticipate having it up to its current nameplate capacity of 180 by end of this year, beginning of 2014.

Also some good news about that that you've heard us confirm, we are expecting Firebag Stage 4 to come in 15% under its sanctioned amount.

So that's about CAD300 million decrease on that CAD2 billion project.

So, lots of good news on the existing Firebag asset.

We're then looking at potential opportunities around Firebag.

And I wouldn't want to commit to a particular year until we take you through it in more detail.

We are expecting something like 200,000 to 210,000 barrels a day in the 2020 timeframe.

We have the option that we're looking at of applying part of the replication strategy that Mike MacSween is developing in detail.

And we'll look at Firebag, we'll look at MacKay River, we'll look at Meadow, and Lewis, and we have lots of good choices.

You'll see a lot of our growth focused on in situ through that period.

Sure.

And then maybe if you could just talk a little bit more about the economics on the debottlenecking projects, those 100,000 barrels a day.

Could you quantify that in terms of what is the typical supply cost on average for this 100,000 barrels a day that you can at 20,000 to 30,000 barrels a day or alternatively, what the rate of return in on the current price deck?

Yes, hi, Greg.

I think you've largely answered your own question there.

We're looking at average costs to bring those new barrels on in the 20,000 to 30,000 per barrel range.

That is going to deliver returns well above our cost of capital at kind of CAD80 crude prices.

So, these are the kinds of projects that really help drive the returns higher and we're confident in all of them.

So, this is very much a good news story.

If you want to try and get in a little more detail, we can take it after the call as well.

But those are the headlines.

Sure.

And very last question, just on technology.

I noticed in your presentation you talk a little bit more about technology than you have in past, highlighting the insolvent technology.

Can you talk a little bit about that and is that part of your, incorporated into your plans through the 2020 timeframe or is that an add-on further out?

Yes, I would like to keep my comments at the sort of high level just in terms of innovation and technology and its application in our business.

One of the things I think we've been is relatively quiet about our commitment to developing and then applying technology.

If you look at our track record, historically, whether it was truck and shovel, from bucket wheel, whether it was the development of in situ, whether it's the solvent-based technologies, whether it's different thermal technology, what we're trying to demonstrate is we are at the leading edge of developing those technologies and our character and the nature of Suncor is we will apply those.

Not limited to just in situ.

We have similar commitments in the mines themselves.

In fact, we've recently put into Oil Sands the first driverless truck out there.

So, you'll see a continued commitment and rollout of those technologies.

You know, for example, the Fort Hills mine has the power finite type extraction process in there so that we can produce fungible bitumen and go straight to market.

So, you'll see us develop and committed to applying these new technologies.

Okay, thanks.

The following question is from Arjun Murti from Goldman Sachs.

Hi, thanks.

Just to follow up on some of the debottlenecking projects, I noticed that you kept your CapEx unchanged this year at CAD7.3 billion budget yet announcing this.

Were these already contemplated, or is the spending perhaps more in future years?

And then just any notion of timing of when we see the 100,000?

Is it progressively over the next four years or more in years three and four?

Thank you.

Hi, Arjun.

It's Bart.

I'll maybe take the first question on capital and while, of course, we're always looking at how to best develop our projects and in what sequence, not all of them were planned in this year.

And the way we're going about this in terms of capital is that we plan and fully expect to be able to accommodate these new projects within our already-announced capital budgets, so it's not incremental.

It's more about reallocation of capital to the highest return.

And that's a core part of our capital discipline framework going forward.

Several of the projects are in flight already or have been approved and will start here shortly.

In terms of how they will sequence and ramp up, we would look to see more of the production coming on in the back half of the three- to four-year timeframe that Steve referenced than in the first two years.

That's very helpful.

And I know you're going to provide a Fort Hills update later this year, but I appreciate the comments that you don't expect any spike in growth capital.

That's helpful color.

The other parts we had a question on was on the Montreal Coker, what the status of that potential project is?

Yes, again, I would just back off, the Coker is one of a series of potential projects to Montreal.

Montreal is a very important asset to us.

It's the one of the four refineries we have, which is not integrated back into Oil Sands and inland crudes.

So, we have a sequence of investments that are possible from the very first one, for example, is to be able to connect Montreal via rail into inland crudes.

Low cost, high return project that we can execute quickly.

That project is already in flight.

The facilities will come on stream probably by the end of this year, and that will enable us to move somewhere between 20,000 and 40,000 barrels, depending on the quality of the crude, into Montreal early in 2014.

