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

Suncor Energy Inc (NYSE:SU)

Q3 2010 Earnings Call

November 04, 2010 10:00 a.m. ET

Executives

Helen Kelly - Manager, IR

Rick George - President & CEO

Steve Williams - COO

Bart Demosky - CFO

Analysts

Andrew Fairbanks - Bank of America

Joe Citarella - Goldman Sachs

Andrew Potter - CIBC

Brian Dutton - Credit Suisse

Stephen Richardson - Morgan Stanley

Mark Polak - Scotia Capital

George Toriola - UBS

Mark Gilman - The Benchmark

Barbara Betanski - Addenda Capital

Paul Cheng - Barclays Capital

Operator

Good morning everyone. Thanks for listening in to our Third Quarter Conference Call. In the room with me this morning, I have Rick George, our President and CEO; Steve Williams, our Chief Operating Officer; Bart Demosky, our CFO; and from the controller’s department John McKenzie, Jolene Gillimo.

Rick, Steve and Bart will take turns to give us a perspective on the quarter and then we’ll open it up to questions. We’d ask that you keep your questions to Suncor results and strategy only. And with that Rick, please kick us out.

Rick George

Helen, thank you very much and I’m delighted to be here and good morning everyone. First of all, I’m delighted to report third quarter results obviously, very solid operating and a financial performance. It was one of our strongest quarters in terms of oil sands production and what makes that even more important is that we reached these volumes so while also completing major plan maintenance.

Again, I think it demonstrates a solid base for a reliable production on go-forward basis and when you think about that in terms of before we are the merger, which I’m going to talk more in the moment, you’ll see that Suncor is getting ready here in terms of a long-term basis on which you can depend.

Production in the natural gas and the international offshore were both exceeded plans, when you take into account the asset sales that we did out of both of those businesses. And in addition, we’re proud of our downstream assets which continues to show a very robust cash flow and earnings. So, we’re on target to meet our production operating cost guidance for the full-year. I’ll let Steve update you a little bit more on that in detail.

What I want to spend sometime this morning on was really kind of a progress we’ve had, ahead of the progress report on where we are on the merger. So the merger closed some 15 months ago and I want to kind of give you an update, kind of item by item in terms of where we are.

First of all, on the divestiture of assets and debt levels our sale of non-core assets is really nearly complete. The transaction matrix we realize were solid, was executed very well, ahead of schedule. And with that our goal to repair the balance sheet and pay down debt by the year-end will accomplish our goals.

We should be roughly at year-end debt levels of $11 billion. And so with that I would quickly say that our natural gas business continues to evaluate its long-term strategy and there may be some more asset sales. That was something that we can talk about later on. Although certainly our core program of what we planned to divest inside of the merger is behind us. On synergies, I’m pleased to announce our final number on this, and if you’ll remember at the time of the merger, we said on an operating basis, we had about $300 million worth of operating synergies.

We increased that about a year ago to 400 million and I’m pleased to tell you that our current estimate and what we expect here is 800 million of synergies, about two and a half times higher than our original forecasts. Almost all of that 800 million and savings has been triggered to date and you should start to see that in our results on a go forward basis, may be not all at once, but year-over-year period of time. The key initiatives we’ve undertaken include supply chain management optimization, improved inventory management, office and overhead rationalization, just what you would expect out of a merger of this size.

I want to congratulate my team that’s worked very hard to drive those efficiencies, and we will work hard on a go-forward basis as well. I think its driven real value for our shareholders and I want to give our team full credit for doing exactly that. If you think about our organization, I’ve been very proud about how it’s aligned, how we’ve gotten behind the Suncor values, our strategy and behind kind of where this team is going. We’re in the process of doing the final stage of closing down the London, England office at the end of this year. By the end of this year also, all of the Calgary-based employees will be in one building, here in Calgary. And importantly, and this has probably been the hardest part of the merger, has been the integration of our ERP systems.

So by the end of 2011, we’ll have the entire company on an SAP system, as Suncor was prior to the merger and that will be the solid platform for driving even more efficiencies and effectiveness on a go-forward basis. We’ve actually completed the roll-out of two out of four phases. The last two phases happen in August and October of next year. And I can tell you that so far so good with those roll-outs and we’re all looking forward to having that kind of solid foundation on a go-forward basis. Then the fourth coming out of the merger is the rich portfolio of growth opportunities.

This company has got growth opportunities that are unparalleled by many or any players in this industry. Looking ahead and I know everyone out here is still looking, when are they going to come out and talk about the exact sequence of these projects. It’s still our plan to come to the market before the end of the year with a strategic update. For now, I think it’s important to remember and recognize the value of some 27 billion barrels of resources. And oil sands in particular, beyond Firebag Stage 4, which is under construction. We have Firebag 5 and 6. The Fort Hills project, the McKay river expansion, Meadow creek and others that we haven’t actually even talked about and firstly all the ones I listed above there already have their key, regulatory environment approvals in place.

Outside of oil sands, we also have a number of very attractive offshore activities, including the Hebron in the East Coast of Canada and Golden Eagle in the North Sea -UK North Sea and we’ve got some kind of very interesting exploration currently going on in Norway and Hibernia South.

And so there’s some real potential, particularly in the iron ore business. We also continue to assess and we actually expect to have some small amount of oil production next year at Syria this at an oil rim around the gas filed we currently produce from and we have an active exploration program on going in Libya.

So listen, with that kind of a portfolio, we’ve got a rich set of assets in terms of growth opportunities, 27 billion barrels of resources that are already on the books, unparalleled by any of the peers of our size and I think with the ability to deliver on growth profit, we out to go forward basis.

The other point that I wanted to make, and I know Steve will emphasize this as well is, our integrated strategies, integrated companies are key components of this strength of this growth. If you look back at this last quarter with maintenance, with pipeline interruptions and you look at how we managed till this quarter, I’d say that kind of integrated strategy, with the balance of bitumen, upgrading, refining capacity, storage, pipeline movements gives us the flexibility to deliver great results in the future.

The one last thing I want to talk about is something that’s very important for a company; especially our size is, improving return on capital. If you think about it, when you go through a merger and almost all mergers are this kinds of companies; when you take into account; an account for good wills and other various accounting and other adjustments. Companies that go through these large mergers usually see a few years where you have a core return on capital, at the bottom of the market in 2009 in our result merger and some assets that we put into safe mode when the floor fell out in the fall of 2008.

We still have significant capital in progress, including the Voyageur upgrader at Fort Hills. Those kinds of unproductive assets on our balance sheet does mean that we have a low return on capital than we had historically delivered. As we bring these projects out of safe mode, as we deliver the next phase of the growth and as we improve our efficiency and effectiveness, one of the things that I’m very excited about is, you are going to see this return on capital number move up, not all in one quarter, but over a period of time, here over the next two years.

I think that one of the things that I really want to portray is listen, first of all, I'm very proud of the work is going on here and it does feel like we’re coming out of a merger, in a really good shape. With the company, to be honest with you, that is unmatched here in Canada or in North America and even compared against European companies.

This is going to get to be fun again, so with that I’m going to turn it over to you Steve.

Steve Williams

Ok thanks Rick, so strong operating results, despite a number of maintenance programs during the third quarter is probably the headline. In oil sand production, was 307,000 barrels a day. A solid production number, particularly given the plant maintenance unit 2 and both Firebag and McKay river, which together reduced production by roughly 20 thousand barrels a day. We just reported our October production of 330 thousand barrels a day; a very strong number, particularly might I say, given that six week turn around at unit 2, which does continue into the fourth quarter, for three weeks into that October number. So year-to-date, including October, that’s 275 thousand barrels a day; on target for our guidance.

The turnaround was accomplished ahead of time and on budget and you’ll hear us using that phrase quite a lot for this quarter. It was small in scale compared to the one in the last quarter, lasting just six weeks and involving 700 contracted. That’s part two of the largest turnaround ever conducted at our oil sands operation and as I said in the last quarter, the strategy to break the turnaround into smaller segments, smaller pieces of work in order to be more planful and tactical in the execution caused clearly fade off.

There is some remaining work on unit 2, and we’ll carry that one in 2011 with a full unit shutdown that's planned for roughly seven weeks in the second quarter. In-situ operations about Firebag and MacKay that also underwent three weeks and one week off and the maintenance activities respectively during the quarter. Overall, we continue to work on operational excellence and the reliability of all of our assets, joining the third quarter, we appointed Vice President of Operations, Integrity oil sands whose sole job is to maximize the reliability of the upgrading assets. It is still early days but we’re already seeing significant progress. This is a journey we’re deeply connected to and that will take us to the world class operations we’re striving to achieve.

So let me quickly move on to natural gas. Natural gas production during the quarter was 564 million cubic feet a day with the previously announced divestiture program that complete. We anticipate exiting the year at roughly 384,000 million cubic feet a day. Shifting gears again into international and offshore. Quarter’s reproduction was 206,000 boe a day. East Coast Canada continues to benefit from strong performance with the new wells drilled at Hibernia.

During the quarter, we undertook a three-week plant turnaround at Terra Nova that also came in on time and on budget. While Libya continues to be restricted on the production quarter, Syria continues with strong performance since the plans became commercial in April.

And finally a few comments on refining and marketing. Reliability in the downstream that it continues to be very strong, we were able to mitigate the productions and earning impacts of the Enbridge pipeline altitudes, particularly on signing through sourcing of alternative crudes and rerouting our oil sands production through Edmonton and Denver. So, as Rick said that integrated strategy has certainly paid off for us during those both difficult times. Now, I’ll handover to Bart Demosky.

Bart Demosky

Thanks Steven, good morning everyone. Consistent with our strong operating performance that also reconceived highlighted and a favorable crude place environment in the quarter, we delivered a very solid financial performance. With our operating earnings coming in at 645 million and operating cash flow of 1.63 billion. Looking at production, overall very strong across the company. We averaged 636,000 barrels per day during the quarter and that was in a fairly, a quarter which saw a fairly heavy amount of plant turnaround activity that Steve has highlighted.

As we stand today with the exception of roughly 20,000 barrels per day of non-core assets sales that are left to close over the next couple of quarters, we’re not getting right down to a very close to a base production number that we planned to grow from here.

Our October oil sands production number which was announced this morning of 330,000 barrels per day is a very good start for the fourth quarter. And we do expect to meet our production target of approximately 280,000 barrels per day for 2010.

Now, Q3 was impacted by a couple of events. First, our hydrogen unit outage at oil sands did impact our production mix during the quarter. But I want to emphasize, it did not have an impact on our total production.

We have updated our outlook for production mix and realized price for 2010, though, to reflect a higher proportion of sour production. We were also able to mitigate, as Steve highlighted, much of the impact from the series of Enbridge pipeline outages that occurred during the quarter. We did reroute a lot of our crude. Also, in our favor was the fact that we were in turnaround, so with less production coming into the market. But really, I had emphasized the integrated strategy that company has, that was the key to our mitigating any impact. Overall, the impact on operating earnings from both events was minimal and we would expect that to be the case in Q4 as well.

We did increase -- or we have increased our full-year guidance for East Coast from 65,000 to 70,000 barrels per day to reflect the very strong performance coming out of that part of the company. And as well, the outlook for international has been revised to 110,000 barrels per day. And that’s really just taking into account the assets sales that have been completed to date. We do have one block left to go. Its about 16,000 barrels per day. It’s the U.K. assets. And we expect that to close some time towards the end of the year or into Q1 of next year.

On the cost front, I want to highlight a couple of things. We continue to work to drive cost efficiencies in our base operations through increased reliability, energy-intensity reductions and continuous improvement. And as Rick said, our final operating synergies run rate is now -- we’ve forecasted to be 800 million. And this achievement reflects an intense focus on driving efficiencies in overhead reduction. And I want to put that number in just a little bit of context.

In terms of merger costs and synergies realized, we have been cash flow positive since May of this year. And our final tally of merger costs and synergies ratio is 0.9 which is first quartile for mergers of this type and size.

Full run rate will be in place by the end of 2011. And to say that in another way, the cost -- we expect the cost of the merger to be less than a single year’s costs saving benefit going forward. And we will be realizing those benefits every year.

On the operations front, I am particularly happy about our cash operating cost of 60 a barrel at oil sands. And that’s really a reflection of strong production of business unit. And we have updated our cash operating cost forecast for oil sands to be now $30 to $40 per barrel, given our strong performance year-to-date. And that’s change from previous guidance of $38 to $42 per barrel.

In the Downstream, Rick mentioned the strong -- continued strong performance there. Wider/light/heavy differentials and stronger fraccing margins contributed to very strong earnings, slightly offset by stronger Canadian dollar. In that business, earnings are robust and the Downstream continues to be a significant source of free cash flow for the organization. Year-to-date, they delivered about 900 million cash from ops, which is well above our sustaining capital requirements. And that’s without the fourth quarter having been reported yet.

As Rick mentioned, divestitures are essentially complete and in total we disposed of 3.5 billion of assets right at the high end of our expectations then again that program is ahead of plan and schedule and so we’ve been able to pay down our debt more quickly than we had anticipated.

In the quarter we received about 1.6 billion of cash from those asset sales and we expect to receive about another 375 million over the next two quarters, so that debt now stand at about 11.5 billion down from 13.4 billion at the beginning of the year and we do expect to be below our target of two times debt to cash flow by year-end, and as Rick said the net debt level of about 11 billion.

On the capital expenditure front, during the quarter we had 1.4 billion of capital expenditures and that brings our year-to-date total to about 4 billion, the spend was largely related to sustaining production although we continue to spend of course on Firebag 3 and on Firebag 4 and Firebag 3 construction is about 90% complete now and we are on track to meet our 2010 capital budget of about 5.5 billion and I’d emphasize that, that will be funded largely from internally generated sources of cash flow. Looking forwards as we come into Q4 now there are a number of maintenance programs so I'll just highlight briefly and then I'll turn it back to Helen.

As I mentioned – or was mentioned we have the six week turn around at U2, three weeks of that turn around did carry into Q4. We also have some annual coker maintenance on going right now in the quarter on U1. That maintenance is expected to last about five weeks, but with U2 wrapped up overall production in fact should be quiet minimal and in the international and offshore part of the company we have the enhancement project hook-up at Buzzard in the UK North Sea, which will impact production through Q4 and into the first part of 2011 as well.

And a three week maintenance program has already been concluded at White Rose. So that concludes my remarks. As Rick said earlier in his comments we do still plan to come out before the end of the year with a strategic update including our 2011 CapEx and production forecast and I hope to be in a position to announce the timing and format of that sometime towards the end of next week or early into the flowing week, with that I'll turn it back to Helen.

Helen Kelly

Great, thanks gentlemen. It seems Steve and Bart have already covered most of the outlook, I won’t go though it again in detail, but I will point out the change in total production before remaining target is divestitures from 610 to 590 reflects almost entirely the impact of our assets divestitures to date.

Our production outlook for oil sands, as Bart said remains unchanged, its 280 and in fact we’ve increased our East coast outlook for 5000 barrels per day. Changes in natural gas and the international offshore were both exceeded plans, when you take into account the asset sales that have been completed to date as well. You’ll find the summery outlook on page 5 of your quarterly release.

For our U.S. analysts out there the LIFO adjustment for the quarter would result in a $1.4 million increase to after tax earnings. So with that John if you wouldn’t mind opening up the line, so we’ll be pleased to take your questions, once again I'll ask you please keep your questions to Suncor results and strategy only, the controllers and I will be available after the call for your detailed modeling question and any other matters you wish to discuss. We’ll be happy to entertain your questions now.

Question-and-Answer Session

Operator

(Operators Instructions), the first question is from Andrew Fairbanks of Bank of America, please go ahead.

Andrew Fairbanks - Bank of America

The oil sands reliability is looking strong, as you mentioned. I was wondering if you had an inclination to talk about some of the independent reviews you've conducted this year, and perhaps some of the lessons learned and things you're doing to sustain the stronger reliability of oil sands operations?

Steve Williams

Yes and let me just brief on that. Actually, you know, we did the full investigation following the events of the first quarter. That included third-party experts to help us understand what the root causes were and what the best plan would be to get to those. They highlighted a number of things to us. I guess the clearest in that switch was you’re on the right track with operational excellence don’t turn. So an operational excellence was looking specifically at safety, environment and reliability.

So we’ve taken those messages. You heard me say we put a fulltime Vice President into there and we are implementing those recommendations at face. And so the strong performance, a strong reliability we’re seeing from oil sand is in par as a result of those recommendations are being implemented. And as I said, you know, we are firmly committed to finishing that program off.

Andrew Fairbanks - Bank of America

Oh, that's great. And I guess looking forward, would the things you need to do going forward be mostly around personnel or procedures or instrumentation?

Steve Williams

I would pick three out to start with you. One is around the maintenance program. You’ve heard us talked about these turnarounds being broken down into manageable pieces and are being on time, that’s one. The second one I’ll pick out is around personnel making sure that we have the right number of competent people in there. One of the benefits of the mergers has been we’re able to – enable to move people from other parts of our operations into the oil sands and give it support. So those will be the two I will always pick out.

Andrew Fairbanks - Bank of America

Oh, that was great. Thanks, Steve.

Operator

Thank you. The next question is from Joe Citarella of Goldman Sachs. Please go ahead.

Joe Citarella - Goldman Sachs

Thanks. I understand you guys may want to wait a bit later into the quarter to talk about project sequencing, but in terms of some of your growth opportunities, any early thoughts you could offer in terms of capital intensity and your expectations for costs are going to come in? I mean, I'm thinking from our early Fort Hills and MacKay, but really any thoughts in general would be appreciated. Thank you.

Rick George

Yeah, Joe. It’s Rick here. So we’re still doing our homework and working very hard in terms of take and look at this projects. Take a look at their return on capital, take a look at the sequence, the men I require and the others – there’s a lot of logistics to each projects as well. And certainly, our expectation here is that – and the expectation I would lay out to our group for sure is that in terms of when we start up Upgrader 3, we'd still expect to be probably the lowest cost increase of upgrading capacity when that happens.

And for certainly on mining things like Fort Hills or the other mine project down the road, we'd expect to be on the low end of the cost curve as well. I think the other comment I would make on Firebag Stages 5 and 6, because you’ve got a lot of the infrastructure in when you do the Firebag 3 and 4. I think those will be around the lower part of the cost curve as well so that we'll take a heavy look at. And when we do kind of come out to see clients, we’ll also kind of give you an update in terms of how those things kind of benchmark it against other projects.

They’re never quite equal. It's a little bit of apples and oranges. But, you will see us, and what I’m hoping to be able to demonstrate here is we'll be one of the low-cost constructors here, with a great long range program that will stretch out here over of decade of length.

Joe Citarella - Goldman Sachs

That's great. And then for 5 and 6, you mentioned -- you've mentioned before lower SORs and potential synergies from 3 and 4, and what you've got in there already. Can you help us put some numbers around this, in terms of how that should benefit your capital intensity or --?

Rick George

Yeah. That’s a good question. So, you’ll see some of the other operators with lower SOR numbers and we’re well aware that we do a lot of benchmarking against that. I think our current, if you give us a daily -- remember we just came out of some heavy maintenance in the third quarter here, but our daily SOR is about 3.1, something in that range. We believe we can get this down to 2.5, 2.6 kind of range with infield drilling and a lot of other small movements as we go forward. And you have got to remember, this is a great reservoir. It’s an incredible reservoir in terms of in the sweet spot. It is slightly under pressure. And it’s not directly comparable to some of the Seg D projects in the South where you are actually producing more of a heavy oil than a bitumen.

So, there are differences in all that. But we will see continuous improvements from us on that front. Overall, I guess the other things on a longer-term basis -- longer-term being the next four, five, six, seven years. I think you’re going to see technology in this SAGD space continue to improve. It’s pretty hard to identify whether it’s longer run rate on downhole pumps, other ways to keep this reservoir’s pressure, infield drilling, just the whole sequence of things that are coming in that kind of help that continues to improve as we go forward.

Joe Citarella - Goldman Sachs

That’s really helpful. Thank you very much.

Rick George

Thank you.

Operator

Thank you. The next question is from Andrew Potter of CIBC. Please go ahead.

Andrew Potter - CIBC

Yeah, hi guys. Just looking into 2011, I mean, especially with these new cost synergies, it seems like there should be a lot of free cash coming, so maybe if you could just talk a little bit about what you plan to do with that free cash, how comfortable you are with the debt levels right now? And, I guess, at what point might we start to see some dividend increases? And then the second question just on Voyageur, maybe just some updated thoughts on how you're thinking of that upgrade or it seems you're signaling that we might see a deal or we might see that resurrected sometime soon.

Bart Demosky

Sure. I’ll maybe take the first couple of parts of that question, Andrew. It’s Bart here and then I’ll turn it over to Rick or Steve. Yeah, we do look forward to a period here as we grow production -- continued growth in cash flow from operations. We’ve been quite clear that our plans are to utilize that cash for sustaining capital and as well for growth capital. We do want to fund most of the capital requirements going forward from internally generated cash flows. So, I think, that’s directionally where you would see most of the cash utilized.

On the dividend front, or returning more cash to shareholders, we’ve been quite candid on that as well, that, the first opportunity to really take a look at that is as we start to grow production again and the first growth in production coming off a rebase lining once we can finish off all these assets sales is 2011. So, shouldn’t expect to see anything before that. That’s the first opportunity we’ll able to take a Tar Board and they’ll have a look at it. Now you had a question on Voyageur as well. So I’ll give it back to Rick.

Rick George

So, let me take the Voyageur question. I’ll start at a very high level, but my view of this North American market is, we’ve built a lot of upgrade capacity in the industry on refineries, but predominantly in the United States, although, even our Edmonton refinery, the latest the company built some coking capacity on the front end of that Edmonton refinery. Now what you're seeing mostly in growth here in Western Canada out of this basin is heavy oil from Seg D projects, from other projects that have taken off.

And my own belief here is that you are going to come to a point here where you fill up all that upgrading capacity we built over last four-five years and you come back to a point where you’ll have wide differentials of justifying an upgrader. If you look at the differentials today you could justify today, the point – the problem of the issue is we’re kind of – I think it’s slightly distorted because of some of the pipeline issues.

But I’ve always been a bigger -- on these long-term cycles. Our upgrader 3 we have the engineering 85% complete, constructions is actually 15% complete when we shut it down, it’s kind of like a very inexpensive option, in terms of when we pull the trigger, so in mind its not a question of if, the only question is when and the timing and this will come back and again it goes back to the kind of integrated nature that we talked about some this morning.

I think we still see Suncor as that integrated company that has a differentiator that has more kind of reliability and flexibility around our assets then most companies or all companies in our space.

Andrew Potter - CIBC World Markets

Sure, that's great. And then just one more question on Voyageur - I mean, if it does get the go-ahead to restart construction, I mean, any thoughts in terms of what's happened in costs, inflation-wise, since the original sanction?

Rick George

Yeah I think that is a great question, it’s one that concerns us a lot and so here’s what I was saying. Following that collapse of the markets in the fall of 2008, we just see if we could pull back in cost and I think the estimate we gave earlier was kind of in the 15% range and we’ve not seen a great exaltation of that yet. But what I would say is, as you see that whole list of projects, I am getting more concerned about going back in the period here where there is lots of activities.

Today in the north, the industry has about 25,000 people in camps – construction workers. That looks like that’s going to increase so I'm very worried. I think that this go around will be a little bit different in a couple of aspects. First of all, you're not -- I don’t think you’ll quiet the material inflationary rates partially because the building of offshore work is our industry and refinery work is probably not going to at the same pace it was in that 2005 to 2008 kind of pace.

I think our challenge will be primarily around availability of labor. The one side note on that I think is, one thing that makes this cycle a little bit different is I look forward to is, you probably will be able to pick up some labor out of United States, where you know the unemployment numbers as good as I do and the one thing about this is, its nearby and there is lot of really good for the good crafts man, you know the unemployment rates in the Gulf coast on the far side of United Stats or maybe some access to someway we didn’t have on that last sit.

Andrew Potter - CIBC World Markets

That's great. Thanks a lot.

Operator

Thank you the next question is from Brian Dutton of Credit Suisse, please go ahead.

Brian Dutton - Credit Suisse

Good morning, Rick. I think you touched a little bit about on this when you're talking about Firebag, but much of your near-term growth in oil sands is really from your SAGD operations. So what lessons have you learned from your current operations? And how do you expect to apply those to your current expansion plans?

Rick George

I think Steve’s going to take that one on.

Steve Williams

Yeah let me pick those up and of course one of the great benefits of Firebag in the way its been developed Brian was exactly that, that because we did it in multi stages we could learn from those early stages and start to build in. So it’s a – the first once I would start with are the surface facilities, getting those to a very high reliability has been important to us and our ability to operate those this year has just steadily improved, exactly the same philosophy as we’ve been applying to the base oil sands, we’ve been applying to In-Situ. So we’ve seen the reliability of steam ranging and the water treatment and oil separation starting to approach a 100% between turnarounds. That’s exactly the space we wanted to get into.

The second piece then around underground, we've also been able to learn. So, this year we've had a very focused effort on steam oil ratios. What the challenges are there and what we can do into the subsequent programs. So the length of the wells, the spacing of the wells, the speed with which we've put in infields, all of those are starting to build into stages 3, 4 and beyond. That's why you hear Rick speaking with confidence that we'll see some improvement as we move through those.

Brian Dutton - Credit Suisse

Okay. Thank you.

Operator

Thank you. The next question is from Stephen Richardson of Morgan Stanley. Please go ahead.

Stephen Richardson - Morgan Stanley

Good morning. A quick question I guess for Steve is just – if I look at the October production numbers that you released this morning, and considering what you mentioned that the September turnaround rolled over into the beginning of October, can you give us any indication of where production was, other – last week or even today?

Steve Williams

It’s interesting as this year is going on, I've gone under pressure to move from annual forecast to quarterly forecast to monthly forecast and then to daily ones. Let me just give you a few comments. We’ve seen very strong performance at the plant. They are sign or they are a reflection of the programs work we’ve been doing. Bart reiterated guidance. We will meet or beat guidance – it can’t right? So overall the news from the plant is a very, very soaring and very good. I do want to keep people’s expectations as granted about what we can achieve. We are producing a natural resource and it does vary from month-to-month. So we are confident that we will meet or beat guidance.

Stephen Richardson - Morgan Stanley

And just back on that, I understand the guidance, but are we still confident in that 340 exit rate from oil sands this year?

Steve Williams

I mean the number I would point to is that if you look at the last seven months, five of them reached about and often made three hundreds and four of the – but three of the last four, we’ve been up above 320 and two of the last three we’ve been up above 330. And so excellent performance, I wouldn’t let our imaginations get too carried away.

Stephen Richardson - Morgan Stanley

Understood. Maybe just a quick question for Rick, just back on the Voyageur upgrader. Can you remind us what the original budget was back in '07 for that project, for the upgrader piece and how much was spent before the project was put into safe mode?

Bart Demosky

Yeah, hi. Steven, it’s Bart here. The original budget was just for the upgrader part was about $11.6 billion and were at about 4 billion spent to date.

Stephen Richardson - Morgan Stanley

Thank you very much, guys.

Bart Demosky

Okay. Thanks.

Operator

Thank you. The next question is from Mark Polak of Scotia Capital. Please go ahead.

Mark Polak - Scotia Capital

Good morning guys. You mentioned in the release and touched on earlier about sort of reviewing the strategy around the natural gas business. You're still long production quite a bit relative to your consumption. Is that still a big focus? Would you like to sort of match those up? Or what's sort of a lower, longer-term outlook for gas prices or are you less concerned about having that natural hedge internally?

Rick George

Yeah, Mark, it’s Rick here. You know, I think it’s an excellent question and it’s one that we wrestle it all the time. So, here is where I would start with that. Again, the focus is one return on capital. This company has got an unbelievable suite of growth opportunities. They happen to be almost 100% in oil. And I think you have to give Neil Camarta a great kudos for how he’s moved that group around, the assets he’s sold in a relatively short period of time. And you cannot build, what I would call, a higher return on capital on natural gas business without good assets. So, we’re going to get this down to the good set of assets that we believe are there for the long-term with a good return on capital. And so, rather than worry as much about size and the natural hedge kind of this go-around, trying to keep the real focus on return.

When this gas price is cycle, I mean, my own belief is, at some point, you will go back towards the $6 gas price, not a $10 gas price you saw at the last peak. But this looks like a very long cycle. And so, I would say, important to us, very important. Really like the job that the teams there have done, in terms of, given the portfolio down, or heading down some assets we’re proud to have in the portfolio, that fit us long-term. And, then we would take a good look at the growth rates. But we got to grow in a way that with low gas prices, we can still have return on capital. And so, this is one that it’s a tough business right now. I don’t need to tell you guys on the phone that, and it’s one that you’ll see us continue to work on but with some degree of caution.

Mark Polak - Scotia Capital

Thank you. And one more, if I could, on Firebags. As Firebag 3 comes on next year, I believe the first two stages in the expansion are generally short steam is, sort of, one of the factors there. Is there some incremental steam from 3 that will -- that we might see some benefit to the existing phases in terms of production rates there?

Steve Williams

Yeah, it’s Steve here. Just a quick update. Yes, if you remember, we had -- there are four steam generators on each of Stages 1 and 2. We also put co-generation in -- after that to have some additional steam. We are also bringing on what we call Steam Gen 9, which is additional steam, purely recognizing that opportunity. Steam Gen 9 will come on in time towards at the end of the first quarter. And so, we start to get more steam available. One of the great advantages of Stages 1, 2, 3 and Steam Gen 9 being there, is that we have a lot of flexibility to direct that steam to where we can make best use of the resource. So, in summary, more steam and the ability to direct it where we want to yield.

Mark Polak - Scotia Capital

Thanks. Is that about 25,000 barrels a day of steam -- that Steam 9 unit?

Bart Demosky

We will have to get back to you on that one, Mark.

Mark Polak - Scotia Capital

Great, thank you.

Operator

Thank you. The next question is from George Toriola of UBS. Please go ahead.

George Toriola - UBS

Thanks and good one, I guess. Two questions. I'll start with reliability of the oil sands business. I just wonder if you are able to talk about the parts of the components that really drive reliability here. Are there certain components of the upgrader of the mining business -- what are the drivers of reliability? And to the extent that you can identify those drivers, how have they performed as differently from the past in the very recent past here?

Steve Williams

Yes, Steve here again. Let me just talk briefly to those. So, I tend to look at -- I mean, first of all, I’ll break it up into the components of the plan and then I'll talk about the competences necessary to operate them.

So I tend to look at it as mining extraction upgrading, the operational excellence program we’ve had has been focused on all three of them and we’ve seen significant and material improvements in all three of those area.

So we’ve produced more tonnage from the mine, we put more tonnage through extraction and the upgraders are operating reliably at higher levels than we’ve historically seen. So the program was focused on upgrading because of the challenge we had, we’ve actually applied across the complete operation.

The competences there are around that ability to have a disciplined controlled operation and maintenance program and have the people in place to do that, so we’ve taken significant steps to make sure we got the right quality of people in there and it’s the combination of those which is playing off now.

Rick George

Okay George if could add just one thing to that, maybe come on a broader basis. Its really important to remember that in Suncor as the assets on the ground that has much more flexibility than other operators, we have two mines Steepbank and Millennium, two stages of Firebag, and MacKay River, all that feed into this complex are both export bitumen, export sweet product, export sour products, export to our own refineries, is much higher than other peoples and so in support of what Steve was saying there, but you got to remember this is a large complex but we’re not mine, one upgrader kind of company and that’s one our competitive advantages.

George Toriola - UBS

Okay, thanks. And -- but in looking at those three pieces, would the upgrade increase be the weakest link amongst those three?

Steve Williams

Intestinally, in terms of reliability I would say historically yes, in terms of materiality coming forward, the answer is not quiet so important because right now and through next year, we have not been – we’ve been bitumen short so the need for 95% plus reliability hasn’t been there because we’ve been short of bitumen to feed them.

So overall I would say they are – all three of them are approaching world class practice now and so they setting the standards in our industry around all three of those.

George Toriola - UBS

Okay, thanks. And then I guess the follow-up to that is, obviously, you have very good cash costs this quarter. So what should we be expecting or how are you guys looking at cash costs going forward, based on the liabilities you expect and volumes on all of that?

Steve Williams

I'll just make a simple comment and then I'll hand over to Bart on guidance. One of the keys to getting good operating costs is we’re a lot sustainable, reliable operations and that’s what we’ve achieved and that’s why we’ve seen our costs is coming down to where we’ve been expecting and we’ve planning to guide.

Bart Demosky

Yeah we’ll be guiding when we come over with our strategic update George.

George Toriola - UBS

Okay, then.

Operator

Thank you, the next question is from Mark Gilman of The Benchmark, please go ahead.

Mark Gilman - The Benchmark

Good morning, wondering vis-a-vis the synergy number -- how much of that 800 million, Bart, was captured in the third quarter or reflected in the third quarter results?

Bart Demosky

We went positive run rate Mark around the middle of the year. What we said earlier was, we would expect that full run rate to be achieved by the end of next year and we’re probably -- yeah part to two-thirds there now. I think the key is Mark that we have triggered all of those energies and what we mean by that Rick mentioned that in his comment is we’ve already taken the steps necessary to actually capture all of that cost savings. So none of the 800 million and stuffs that we have to continue to work or to get we’ve done the things we need to do and it will – the run rate will continue to rise as we move through 2011.

Mark Gilman - The Benchmark Company

Okay. If I could just go back to the gas question a little bit – Rick, part of the ability to maximize returns is associated with when you divest. And I don't think it takes a degree in rocket science to see that divesting gas properties right now probably isn't a high return option. How does that factor into your thinking on where you want to go with that portfolio?

Rick George

Well, first of all I think we’re relatively pleased with the prices we've gotten for our cash. As I said to my view this is a pretty long trough out there, and so to kind of back on a strategic basis what I would say is you've always got to watch this – the E&P industry because it tends to be I don't know if a lot of my colleagues will probably kill me, but it tends to be an industry where they use a lot of shareholders’ might and drill holes that kind of keep recycling the cash flow. So return on capital which is absolutely prime for us is not necessarily prime some of the people who compete in that space.

I guess that’s my point. And so we’re going to be really careful how you look at that. I do think there may be an opportunity at the bottom of the cycle to invest, taking the bottom in that cycle that’s as you know, you’ll notice much about that as I will. I can really look at those drilling rates in the US, you can look at what the cost curves are in these tight gas, shale gas basins. And you've got to look at what happens to gas demands. So it’s not a single dimensional picture, those things are all in our radar screen.

Mark Gilman - The Benchmark Company

Okay. One final one for me. You had, I guess, earlier in the year, some exploration disappointment in Libya. And I'm wondering whether there's any reconsideration that you're giving to whether or not you want to retain that asset?

Rick George

I don’t know what disappointment you’re talking about. We actually had some success wells on our first couple – first few wells and in Libya now we’re onto our 40-well drilling program. So 42 is the actual number. So we’ve also drilled a couple of dry holes but we’re just in the front end to that. So working hard on interpreting 3D Seismic, we’re almost done with – run in 3D Seismic. I like where we are in the basin, it’s an oil basin, it’s one we’re onshore. These are relatively shallow wells, I mean relatively on the world context and we’re moving ahead to fulfill our commitment and to see what those assets we’ve got and so there are no plans to divest of Libya. So that’s where we are.

Mark Gilman - The Benchmark Company

Okay, thanks, Rick.

Operator

Thank you. The next question is from Barbara Betanski of Addenda Capital. Please go ahead.

Barbara Betanski - Addenda Capital

Guys, thanks very much. The question is about bitumen production. That segment that's currently coming from your mines, though, the Steepbank and Millennium mines. And I was wondering what is sort of the maturity of those mines or whether there's a timing of a phase-out of any of the mines or portions thereof? And if you could talk about the North Steepbank mine extension and, as well, I think Voyageur sells the expansion within the plans at some point?

Steve Williams

I just make a couple of comments and then deferred to the strategy with you into later this year. So we have some flexibility. Our production is concentrated on the Millennium mines. The Millennium mine still has 10-plus years left in it. So, you do move through good parts and bad parts of the mine. And that’s part of what we build into guidance. But overall, it’s good quality mine, 10-plus years of production from there.

For operating reasons, we’ve looked at the North Steepbank expansion. We’re still spending moneys on that. And later we will back -- that will come back into production. And then more generally, the balance between mining and In-Situ will be part of the strategy review we bring at the end of the year.

Barbara Betanski - Addenda Capital

So at this point, would you be able to say whether you would expect production from the mine to remain at current levels or possibly increase or decrease? Or can you determine that yet?

Steve Williams

It will. In the short-term, in the operating window, broadly, the production you see from Millennium will continue. It continue to produce these rates for a long time.

Rick George

So, flat is the answer to your question.

Barbara Betanski - Addenda Capital

Okay, great. Thank you very much.

Steve Williams

Thank you.

Operator

Thank you. (Operator Instructions) The next question is from Paul Cheng of Barclays Capital.

Paul Cheng - Barclays Capital

Rick, a couple of questions -- and maybe that I joined late or you already covered, I apologize. Have you given any kind of production guidelines for 2011?

Rick George

No.

Bart Demosky

No.

Paul Cheng - Barclays Capital

And that you're not going to until your strategic plan coming up?

Bart Demosky

Yeah. That’s right Paul.

Paul Cheng - Barclays Capital

Okay. The second question is that -- going back into the gas business, Rick, if you looked at strategic code inspection, that do you actually have a competitive edge in that business? If you do, what that may be? Because I mean, when you're looking at whether you want to continue to invest and one question, of course, is the cycle; the other question is that do you really can do much better than your peers? So do you believe that you actually can do much better than your peers in that business?

Rick George

Paul, that is a great question. I think the answer is when we get down to the assets that we have in our portfolio, we will be very proud of those and those will compete. We’re trying to drive that business to a second quartile, first quartile business week. I wouldn’t say that we can see ourselves as being our company that is absolutely top quartile in every single phase as a big integrated company. So, what I would say is if we can drive that business to have assets that are in the first quartile or top second quartile kind of performance, that I would be extremely proud of something that we would work for our shareholders. What you can do is hold on to assets that are below the mid-term of asset base and continue that. We have many more prospects and we’ve got the capital budget for or the ability to execute, so we want to be very careful about where we put that capital.

Paul Cheng - Barclays Capital

Right, I presume that that means that you -- right now you're even on the third or the fourth quartile. Is it a execution issue or is this an asset contribution from your standpoint?

Rick George

I think it is more around the asset base than it is one. You’ve got to remember, we went through a cycle here where gas prices were in that $8 to $10 range and everyone can make money. It’s much more difficult when you get down to these ranges than for the range that we see on a go-forward basis. I would say most of our assets are conventional, not unconventional type resources. And as we’ve seen this unconventional tight gas, shale gas plays come on, that has been the game changer in that sector.

Paul Cheng - Barclays Capital

Last question, when you're looking at statistically costs, just broadly speaking, in the oil sands, you had mentioned earlier that the (inaudible) you believe over the next several years is going to have a tremendous improvement. In comparison to that, mining has been a very, I think status quo kind of operation or technology-wise. The last time we see a major technology improvement is probably 15 years ago in the Chapelline Chalk. And mining costs that later is very important and labor costs is not coming down. So with all that in mind, perhaps, strategically speaking, should we start shifting all the growth, forget about expanding any of the mining and just focusing on the SAGD going forward?

Rick George

No, I like having a foot in both camps. I see technology going -- progressing very well on both fronts. So if you think about the technology that we’ve developed on this TRO technology and the recreations of fund, you will see relative to other options the cost of mining actually coming down on a longer term basis.

And so that’s one example and we’ve putting as you know well over a billion dollars for that technology and it does result in a reconfiguration of mines and we will use that on future on go forward basis and so what I would say is its not a one dimensional issue Paul, you remember, SAGD is higher in terms of energy intensity, it's higher in terms CO2 output, mining is more people intensive although there is some technology that are again in the works down the road here that you could see, that might just come along to help you reduce those costs.

Part of that’s affiances and we’ve seeing great affiances out in the mines in terms of maintenance and in terms of a number of other issues, so here’s what I expect Paul, I expect continues improvement on both fronts, SAGD and the open pit mine; and to be honest with you given the size, the scale of Suncor and our resourced base with 27 billion barrels, you’re going to see those advanced technology on both those fronts.

Paul Cheng - Barclays Capital

Okay, very good. Thank you.

Helen Kelly

John I think we have time for one more question.

Operator

Thank you, we have one final questions from George Toriola of UBS, please go ahead.

George Toriola - UBS

Just a quick follow-up question. On the hydrogen reformer unit, how is that - is the repair work done? Is that back in service? Where does that sit right now?

Steve Williams

Thank to have stayed again, yes the work is complete, the unit is back on and because of the way – we knew we had some potential issues so we have completely sourced the materials, completely mobilized the contractor prior to the event happening so it came back faster than we expected.

It’s in full operation and it was a comprehensive repair so we’ve not returned it to a 20 year operating live.

George Toriola - UBS

Okay, thanks a lot.

Helen Kelly

Thank you everybody for joining us today, I think that concludes our third quarter conference call. As I said earlier that controllers and I will be available afterwards for questions, so thanks again for joining us today.

Operator

Thank you the conference has now ended, please disconnect your lines at this. We thank you for your participation.

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 CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts