Suncor Energy Inc (SU) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Suncor's four-quarter 2014 financial results call and webcast.

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

Mr. Douglas, please go ahead.

Thank you, operator, and good morning, everyone.

Welcome to the Suncor Energy Q4 shareholder call.

With me here in the conference room are Steve Williams, our President and Chief Executive Officer; and Alister Cowan, Executive Vice President and Chief Financial Officer.

I do need to note that today's comments contain forward-looking information, and that our actual results may differ materially from expected results because of various risk factors and assumptions described in our Q4 earnings release, as well as our annual information form.

These, of course, are both available on our website.

Certain financial measures that we refer are not proscribed by Canadian generally accepted accounting principals and we have a description of these measures in our Q4 release.

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

I'll now hand over to Steve Williams for his comments.

Okay.

Good morning and thanks for joining us.

Since becoming Suncor's CEO, I've been telling you about Suncor's commitment to capital discipline and our journey to operational excellence.

We've been working relentlessly to become the most reliable and the lowest cost operator in the sector.

We've been building a balance sheet that would sustain us when the inevitable downturn in crude pricing came along.

The sharp drop in crude prices these past few months has underlined the importance of this approach.

So far, we've been able to position ourselves to manage through the downturn, whilst continuing to grow the Business for the future.

Later, Alister will get into the specifics on the financial front, but first I'd like to review the operational results from the year we just completed and look at how we're set up to perform in 2015.

In the fourth quarter, our total crude production averaged almost 558,000 barrels a day, bringing our annual production well within the guidance range.

In Oil Sands, the Firebag in situ plan produced above its 180,000-barrel a day capacity throughout the quarter, while achieving continued reductions to cash costs and steam oil ratios.

At Oil Sands base plant, maintenance activities contribute to falling slightly short of production guidance, as we previously indicated in December.

Nevertheless, our fourth-quarter production contributed to annual Company records for in situ bitumen, upgraded crude, and overall Oil Sands production.

We also managed to get the costs where we were looking for, so manage them very effectively.

Our fourth-quarter cash costs came in at CAD34.45 per barrel, bringing our annual per barrel costs below CAD34, and that's a reduction of almost 9% versus 2013.

For the year, we reduced our total cash operating costs by CAD19 million, and that was despite the production increase and much higher gas costs.

Our controllable operating expenses, excluding natural gas, were actually down by over CAD0.25 billion year over year, and that's a very encouraging trend.

You can see from our 2015 guidance, it's one that we expect to continue into the future.

In Exploration & Production, Terra Nova came back online in mid-October and produced reliably through the end of the quarter.

We also saw first oil from Golden Eagle and a temporary return to production in Libya.

It all added up to our strongest E&P production quarter in over a year.

Turning to the downstream, our refineries once again operated reliably in the fourth quarter.

Despite plant maintenance at three of our four plants, we achieved an average utilization rate of over 95% during the quarter and 93% for the full year.

Looking back on 2014 as a whole, I'm pleased with the overall operational performance.

Oil Sands production was up 8% for the year, largely driven by reliable and growing in situ volumes.

A great deal of effort, as you know, has been devoted to systematically improving reliability.

I remain confident that 90% upgrade utilization is achievable on a sustained basis.

The midpoint of our 2015 guidance calls for a further year-over-year increase to Oil Sands production of about 9%, continuing the trend of steady growth.

With no major turnaround maintenance scheduled this year, I believe we're well-positioned to hit that target.

In E&P, our 2014 production exceeded the annual guidance range, both in Canada and the North Sea.

With Golden Eagle ramping up to capacity by the middle of this year and new production from Hibernia South, we expect to overcome declines and modestly grow our E&P this year.

We don't include any Libyan production in our forecasts, given the volatility of the situation there.

Cost management was also a good story in 2014.

Thanks to improved reliability and productivity, we continued to reduce our cash costs at Oil Sands.

When combined with our relatively low cost off-shore production, our blended cash operating cost for all oil production across the Company averaged less than CAD30 a barrel.

We've also continued to advance our large, longer-term growth plans.

The Hebron project off the east coast of Canada continues to progress well.

Construction activities on the top sides and facilities are continuing at the deep-water site.

The project remains on budget and on schedule to produce first oil in late 2017.

At Fort Hills, all critical 2014 milestones were substantially completed on schedule.

Overall aggregate engineering and procurement progress have surpassed 60% as per plan.

Site construction manpower is now over 3,000, and we're beginning to see an increase in high-quality labor availability as a result of the recent downturn in project spending across the industry.

Our capital and schedule outlook remains unchanged and we continue to expect first oil late in 2017.

So our operations came into the new year firing on all cylinders, setting us up for a solid year-over-year increase in production and our key growth projects are tracking to plan taking advantage of the soft market conditions to maximize both quality and productivity.

In short, things are moving ahead operationally according to plan.

But of course with low oil prices where they are today, there're plenty of questions about our Company's plans.

With excess global oil supply and slowing demand, some analysts are suggesting that today's price environment is the new normal.

I'm not going to get into forecasting oil prices, but there are a few observations I'd like to make.

The first one is Suncor is a Company with significant operating assets, growing production, and decades of resource in our control.

We're focused on continually improving the reliability of our operations, taking capital and operating costs out of the Business, and profitably growing our production.

When global oil prices were consistently between [$105] and [$125] per barrel over the last few years, we continued to plan based on a much lower price, which we saw as more representative of the long-term.

We used the excess cash flow we generated to build a balance sheet that would see us through the downturn we knew would eventually come.

And, of course, we have returned over CAD5 billion to shareholders via share buybacks and steadily increased our dividend.

Today's low oil prices should not come as a surprise.

In fact, on the contrary, it was the stable pricing of the last few years, which represented the anomaly.

We planned for this crude price environment and we're prepared to manage through it.

We've taken prudent actions to accelerate our cost reduction initiatives and defer some discretionary capital spending until a definitive price recovery is evident.

These actions have not impacted our 2015 production plan or our largest growth project, but they will strengthen our operating model and help us maintain or improve our competitive position.

So in short, we've been managing the Business and the balance sheet with the expectation of volatile oil prices.

We fully expect the price cycle to include highs and lows and we have a financial strategy that's designed to work through the entire price cycle.

This is a very challenging time for the entire industry, but it's -- I hope you can see it's a challenge that we at Suncor are prepared to meet and to meet head on.

With that, I'll pass it along to Alister to go into the detail of our financial results.

Thanks, Steve.

As we all know, the final quarter of 2014 saw a steady drop in the global oil prices for the first time in six years.

Of course, that had some consequences for Suncor's [out] and led to a decline in our earnings in cash flow.

We generated CAD386 million in operating earnings and CAD1.5 billion in cash flow from operations.

Our average sales price of the Oil Sands fell to just under CAD70 per barrel, a drop of almost C20 per barrel versus the third quarter.

In E&P, the decline was even steeper.

East Coast and North Sea realizations fell by about CAD32 and CAD25 per barrel respectively versus the third quarter, reflecting the greater drop in Brent crude pricing during the quarter.

The fallen crude prices further impacted financial results in the downstream business, due to the first-in, first-out inventory valuation that Suncor employs under Canadian GAAP.

As we all know, the FIFO accounting methodology matches our crude costs and product sales on a lagging basis.

Generally, over time, the impact on earnings and cash flow is neutral as prices even out.

However, as we have seen, in a sharply rising or falling market, the impact can be significant and that was the case in Q4, with the FIFO calculation resulting in a reduction to earnings and cash flow of approximately CAD372 million after tax.

During the fourth quarter, we continued our focus on careful cost management, taking a very disciplined approach to both capital and operating expenses.

On the capital front, we invested CAD1.8 billion in the quarter, bringing our total CapEx for the year to just over the CAD6.5 billion mark.

This represented a saving of about CAD1.3 billion versus our original budget, and prudent management in the fourth quarter [borrows] in below our guidance estimate.

That marks the fourth consecutive year in which we have delivered our capital program, while spending less than our budget.

2014 was also the fourth year in a row that we have generated significant free cash flow over and above our capital spending.

In 2014, our cash flow from operations exceeded our capital spending by CAD2.1 billion.

That brought our total free cash flow for the past four years to over CAD10.4 billion.

That is quite an accomplishment, but with oil prices hitting multi-year lows, we need to exercise even greater capital discipline to ensure that we continue to live within our means.

Consistent with our financial strategy, as you know, (technical difficulty) we announced a CAD1 billion reduction to our 2015 capital spending program.

This involves deferring discretionary spending that will have no impact, as Steve said, on 2015 production, and only a modest impact on future production.

We also announced a planned reduction of CAD600 million to CAD800 million of operating expenses.

In most cases this represents an acceleration of cost reduction initiatives that were already underway across the Company.

We expect to achieve sustainable reductions to our cost base, which will offset growth and inflation over the next couple of years.

Moving forward, we will obviously monitor the price environment closely and make any further adjustments to our spending plans, as the situation warrants.

Spending within our means and preserving a strong balance sheet will continue to be top priorities for us.

Speaking of the balance sheet, it remains in excellent health.

We finished the year with almost CAD5.5 billion in cash and a net debt-to-cash flow ratio of less than 0.9 times.

During the fourth quarter, we increased our liquidity by executing a very successful CAD1.6 billion debt issue, and of course, we continue to have access to unutilized lines of credit exceeding CAD4 billion, so we have ample liquidity to execute on our strategies.

Our long-term capital allocation priorities remain unchanged: fund the base business as it continues its operation excellence journey to lower costs and improved reliability, invest in our long-term profitable growth in our core business areas, and return meaningful cash to the shareholders.

In the near-term, we are taking the necessary steps to preserve cash and maintain our balance sheet strength.

This will result in the deferral of some growth spending, as we've already discussed.

We have also suspended purchases on the share buyback program, as we focus on cash preservation.

There's no change to the quarterly dividend, which we have increased twice in the past year, by a total of 40%.

This continues to align with our commitment to a dividend that is competitive, reliable, and sustainable.

To sum up, our financial strategy, as Steve said, is designed to enable to manage through the inevitable oil price cycle.

We're making prudent, proactive moves to preserve cash and liquidity, and maintaining our balance sheet strength.

We remain resolute in the commitment to capital discipline, operational excellence, and profitable growth.

With that, I'll pass you back now to Steve Douglas.

Thank you, Alister.

Just a couple of notes before we go to the questions.

Some one-time impacts, obviously, the LIFO, FIFO accounting adjustment was a considerable impact this quarter, with crude prices falling as sharply as they did.

The after-tax impact was a negative impact to earnings and cash flow of CAD372 million in Q4, and for the year, it was a negative of CAD290 million.

Stock-based compensation impact was actually a recovery after tax of CAD7 million in the quarter and a cost of CAD251 million for the year.

FX exchange rate was again a considerable factor, with the Canadian dollar weakening during the quarter.

It had an after-tax negative impact of CAD302 million, and for the year, a negative impact of CAD722 million.

I should point you to our guidance.

The 2015 guidance was adjusted in January.

It remains as per that January adjustment.

The key changes were a CAD1 billion reduction to our capital spending program, a CAD1 a barrel reduction to Oil Sands cash costs, and various adjustments to taxes and royalties that flow out of lower oil and gas price assumptions.

Full details, of course, are available on our website.

With that, I'd request that we keep our questions on a strategic level.

We'll be available, as always, along with the Controller's group, to answer detailed modeling questions.

Melanie, I'll open the lines for Q&A.

(Operator Instructions)

Greg Pardy, RBC Capital Markets.

Thanks, good morning.

Steve, just wanted to touch on a couple of things in the release.

One is just the storage capacity you've got in the Gulf Coast, just interested in what the magnitude is there and the thinking behind it?

And is there any update on the Line 9[B] reversal?

That's a tough first question, Greg.

We'll have to take a quick look and see what the absolute storage capacity is down on the Gulf Coast and we'll let you have that.

Suffice to say, with the Keystone south leg being commissioned, we have been using that, both for equity crude and trading, as well.

So we are making good use of the facilities down there.

I'll get you an update on the absolute inventory.

On Line 9, no specific update.

We've been saying for a couple of years now that our expectation was that, that line would come into service the second quarter of that this year.

We have no reason to change that guidance at the moment, so it's in process, the regulator has been reviewing it, and we have no update as to when he's going to conclude, although his latest review period is coming to an end quite quickly now.

We're still, at the moment, anticipating second quarter this year.

Okay, great.

Thanks for that.

The second one is just around the Oil Sands.

Firebag has obviously been hitting the cover off the ball and MacKay River has been very, very strong as well.

Just with the unplanned maintenance that you've seen in the mining operations there, any thoughts around that?

I know that, going into -- through 2015, there's not a lot of maintenance, but did you see more unplanned maintenance last year than you expected?

A little bit more than we expected, but nothing exceptional and nothing to worry about.

No major events there.

We have been able to -- we've corrected those through the maintenance we did.

So the trend, as you can see, from guidance is -- it's that 9% volume year-on-year underpinned by Firebag and MacKay River, but also depending on a solid [mined] volume, as well.

Things came out in great shape and we've had a very, very strong start to 2015.

So it looks as though all the work we did has been successful.

Good stuff.

Thanks, all.

Paul Sankey, Wolfe Research.

Steve, given the oil price plummet, there's been a lot of debate about the price at which Canadian heavy oil sands producers would be forced to shut [in] production.

Clearly, as regards to cash costs exceeding the oil prices, and I just had a three-part question for you.

You mentioned your own cash cost was below CAD30 a barrel.

What would be the comparable global crude price we should consider against that?

The second was where do you think the wider Canadian industry, heavy oil sands industry, sits in terms of its cash costs?

And the final part was, what do you think it would take if we really get low and stay low, for production actually to be forced to shut in?

Thanks.

Okay.

Thanks, Paul.

A lot to that question.

I'm not going to get into the game of trying to forecast prices.

What Alister and myself have tried to indicate is that we've developed a balance sheet and we've been driving with capital discipline and operationally excellent to position ourselves as the lowest cost and highest reliability competitor.

I'm very pleased with our progress.

You've seen successes, year-over-year reduction in cash operating costs at Oil Sands, and you can see we have a high degree of confidence coming into 2015 that, that trend will continue.

In fact, with the current low crude prices, we've accelerated our cost reduction program.

So we're confident that we are -- depending on which part of the business you look at -- the lowest cost operator integrated overall.

I talked about a blended cash cost of less than CAD30 a barrel.

For Oil Sands in 2014, it was just under CAD34 a barrel.

We believe that, that is the, or amongst the best in the industry.

That was a conscious challenge of ours that we set ourselves to get there and to stay there.

We believe we still have significant progress that we will continue to make this year as reliability comes up and the cost drive continues.

The last comment I would make is we're very well-positioned relative to industry, is a significant amount of our costs are fixed or sticky, and therefore we continue to operate down to low, low prices.

Of course, we're not taking -- we don't take a spot view.

These are not plants you start up and shut down in a day.

It has to be a long-term view of where prices are going.

So all I would say, with confidence, we've seen nothing so far that has caused us to take capacity off and we watch the market very closely.

We do have a proportional and progressive cost reduction program.

We've taken the first steps that Steve and Alister talked about, but we have more available to us if necessary.

We don't judge them to be appropriate yet, given the strength of our balance sheet and our ability to stick to our overall strategy but we remain poised; if we have to take action, we will face the challenge.

Great.

Thank you.

That's a complete answer and I understand what you are prepared to comment on and not prepared to comment on from the way you've talked.

Could you just highlight what gives you the competitive advantage that you're claiming in terms of having lower costs?

And I was wondering, further to that, if you like more or less fixed and sticky elements and really what differentiates Suncor in terms of your ability to say you believe you are as good as or lower than anyone else?

I'll leave it there, Steve.

Thanks.

Thanks, Paul.

I would say, judge us by our track record.

It's very easy, when you come into circumstances like this, to claim that you will be working hard on operational excellence and cost reduction.

These are fundamental, deeply engrained projects within companies and they're not things like a tap you turn on and off.

So look at our track record.

You've seen us come down over the last three or four years from CAD40 to near CAD30 and we've put that trend in our guidelines.

So you should have a degree of confidence that when we say we're going to deliver, absent something completely unforeseen, you will see us deliver on that.

The proportion of fixed costs for us is no different.

If you look at the fixed cost variable cost ratio in these businesses, a mine compared to a mine or a in situ compared to in situ is largely the same.

We do believe we have benefits as an integrated Company up there, because the ability to move plants up and down on a daily basis is different between in situ and mining, and we think having a combination gives us a competitive advantage.

Thank you very much.

Phil Gresh, JPMorgan.

First question is just, in this environment, given the strength of your balance sheet, the amount of cash you have, would you be interested in going on the offensive and possibly making acquisitions?

To the extent you would have some interest, is it in the Oil Sands or would you want to diversify in other areas around the world?

Just any general thoughts about the overall environment?

Thanks, Phil.

What I would say is we are very well-positioned with our balance sheet and a degree of what I will call countercyclical behavior is a possibility, but we've always said that.

We do look at each of the components of our Business, and also a recap on a few comments I've made over the last few years.

Each piece we look at -- if you look at the integrated strategy, there are assets on the market in all elements of that at the moment.

There are downstream assets on the market.

We've been a very cautious purchaser of downstream.

We like where we are in terms of downstream integration but we do keep an eye on the future to maintain, at the right price, the sorts of proportion of upstream to downstream ratio that we have.

So no particular plans.

We stay prudent there.

Same on E&P.

I've been saying for a number of years, in fact, what we've been doing is selling down our E&P assets and we've completed most of the big pieces.

We sold the gas business almost at the top of the market.

We've been selling small pieces, which don't fit strategically with our view forward of E&P.

There's a great deal of assets on the market at the moment.

We continue to look.

We've got -- there's nothing significantly different today than yesterday other than there's lots of assets on the market.

You will see us exercise caution and we're not in any hurry.

We'll just continue to take a look and if it fits with our strategy, we'll take a second look.

And our strategy was concentrate on where we're strong: North Sea, East Coast, East Coast of Canada, not exploring the world and necessarily moving into regions we have no expertise in.

So again, downstream and E&P, nothing particularly different today than it was yesterday.

It's much the same in oil sands.

We still see -- there are lots of assets obviously potentially becoming available.

They have to pass a very difficult hurdle in Suncor's case, because we value the components of the company and the obvious ones are the operating assets and the resources.

All resources tend to struggle to pass Suncor's test because we believe that we have the best resource in the industry.

Any resource we buy likely wouldn't be developed for 20 or 30 years, and therefore has very little current value, so it's much about the quality of the operations.

So we continue to look.

There's no special activity going on in the Company at the moment.

And just as a general comment, we still see a gap between the expectations of buyers and sellers, so you'll see us exercising an abundance of caution.

That makes a lot of sense.

I appreciate all the color.

It seems like it could take some time.

Just on the capital spending side of things, maybe just remind us whether there is any additional flex in 2015 and just what flex you feel like you have in 2016 as you're thinking about managing the capital spending?

Just as a matter of discipline in the Company, we went far beyond the CAD1 billion we've talked about.

We think that proportional prudent at the moment to keep us effectively neutral at prices we're anticipating.

We've also got the next tranche ready.

It's very -- it tends to be more capital inefficient to stop projects in the current year, just because the spend has started, people are mobilized there in the field, you've spent money on pieces of equipment and people getting them in there.

So what we do have, we have more that we can do in 2015.

We've also already taken a good look at 2016, and have considerably more scope there.

And of course, it is possible to suspend the large growth projects.

Our view is that, that's not appropriate at the moment and not warranted.

In fact, if I gave you a quick update on Fort Hills, the project is going very well.

It's 25% complete.

It will be 50% complete by the end of this year.

All the partners are supporting it.

All of the partners have approved the details of this year's spend and we are seeing what we anticipated, which is improved productivity and quality in the market.

So you will see us protecting those big strategic growth projects for as long as we reasonably can and right now, our judgment is that we can still go ahead with those.

If I just could ask one clarification, is there any deflation in your capital spending budgets?

Some other companies have started to dial in the idea of deflation.

Just wondering what you're seeing in the Oil Sands specifically?

At the micro level, the answer is yes.

We're seeing it right now.

We're seeing -- and of course, you get it in a couple of forms.

You get it in, obviously, some commodities can cost -- fuel is costing less.

We're finding that people are much more local now so we're not having to fly them in from such distances.

Those are easy to measure.

The other ones are, we're seeing the quality of worker improve.

We're seeing the productivity of the groups improve.

Those are more difficult to reflect, but -- so we haven't put out revised numbers, but there is definitely a deflationary pressure in the contracting and construction business at the moment.

Got it.

Thanks a lot.

Guy Baber, Simmons & Company.

Good morning, gentlemen.

Thanks for taking my question.

I was hoping we could discuss your expectation for returns in this environment and what assumptions might be implicit in some of the medium-term planning.

I believe you all have the ROCE target of 15%.

So on the medium-term assumption, what combination of oil price appreciation and cost structure improvement/deflation may be necessary for you guys to achieve your target?

I'm just trying to get a sense of how achievable those objectives are, what the confidence looks like, what we might need to see, and especially just what the latest views are now that it looks like we may not be revisiting $100 barrel WTI environment anytime soon?

And then I had a follow-up.

Guy, it's Alister.

That's a pretty detailed question.

What I would say is when we set out a target of 15% for our overall return on capital on our business, we're looking at that in a more normalized oil price, not in an environment we're in today, clearly.

I don't think there will be any expectations on this year.

If you go back to slightly higher oil prices, we're going to see the execution on our capital being able to bring that in as we expect.

The returns on the projects that we have previously discussed, whether they be in the Oil Sands or in the E&P and the downstream business, the combination of that with our existing business is going to get us that 15%.

Okay.

Thank you.

And then I had a follow-up on the prior question on capital spending guidance.

You had some detailed slides out that showed CAD700 million of discretionary growth capital.

I was just hoping to get some incremental commentary on exactly what that pertained to, just considering that the strip right now is below for 2015 what your planning assumptions are.

Could you provide some commentary there?

Would that be spending related to the logistics growth piece that you've called out or is that logistic piece, such low capital intensity that you could probably achieve that and that would be in a separate bucket?

Just looking to get some more clarity there?

That discretionary capital spend really consists of a couple of stuff.

Spend in our E&P business, we're doing some drilling this year, which could of course, as Steve said, be cut, if we decide that oil prices are going to remain lower for longer, much more difficult to do given [rent] commitments.

And across the whole business, it's projects that are nice to do and that do derive a longer-term benefit, but in today's environment, we don't have to do them this year, we can do them next year.

That's really the mix of projects and discretionary spend which gives us some scope, as Steve said, to make further cuts if we need to.

Just to clarify, the incremental production that you guys think you could realize from logistics de-bottlenecking over the next couple of years, which is pretty significant, that looks as if it should be relatively safe?

Steve Douglas, here, Guy.

The incremental production from logistics de-bottlenecking, that is uniquely in Oil Sands, and the cuts that we've made to date largely don't impact our Oil Sands plans.

We're still talking in terms of 550,000 to 600,000 barrels a day of production from Oil Sands by the end of the decade.

So you're talking about potentially a year, one- to two-year push on some projects like the next phase of MacKay River, for instance, but largely, that growth track remains intact.

Okay, great.

Very helpful, guys, thank you.

Paul Cheng, Barclays.

Hey, guys.

Maybe this is either for Steve or Alister.

Before the downturn in prices, the Company has been talking about to spend CAD7 billion to CAD8 billion a year or to grow, [as they call it], 5% to 8% a year in production.

It looks like that the course is being somewhat reset, so even after the oil price recovers, should we assume that, that range is now more like in the CAD6 billion to CAD7 billion?

We don't guide on capital for two or three or four years, but I'll make a general comment, Paul.

We've maintained our trajectory and we spent CAD6.5 billion for the last four years.

That doesn't mean there won't be years where it can peak in there.

It doesn't mean we haven't got a long list of projects we can spend money on.

What we've always tried to stick to is a capital discipline where those projects can be very effectively executed.

So one of the things we'll be taking you through later this year is we have now started to clarify the in situ replication program.

That's looking really very exciting now.

It looks as though we have a multi-phase program, which can happen over a five, 10 year period and we'll start to -- as we start to see oil prices recover, then we'll start to talk more of that and factor that in.

So judge us by what we've done.

You've seen us at the CAD6.5 billion level.

We have a queue of very attractive projects, so you'll see some pressure on that.

But what I would say is, if you think when me and you were having this debate a couple of years ago, there was discussion of CAD9 billion or CAD10 billion.

You've clearly seen us pull back into a more balanced range.

So you're right, you're going to see -- and it depends, if you look at last year, we generated just over CAD9 billion, even with the price corrections at the end of the year.

So you've seen us spend well within the cash we've been generating.

Alister, for CAD600 million to CAD800 million of the cost saving target for the next couple of years, can you break down the nature of the cost savings?

Is it labor costs?

Is it service costs?

Or any breakdown?

And also if [rock me], break it down by segment, also?

Yes, Paul.

Of that, I'll give you some three high-level buckets that will be easier for you.

The first one is workforce, which probably accounts for maybe 30%, 40% of that number.

That's a combination of contractors and some employees leaving the Organization.

Then the next bucket is probably -- is around 30%, too, and that's really looking at discretionary projects, expense projects, much the same as on the discretionary capital projects we were buying.

We've taken a look at them.

The economics are good, but they perhaps do not a benefit until next year or the year after, so we're just going to defer those.

They don't need to be done this year.

And then next 20% to 30% is really looking at the amount we're spending on overall contractors, consultants, professional services, stuff like that.

That's the three buckets that we're looking at taking those operating expenses out.

What we want to make sure, though, is that we implement as much of those savings as sustainable as we can, so they're not just a one-time reduction that comes back.

We want to make them sustainable to be built into our lower cost base going forward.

Alister, if we're looking at throughout the entire Organization your supply chain, the supply cost, is there any rough estimate you can give us?

What is the percentage of the service costs that are either under very short term or no contract is based on -- when I say short term less than two years?

I'm trying to understand that, if we do see deflation in the industry, how quickly that we could expect that could be able to pass through?

Paul, that's a large part of what we're trying to get after in some of the cost savings and on workforce cost savings.

So anything that is short term, but even longer-term contracts we are having discussions with our suppliers.

We're all in this together.

We all have to take the hit here.

That's really -- we are be able to get that out this year and then next year rather than wait for several years on that.

Two final questions.

Steve, let's assume that you're going to protect the long-term major growth project and you're going to continue through on the safety and all the spending there.

What is the minimum spend you need to do in 2016 and 2017?

Is it a CAD6 billion?

CAD5.5 billion?

Any number?

Sorry, microphone on there, Paul.

In terms of sustainable, we print those numbers, and it's in that, depending on the year CAD3 billion to CAD4 billion, and of course, 2015 is a low turnaround year.

We come into a bigger turnaround in 2016.

So that's impacted.

And then there's discretion.

I would go back to the same answer as before, if you like, that look at what we've actually been doing.

We've comfortably been doing CAD6.5 billion for four years now, so you can put some factors around that.

Other than that, we'd have to take you through the specific items in the year because there are decisions we make at the margin around turnarounds and discretion.

All right.

Thank you.

Amir Arif, Cormark Securities.

Good morning, guys.

Just a quick question on the capital spending reductions or flexibility that you see out there.

Just trying to get a sense of how much of that is based on where you have the flexibility versus where the returns are.

I appreciate the color you gave on Fort Hills.

Just looking at the projects that are being delayed, like East Coast Canada, [Roar Ford] or the MacKay River expansion.

Can you give the sense of where the returns of the those projects would be relative to Fort Hills?

First of all, the dimension it's difficult to give a simple answer on is time because the capital discipline part of our program means that we always go to effectively the highest return projects first.

Of course, there is some adjustment for the type of project.

A Fort Hill -- you don't make that judgment every year on a CAD15 billion.

You make some judgments, you do it on the basis of a forward projection of crude, and in Fort Hill's case, for the next 52 years.

You then don't go back and revise that.

We have a long list of projects with returns which support our objectives of a 15% return on capital.

If you like, the Fort Hills decision is done.

It's difficult to see how that project will start.

It will be 50% complete by the end of this year.

So that one is [passed].

If you then look at the MacKay River, if you look at the replication in, in situ, if you look at the -- and they clearly are supporting, as part of the basket of projects, our objectives to make a move to 15%.

Clearly, the most attractive ones economically, and that's why Steve said they're also protected in here at the moment, are the de-bottleneck projects.

They are higher return, lower cost, faster to execute projects, and that's why we've executed the first of those already and they will take a high priority because capital discipline for us is about doing the higher return ones first.

Okay.

Appreciate that color.

And just a quick question, a follow-up on the last question.

The CAD600 million to CAD800 million in operating cost savings over the next two years, how much of that could show up in this year?

And is that factored in your current operating cost guidance?

It's certainly factored into our estimated for the year.

Clearly, we have set a target to get those out over two years, but we are accelerating as much as we can and we're trying to achieve as much of that this year as we can.

Okay.

And then just a final question if I may.

On the -- as Brent spread has come in relative to WTI, just curious about the economics of the rail into Montreal and the Gulf Coast storage.

Are the economics of those sensitive to the Brent?

I'm just curious why volumes [of the rail] today?

They certainly are sensitive to them, but it's not as simple as taking the Brent/WTI differential.

You have to look at the local crude differential.

So I would say that rail into Montreal is marginal and rail to the Gulf Coast is not economic at this point, so we're currently not railing to the Gulf Coast.

Okay.

Thanks for the color.

Mohit Bhardwaj, Citigroup.

Thanks for taking my question.

A lot of stuff has been hit already.

Steve, I just wanted to talk a little bit about some of the stuff that you mentioned before on reliability in cost management.

If you look at the cost management part, obviously since you took over as CEO, you guys have made a lot of progress over there.

Just looking at the reliability part here in the mining operations, you have consistently maintained a 90% utilization on the upgrader, but we still haven't seen even a single quarter where we have seen that utilization.

So if you could talk about that a little bit?

How do we get over there?

Remember, we did always say 90% once we've been through turnarounds on both of the upgraders and the one to still go is in 2016.

I am confident that we're going to achieve these 90%s.

We're seeing steady progress.

It is a question of relentlessly working on the challenges that are there.

We understand a lot of them.

We're working on them.

We're making the progress.

If you draw a chart of upgrader reliability over the last two or three years, you'll see it consistently moving in one direction.

So I am more and more confident as the days go on.

In fact, we've seen -- there's always an element of seasonality just because the consequence of any challenges in terms of fixing them in the winter months is that bit tougher.

But we've seen excellent performance through this winter period.

In fact, we're seeing a number of days where we are well above 100% on those machines now.

So getting -- I'm very pleased with the work that Mark Little and his team have been doing and I fully expect to see the reliability come up and the costs come down and that's why we're reflecting it in the guidance this year.

All right, thanks.

Just a question on Firebag, obviously great quarter on Firebag.

Is there a scope to bring some of the de-bottlenecking projects forward so that Firebag actually starts to produce at that 220,000 level even without the slow spending or the discretionary spending, which is lower this year.

Is there a scope for moving Firebag production to a higher level than what you have currently?

Is there a scope for that this year?

There's a scope for it.

The timing is important, of course.

What we're doing is, if you go back two years, our objective was to ramp up Firebag quickly to it design at 180,000.

We were able to do that more quickly.

We then said, okay we're -- now we've been able to get the plant up there occasionally, we want to get it up there more full-time, and as we do that, that will help us identify where we would spend the de-bottleneck money.

Of course, we've been able to go much further than we expected.

We've got -- we've been up, as we said, above 180,000.

We've actually had it up for a period above 190,000 and it's looking very good.

Before we design the de-bottleneck, we want to take the plant itself to where we believe we can get it.

We're very comfortable in this 180,000-plus range.

We're working on the next de-bottleneck phase.

It's not fully designed.

It could be in that 20,000- to 40,000-barrel a day range, but we want to be able to see the plant operating at its full capacity with the existing assets.

Very encouraged.

It's going very well.

It's proven very reliable at these levels.

Because of course, if you remember, it was a year ago when we took -- there are three parts to that plant.

There's, effectively, the steam-raising part of the plant, there's the reservoir, and then there's the oil-water separation.

Depending on how well you're operating, it depends on where you de-bottleneck it.

So early on, when the steam-to-oil ratios were up over 3, then the place to spend the money was to raise more steam.

As we're getting into operating this at higher levels, what we're finding is we've been able to bring the SORs down.

So that's not the only place you would spend money.

You start to have to look at spending money in other parts of the plant.

It's important that it's a measured, steady progress.

Delighted with the reliability.

A little bit more to come and the team are working hard on what the de-bottleneck will look like.

Thanks for taking my questions.

Mike Dunn, FirstEnergy Capital Corporation.

Good morning, all.

A few questions on asset performance, mostly offshore fields.

I'll start with Terra Nova.

It looks like November, December volumes averaged about 77,000 barrels a day gross, which I believe is the highest in maybe 3.5-plus years.

Is this the base from which we should assume declines?

I know there was some new wells, a couple that came on in Q4, but -- anyway, production was surprisingly strong, just wondering if we should be modeling declines from here or steep declines quarter-over-quarter after this?

I'll take the question.

First is a compliment, in yes, you're right, we had a very good year with E&P and it ended very strongly and that helped us in the fourth quarter.

We can give you more guidance on the actual numbers of individual assets if you need those, but there was an element of a flushing volume in Terra Nova in particular.

It was an excellent quarter.

The numbers were generous to us.

But we're very pleased with the same reliability programs are happening in Terra Nova as in Oil Sands.

The same assistance through the joint ventures in the North Sea are happening with our partners there.

It's a committed focus on reliably operating assets and we're seeing benefits right the way across the business.

We're seeing it in E&P, we're seeing it in Oil Sands, and clearly visible around downstream.

And Mike, we can -- it will be a slightly lower base than where we finished the year, that you'll want to take your declines on Terra Nova, so we could walk you through that offline.

Sure.

Great.

Similar question for Buzzard, gentlemen.

If we go back a few years ago to what Nexen had been saying about when declines would start, they should have shown up by now.

If you go back a couple of years, it was supposed to be 2014, 2015, and now guidance is it's officially that some time in 2015, it will begin to decline.

I'm just wondering how confident are you that, that's going to happen, or is there a chance that declines don't kick in until next year?

We have started to see the declines here in the fourth quarter and so we have reflected decline in the guidance for 2015.

Great.

So you're definitely going to see -- and it would be in the order of 15% to 20% in the first year.

Okay.

Thanks, Steve.

The Montreal hydrocracker work, you mentioned that you are expecting a yield uplift for that.

Can you just give me a sense for order of magnitude.

Are we talking a couple or a few thousand barrels a day there?

It would be too early to talk about the details of the Montreal yield change, just because the schedules for the later stages of the project are part of what's under review at the moment.

Most of the Montreal refinery projects have refining type margins, so we will take a moment to reflect in the new price world, what we think those returns, what the timing of the projects are, and that's probably the time to talk about the actual details of the projects.

Okay, great.

One last one from me, if I may.

I believe you're partnered with -- I forget who -- but there was plans for you to participate in an offshore well, offshore Nova Scotia, I believe this summer.

Is that still going forward?

Yes.

Just to remind you.

We did do a deal in two different joint ventures.

One was with Shell and Conoco in the Shelburne Basin.

That's a massive resource, the first part of that will be some exploration later this year.

That is still planned to go ahead.

The second deal was with Exxon and Conoco around the Flemish Pass, another potential reservoir with great potential, but there's no material spending on that one for the next couple of years.

Okay, thanks, Steve.

That's all for me.

Operator, we're getting pretty close to time here.

I'm going to ask that we take one more question and we will certainly be available offline to field further questions the rest of the day here.

Jason Frew, Credit Suisse.

Sure, thanks for taking this.

I was wondering, Steve, if you could give a bit more life to what seemed to be a strong operating set of results, excluding the FIFO impact in the downstream?

And then just a quick follow-on as to how you see the downstream portfolio, strategically.

You've done some small optimizations in terms of the assets, but is there room for more?

First of all, let me just talk around general operation, particularly downstream.

These are big operating businesses and I have to say, overall, 2014 was a good year for us.

I'd like to have seen slightly stronger operations around Oil Sands and the mine, but I'm comfortable that the maintenance has been done and the plans are in place now.

So you're going to see a clear year this year and you're going to see what the capability of those assets are.

There is no doubt, if you look at the downstream, in particular, we are one of the, if not the number one operator on this continent.

It does move around a little bit depending on what turnarounds we take, but we regularly get the best margins per barrel of capacity in the downstream and most of the serious players have us in their sights as a target to try and do what we're doing.

That's for a number of reasons it's a high-quality business with high-quality assets, a great team down there delivering it.

And this has been happening over multi-years.

This is not something that happened last year.

It's something that's been happening over -- it was started 10 years ago, continued through the merger between Suncor and Petro-Canada and has continued with the new Company.

We do continuously look at how much further we want to take that integration.

Of course, the next step for us is when Line 9 gets reversed, then we start to integrate Montreal in as an inland refinery.

We then have the opportunity beyond that to look at capital expenditure there, and we're looking at those projects and going through them in detail.

Clearly, in a capital-constrained world, those are projects that you have options on, but they're looking reasonably attractive.

So at the appropriate time we'll take the detailed reviews and look as to whether the coking project goes in.

We did make the first modifications to the Montreal refinery in anticipation of some of the changes in feedstock and we've done that and that project was completed before Christmas and is online now.

So there's a suite of projects around downstream integration and we'll look at those.

Beyond that, we're opportunity-driven.

We look at every asset that is bought and sold on the continent to see if further integration is planned and we like the amount of integration we've got now.

We've got, as I say, that effectively spare Montreal refinery, in terms of integration, so we've got running room in front of us.

In our mid-and long-term plans, we look beyond that, but no plans at the moment.

Okay.

Thank you very much.

Okay.

With that, I'd like to thank everybody for participating.

We really had an unusually lengthy list of questions, and I know we didn't get to some.

As mentioned, we're certainly available to field them the rest of the day.

But I'll thank everyone for participating and sign off.

The conference has now ended.

Please disconnect your lines at this time.

We thank you for your participation.