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Suncor Energy (NYSE:SU)

Q4 2010 Earnings Call

February 02, 2011 9:30 am ET

Executives

Rick George - Chief Executive Officer, President and Non-Independent Management Director

Bart Demosky - Chief Financial Officer

Helen Kelly - Manager, IR

Steven Williams - Chief Operating Officer

Analysts

Andrew Fairbanks - BofA Merrill Lynch

Joe Citarrella - Goldman Sachs

Gene Laverty

Mark Polak - Scotia Capital Inc.

Mark Gilman - The Benchmark Company, LLC

Greg Pardy - RBC Capital Markets, LLC

Shaun Polczer - The Calgary Herald

Paul Cheng

Brian Dutton - Crédit Suisse AG

Justin Amoah

Operator

Good morning, ladies and gentlemen, and welcome to the Suncor's Fourth Quarter and Year End Conference Call. I would now like to turn the meeting over to Ms. Helen Kelly, Manager, Investor Relations. Ms. Kelly, please go ahead.

Helen Kelly

Thank you, operator, and good morning, everyone. Thank you for listening in to our fourth 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, we have Jon Mckenzie and Greg Freidin. As well, we have Jenna van Steenbergen, who now works with me in Investor Relations. Rick, Steve and Bart this morning will take turns to give us their perspective on the quarter, and then we'll open it up for questions.

And with that, I'll pass it over to Rick.

Rick George

Helen, thank you very much and good morning. Welcome, everybody. Just before we ended the fourth quarter, I do kind of remind you where we are in the merger and see 2010 as I do. It was a great year for us overall in terms of driving synergies, in terms of getting the divestments that we talked about at the start of the year done, repairing the balance sheet, and also forming one culture, so feel very good about the year and where we are in our progress of the merger with Petro-Canada.

So on to the fourth quarter, obviously, a very good solid operating and financial performance. The downstream earnings, obviously, one of the highlights and surpassed our expectations, helped by, obviously, strong operations and good margins and good sales volumes. It was also a record quarter for us in the Oil Sands business in terms of productivity and reliability, which is a great indicator for us. Overall, the strong fourth quarter mainly exceeds our full year production outlook in Oil Sands. And although still very, very early in 2011, we're off to a solid start, and Steve will give you an update in just a moment on those operations.

And what I'd like to spend my time with for a while here is around our longer-term strategy and to share my thoughts with you as we head into 2011. Obviously, on a strategic update basis, in December, we announced a real milestone for us. Our 10-year strategic plan to grow our oil-based production to over 1 million barrels a day by 2020 and laid out a roadmap for sequencing the projects that will enable us to deliver high return growth. That growth will be underpinned by Oil Sands. Our Oil Sands will grow to represent more than 75% of our cash flows by the end of the decade.

A key component of that whole plan is our partnership with Total and the joint venture development of Fort Hills, the Voyageur Upgrader and the Joslyn mine. This joint venture is a key strategic fit for us, not only is Total financially and operationally strong partner, the deal de-risks the development of the Upgrader with Total paying some of our sum cost upfront as they pick up a share in the future development costs. As we bring on the Voyageur and Fort Hills out of the safe mode and deliver the next phase of growth, we're targeting much higher returns to our shareholders and obviously, return on capital, a key number for us.

On the current construction side, Firebags 3 and 4 are both in flight. Construction of Stage 3 Firebag is now 92% complete, and we expect first oil at Phase 3 to come on late June this year. Firebag Stage 4 is targeting first oil in early 2013 and sharings about 93% complete and will start wrapping up construction in the next few months. Looking further out of course on the in-situ side, we do have plans in place to develop our MacKay River 2, Firebag 5 and Firebag 6. By the end of this decade, we'll have a portfolio of bitumen production that's split roughly 60% mining and 40% in-situ, paired with upgrading and refining capacity to maximize the value of every barrel we produce.

In our long-term plans, we're also targeting a modest growth in our International and Offshore portfolio through the investment in Golden Eagle, Hebron and other step out opportunities as well as ongoing exploration in Norway, Syria and Libya. Overall, this phase development should enable us to deliver increased returns to our shareholders. And somewhere in the $80 range, we would expect to fund this growth largely out of internally generated cash flow. So as I hone in a little bit more on 2011 near-term, this year we have a capital budget of about $6.7 billion, which is more than 40% growth weighted.

We're targeting some of 550,000 to 600,000 barrels a day of production in 2011, something in the range of 280,000 to 300,000 barrels a day, which will come from Oil Sands, something in the 35,000 to 37,000 barrels a day from Syncrude and the remainder of some 230,000 to 250,000 barrels a day from our new E&P business. There are kind of five key things to 2011 as I look out on the year, and I'll kind of give you an outline of those and Steve will elaborate on them more in just a moment.

The five key things for us in 2011 is operational excellence, with continuous improvement on our operator reliability. The second one is improved Firebag performance and volumes. The third is to reduce our cash cost at Oil Sands and in situ. The fourth is to drive effective project execution, particularly this year on Firebag Stages 3 and 4; and to implement and start the planning around the Total joint venture and that 10-year growth plan. These are the five goals I've set up for my executive team in 2011 and believe is what will ultimately drive the types of returns that our shareholders expect.

Now with the merger behind us, the focus, obviously, is on moving ahead. And we announced in January the amalgamation of our Natural Gas and our I&O [International & Offshore] divisions into a single exploration and production division. That group will be lead by Francois Langlois, who has been with the company for some 29 years and had leadership positions in both Natural Gas and I&O. Not only will this enable us to take advantage of the synergies between the two organizations, it also helps make our strategy increasingly clear by forming one single conventional upstream division that will spin off cash and grow and support the Oil Sands while sustaining and delivering on that small growth I talked about.

I'd like to take this opportunity to offer my thanks to Neil Camarta for his contribution to Suncor over the past 18 months and during his tenure at Petro-Canada. So obviously, very excited about the path we're on, very excited about how this quarter went and, general, the year. We've got the merger behind us as I've mentioned. Our operational and financial results are improving and we're really showing the kind of company that Suncor is and can become post the merger. I believe we're in a much better position than ever.

Now over to you, Steve.

Steven Williams

Thanks, Rick. What I'd like to do this morning is to split my comments into two sections. First, I want to recap and we'll talk about the company-wide Operational Excellence Management System or as I'll refer to it today, OEMS. And second, I will talk about the fourth quarter and overall 2010 actual performance. In summary, the overall message I want to get across is we are making significant, visible and measurable progress across the company's operations.

So first let me recap on what OEMS is. It is the combination of the best systems and processes in the world with the right culture and strong consistent leadership. These systems we've designed have been benchmarked to the best in class, including both Exxon and DuPont. We're implementing OEMS company-wide with no exceptions. And whilst it's early days, we are seeing strong company-wide progress and improvements we're seeing will continue as the system is rolled out and matures, and successful implementation of an ambitious program like this does take time. The OEM System will lead to company-wide improved performance.

The early implementation, as I've mentioned before, is focused on Oil Sands base and in situ businesses, with the aims to eliminate all major incidents through improved process safety management. And safe and reliable operations are the biggest levers to increasing volumes and reducing costs that Rick was talking about. So while our improvements in 2011 will be matched by the Upgrader 2 turnaround, which is the largest in Oil Sands history and the start up of Firebag 3 project, we are cautiously optimistic about both. The last six turnarounds in Oil Sands have been completed on cost and on schedule, and the start up and commissioning teams for Firebag 3 have been fully trained and they're in place. In fact, the team successfully started up the ninth steam generator earlier in January of this year.

On the major projects front, we are also fully implementing the Operational Excellence Management System. And what that will do is help to drive effective, disciplined project execution, particularly on the growth program that Rick covered earlier. The major projects focus will be on costs and quality, with schedule coming third. One of the principles in which we will design and execute the growth program is that we will minimize distraction for the day-to-day organization. That was one of the important lessons we've learned. And that's why we were particularly pleased to announce the appointment of Kirk Bailey as the EVP for Joint Ventures. That will allow the operating businesses to focus hard on costs and reliability. Mark Little, who had extensive oil sands experience at Imperial before joining Suncor a couple of years ago, has been appointed to EVP Oil Sands. So that's a long introduction but it's very important context for the performance we're now achieving.

So let me talk briefly about the fourth quarter results. Overall, production was strong across the company, averaging 626,000 barrels a day during the quarter. Oil Sands, Natural Gas and International and Offshore all exceeded their full year guidance on production. Oil Sands production in the fourth quarter was 326,000 barrels a day, a record quarter, and during that quarter, we saw improved upgrader reliability and higher bitumen production. Oil Sands costs for quarter-on-quarter were higher than anticipated, or higher than the market may have expected. Several reasons for that but that was due to some seasonal effects, some additional maintenance, particularly on upgraders and in situ and the preparation work that we started for the Firebag 3 start up. The good news is that maintenance work is one-off and we're already starting to see the improved reliability as a result of it.

We've just completed the January numbers, and we had another good month. Production is 329,000 barrels a day. So that's the seventh month that we've been able to produce at these levels since completing the turnaround in the middle of the year. So the OEMS program is improving the upgrader reliability and reducing the probability of fires in the future. That focus will continue and is relentless, and we will see further improvements that are planned through this year and into the future.

Today, just to recap, we have two upgraders and, of course, in the future, we will have three. We also have the assets available on the ground now to export MacKay River and Firebag bitumen when required. Now that flexibility is an important part of the Suncor strategy and is unique in the Oil Sands industry. And of course, it helps us to mitigate the impact of planned and unplanned shutdowns. And integration, which is also part of the strategy with the refineries, also offers earnings protection when light heavy differentials widen as we've seen during the quarter.

In Natural Gas, production during the quarter was 438 million cubic feet a day, which was higher than planned. And subject to market conditions and interest, as we've highlighted before, we do plan to divest a further 220 million cubic feet a day of gas business in 2011. Refinery reliability was exceptionally strong in the fourth quarter and overall utilization averaged 94%. Denver, Edmonton and Montréal all ran utilizations above plan, although Sarnia did continue to be negatively impacted by Enbridge pipeline issues, which restricted deliveries of Syncrude from Western Canada.

So let me just briefly summarize. While we continue to pursue operational excellence across the organization, fourth quarter results and January 2011 results, so far, are encouraging indications that we're on the right path. This is a journey that takes time, but we're confident our work on OEMS and process safety management will lead to higher volumes, lower costs and ultimately higher value for our shareholders.

So let me just pass back to Rick to discuss our performance in International and Offshore.

Rick George

Thanks, Steve. On the International and Offshore front, first of all, on the East Coast, during some regular well testing in the fourth quarter, we encountered H2S and part of the Terra Nova field. So what we've done is shut down the affected wells and the facilities in which we were testing H2S while we developed a mitigation plan. And that current outage is about 9,000 barrels a day net to Suncor, although I quickly have to say that, that deferred production is within our East Coast production guidance. We also, in this year, in 2011, have a plan for a 15-week dockside maintenance of Terra Nova, of the vessel itself. However, we are currently working with our partners to consider the possibility of delaying this into 2012. As many of you know, we've got an issue there specific around the swivel that connects the production to the vessel. And if that's swivel continues to operate safely, we'll continue to take a look at delaying that maintenance.

Moving on to our operations in Libya and Syria. I'm delighted to tell you that in both countries, operations are normal and that we see no disruptions of the type that we're currently seeing on TV in Egypt. During the quarter, we actually had the start of oil production in Syria, only about 1,000 barrels a day, although we'll be adding more wells to that as we go through 2011 as we bring this oil rim that's around the gas field into production. So that will continue to improve as we go forward. And our exploration program in Libya continues. We actually are delighted to announce this morning that we've been moved up to full quarter production starting here in February. So again, you'll see a little bit better production from us in Libya as well as we go forward.

One exciting thing that happened in the fourth quarter was in Norway. We tested an exploration well, which is a Beta Statfjord well. We did test it at 10,000 barrels a day on fairly tight chokes. The reservoir, obviously, looks very good and very productive, but we have to do a lot more work before we can really determine the size of that particular discovery. So that's kind of the highlights on the International and Offshore side.

Bart, over to you.

Bart Demosky

Thanks, Rick, and good morning, everyone. From a financial perspective for the strong operation results that Rick and Steve have spoken about, certainly, translated into strong financial performance as well. During the quarter, we delivered operating earnings of $946 million, which is roughly a three-fold increase year-over-year on the quarter, and operating cash flow of over $2.1 billion, which was almost double from the fourth quarter of 2009. I guess, what I'd say is I'd characterize our results this quarter as a clear sign of the financial capability of this company. And that's based on reliable operations and our integrated strategy, which Steve highlighted, combined, of course, with strong pricing environment in the quarter.

Turning to our operations for a moment, in the downstream, that business delivered a record quarter of $372 million in earnings due to improved and higher utilization rates, wider light heavy differentials, improved fracking and refined product margins and very strong product demand across that business. And our R&M division continues to be a significant source of free cash flow for the organization, certainly was in 2010. And in 2011, we expect the downstream to generate well north of $1 billion of cash from operations.

For the upstream, Oil Sands reported $487 million in earnings during the quarter as a result of record production and higher price realizations year-over-year, as well as the one-time royalty recovery of $105 million related to a bitumen quality adjustment. Sales mix, however, was impacted by maintenance at one of our hydrogen units, which carried over from the third quarter. As a result, we produced a higher proportion of sour products compared to plan. Oil Sands volume was also impacted by inventory build of just about 15,000 barrels per day during the quarter as a result of pipeline restrictions on the Enbridge system, which have continued.

Oil Sands cash operating cost per barrel in the fourth quarter was $36.70. And as Steve mentioned, costs were impacted by higher maintenance expenses at upgrading and in situ, which will enable us to drive higher reliability going forward from here in 2011. And we believe that's amounted to roughly about $2 per barrel of the costs. We do expect costs to be higher over the next two quarters as we ramp up Firebag 3 facilities and as we undertake a large six- to seven-week turnaround at Upgrader 2 during the second quarter. Overall, we expect Oil Sands cash costs in the range, and this is consistent with our previous guidance, of $39 to $42 per barrel in 2011.

International and Offshore recorded net earnings of $452 million from continuing operations. And there again, higher realized prices were benefiting the business. Those were offset somewhat by lower volumes from Terra Nova and White Rose, as detailed by Rick. Also included in I&O's net earnings were the $192 million after-tax settlement related to our Terra Nova ownership, which are redetermination, and that increased our working interest going forward by roughly 3.7%.

One of the strengths and benefits of having an integrated strategy like Suncor's is that as we move through different parts of the commodity cycle, the upstream and downstream parts of the business will share in the profits. Sometimes, more value will be captured in upstream and other times, such as this past quarter where we saw those pipeline disruptions and it impacted upstream price realizations, the downstream will share in the profits. But sometimes more value will be captured in the upstream and other times, such as this past quarter, the downstream will see more of the value. Over the long term, our integration strategy enables us to maximize the total value we're able to extract from our upstream bitumen production to refine product sales to the end customer and ultimately to our shareholders.

Turning to the balance sheet and CapEx for a moment, our long-term view and focus is also reflected on how we manage our balance sheet and capital plans. And I'm happy to report that we've met or exceeded all our financial targets in 2010. First, we completed the sale of $3.5 billion of non-core assets ahead of schedule, with all of the cash in the door now except for a portion of the package in the U.K. North Sea. Through that process, we've high graded our portfolio with the sale of our lower returning assets and we've paid down our debt significantly. Overtime, this will enable us to generate higher earnings and improve our return on capital employed.

Net debt is down from $13.4 billion at the end of last year to $11.1 billion at the end of the fourth quarter, and that translates into a 1.7x debt to cash flow ratio. The proceeds that will be coming from the Total transaction will further improve our position upon closing, which we expect to be sometime in late Q1 or early Q2. So looking forward, we expect to maintain our debt levels well below our 2x debt to cash flow target and within our 20% to 25% debt to capitalization target.

Now with the merger behind us, a strong balance sheet in place and as we bring on new production and increased cash flows, certainly one of the questions that we get a lot is what’s our policy on dividends is going to be going forward? And while we don't have and haven't had a formal dividend policy in place, our philosophy has been consistent and it's been to increase dividends with production growth. With Firebag 3 coming on stream in 2011, this will be the year we start thinking about dividend growth again. Obviously, this is going to be a board decision but our preference is for modest, consistent but sustainable dividend increases, which are in line with our industry-leading growth and position in the market. So when we think about maximizing shareholder returns, we see that as a combination of growth and execution and we're in a great position in 2011 and beyond to deliver on both. And with that, there will be more money to return back to shareholders.

So thank you very much, everyone. And with that, I'll turn it back over to Helen.

Helen Kelly

Thank you, gentlemen. Since Rick has briefly gone over the 2011 outlook, I won't go through again it in deal. The outlook is unchanged from what we had disclosed in December. You will find the detailed guidance documents on suncor.com under the Investor Centre. A quick reminder that's commencing in 2011, our monthly Oil Sands production numbers will now be posted directly on our website instead of via press release. Please visit suncor.com/production for these numbers. And quickly here for our U.S. analysts, the LIFO adjustments for the quarter would result in a negative Canadian dollars $96 million impact to after-tax earnings.

So with that, Melanie, if you wouldn't mind opening the lines, we'd be pleased to take your questions. Just a quick reminder that the controller and I will be available after the call for detail modeling question. We'd be happy to entertain your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Joe Citarrella of Goldman Sachs.

Joe Citarrella - Goldman Sachs

Rick, hoping you could elaborate a bit first on what you're seeing broadly in terms of cost inflation in the region. And second, more specifically, your expectations for capital cost for Fort Hills and Joslyn. You're obviously still early on in the process there. But any sort of original take on where you are in the process of re-engineering those, what your initial thoughts are and maybe when you'd expect to have additional details there would be great.

Rick George

I don't really have a lot to add other than kind of the general knowledge that basically is out there. My views, and I discussed this in the last quarter, this next run will be different than the last high inflationary period we had. For us, partly because we have a lot of the engineering on some of these projects like, for example, the engineering on our upgrader is partially done or 80% done. And also, a lot of materials for these projects, some of the materials on Fort Hills, but a lot of materials on our upgrader have already been purchased. So a lot of that is kind of behind us. And we're not seeing the kind of inflationary rates on purchased equipment, steel pipe and all of those kinds of issues on these projects. I think if there is a concern, generally, it's around labor and labor, both in terms of availability and also productivity. And what we're trying to do is take the lessons that we learned on this last cycle and try to make sure that we don't repeat that. Those are things like not overbuilding a workforce too large on any one individual site, making sure that we do the planning and engineering well, and we've got the tools and equipment to the work site so that people aren't waiting on that, trying to organize the work in a much better fashion so that we've got clean work sites and clean work fronts to work on, trying to maximize outdoor work in the summer and indoor work in the winter. So I mean there's a lot of planning. It's really about that upfront planning that's going to make a difference. So not really clairvoyant except that I don't actually expect this next one to be exactly like the last cycle. Still a concern, but I do expect it to be different.

Joe Citarrella - Goldman Sachs

The upgrader turnaround, the U2 turnaround, can you just confirm the dates of that, and also just that this will take you through turnarounds for the rest of the year?

Steven Williams

The U2 turnaround is the main turnaround. It's a big one. It starts in May and is approximately seven weeks.

Operator

The following question is from Andrew Fairbanks of Bank of America.

Andrew Fairbanks - BofA Merrill Lynch

It's been sometime since we maybe talked about strong downstream results, and I just wanted to in light of that get your thoughts on the downstream generally and also wanted to see if you had any thoughts around some of the refining assets that are coming out in the U.S. Obviously, you've got the Voyageur upgraders set but is there an opportunity with BP selling some assets to get some cheap cokers?

Rick George

I see our position really very different than other Oil Sands companies or other Canadian companies in the sense that we do see our refineries, particularly three of the four, very tied to our Oil Sands business. And so in the quarter here where you see pretty large spreads between WTI and gulf light crudes and brent, then our in-line refineries i.e. Sarnia, particularly Edmonton and also Denver, are going to make good money. And so it's kind of if you're integrated and have enough of these flows between the two systems, when you get wide differentials, we're going to make it in a downstream, when you smaller differentials, we'll make it in Fort McMurray. So I mean I think a little bit of that just shows the value of integration, and it will swing. I mean, I do think it will swing overtime. On the second part of that question, Andrew, is around what we'd be looking at buying refine assets in the U.S. First of all, you do not see any growth in terms of U.S. demand. World demand for crude continues to rise, but it's on the back of Asian and developing economies GDP growth. And you're not seeing growth in oil consumption or demand in the U.S. despite a lot of sales of SUVs and large vehicles continuing. So you know what, I don't see it as a growth market. I definitely do not see us buying refinery that's on title water and getting into that game. So really, no interest right now in expanding our refining business by buying other refine assets. I would never say never, but it would have to fit back into our strategy. And I don't see, for example, buying a large BP refinery, fits that strategy for us.

Andrew Fairbanks - BofA Merrill Lynch

I guess along those lines, any additional thoughts on the Montréal coker project? Would that be just pushed well far down the road to when you might need additional capacity for heavy oil?

Rick George

No current plans, and I would say that project will be somewhat dependent on us reversing Line 9, us, meaning the industry. So right now, we cannot remove western-based crude into Montréal. And you remember, Line 9 is the key line that actually moves crudes from east to west into Ontario. At one time, it ran crudes into Montréal while the industry is taking a good look at reversing that line. So I would say that project is on hold until we can see if we can get that line reversed over time, and that's not a short-term project, and then feed it from our own operations. That's where the logic of that project would be. Steve, you want to add some?

Steven Williams

Yes, the only thing I would add Rick is the refining world is historically cyclical and tough. The only place to be in that world is the best. Our downstream assets, our first core tied along reliability and costs because that's exactly the place we intend to take Oil Sands.

Operator

The following question is from Greg Pardy of RBC Capital.

Greg Pardy - RBC Capital Markets, LLC

Just some of the questions I had were on some of the things you mentioned going into this and shorter-term issues, but Rick, what's the run rate now in Libya? If you go back up to full quarter, are you back up to 60,000 barrels a day?

Rick George

Yes, in that 40,000 to 50,000 barrel a day kind of range, net to us. So that's our 50%.

Greg Pardy - RBC Capital Markets, LLC

And just with respect to the inventory, so what I was going to ask you is whether the inventories you'd expect to basically draw those down in the first quarter, but are you seeing a continuation then in terms of -- I think you mentioned that, that there are still disruptions on the pipeline and I'm wondering if you can enlighten us.

Steven Williams

Overall, our plan is to draw them down. Greg, there are some big puts and takes, of course, on the system at the moment. One is Enbridge reliability and the clarity around. The second one is, as you know, there are some industry production issues and so pipelines are being rigid as we speak in light of that. Overall, the strategy is to draw that inventory down but it will be subject to some of those market impacts.

Greg Pardy - RBC Capital Markets, LLC

The bitumen valuation methodology, I know it's probably complex, I think, in terms of explaining it. But what was the major change? Was it the agreed-upon differential between bitumen and Bow, or what have you? What led to that?

Bart Demosky

Greg, it's Bart here. The piece that was changed was the part of the differential related to quality of the bitumen. And we've been quite candid about this, but we're still in negotiations with the province. This is a first step towards finalizing what that differential will be.

Greg Pardy - RBC Capital Markets, LLC

With Syria, equivalent volumes over 100 million a day, I think that exceeds your offtake agreement, but curious as to how sustainable those rates are and also curious just on the gas pricing that you're getting there right now.

Rick George

Greg, listen, we're at 80 million cubic a day flat. I think there may have been a quarter end kind of differential there. You'll see us move production up in Syria, but it's more around us producing the oil rim on a go-forward basis. We're just getting ready to put our second well on, and we'll put a third one on. And I think later in the year, we should have about four wells on there on the oil side. But gas has been steady. That's our quota. That's where we'll be for the full year in terms of that. And that's been a very steady operation for us and a good cash flow generator.

Greg Pardy - RBC Capital Markets, LLC

Just on the cash cost, so with the repair costs for the hydrogen outage, those were embedded then, right, in the fourth quarter numbers and was that the bulk of the $2 that we would have?

Steven Williams

So $2, Greg, $2 a barrel was embedded in that fourth quarter. $2 million, just a clarification. $2 million were embedded.

Operator

The following question is from Paul Cheng of Barclays Capital.

Paul Cheng

Rick, you stated in the rough preliminary data that you can provide related to the reserve replacement in 2010?

Rick George

No, not currently. When we release in March, we'll get a chance to go through that in some detail. Paul, not many people ask me about reserves, that's an unusual one.

Paul Cheng

On Firebag 3 and 4, Rick, how about in terms of the actual cost versus budget, I presume they're pretty high. Any data that you can provide in here?

Rick George

It's in the guidance. We did move Firebag 3 up by about $200 million to $300 million and part of that was some surprises that we got out of restarting that project up. And the numbers that, I think, we provided to you earlier on, 4 [Firebag 4] has still very solid numbers. We did see a small increase in Firebag 3. I do not expect to see any further increases. As I mentioned earlier, we're actually starting to stream that. The ring in the facilities are kind of every week and every month here but starting to stream them in March and should have production starting to ramp up in June. But Firebag 4 seems to be very well under control with the numbers we've given you.

Paul Cheng

Rick, based on your experience now in Firebag 3, how long you think, after the streaming, you think you will reach a steady state of the production?

Rick George

You mean full production, Paul? I mean we've already said it's about an 18-month kind of time period, 18 to 24, something like that.

Paul Cheng

So looking at the end of 2012, kind of?

Rick George

Yes, into the start of 2013. That's a good number, yes.

Paul Cheng

And I think previously that you guys have the target to bring the steam oil ratio to about 2.5. In Firebag 1 and 2, I think, and maybe over 3, are those still the good number?

Steven Williams

Yes, Steve Williams here. Those are reasonable numbers to assume. We have an active program to manage SORs this year. Given the nature of it, the actual timing and how it works is very difficult to predict to the month. But we are putting in the infill wells on Stages 1 and 2. Of course, on Stages 3 and 4, the spacing of the well pairs is different so we will get to different SORs. And we have seen some progress on the early stages. So we were getting it down into the low 3s at the end of last year. And of course, on MacKay River, we kind of have much lower industry-leading levels, down in the lower 2s.

Paul Cheng

So Firebag 1 and 2, right now, you're just about, what, 3.1, 3.2?

Steven Williams

Paul, around there, yes.

Paul Cheng

Rick, I think earlier that you guys talked about the dividend policy or your expectations. How about in terms of the share buyback as a tool to return cash to shareholders. How do you guys view that?

Bart Demosky

Paul, it's Bart here. I think just looking at our plans forward from here and all of the extensive slate of growth projects that we have planned to develop, that's first call on our cash. That how we're going to be able to best return and drive improved returns to our shareholders. Next would be dividend and we think that's the right place to focus, starting to return more cash to shareholders over time, consistently, consistent growth and we add that with shareholders value.

Operator

The following question is from Brian Dutton of Credit Suisse.

Brian Dutton - Crédit Suisse AG

You mentioned in your comments at the beginning that reducing cash costs were a priority for you this year. And I know we always talk about cash cost on a per barrel basis but was looking at the cash costs here for the fourth quarter and it came in at $1.1 billion, which I think is a record amount. I was wondering if you could give us one color around why are the costs so high in absolute dollar terms, and the steps you plan to take to reduce the costs in absolute dollar terms.

Steven Williams

I mean, of course, the move from the per barrel cost into the absolute one, and Brian you have to look at overall production levels as well. So the record absolute costs come with the record production in fourth quarter. We have the most comprehensive of programs attacking these costs aggressively. The biggest parts, as I described earlier, are the execution of this Operational Excellence Management System, and the biggest leavers on costs are safe, reliable operation. You did see during the better quarters on costs last year, we got into the very low 30s and that's where we aim to get back to. And we think the main thing in achieving that will be to get the assets reliable particularly around upgrading, and we're very encouraged by the progress we're seeing. So we did have to do two pieces of work in the fourth quarter. One was on the finishing off of the repairs on the hydrogen furnace, which is now back in full service and operating very well. The second piece was part of the rolling program of repairs to the U1 Coke Drum. And these repairs are extensive. Instead of just simply repairing individual problems, as we've done in the past, when we take these facilities out because we have spare upgrading capacity at the moment, we take the opportunity to fully weld, overlay and repair the complete circumferential rings around the cokers. The consequence of that is the costs have been a bit higher, but we will get improved reliability as we go through 2011 and '12.

Rick George

Brian, let me just add. Listen, I know that there is a concern. As I mentioned, the five targets for 2011, it is certainly on Mark Little's list and we will get to this. You may not quite see as much of it as you'd like in the first and second quarters as we go through this turnaround and prep for the turnaround, but it's our aims and goals. And we'll kind of try to roll this operating cash cost over, and you'll see it more in the third and fourth quarter.

Brian Dutton - Crédit Suisse AG

Rick, I guess what I'm really struggling with though is the cost in dollar terms are up $150 million from the third to the fourth quarter. And I realize that the increase in the record number of volumes are coming out of the mine -- but about 80% of the costs fixed coming out of the mine. So that's really what's surprising me is the absolute dollar amount given the fixed nature of the business.

Rick George

Yes, and again, we don't see that trend for the long-term. I think our longer-term trend is as we described it here. But as Steve described that the key is reliability. And we are paying a price, and we are going at this in a very systematic and sequential piece here. There are no shortcuts. And you know what, going through this in the way we are gives us a lot more confidence that we're on the right track in terms of long-term reliability. So I know it's uncomfortable. It's uncomfortable for us in seeing that, but it's not the long-term trend.

Operator

The following question is from Mark Polak of Scotia Capital.

Mark Polak - Scotia Capital Inc.

Now that you're a few months into the feed and some of the EPC work on Hebron, is there any update on what you think costs might be on that project?

Rick George

No, we do not have any current update on that. As you know, that's being led and operated by Exxon. We are continuing to go through that but no new numbers to come out at this time.

Mark Polak - Scotia Capital Inc.

The Beta Brent discovery in Norway with your appraisal well tests, can you provide any sense on the size of that discovery? And are you starting to think standalone or does that looking like a tie-back development?

Rick George

The answer is yes in the sense that we have not really decided. We're looking at both. But you know what, we'll get a second well down off the discovery, an appraisal well, either sometime late this year or early next year. And then, I think we'll start to be able to hone in on what is the true size and scale and producability of that. So listen, it's sort of better than drilling a dry hole. But we just don't know enough yet to really get very definitive about how that ties in.

Operator

[Operator Instructions] The following question is from Gene Laverty of Bloomberg.

Gene Laverty

Just wanted to double check on the turnaround schedules for the upgraders and things like that. You did mention U2. Can you give me the start date for that turnaround, and how long it's going to go?

Helen Kelly

Gene, we've updated our Suncor presentation for the fourth quarter and you'll find that on our website. There's a page on turnarounds. We have just narrowed it down to, as Steve said earlier, May is the start date of the turnaround. It's roughly somewhere between six to seven weeks. So that's the final call on that.

Operator

The following question is from Justin Amoah of Argus Media.

Justin Amoah

I also had a question about the turnaround. In the previous presentation, investor’s presentation, I think you guys had a seven week. And then, this one you had six weeks. Is there a reason for that change?

Steven Williams

No. You should think of it as approximately a seven-week turnaround. These are major events. And what we're calling at the moment is it's between six to seven weeks. So it's just a rounding error. As we get into it, we'll plan it down to the half hour. But we don't normally share all those numbers at this stage.

Justin Amoah

And I think you guys mentioned inventories, did you say, above 15,000 a day, if I'm right? Or was there another number?

Steven Williams

That's the right number. Just under 15,000 barrels a day.

Operator

The following question is from Mark Gilman of Benchmark.

Mark Gilman - The Benchmark Company, LLC

I have two questions, first, could you, maybe Bart, remind us of your hedging philosophy and give some indications as to open positions for 2011? Secondly, Rick, you've got a number of satellite platforms and projects coming on in '11, the White Rose satellites, South Hibernia, the Buzzard enhancement. Can you give us an idea the implications of these projects regarding how long they will sustain the production plateau with each location?

Rick George

So Bart will take the hedging question, and sure I'll be glad to answer that.

Bart Demosky

So hedging, the philosophy go-forward for the company given the strength of our cash flows, the diversity of them and our plans to really fund growth out of our internally generated cash flow is that we don't feel that we need to hedge our production go-forward from here. In 2011, we have no crude hedges on the books.

Rick George

And none planned, I have to add. Right, Bart?

Bart Demosky

That's right.

Rick George

So, Mark, on the second question. So yes, we do have these satellites. It's all built into that estimate we gave you on I&O production rates. Longer-term, the way I like to think about our I&O, and now rolled into an exploration production vehicle, is this is a division which will show growth over the next decade. It will not be steady, and we do have some really big chunks coming on as well, like Golden Eagle and Hebron, and with the results of discoveries in Libya and potentially the Norway discovery as well. But what I would see is, today, if you take a look at this newly created E&P division, we would be just around 200,000 barrels a day. And I would see that actually growing slightly over the next decade. These current kind of satellite tie on the East Coast are not overly material to Suncor but certainly built into those projections that we show on the outlook.

Operator

The following question is from Shaun Polczer of Calgary Herald.

Shaun Polczer - The Calgary Herald

You said that Libyan production is going to go back up to full producs. On Monday, I guess, WikiLeaks released some diplomatic cables that said that the quarters were imposed because of the diplomatic disputes with the Canadian government. Just wondering if you could care to comment on that. And second, whether or not you plan to sell the Libyan assets now that they're up to full production?

Rick George

So on the first one, that WikiLeaks' was actually a report of something the U.S. Ambassador in Libya reported. So I mean, I would not want to get into any comments. You should call his office and ask him what he said, okay. It has nothing to do with us per se. On the second question, we have absolutely no plans to sell in Libya.

Operator

There are no further questions registered at this time. I'd like to turn the meeting back over to Ms. Kelly.

Helen Kelly

Thank you, everyone, for joining us this morning. As I said, the controllers and I will be available after the call for detail modeling questions so feel free to give us a call or send me an e-mail. And thank you for joining us today. Goodbye.

Operator

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

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