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

Executives

Steve Douglas - Vice President of Investor Relations

Bart Demosky - Chief Financial Officer

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

Steven Williams - Chief Operating Officer

Analysts

Joe Citarrella - Goldman Sachs

Katherine Minyard

Gil Alexandre

Greg Pardy - RBC Capital Markets, LLC

George Toriola - UBS Investment Bank

Michael P. Dunn - FirstEnergy Capital Corp.

Paul Cheng

Menno Hulshof - TD Newcrest Capital Inc.

Brian Dutton - Crédit Suisse AG

Justin Amoah

Unknown Analyst -

Andrew Potter

Suncor Energy (SU) Q2 2011 Earnings Call July 28, 2011 9:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Suncor Energy Conference Call and Webcast. I would now like to turn the meeting over to Mr. Steve Douglas, Vice President, Investor Relations. Mr. Douglas, please go ahead.

Steve Douglas

Thank you, operator, and welcome, everyone to Suncor Energy's Q2 Earnings Release Call. With me here in Calgary are Rick George, our President and CEO; Steve Williams, our Chief Operating Officer; Jolienne Guillemaud, our Controller; and Greg Freidin, our Assistant Controller; and on the line, we also have Bart Demosky, our CFO.

Just before we start, I should give the mandatory legal advisory regarding forward-looking statements. Please note today's comments contain forward-looking information. Actual results may materially vary from expected results because of various risk factors and assumptions described in our second quarter earnings release and MD&A, as well as in our current AIF, all of which are available on and SEDAR and EDGAR and on our website. Certain financial measures referred to in these comments aren't prescribed by Canadian generally accepted accounting principles. And for a description of these measures, please see our second quarter MD&A.

With that, I will hand it over to Rick George, our President and CEO.

Richard George

Thanks, Steve. Listen, I'm very pleased to be here with you this morning and to announce what we see as a solid quarter, especially solid since this was our quarter around extensive maintenance, both in oil sands and in our downstream. And despite that, we've managed to take advantage of posting very good strong financial results. Obviously, this sets us up well for the next long period of time starting the rest of this year but also into 2012, and we're looking forward to that.

So Steve and Bart will go into detail on our operating and financial performance in a minute. I'd rather highlight a few things that stood out in the quarter.

First, we increased year-over-year numbers in both earnings and cash flow. The second quarter net earnings were $562 million versus $540 million a year earlier. The operating earnings were $980 million, just short of $1 billion, and that's up from $839 million the quarter -- same quarter last year. Second quarter cash flow was just short of $2 billion, again an improvement over the 2010 second quarter.

We also are very proud of our balance sheet. If you think since the merger, we've brought that down from 13.4 to 7.7. That included this quarter the purchase of the -- our interest in the Joslyn project. So our debt-to-cash flow is less than 1 and obviously in a good position as far as going forward. This is a company that can generate amazingly strong cash flow to fund our base growth while continuing to return cash to our shareholders. That's kind of the cornerstone of our strategy going forward. My belief, and I guess it would sound slightly defensive, but it is that the merger that we did, now 2 years ago on Monday or Sunday, has really driven and will continue to drive huge shareholder value going forward.

First, just to kind of -- an overview on operations. Our commitment to operational excellence, which we're -- we've been on a path for 3 or 4 years, is really starting to pay off. The completed U2 turnaround was done safely and on time and with record productivity. That was a significant piece of work. We're also, as you will notice, on track to meet our production guidance for the full year. Our safety and environmental performance continues to be on a positive trend. We measure this on many different measures across the company. And virtually, on all fronts, we're making improvement. And also, I have to mention that despite the forest fires up in the northern part of Alberta, really didn't have a major impact on our operations. So that's kind of the operational view.

I'd like to take a couple of minutes to talk about our growth plan. And as we do that, I know the one thing that's on the mind of the market significantly is the concern around inflation on new capital by the industry in the Oil Sands businesses.

First, I'd like to address our current construction projects. And we're making great project on our Firebag in-situ projects. Firebag 3, construction is over 95% complete. We achieved first oil in July. We'll be ramping up above 60,000 barrels a day over the next 24 months. The final cost estimate was $4.4 million, which is in -- which was within 10% of the plan, which is an excellent accomplishment. And really, even that 10% was really dealing mostly with changes of scope and taking that project out of mothballs. And again, we'll -- over time here, we'll talk about bringing these out of mothball stage a lot less.

On Firebag 4, we're taking a lot of the lessons learned on Stage 3. Engineering is totally complete or virtually complete, and construction is over 25% complete. First oil is expected in the first quarter of 2013 and again ramping up above 60,000 barrels a day over the following 24 months. Our latest cost estimate of that is just under $2 billion. So again, you're going to see these future Firebag stages coming in at a much lower cost number than the initial one because of the infrastructure.

We also have a number of projects that are moving forward according to plan, and I'll touch on each one just very briefly. Our TRO, this is a new technology around tailings reclamation, it's about a $1.3 billion project. It's on track to be completed in the fourth quarter of next year and looks right now to be on track in terms of both schedule and costs. The MNU project is -- the Millennium Naphtha Unit, is ahead of plan and is expected to come online with our last estimates. And it'll come online in the first quarter of 2012, if not late this year, and will give us significant benefits in terms of being able to produce more sweet product out of our plant.

The North Steepbank mine extension will also yield tremendous benefits in 2012. It's over 70% completed, and we expect to see first oil from that on an accelerated schedule in the first quarter of 2012. In Denver, our gasoline and benzene reduction project is going well and is expected to be operational by this time next year.

