Suncor Energy Inc (SU) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Suncor Second Quarter 2016 Financial Results Conference Call and Webcast.

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

Thank you, Wayne, and good morning to everyone. Welcome to the Suncor Energy second quarter earnings call. I have with me here in Calgary, Steve Williams, our President and Chief Executive Officer, along with Alister Cowan, our Executive Vice President and Chief Financial Officer.

I'd ask you to note that today's comments contain forward-looking information, that our actual results may differ materially from expected results because of various factors and assumptions and they're described in our Q2 earnings release as well as our current AIF. Both of these are available on SEDAR, EDGAR and suncor.com.

There are certain financial measures referred to in these comments that are not prescribed by Canadian Generally Accepted Accounting Principles and these are described in our Q2 earnings release.

After our formal remarks, we will open the call to questions, first from members of the investment community and then if time permits, members of the media. With that I'll hand over to Steve Williams for his comments.

Good morning, and thank you for joining us. I think as everyone is aware, the second quarter dealt us a considerable challenge in the form of forest fires in Northern Alberta, which forced an evacuation of the Fort McMurray area and impacted the majority of Oil Sands operations in the region. However, I think both as industry and as a Company, we were able to respond in a manner demonstrated the ingrained and deep value and culture of safety, social responsibility that is developed in the Canadian Oil Sands.

And let me just take a moment to put this in perspective. So consider the scale of event and Suncor's response. Fires impacted an area roughly the size of the province of Prince Edward Island or the state of Delaware with a perimeter of fires in kilometers. We shut down all our Oil Sands production in order to focus on the safety of employees and Fort McMurray residents and protect our assets from the fires.

We hosted more than 14,000 guests in our lodges. Our Firebag Aerodrome handled almost 1,000 flights. Suncor employees joined over 2,000 firefighters from around the globe in responding to the blaze. And perhaps most importantly, we responded successfully to this unprecedented situation without a single Suncor lost-time injury, recordable injury or even medical treatment associated with the fire.

So when the evacuation order was lifted by the province, we safely remobilized thousands of employees and contractors, completed plant maintenance of second Upgrader, on budget and returned to full production across all of our oil sand facilities, including Syncrude by the middle of July. All of that was accomplished in line with our updated guidance, which we issued on June 6.

The forest fires were without question a significant event that tested our mettle on many fronts and resulted in a one-time reduction in production and cash flow. But the important takeaways are actually very positive. We sustained, as I said, no recordable injuries and no damage to any of our assets and we were able to safely restore production and return to normal operating rates in relatively short order. The event represented a comprehensive test of our emergency capability, it confirmed that we have well trained people and robust plans in place to efficiently and effectively respond.

In the spirit of continuous improvement, we're also incorporating learnings from this event into our emergency response plans going forward. The results of the fire and the mitigation efforts that we took mean that the threat of damage from a future forest fire incident has been dramatically reduced.

We shut in approximately 20 million barrels of Oil Sands production across all of our operations, but we were able to mitigate the financial impact through excellent cost management. In fact, our updated guidance for the year maintains our original cash cost range of CAD27 to CAD30 per barrel and we fully expect to meet that target. So that gives you an indication of what our trend was prior to the wildfire.

And despite the sharply reduced Oil Sands production, we were still able to generate over CAD900 million in cash flow in the quarter, thanks to the integrated business model. And this underscores the fact that although our operating model is integrated, it is made up of highly efficient, but independent upstream and downstream businesses, which can each generate strong standalone profitability while effectively mitigating the impact of crude price differentials.

So even though our Oil Sands production was shut in for an extended period, our refineries were able to secure alternative feedstock and continue to outperform the peer group in terms of realized margins and profitability. Effectively, the forest fires were a quarter two event, and with the number two upgrade, a major turnaround completed on budget, we're now poised for multiple quarters of strong profitable production.

So whilst the forest fires attracted a lot of focus, this was also an eventful quarter on other fronts as well. Our offshore production is tracking ahead of plan, thanks to strong reliability at Buzzard and Golden Eagle, combined with new wells coming online at Hibernia. And as a result, we've recently increased our production guidance for E&P.

In the downstream, reliable operating performance and solid local refining (inaudible) enabled us to generate strong earnings and cash flow. And that was supplemented by a FIFO accounting gain as a result of the increase in crude prices during the quarter. These results were particularly notable given we completed our plant maintenance at the Montreal, Sarnia and Denver refineries and dealt with forest fire related crude shortages and unplanned maintenance at Edmonton during the quarter. So as I said, it reinforces the point that I made earlier that Suncor's downstream, whilst it's integrated with our Oil Sands production, it's not dependent on that production for its profitability.

Turning to our major growth projects, we continue to make significant progress on Fort Hills construction, which is now over 60% complete at the end of the quarter, the remaining work being almost entirely Alberta based. The forest fires resulted in demobilizing just over 5,000 people from the Fort Hills site and interrupting the site construction activities for approximately a month. However, the project has since been safely [returned] back up to the planned workforce levels. We're currently assessing the impact of the forest fire interruption and developing some mitigation plans. We continue target first oil in quarter four of 2017 with production expected to ramp up through 2018. Suncor share of production will be approximately 90,000 barrels per day.

At Hebron, on the East Coast, construction of the gravity base structure and topsides continued during the quarter. A major milestone was achieved in late June with the last major module fabricated overseas being shipped on schedule. First oil is anticipated by the end of 2017, followed by a multi-year ramp up to peak production and Suncor share will be back to 30,000 barrels a day.

In addition to our organic growth projects, Suncor has taken full advantage of recent oil price weakness to invest approximately CAD9 billion in acquisitions over the past year. We've increased our working interest in the Fort Hills project by 10%, taking our ownership to 51%. We also acquired two additional stakes in Syncrude, bringing our working interest up to 54%. These transactions (inaudible) on a well-established track record of counter cyclical acquisitions and divestments. By exercising patience and discipline, and remaining focused on our core business, Suncor has added significant shareholder value through A&D at the right points in the price cycle. This includes the purchase of the two Denver refineries back into (inaudible) in 2005, when refining cracks were at single-digits. The Petro-Canada acquisition during 2009 oil price crash, the sale of our natural gas business when gas prices rallied briefly in 2013 and of course the recent Syncrude acquisitions, which were completed as oil prices (inaudible) earlier this year. We're currently working on a plan to improve reliability, reduce costs and capture the very attractive synergy opportunities between the Syncrude and Suncor operations and I'm optimistic and pleased with the way that work is going and we expect to be in a position to share that plan with you later this year.

We also will continue to look for opportunities to build shareholder value through more opportunistic A&D. But be very clear, we will not chase the market, we'll only act if we see the opportunity for genuine long-term value creation. Between organic growth in-flight and recent acquisitions, Suncor expects to exceed 800,000 barrels per day of production by 2019. So that's over 40% growth in just four years and represents a 6% per share compounded annual growth rate between 2015 and 2019. This production growth significantly increases our leverage to oil prices and we expect it to put us among the industry leaders on free cash flow at forward strip crude prices.

So the Suncor strategy, which has served us so well through the price cycle remains very much intact. The relentless pursuit of operational excellence, as demonstrated by the continuous improvements to reliability and ongoing reductions in both capital and operating costs, a very disciplined approach to the allocation of capital as we profitably grow production through organic projects that are in progress at the moment, and counter cyclical acquisitions, while continuing to return cash to shareholders through a competitive dividend. So we'll continue to execute, and I'm confident we'll deliver strong returns for shareholders.

So now I pass over to Alister to provide some additional color on the second quarter financial results.

Thanks Steve. And as Steve pointed out, the forest fires in Northern Alberta had a very significant impact on our Oil Sands production in the second quarter, but nevertheless as he pointed out, we're still able to generate healthy cash flow from operations of CAD960 million. Number of factors contributed to this positive result, they included reliable low-cost production from E&P continue to exceed our expectations. Strong downstream profitability as our refining and marketing network actually realized improved gross margins versus the second quarter of 2015. Despite a decline of [about] 30% in the New York Harbor price spreads, and a continued focus on cost management, which [has] us on track to exceed our target of a further CAD500 million in cost reductions this year across the enterprise. And this is in addition to the CAD1 billion of cost reductions (inaudible) in 2015.

We're equally focused on cost savings and the execution of our capital spending programs. As Steve noted earlier, we were able to complete the major upgrader turnaround at the Oil Sands on budget, despite having to demobilize and remobilize our turnaround work force as a result of the forest fires. Major maintenance on the downstream business was also completed on budget. Overall, when I look at our capital spending, it's tracking towards the low end of our reduced guidance range of CAD6 to CAD6.5 billion for 2016. Now that includes absorbing the additional capital relating to our increased working interest in Syncrude.

As we've talked about before, this is the peak year for spending on Fort Hills and Hebron, and we anticipate a significant reduction in CapEx as we look to 2017 and beyond. The Suncor's strong balance sheet has been a competitive differentiator through these past two years weak oil prices. And during the second quarter, we took a number of actions to ensure this continued strength going forward. We issued CAD2.9 billion of equity to fund the acquisition of Murphy's 5% interest in Syncrude and to reposition the balance sheet for other potential acquisitions.

I'll now reemphasize what Steve mentioned earlier, we don't feel pressured to make further acquisitions, but we'll continue to evaluate opportunities that fit well with our existing business, and we won't hesitate to take some action if we can generate value for the shareholders. The equity offering was very well received by the market, it was heavily oversubscribed with existing shareholders taking almost 80% of the issue.

We also repaid CAD600 million of bank debt and CAD864 million of bonds acquired in the Canadian Oil Sands transaction, and these bonds were replaced with commercial paper, resulting in annual pretax savings of over CAD40 million at current funding level.

The net present value associated with interest savings over the life of the redeemed bonds is estimated at approximately CAD125 million. The net result of these actions as of June 30 is a balance sheet that continues to be in excellent condition, where the metrics appropriately positioned for this point in the price cycle. We have almost CAD9 billion of liquidity, including CAD3 billion of cash, our net debt to cash flow is 3 times despite the impact of forest fires on our cash flows. Our total debt to capitalization is just over 28% and of course we continue to attract a strong investment grade credit rating.

Crude prices rose quite sharply in the second quarter, but seem to be somewhat range-bound currently. We're remain believers in higher oil prices long term, but we don't expect to see those higher prices until global demanded of strip supply and inventories return to historical levels. Even then, we would expect that crude prices will continue to be volatile.

Now the good news for Suncor is that we can achieve cash flow neutrality at relatively low crude prices. We believe our current operations can generate efficient cash flow to cover sustaining capital and dividend obligations at a Brent crude price of less than [$40] per barrel.

As our growth capital starts to decline starting in 2017, it's easy to see that we'll quickly return to generating free cash flow, even as the relatively low forward strip prices and crack spreads. So we have good reason for optimism. Our major Oil Sands maintenance for this year is complete, production is back up to maximum rates, we're continuing to increase efficiency and cost side of the business and advance and organic growth projects. We're also continuing to evaluate opportunities for further profitable inorganic growth. Our market conditions have improved to a level which should allow us to generate free cash flow going forward. We're certainly looking forward to a strong second half in 2016.

Now I'll pass it back to Steve Douglas.

Well, thanks Alister and thank you, Steve. Just before we open the floor for questions, a couple of comments additional to that. There was significant LIFO, FIFO impact in the downstream, it was an after-tax gain of CAD275 million in the quarter that offset or more than offset Q1. It leaves us year-to-date at an after-tax CAD83 million positive impact from FIFO. Stock-based comp was an after-tax expense of CAD29 million, bringing the year-to-date to an expense after-tax of CAD131 million and the Canadian dollar strengthened modestly in the second quarter, resulting in an after-tax gain of CAD27 million in the quarter, but there's still an after-tax net expense year-to-date of CAD858 million. We did make an update to our guidance on June 6, we have updated it further with the incorporation of the 5% working interest of Syncrude associated with the closing of the Murphy deal on June 23. But other than that, no changes to guidance.

With that I will turn it back to the operator, to go to questions from the phones.

Thank you. We will now take questions from the telephone lines. (Operator Instructions)

Guy Baber, Simmons.

It was mentioned a few times during your prepared remarks that you all see yourself as free cash flow leaders, even at the forward strip and generating free cash flow going forward into next year. We obviously have production and oil price sensitivity (inaudible) check on our cash flow numbers. The other part of the equation is obviously CapEx. Can you just help frame for us perhaps understand, you can't give specific guidance, but if you could frame for us a roadmap for capital spending over the next couple of years, I think that will be helpful.

Okay, thanks, Guy. Yes, we do and of course -- and I will answer your question on CapEx, but of course the fact that we believe we can -- that we're sort of cash flow neutral after sustaining capital and dividends at less than CAD40 a barrel sort of sums it all up. Let me give you some comments on CapEx. If we look at our CapEx and you look over the last three years or four years, you've seen a great deal of discipline around that and we've been in the sort of CAD6 billion range, plus or minus for a number of years. Now that is of course included a significant amount of growth capital. So if we look at our sustaining capital, it was through that period, in the CAD3 billion range. If you look, and clearly that's -- we're not in a position to guide in detail yet, and we need to work through the acquisitions that we have gone through. But we would expect that number to modestly increase associated with Syncrude, so you could see it coming up CAD3 billion to CAD3.5 billion and maybe up slightly higher. And then you move onto the next piece, which is organic capital spend, both Hebron and Fort Hills have peaked this year, so they are coming down, and both will be largely complete next year.

So we have no plans to approve major growth projects, organic growth projects in that time. And if you look at the lag time between approval and spend, we've already going to see big dips, and I don't think you'll see us approving big organic projects for at least the next couple of years. So you're going to see a significant decrease in overall capital, and I'm guessing, it's too early as you say to guide, but that will be challenging the organization with getting down into that CAD5 billion range.

So that was challenging to get into the CAD5 billion range next year, you think?

Well, next year, yes, I think next year as we start to taper off on Hebron and then Fort Hills and then we've got some contractual scope to go further after that.

And then you mentioned M&A a few times in the prepared comments that you won't chase the market, that you're focused on value. Can you just be very clear for us what your priorities would be when it comes to potential acquisitions, what your primary criteria is when it comes to how you determine whether or not opportunities create value? And if you could just give maybe a quick comment on the level of relative attractiveness when it comes to adding Oil Sands opportunities versus something offshore versus downstream, I think that would be very helpful.

Okay. And I'll do the first phase around strategy and I'll actually look at both sides of it, both acquisitions and divestments and Allister will give us a few comments on the actual metrics we look for creation of value.

So let's first look at -- and you've heard me use these phrases in the past, you'll see us investing in the core of our business and divesting in the non-core part of our business, and our definitions are really very clear. So the core of our business is, the very central part of it is oil sand, but Oil Sands, to get the full margin for the product, so it's oil sand integrated to the market. So you'll see us looking at Oil Sands possibilities and you'll see us looking at potentially refining opportunities.

If I look now at the next level of detail, the market is offering lots of opportunities potentially around Oil Sands, what we've looked at in the refining and marketing sector (inaudible) particularly like, so I'm not optimistic to see any moves in that area. So core area is Oil Sands. The next to the core area is the areas in the world where we add value, where we believe we have a competitive advantage, and that's in the North Sea and off the East Coast of Canada. So you've seen us invest with first grade partners in potential opportunities, with Shell around Shelburne and in the other venture there with Exxon. And we're very comfortable with those areas. But you're not going to see -- I think there's been a lot of speculation in the market about transformational and step back changes, that's not what you're likely to see.

Now, I wanted to qualify it with -- we really have no need for any more acquisitions. So we start in a very strong position, you heard us say, we've got 40% growth between 2015 and 2019, which is probably the pace setter in our industry for our [sort of size] of corporation. So you can expect us to be rigorously adhering to our capital discipline. And unless there are opportunities in those core areas, which really stand out, we will not be pursuing them. So it's a really powerful counter cyclical position that we find ourselves in.

Just a quick comment on divestment. Divestment will be in non-core areas that don't fall into those categories and the example we've been talking about in the market is potentially our Lubes business. No final decision has been made on the Lubes business, although actually went into the front end of the process, the interest we've got has exceeded our expectations. So I'm very pleased with the way the divestment program is going as well.

So I'll just Alister to make a few comments on the sort of the metrics we look at to evaluate whether we think these deals are adding real long-term value for our shareholders.

Okay. Thanks, Steve. Guy, so just I'll take us back to the fundamental underpinning of -- probably look at is capital allocation and the discipline around that, and we'll go free cash flow, the three areas, as you know that we look at. Are we going to take that free cash flow and invest it in profitable growth, are we going to invest it in increasing the dividend sustainably for our shareholders, or are we going to invest it in buying stock back. So we've talked about a lot about how we're very disciplined around what do we look at when we're trying to make an evaluation of those three areas. We're very focused on return on capital, internal rates of return, as you would expect. But that's not the only part of the story, how much cash flow are we going to generate, what's the free cash flow coming out of an asset, what kind of accretion are we going to be looking at to generate value cash flow on an earnings basis. And then when we stand back and look at what is the cost per barrel of the assets that we're potentially buying, those are probably the key things that we look at when we're assessing value. But I come to back to -- we're very disciplined about, are we going to invest it in growth, looking at dividend increases or are we going to buy the stock back.

Neil Mehta, Goldman Sachs.