So that's it, what I would call the capital light end of the sequence of projects we have.

We then have a range of projects right away through to the other book end, which is the Coker project, and what we've been looking for is we like the Montreal refinery.

We're committed to our operations in Quebec.

We're working very closely with the Federal and Provincial government to reverse the flow on Line 9. And as we start to get increasing confidence around the reversal of that line, and it's looking very good, you'll start to see us committing to the bigger projects.

Of course, as you will recall, the main components of that project were purchased and have been mothballed in a protected circumstance, have nitrogen blankets on the Cokers, which are actually in a lay down area next to the refinery at the moment.

So, we're able to execute that project reasonably quickly once we sanction it.

So, we're keeping our eye on Line 9, we'll keep our eye on that project and that will be towards the end of this year, beginning of next year, we'll look at sanctioning.

Steve, that's very helpful.

Just a final follow-up for me and I think you might have just partially answered it.

In the event we do see further delays and whether it's Keystone XL or Northern Gateway, or either of them, can you talk about other ways to get your crude out of the Alberta region?

If you have any updates on that, that would be great?

Yes, certainly.

The first thing I would say is one of the strengths of Suncor, having been a pioneer and being in this business so long, is our logistics and trading capability around access to market.

So, we have an interest in the Gateway line.

We an interest in Keystone XL.

We have an interest in Line 9 reversal.

We have an interest in the reversal, or the switching of the gas line to the oil line, to the east, which is currently being discussed.

We have already a business and plan to continue it around movement by rail.

We have a marine department and move materials globally with around our lubricants business.

So, we see logistics and connectivity as an area of deep expertise within Suncor.

That's one of the reasons why through all of these market disconnects, with the access to market issues, with the big differentials, you see a relatively consistent, high level of earnings from Suncor.

So, amongst our competition, of course we are with the rest of industry, we want access to market.

We think getting access to tidal water is important, but actually, we are very well positioned relative to competition.

So, we're involved in all of those lines.

We have many alternatives and flexible solutions, and we don't see access to market actually have an impact on our business for a considerable number of years.

Thank you so much.

The following question is from George Toriola from UBS Securities.

Thanks.

I have a couple of questions.

The first is on Fort Hills.

And now, while still expecting your update later in the year, can you talk about what capital intensity, the background to this is the market is very skeptical to the economics of any mining project and the capital intensity we've seen recently has not been supportive.

Can you talk about the capital intensity that you require to make this economic?

Okay, again.

Let me just talk in general terms.

I hope one of the things that's becoming clear about Suncor is that we have been saying what we believe and then you've seen our actions follow it.

So, we talked about operational excellence.

We understated and then we've started to overdeliver on reliability and operating costs.

We talked about capital discipline, and you've seen us understate and overdeliver.

We've brought the Firebag projects in under the costs we expected and they have come up faster than we expected.

So, I hope you are starting to see a pattern of we say what we believe and then our actions follow up.

When we get to Fort Hills, let me say, I won't speak about the specific capital intensity of it, because that would be inappropriate until the next quality of our estimates are available and that's the process we're in at the moment.

But a few things I would say, Suncor was the pioneer in Oil Sands around mining.

We, 10 years ago, started up the Millennium mine.

More recently, we invested and started up the North Steepbank mine at a fraction of existing costs.

Not surprising, because it was utilizing assets that were already on the ground, but it was in the sort of CAD5000 to CAD7000 a flowing barrel.

My point being, we understand this business.

If I compare to some of the outliers in the market, and I won't mention specific names, we look very closely and we understand what have driven those costs.

We're looking at Fort Hills in detail and the commitment we give you is we will only progress those projects if they are to give us good returns.

So, if the costs per flowing barrel are in a range that are acceptable to us and that the returns are generated are significantly higher than our cost of capital.

You saw us take the debate on Voyageur and we canceled the project.

You have seen us take the position on our gas business where those assets don't align with our core strategy.

So, I hope what we're demonstrating is we mean it around the economics and we're willing to make these tough decisions.

Of course, the final point I would make on Fort Hills is we have largely derisked it, because we only own a portion of that project.

So in terms of cash flow, it's not actually that significant to Suncor relative to the rest of our capital spend.

So, I think watch this space and we're aiming by September, October to come out with the specific numbers to answer your questions.

Okay, thanks.

And then my next question is on return on capital employed.

Do you target a return on capital employed?

Hi, George.

It's Bart here.

