Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Rick George - President and Chief Executive Officer

Steve Williams - Chief Operating Officer

Bart Demosky - Chief Financial Officer

John Rogers - Vice President, Investor Relations

Analysts

Andrew Fairbanks – Bank of America

Arjun Murti – Goldman Sachs

Andrew Potter – CIBC World Markets

Amir Arif – Stifel Nicolaus

Greg Pardy - RBC

Stephen Richardson – Morgan Stanley

Paul Cheng - Barclays Capital

George Toriola – UBS

Mark Polak – Scotia Capital

Carrie Tait - National Post

Francois Dejardins – Le Devoir

Suncor Energy Inc. (SU) Q2 2010 Earnings Call July 30, 2010 9:30 AM ET

Operator

Good morning ladies and gentlemen and welcome to Suncor's second quarter conference call and webcast. I would now like to turn the call over to Mr. John Rogers, Vice President Investor Relations. Mr. Rogers please go ahead.

John Rogers

Thank you Colleen and good morning everyone and thanks for listening in to our second quarter conference call. In the room with me today I have Rick George, our President and CEO; Steve Williams, our Chief Operating Officer; Bart Demosky, our CFO; Helen Kelly who works in the Investor Relations Department and from the controller’s department I have John McKenzie, our Vice President and Controller and Jolene (unintelligible).

We’re going to start with the normal process. Rick and Steve and Bart will give us their perspective on the quarter, and then we’ll open it up to Q&A. So Rick, why don’t you kick it off?

Rick George

John, thank you very much. Good morning and welcome everybody. Listen, we’re delighted to have you on the phone call this morning and delighted to report a solid second quarter. We had good strong production and what’s obviously very encouraging for us is the remaining portion of the year looks very encouraging.

The second quarter was really one in which we had significant turnaround work at our oil sands. I can say it was executed very well, and despite the turnaround work that we had when we had our (unintelligible) or down for about a month or a little over. We still had one of the best quarters on record.

I’ll let Steve update you more on the operational side in just a moment. What I’d like to do is kind of concentrate my comments on the merger and the forward-looking strategy. What I want to take you back is one year. I guess it’s always kind of the role of the CEO to take the broader view, and you know we closed the merger on August 1, so just one year and a couple days ago, or a couple days less than one year ago, and what I’ve got to do is kind of give you the report card on where we are. I feel very proud about what we’ve done in that one year. I feel very good about the path forward, and feel very good about being on the right track.

Now in that merger we had announced that we had $300 million of operating synergies. We actually increased that in the intervening period to $400 million. We still continue to make great progress on that front and would expect to exceed that number. We’ll come up with a final update here in the third, fourth quarter of this year and we’ll kind of close that off, but feel very good about that and you should continue to expect to see that flow through to the bottom line as we go forward, certainly through some of the toughest part of that.

We also had a target to sell between $2 billion and $4 billion in assets. I’m proud to tell you that we’re on track with that. Most of the divestitures will be completed here by the end of 2010. To date those divestitures amount to about $2.4 billion. Now you didn’t see a lot of the cash come in during the second quarter, so the cash from these divestitures are going to start to roll in third fourth quarter. There may be a little bit that lags into the first quarter of next year. And our current estimate is that the divestitures in total will be in the $3 billion to $3.5 billion range, so those of you that are modeling that, know that’s kind of where we are.

The transaction metrics we’re seeing are solid, well above plan, and definitely the assets that we would not see in this company long term. So it all kind of fits there. Along with the asset sales and operating synergies, we’re obviously working hard on our overhead costs. We’ve reduced our office size by, our head office size, by about 1,000 people, and what we would expect here is continued drive on efficiencies.

We’ve closed the London office. It actually has, I think, a little less than 100 people currently in the office and we expect to get that totally closed by year end. We are in the process of relocating the staff in Calgary to one building over the next four months. In fact I think we move here in two weeks’ time, we in the finance and CEO/COO’s office. We’re proud to tell you that we’ve already subleased 70% of the space we have in the Sunlight Plaza, where we currently sit.

So the subleasing and moving, getting everybody in one building is actually moving along and you know on that front I’m very happy to tell you that I feel like the team’s really coming together. We really, you know, you never want to declare a success on this but what I would say is I feel very good about the leadership team coming together as one team, really understanding where the strategy is, what the values and beliefs are, what we’ve got to do to make this company a lot more efficient, and feel really great about that.

Now of course there are always challenges ahead before we can actually realize the true long term potential of this company. One of those major enablers is a company-wide ERP system. We are going to a total SAP system. Now that’s the system that Suncor was on, and we went through the challenges of that about four or five years ago. We’ll have the total company converted over to the SAP here by the end of 2011. The first phase of that, it actually comes in four different phases, the first phase of that actually gets enacted this weekend.

And so we are making progress, never as quick as you want, but we are making progress, and that will be, that platform will be a key enabler. You know these mergers, it always seems like your systems are some of the toughest things to get right and get going.

Work on operational excellence and reliability of our existing assets has continued to be a big focus area and I’ll let Steve talk about that, and again I mentioned the real drive in one of the areas that I’m concentrating on is a drive for efficiencies and cost management. But listen, if you think about a one year out, and if I could have painted you a picture then about what this company should look like, where we should be, some 12 months later, feel good about that. It is up to us in terms of delivery of execution and then getting prepared to go on to our growth strategy.