I wanted to kick it off on downstream; it's something that has gotten a lot of attention on the integrated call so far in earnings season. We've seen product margins soften up a little bit, just from your perspective, how do you see it playing out from here? And given that you have a large refining business, does that impact the way you see go-forward cash flow for the Company or do your assets have a built-in premium, just given the markets that they serve that you can weather any potential storm a little bit better than others?

Yes. Let me make a few comments, and I'll just take a step back as well and look at the downstream over time. I mean Suncor clearly has the best quality downstream in North America in terms of dollars per barrel margin we are making. You can go back as far as 2010 and you'd see that through a quite extreme cycle in terms of commodity prices, that business has been resilient. I think we still continue to surprise the market in the ability to be able to model that business through the cycle. And in terms of how we continue to beat it, whether it's low crude prices, whether it's high crude prices, part of that's to do with the location also refineries and part of it's to do with the indication, with the integration of that business back into Oil Sands. But throughout the cycle, we tend to be the Number 1 margin producer on our downstream assets. So are there going to be some changes in profitability in that sector? Yes, certainly we would expect -- we didn't expect the levels to stay at the sorts of levels we've seen in, particularly 2013, 2014 and 2015, but we do expect us always to be at the very top of those profitability and cash margin for those refineries. Sometimes that becomes a little bit of opaque because of the FIFO accounting mechanism where you will see -- some quarters you will see it high, some quarters you'll see it low. But interestingly, approximately this year, those effects have almost netted each other out. So if you start to look over more extended period, I'm optimistic, so. I like the business, I like the positioning of it and I think you're going to see it continue to make a significant contribution going forward.

And then on Syncrude, you've been able to spend even more time with the assets here and so, any update that you can provide the market on just the opportunities that you see in front of it to improve the utilization and drive down costs?

I would just say, we are quietly confident, we are working the very detail now of the changed plan with the operator Imperial. We are still optimistic we will get that reliability into the 90% range and we'll get the cash cost of that business down into the CAD30 range. So very pleased with the acquisition, very pleased with the prices we got that business for, encouraged by how the plan is panning out and I hope that as we finalize that plan, we'll come and share with you guys. So I would expect to be in the market sharing the details of how we get from here to those numbers before we get to the end of the year.

Greg Pardy, RBC Capital Markets.

Steve, most of my questions has been answered, but when we come back to the organic opportunities that you have, let's just say some additional dollars become available, then what becomes attractive to you? Is it things like the expansion of MacKay or do you look at further growth at Firebag or is it that replication strategy that you described a couple of years ago? Just trying to get a feel for that as well.

All right, thanks Greg. I mean I would say it clearly is -- you can fix these things, one year, two years and three years ahead.

If I look at those three potential allocations of cash, organic growth, the question you're asking, shareholders either through dividends or buybacks or acquisitions and mergers, clearly our view at the moment is that there is more value had to be had in the acquisition and mergers pieces rather than the organic pieces and that's where you've seen us concentrating and spending our time.

I think that cycle will come to an end. It's not going to stay like that as we're starting to see upward movement and volatility in crude prices, I think as that trend continues, then the (inaudible) things will happen in our willingness to buy other assets. We like to be counter cyclical, we like to buy at the bottom of the market. So then we get back, so that says we're looking at, as we grow the Company, dividends and share buybacks.

You then go to your particular question on organic growth. We have the best opportunities in the industry available to us going forward. We have a long list of opportunities with mines. I don't see us investing in a major mine, a new mine similar to at Fort Hills for a long time. It could be 10 years, so you can take that out of the equation. That leaves you then the In Situ assets we have in Oil Sands and it leaves you with some of the potential opportunities of the East Coast of Canada and then the North Sea.

If I look in Oil Sands, which is where I think your question was particularly focused, you're right, we have a long list of In Situ opportunities. We will take the opportunity of not approving those in the next year or two years to really work the options there. And we can already see what's going to come out as the leader, it is going to be the replication strategy. We've identified a program, which would take us 8 years to 10 years of replication, probably one project every 1 year to 18 months. The more we're working on, the lower we're able to get the prices and the more we're able to include the new breakthrough technologies that we're starting to see about solvent extraction and use of these electromagnetic wave technologies.

So you're not going to see it quickly and given we're talking about approvals for at least a couple of years, you are then into the early to mid-20s before those projects come on. But the next generation of organic growth, if the market, if we come to a conclusion the market will support those, it's going to be in that replication In Situ business.

Just one more from me, I mean it's more a nitty question, but the sales, your base Oil Sands sales were obviously supported by pretty significant drive downs on the inventory side. Should that more or less rework itself by the end of the year? In other words, you'd expect to see sales lower than production here just through the balance of the year as you rebuild?

It's already starting to build. I think you'll see the majority of that correction in the third quarter. And of course I will be putting some pressure into the business because the part of our cost reduction is to get our working capital down, and I am putting a fair amount of pressure in the business to make sure we only go to levels we actually need to service that business.

Jason Frew, Credit Suisse.

Steve, it might have overlapped a bit with your comments on the replication strategy, but I wonder if you could comment a little more on the recent sustainability report and the targets you have for reducing emissions intensity? Just what's the strategy there and how well do you think that strategy is developed, I guess in your view?

We are engaged in all of the conversations in Canada around climate change and arranged sustainability goals and how we make progress to get there. We've done a comprehensive piece of work in putting together our targets. We believe that the best place for Suncor, the best place for Alberta, the best place for Canada to be is at the leading edge of those conversations. And then we can start to form the world's policy around how you manage a climate change.

Of course, what we like about that is that then starts to give us a certainty in terms of the investments we're making, what the cost structure looks like, what our ability to grow the industry looks like. And I have to say overall, I've never been more optimistic. So the conversations have moved Canada into a leadership position, you know President Obama came into Parliament in October and said he recognized Alberta and he recognized Canada now as one of the leaders in in policy. Well that starts to do, it gives us a certainty and hopefully starts to create a way for the next pipeline to be approved and installed. So overall, I'm very comfortable with that big picture.

I then look at the -- clearly our sustainability targets are ambitious. We have the ideas, we still need some technology development to be able to get there. But the major steps in that we're already starting to see. So we've already scoped what some of those projects would look like in terms of technology step. And of course, a couple of examples would be -- the first one would be the In Situ technology you've heard me speak about. Once you start to put solvents and you need much less heat, so you take a step improvement in the carbon footprint of that type of project and we plan to be implementing some of those in this period.

Another one would be, and it's an interesting one because it's not immediately intuitive until you sit back and think about it. We are advocating, in a modest way, to work with government so that we can strand some of the oil in the Oil Sands. And what I mean by that is when you have vast reserves like we have, what our preference would be the last barrel we currently take out, because the reserve belongs to the province and the population there. Our regulation is written so that we take to a very high percentage, the last piece of oil (inaudible). That tends to be the most expensive, both economically and environmentally. What we would like to do is be able to leave that last piece in and effectively high grade, particularly the mines and In Situ as well.

I'm very optimistic that we're making some breakthroughs with government now that will enable us to do that. So -- and you could be talking about 10% or 20% improvements in the economics of some of those extraction operations. So it looks as though, but through a bit of interpretation and a bit of regulation, we will be able to do that, so great opportunities. That is another significant potential contributor to reducing our carbon footprint. So I'm really encouraged by where we are. Our plans are ambitious and that's deliberate because we want to push ourselves to be the best.

Paul Cheng, Barclays.

Several quick ones. Steve, if we're looking at your production mix right now, it's probably about 85% oil sand and then spread evenly on the Eastern Canada and North Sea. From that standpoint, is that the desirable mix for you or whether you think one is more heavy, or that too light that you want to change it?

Yes, thanks, Paul. I would look at it slightly different way. So we're really looking -- we have a -- clearly Suncor is a Company which is very heavily concentrated on Oil Sands. We're very comfortable with the mix we have, we're very comfortable with the (inaudible) business because we believe we have value we add in those two regions, North Sea, East Coast. And we have some potential opportunities there in the medium to long term. If you look at the -- the business has critical mass, and is a good generator of cash through -- right the way through to the mid-20s. We have leases in our ownership, which will work offsetting any depletion in production there. And if we were going to sell that business, you probably look at in -- you could look at it -- we certainly wouldn't look at it at this stage in the cycle and you probably would look at it towards the mid-20s.

So I really like the position we're in, we have no imperative to do anything in those businesses. We liked those -- with Exxon and Shell, the opportunities that we've [bolt] into there. We look around the North Sea, there hasn't been a great deal that's excited us, but there are opportunities around some small and much more mature developed opportunities there. You can look some tax benefits and opportunities, but I don't see any significant moves in those areas, most of it is likely to be concentrated in Oil Sands, which means you end up with about the balance we've got or you could see it slightly changing, but nothing significant.

Second question maybe is for Alister and Steve, also for you. If we look at most of the oil company and I think including you guys, looking at share buy back as (inaudible) I mean, we are in a highly cyclical industry, and so if we decide to grow the dividend overtime, but is that a concern at some point the dividend commitment becomes so big, it's not sustainable. Now you are not in that case, but if we continue to grow here at some point we may get there. So from that standpoint, should we look at dividend and buyback, you need to go hand by hand as you raise dividend on a per share basis, you should also (inaudible)?

Yes. I mean, what we said in the past, Paul is you can expect to see -- of course the dividend is at the discretion of the Board, not management. But you can expect probably that you will see dividends increase in line with our growth as we go forward. And that clearly is an opportunity for some variation on that, but that's the expectation we try to create.

The second piece, you will see us opportunistically buying our stock back. And as Alister said, we'll just value it on a level playing field and compare it with the other alternatives, which is organic growth or acquisitions and mergers. So I think that position -- and if you look at our track record, you've seen us increase dividends for multiple years. And you've seen us -- we effectively pre-purchased the acquisitions by -- that we used our stock for, because we bought 10% of our stock back over the previous three years plus.

So judge us by our track records, you will see us continuing broadly with those philosophies going forward.

I know its early, do you have (inaudible) look for 2017 CapEx versus 2016, what area is going to be about flat, go up or go down?

Yes, we've -- yes, you did miss an answer earlier on that, Paul. I mean, I would expect it to modestly go down from -- both Fort Hills and Hebron peaked this year, so you'll see it go down modestly.

And final one. Based on what you just described on the replication strategy and looking over the next couple of years, you (inaudible) Steve, maybe I got you wrong, but it seems like the timeline has been pushed a bit to the right a little bit later. Is that a -- well, first of all, whether you think that is a correct statement? And if it is correct, if it is driven primarily because the technology is not mature enough or that it is -- you are focusing a lot of effort into integration of your recent acquisitions, so that you may -- and management may maybe having lesser time on that or that is a capital availability issue?

Yes. I mean, first of all, you're right, we've pushed it back a couple of years. No technology is -- we can see our way largely to the new technology. The more time you spend in the design phase, the better it gets, the lower cost and the more efficient it is. So I'm not concerned about and itself is not the driver, it's simply when we look at the allocation of capital between the organic acquisition and mergers and buying our own stock back, we do the economics on that on our view of prices going forward. And the other two are coming out in a very strong position relative to organic growth at the moment.

So we don't see ourselves investing organically in major projects in this area. We don't see ourselves approving those for at least a couple of years and that's a combination of economics and the fiscal environment there.

Fernando Valle, Citigroup.

If we look at how you've proceeded with acquisitions so far, it seems to be concentrated on the light oil end of the spectrum in Syncrude? Just wanted to understand, as you're growing in Fort Hills, and as you look towards acquisitions, how market access will play a part in this strategy, particularly since you're saying that there aren't a lot of opportunities on refining and marketing?

Also wanted to understand how you're seeing with (inaudible) gas under CAD1 for the quarter, it seems to be an interesting (inaudible) the utilization of natural gas and your upstream Oil Sands business, I wanted to understand how that plays into your strategy going forward? Thanks.

Sorry, you just broke up on the second piece of the question there on natural gas.

Yes, so currently you produce 99% oil and obviously SAGD and Oil Sands are a huge content of cost that are natural gas related. So wondering if you see more interesting opportunities to acquire, to balance out and hedge out your natural gas exposure?

Okay, got it. Thank you. So I mean, the first one just to say, we have a clear strategy around light oil, heavy oil, upstream, downstream and we are well within our target ranges as we go through the acquisitions that we have done. Of course, market access is very easy for things like the Syncrude because it's already there, it's an operating business. And as far as Fort Hills goes, we -- Suncor is in a -- we are, at the industry level, we support all of the pipelines. We are actually the partners in of each the pipeline. But as a corporation, we don't actually need them through this period. We'd like them there, I think -- we sell most of our product because of our integration at a Brent related price, so we're significantly different than most of the other players. But we've also secured a preferential position in terms of market access on existing facilities, and in fact, today we have -- that we are often in a situation where we will subcontract or capacity in pipelines to some of our competitors as a profit making trade transaction.

So market access is not really an issue for Suncor through this period, it's more of an industry challenge. We do have a view on gas prices, that was why we sold our business in 2013. Our view was that the price of gas was going to go low and stay low for an extended period, probably 25 years plus. We didn't anticipate it was going to be quite this low after this long, but we were thinking more in the sort of CAD3 to CAD5 range. So we find ourselves 99% oil and a low percentage of gas by design, and decisions we made. As a hedge, when we sold our gas business, we kept a very significant reserve in the (inaudible) and we have -- we still have that, that's very low cost to keep in retain it, if there is (inaudible) opportunities that others would dearly like to acquire that because it's very high quality resource, right in the sweet spot of that reserve. So we're very happy with our high (inaudible) oil because we think gas prices will stay low, and so the opportunities there have not been great, and we have a -- we already have a gas resource in our ownership, should we choose to develop that when prices go high.

Phil Gresh, JP Morgan.

First question is just a follow-up on some of the CapEx discussion. Could you just remind us how much of the CapEx budget this year is from Fort Hills and Hebron? And then how that rolls off into 2017 and 2018?

Yes, Phil, it's Alister. Of -- Fort Hills and Hebron is about CAD2.8 billion this year and as you move into 2017, you see that coming down probably by close to CAD800 million to CAD1 billion and then rolling off to a level as you finish it up in 2018.

I believe the long-term CapEx commentary was around getting the number towards CAD5 billion, which of course is above a maintenance capital level. I'm just wondering how you think about the growth that were tied to that level of spend and then I know maybe some of the opportunities on the Oil Sands probably need some cost reductions, so where the opportunities lie?

Yes. I think what it says is that, I mean if you actually look at our sustaining capital, even with the acquisitions we've done, you're getting into the CAD3.5 billion CAD4 billion type level, we think is the top end of the range. And that's a range because it is slightly cyclical, it's not a completely flat spend

If you look beyond that, it's discretionary, I mean, we clearly know that some of the opportunities in front of us, as we've acquired these assets with very modest amounts of capital can have very, very high impacts in terms of reliability and therefore returns. And I remember coming out a couple of years ago and we talked about 100,000 barrels a day capability by fine tuning, debottlenecking our existing assets.

So that clearly are those opportunities and that's why the number pushes up slightly from the end of the CAD3.5 billion, CAD4 billion sustaining capital. So it's those types of projects and we note when we talk about the numbers factoring any major independent growth projects like new In Situ or new mines in there.

My last question is, as we think about the balance sheet now, it's around 3 times levered on trailing 12 obviously that's influenced by the impact of the fire, so really as you move forward it's not that high, but as you move to out to 2017 and you talk about M&A over buybacks, I mean is there a leverage level where you are comfortable, maybe being more assertive with buybacks, even if you see opportunities out there on the M&A front?

I'll start and then let Alister come together with a comment as well. Part of the power of the model is this ability to do things counter cyclically. And it means is that because we -- and that's one of reasons we went under the equity issue is the opportunities we've seen when we're able to operate almost at the -- when the market is in the best position for the acquirer is because of that strong balance sheet.

So you will -- and I took you through my words back to 2003 and listed seven or eight acquisitions and divestments whereby having our balance sheet in the right position, we've been able to take advantage of those market opportunities and that's going to create vast amounts of shareholder value. So you see us doing that just broadly in terms of the ratios and the health of the balance sheet, you see that capital discipline right the way through. So Alister can give us a few more details in numbers, but you see as we trade off to three uses of capital, one of them will be we're going to keep our balance sheet in excellent health.

Yes. Phil, if you look at our numbers, the debt to cash flow is obviously impacted by the fire, so (inaudible) it's actually less than that on a realistic basis. Well, the top end of the range is as we (inaudible) cap and cash flow, I think that's entirely appropriate from where we are, what we have done investing the CAD9 billion in acquisitions and also bringing Hebron and Fort Hills forward.

We've got flexibility, as Steve said, and if I look at going forward, even with -- thinking about dividends and stock buybacks and potential other acquisitions, I do see those metrics trailing down to the bottom end of our regions over the next few years just as we bring on the projects and generate more cash flow. (multiple speakers).

Do you see divestiture cash coming in this year? I know you have some things on the market.

Yes, I think we may see some of that I think if I recall what I said at the beginning of the year, CAD1 billion to CAD1.5 billion 12 months to 18 months, I guess you know (inaudible) 12 months. So I'd expect to see some of it in this year but probably some of it actually in the door, Q1, Q2 next year.

Thank you, Phil. And we have reached our time. So I am going to stop us there, but obviously we have lots of opportunity, the IR team is available, and welcomes your calls later today and going forward. Thank you to everybody for joining us. Thank you, operator.

Thank you. That concludes today's conference call. Please disconnect your lines at this time and we thank you for your participation.