Suncor Energy Inc (SU) 2015 Q3 法說會逐字稿

All participants please stand by, your conference is ready to begin.

Good morning ladies and gentlemen and welcome to the Suncor third-quarter 2015 financial results 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, Melanie, and good morning, everyone.

Welcome to the Suncor Energy Q3 earnings call.

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

A legal advisory regarding forward-looking statements, I'd ask you to note that today's comments contain forward-looking statements information that actual results may differ materially from expected results because of various risk factors and assumptions described in our Q3 earnings release as well as our current AIF and the offer to purchase and takeover bid circular dated October 5, 2015.

All of these are available on SEDAR, Edgar and Suncor.com . There are certain financial measures referred to in these comments and they're not prescribed by Canadian GAAP.

For a description of these, please see our Q3 earnings release.

After our formal remarks, we will open the call to questions from the phone lines.

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

Good morning and thank you for joining us.

We have a lot to talk about this morning.

What I'd like to do is start by reviewing our performance in the quarter.

Then take a few minutes to take about Suncor's offer to our Canadian Oil Sands Limited.

But first our quarterly results.

Suncor delivered strong operational and financial results, once again, in the third quarter and we took significant steps to profitably grow the company.

As everyone knows, we remained squarely focused on operating our assets well, allocating capital in a disciplined manner and profitably growing the business and in this quarter, we continue to make meaningful progress on all three fronts.

Our operating results in the quarter were very strong.

At our oil sands operations, we produced over 430,000 barrels per day, including 315,000 barrels per day of synthetic crude.

It was the third consecutive quarter in which we reached 90% throughput on our upgraders and we also continued our trend of steadily reducing costs.

Oil Sands operating costs declined to CAD27 per barrel with just over $20 per barrel.

Next the lowest levels since 2007.

Record in (inaudible) production with an average cash cost of just above CAD12 coming in at [CAD12.55] per barrel contributed positively to our results and we achieved these production and cost thresholds despite several weeks of planned maintenance in September.

We also saw strong results from exploration and production in Q3 in the UK North Sea but it continued to operate reliably and Golden Eagle reported it's first full quarter running at nameplate capacity.

Together, they produced 67,000 barrels per day during quarter at an average operating cost of just under CAD6 per barrel.

On the East Coast of Canada, we completed plant maintenance at Terra Nova and continued to see natural declines at White Rose and Hibernia.

Nevertheless, we remained on track to meet our production guidance for the first year.

In the downstream, we enjoyed one of our quarters ever.

We recorded average utilization rates of 96% of our refineries and took advantage of strong crack spreads and location differentials to generate near-record earnings and cash flow.

With the recent announcement of a final approval for the reversal of line 9, we were able to commence line field this month and we expect the first pipeline shipments of inland crude to reach the Montreal refinery before year end.

This represents the potential for significant economic uplift for our downstream, which is already a consistent industry leader in profitability.

During the third quarter, we maintained our unwavering focus on capital discipline.

We executed extensive plant maintenance in both the upstream and downstream.

We continued to drive our major growth projects forward according to plan.

And we managed the associated capital spending well within our budget.

This helped us generate free cash flow once again in the third quarter, even after investing more than CAD900 million of growth capital and despite a Brent oil price to average just over CAD51 per barrel for the quarter.

Turning to profitable growth, I'm very pleased with the progress on our Fort Hills project.

Engineering is now over 95% complete and construction is approaching the halfway point as we continue to target first oil in Q4 of 2017.

In September, we announced the acquisition of a further 10% working interest in the project, bringing our own share to just under 51%.

This transaction is a great fit with Suncor's profitable growth plans for a number of reasons.

We originally established a joint venture structure for Fort Hills in order to effectively manage the financial risk associated with CAD15 billion project.

We are now two years into construction and we're tracking to plan on all major milestones.

We believe that the project execution risk has been significantly mitigated.

And so many we seized a strategic opportunity to increase our working interest.

The cost to Suncor for the additional 10% working interest will be approximately CAD1 billion.

That equates to about CAD56,000 per flowing barrel, a significant discount to the expected overall project cost of CAD84,000 per flowing barrel that we announced at project Sanction.

As a result, the acquisition has good stand-alone economics and also improves Suncor's overall project returns.

And of course, moving to 51% working interest gives Suncor majority interest in Fort Hills and strengthens our governance role on the project.

It was about this time last year that we were finalizing our goals for 2015.

Oil prices were in freefall but we were looking to maintain our track record of improving reliability and grow in production whilst accelerating cost reductions.

With three quarters now in the books, we're delivering on each of these goals.

We've been working to steadily improve the reliability of our oil sands upgraders with a goal of averaging 90% throughput by 2017.

Year-to-date in 2015, we had managed 94% upgrade in throughput including plan the maintenance down time in both the second and third quarters.

This compares to 84% throughput for the same period in 2014.

On the production front year-to-date we've increased total upstream output by over 9% versus 2014.

At oil sands operation, our year-to-date synthetic crude oil production is up by 12% and our overall production has increased by 9% versus 2014.

We expect our total production to finish the year squarely in the middle of the guidance range which of course we revised upwards in the second quarter.

We anticipate all production areas to be within their respective guidance ranges with the exception of Syncrude.

Which is likely to fall short of guidance due to the third quarter impact of the fire in August and continued operational challenges in the month of October when it's been operating at an approximately 60% of capacity.

With crude prices at the low end of the cycle, cost management is more important than ever and we've continued to steadily reduce our costs on both the per barrel basis and an absolute basis.

At oil sands, our cash operating costs are down by over 17% year-over-year.

From CAD33.55 per barrel in the first nine months of 2014 to CAD27.80 per barrel in the same period of this year.

On an absolute basis, oil sands cash costs are down over CAD300 million or 9% year-over-year.

And that's even though we've substantially increased production.

We have not made further reductions to our Q2 guidance which was CAD28 to CAD31 per barrel on oil sands cash costs but given the positive trend in our performance, we would expect to be at the very low end or possibly slightly below that range.

We're meeting or exceeding our goals on reliability, production, cost management, and growth.

And that adds up to very strong financial results.

So I'll now turn the mic over to our CFO, Alister Cowan to provide some color on our financials.

Thanks, Steve.

During the third quarter, we were faced with the lowest [regional] prices we've seen in our six years.

[Rental] resist over $51 per barrel for the quarter and WCS the Canadian heritage marker] average just under $33.25 per barrel.

Nevertheless, as Steve has said, we did put some solid financial results thanks to strong reliability and careful cost management and the strength of our business model.

We generated cash flow from operations of CAD1.9 billion and free cash flow of CAD146 million after growth capital of CAD923 million.

We now bring our year-to-date total to CAD5.5 billion of cash flow and CAD875 million of free cash flow after CAD2.7 billion of growth capital spending.

The refinery and marketing segment accounted to 42% of our cash flow, as our refineries operated at 96% utilization rates and we took advantage of a very favorable pricing environment.

As Steve said, we continue to take cost out of our business.

In January of this year, we committed to CAD600 million to CAD800 million of reductions and operating expenses over a two-year period to offset inflation and reduce overall cost.

We have made significant progress against that goal.

During the third quarter, our total operating, selling and general expense declined by 11% versus Q3 2014.

On a year-to-date basis, our OS&G expense is down by CAD864 million or 12% even with a significant production in [Q3].

Our [family] benefitted from lower commodity prices this year.

We've also made great progress in managing controllable expenses and taking structural cost side of the system.

We estimate that two-thirds of the savings we've achieved today is sustainable and we're working to identify further opportunities that we finalize our budget going into 2016.

When we set our cost deduction target last January, we committed to reducing 2013 capital spending program by CAD1 billion.

Our updated capital guidance range of CAD6.2bilion to CAD6.8 billion for the year reflected that CAD1 billion reduction.

Our capital discipline efforts proved very successful in the first half of the year and we were able to lower the guidance range in Q2 by a further CAD400 million.

We have continued to realized significant savings through a combination of capital efficiency, deferrals and consolations of non-critical project.

As a result, we may anticipate that our year-end capital spending come within a reduced guidance range of CAD5.8 billion to CAD64 billion, even after accounting for the additional capital spending associated with the purchases of a further 10% interest in the Fort Hills project.

Importantly, we've been able to manage to capital spending down without compromising our goals around profitable growth or operating excellence, which includes safe and environmentally responsible operations.

We have completed the extensive plan maintenance at (inaudible) asset base and we continue to fund significant growth initiative that are expected to deliver production and cash flow growth through the end of this decade.

Obviously, this performance is helping us to maintain a very solid balance sheet.

Our net debt to cash flow is running at 1.4 times and our growth debt to capitalization is 27%.

This looks like the impact of the lower Canadian dollar on the translation over long-term US dollar denominated debt.

We finished the quarter with CAD5.4 billion in cash and undrawn lines of credit of CAD6.9 billion for a total liquidity over CAD12 billion.

And, of course, we continue to earn a strong investment grade credit rating.

Our healthy balance sheet and cash position are what have enabled us to increase the return of cash to shareholders.

We continue that practice in Q3.

In September we made the first quarterly dividend payment to shareholders at the increased rate of CAD0.29 per share.

During the quarter, we reinstated a share buy-back program we purchasing and canceling over CAD1.2 million shares at an average price well below our current trading value.

And our securities regulations have required us to suspend the buy-back program for the duration of the Canadian Oil Sands offer process but we aim to pick off where we left off upon completion of the offer and subject to market conditions, the commitment we have made to repurchase CAD250 million worth of Suncor shares by the end of Q1, 2016.

Returning cash to shareholders remains as key element of our strategy.

It's critical to our focus and capital discipline.

Over the past five years, we have grown our dividend by 190% and have repurchased and canceled over CAD5 billion of Suncor stock representing approximately 10% of the outstanding shares.

As we move into the final two months of 2015, we're driving to meet or exceed our targets for this year while finalizing stretch goals for 2016.

And of course we're focused on completing the growth transactions we have announced in the fast few weeks.

Moving forward, you can be confident that we will stay true to our principles of managing the base business well, applying strict capital discipline and investing in profitable growth.

And with, that I'll pass it back to Steve Douglas.

Thanks, Alister and thank you, Steve.

Just a few further notes on the quarter.

As everyone knows, crude prices were falling sharply.

As a result we have a LIFO FIFO impact net after tax and expense of CAD274 million in the quarter and that brings the total for the year to an after-tax expense of CAD209 million.

The dollar also weakened.

The Canadian dollar and so there was a net after-tax expense to us on FX of CAD786 million in the quarter, bringing the after tax cost of our US dollar denominated debt to CAD1.55 billion year-to-date.

Stock-based comp was a CAD77 million after-tax expense bringing year-to-date number of expense after tax of CAD175 million.

As Steve Williams mentioned, we have updated our guidance.

In keeping with our standard procedure of not making changes unless we expect to be materially outside the guidance range, there are only a couple of revisions to note.

One is the international tax rate change which has dropped to 10% to 15%, and that's as a result of tax credits received for exploration drilling in Norway.

And we've also reduced the pricing summations for the various marker crudes to reflect the actual lower numbers year-to-date and the lower forward curve through the end of the year.

That wraps up our review of the third quarter performance.

But before we open the lines for questions, I'm going to turn back to Steve Williams to provide some comments on our offer for Canadian oil sands which was made on October 5.

Thanks, Steve.

And this is a bit of a departure from our standard call format but I thought it was important to separate my comments on our offer for Canadian Oil Sands from our commentary on the third quarter.

I did not want our strong third quarter results to be lost in the discussion of the proposed transaction.

That said, the Canadian Oil Sands offer is an important development for Suncor and I'm pleased to be able to provide some insights on in this morning.

Since we announced our offer on October 5, we've had the opportunity to talk to the majority of the reporting shareholders of Canadian Oil Sands.

They understand Canadian Oil Sands is facing a risky and uncertain future and they acknowledge the value of what we've put on the table.

And just to recap, that's a 43% premium to Canadian oilsands preoffer closing price, a 45% cash dividend uplift, and an all-share that enable a tax deferred rollover and participation in the potential upside associated with owning Suncor shares.

And that includes the impact of any increase in oil prices as well as the value we expect to create as owners of a much larger stake in Syncrude.

These investors also recognize Suncor's track record on operational excellence, capital discipline, and profitable growth.

They know that we've generated over CAD10 billion in free cash over the past four years and that we've returned the majority of it to shareholders through dividends and buy-backs while continuing to invest in long-term sustainable growth.

Now I'd like to take a few minutes to comment about our offer and address some of the key questions that have been raised in the past few weeks.

So firstly, I just mention the impact on Suncor shares of any increase in oil prices.

If you go back and look at the correlation to oil price over almost any historical period, you'll find that Suncor enjoy as very similar upside to Canadian oilsands.

But of course far less downside when oil prices fall.

And that's due to the integrated strategy.

We think that should be very attractive to Canadian oilsands investors in what we and many others believe is the new business reality of a lower for longer oil price environment.

Secondly, Suncor has the same information as Canadian oil sands and every other Syncrude owner.

All material information we are aware of regarding Syncrude has been made public.

Canadian Oil Sands actually chairs the Syncrude committees where this information is tabled, and Canadian oilsands of course has a much lower materiality threshold than we do.

So if there were any such information presumably Canadian oilsands would have disclosed it.

Thirdly, Suncor is actually offering to pay more for Canadian Oil Sands than we recently paid for a 10% increased working interest in Fort Hills.

If you do the math based on Syncrude's actual historical production, we are offering [CAD67.5 thousand] per flowing barrel at Syncrude for Canadian oilsands versus the CAD56,000 per flowing barrel we paid for our additional ownership stake in Fort Hills.

So roughly speaking, that represents a 20% premium.

However, we do recognize it's difficult to compare the two transactions on a cost per flowing barrel basis because Fort Hills will produce a high quality premium bitumen where Syncrude produces synthetic crude oil.

We value an asset on its free cash flow profile.

Fort Hills is a brand up in asset with operating costs and sustaining capital costs that are expected to be significantly lower than those of Syncrude.

And frankly, depending on the assumptions you make, Fort Hills margins and free cash flow could well exceed those of Syncrude.

And finally, our offer reflects the full and fair value of all of Canadian Oil Sands assets and liabilities.

There's been a great deal of speculation around Suncor's offer and our willingness to increase our offer.

And I'd like to make four points on this topic.

The first one, oil prices are sharply declined in the six months following Canadian Oil Sands rejection of our initial offer.

More importantly, the outlook for oil prices is much more bearish as reflected by the forward strip on pricing.

It is clear to us that we need manage our business with the assumption that low oil prices will be with us for the next several years.

Secondly, the Syncrude asset has continued to underperform.

In the third quarter, it ran approximately 67% and average production so far in the fourth quarter has further Dee Kleined from this level.

Thirdly, at this time there is no competing offer or alternative that we are aware of.

Fourthly, Suncor with its integrated model, diversified portfolio and strong balance sheet can handle the risk of a lower for longer price environment and/or continued operational challenges at Syncrude.

But Canadian Oil Sands with its single asset exposure and a high debt rating only one notch above speculative is in a precarious position.

We believe Canadian Oil Sands shareholders need to take these facts into account when they consider the Suncor offer.

We think our offer delivers Canadian oilsands shareholders significant immediate value.

Strong upside potential and considerable downside protection which they otherwise lack.

In short, we believe our offer represents full and fair value and a compelling opportunity for Canadian Oil Sands shareholders.

And we would like to see Canadian oilsands shareholders decide for themselves on its merits.

Well, thank you, Steve.

I'm now going to ask Melanie to open up the line for questions.

Thank you.

We will now take questions from the telephone lines.

(Operator Instructions).

Thank you for your patience.

The first question is from Greg Pardy of RBC.

Please go ahead.

Yes, thanks.

Thanks, good morning, all.

Steve, just a couple of questions.

The first one is just with respect to that 94% upgrader utilization rate that you mention.

So what's different about this year than last year?

And does it performance this year then cause you to rethink that 90% target utilization rate longer term?

Thanks, Greg.

You know, we've been on this journey of fractional excellence now for the best part of 10 years.

And one of the characteristics we've tried to have with all humility is to be very straightforward on what our expectations are but with an air of conservatism so to be quite frank, we're understating and overdelivering.

If you remember part of the getting to the 90 and above utilization rates was to move to five-year turnaround cycle and to go through two of those cycles in order that we could pick up through inspection all of the maintenance that would need to be done without new operating regime.

And we go through the final second turnaround of that cycle next year with unit.

So in summary it's been a long program.

It's been very focused.

And we had in-house objectives to get to higher levels but the guidance we issued was 90.

So I am -- in fact let me just talk about for a second and it will give you a clue about the potential trajectory.

If you look, we went through a very similar program with our refineries and we have rerated upwards three of the four refineries.

What we're finding with the upgraders is a very similar program of rigorous discipline is working and delivering.

What you're seeing is a trend not just an aberration.

So we do expect it to go up and my belief is that 90 will prove to be too conservative.

But, you know, it is a principle we established that we wanted to understate and overdeliver.

It is that long-term focus and relentless focus that's got us there.

And, you know, there have been clearly to get to those sorts of levels, you need months where you're above 100% and we have seen that.

Okay, thanks for that.

And maybe the second one is just with the line 9B reversal essentially in place, can you just remind us what the uplift, the annualized uplift in cash flow that you expect there from Montreal?

Yes.

What I'll do is just give you the math so you can do it yourself if you like.

We put 50 million barrels a year through the Montreal refinery.

So for every dollar, we get a CAD50 million uplift through the year.

If you were to look historically, there have been times when that will be CAD20 plus.

That's not what we're expecting going forward.

Much more conservative assumptions.

But you can see even if it's a CAD5 uplift, you're getting up to CAD250 million.

So material to Montreal and will make a difference to what is already we think a best in class downstream.

Okay, great.

And the last one for me then is you've talked about before at least examining a coker at Montreal.

I think initially that was probably designed for mine crudes.

What's the status of that and frankly is there any urgency to be putting a coker in if you're going to get so much he have a benefit just by going to indigenous crudes?

Great question.

I mean you're right.

You get a substantial part of the uplift by simply moving international crudes to inland crudes.

Now there are further benefits by putting the coker in.

The project is still being developed and we've been developing it with within the capital constrained budget that we've been managing to.

It will come across my desk probably in the first quarter now for the next gate review and see whether we take it to the next stage.

But the economics we've just been talking about around moving to inland crudes are stand-alone.

They don't need the coker and the coker would be based on refinery-type economics.

So it still looks attractive.

The timing is not critical.

So I'll take that review in the context of our budget.

Very good.

Very good.

Thanks very much.

Thank you.

The following question is from Guy Baber of Simmons.

Please go ahead.

Good morning, everybody and congrats on the strong quarter.

Obviously Suncor is uniquely positioned for this depressed environment, given the strength of the cash flow generation which allows you all to act countercyclically when other companies can't.

We've seen that with your pursuit of acquisitions.

And as you continue to perhaps pursue bottom of the cycle acquisitions, future opportunities, can you just remind us of the key criteria and metrics that you are screening for and that are most important?

And related to that, if we assume any credible long-term threshold oil price, your shares obviously look very cheap so how do you evaluate acquisitions versus potentially ramping up the buy-back of your own stock given your advantaged financial position?

Okay, thanks.

I mean I'll take the first part and then I'll let Alis to talk about the screening criteria that we use.

First of all, I think I would go back to our overall strategy.

Our strategy has been first of all we have to earn the right to spend money so we have to run our existing assets very, very well.

That's what operational excellence is about and I'm pleased with the progress we're making.

Still more to come and you'll see that in terms of reliability and continued reduction in operating costs.

We're not finished yet.

We still have some more of that to deliver.

So run the assets really well.

The second part then has been about a very disciplined allocation of capital.

And we have three-ways that we look at using that capital.

The first one is organic growth, and, you know, what's so pleasing about this results are that we are still funding our organic growth.

We've grown it nearly 10% for the last four or five years per year and we are growing at 5% through to the end of this decade with investments that are in place.

And we then have a very long list of organic projects which are there but they have to compete with the other two buckets.

One of those buckets is the world of M&A and we've been looking and whether we're at the bottom of the cycle or (inaudible) as there will be as many views as there are individuals having the conversation.

What we know is that in the M&A world at these prices, some companies have started to look reasonably attractive to Suncor.

So we're letting those compete.

And then, you know, I think our track record speaks for itself on the third bucket which is we return money to shareholders.

We talked in our prepared comments about the CAD10 billion of free cash that we've generated and returned.

We've done that through a mix of dividend and buying back through share buy-backs 10% of the company.

So we let those three compete and the beauty of that is that given the very healthy balance sheet we have, we're in no hurry.

We have very good opportunities in each of those.

Our shareholders very happy to take returns themselves.

The organic growth list is a very long list which takes us forward for the next 20 plus years and we've got some of these targets.

The commitment that I've been give very clearly to shareholders is we will not move from that capital discipline.

If things don't fit in on those lists, we will not pursue them or move away.

We'll do that on organic projects.

We'll do that on potential M&A targets and we will use the tools available to us in terms of returning to shareholders.

And just before I hand over to Alister on the more detailed criteria and I'll just answer the piece on long-term crude value.

We have a simple philosophy in the company.

Depending on which use of capital we're looking at.

We make different crude price assumptions going forward.

And they're interesting but we run the company to be cash-free at this level of crude price.

And that's what's exciting for us about this year is that in each of the three quarters, we have generated free cash.

Okay, thanks, Steve.

So just specifically looking at acquisition criteria, I think we have been pretty clear the three main areas that we look at.

One is the potential target of strategic (inaudible) in an area that (inaudible) strategy whether it be in the oil sands, [E&P] or the downstream business will help in our integration.

Is the asset itself or the resource a top tier, a top quality asset or something that we believe we can use our expertise to get it to a top tier performing asset?

And then thirdly, and not lastly but is value accretive.

Is this something that can value to a shareholders and we look at earnings and we look at cash flow and we look at net asset value around can it add value?

And then we go back to what Steve just said around our capital discipline.

Any acquisition that we look at has to compete against the organic growth opportunities and the potential to return cash to shareholders through the dividend of the sell buy-back.

So it's a broad mix of things that we look at and we're really disciplined about when and where we go after acquisition.

Thanks very much for the comprehensive answer.

I had one follow-up on the Canadian oil sands acquisition if you could speak to that.

You mentioned and we agree that Suncor's established a track record of operational excellence.

The Syncrude project on the other hand does not have that track record.

So the obvious question is, can you just discuss the confidence level in improving the reliability, the operations at Syncrude, over what timeframe that could be achieved, what level of investment that might take?

Yes.

I mean I think I'll give a relatively short and clear answer.

We are confident that we can add more value than we have been doing.

I don't want to understate how challenging it is to increase the reliability of these types of assets in this type of location with the access to the workforce and contractors we have there.

But what I would do is just reference you to what we've actually achieved.

If you go back 10 years, we faced some very similar challenges to the ones that Syncrude are facing.

We put a comprehensive multi-turnaround, multi-year plan in place, and we have slowly worked through that.

The results I think are evident now in our actual performance over the last few years, how that's improved.

If you look at the operations, they're very similar.

They're immediately adjacent to each other.

They're the same unit processes -- mining, tailings, extraction, upgrading, so coking, dislation, same sorts of maintenance challenges in the areas.

And of course we along with all the other owners have a detailed understanding of the challenges that are faced.

So we're confident that if we were to move from 12% to 49%, and we would start to help Imperial with a more significant resource assistance.

We're confident that through that support to the operator, we can see significant improvements.

But, you know, we do believe that those synergies largely are Suncor's because that's an area of expertise we have in that region.

You know, Imperial is an excellent operator and so know, I'm looking forward to the opportunity to be able to work more closely with them

Thanks for your comment.

Thank you.

The following question is from Paul Cheng of Barclays.

Please go ahead.

Hey, guys, good morning.

Two short question.

Maybe the first one is for Steve.

The second one is for Alister.

Steve, you were pretty basic on the M&A fund over the last couple months so at this point should we assume you have reasonably your hands full that you will be primary focusing on your internal integration and execution and not necessary aggressively targeting additional M&A or do you think that your management capability actually would be able to handle substantially more transitions?

The second question for Alister is do you have any memory 2016 CapEx production outlook?

If not, a absolute number but maybe just some part number or direction?

Okay, thank you, Paul.

I mean on that first question, the sort of principle we have used in-house has been that we have to earn the right to move on.

That's why to an extent there was a sequence -- operational excellence, deliver the reliability and the low cost.

That discipline around capital and earning the right to other things.

And my feedback to the company has been you're doing very well, you're starting to earn the right to look at some of these other opportunities.

Of course so far if I just looked briefly at the two transactions we've been considering, firstly on four tails.

We are already the operator.

We're already the constructor.

And all that happened is our percentage of ownership and where the cash flow following the start goes will be directed.

So there's no significant change in the amount of effort we need to put in.

It is of financial benefit to us both.

And then you look at Canadian Oil Sands and the proposal is not at this stage to go to operatorship.

It is about increasing the percentage ownership in the joint venture and then breaking to bare to a handful of experts in that region and in that technology best support we can for the operator in period.

So again it's not a significant change.

It's not like the petro Canada merger where we had to integrate multiple departments and have multi-year integration targets to achieve that.

So what it says is all options are there.

These are two potential attractive proposals.

We continuously are -- as a matter of good business screen the market.

We don't have any immediate other projects planned but we will keep looking because this hasn't significantly affected our balance sheet particularly our debt metrics.

So we still remained in a very powerful position after.

But anything we look at will have to be very attractive.

And we'll have to compete with those other objectives of the organic portfolio and just returning the funds to our shareholders.

Thank you.

Okay, Paul.

On your guidance question, we're coming out of the end of November with 2016 guidance.

I just remind everybody on the call that it will the CapEx on the additional 10% of Fort Hills and remind everybody that there will be some CapEx related to the five-year turnaround at unit two but we'll be able by the end of November for our guidance for production and CapEx.

All right.

Very good.

Thank you.

Thank you.

The following question is from Benny Wong of Morgan Stanley.

Please go ahead.

Hi.

Good morning, thanks.

Fort Hills seems to be progressing very well.

Just got two-part question on it.

First is from this point forward, what's the biggest potential challenges you guys might face?

Is it really just staying on schedule?

And the second part, is there any areas in engineering construction that so far surprised you in terms of cost?

Thanks.

Thanks, Benny.

I mean let me just go back to, of course, a few years ago now when we were up sanctioning the project.

And we clearly made a break with our own past.

And I think to an extent the industry's past.

And said there are normally three important metrics you look at when you were developing these mega projects -- cost, quality and schedule.

And we said where companies have really come into problems is when they try to manage all three.

Our clear priority at the beginning and our clear priorities we've executed this project is to manage the cost, manage the quality and keep an eye on schedule.

Schedule is very important to us but it's not critical.

It's much more important that the capital spent efficiently and we get the returns -- as we get the returns on the project once we hand it over to our operations folk.

And I'm pleased to say not only is it the cost are pleasantly surprising as we are -- we did actually -- one of the reasons we selected the timing for the project was because we thought there was a quiet period through this construction window.

It actually turned that to be much better than we expected.

So I think our assumption was right but it was better than we anticipated.

The quality of resource we're getting and the quality of the work they are producing is surprising us to the upside.

So congratulations to the contractors working it.

They're putting very high quality people on it and these guys are delivering a very good project.

And then the final piece of good news on the project is it's on schedule so we are still anticipating 2017 start so good news.

I guess one of the big things we have to do -- and again I say it with all humility because we've had -- we have had projects a long time in the past which had problems too.

We learn some lessons from our own experience.

We try to learn from others in the region and we knew that one of the challenges was going to be the logistics of moving materials in.

I'm pleased to say that we're already over the hump of that and we've not experienced any significant issues.

So right now we are starting to allocate the contingency to sub components of the project but we still have a substantial piece of the contingency available to us.

So I think if it continuous the way it's going, this will be -- we believe we spent something like CAD20 bilion over the last three or four years on smaller projects, on cost, on schedule.

And I think the industry is seeing those steady improvement.

But this may well be the first mega project that is delivered on cost and schedule.

Great.

And just a quick question.

You guy posted strong operating costs in the quarter and with the trend turning to the bottom end of your guidance, potentially even lower.

Is there something that's getting you from lowering your guidance further?in other words are you still waiting for something to play out before you went to commit to it?

No.

One of the principles we have with guidance is we only make material changes.

So if it's fractions on it, we don't reguide every quarter just because there are lots of moving pieces here.

So our belief is and I tried to be pretty clear, our belief is we will be at the very low end or below.

What we're seeing in reductions in costs are coming from hard core stuff.

It's a different labor force.

It's extreme line lodgings.

It's improved productivity, lower contracting rates reduced over time it's prioritized IT and it's all of those things that we have been working on so we're comfortable they are continuing into the first quarter.

But it's just our reticence to reguide every quarter as smaller things change.

So what you're seeing is you can see it's a trend.

It's not once off.

It's a trend and we're not there yet.

I still have an internal ambition of getting below $20 a barrel

Got it.

Thank you.

And just as a final question, I really appreciate the color you provided on the discussions with [Kios] and shareholder.

Just curious if you can comment, what's the support been on the deal, the bid for [Kios] and Suncor shareholders?

Yes.

That's a great question.

What we did do was we launched by any measure was an extensive communication program on October 5. We put two investment teams in place and they cycled around both nearly two-thirds of the Canadian oilsands shareholders and the vast majority of Suncor shareholders in that first two weeks.

And there were lots of questions.

Overall understanding the deal, supporting us, healthy questioning of are you moving away, Steve, from the capital discipline that you've exercised?

And we've made it clear, judge us by our track record.

We have been very disciplined in what we've done and we plan to be disciplined about this.

And then okay, well what are the synergies and we can see why it's very attractive to Canadian oil sands shareholders, but why is it attractive to Suncor shareholders?

And what I would do is just says, you know, almost go back to the third quarter script I went through earlier.

Operational excellence is what we do.

We started with a very humble beginnings and have worked very hard to get our reliability up and our costs down.

We believe that's the very set of scales that Syncrude can deal with and that we are relatively uniquely placed to be able to do it.

That's why we believe our offer was full and fair and we didn't come in with what we believed was a low bid.

We wanted to make it clear we were serious and that we had the access to those unique synergies by bringing that expertise.

Of course there are also adjacent leases which are very attractive.

And those synergies belong to potentially to Suncor and to the Canadian Oil Sands shareholders in terms of the deal to be done.

For that to happen, it needs multiple partners to agree.

It's not something which is just Suncor can go in which is 51% will get you it.

It's a number of the partners need to contribute.

So our belief is that there are significant synergies available and they are largely only available to Suncor.

Great.

Thanks, Steve.

Thank you.

The following question is from Mike Dunn of FirstEnergy.

Please go ahead.

Thank you.

Good morning, everyone.

Another great quarter out of your refining and marketing division, folks.

Just wondering if you can talk about the location differentials you mentioned and how you might see them evolving as we go into 2016 and potentially beyond.

They've been quite strong here for the last few years really.

Thank you.

Yes.

I know thank you.

I mean you're right.

I mean what a standout performance from the (R&M) group again.

What I would do is just take you back to our integrated model -- what it's attempting to do and it's proved very successful through this cycle is take advantage of differentials that may occur between extraction of resource and selling it to the final customer.

We've deliberately designed with the (inaudible) integration we have and some of that is hard [physical in] with things like [desaltrilization] and coker.

Some of it is a trading capability once you have a relatively balanced upstream and downstream.

And what's been interesting this time as you say has been largely around crack to rack spreads and it's been around location differentials, particularly when you start getting to places like Denver or Sarnia.

And we've been able to get very high differentials.

And often the regional spreads of course don't reflect that very well which makes it very tough to model what we're doing because you can pick up regional spreads and not see the actual local benefit we're getting in the market.

Of course with line 9 we now have increased optionality around being able to put either Western Canadian crudes or US crudes into that refinery so it gives us not only because it gave us the benefit I was talking about earlier of logistics benefits in terms of [rail] versus pipeline type [cuts].

It also gives us some of these other differentials.

So it's part of the design.

It's why we put we it there.

It's quite difficult I recognize for analyst to be able to forecast it.

But what is most important about our system is the flexibility.

We're not particularly dependent on -- some look and say -- is it the [Brent] WTI spread?

Is is the WTI WCX spread?

And actually one of the benefits of having upstream, midstream, downstream and trading capability is whatever it is we can [hone] in and probably be one of the best to take advantage of it.

So it's an important part of our design.

We plan to keep it and that's why Montreal has been (inaudible).

And I think Steve Douglas is going to give a few more detailed comments.

I'm mainly going to call time here but I think Steve has given a comprehensive answer.

The only thing I would add is we have set up our downstream such that we have four refineries which are essentially logistical islands buying inland crude which is often at a price advantage and then integrated back to our refineries where we're comprehensively planning on an optimized basis.

So we have some advantages which are quite unique to Suncor.

I apologize, I know we have a number of other calls and what I would say is we will be available throughout the day to field those calls.

I'd like to thank everyone for participating.

And operator, I'll hand it back to you and we'll sign off.

Thank you.

Operator: Thank you.

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