We continue to make, on the growth side, we continue to make good progress on Firebag 3, largely on time and on budget. One thing to remember about Firebag 3, much of the work there is actually hard money bids, so this is a little bit of a different era. We haven’t seen hard money bids on a job in over a decade, but did get that on three, and expect to get some of that on four as well.

The expectation here, which is what we’ve told you before, is to have steam in the second quarter of 2011 and production to start after that. Full production about 24 months after that date, and that’s 62,000 barrels a day. The Firebag 4 engineering continues, it’s quite a ways along, and we expect to start putting assets in the field later this year with production starting up in the fourth quarter of 2012.

One of the highlights of the past quarter is the Syrian gas production project, the plant. Came into production during April, and that has been a great success story for us, and for the country of Syria by the way. I was there for the plant opening. Great celebration and very proud of what the team there has done.

The expansion of the ethanol plant is proceeding as planned, targeted completion late this year, so we’re starting to knock these projects off and we’re working hard. One of the things we’ve promised you is that we’re going to work hard on the growth projects, sequencing subsequent to Firebag Stage 4.

We had always committed that we would get back to you in the fourth quarter of 2010, and that remains our intent. So we’re doing a lot of hard work. I want to make sure we do that well, and then we should be able to lay out much of what the next decade for this company looks like.

One of the challenges, of course, is the natural gas business. It is for the entire industry right now in North America, and part of that work that we’re doing is also to look at that natural gas business. It’s one that I think is still very important to the portfolio, but one which is very difficult right now to get your return on capital numbers to where you’d like them to be. So just know we’re working hard on that.

The goal of this company, and this is kind of an important point, after we get done with the divestitures, and these near term growth plans are implemented, is to move from kind of 50-50 cash flow on oil sands as we are today toward, we should be at the end of this period 65-35 percent, with 65% of our cash flow coming from oil sands. And as we go forward with growth plans in the not too distant future it will be closer to 75-25. Of our upstream assets, 90% will be oil, and so that’s a very different kind of profile than you’ll see with many many other industry players.

So just to summarize, one year out, the culture I feel really good about. I feel good about the teams coming together. I feel like we are really getting to the focus part, harnessing the value from each one of our assets, and I would say that focus also on continuing to work our overhead costs down and working on efficiencies. We understand our real commitment to deliver on results, and a big focus for us, as I mentioned. And then the exciting part of this is we will be getting back to the opportunities, to what I see is some real world-class growth opportunities on a go-forward basis.

So all in all feel really good about the quarter. Feel good about where we are one year after the merger. Steve, I’ll turn it over to you.

Steve Williams

Okay, thanks Rick, and good morning everyone. So, as Rick said there, a number of solid achievements during the second quarter. The turnaround at the oil sands was accomplished on time and budget. It was a large-scale turnaround, below management’s expectations on cost at approximately $295 million, and at its peak employed 2,300 people on the project there. So the strategy, to break the turnaround into smaller segmented scopes of work in order to be more planful and focused in execution, certainly paid off.

We do have a much smaller turnaround in September, starting on the ninth, for approximately six weeks. Remaining work on U2 will carry on into 2011, with a full unit shutdown planned in the second quarter for approximately 7 weeks. I still expect production at the oil sands plant will average 280,000 barrels a day for 2010 and given that six months to date we’re just under 250,000 barrels, you can see we plan to have a very strong second half to the year. In the fourth quarter, as we average over 330,000 barrels a day, we should see the cost in the low 30s.

In our natural gas division, production remains quite strong. Divestitures continue according to plan. The strategy is being reworked as Rick said, to ensure that it fulfills the objectives of being a natural hedge, but also earns at least its cost of capital while doing that. The downstream continues to show good reliability and strong earnings and cash flow generation.

During the quarter we received regulatory pre-approval to move ahead with our new tailings reduction process. This process will dramatically reduce the time it takes to settle our tailings pond. Through what we’ve typically highlighted is 40 years to less than 10 years, from the initial disturbance to reclamation. So a significant game changing technology for Suncor and the industry. We expect TRO will also help us reduce fluid containment costs and therefore mining operation and reclamation costs. It’s expensive at over $1 billion, but we expect it will be both economic and pay environmental dividends as we implement.

Okay, Bart.

Bart Demosky

Okay, thanks Steve, and good morning everyone. As Rick highlighted in his comments, this certainly was a solid second quarter for the company, both operationally and financially. I guess what I’d say in summary of the financials is I’d characterize our operating earnings, of $781 million and operating cash flow of $1.76 billion, as a suggestion of the financial capability of this organization.

And contributing to the financial performance this quarter, overall production was strong across the company, and that’s not withstanding some significant turnarounds we had at U2 and our oil sands operations, and at Buzzard. In fact, the 296,000 barrels per day production at oil sands, it had one of its best quarters on record and that’s despite the 85,000-barrel a day impact to production during the 45-day scheduled maintenance turnaround that Steve was just speaking to.

Our east coast Canada operations benefitted from some very very strong performance at Hibernia, along with contributions from the North Amethyst add on at White Rose. And we also did benefit from a delay of maintenance work at Terra Nova, but given the performance to date, and how things have gone, we decided to increase our full-year guidance for production for east coast Canada from 60,000 to 65,000 barrels per day.

And while Libya continues to be restricted under a production quota, we did have an earlier than expected ramp up at the Ebla gas plant and it’s now operating at full production, so we’re looking forward to positive results from that part of the business going forward.

Now with the strong production that the company realized in the quarter we also enjoyed relatively high oil prices, so it was a very good time to have the production running very well. That was partially offset by a continued strong Canadian dollar, though.

Operating costs were relatively in line across the business, which is very good news. But I think most importantly, I’m seeing a consistent drive to lower our costs, both on the capital and expense side, and Rick talked about the attention that he and I think the whole company is paying to making sure we keep costs in line.

And I’m particularly encouraged that oil sands will have their costs back to the low $30s once they are through the turnarounds. That will be very positive for the organization. And we did see that cost double during April, when we were at record production for the month at oil sands of 333,000 barrels per day. We still are, though, expecting oil sands cost to range in the $38 to $42 per barrel for the year, given the impact of the higher costs we saw during the first quarter of the year.

In the downstream part of the business we saw higher cracking margins this past quarter, but they were offset by wider light-heavy differentials and as I mentioned earlier the strong Canadian dollar. But earnings and cash flow performance for that part of the business continued to be robust within a greater North American refining context. On the capital spending front, our outlook is for spending to be unchanged versus our budget of $5.5 billion approximately for 2010.

Now as Rick said earlier, at present we continue to move at pace with our planned asset divestitures. We’re about two thirds of the way through our natural gas sales and we have about another 15,000 barrels per day of assets to go in the North Sea. To date we’ve divested of $2.4 billion of assets and although we have only collected just under half of that amount, which has had an impact on our progress on debt reduction.

On that front, along with some working capital changes that affected our debt balance, we ended the quarter with a net debt of $13.2 billion and although, what I’d say is that although the debt has not come down as fast as probably you would have expected, and certainly as I would hope for, most of that can just be attributed to timing, and I would expect that with the completion of our $3 billion to $3.5 billion of divestitures and collection of those proceeds we should see our debt ending up within our targeted range.

Looking forward from here, we have one smaller turnaround at U2 during the third quarter, and some planned maintenance at White Rose in Q4 as well as turnarounds at a couple of our refineries later in the year. So while the Q3 financial results will be impacted by that planned maintenance, the magnitude will be much less than what we saw this quarter. And I’m expecting Suncor’s earnings capability will become much more apparent over the remainder of 2010.

That concludes my remarks. Thank you very much everyone and I’ll turn it back to John.

John Rogers

Great. Thanks Rick, Steve, and Bart. I’m not going to belabor the outlook too much. One would expect when you have a quarter that’s on track that you’re not going to have to make much of an adjustment to your outlook. The oil sands, as Steve mentioned, will we are expecting it to produce at about 280,000 so in spite of the turnaround that we do have in September and slightly into October, we would expect the 280. Now for those of you who want to do the math, which I’m sure you do, that will be about 315,000 barrels a day in the second half of the year. So a much stronger second half [unintelligible] in the first half.

[Unintelligible] crew production we adjusted my small amount down to 36 to where it was, 38, and Bart mentioned that the East Cost is performing so strong that we did update that number to 65 versus where it was before, 60. So all in all some pretty good news I think in terms of the outlook.

The one modeling question which we’ll entertain and I’ll get to right here is the LIFO/FIFO adjustment resulted in a $50 million positive adjustment to after tax earnings. So with that, operator, if you wouldn’t mind opening up the lines to the questions we’ll be pleased to take people’s strategic questions. Once again I will remind you that John McKenzie and Jolene and Helen and I will be available after the call to help you with your detail calls so for your strategic questions we’d be happy to entertain them now.

Question-and-Answer Session

Operator

(Operator instructions.) The first question is from Andrew Fairbanks of Bank of America. Please go ahead.

Andrew Fairbanks – Bank of America

Had a question as we look out towards the fourth quarter growth sequencing release you’ll have. Are you at that point also going to talk about some of the other business segments? So as we look at strategically over time how much capital is natural gas going to get, non-oil sands production going to get, or do you have any early conclusions on how those other businesses fit into the medium-term outlook?

Rick George

Yeah, Andrew, I think we’ll be able to give you a good outline of that as we get into the fourth quarter and give you that outlook. I mean, generally I kind of went through it in my piece but you’re going to see the dominance of capital in this company is spent on oil and on the oil sands, and that doesn’t mean, because I have employees on this call, doesn’t mean that the other businesses aren’t important, it just means that’s where we see the biggest part of our reserves, our growth, and the go-forward strategy.

Andrew Fairbanks

And I guess a lot of the debate, in the example of natural gas, do you go smaller with higher returns, or keep the full integration with the oil sands, and presumably you’re still working through some of those thought processes.

Rick George

We are, but what I would say is the main focus on there is we’ve got to have return on capital that, at or above our cost of capital or you even question whether you stay in the business at all. I would just, the other thing when I think about that Andrew is, you know, the natural gas production is not what makes this company unusual. And so you’ve got to focus in on what our strengths are but also the things that make us different than other oil companies around the world. And gas, it’s hard to see that, so without getting to the answer, what I would say is those are questions for the rest of us. What is the size, and how do we get return on capital?

Andrew Fairbanks

No that’s great. Thanks Rick.

Operator

Our next question is from Arjun Murti of Goldman Sachs. Please go ahead.

Arjun Murti – Goldman Sachs

Thank you. You touched upon kind of base business execution and that was the focus of my question. You’ve clearly been performing and producing very well coming out of the latest turnaround, but these kind of assets they’re going to have planned down time, they’re going to unfortunately from time to time also have unplanned downtime. It’s just the nature of these types of assets. Should we think about your base business, kind of everything through Firebag 2, is 200,000 and 300,000 to 315,000 barrels a day on a sustained basis? You may be able to do better than that at times, but we have to take into account the downtime you’re going to have and while you can do kind of a low thirties per barrel operating cost when you’re performing well, we probably do have to take into account some downtime and I was just curious how you’re kind of thinking about sustainable base business execution. Or is that too pessimistic of an outlook and there are things you can do to kind of get a higher sustained level of production, lower unit costs. Thank you.

John Rogers

Well, Arjun, that was a long question. The way that we think about it is the capacity of the Upgrader is 350,000, and that means rarely does it ever do 350,000. There are days it does over 350,000 and there are days it does under 350,000. When we put out our outlook to you we try to take into account all of the things that could potentially affect planned maintenance and whatnot, so the numbers that we give you, the outlook that we provide for you, is our best estimate based on all the variables that potentially go into production. So I think 300,000 to 315,000 is a little bit of a pessimistic view in terms of where we think we are right now. As most of us know, we have been a little bit restrained in terms of bitumen delivery to the Upgrader but those are being resolved as we go forward and we would expect in the fourth quarter we should be able to do over 330,000. So that’s our goal and that’s what we expect to do going forward.

Arjun Murti

Thanks, John. Are there steps you’ve taken to give people more confidence that 330,000 plus or minus is a better sustainable number for the base business than the 300,000 plus or minus you’ve kind of been at?

Rick George

Arjun, I think one of the things you’ve got to remember is as we continue to progress with Firebag 3 and 4 we are also going to complete with Millennium Naptha Unit, so well you remember that the thing that changes this company a lot around that particular production that you’re focused in on is more and more of our bitumen has kind of come from SAGD bitumen which is more marketable directly without necessarily taking it through upgrading. So if anything your flexibility on a go-forward basis increase is it still doesn’t mean that there aren’t periods of time where like next year we’ve got the Upgrader number 2 down for 45-50 days that you’re not going to see a big production cut. But you’re going to see more flexibility here in terms of what products we do export. Where we were before is on mined bitumen. You had no flexibility to sell diluted bitumen. So if anything you should see over time here our flexibility in terms of products we produce go up and the variability drop somewhat, and I guess that’s part of what John was getting to.

Arjun Murti

That’s a good point and thanks for that color. Just a final one. I think you mentioned in your prepared remarks that Firebag 3 is on track on budget. It looks like you spent $3.3 billion. I presume that’s through the second quarter and the budget is $3.6 billion. Is there only $300 million of spending left over the next three or four quarters, or any chance it could start up earlier and you’re just further progressed through the project?

Rick George

No, it is on the track that we mentioned before, and John you’re kind of scrambling to look at the numbers he’s referring to. But from our viewpoint we’re not bringing this thing on earlier. We’ve got a lot of systems to turn over. Now what you will see, because we do bring on one steam gen early, the ninth steam gen, that will again increase our flexibility, but we’re not calling Firebag 3 [unintelligible]. John?

John Rogers

Yeah. I guess the problem with putting out a 75-page release is that it takes a second to jump to that page you were at, Arjun, but you’re right, we have…

Arjun Murti

We still go with the 75 pages too, I promise you.

John Rogers

But you’re right, $3.3 billion. The bulk of the heavy spending, you’re right, has been done, but as Rick said we’re still driving toward that second quarter. And the review of the project has said that we’re for the most part we’re on track in terms of time and costs, so haven’t had a need to change that at all.

Arjun Murti

Thank you very much. I appreciate it.

John Rogers

You’re welcome.

Operator

Thank you. Our next question is from Andrew Potter of CIBC World Markets. Please go ahead.

Andrew Potter – CIBC World Markets

Just a quick question on the 2011 outlook. It looks like on your base planner, kind of base cap ex plan, we should see some pretty substantial free cash flow in 2011, so maybe just a little bit of color in terms of how you think about that free cash flow. Is there a scenario where you decide to accelerate cap ex on some of the more conventional opportunities, or does that contribute to kind of a resurrection of the Voyager upgrader, or are you just happy, you’ll possibly increase in dividends or buying back shares with your free cash.

Bart Demosky

Great questions. What we’ve been saying for the last while and you’ll continue to hear us say this, and I think you’ll see us be consistent in the way we conduct ourselves, is that we see it sort of steady as she goes. We’ve got a planned capital spend. We’d see ourselves spending in the range each year of probably $5.5 billion to $6.5 billion or so of capital. That is our target range. We haven’t come out with numbers for next year, but as I said for this year we’re on track to spend about $5.5 billion. You’re right. At the right price line, and with the production outlook that we have, we could be in a position to start to generate more free cash flow. You shouldn’t expect to see us look to accelerate capital projects more quickly. I mean one of the things that we’ve talked about and obviously would be concerned about with doing that is starting to bring more inflation into the marketplace again and that’s something we’d like to avoid. So we will have other options, obviously, with the free cash, if it’s there. From a dividend perspective, our philosophy is to grow dividends as we grow production, and 2011 is the next time frame in which we’ll have new production coming on stream. And that’s the time we’ll take a look at increasing the dividend, obviously subject to what the board says.

Andrew Potter

Perfect. And just from a debt-management perspective, I think you guys were sort of saying that $10 billion is where you’re comfortable at. Should we look at it and say that, you know, any free cash kind of that would take debt down below $10 billion would go back to some sort of return to shareholders through either dividend or buyback? I guess what I’m getting at is $10 billion kind of the targeted debt level?

Bart Demosky

Yeah Andrew, it is and I think the way to think about that is we set $10 billion as kind of a target level because based on where our capital structure is right now that gets us to just under two times debt to cash flow and two times debt to cash flow is kind of our target at the lower end of sustainable crude prices. So that’s where the $10 billion came from, but the number to focus in on is the two times. And the way I think to think about the cash flow is first, as we grow our production and we grow our cash flows, where we look to return more to shareholders is through dividends. If we did see some kind of a windfall environment, where we have extreme free cash flow, obviously we’d look at other ways of deploying that and share buybacks or returning it in other ways is one opportunity for us.

Andrew Potter

That’s great. Thanks a lot.

Rick George

You know, Andrew, if I could, this is Rick here, if I could provide, maybe, one additional piece of color on that, is because we’re the largest player in the oil sands business and there always is this underlying concern around inflationary rates, one thing you shouldn’t expect us to do is to have a massive ramp up of capital because it kind of creates our own firestorm of inflation. It can have that kind of influence. The way I look at this thing is we’ve got a decade of growth, if not 15 years of growth ahead of us. This is kind of about how do you develop the plan so that you just steadily go at that and don’t go into the big kind of inflationary period that this industry experienced leading up to the fall of 2008.

Andrew Potter

Yeah that’s great. Thanks a lot.

Operator

Thank you. Our next question is from Amir Arif of Stifel. Please go ahead.

Amir Arif – Stifel Nicolaus

First question is really on Firebag stage 3 and 4. As those volumes come on and again you’re upgrading capacity to 350,000, how are you thinking about that and Rick I know you sort of touched upon it in terms of the flexibility it gives you, but are you thinking of it in terms of flexibility on the production mix to meet the 350,000? Or are you comfortable enough in the standalone SAGD economics to be thinking about increasing sales volumes?

Rick George

Oh yeah, you will see us, you know our goal here is to get bitumen along and we’ve got plenty of capacity to [unintelligible] this. We’re working hard on a number of pipes and obviously have the [unintelligible] as well so you’ll see us, over time here, as three and four ramp up, increase the amount of bitumen sales and if you look at the, both the capital investment but also the cash operating costs on the Firebag side, we should have plenty of margin in terms of making a very good return on that, at least on the scenario we see on a go-forward basis.

Amir Arif

And is there a better way to hedge that bitumen now with the [unintelligible] or is the market not there yet?

Rick George

Well, we’re not really hedgers, I mean I give Bart here for a fuller answer, but we’ve kind of, given the size and breadth of this company and the stability and the go-forward basis, we’re not really looking at hedging that per se. In fact you’ll see a small amount of hedges this year but really in place nothing beyond that.

Amir Arif

And just second question on the asset sales, I mean the A&D market’s picked up because of the prices people are getting are pretty good, just like you guys. Have you thought about potentially selling more assets than what you initially were targeting? Or to capture the value you can get on conventional assets right now?

Rick George

Yeah, listen, we don’t really have any big plans to add any more significant. What I would say is as we get the divestments done that we said, you’ll always look at your portfolio and check and make sure where you are. We’ll kind of go through that at the end of this year. Where we are right now is we’re just focusing in on the assets that we said we were going to sell, let’s get that done. As we get into the strategy piece late this fall, we’ll show you that go-forward. I’m not saying there wouldn’t be a few pieces that you may go on and divest after that but it’s not really something that we’re stepping up to in terms of right now.

Amir Arif

Thanks, Rick, and just one final question, on your cap ex of, I think, $5.5 billion this year, about $400 million or $450 million is going to the tailings reduction operations. Should we be thinking of that as an ongoing maintenance capital or is this more…

Rick George

Oh, absolutely not. If this is $450 million this year, then you’re going to have something on the order of $600 million to $800 million next year. A tail bit of it into 2012. And then that system should be there in place and all of our scenario work shows that the ongoing operating costs of that system, as we put it in, is lower than our current projections. So I wouldn’t over model that in, but no, this is not a program that you’ll see go on for years and years.

Amir Arif

It was just under your sustaining capital part versus your growth capital. But I understand what you’re saying.

Bart Demosky

Yeah, and Amir, that’s simply classification. We have to put things that don’t increase the productivity or the amount that we can produce up at oil sands into maintenance as opposed to growth, and that’s why it’s there.

Amir Arif

Thanks guys.

Operator

Thank you. Our next question is from Greg Pardy of RBC Capital Markets. Please go ahead.

Greg Pardy – RBC Capital Markets

I’m going to hit you with three quick ones, but just maybe to follow up on the tailings management, could you put any numbers around the impact of what bringing in the new technology would save you versus what you’re paying now. Just curious. Second, how soon could we hear about the North Sea asset disposition. And then third, Ebla quite impressive in terms of the rate of ramp up in the second quarter. Does that exceed nameplate of $80 million a day to your interest?

Steve Williams

Greg, why don’t I take the first one, on tailings. So the answer is not yet. We are looking at the numbers and what we’ll be talking about. What I would say is just to underscore what Rick said earlier there, in terms of if I compare the tailings costs, the TRO costs, with the base mining and reclamation costs, then it saves us money versus that option. So we actually see a return on that investment as we go forward.

Rick George

Thanks Steve. On the North Sea, the small North Sea assets that we’re looking at putting to a package that, and is out there, is one that we’re still continuing to work. We would hope to have bids in that are satisfactory in the third quarter. Again with divestments you’re not always sure, and you have to always judge that against our profit on a go-forward basis in terms of just holding where we are. That is the last piece of the international, at least a big part of the portfolio that’s up for divestiture. And it has been the one that we worked on last I guess would be the way to put it.

On Syria and Ebla, what I would say is yeah, that AD is there. The field is actually we feel in very good shape. It’s actually larger than we first projected. We are going to put a couple more wells in that field, particularly focused on, there’s an oil rim around that field, and so we’re actually, it’s not big material in terms of the overall company, but you should see some oil production on top of the gas here in the first part of 2011. Again, not a big number, and it’s not material, but the growth near term is probably more on oil than on the gas field itself. But the ability to both de-bottleneck, to ramp production up is there in the longer haul. I think, you know, it’s good to get this plant stabilized, make sure that the reserves are in the range we believe they are, and all of that will kind of unfold as this year unfolds, and we’ll know a lot more about where we are.

Greg Pardy

Okay, thanks Rick, and you know, Bart you’ve talked, you mentioned the $2.4 billion but generally I think you were expecting to come in at the higher end of the range on total dispositions of whatever it was, I think $3 billion to $3.5 billion. Is that still in the cards, or do you think it’s midway between the two numbers?

Bart Demosky

I think that’s still in the cards, Greg. Obviously it’s subject to getting these last assets sold. We don’t know what the pricing is there yet, but we’re on track.

Greg Pardy

Okay, thanks a lot.

Operator

Our next question is from Stephen Richardson of Morgan Stanley. Please go ahead.

Stephen Richardson – Morgan Stanley

Quick question. In terms of thinking about the growth outlook and the exposure later this year, should we also expect, and I think Rick you talked about laying out a growth outlook for a decade, should we expect that some of the projects within the portfolio were pared down, i.e. some clarity on certain projects that will not be part of that 10-year plan?

Rick George

That’s a good question. You kind of caught me by surprise. Listen, I think that when we lay the logic of this plan out there won’t be a lot of surprises, and I do not, also, expect that you’re going to see, okay, as a result of that, downtooling on a lot of other projects or anything else like that. So no surprises I think on that overall process. I think once you see this laid out and in the sequence we lay it out it will look very logical to you. Not a lot of surprises in terms of more asset divestments or big changes.

Stephen Richardson

Okay. My second question was on the writedown of the extraction equipment. Can you speak a little bit about that? About, I guess there was some expectations going back surrounding mobile crushers and some of the work being, more of the work being done at the mine face. Can you just talk a little bit about what preceded that decision to write that off and what the go-forward expectation is there?

Steve Williams

Steve here. So Steve, what we did there, we just took an in depth look at the forecast use of those assets going forward. If I just summarize quickly what we concluded from that work, the project worked, it’s economic for us to progress. The economics are not particularly great in a mature mine. They work much better in a new mine. So we’re able to use pieces of that equipment and we’ve not written down that but the pieces that we’re not going to use in the foreseeable future as a matter of discipline we’ve written down. So overall a good piece of technology. We’ve now go to look for the opportunity to use it.

Bart Demosky

Steve it’s Bart. Just one other thing I’d maybe add to that. It wasn’t a complete writedown. The oil sands operation is using some of the equipment off of that as well. I think $30 million or $40 million worth. So only the part that we know we won’t be using is being written off.

Stephen Richardson

Thank you very much guys.

Operator

Our next question is from Paul Cheng of Barclays Capital. Please go ahead.

Paul Cheng - Barclays Capital

Rick, I think that many years ago that you were a big proponent of an integrated approach for oil sands in the last two years that you started to believe that you don’t necessarily need an upgrade and look for more bitumen. And in the last two years clearly I think we’ve seen the industry executives moving into that direction. And it looks like most of the project [unintelligible] is only for the bitumen. Is that a concern with everyone moving in that direction, say four or five years down the road, that the light-heavy [unintelligible] will expand dramatically and end up having the upgrade be maybe a good idea. I don’t know whether that, you’re starting to revisit your view, or you’re stating that you want to be long in bitumen and upgrading is not really an important piece.

Rick George

Paul that’s a great question. That’s one that we think about often here. You know, you’re right. The industry has kind of moved kind of in a herd mentality, which happens. And say, okay, we don’t need a lot of upgrading. I believe there will be a point in time here where upgrading will be, again, necessary and that’s where our Upgrader 3 will come into play.

You know, I’ve been around this industry a long time. There always has been cycles and will be cycles. If you look at it in a North American context, right now we’re going into a bit of a cycle here where we’re long on upgrading and that deals with the expansion of many upgraders in the U.S., including places like Wood River, Port Arthur, a number of other coking projects, which I won’t necessarily list for you, Paul. You know them as well as I do. As that gets absorbed, then I think there will be a time where an upgrader, in fact pulling the trigger on that, will be at a point where you kind of start to see that cycle change. So I still do believe Upgrader 3 will be built. The timing of it is not the only issue.

So for us I think going bitumen long for a period of time makes a lot of sense, and then we’ll be looking for what we think is the right sequence in terms of when we go back at that project and start that upgrader project again. These do tend to be pretty long cycles. This one is particularly long because of the amount of upgrading built into the North American system. But you’ve got to remember that the feed overall, certainly coming from the north, is going to get heavier and heavier quite quickly.

Paul Cheng

Rick, from the time you decided to restart the construction in the Upgrader 3, how long will it take for that to be complete?

Rick George

It’s a two to three-year period, could be a little bit longer than that, you know, on the execution mode that you choose, and the pace at it. But if I were modeling that or thinking about that, you’d plan on at least three years for that.

Paul Cheng

And I know that you’re going to give us far more detail in the fourth quarter, but what is Fort Hills’ importance in your future portfolio?

Rick George

Yeah, this is Fort Hills, Paul?

Paul Cheng

Yeah.

Rick George

So yeah, I mean Fort Hills, we still see it as a valuable asset. It’s a very good mining lease. There’s already capital investment put in there. It will be in the sequence of projects at some point. Again, what I’m not yet really ready to talk about is where is that in that sequence? We have so many opportunities, whether that be, you know, expansion at McKay River, Firebags 5 and 6, Fort Hills, we’ve got Meadow Creek. So we have so many opportunities. This is about the sequencing and a lot of different factors that go into that. So without getting any further into what we expect at least in the fourth quarter, I think that’s the best thing I can say. It’s in the portfolio. The exact sequence is not something we’re willing to land on at this moment.

Paul Cheng

Okay. We’re talking about the Firebag 3 starting up next year. Firebag 1 and 2 are [consumed] now it’s already on a [sustainable] one way. Can you give us some data on what is the steam oil ratio, what we have learned. Is it a disappointment or has it been good? And is the Firebag 3, 4, and 5 the quality of the sand and all that is going to be dramatically different than Firebag 1 and 2?

John Rogers

I always seem to get the Firebag questions, Paul. The 1 and 2 no doubt went through, Suncor went through a lot of learning with 1 and 2, as did the industry, you know, as we went through this early phase. Some of the things we didn’t do is steam, you know, we didn’t put enough steam into the reservoir. I think we overestimated where the steam oil ratio should be. Right now we’re anticipating it will probably be in the 2.6 range. Eventually we will do some in-fill filling to enable us to do that. Going forward with 3,4, and 5, we would expect that we probably would have a steam oil ratio in the 2.6 range.

Paul Cheng

John, can you tell me what is the current steam oil ratio in 1 and 2?

John Rogers

Yes, it’s currently somewhere between 3 to 3.3.

Paul Cheng

And you’re saying that you think that it will go down to 2.6 and what initiative are you taking and why do you think it’s actually going down to that. After all, those have been coming on stream quite some time.

John Rogers

Yeah, and that’s a good question. There’s a couple of things. As we get to full capacity, that is going to help. The second thing is the in-fill drilling that we should do should bring more barrels on with less steam and that should enable us, and that’s our target, to bring it down to about 2.6. But as the saying goes, we’re all kind of moving along, we’re all learning as we go along. So 2.6 is currently our target for 1 and 2, and based on our experience we think we should be able to get close to that range.

Paul Cheng

Okay. My final question. For the oil sands, John, what kind of sustainable capital that on a normal year we should assume on a per-barrel basis, including, say all the whole nine yards, whether it’s an upgrade or the [unintelligible], everything, all-inclusive?

John Rogers

Yeah, Paul, it should be in the $8 to $9 per barrel range going forward.

Paul Cheng

Okay, very good. Thank you.

Operator

Our next question is from George Toriola of UBS Securities. Please go ahead.

George Toriola – UBS Securities

Just a question around natural gas. Post your divestitures I’m wondering if you can talk about how you see, how you’re thinking about natural gas, the development of your natural gas assets, in the context of a weak gas price environment. The comment Rick had made earlier was, the question around return on capital in natural gas. So would you still look at that as a hedge? Or would you look to bring in third-party capital? How would you be looking at that, and would you look to grow those volumes with your oil volumes?

Rick George

Yeah, so that’s a great question and a strategic one. I guess, you know, I would say that having our gas consumption and gas production totally hedged with production is not something that’s necessarily high on our list. I think what we’re trying to do here is to reposition our gas business so that we can make money when gas is in this $4 to $5 an [mcf] kind of range. And so if we can’t get to that kind of point, given the amount of gas that we see on the horizon here around North America, then you’ve got to really question are we in the right business? So this is about repositioning our gas business so that we can make money in this kind of environment. We’re certainly going to be there for a period of time. You can never say forever in this business, but we certainly see an abundance of gas given the tight gas, Shell gas play around in North America. So I would say more of an emphasis on return on capital, and a little less on the total balance.

George Toriola

Okay, thanks a lot.

Operator

Our next question is from Mark Polak of Scotia Capital. Please go ahead.

Mark Polak – Scotia Capital

Just a quick question on Hebron. With the new study coming out on that last week, talked about construction beginning next year. Just wanted to confirm. My suspicion is it’d be pretty minimal capital net Suncor next year, and then are you sort of thinking over the life of this project this is a, or the life of the construction, is about a billion dollar investment for Suncor to get that to first oil?

Rick George

I think that’s a good way to look at it. Pretty much on that kind of line.

Mark Polak

Great, thank you.

Operator

(Operator instructions.) Our next question is from Carrie Tait of National Post. Please go ahead.

Carrie Tait - National Post

I’m wondering if you can sort of explain what you’re doing to counter the campaigns like Rethink Alberta and the different political roadblocks that are popping up in the United States like members of Congress opposing Keystone. What are you doing to get them on your side?

Rick George

Okay, yeah. So thanks for that question. So listen, the most important thing is that we get this discussion out on a fact-basis, not on a theoretical or a basis with no fact. So we’re working very hard as an industry and also from Suncor in terms of making sure that we get the facts and the basics of this industry out in the public in a very big way. You’re seeing ads by CAPP out there that are trying to straighten out the record. Certainly I’m out on the road as well as other senior executives in this company, out on the road talking about this.

All of the work that we’ve done indicates certainly for Canadian citizens but increasingly for Americans as well, is they do see the oil sands as a very important part of a long-term strategy around energy security in North America.

Now obviously, all of us, especially here at Suncor, but the industry in general, knows that we need to show continuous improvement on the environmental front. So I think there’s two actions: getting the facts out and then working very hard on continuous improvement on a go-forward basis. And that continuous improvement comes in the form of less land disturbance, less water use, less air emissions, and a real focus on technology.

So all of those fronts we’re working on, we just were up in [unintelligible] this week and our pond went number one, which is no longer a pond by the way, it has some incredible work on restoration. You’ll see us out here in September demonstrating that and some real visuals and in fact Carrie, I’d love to have you up there to show you what is actually progressing and how we are making real progress.

Carrie Tait

When you talk about that you’re out on the road talking to people and trying to get the facts out, who are you talking to? What kind of groups, what type of politicians?

Rick George

Well all kinds of groups. You know, everybody has a political agenda and all politics are local. That’s the one thing you’ve got to always remember about life. And you know, and certainly I find that the Canadian press overplays how this plays in the United States. So it may be a headline here in Canada but it doesn’t even get to the 20th page in the U.S. So I understand your role in this and your job, but you know, if you ask the average American they won’t even know what the issues are. And so, you know, listen, we’re out on a very broad basis, talking to big audiences. We’re trying to talk to influence leaders. What I would say is once people understand the facts, then we garner a lot more support.

Carrie Tait

When you talk about how it’s overplayed in the United States and you know, it plays in page 20 of an American newspaper, does that mean to say that you don’t think that the concerns members of Congress are putting up against projects like Keystone are very weighty?

Rick George

Okay, if I answer your question it seems like you’re leading the witness here a bit. No, I would not say that. I think everyone’s concerns are very important. We listen to everyone’s concerns, but with that we really want to make sure the discussion is adult-based and factual-based.

Carrie Tait

Thank you.

Operator

Our next question is from Francois Dejardins of Le Devoir. Please go ahead.

Francois Dejardins – Le Devoir

I’ve been covering the Shell refinery situation here and I’ve been kind of wondering if you guys have weighed the impact, you know, if Shell did close its refinery, leaving you alone to bear the cost of the Portland pipeline?

Rick George

We certainly have looked at all of those cases and do not expect that to be a huge feature overall in terms of the economics of running in Montreal. You know, Montreal certainly is a tough market because you can get water-borne product into the Port of Montreal, so it does change the dynamics some, and certainly in our overall market that’s one of the tougher ones because it is on tidewater.

Francois Dejardins

I’m sorry, I didn’t catch the end of that. You said you cannot get more product into the port?

Rick George

You can. My point is that it’s a difficult market.

Francois Dejardins

All right. Thank you very much.

Operator

Thank you very much. There are no further questions registered so at this time I’d like to turn the meeting back over to Mr. Rogers.

John Rogers

Great. Thanks everyone for listening in to our call. Again, Helen and John and Jolene and I will be available for detail questions after the call, so should you have detailed modeling questions of course give us a call directly. Other than that, be careful out there and we’ll talk to you soon. Thanks.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Suncor Energy Inc. Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts