Petro-Canada, Q1 2009 Earnings Call Transcript.

Petro-Canada (PCZ)

Q1 2009 Earnings Call

April 28, 2009, 9:00 am ET

Executives

Ken Hall - Senior Director, IR

Ron Brenneman - President and CEO

Harry Roberts - CFO

Analysts

Paul Cheng - Barclays Capital

William Lacey - FirstEnergy Capital

Brian Dutton - Credit Suisse

Ross Ping - Wachovia

Linda Swing - VOCN Radio

Sian Yun Lee – Dow Jones

Presentation

Operator

Welcome to Petro-Canada's First Quarter Earnings Release Conference Call. Please note today's comments contain forward-looking information so actual results may differ materially from expected results because of various risk factors. These factors are described in Petro-Canada's quarterly release and annual filings which are available on CEDAR, EDGAR, and the company's web site.

I would now like to turn the meeting over to Mr. Ken Hall, Senior Director of Investor Relations. Please go ahead Mr. Hall.

Ken Hall

Thanks Valerie. Good morning everyone and thanks for joining us. On the call this morning are our President and CEO, Ron Brenneman and our Executive Vice President and Chief Financial Officer, Harry Roberts. For today's call Ron and Harry will provide their perspectives and then we will open up the lines for questions first to investors and then the media.

With that, I will turn it over to you Ron.

Ron Brenneman

Thank you, Ken and good morning. You all have seen from our Q1 results that even though we had a great quarter operationally earnings were actually below market expectations. I think its worth pointing out and with the modest level of operational earnings that we are seeing the puts and takes that might otherwise be covered by a larger number are having a more noticeable effect on the bottom-line and that was the case this quarter where two items depressed operating earnings and these are items that analysts may not have picked up on.

The first is the expense associated with the start of our exploration obligations in Libya and the second is related to inventory effects. While our earnings were not strong, a key priority for us during these tough times is to maximize cash flow in order to preserve a strong liquidity. This quarter was a testament to the quality of our asset base.

Our East Coast international natural gas and downstream business units all contributed reasonable cash flow even with lower commodity prices and cracking margins. This combined with a reduction in our capital spend below what we indicated in December enabled us to maintain strong liquidity through a difficult first quarter business environment.

Our continued focus on achieving operational excellence in our base business is what drove that cash flow. Strong reliability in our major operated facilities in Q1 kept our production on-track with guidance. During the first quarter MacKay River operations continued to be excellent with reliability at 98% and production averaging over 30,000 barrels a day.

We also saw 96% reliability at Terra Nova and 99% reliability at our operations in Western Canada. So, although we are cutting operating cost across our businesses, we are doing so without compromising safety or reliability.

In the downstream, we successfully ramped up the Edmonton Refinery conversion project during the first quarter. Although we had the scale back throughput because of lower market demand.

In Eastern Canada we can take the demand downturn and reduced imports and keep our Montreal refinery running full out. Along with the focus on operational excellence, we also told you we were going to carefully manage our capital budget through the year. During the first quarter our capital spending was $681 million that reflects lower spending and project costs in our North American natural gas and in our oil sands business.

Harry is going to touch a bit more on our capital spend for the year, but I would say that even at these low commodity prices we are looking to be in a pretty good shape financially. We are also realizing some impressive cost reductions in OpEx and G&A. The fewer capital projects our people have been enable to get under the hood and find some great cost cutting opportunities in our base business.

This bodes well for us not only in this tough business environment but also by making us a stronger company when the market recovers. Our third priority was to continue to maintain growth in shareholder value by appropriately fixing our three sanctioned projects. At White Rose, development drilling, procurement, and fabrication for North Amethyst progressed during the quarter and the project remains on schedule to deliver first oil in late 2009 or early 2010. In Syria our gas project is on plan and was 60% complete at the end of the first quarter.

Our current focus in Libya is on working on key field development plans starting with the large oilfield. Seismic operations for exploration program are continuing and we expect to be drilling our first operated exploration well in the second-half of 2009.

Our Q1 results included an after-tax charge of approximately $43 million for our Libya seismic program. All in we will expense about $50 million after-tax a quarter on seismic related activities across the company for the remainder of 2009. This total seismic spend is accounted for in our 2009 plans and it includes part of our exploration commitment for our track of Libya acreage.

For our three unsanctioned projects, Fort Hills, the MacKay River expansion and the Montreal Coker. We continue to work the cost down to make these projects attractive at prices more in the $60 barrel range. Given the slowdown at Fort Hills we made the tough decision to let some of the project team go this month. Our two oil sands projects remained essentially on hold as we look at operating and capital synergies from the proposed merger that will improve the economics even further.

Now, I will pass it over to Harry to say a little more about our financial flexibility, Harry?

Harry Roberts

Thanks Ron. On our Q4 conference call in January I said that we would closely monitor the business environment and financial markets through the year to manage within our financial means. Our goal was to prioritize our capital spending in 2009 so that we can fund most of it from cash flow and draw on liquidity if necessary. During the first quarter, in light of the continuing tough economic environment, we reduced our planned 2009 capital budget of approximately $4 billion down to $3.4 billion. This $600 million reduction mainly reflects less spending in our natural gas business and our two oil sands projects at Fort Hills and MacKay River. As Ron mentioned earlier, we have also worked hard on our operating costs, so we expect some healthy savings there, approximately $200 million for the year.

Given this financial discipline our committed bank lines were untouched in the first quarter, our unused credit facilities total about 4.7 billion so we continue to be well positioned, should we need to access credit sometime in the second half of the year. With the strong balance sheet, low debt ratios and good cash flow we are in a solid financial position for this tough business environment.

Ron Brenneman

Before moving onto questions let me just give you a brief update on the merger.

When we announced this deal I said to all of you that Rick and I would be heading over to talk to shareholders and analyst. Generally I would say the feed back on the merger has been positive on both sides. Last week you all have seen that we announced the executive team for the new company. These individuals were selected because of their skill and fit with the new company and we’re confident they will provide the strong leadership needed to guide in the organization. Shortly, we will be announcing the proposed board slate to complete the picture.

Next week, we expect to file the joint circular for each of Suncor and Petro-Canada shareholders with votes at the annual and special meetings held by each company on June 4. With respect to other approvals, we have already received the okay from the US federal trade commission. We are engaged with the competition bureau and are assisting them with their review of the transaction. Depending on the timing of the competitions bureaus review we are still hopeful that we can close the merger in the third quarter of 2009.

So in summary, reliable business operations, prudent financial oversight and our cash flow generation capability are helping us weather this downturn. We continue to advance our sanctioned growth projects at a pace that matches our cash generation, and we are advancing on the merger front. All of this positioned us well to deliver sustainable shareholder value in the future.

Back to you Ken.

Ken Hall

Thanks Ron. Operator, we would now be pleased to answer questions, first to investors and then to the media.

Question-and-Answer Session

Operator

Thank you. We will now be taking questions from analysts and investors. (Operator Instructions). Our first question is from Paul Cheng from Barclays Capital. Please go ahead.

Paul Cheng - Barclays Capital

How are you guys? Good morning. Ron, can you tell us that you have seen that Edmonton Coker you actually had to reduce the one comparing to what you were hoping for because of the market condition, can you tell us what is the contribution from the Edmonton Coker in the first quarter?

Ron Brenneman

Don’t have a number for that, Paul. But I will say that the operation now is running as we would have expected and according to design, we actually did or a few days do a throughput test on it and demonstrated that we can achieve the kind of throughputs that we expected. And as I indicated, though we had to back down a little bit from that just because of a slackening demand in the Western part of the country here, but I don’t actually have a number broken out for what the Coker would have contributed.

I would say that if you look at the business environment we are in, Paul, with narrower light-heavy spreads and somewhat narrower sweet sour spreads, it would be off a little bit from what we would expect the long run rate to be in terms of contribution.

Paul Cheng - Barclays Capital

Okay. Ron, I think (inaudible) some almost rumor I don’t know considered CNPC maybe interested in buying your operation in Libya and Syria. Any comments that you can share with it that if that is true you will be interested in selling those?

Ron Brenneman

We haven’t had any approaches from CNPC or any one else for that matter on expressing an interest in those assets. Paul, also I really don’t have much to add to that.

Paul Cheng - Barclays Capital

Okay. So the rumor is just totally false then?

Ron Brenneman

Well, as I said we haven’t been approach, so I can't comment.

Paul Cheng - Barclays Capital

Okay. And if I am looking at international effective tax rate, is there a huge jump in this quarter, Harry is that anything you need in this quarter, if that's special factor if not is that means that you price stay run into 45 to 55 we should expect your international tax rate somewhere in the 80%, 85% for the remainder of the year.

Harry Roberts

Paul, when you look at the international tax rate we have to do primarily with Libya. There are numbers of puts and takes in there. So, what I would like to do rather than get into the level of detail here on the call is refers you to Ken or Lisa, they can give you some of the reasons for the movement that we saw there. Other than what we have seen here in the first quarter I will say that the tax rate for the balance of the year would be more or less inline with what you mentioned.

Ken Hall

I will call you shortly, Paul.

Paul Cheng - Barclays Capital

Okay. That's good. And final one, on the 2009 Ron is there any new update about your production guidance given that first quarter look like is better than we expected in terms of productions fund then on the other hand you have cutting some capital in the natural gas?

Ron Brenneman

No, we don’t have any update Paul, I think if you go back to the original guidance that we put out in December you will see that we have some major shutdowns on our four big offshore platforms coming up mostly I think in the third quarter. So, you need to factor that into your thinking but, we did do a look forward two plus ten outlook to basically convince ourselves that we were on-track with what we expect to deliver this year and on the basis of that we have concluded, we really shouldn’t be changing our guidance at this point.

Paul Cheng - Barclays Capital

Okay. Very good. Thank you.

Operator

Thank you. Our next question is from William Lacey from FirstEnergy Capital. Please go ahead.

William Lacey - FirstEnergy Capital

Gentlemen, with the announcement this morning that Fort Hills walking way from its bit for UTS, does this change your views on the Fort Hills project and potentially on your interest in increasing your ownership in that.

Ron Brenneman

No, I mean, this is late breaking news for us William, so we haven't had a chance to think this through but at this stage I would say that we are still basically comfortable with our 60% position in that project and we'll just have to see how this little partnership being unfolds.

William Lacey - FirstEnergy Capital

Okay. Thanks.

Operator

Thank you. (Operator Instructions). Our next question from Brian Dutton from Credit Suisse. Please go ahead.

Brian Dutton - Credit Suisse

Yes, good morning, Ron. There is some commentary peculating held on Fort Hills on the cost, that partners were now seeing. And as I was wondering if you could give us a little bit of insight is to where now you think the cost may stand on the mining side of the project?

Ron Brenneman

Yes, good morning Brian, we have been working pretty hard at trying to incorporate the more recent cost estimate data into our original engineered estimate that we published I guess it was middle of last year now. That number on a go forward basis was $14 billion in change, I forgot what the decimal point is now but we are seeing reductions in total of about 30% from that number. And this is a combination of lower steel prices, lower pipe prices, lower expected wage rates, less escalation in wage rates due through the course of the project somewhat better productivity just because of the improved construction climate in Alberta. And to some extent we have re-scoped some of the details within the overall capacity of the project to eliminate some redundancy so we are at a number now that’s under $10 billion from that 14 and change.

And we have also been able to reduce the operating cost by a couple of dollars a barrel. Now I would caution you that these are not reengineered numbers. These are just taking estimates of input cost like I described on steel and labor for example, and inserting them into the original estimate that we had. And we are not going to reengineer the project as now sets because if the merger goes through, we would expect to see some further opportunities in infrastructure sharing and that sort of thing that we would want to incorporate before we did any further engineering work.

So, it’s a pretty rough estimate at this point but it's to us pretty encouraging because it says that even based on a standalone basis, we can probably generate a double-digit return at $60 with those kinds of numbers and where we can look forward to improving on that with the synergies we would see from the merger with SunCor.

Brian Dutton - Credit Suisse

On and I want to address this question but on the hypothetical basis on a stand alone, where would you see the timetable for Fort Hills being at this point if the merger was not being undertaken with SunCor?

Ron Brenneman

Well I think if we were undertaking this on our own Brian, what we said is that we would want to see commodity prices come back in the line with what we would see as threshold prices were the economics of the project and we would also want to see some opening up in financial markets, so that we were confident we had a cushion of being able to go to the market if we needed to for financing. So, it's a bit up in the air at this point and it's not one that we have, we were basically in a pretty, well we are in a low cost, almost no cost kind of holding pattern right now. So, we can wait out the conditions as long as we need to until we are comfortable we should pull a pin on this or fire the gun on this and get it restarted.

Brian Dutton - Credit Suisse

Just one last question if I may. The lubes business, marketing looks strong again. Lubes were pretty good last quarter or lube burning still holding up?

Ron Brenneman

Yes, our lubes business is doing quite well. We are being hit here by a couple of different factors, one is down turn in the economy of course when manufacturing and particularly auto sales in manufacturing fall off. We’re a big supplier to General Motors for transmission fluid for example. We do see some reduction in demand but on the other hand our margins are held up pretty well in that business and we have been able to continue to push our product, our very high quality product into higher margin markets. So, our folks in the lube business has really done a terrific job in compensating for the downturn and demand in that business.

Brian Dutton - Credit Suisse

Great, thank you very much.

Operator

Thank you. Our next question is from Ross Ping from Wachovia. Please go ahead. Mr. Ping, your line is now open.

Ross Ping - Wachovia

Two quick questions, first, is the company considered any assets.

Ken Hall

Sorry Ross we are having trouble hearing you.

Ross Ping - Wachovia

Okay how about now? Can you hear me?

Ken Hall

A little better.

Ross Ping - Wachovia

Okay, has the company considered any assets sales in the near or medium term? And second of all are you still comfortable with your original production guidance for 2009?

Ron Brenneman

Yes Ross, on the production guidance, I indicated earlier that we are quite comfortable with the numbers we have out there now and we looked consciously at the rest of the year and included that there is no reason to change that. On the question of asset sales, you know, normally we are always looking at opportunities for asset sales at the margin but right now let’s say the market isn’t particularly conducive to that. I wouldn’t expect that we did see a lot of interest, particularly not the type that we would like to see if we were in the market. So, we are not particularly active right now.

Operator

Thank you. There are no further questions from analysts and investors. We will now be taking questions from media. (Operator Instructions). Our first question is from Linda Swing from VOCN Radio. Please go ahead.

Linda Swing - VOCN Radio

Good morning. I am calling from St. Johnson, New Finland, and I am curious if you could outline some of your plans for East Coast Canada?

Ron Brenneman

Well Linda, we have a pretty big project underway there we are there now with the extensions to the White Rose project. I talked a bit on North Amethyst project for example which is well underway and targeting to start up either later this year or early 2010. We are also in discussions with our partners and the province on the kind of fiscal terms that would apply to some similar extensions for the Hibernia platform. We have quite an interesting exploration prospect that we are anticipating drilling in the latter half of the year called (inaudible). And we are also involved in what is right now certainly early development of the Hibron project, so we have got a lot of activity underway off the East Coast, I would say a various stages of development.

Linda Swing - VOCN Radio

Are you planning some shutdowns as well can you tell us about that?

Ron Brenneman

Yes, so each of our three big platforms off the East Coast will be undergoing some fairly major turnarounds in the later. I think Ken its mostly in the third quarter, we talked about the timing of those earlier.

Ken Hall

Turnovers in the second and third quarter 28 days, Hibernia 21 days in the second quarter and White Rose is 28 days in the third quarter, Linda.

Linda Swing - VOCN Radio

And there is going to be a 40 day shut down to do some work to time with North Amethyst as well?

Ken Hall

No, the 28 day shutdown accounts for that.

Linda Swing - VOCN Radio

But there will be a period of reduced production?

Ken Hall

Correct.

Linda Swing - VOCN Radio

Thank you.

Operator

Thank you. Our next question is from Sian Yun Lee from Dow Jones Please go ahead.

Sian Yun Lee – Dow Jones

Good morning, I just have to clarify on those numbers Ron, that you mentioned earlier about Fort Hills as the cost saving that you have mentioned. The 14 billion plus change which is now comedown to under 10 billion, is that for the mine? I was just trying to figure out what they actually refer to those projects?

Ron Brenneman

Yeah. That’s for the mine only.

Sian Yun Lee – Dow Jones

Right.

Ron Brenneman

That’s, you know, we deferred the upgrade back in the latter part of last year. So, we have only been working on the mines since then.

Sian Yun Lee – Dow Jones

Okay. And those cost you feel are at the moment under 10 billion, as they stand now.

Ron Brenneman

Yes. You just have to be a little careful with that number. As I indicated, that’s not an engineered number.

Sian Yun Lee – Dow Jones

Sure.

Ron Brenneman

That’s a revised estimate based on just sort of pumping the different input costs into the estimate we currently have so.

Sian Yun Lee – Dow Jones

Okay. That’s great. I just wanted to clarify that. Thanks very much.

Operator

Thank you. (Operator Instructions). There are no further questions registered at this time. I would like to turn your meeting over back to Mr. Hall.

Ken Hall

Thank you, Valerie. Any further investor questions can be forwarded to me or Lisa McMann. Media are welcome to contact (inaudible). Once again, we are glad you could join us and thank you for your interest in Petro-Canada.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.

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