Steve Williams – President and Chief Executive Officer
Paul Cheng – Barclays Capital, Inc.
Suncor Energy Inc. (SU) Barclays CEO Energy-Power Conference Call September 11, 2013 1:05 PM ET
Paul Cheng – Barclays Capital, Inc.
Good afternoon, welcome back after the lunch. Our next presentation is Suncor. We are very excited to have the CEO, Steve Williams to be with us sharing about the exciting news and development in the company. Without any further delay, let me welcome Steve.
Thanks, Paul. Paul you told me there are only going to be 20 people here. Well it’s a pleasure to be here today. I am excited to be able to take you through the Suncor journey and what lies ahead. For those of you, who’ve been following our company, you’ll know that we’ve been systematically laying a very strong foundation for profitable growth with a razor sharp focus on capital discipline and I am going to talk to some of that discipline today.
You’re going to be seeing the first of the effort, we’re starting to see some of it flourish now and I’ll share how this is starting to be rewarded for their patience with us. So today what I’d like to do is give a brief overview of the company to start with and then I’ll touch on tree areas that you’ll hear me keep referencing which are operational excellence, capital discipline and profitable growth.
And then a guide to the strategic choices that drive the shareholder value, I am going to talk to, I know it’s choices, I believe need to be made for this business very much in the context of a long-term view. And when I say that, I mean looking at the bigger picture based on decades of experience planning for what’s on the horizon rather than being forced to just react to the current situation, so looking beyond the short-term market conditions. And commitment and you’ll hear me commit a number of times today to a triple bottom-line vision of resource development. And in the end, a long-term view requires that focus rather than the short-term distractions.
So first let me just say a bit about Suncor. It’s Canada’s leading integrated energy company. We have operations that include oil sands development and upgrading, conventional and off shore oil and gas production, petroleum refining and product marketing primarily under the Petro-Canada brand. And what sets up apart and what we believe is a distinct competitive advantage is a very high level of integration. Our business model has been built by looking at the bigger picture rather than a single operation or single market segment.
The majority of our production is from oil sands, which is upgraded into more valuable crude blends. Three of our four refineries, soon to be joined by our Montreal refinery processed oil sands production into refined fields and specialty blends. And with offshore and international productions sold into premium price markets, we’re geographically diversified. So that market not only we have many sources of profit and the flexibility to take advantage of market conditions as they change. And the benefit is, we can balance volatility as well as reduce our financial risks through both good and bad economic cycles. And it allows us to capture global prices for well over 90% of our [indiscernible].
Another differentiator is our enviable resource position, including what we believe is the most favorable position in the Canadian Oil Sands. The strong resource position helps us to generate profits and grow in a disciplined manner and continue to do that for decades to come. In fact if you assume the old 6.9 billion barrels of our proved and probable reserves are produced at existing rates, we could maintain production for more than 34 years.
If you add to our contingent resources of another 23.5 billion barrels, that means we could produce for more than a century. So the bottom-line is that we have resources available for development that are well in access of others and by that I mean countries as well as companies and with that stretching ahead you shouldn’t be surprised that we take the long-term view that I mentioned when it comes to the three important principles.
First one is operational excellence; it’s quite simply doing the right thing, the right way every time to create long-term share holder value. A sustainable, profitable energy company must have zero tolerance for accidents, absolute environmental integrity and reliable operations and that can’t just be a short-term focus.
So safety is a core value at Suncor, in fact it’s a priority above everything else we do and I am pleased to say we consistently reduced our lost time injuries and recordable injury frequencies across the company. In fact in the second quarter we completed the largest maintenance turn around in Suncor’s history that involved over 3.5 million personnel at our oil sands operations without a single injury to course time today lost from work. So that long-term view is part of the efforts as we seek to raise the bar on the environmental front as well.
We’ve reduced our sulphur dioxide flaring, we cut our greenhouse gas emissions per barrel and we substantially reduced our river water withdrawal and with TRO our tailings management technology we are targeting surface land reclamation in a third of the time it currently takes.
So a long-term view, a sustainable development, let us a few years ago to develop climate change action plan and of course, when it comes to the environment, what we do both now and in the future is directly linked to our long-term business success, every barrel of water we handle, every bit of energy we consume has a cost so with that in mind we’ve developed environmental performance goals through to 2015. Those include reducing fresh water consumption by 12% increasing reclamation of disturbed land by a 100%, improving energy efficiency by 10% and reducing air emissions by 10%.
Now towards operational excellence at Suncor also includes a firm commitment to improving reliability and as a result of our successful preventative maintenance program and some significant plant improvements we now expect to safely extend our runtime between major upgrade turnarounds from four to five years, and we’ll be able to run them at higher rates of throughput.
So I’m pleased so say we’re taking advantage of that opportunity. We’ve achieved record production of base plant in August at 433,000 barrels a day, that’s an 11% increase versus the previous record, which was the month before.
The synthetic crude oil portion of that, so the material, the bitumen has been upgraded, exceeded 330,000 barrels per day and that represents a utilization rate of above 95% on our upgrade. So world class levels of reliability by any measure. Operational excellence also helps us to reduce our cost and our objective is simple, it’s to be lowest cost operator and we think we’re making a great progress through the push on reliability, productivity and the technology we’re bringing to today.
So we’ve made tangible improvements driving down oil sands cash operating costs per barrel from $39 in 2011 to 2013 guidance of an average of $35 or in the range $33.5 to $36.5. Now some of you might be wondering what this progress might mean in terms of market access, and I said it recently on our quarterly call, but let me just say aging, simply for access to markets is not an issue for Suncor.
We have ample market access to handle both current production and our future productions. By the end of 2014 we expect to be able to ship over 600,000 barrels per day to our refineries and other globally priced markets across North America. By the end of the year we plan to begin shipping western crude to our Montreal refinery and at the same time we expect to ship heavy barrels to the U.S. Gulf Coast by the new Keystone South pipeline.
Just as an insight for those who are not familiar with it that separate and distinct from Keystone XL where distribution lies – still rests with President Obama. The debate continues, but my personal view is that approval is in the best interest of Americans and Canadians, both in terms of energy security, job creation and trade.
So when it comes to operational excellence, safety, environmental care, reliability and productivity play an important part and must be considered with that long-term view. They set the foundation for better overall performance and higher quality earnings.
The second area of focus for Suncor, as I mentioned, is capital discipline and that means a relentless discipline to allocating our capital and our priorities are simple. From the base business fund profitable growth projects and accelerate the return of cash to shareholders through growing dividends and value-based share repurchases. And when assets or projects are outside of these priorities, you will see us take decisive steps. As you’ve seen we’ve announced plans to divest the majority of our North American onshore conventional gas business and that’s part of our practice of reviewing our portfolio and identifying asset that are not core to our strategy.
As we look to deploy capital, we’ve got an extensive set of assets in the oil sands that offer all kinds of integration synergies and debottlenecking opportunities. For example, we’ve focused capital on high return reliability projects at our upgraders. We’ve augmented our logistics infrastructure with a suite of assets. This prudent approach is allowing us to unlock significant new volumes from our existing operations.
And with a step change in production in August we’re seeing the results of some of that capital already put into place. We have and we’ll continue to deliver value through a series of debottlenecking and expansion projects, and we announced those earlier this year to add 100,000 barrels per day, and they include improvements in logistics, higher bitumen throughput from additional water handling capability at MacKay River, several new units at Firebag as well as an expansion to the MacKay River operations. The average capital intensity for these projects is expected to be between $20,000 and $30,000 per flowing barrel.
We are applying the same stringent capital discipline to a suite of those projects across the company and Fort Hills, the next mining projects on our books is the most visible to the market today. Since the decision with our joint venture partners is still ahead of us I can’t speak to specific plans, but I can tell you however that a rigorous approach has been taken to all aspects of the project. It’s important to talk the project in context of our growth plan. Fort Hills provides long-term sustainable growth.
Construction is expected to represent no more than 15% of our capital budget in any give year and 67,000 barrels per day represents only 20% of our 300,000 barrel per day growth plan in that sort of timeframe. So we continue to target a sanction decision later this year. Looking again through the lens of the long-term we will only move forward with the project if we’re fully confident it will deliver strong returns for our shareholders.
All of these efforts are targeted towards building the business and returning value to shareholders. Earlier this year you saw us increase our dividend by 54%, moving from $0.13 to $0.20 per quarter.
We also renewed our share buyback program to allow for the repurchase and cancellation of up to $2 billion of common shares, both decisions were very well received by the market and you can expect more of the same going forward.
As a strong cash generation company with a rock solid balance sheet, we think we are uniquely positioned to not only fund profitable growth, but steadily growth of the cash we return to shareholders. Our view is that dividends should be sustainable, predictable, competitive, and steadily growing.
Our approach to maximizing long-term value is increasingly attracting serious investors to value quality assets, sign capital choices and a visible path of the sustained dividend growth. Suncor’s value proposition is build on a very strong financial foundation. Reliable cash flow from operations of $2.25 billion in quarter two this year and that’s our eighth consecutive quarter at that level.
Moody’s net debt of just over $7.1 billion representing a net debt to cash flow from operations of just 0.7 to 1. Our prudent CapEx program of $7 billion to $8 billion annually and that will fuel corporate annual growth of about 8% in the next few years and I think that’s a surprise that we’ve been able to stick with that capital discipline, in fact slightly over-performed.
Significant free cash flow, we will continue return to shareholders in the form of both dividends and share buybacks, but just as important is what’s behind the numbers and that’s the team that make it possible. So here we’ve got a very strong leadership group, very strong employee base of 14,000 employees and for those of you being lucky enough to meet the [indiscernible], they are committed to our shareholders, customers and other stakeholders.
And with their help, I am confident that looking at those areas of operational excellence, capital discipline and profitable growth we’re going to make significant progress. So, just as we’re focused on the long-term, I hope I’ve given you some reasons to think the same way when it comes to Suncor.
Should be no surprise that we won’t – you deploy and enjoy the benefits of being a long-term Suncor shareholder. If you’re already an investor in Suncor, then I encourage you to consider adding to your possession. If you aren’t, then it could take, maybe take a closer look at company, I think you will be very pleased with what you discover. You’re going to see a strong commitment to creating energy for today and tomorrow and creating strong shareholder value in the process.
So let me draw my formal words to an end there and if there are any questions, I am very happy to take them.
Paul Cheng – Barclays Capital, Inc.
If you have any question, please raise your hand and wait for the microphone. Steve, maybe then I can start with the questions. For a number of years, particularly after 2005 to 2008, there is always constant concern among the investors mind about the cost inflationary pressure in the oil sand area. The last 12 months or 18 months we have seen a wave of new oil sand projects being sanctioned. So just a question from [indiscernible], a, have you seen evidence of an accelerating cost pressure along supply chain and secondly that if you do, what are you doing in terms of migrating some of those pressures?
I mean the simple answer Paul is, I mean this is still one of the capital hotspot of the world with significant project activity. But relative to previous periods, we are actually seeing less pressure. So the last four or five major projects or billion dollar plus projects, we put in both been delivered on or below budget and normally on or ahead of schedule.
So, I think in general, what happened is, the region is getting better in coping with it. So it’s not to say that there is no pressure, but we’ve certainly seen the pressures relaxed. On the same for operating costs, I talked about $39 operating cost in 2012, we targeted plus or minus on $35 this year and every indication is that we are going to be able to breakthrough that level as well.
So there were pressures there. There is no doubt that rigorous capital discipline, working hard on the supply chain to make sure you put contracts in place, which don’t allow for too much inflation are working and you have actually seen this if I just add all of the projects up across the company. You’ve seen us we targeted that range $7 billion to $8 billion. In 2012, we came in under it and we’ve already reduced our capital budget, it’s the very low end of it and I am hopeful we will see some progress later this year.
Paul Cheng – Barclays Capital, Inc.
Thank you, Steve. There is a question.
On the same topic of cost inflation, Keystone XL is impacting Canadian oil prices, by keeping it on a discount, obviously you are well positioned for that, but and your access to global prices through your refineries, so on and so forth. But it must impact your competitors and their spending outlook. If Keystone XL gets billed will there be an expectation of acceleration and inflation in the basin i.e. have you benefited from the lack of Keystone XL and has kept inflation at bay [indiscernible]?
Yeah, good, great, great question. I mean, I think first of all, I would say, we support all of the pipeline projects. So Keystone XL, we are part of the commitment, to the Gateway project, to the Eastern pipeline, the Line 9 reversal. All of the projects we thought, because we believe it’s in the industry’s interest that we get to multiple markets.
You’re absolutely right, it doesn’t affect us because of the way we’re integrating, whether there is a differential between Brent and WTI, whether there is a differential between WTI and the heavy Canadian mixes, so the WCS actually the bitumen crude. It makes very little difference to Suncor. We effectively sell 90 plus percent of our production including oil sands at Brent related prices and because of the integration we either take the profit in the upstream or the downstream, but we take the profit one way or another is that what enabled us to get to steady earnings of 2.25-ish billion dollar cash a quarter.
I think overall, there is an assumption and the industry is not constraining its growth because of the pipeline access, but the belief is that the industry will get access to market, so the main in fact the opportunity at the moment, if there is any hesitation in terms of this is a good moment to go ahead with capital as long as it’s well-planned. But overall I think the belief is that market access will not constrain the growth of the oil sands.
So there are lots of other alternatives, in fact our sales by the end of next year we have 600,000 barrels a day of access to market. That even with our growth plan, we don’t hit those numbers into the end of this decade. So it’s certainly not constrained our growth and my best estimate would be it’s not significantly constrained the rest of the market either. So I wouldn’t expect to see a sudden burst of growth if market to access solution start to appear.
Steve, you start off thinking as board decision need for upgraders in any oil sands project and of course, you guys advice [indiscernible]. How do you think about the need for upgraders going forward and I guess that goes to your point about market access as well?
Okay. I mean just generally in terms of where the differentials go and where that – so that upgrading margin comes from taking bitumen or WCS and upgrading and putting it into refineries. Our view is that on this continent the shortage will be in heavy crude or bitumen. And therefore most of that value can then be added at the refineries.
So it’s a very easy decision for us to say given the surplus light sweet crude, the margin for upgrading from heavy to light is not as good as it’s been in the past. So we don’t think it justifies the big upgraders in Alberta and Fort McMurray. So I mean, I think that that’s our long-term view. We don’t believe that those upgraders are justified.
If you then look and say, what other opportunities are there, so would you upgrade at refineries might you, upgrade in different locations maybe Edmonton, maybe Diamond in the U.S.
We said there are a number of opportunities and for Suncor in particular there is one very good opportunity, which is the Montreal refinery. So our integration uses three of our four refineries. We have a fourth one and there is the option to get western crudes and inland crudes to that refinery, depends on the Line 9 reversal you may have heard of it. Our belief is that that line will get reversed, it probably be the first of the pipeline projects to get approved. The line already exists, exactly designed to flow in a different direction and it’s flowing there. So it’s a question of just putting it back to how originally operate.
Our belief is that that project will go ahead. That gives us the opportunity then to an upgrader or coker into the Montreal refinery. It’s a very attractive project because the project was already designed, in fact most of the facilities have already been manufactured and the project was stopped about three years ago. So I think for Suncor, there is an option to put a coker into the Montreal refinery if we can get good western crude access into the refinery.
Paul Cheng – Barclays Capital, Inc.
Steve, you find…
Hi, I was wondering, you announced about a week ago that one of the upgraders was going on maintenance, could you talk a little bit more in detail about that, how long you expect it to last and what if possible the net impact on your synthetic crude output might be?
Yes, it’s a minor impact. It’s not an upgrader. We’ve moved the two upgraders; unit one and unit two on to the five year turnaround cycles, and we don’t have the next maintenance full upgrader maintenance shutdown until 2016. So we’ve got a relatively clean period through 2014 and 2015. What we have is halfway through the run length of Unit 2. We shutdown the vacuum tower. So it has an important impact, but relatively minor. So we’re expecting something of the order of 50,000 or 60,000 barrels a day impact, so not too significant. The shutdown started at the beginning of the month. It’s progressing very well so far. So we’ve been expected to be up on plan.
Paul Cheng – Barclays Capital
Steve, I have two questions.
I always worry when Paul gets all these questions.
Paul Cheng – Barclays Capital
First, given your resource potential and your opportunity in the oil sands, is there any strategic reason or good strong long-term reason why you invest internationally?
It’s a good question. I think that Suncor is – the easiest way literally I think is concentric rings. The center of Suncor is the oil sands and it’s about oil sands and that integration to market. So developing, producing the bitumen, upgrading some of it, having a mixed product, putting them through some of our own assets, selling them and then getting them to market that’s the core of what Suncor is.
In terms of, and I think particularly you’re thinking about the E&P business. I then think that is another ring outside and where I get to it, we start from here and that we merged Petro-Canada and Suncor and we took a hard look at those assets and said which are the pieces we really think are of highest value and which are the pieces we could most easily and strategically start to sell.
The first at the top of our list was the gas businesses. We couldn’t see the long-term. Our view is that the gas market on this continent has changed and there is reasonably priced gas for a long period.
So immediately sold and about $3 billion worth of gas and some small international oil opportunities. We are just in the process of finalizing that fees, we have the last $1 billion piece of that North American gas business and it leaves us a very small gas business. So we follow that logic and dispose largely of the gas business.
We then look at the oil side of the business and the majority of our operation is in the North Sea, on both sides of the North Sea and also the East Coast of Canada. And our view on those is they are highly cash generative, good return very low risk geology and political environments where they operate. And we have some small step out opportunities around them which are very low risk good return projects.
So that piece is not absolutely corporate, it’s not far off core, I hope this is a little bit of diversity relative to just Canadian oil sand. We have no plan necessarily to take big steps to change that position. We could one of the strategic options at some stage is to look at whether that is something we need to keep and now we are very happy with, it’s performing well, good cash generator with some good investment options and you will see, if anybody looked at our investment plan, you’ll see a couple of those options in there.
So we think that degree of balance is appropriate at the moment.
Paul Cheng – Barclays Capital, Inc.
Well, if I could add to the second part of the question, the last two years, particularly after Steve you become the CEO, then main focus is on reliability and execution. Is there any change in the way the compensation schemes in the company to encourage and because we actually start to seeing some much better improvements in the reliability and execution.
Yes, interesting, we’ve reflected it in the compensation. So when we look at, first of all a lot of it’s a very tough for the company, a lot of the compensation is stock price related auctions or units, they absolutely share exactly the benefits that the shareholder sees through those case. But in terms of the annual cash incentives, we target them hard on operational excellence and capital discipline. So you will see the sorts of shift in performance, we’ve seen will be underlying then and rewarded in senior people’s compensation.
Paul Cheng – Barclays Capital, Inc.
There’s a question over there.
Steve, where are we in the trade-off between the upstream side and the downstream side and balancing to that $2 EPS kind of run rate? I guess we’re probably more on the upstream side now, but where do you see yourself in the cycle and how does that shift going forward?
Yeah, it moves massively. So it’s very difficult to give you sort of numbers and it’s almost gone from one extreme to the other few times in the last couple of years. I think the importance of the model is through this period of volatility, which has been for the industry exaggerated by these market access issues. We’ve been almost wholly protected.
So where the bitumen prices have been heavily discounted, we’re almost fully recovering that. In fact, I think the latest charts I’ve seen said, we’re the number one net margin refiner on this continent and have been for the last three years. So, a very strong position, if the margin start to shift from bitumen to the refiner because the price is going down, we almost capture all of that.
Our ambition is not necessarily to be perfectly balanced on that all of the time. As I was saying, we can protect that balance with the Montreal refinery as we start to reverse that pipeline.
So as a company we’re very well protected through. Of course one of the challenges, one of the reasons I think stock is undervalued is because downstream earnings tends not to attract the same multiples as upstream earnings, which I think is a mistake in Suncor’s case, because what we are doing is we are guaranteeing that margin. It’s just where we take it.
So you’ll see us stay balanced in terms of upstream and downstream for now. You’ll see us take advantage of the Montreal refinery. Then strategically we’ll take a look and see whether we think keeping that balance as we continue to grow the upstream is appropriate or whether we think the market has largely sorted that issue out by then.
Paul Cheng – Barclays Capital, Inc.
Well, with that, we will continue the discussion in the breakout session Liberty 1 & 2. Thank you very much.
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