We do have internal targets, but what I -- as we've started to develop and deliver on our capital discipline approach and profitable growth, it is evolving.

What I would say is that all of the projects receive, it's actually an incredible amount of scrutiny and detailed review prior to any kind of sanction.

We're only looking at those projects well above cost of capital.

The projects that have been sanctioned this year are all actually well north of 15% return on capital employed.

That's on a full-cycle basis.

And, so, that hopefully should give you some indication of the kinds of returns that we're targeting.

Thanks, Bart.

And maybe just a follow-up.

In a more normalized sort of downstream environment, do you -- when I look at your return on capital employed, quite the substantial amount of that is due to the earnings from the downstream business.

In a more normalized downstream environment, do you see the integrated business being able to consistently generate upwards of 10% return on capital employed?

I mean, the simple answer is yes.

And, of course, the power of the Suncor integrated model is that with our view of the future, those returns and margins in the long run actually belong to the upstream and Oil Sands.

But because of the difficulty in predicting those differentials year to year, that's why we have an integrated business and that's the power of the model we have.

So, all we would expect to see is those returns will move from the downstream back to the upstream.

And that's our view in the mid and long run and that's where they will go.

Okay.

Thanks.

Last question for me.

Sorry, George.

It's Bart.

Just one other thing I would add to and build on Steve's comments is that our downstream business has been, and likely will continue to be, the most profitable R&M business in North America on a per barrel of installed capacity basis.

And if you look back probably over the last decade, that has been the case for most of that time period.

And it's the unique combination of inland refinery and unique geographic location and short markets that allows us to continue to deliver on that year after year after year and as well given the higher reliability of those assets.

So, double-digit returns were what was being achieved by that business, even in the very, very bottom of the cycle with much lower cracks.

So, when the value returns to the upstream part of the business, it's our full expectation that business will continue to perform at or above the rest of the market.

Thanks a lot, Bart.

Last question for me.

Just industry-wise, what are you guys seeing in terms of cost inflation?

And this is more capital cost inflation I'm talking about here, because we've seen you guys have taken Voyageur off the market.

Other people are slowing down capital expenditures.

Are you seeing capital costs sort of come down or not yet?

I think there are several effects going on.

One, in general, there still is a lot of construction activity in the Fort McMurray area.

But we are not seeing the type of inflation we've been seeing in previous periods.

I think in our case, I would say that without doubt, the focus on more rigorous and disciplined practices, the focus on cost and quality rather than schedule is having a significant impact.

So, we are now seeing a pattern of bringing projects in under cost, so we have a number of projects that have come in like that.

Part of that is because, of course, there was assumed inflation when the projects were approved and it's not there.

Part of it is the more disciplined and rigorous project execution practices.

So the bottom line is, overall, we're not seeing the inflation that we were seeing before.

Okay.

Thanks a lot.

The following question is from Guy Barber from Simmons & Company.

Hi, and congratulations on the results this morning, guys.

I wanted to follow up on the topic of returns.

But the new slides state that you're targeting 15% ROCE ex some of the major projects in progress.

And I was just wondering if you have a timeframe over which you expect to realize that improvement versus where you are now?

And then also, what are the biggest drivers that we need to be watching?

Is it mainly the improvement in reliability?

Is it debottlenecks or is it major project-driven?

Yes, it is all of those things.

I think how I would start is think of those three areas that we talked about in the sequence.

Operational excellence, then the capital discipline, and that leads to -- and profitable growth.

And of those things then factor into our overall return on capital employed.

The two or three signs I would see around operational excellence are reliability coming up and costs coming down.

And as Brian said earlier, that's absolute costs coming out of the system, as well as per unit costs as reliability and production is increasing.

So, keep your eye on those two and those will give you a good indication.

One of the best indicators for me is the Unit 2 reliability, because it's been our biggest challenge as we brought that plant up to its nameplate capacity.

And we're seeing it.

So, for the four months this year, it's world class.

It's up there at 95% utilization.

Then I would move onto the two or three metrics I look at around capital discipline are around project execution.

So, are the projects coming in at or below the costs we expected?

And then are we bringing those units up to the operating levels we would expect them to come up to quickly.

So, those are the things we can effect in the short-term.

Of course what you've also seen, which is accretive to return on capital employed, is us willing to look at mature, low return businesses and take them and sell them because they're not core to our strategy, that adds to return on capital employed as well.

So, the net result of selling the gas business will be return on capital employed will increase.

And relative to where we would have been, the tough decisions we made around Voyageur are also accretive to return on capita, so there are some you can see around operations, some longer terms.

I wouldn't give you specific numbers.

I mean, I looked at -- even at current prices for the first quarter, if I factor out the Voyageur, which are short-term consequence decisions, then we're back up at the 11.5%, 12% level.

Okay, great.

And then on the point of reliability, you all have a lot of maintenance obviously scheduled over the next couple of quarters.

And I was just wondering if there was anything you would specifically point out above and beyond the normal recurring maintenance that you have every year that you believe might specifically address a problem that you all have been seeing or lead to some visible improvements to reliability and operations over the back half of the year?

Yes.

I won't go into too much detail on specific ones, but you do put your finger on something which is very clear to me but not necessarily transparent to the market yet, which is we have made material and significant improvement on the Unit 2 performance.

It's the overall upgrading level is not clearly visible yet, because Unit 1 was approaching the end.

We took Unit 1 for the first time to industry leading runlet, that went to five years between turnarounds on this run.

At the end of it, we have some fractionation issues in one of our towers.

We did the calculations and decided to continue.

But we know we can get somewhere between 15,000 and 25,000 barrels a day of upgrade in when we bring that unit back up.

So, you will see reliability levels in the back end of this year that we haven't demonstrated before.

So, I think as you get into the third and fourth quarter, we have one bit of maintenance on the Unit 2 vacuum tower, but you're going to start to see monthly and quarterly run rates which will set new records.

Okay, perfect.

Thanks for the comments.

The following question is from David McColl from Morningstar.

Good morning, everyone.

Thanks for taking the question.

I just have a bit of a clarification on the 20,000 to 30,000 number for flowing barrel for the in situ projects.

You talk a lot about that being kind of debottlenecking.

Is that also a realistic target for MacKay River Phase 2 and possible expansions to Firebag, which is 5 and 6?

I though that's a little bit further out and harder to pin down on but I'm just wondering if you can get a bit of clarity around that?

Yes, hi, David.

It's Bart here.

So, the 20,000 to 30,000 average is reflective for this next 100,000 barrels.

And within that is a whole series of different largely debottlenecked projects.

So, that is a set of numbers that we're very confident in.

We're actually, and I think Steve mentioned this earlier, we're just in the process now of working through what our new replication strategy will look like for our SAGD business and that includes its application across all of the potential SAGD assets that we have, which based on the work we've done to date look to all be very, very high quality.

We haven't actually come out with those numbers yet.

We'll be working on that through the remainder of the year and we would expect to have more information towards the end of the year.

That's great clarification.

Thank you so much.

The following question is from Paul Cheng from Barclays.

Hey, guys.

Good morning.

Two quick questions.

First, I just want to clarify.

Bart, I think earlier you're saying that, or maybe it was Steve, the growth capital should not be more than this year, CAD3.3 billion.

And also that you guys are working and trying to see whether that you can further reduce the base capital from the CAD4 billion.

So, we assume we have everything going on, that your next several, say three or four years, your CapEx is still going to be somewhere around the CAD7.5 billion?

Yes, that's a reasonable assumption that it will be in that CAD7 billion to CAD8 billion range.

We are working hard on sustaining capital and seeing some real progress.

We have had what we've been calling these lumpy projects, where we have big one-off pieces of sustaining capital we have to spend.

And an example would be the TRO project, in excess of a CAD1 billion.

You don't have to keep repeating that.

So, I think it's we want to understate and overdeliver.

So, if you use around the CAD4 billion, we're working hard to reduce that and we'll try and lead with results rather than just saying it.

On growth capital, yes, you are broadly right.

We'll be in that sort of CAD3 billion to CAD4 billion range.

We have this new 100,000 barrels a day of growth that we've been talking about.

They are relatively low cost, as Bart was saying.

Two of those projects are already approved and in flight, and included in our activities.

And so in our budget this year.

And then the active ones, they will compete for those growth funds alongside other projects as well.

So, you should see it within that overall CAD7 billion to CAD8 billion.

Steve, in longer term, strategically speaking, when you are looking at your portfolio in terms of capital allocation, looking at mining, I understand that you guys probably there have one of the better track records in the mining project than some of your peers.

But, let us understand, when you are looking at full-cycle return between your portfolio in the SAGD potential project comparing to your mining, do you actually think that the mining will be able to generate similar return?

If they are not from a capital allocation, why not delay the mining and just focus on the SAGD for the next several years until you find a way to put the mining into a similar return base mine?

It's a great question, Paul.

And I don't want to sound over defensive.

We have a long list of very attractive projects in both in situ.

I think from the information I can see, we have amongst the industry-leading best in situ resources.

We also have some of the best mining opportunities in the industry.

So, they will compete on a real basis for funds.

And if there's a clear leader in those, then that's the horse we're going to bet.

One of the things about a mine that you, and I just want to say around the economics of it, of course a mine, you have to view it a little bit differently than in situ.

A mine is higher capital at the beginning and then lower sustaining capital as it goes, and a lower operating costs.

It also has a much lower risk.

And often forgotten is the resource quality.

So for a mine, it's very easy.

It's -- once the project is done, it's almost like a bond.

It just gives you, so for example, Fort Hills has a reserve life of somewhere north of 40 years.

So once you've done it, you're effectively stamping a return of that thing for twice the life that you will depreciate that asset over.

In situ is different.

It's lower original capital costs, higher sustaining capital costs, and different drivers for operating costs.

So, we take all of those factors into account.

Historically, given our experience, we found that both compete through the full cycle.

Right now, with gas prices where they are, clear, and technology moving on, in situ has done very well.

We will let those projects complete on normal economic metrics of return and quality of resource.

Thank you.

Just want to say a final thing.

On behalf of all your investors, I think everyone really appreciates your decision to go with a higher dividend increase and return more cash through the shareholder.

Thank you.

Thank you.

Thank you, Paul.

The following question is from Mark Polak from Scotia Bank.

Good morning, guys.

First question is just around the upgrader reliability wedge of growth that you have identified there.

Would you think of that as 90% utilization on 350,000 barrels a day of capacity?

And I would suspect this is some of the lower hanging fruit you've got.

Just curious what you need to do to achieve this and if there's much capital associated with that?

So a lot of it is, the 90% is in our grasp right now with no capital.

So if I look at it, we can get to utilization rates.

We've already done it on Unit 1 for extended periods.

That's where we expect the unit to come back up when we start it up later in the second quarter.

And we have a program of work which is largely around procedures, operating practices, quality and training of individuals, a culture of operational excellence, which gets us up into that range.

Beyond that, we have further programs which are going to take us up, we believe, on Unit 2 in the mid and longer run.

We can get up to 95% plus.

And whilst I don't want us to stay in that pattern of understate and overdeliver, if you look at what's happened to our refineries, you have seen as we put these practices into place, we're able to go beyond nameplate capacity.

So our first commitment is, as you say, let's get to nameplate capacity and we can see it in that timeframe.

We then think we can continue this program beyond that point with relatively low capital costs.

And, Operator, with that, I see we are over time.

We'll take one more question and we'll certainly pick up the rest of them later today.

The last question is from Amir Ariff from Stifel Nicolaus.

Thanks.

Good morning, guys.

Just a couple of quick questions.

First, on the 100,000 barrels a day of new in situ production coming, can you break down how much of that is debottlenecks versus new growth?

I think in your slides, you mentioned 30.

But in some of your comments, you were saying it sounded like it could be a larger portion?

Hi, it's Steve Douglas picking that one up.

It probably wouldn't be fair to characterize it all as in situ.

In fact, it's a range of debottleneck projects across both our mine, our in situ projects, and our logistics.

And part of that is it frees up mine capacity to feed the upgraders and support increased reliability to the upgraders.

So, it's really a range of projects which leverage the great deal of steel we have in the ground and start to optimize your operations.

Okay, but could you give me a sense of how much of the 100,000 is going to be greenfield?

There's no greenfield in that.

These are all increases in your MacKay River, in your Firebag, in extraction, and base facility.

Okay, got it.

And just a second question, as you review your portfolio, is there any other areas that don't meet your view of profitable growth or are we done with the large asset sales?

I was just thinking of your international operations.

You know, we will constantly review but the big, when we came out of the merger, we had a clear strategy around gas assets and taking it essentially from a conventional to potentially an unconventional business.

That is largely done now because the North American gas assets with this sale will be close to zero.

We constantly review that program.

We do have other assets, as you know, internationally.

But we currently have no plans with those.

Okay.

Thank you.

And with that, I'll thank everyone for your participation today and just a reminder, we will be available, both the Investor Relations team and the controllers, for any further calls throughout the day.

So please contact us by e-mail or phone.

With that, thank you very much.

Thank you.

That concludes today's conference call.

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