So if you take a look at it, a lot of our projects are actually coming along quite well. Again, that doesn't necessarily address the concerns of the market about the next few years. And I thought what I would do is just spend a minute about kind of lessons learned for Suncor over the past 15 years. This isn't rocket scientist stuff. It is pretty basic, and you'll hear all kinds of people talk around this. But I thought, listen, here are the 5 most important things on projects going forward despite the pressure we're going to have in this industry in Canada.

First of all, you have to have the discipline to follow world-class processes; you've got to complete engineering and procurement prior to mobilizing construction; you've got to keep workforces at any one site down to a manageable size so you can measure productivity; you need to award smaller bite-size contracts to contractors who you've worked with for many, many years that have proven track records in our industry; and fifth, apply lessons learned across all your projects, and creations of new teams and new processes are usually not very helpful through these times. And you know what? I think that Suncor is in the best position to do this, and I firmly believe that the companies that follow this kind of formula will distinguish themselves from the herd in a significant way.

So listen, I also want to talk a little bit about the risks to Suncor because I don't think the market really quite has focused on it. By this time next year, we expect that all of the previously mentioned projects that I have will be actually complete except for Firebag 4, which will be very far along, if not nearing completion. Then our focus 12 months from now will be on Voyageur upgrader on Fort Hills to be followed later by the Joslyn mine project operated by Total. Because of this transaction we announced last December with Total, our interest in these projects is 50%, 40% and 35%, respectively. That has certainly also contributed to reducing our risks through the 2012 to 2015 period. Thereafter, the 100-owned projects that are -- or 100%-owned and controlled by Suncor, that is, Firebag 5 and 6, the MacKay River expansion and other expansions we'll have on the slate, will be much smaller in scale, especially compared to the size of this company. My point to all of that is that I make -- and we've actually reduced the risks going through this important period, and I think it's an important feature to make sure you kind of think about it.

On the asset divestitures, we continue to align our portfolio with our long-term growth strategy that we've talked about a number of times. And in the second quarter, we sold an additional noncore assets in the North American operation for after-tax gains of about $62 million. Given the current environment, we actually don't expect to execute any significant divestment of assets through the remainder of this year.

So what I wanted to do, finally, is to stress that as a company, Suncor remains squarely focused on the 5 key priorities that I've talked about the last 2 phone calls, quarterly calls. And here are the 5 key priorities: first, operational excellence across all of our businesses; improving the performance of our Firebag in-situ projects; reducing our cash costs at oil sands and in-situ; effective project execution, particularly around future projects; and implementing the Total joint venture and growth plan.

With that, I'll hand it over to Steve who will give you an operational update.

Steven Williams

Thanks, Rick. And I think we had a great -- all in all, a strong quarter in which we made significant progress on our operational excellence journey. And I know I've beaten that drum in the past, but that program is focusing on rigorous and disciplined processes in the 4 key areas of safety, environment, reliability and people. And of course, we focus on those because those are the precursors to the volumes we want and the low costs that we're looking for.

So just to repeat, very proud of the execution of the Unit 2 turnaround, the best-ever safety performance, we believe, and we've had it third-party looked at to confirm that we set a North American record for productivity on a man-hours basis with 46,000 man hours of work per day being completed during that turnaround. And just as important, we're very pleased with the quality of the work.

We also completed major maintenance safely at our 3 inland refineries and a successful turnaround at MacKay River. So a very busy turnaround period for us and the months and quarters ahead are a little bit cleaner.

So as expected, the overall production during the quarter was reduced from 634,000 barrels a day in Q2 2010 to 460,000 barrels a day in Q2 this year for a variety of reasons. And those include the planned maintenance I've just talked about at oil sands and the ones in the in-situ operations, the unplanned maintenance at Buzzard and Syncrude, the sale of noncore assets that we've taken you through and the shut-in of production in Libya.

At Oil Sands, the impact of lost upgrading was mitigated to an extent by our ability to produce and sell bitumen blends from the in-situ operations. And we were able to support that bitumen marketing by bringing in billions [ph] from Edmonton. So that highlights one of the integration benefits and flexibility pieces that Rick was talking about in the new Suncor. And that's something we've seen following the merger.

That flexibility will increase again later this year when we complete the Millennium Naphtha Unit that has many benefits for us. It gives us an additional hydrogen plant. It gives us further upgrading of coker, naphtha, and it improves our sweet to sour ratio going forward.

I also mentioned on the last call that we've been working to bring the North Steepbank mine extension online early next year. That work is progressing well. The project will reduce congestion in the Millennium Mine, reduce the hole distances and lower cash operating costs.

So in summary, with no further major upgrade or maintenance scheduled until 2013 and key projects coming online, we're now set up for an extended run of strong production in oil sands to take advantage of the positive crude price environment we've seen.

Over to Exploration and Production. We've seen improved production from the new wells that Hibernia brought on in 2010, as well as steady production from the new Anafesh [ph] field. The H2S issues continue to reduce Terra Nova production. We do expect to fully resolve that issue during the dockside maintenance scheduled for next year.

Buzzard production in the North Sea was reduced due to unplanned maintenance on the cooling system and a third-party pipeline, and we expect to return to full production shortly in the third quarter.

Operations in Syria remained reliable despite political unrest in the country and as we've clearly said before, our focus remains squarely on the safety and security of our people.

Over to Refining and Marketing. We've had good reliability and profitability from our R&M assets through the past few quarters. Refining cracks remain very strong, thanks in large part to the spread between WTI and Brent. And of course, as we've said before, Suncor is strongly positioned to take advantage of that situation. Our inline -- our inland refineries processed WTI-based feedstock, including significant Suncor oil sands crudes and sell finished products at global Brent-based prices.

So with our major maintenance activity now complete, we're set up to take advantage of the continued strong cracking margins in the second half of the year. So with that, let me hand over to Bart for a financial update.

Bart Demosky

Okay. Thank you, Steve, and good morning, everybody. Thank you for being on the call today. I think this quarter does continue to demonstrate the cash generating power of the Suncor company. And even with the extensive planned maintenance in both Oil Sands and our R&M groups that Rick and Steve outlined, we were still able to take advantage of a very strong pricing environment to post year-over-year improvements in both earnings and cash flows.

Year-to-date, our operating earnings are up about 103% versus 2010, and our cash flows are also up considerably, 51% in the same period. All of this comes on a lower production base, as Steve had outlined, and I think that underlines our leverage to crude prices as a company.

Now we talk a lot about the value of our integrated model, but I thought I'd take just a minute to share with you a few numbers that demonstrate the value generation year-to-date in 2011 of that integrated model. Starting with bitumen netbacks, which year-to-date are about $54 per barrel. For the bitumen then that we upgraded, we achieved an average uplift of over $34 per barrel. For the oil sands output that we then processed in our inland refineries, we achieved a further uplift of over $35 per barrel and those numbers are additive given the physical integration of our assets. And the resulting increase in margin captured year-to-date is over $1.3 billion versus a strategy of a straight bitumen seller into the marketplace. And I think that is -- really demonstrates the power of Suncor's integrated model, which works to optimize every one of the oil sands barrels that we produce.

So with that in mind, let me take you through some of the financial highlights for each of the business units this past quarter, and I'll start with the Oil Sands business. In Q2, the earnings were $371 million and cash flow was $733 million. And that brings us to year-to-date earnings of $1.1 billion and cash flow of close to $1.9 billion. So very strong results, putting us well ahead of where we were last year. Even with our U2 turnaround, we were able to take advantage of high crude prices and post an average sale price of over $90 per barrel for the business.

As expected, given the turnaround that we had on U2, cash costs rose in the quarter to $51 per barrel from -- in the quarter at $42.60 year-to-date. But with our major maintenance now safely behind us, we are very well positioned to meet our 2011 guidance range of $39 to $49 costs and WTI less $5.50 to $6.50 per barrel for price realizations. So no changes there.

For our E&P business, as anticipated and we've communicated this, I think, on the last call, we have elected to take a write-down on our Libyan assets of some $514 million. Now that number is based on a probability-weighted assessment of expected future net cash flows over a range of possible outcomes. That's really the math behind how we calculated that. And that leaves us with a remaining net book value of about $400 million.

I think it's important to remind everyone as well that we do have risk mitigation instruments in place for that asset of just over $400 million, and our insurers have been notified of our intention to make a claim.

Another important reminder, I think, is that even with the loss of Libyan production, from an earnings point of view, it's not significant to Suncor. Those operations accounted for only about 1% of Suncor's earnings in 2010.

The E&P business as a whole contributed operating earnings of $260 million during the quarter as we did see strong Brent crude-based pricing, which obviously helped to compensate for the shut-in production we had in Libya and the operational challenges at Buzzard.

Looking at the R&M business, we very much posted another strong quarter in the downstream. When you look at it outside of planned maintenance, in particular, as our inland refineries in Denver, Edmonton and Sarnia continue to benefit greatly from the large spread between WTI-based crude inputs and the Brent-based product prices that we see there. And despite the major turnaround work at those 3 plants, R&M generated operating earnings of $313 million and cash flows of $500 million in the second quarter. I guess the way I'd put it is quite simply we believe we have the strongest performing R&M network in North America. And already in 2011, it has generated over $1 billion in operating cash flow and that's in a period where we took major maintenance on those facilities.

Looking at the balance sheet and capital structure, I'm very pleased with the shape the balance sheet is in. Since the merger, we've rapidly delevered our balance sheet. We've taken our debt-to-cash-flow ratio down from 4.8x at the end of 2009 to now below 1x, as Rick mentioned, at the end of the second quarter. And so that's a significant move and a vastly improved balance sheet and we're very, very proud of where we're at.

During the same period, we reduced our debt-to-capitalization from 29% to 23%, and I think there's opportunity to improve even from there. And we do intend to continue to reduce debt further with the payout of a U.S. $500 million bond that matures in Q3, and we'll be paying that out from -- we plan to pay it out from cash on hand.

Now our E&P and R&M business generate a substantial amount of free cash flow, which is then used to fund our oil sands growth. And the Total merger, as Rick had outlined, has greatly de-risked that growth plan. As a result, I think we're now very, very well positioned to fund our growth program through the business cycle and commodity price cycles without interruption.

Our 2011 capital program of about $6.7 billion is on track and we are expecting it to be entirely funded from internally generated free cash flow. And as we continue to generate free cash flow going forward from here, we will evaluate our options based on the best return for our shareholders in terms of how we utilize that cash. So I think that I'd reiterate both Rick and Steve's comments that we're well positioned from here on out through the rest of the year for strong results, taking advantage of the good pricing that we're seeing.

So with that, I'll complete my comments and hand it back to Steve Douglas. Thank you very much, everyone.

Steve Douglas

Thank you, Bart, and as well, Rick and Steve. I'll just -- a couple of notes before I open it up for questions. One is just to let you know we have updated our guidance, and it is available on the website. Pretty much just minor changes to it. Our production outlook remains unchanged. Our overall capital outlook remains unchanged, but there are some changes to the distribution of spending based on actual spending for the first half of the year; and then a couple of small adjustments to East Coast Canada royalty rates due mainly to pricing; and also, obviously, to the exchange rate and a slight change to the natural gas price outlook.

One other note, the FIFO adjustment in our downstream this quarter resulted in a gain of $60 million after tax, bringing the total FIFO impact for the year-to-date to $245 million positive.

Also, I would ask you, as I open it up for Q&A, to keep the questions at more of a strategic level. If you have detailed modeling questions, the IR team and controllers will be available throughout the day. You can simply send a note or give a call to Jenna van Steenbergen and we will set up to talk to you later today. So with that, operator, I'll ask you to open up the floor for questions.

Question-and-Answer Session

Operator

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

Joe Citarrella - Goldman Sachs

I'm hoping you could provide a bit more of an update on the joint venture with Total and the ongoing design work at Fort Hills and Joslyn. Curious what kind of progress the team's made so far and when we can expect a more fulsome update on capital cost expectations.

Richard George

Yes, it's Rick here. So listen, I think we're kind of on track where we though we'd be this time of year. We have got the teams formed both on the kind of operating side and on the construction side of our internal teams. The relationship is going very well. And so we're just lining things out. It's obviously, there is a -- it's very important that actually kind of get the production of bitumen up before we get the upgrader because the reverse does not drive shareholder value. And so still early days. We -- right now, our expectation is that we'll be able to come out with a cost estimate and we still believe that we're in the range that -- of where we would expect it to be and not in some of the outliers that you currently see. You see kind of numbers all over the map both on upgrading and on other projects, but we'll come out with some kind of a firm number in the middle of next year.

Joe Citarrella - Goldman Sachs

And Rick, I also appreciate the -- your update on Firebag costs. Just a quick clarification there. It's -- clearly the Phase 4 can leverage infrastructure built out as part of Phase 3. But I just want to confirm, is that also the case for 5 and 6? And is your expectation there for that capital intensity should be roughly similar to Phase 4?

Richard George

Yes. Actually, my expectation is that they'll lower than 4. So you know what? That -- this is very early days and that's quite a ways off. But I'm not -- we're not even sure here that we'll do 5 and 6 in the same way that we've done 3 and 4. You may, more or less, incrementalize yourself through that. So my expectation at this point, again this is 4 years out, is that those costs will be lower.

Joe Citarrella - Goldman Sachs

Very helpful.

Operator

The next question is from George Toriola from UBS Securities.

George Toriola - UBS Investment Bank

My question here is around cash costs in the Oil Sands business. Now 2 parts to the question. Could you explain the -- just in terms of the increase we've seen this quarter, could you explain what that was -- what drove that? Was that reliability related? Was it inflation? And secondly, could you talk about what levers you have to drive down your cash costs? And for the project, what you think we should be expecting both in the second half of the year and further out?

Steven Williams

Yes, George, Steve. I'll pick that one up. The higher costs in the second quarter were wholly expected. They were a reflection of the planned maintenance we've had there. If I actually look and you don't -- you can't see the details I can see in terms of month-on month costs, we're ahead of where I would have expected to be in terms of how low our costs are at this stage of the year. And so everything through that turnaround went as we expected and that's why we said we would expect to see ourselves at the very low end of guidance for the year. So all volume related, with turnaround. The costs for the balance of the year, it's -- as I expected when I spoke earlier in the year, I would expect those things to be down in the lower half of the 30s for the rest of the year.

George Toriola - UBS Investment Bank

And, I mean, is this simply a function of volumes or are they are the levers that you have to optimize these costs as you go into the future?

Steven Williams

Yes, it's simply the fact that oil sands is a high fixed-cost operation. When you don't have the volumes, you don't have the divisor. And as we go into the second half of the year, we fully expect to hit our full run rate.

George Toriola - UBS Investment Bank

But both on -- just to round it off, but you're not seeing any -- this is not a function of service cost completion or things like that?

Steve Douglas

No, that's not what you're seeing reflected in the second quarter costs.

Operator

Our next question is from Andrew Potter from CIBC.

Andrew Potter

Just a question on free cash flow. I guess maybe just looking at -- for a little bit more color in terms of some of the options you're thinking about. I mean, are some of the options accelerating oil sands development beyond the plan you've already laid out? Or are you thinking more in terms of deciding between more dividend increases than buybacks, that kind of thing? And I guess second question related to that is, what are sort of the time frame for you to make some decisions? Is this more of a 2012 story? Or is this something that we might hear more on in the latter part of this year?

Richard George

So Andrew, it's Rick here. So listen, I think if you go back to my comments about how you run these projects, then you'll realize accelerating them in the middle of where we are today with the industry is not really a logical step. Suncor's got a decade, maybe 2 of growth ahead of it, and so this is about hitting a very steady pace through here and controlling your costs and controlling your technologies as you go forward. So acceleration of these projects is not on our list at this juncture, and I don't expect it to be near term at all or even longer term. In terms of generation of the free cash flow, obviously we want to make sure that we have a balance sheet that's in excellent shape. That's always #1. And then #2 would be how we return value back to our shareholders. And so, we've been quite clear about the fact that our preference is, first of all, to have a dividend increase each and every year. We had that pattern for a while until we kind of got into this 2008 and to the merger. Our first game plan would be getting back to that. And I'm not making a commitment. I'm just saying that's kind of our strategy on a go-forward basis, and then we'll see kind of from there. If we get access to cash flow above those 2 primary issues, then we'll kind of determine where we go from here. I would say share buybacks, which is kind of where your question leads, is probably not high on the priority list right at this moment, but I wouldn't rule them out. Bart, I don't know if you want to add anything to that.

Bart Demosky

No, Rick. I think you've summed it up very, very well. I mean, the priorities are as Rick outlined, Andrew. And it really focuses on how we drive the greatest shareholder return over time, and it starts with our high-return growth projects and investing there and then as the rest as Rick outlined, for sure.

Andrew Potter

And then what -- just one last question just in terms of that long-term growth plan. I just wanted to know how flexible the plan is. So for instance, if we do see labor inflation, labor productivity really start to decline, are you able to push back mining then move ahead in Firebag 5 and 6? Or are you pretty much stuck with or, well, committed to the course that you've laid out last December?

Richard George

Yes, Andrew, that's a good question and we often think about that. And sure, we have flexibility. I would say we have more flexibility than any other operator. And again, I think with 5 and 6, you'll kind of incrementalized yourself through that. You're not going to have the Big Bang Theory as you go through there. I mean, there's going to be lots of chances that you can devolve them like that. I guess on 3 and 4, I think you've got to remember we've been kind of under construction at the Firebag site here for a long period of time. One of the things I know we're looking forward to is getting Firebag 4 done, getting the place settled down, getting operational excellence really driven through that group, and then to get your cost structure down and then deliver. And so I think these sites where you have a lot of construction really do a lot better if once in a while you clear construction crews out and then just focus on the fundamentals. So yes, we have a lot of flexibility, and yes, we can take advantage of that. But right now, our game plan is as we outlined.

Operator

Your next question is from Greg Pardy from RBC Capital Markets.

Greg Pardy - RBC Capital Markets, LLC

Just a couple of questions then. I don't want to beat Firebag 3 too much, but I am curious as to the change in the CapEx and wonder if you could just outline how much of that might have been inflation versus just scope changes and other? And just on the hydro treater unit, I'm just wondering if you could add any color in terms of timelines. And are things running pretty smoothly with the existing hydro treater unit now?

Richard George

So maybe I'll take the first one and give Steve the second one. So Greg, listen, when you look at Firebag 3, it was a project that was mothballed back in the '08, '09 period, and we also added about $500 million of scope by adding another well pad and some other pieces of scope to that. And so listen, I do not think that this increase was driven in any significant way by inflation. This project was very far along. The materials were bought. We had a lot of hard money bids in Firebag 3, not all of them obviously, but quite a few. So this was not significant. I'm not saying there's none because nobody can say that, but not significantly driven by inflation. So Steve, I think the second question is around MNU.

Steven Williams

Yes, I think the second -- I think also about MNU and the existing hydrogen units. So yes, we bring out the third, so the MNU has a third hydrogen plant and of course that gives us more -- even more flexibility as we go forward. We did take the opportunity to put the hydrogen from that plant with the existing 2 hydrogen plants into a common header, so it gives us much more flexibility once that plant's up. As you know, we did have some issues with the Unit 1 hydrogen plant in the second quarter. The repairs have been completed. The startup is in the very late stages. It's about a 6-day startup, and I would expect that unit to be fully on grade tomorrow. We do understand -- so that brings then all of our existing hydrogen plants online and our hydro treaters will quickly follow that. So we expect to have high levels of operation through the second half of the year, and then the next turnaround for that plant is 2013 with Unit 1.

Greg Pardy - RBC Capital Markets, LLC

Okay, great. And then the third hydrogen plant, what -- it may have been in the release, but what's the timeline on that for completion?

Steven Williams

So it's approximately the end of the year. There's some advantage to us bringing that one on. So as part of MNU, it will be one of the first parts we bring on.

Richard George

Yes, great. The official release actually says we will be in operations first quarter and that you may see a little of that in the fourth quarter, but not significant.

Operator

Your next question is from Paul Cheng from Barclays Capital.

Paul Cheng

Rick, given the TI spread, I think there's a lot of debate and also that with Keystone something expansion it still gets stopped in the State Department. As one of the major operator in the oil sand area there, have you guys looked at what the producer can do in seeking alternative option? I mean, are you taking that into your hand and trying to look for alternative options, or that you are still relying on the primary operator there to find the solution for you?

Richard George

Sure, Paul. I mean, we're looking at all kinds of options. And again, remember, this is not a near-term issue, and we've got plenty of pipeline capacity for the next several years. Keystone XL is more about the future and more about de-bottlenecking the system. So we don't see these large differentials between WTI and Brent, and I don't think there's been nearly enough focus in the U.S. around that issue. And you know what, sure, we're exploring all kinds of opportunities. We believe Enbridge's gateway pipeline to be equally important, especially from a Canadian national's viewpoint. We will be looking at reversing Line 9 in terms of getting western crudes into Montr?al. We're looking at things like rail as well. And so, listen, there are lots of options out there. At the end of the day, let's hope the State Department does the right thing for the total energy balance of North America, but there are other options there.

Paul Cheng

Okay. And earlier, that you said that -- I mean, the Fort Hills and Voyageur that you would be focusing on that 12 months from now. So from now until then is that basically we're just going through the revised detailed engineering or what are we doing currently or that is not really spending any money yet?

Richard George

Well, yes, sure. On Voyageur, we're not spending loads of money. The engineering is virtually complete. We are doing some rework to make sure that as we bring in both Fort Hills and Joslyn that we've got the front end of that plant, but virtually the engineering's complete. What you got to remember, we got to bring Fort Hills on before you bring the upgrader on. So this is a sequencing issue, not anything more than that. I would expect Voyageur to have lots of options here in terms of -- normally, we get kind of a lot of the basics done about the same time we get the plant done, but we have here the opportunity to do a more plentiful job in terms of things like getting all your underground work done, getting your housing and your office locations done, getting electricity and utilities in before you get a long ways down on construction. That should make the whole construction part of the project more efficient. And we will -- we, obviously, are looking at how do we do that in a way that minimizes cost. Again, the focus on these projects going forward is on quality and costs, not schedule. Again, part of that formula for how do you manage through these projects on a go-forward basis.

Paul Cheng

Just a final question. I mean, there's many, many different new technology has currently being test in the situ [ph] side. In the mining, other than the tailing that you guys are doing, is there any other more interesting or promising technology that could potentially drastically change the way how the operation and the operating cost or that we're pretty much that still dealing with and just evolution device [ph] and trying to improve their efficiency, but there's nothing revolutionized [ph] over there?

Richard George

No, no, there's technology on all kinds of fronts, and I often talk about this in a broader audience sense that we're really kind of getting to critical mass where you're going to see technology changes across-the-board, not just in-situ, but in mining as well. Things like froth treatment, which we're going to -- the new froth treatment, the system -- paraffinic froth treatment in Fort Hills to potentially looking to drive those trucks somewhere down the road to maybe even waterless extraction and other technologies on a go-forward basis. So without identifying which of those are likely to come all the way through the system, there are a lot of technologies that will come along here. Internally, Paul, what we would like to think about is our offset against inflation in terms of operating cost is really based around these technology improvements and technology change that we see coming.

Paul Cheng

So for the mining, you don't expecting your unit cost will be able to come down, on SAGD you may be able to drive it lower?

Richard George

Yes, the biggest thing near term in terms of operating cost is this North Steepbank project, right, which we've clearly identified, and that, near term, should help us reduce costs. But what I wouldn't model is some big reduction in operating costs on the mining side. I think that the North Steepbank should bring us down by about $1 a barrel and then our ability to eat [ph] inflation from there should be the primary goal.

Paul Cheng

A final question. What's the steam-to-oil ratio in Firebag 1 and 2? In Firebag 3, I presume right now it's very high, probably in the 4 or 5. And I think you have a target that to be below 3, maybe into the 2.5, 2.6. How long it may take, do you think, before you can get there?

Richard George

Yes. So we would be just around the 3 number, just below the 3 number on Firebag to date, not counting Firebag 3. And of course, we just started the first wells from Firebag 3. So as you know, on the steam-to-oil ratio, you start at infinity and then work yourself down as you put steam in, but don't get oil out when you first warm these wells up. So we would expect to get down to that 3, below -- just slightly below 3 number over that 24-month period.

Paul Cheng

So you're looking for -- only slightly below 3, but not down to the 2.5, 2.6 number?

Richard George

If you're talking about average from the whole Firebag, I think that's a pretty accurate statement.

Operator

Our next question is from Brian Dutton from Cr?dit Suisse.

Brian Dutton - Crédit Suisse AG

Just to circle back to -- on the discussion earlier on cash costs, always talking about cash costs on a per barrel basis, but maybe we could actually talk about it in total dollars. So if you look at your cash costs in the first quarter, they're about $1.05 billion and they went to the $1.134 billion in the second quarter. Can you quantify how much, if any, of that increase is due to the turnaround costs in the quarter? And also, looking forward, what would a good run rate be on a total dollar basis?

Bart Demosky

Brian, I mean, the amount of cost increase you're talking about is actually quite modest, so I think that's maybe something we can take off-line afterwards. I think Steve did talk about where he sees costs trending from here. Obviously, we had higher costs almost entirely due, in the second quarter, to the turnaround work that was completed. That does add up to the total costs, obviously, but we see costs per barrel coming down significantly. But as we grow production growth even with a lower per barrel cost, you could see some increase in total dollars. But I mean, it's just math, right? It's the per barrel cost times the number of barrels that are there. So happy to take a little more detailed question like that off-line after the call as well. Steve, I don't know if you have anything to add there?

Steve Douglas

The only thing I would say is about half of it is to do specifically with the upgrader turnaround, the other half is to do with the other stuff we take the opportunity to do. So it's very difficult to unravel it. We are where we expect it to be at this time of the year following the turnaround. And so all of the guidance we've given on cost is still in place and, in fact, we think we'll be at the very low end of that math [ph].

Brian Dutton - Crédit Suisse AG

Sure, okay. Because what I was looking at here is that, if you take that first quarter cost of $1.05 billion, you do get very -- it's quite easy to get to the per barrel cost that you were -- you've been talking about. And so I just wanted to circle back on that, then to look at it in both lights as opposed to just look at it on the per barrel basis, because I think that, as you say, the key driver here is the per unit number, but the big factor is indeed the total dollar. On the tax side, I saw that your tax guidance is unchanged for the year. Could you give us any insight as to what you might think will be happening down the road given changes in the federal legislation on the tax front?

Bart Demosky

Yes. Brian, I can take that. Just very quickly, we haven't revised guidance for this year. Obviously, with a higher price environment that we're enjoying, along with the changes in the Canadian tax code that looked like they're coming. We're anticipating that we'll see a bit of an acceleration in our cash tax horizon. I can't give you an exact time frame for that now, we will come out with guidance later. But I think primarily it has to do with the better pricing environment we're seeing and in an environment like that, taxes aren't always a bad thing.

Operator

Our next question is from Mike Dunn from FirstEnergy Capital.

Michael P. Dunn - FirstEnergy Capital Corp.

A question on Hibernia, volumes in April and May were quite strong and I believe the first part of the Hibernia South Extension was -- came onstream in June. Not a whole lot of detail available on what's happening at Hibernia, I wonder if you could just shed some light on what you're hoping to see from production from the Hibernia South over the next few years and from the base assets as well? And I've got a question on Firebag after that.

Richard George

Yes, it's Rick here. So listen, yes, Hibernia did have a very good operational record, so thanks for noting that, and we expect a very strong result there, but not really any huge volumes from Hibernia South until 2013, '14, somewhere in that range.

Michael P. Dunn - FirstEnergy Capital Corp.

Okay. And on Firebag, what should we be expecting in terms of production from phases, the existing Phases 1 and 2? I believe that additional steam capacity was built into Firebag 3, 4, the base phases. So are you still kind of hoping that, that -- you get that above 70,000 barrels a day over the next year or 2?

Steve Douglas

I mean, it is quite a complex question because we have a lot of things going on, on Stages 1 and 2. We've seen -- as you note, we've seen significant progress on steam production. So we've got 3 and 4 and we've done some derating on the unit. So the surface facilities are operating in the high-90s in terms of service factors, so we now have high volumes of steam coming forward. In terms of the steam allocation, we have lots of choices because we put -- we can put the steam from 1, 2, 3 and 4 to any of the phases and we have the infill wells coming on. So overall, you're going to see some comingling of 1, 2, 3, 4. But yes, you will start to see some of the infill wells come on Stages 1 and 2. Our anticipated SORs for those are lower, so you will see some production from that.

Michael P. Dunn - FirstEnergy Capital Corp.

Okay. Maybe just another way of asking then, Steve, should we expect higher steam injection into the wells that are currently within Phases 1 and 2?

Steve Douglas

No, you won't see higher steam injection into the existing wells, you will see a portion of steam into the best location, which will be some of the existing 1 and 2, some of the infill and some of 3 and 4. So you'll see some benefit from that.

Operator

Our next question is from Gil Alexandre from Darphil Associates.

Gil Alexandre

Could you give me your first guesstimate as to what your production would be from the oil sands next year?

Richard George

I think it's very early days for that. We normally give that when we get back to the tail end of this year. So listen, let's hold that question. What I would say is, listen, we do have some maintenance next year, but nothing on the size and the scale that we've experienced this year particularly all -- virtually most of it in the second quarter. You will have also Firebag 3 ramp up, as well as the North Steepbank. So what you should expect here is a good strong year from us in terms of 2012, but we don't give exact projections this far in front of the year.

Gil Alexandre

Okay. And the second question, on your joint project with Total. Can you give us any feel as to what that production could be like?

Richard George

We've given those exact numbers, I think, in terms of what those volumes are. Steve's looking that up. I just don't want to give you 2 sets of numbers here, but those have actually been public in terms of what the numbers are. The upgrader itself is, I can tell you, is 200,000 barrels a day, 50% ours, 50% to Total. And then on the Fort Hills, our net capacity there is 67,000 barrels a day. That's for a 45% interest -- sorry, 40 point -- 41% interest, which is 67,000 barrels a day. And Joslyn, we would expect 37,000 barrels a day. That's again for a 35% interest.

Operator

The next question is from Obinna Obilo from Citigroup.

Unknown Analyst -

Just a really quick balance sheet question related to the upcoming maturity in August. Just wanted to get a better sense of how you intended to address it, are you just going to use cash on hand or availability under the revolver? I know, probably look at it being fungible, or do you expect to come back to the market to address that or maybe even later in the year in relationship to the CapEx program? That's it.

Bart Demosky

It's Bart here, good question. The bond that's maturing here in Q3, we've got sufficient cash on hand in our accounts to pay that off from cash. I think we're, to date, so right now, we've got about $2.5 billion of cash available to us. So that's how we plan to pay that debt off. We wouldn't be increasing our commercial paper or drawing down our lines further.

Operator

The next question is from Katherine Minyard from JPMorgan.

Katherine Minyard

Just a question in terms of -- when we look at Firebag 3 coming online and we look at the subsequent phases of Firebag, and then we look at the kind of fixed capacity for the upgrader and the fact that you've got upgrader feedstock coming from both mining and then also from in-situ right now. How should we think about the factors that will influence the extent to which Firebag 3 and 4 will enable you to grow production or simply change the mix of feedstock going into the upgrader and keeping you at a relatively consistent level of synthetic crude production?

Richard George

Yes, that's a good question and I understand completely because the question is really as you ramp up on stages of Firebag, does that just mean steady production out of the total oil sands business or does that mean increases? And the answer is, it should mean increases and we will, at that point, be producing more heavy oil bitumen. Again, Firebag is a completely fungible oil and so you get that complete flexibility. I would remind you that we have a coker at Edmonton, so we run oil through that coker and we've got plenty of flexibility in terms of downstream from our upgrader as well. So again, we've got the maximum flexibility. Net-net, yes, you should see an increase in production over time here as Firebag 3 and 4 ramp up.

Katherine Minyard

Okay, great. And then, could I just quickly touch on some of your most -- or some of your forward guidance for CapEx kind of indicated $8 billion to $9.5 billion for 2012 and beyond and that was in your December presentation. Has there been any updates since then? Or is that still a good run rate as we look forward?

Richard George

We have no update at the current time, that's still, I think, a pretty good look at the run rate.

Operator

The next question is from Menno Hulshof from TD Securities.

Menno Hulshof - TD Newcrest Capital Inc.

I've got a couple, and I think they're reasonably quick. The first is on your divestiture program. I believe you suggested you weren't seeing reasonable bids on assets that you had recently put up for sale. I was just wondering if you could maybe give us any color on why you decided to pull them and market conditions in general, I suppose? And lastly, whether you consider that to be a temporary decision?

Richard George

That's a great strategic question. And I think the answer is listen, it's a calculation, right? I mean, we know what they are to us on a valuation basis in terms of producing those assets out versus selling them. And so it's really kind of a very simple equation. If it's of more value for us to hold and produce those assets out than to do it, than to sell, pretty simple math kind of issue. So that's kind of directly where we are. I mean, I think we've been quite clear that this is -- our focus on a strategy basis is on oil sands and we're not abandoning the gas business or the E&P business at all. We'd be like everybody else to try to kind of focus in that business more on liquids than on gas at the current time. But we're not totally giving up on having a reasonably sized or a small sized gas business. Again, our primary focus and if you look at what makes the difference in this company, it's around oil sands and oil production, not gas. So it's very important to us, and I'll have some E&P employees on the phone, so I want to make sure that I say that for sure. But you got to remember what really drives results here is oil.

Menno Hulshof - TD Newcrest Capital Inc.

Okay, perfect. And then just a quick follow-up question on the reshuffling of the 2011 capital, it looks like your oil sands growth capital is up roughly 10 percentage. Is that all in relation to Firebag 3 or were there other considerations?

Bart Demosky

No, you've got a correct understanding. It's largely to do with the shifting of cash into Firebag 3 and the flexibility we have.

Operator

[Operator Instructions] And we have a follow-up question from George Toriola.

George Toriola - UBS Investment Bank

Quick question on Golden Eagle. You talk about -- you've sanctioned that project. Could you talk about what, if anything, has changed from your discussions with the U.K. government or how you see the tax situation in the North Sea?

Richard George

Yes, sure. So listen, the whole industry is not very happy about the surprising increases in taxes that we saw out of the U.K. It has a material impact on our net present value, but not a material impact on our rates of return. You just got another partner involved if you think about it in one way. And this is ring-fenced with Buzzard, right, so you got to think of that from a tax and royalty viewpoint. So listen, the rates of return look very, very healthy. It's a project that looks very robust. We have some 14 penetrations. We know this reservoir well. And so, this is one that the risk is relatively low in terms of execution, in terms of production, in terms of what we know. This is pretty standard North Sea stuff. Do we wish the government would have thought harder about that? They will, down the road, once they realize that this will actually increase their decline rate. So you just got to be patient through some of this.

George Toriola - UBS Investment Bank

Okay. So at this moment, yourselves and the rest of industry that's -- you're not actively pursuing any sort of discussion as to change the mind of the government out there?

Richard George

No, I wouldn't say that. I would say we're in active discussions. But the discussions take both a sender and a receiver, right?

Operator

We have a follow-up question from Brian Dutton from Cr?dit Suisse.

Brian Dutton - Crédit Suisse AG

Just to go back to the well one more time on cash costs. Cash costs, just thinking about how to look at this, the cash costs in your in-situ projects run around $20, $22 a barrel and fully upgraded volumes are running in that, as, I think, Steve mentioned there, that $30, $35 a barrel range. As you build up the various phases of Firebag then, as those volumes are then just being sold into the market, is it a fair conclusion then that you could perhaps see, absent inflation impact, see cash costs start moving below $30 a barrel because of the weighted average as the Firebag volumes come in?

Steven Williams

I mean, if I went back to -- I mean, Firebag, Brian, we have to be very careful around the costs we're looking at particularly in the second quarter because what we are seeing is all of the startup and commissioning costs starting to be incurred without the volumes. But in principle, your statement is right. It's just -- the only thing I would question is the numbers and very happy to take a conversation later if you want to go into some detail.

Brian Dutton - Crédit Suisse AG

Yes, sorry, I was thinking longer term, not near term.

Steven Williams

Okay. Yes, longer term, you're principally, absolutely right.

Operator

Our next question is from Justin Amoah from Argus Media.

Justin Amoah

I'm wondering if Suncor has any further upgrader maintenance plan this year?

Steven Williams

No significant maintenance at all this year. And actually, no significant maintenance on the upgraders next year either.

Justin Amoah

Okay. So you guys noted significant premiums for synthetic crude this year, so with no significant upgrader work done, I'm wondering why you chose not to revise your expectations for your crude sales basket.

Steven Williams

Sorry, the crude sale basket that we have guided to is on a full year basis. And so we're expecting to go back to more typical sweet/sour ratios. And assuming that is the case, we'll hit our annualized target.

Justin Amoah

Just one more question on Libya, if the force majeure moves beyond 2 years, what happens with your Exploration and Production sharing agreement?

Richard George

Well, it would basically end. That's what legally is there. And I know there are probably some questions about that, what you also got to think about is the government sanctions. So when you think about that, you got to think about where does this whole situation in Libya go and how quickly, if at all, the Western governments lift sanctions because we obviously cannot go back to work until the sanctions are lifted.

Operator

[Operator Instructions] There are no further questions registered, gentlemen.

Steve Douglas

Looks like my timing was impeccable. So I'd like to thank everyone, and as noted previously, we will be available for any detailed modeling-type questions the rest of the day. And just please get in touch with Jenna by e-mail or phone to arrange that. Thank you, everyone. Bye-bye for now.

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's CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts