Suncor Energy Inc (SU) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Suncor third-quarter 2013 conference call and webcast.

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

Mr. Douglas, please go ahead.

Well, thank you, operator, and thank you to everyone who is joining us for the third-quarter Suncor Energy call.

With me here in Calgary are Steve Williams, our President and Chief Executive Officer, and Bart Demosky, our Chief Financial Officer.

I would ask you to note that today's comments do contain forward-looking information.

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

And these are described in our Q3 earnings release, as well as our current AIF, and they are both available on SEDAR, EDGAR, and, of course, our website.

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

However, I would note that since we have a dedicated call coming up next hour on the Fort Hills Project, we will be wrapping up this call by a quarter after the hour at the latest.

So if there are calls we don't get to, we will get to them later in the day.

With that, I will hand over to Steve Williams.

Okay, thanks, Steve.

And good morning, and thank you for joining us.

You will hear some very encouraging comments as we go through our results this quarter.

We have taken a significant step forward in our drive to improve profitability.

Our focus on operational excellence is paying off in improved reliability across the business, and our debottleneck efforts at Oil Sands have produced a step change in production.

At the same time, we have made real progress on our growth initiatives, while continuing to exercise capital discipline.

So we have a lot to talk about.

And as I said earlier, I am very encouraged by the results.

So let me start with a review of the operations.

Now first, the Oil Sands, we have achieved record quarterly production of nearly 400,000 barrels per day, despite some third-party pipeline outages in July, and some planned maintenance in September.

In August, we demonstrated the real potential of our operations, as we produced a record 433,000 barrels per day, at a cash operating cost of just CAD29 per barrel.

So with the commissioning of the new hot bitumen facilities, we began blending Firebag bitumen and shipping it straight to market.

This enabled us to significantly ramp up our mine production.

We also saw improved reliability from our upgrading complex.

So when you put all of that together, with favorable crude pricing, it adds up to a record quarter at Oil Sands.

In our E&P group, we closed the previously announced CAD1 billion sale of our conventional natural gas assets, and booked a CAD130 million gain.

We have now sold over CAD4 billion worth of non-core assets since the merger, and that has enabled us to build a rock-solid balance sheet and focus our attention on a core portfolio of high return assets.

Our offshore assets are an important part of that core portfolio.

In the third quarter, we saw reliable production from the North Sea and the East Coast, and we took advantage of favorable Brent pricing to post strong financial results.

In Libya, political unrest prevented liftings and shut in production.

And while the financial impact was not material, we continue to hope for a more stable environment for the Libyan people.

Our focus there will continue to be on the safety of our employees and the longer-term profitability of the operations.

On the growth front, the Golden Eagle and Hebron projects are moving ahead, on budget and schedule.

We continue to anticipate first oil at Golden Eagle around the end of next year, and at Hebron in 2017.

These projects are an excellent fit with our profitable offshore production, and are expected to provide strong returns for shareholders.

Turning to our Refining and Marketing group, we achieved record reliability for the quarter.

Our four refineries ran an average of 98% of capacity, with a throughput of almost 450,000 barrels per day during the quarter.

And thanks to tight integration between our Oil Sands production and Refining and Marketing network, we were able to once again capture Brent pricing for more than 90% of our growing production.

There are two imminent developments that will actually increase that percentage by the end of the year.

In Montreal, we are preparing to commission crude-by-rail offloading facilities, and this will allow us to ship up to 40,000 barrels per day of inland crudes to our Montreal refinery.

Looking south, we expect to begin line fill in the Keystone South pipeline to the US Gulf Coast in the fourth quarter.

This new pipeline will enable us to begin shipping 50,000 barrels per day of heavy crude to refineries in Texas.

These two projects are very real, concrete examples of the power of our integrated business model.

And thanks to our deep midstream capability, we will continue to enjoy superior market access for our growing production.

Speaking of growing production, we continue to move our growth plans forward in Q3.

As I mentioned earlier, our two major new projects in E&P are on budget and schedule, and our debottleneck efforts at Oil Sands have begun to unlock new production.

And with several more debottleneck projects in flight across our Oil Sands operations that will see us continue to profitably increase growth production in 2014.

Yesterday, Suncor, together with our partners, voted unanimously to proceed with the Fort Hills mining project.

And Fort Hills is the best undeveloped Oil Sands mining asset in the Athabasca region.

The project will benefit from our depth of mining experience, and our well-established infrastructure in the region.

We expect it will provide us with a long-term source of cash flow, and contribute to strong returns for our shareholders for decades to come.

So we are excited to move the Fort Hills project forward.

We have been convening -- we will be convening a dedicated web conference immediately after this call, in order to discuss the project in detail.

And I look forward to getting into some of those details.

So to sum up, our assets are operating reliably.

We have encountered some minor setbacks here in October, with several days of Oil Sands production lost as a result of third-quarter natural gas supply outages in the Fort McMurray region.

However, we are still on track for a strong finish to the year and continued growth moving forward.

In fact, the Oil Sands, with no major turnaround maintenance planned until 2016, we are well-positioned for a lengthy run of continued production growth.

I am certainly pleased with the progress we are making, but we won't be resting on our laurels.

Suncor will continue to relentlessly focus on achieving operational excellence, exercising capital discipline, and profitably growing our business.

So with that, I am going to hand over to our Chief Financial Officer, Bart Demosky, to go into a little more detail on the third-quarter results.

Thank you, Steve, and good morning, everyone.

In the third-quarter, our debottlenecking efforts at Oil Sands began to pay some big dividends.

We were able to add lower cost barrels to the mix, and as well we reached new highs for both production and earnings.

Our integrated model delivered once again, as the upstream captured strong pricing to make up for declining refinery and cracking margins in the downstream.

Now with that backdrop, operating earnings came in at CAD1.43 billion, including a record CAD951 million from Oil Sands.

Cash flow from operations was CAD2.53 billion, which represents the ninth consecutive quarter in which we have exceeded CAD2.25 billion in cash flow.

And we achieved these levels of earnings and cash flow, despite having to rebuild inventory at Oil Sands after our second quarter major turnaround maintenance.

This had a one-time impact of about CAD200 million on cash flows and CAD100 million on earnings.

Return on capital employed is a key metric for the management team at Suncor.

And in the third quarter, after adjusting for major projects in progress and the impacts of Voyageur, it rose to 13%.

With strong reliability and record production at Oil Sands, we were able to take advantage of favorable crude prices and shrinking differentials to achieve a very healthy average price of over CAD98 per barrel.

And in our offshore business, our average price was about CAD115 per barrel.

Now, of course, rising prices and profitability are accompanied by increased royalties and taxes, and we did see a corresponding increase in fiscal take, as we had forecasted in our guidance back in July.

With growing production, enhanced logistic capability, and an ongoing focus on cost management, our Oil Sands cash operating costs per barrel fell to CAD32.60 for the quarter.

And I am very pleased to say, we remain on track to hit our cash cost guidance range of CAD33.50 to CAD36.50 for the full quarter.

Our in-situ operations contributed to the reduction in cash operating costs, as they reached a new low of just over CAD15 per barrel, which represents a decline of almost 16% from the same quarter last year.

Now as we look forward to 2014, with no planned major maintenance and production continuing to ramp up, we anticipate that cash costs will continue to decline.

Turning to the balance sheet, the story remains very positive as well.

Our net debt fell to CAD5.8 billion this quarter, and our net debt to cash flow from operations declined to just over 0.6 to 1. We continue our relentless focus on capital discipline, and I am pleased to say that we have been able to reduce our 2013 projected capital spend a further CAD300 million to CAD6.7 billion.

This is a number we are managing very tightly, and it will remain an area of focus moving forward.

We believe we can continue to fund our base business and execute our growth program, with an annual capital budget of CAD7 billion to CAD8 billion in 2014.

But, of course, we will also continue to evaluate new growth opportunities, and set future budgets at appropriate levels to accommodate our plans as they evolve.

We have also continued to return significant cash to shareholders via our share buyback program.

In the third quarter, we repurchased and canceled over 12 million Suncor shares.

And since we launched the buyback program just over two years ago, we have bought back and canceled over 6.5% of the Company's outstanding shares, at an average cost of less than CAD31.50 per share.

We believe this represents terrific value for our shareholders.

Even with our aggressive share buyback program and the paying down of CAD300 million in long-term debt in the quarter, our cash flow balance grew to over CAD5.3 billion, thanks in part to the divestment of our non-core natural gas assets.

While this is somewhat above our target, we are comfortable with a little excess liquidity on the balance sheet.

It gives us valuable flexibility, as we continue to grow the Company.

Last quarter, I closed by saying that we had put the necessary elements in place to outperform in the second half of the year.

With a strong third quarter now on the books, we are well on our way to doing just that.

And we look forward to continuing to deliver on our commitments to shareholders in the fourth quarter and beyond.

Thank you very much, and I will now pass it back to Steve Douglas.

Well, thank you, Bart, and thank you, Steve.

Along with our Q3 release yesterday, we also updated our 2013 guidance.

All the details are on our website, Suncor.com, but I would ask you to note a couple of key changes.

With the low value production in Libya shut-in due to political unrest, we have adjusted our production forecast down accordingly.

Now our Oil Sands production guidance remains unchanged.

As Steve referenced earlier in the call, October production at Oil Sands will be reduced due to third-party natural gas supply outages.

And, of course, we did have planned maintenance in September which went into the first week of October as expected.

But we do anticipate moving forward, that strong production will prevail in November and December, and we expect to finish the year in the middle of our guidance production range.

Finally, as Bart referenced earlier, we have reduced our forecasted capital spend for the year by CAD300 million.

As I said, the full guidance is available on the website.

A couple of other small points to note, the inventory impact, the LIFO/FIFO adjustment in the third quarter, it resulted in a gain of CAD104 million after-tax.

And for the year-to-date, that is CAD222 million after-tax gain.

With our share price rising, stock-based compensation impact was a charge of CAD155 million after-tax, and CAD237 million charge year-to-date.

And finally, the impact of FX was a positive CAD138 million in the quarter, but year-to-date, it is a charge of CAD262 million.

With that, I am going to open up the lines to questions and answers.

A reminder again of two things, we will ask the media to hold to the end of the question period.

So we will start with analysts.

We would ask you to keep those at a strategic level.

The controllers and the Investor Relations team will be available throughout the day to answer detailed questions, and we will wrap up in about 20 or 25 minutes.

Operator?

(Operator Instructions)

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

Please go ahead.

Yes, thanks.

Good morning.

Just a couple of questions for me.

Maybe just on Libya, did you register inventory builds there?

And then secondly, can you give us any color in terms of what your outlook is for just a possible ramp-up?

I know it may be hard to do, but we couldn't find the inventory builds.

Then secondly, Oil Sands, did your Oil Sands royalty rates increase, or at least the dollar amount obviously increased quite a bit.

Has there been any change in your bitumen valuation methodology?

Thanks very much.

Okay.

Let me just take those, Greg, because they will be relatively easy, easy answers.

Libya there's been a very small gain.

It is very difficult to forecast what is happening in Libya.

Some of the facilities have been coming on.

There has been some cause for optimism, and then we have been disappointed.

So we are watching very closely, but very difficult to predict.

What is most important is that, largely because of the low margin on that business, it is immaterial to Suncor's overall performance.

And on your second comment on royalties, no, there has been no significant change on bitumen valuation.

Okay.

And last one for me is, just in terms of the timing of your potential dividend increase then, that would coincide with your year-end results that would be potentially January we would hear more about that?

Yes, Greg, that is right.

We have traditionally made the announcement in conjunction with our AGM, but we are moving that forward a quarter this year, so you are right.

It is in -- it will be -- I think we are announcing the first week of February.

Okay, perfect.

Thanks very much.

Thank you.

The next question is from Paul Cheng from Barclays.

Please go ahead.

Hey, guys.

Now with the Fort Hills expansion -- I suppose you guys are paying more attention to Joslyn, what would be the criteria to determine whether you are going to go ahead?

Or would that, from a portfolio standpoint, would that be a concern having two mining projects at the same time that would stretch the industry overall cost structure, or that availability of the skilled labor too much?

I mean, you have almost sort of answered your own questions there, Paul.

I mean, the considerations we will take into account when we look at Joslyn, will be the work that is going on in the region.

And, of course, one of the great benefits for Fort Hills is that we actually believe we have a window of opportunity there, where there is still lots going on.

But it is a relatively quiet period, so we have been able to get some very competitive contracts there.

Of course, the second one is then the -- our ability and the joint venture's ability to manage multiple projects at the same time.

So we will take that into account, and that will push us to not wanting to overlap those projects.

And then just the general comment that I made last time, that we are still working hard on Joslyn.

We are working together with Total to make -- to put the very best project we can together.

And our experience on Fort Hills is, it takes time to get the best projects.

So you won't see us rushing ahead with Joslyn.

Okay.

Steve, last time I think that when we asked about the debottleneck projects, and you are saying that it is still a little bit too early, not ready to give detail.

And maybe that wait until the Analyst Day.

If we got an answer today, is it the same answer, or that you have more details that you can disclose on those debottleneck projects?

Okay, yes.

I mean, first off, I would say we have been delighted with the progress we have made on existing debottleneck projects.

We have got the first, 30,000 or 40,000 barrels a day, and we have talked to those.

We do have several other debottleneck projects that we are working on right now.

One is around extraction, and there are some further logistics ones.

And, of course, Firebag 4 is coming up towards its design capacity now as we speak.

So it is making good, good progress there.

The nature of debottlenecks is that as you push to a limit, you discover the next one.

So we will talk more about those projects when we have our Investor Day in the early part of December.

On the MacKay River expansion that mentioned, is that going to be considered somewhat of a brownfield, or is it greenfield development?

In other words, that when we are looking at the capital costs, is that going to be pretty low at CAD20,000 to CAD25,000, because it is a brownfield?

Or is it going to be more like in the CAD40,000 because it more resembles to the greenfield?

Yes, I mean, we haven't given numbers on the project yet, Paul, but you should consider it more of a brownfield than a greenfield, because we already have significant assets in the area.

We already have significant professional resource in the area, so we are able to get some economies of scale.

So consider it a brownfield.

Okay.

Thank you.

Thank you.

The next question is from Mark Polak from Scotiabank.

Please go ahead.

Thank you, and good morning.

First question, I guess would be for Bart.

This is the first quarter we have seen any real cash taxes paid from the Oil Sands segment.

I wonder if you could provide any color on that?

Is that -- have you started to exhaust tax pools there, and would you expect to see that reverse as spending on Fort Hills ramps up?

Hi, Mark.

Yes, I think one of the benefits of continuing to grow our production and improve margins and bring our costs down, is we are becoming more profitable as a company and the, the corresponding element to that is, that there is going to be higher fiscal take.

So we now are a cash tax paying entity.

Even with the continued investment in the Oil Sands, we wouldn't see that reversing any time in the near future.

Okay.

Thank you.

And then just a couple questions on Firebag.

First in the near-term, it looked like with the ramp-up going on, that sort of leveled off in September, using regulator data for July-August and kind of backing into September.

Just curious, any color on sort of what was going on there?

I am assuming it wasn't the Upgrader 2 turnaround after the hot bitumen line is now in.

And just when do you see getting up to 180,000 barrels a day there?

Yes, let me take that one.

Just to say, Firebag continues to exceed our expectations in terms of ramp-up.

I think we mentioned that we have already had days up in the 160,000s.

So it's all -- it is almost at its capability now.

The design is 180,000, and we fully expect to get there.

So we are getting very close to, to its design levels now.

So progress is -- no particular issues on the plant.

We did do some planned maintenance in the, in third quarter which held some levels.

The hot bitumen line has started up as we expected.

And that is one of the areas, as volumes start to come up, we do have some capability for getting more throughputs up through there.

So we can step up the operation of that, and the hot bitumen terminaling facilities.

So things are going well.

Okay.

Thank you.

And last one for me again on Firebag, just curious what your current thinking is, in terms of stages 5 and 6, and when you might be going ahead with those?

Would that likely not be until after Fort Hills comes on?

We are constantly looking at those midterm plans.

We have put -- we will talk more at the beginning of December about what that plan looks like.

Our in-situ strategy is -- has been adjusting to a different type of modular type strategy, and Mike MacSween has been working hard on that.

So stages 5 and 6 will not look like stages 3 and 4. So we are working on those projects.

And our challenge is not -- we have lots of cash.

They are attractive projects.

So it's a question of making sure we lay that capital down in a very disciplined way.

We will work hard to get those designs right and then we will come forward and tell you what the next debottlenecking or expansion of Firebag will look like.

It won't be similar to what you have seen in the past.

It will be a different type of expansion.

It will be much more akin -- the first stages of it will be much more akin to the debottlenecking you have seen on the base plant, where we are able to target very specific pieces of the plant.

So much more of a brownfield than greenfield-type expansion.

We will take you through more of that in December.

Okay.

Thank you very much.

Thank you.

The next question is from Mike Dunn from FirstEnergy.

Please go ahead.

Thanks.

Good morning, everyone.

Just to follow up on Greg's question about Oil Sands royalties, were there any projects that reached payouts in Q3?

Or is this just sort of the regular calculation that just happened to be higher bitumen prices in the quarter causing the higher royalties?

Yes, there was no changes, nothing that reached payout, Mike.

It was simply higher, higher profitability and therefore, higher royalties.

So no changes at all.

Okay.

Great.

And then maybe, Bart, as the share price is now in the high CAD30s, is this going to be impacting how you are, how aggressive you are going to be with share buybacks?

Yes, a good question, Mike.

We continue to be very diligent on how we apply our cash to improving our operations, growing, and in returning cash to shareholders.

I think as we have indicated in the past, we do have a view to valuation and we want to be value buyers.

But we are also growing the value of the Company over time.

So we are very committed to our current program and programs in the future, so long as we can continue to execute on that.

And this quarter, I think we bought back just over CAD425 million of stock, and we continue to be active in the market.

Okay, great.

Thanks, Bart.

Thanks, everyone.

That's all for me.

Thank you.

The next question is from Kyle Preston from National Bank Financial.

Please go ahead.

Yes, thanks, and good morning.

Just first question here is just on your upgrader utilization.

It was a pretty strong quarter here in Q3.

Just wondering if you can give us a sense on how you expect that to trend going forward.

Obviously, that is part of your debottlenecking initiatives there, but how should we be looking at upgrader utilization over the next year here?

Okay.

Yes, I mean, the improvements we are seeing in the upgrader reliability are as a consequence of the operational excellence focus, and some of the, what we call debottlenecking focus as well.

So we have seen very good results, as we were expecting.

And one of the most significant elements of that was, as part of the hot bitumen line in and increasing the settling time in the feed tanks, we have improved the feed quality to the upgrader significantly.

So we are starting to see significant shifts in upgrader reliability and utilization.

We would expect that to continue.

And when we guide this year, we will actually have an upgrader utilization assumption in there, and it is going to start pushing up towards 90%.

Okay, thanks.

Just one other question here on the, just overall Oil Sands realized pricing.

Obviously, as you start shipping some volumes down the Keystone South line, do you have a sense on what sort of magnitude improvement in realized pricing you would expect to see there?

Hey, Kyle, it's Steve Douglas here.

Yes, we are going to begin to ship on the Keystone South line.

And really what you capture is very much dependent on prevailing differentials at any given point in time.

Today, that differential is about CAD30.

So we can get it down to the Gulf for less than CAD10.

Obviously, you are capturing a big uptick, but we wouldn't want to promise that for the future.

I think the key thing is, we have got ample access to get our production to global prices.

Is there room to increase that beyond 50,000 barrels?

Yes, there is.

We see that going probably to 75,000 -- actually by next year, you will see that we will have 75,000 by the end of the year down to the Gulf, which is certainly ample for current and immediate future production.

Okay, great.

That's all for me.

Thanks.

Thank you.

The next question is from [Mahud Bardwatch] from Citigroup.

Please go ahead.

Yes, hi, congratulations on your results.

I have a question on sustaining CapEx.

How should we think about it as you guys grow production?

And going forward, would it be in like the CAD4 billion range, and what is the number that we should think about?

Yes, good morning, Mahud, and thanks for the call.

As Steve was just talking about the benefits of operational excellence and improvement in the reliability of the assets, one of the side benefits of that is that we see our sustaining CapEx costs starting to trend down now.

I believe we had estimated about CAD4 billion next year, but next year that number will be lower.

We will come out with budget numbers in November at some point here, and you will get more detail then.

Thank you.

Oh, sorry, the other thing to keep in mind is we have no major turnaround maintenance at Oil Sands now planned until 2016.

So that will help bring down the cost as well.

Okay.

Thanks for the color on that.

And one more question on share buybacks.

You have already sort of outlined your strategy and you say that you are going to be -- economics is going to decide that.

Just wanted to understand, what is the current authorization?

And is there like a total number that you guys are thinking about, that maybe we should do, say a CAD1 billion or CAD2 billion every year going forward?

How are you actually thinking about that?

A little more color on that would be great.

Yes, great question.

So we -- the current approved program is for CAD2 billion.

We are working our way through that.

We spent about just over CAD425 million this quarter.

We continue to see very good value in the share prices right now, and would expect that to continue to spend under the authorization of that program going forward.

We will, of course, review that with the Board if we exhaust that program, and take another decision at that point.

Thank you for your answers.

Thank you.

(Operator Instructions)

The next question is from Menno Hulshof from TD Securities.

Please go ahead.

Good morning.

I just have one quick one, I think.

What are your current thoughts on the Line 9 reversal, given the hearing that took place earlier this month?

Hi, we are still in procedure at the moment, so I wouldn't want to say too much.

I think the process so far has been very fair and balanced.

I was pleased to hear the Ontario Premier come out this week and say, that Ontario are not anticipating taking a review.

So I think it is moving as well as we could be expecting.

So I am still optimistic that we will get approval for that line sometime early next year, and we will move into operation towards the end of next year or beginning of the following year.

But every sign at the moment is reasonably encouraging.

Okay.

Thanks, Steve.

Thank you.

The next question is from David McColl from Morningstar.

Please go ahead.

Yes, good morning, everyone.

Thanks for taking the call.

And it sounds like the tough questions are waiting for the Fort Hills call.

Two kind of easy ones here for you, on rail basically.

I am wondering, did you take advantage of any material rail volumes during the third quarter?

And with the widening of differentials, do you envision that you will maybe put some rail volumes in the fourth quarter?

And third question, so I lied there, I might have missed the comment on Montreal.

Did you put out an estimate for what quarter we could start seeing those 40,000-barrel per day of inland crude moving into that refinery?

Thank you.

I mean, just in general, about rail, I won't make specific comments, David.

We are a -- rail has a place as part of our mix in logistics.

We are a significant user, and have been for a number of years of rail facilities, particularly in mid-continent here.

There were no significant changes in our position.

We have, one of the -- our logistics are very advantaged relative to competition.

So we have good market access, and look at the economics and the options available to us.

We would anticipate the first crude movements into Montreal with the newly installed facility to be later this year.

Great.

Thank you so much.

Thank you.

There are no further questions registered at this time.

I would like to turn the meeting back over to Mr. Douglas.

Well, thank you very much, Jessica, and thanks very much to everyone on the call.

We will be convening a Fort Hills call in about 20 or 25 minutes.

I look forward to talking to you about the project at that time.

If you have further detailed questions, the IR team and controllers will be available throughout the day.

Thank you, operator, and we will sign off.

Thank you.

The conference has now ended.

Please disconnect your lines at this time.

We thank you for your participation.