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Suncor Energy (NYSE:SU)

Q4 2011 Earnings Call

February 01, 2012 9:30 am ET

Executives

Steve Douglas - Vice President of Investor Relations

Richard L. George - Chief Executive Officer and Non Independent Management Director

Steven W. Williams - President, Chief Operating Officer and Director

Bart W. Demosky - Chief Financial Officer

Analysts

George Toriola - UBS Investment Bank, Research Division

Mark Polak - Scotiabank Global Banking and Market, Research Division

Carrie Tait

Gil Alexandre

Brian C. Dutton - Crédit Suisse AG, Research Division

Allen Good - Morningstar Inc., Research Division

Michael P. Dunn - FirstEnergy Capital Corp., Research Division

Kam S. Sandhar - Peters & Co. Limited, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Suncor fourth quarter and year end 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, sir.

Steve Douglas

Thank you, Thomas. I should -- I'd like to welcome everyone to the call. I have -- we're actually in 3 locations today. We have our management team: Rick George, our CEO; Steve Williams, our President and COO; and Bart Demosky, our CFO, and they are on the West Coast in Calgary. In our head office, we have our controller, Jolienne Guillemaud; and our systems controller, Greg Freidin. Here with me in Toronto is the IR team: Mark Illing and Jenna van Steenbergen.

Just before I turn it over to Rick for his opening comments, I want to give a legal advisory. Please note that today's comments contain forward-looking information. Actual results may differ materially from expected results because of various risk factors and assumptions that are described in our fourth quarter earnings release, as well as our current Annual Information Form and both of those are available on SEDAR, EDGAR and our website, suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian GAAP. For a description of these financial measures, please see our fourth quarter earnings release. With that, I will hand over to Rick George for his comments.

Richard L. George

Good morning, everyone. It's a delight to be here this morning. And also delighted to give you our fourth quarter year-end results. Obviously, we're absolutely delighted. It's been a record year for Suncor and the results, I think, really reflect where this company is and the great shape it's in as we sit here today. I'm going to let Bart and Steve take you through the details shortly, but the headlines are obviously extremely positive. It was another strong quarter, with oil sands production at just over 325,000 barrels. The average CAPP by a new production record in December of some 345,000 barrels. Operating earnings were $1.4 billion in the quarter, cash flow of just over $2.6 billion. And if you take a look at the year in total, we had record both income and cash flow. That's both the quarter and the year for the full year. And internally, we actually thought we had a shot at the $10 billion cash flow number. We didn't quite get there but listen, it's all good and really has been a great year.

Also, what's really important to us and something that you'll see us talk more and more about in the future is how we are improving our return on capital deployed, and moving back into our target range after the merger, and of course, the rebasing of our whole asset base at the time of the merger. And so both that was expected and is happening, which we're quite proud with. Now that the Petro-Canada merger is well, well behind us in our rearview mirror, we've got this company really set up to drive shareholder value across the business cycle, and the future looks incredibly bright.

Before I pass it on to Steve, I'd like to remind you that a year ago at this time, we set 5 major goals for this organization. And I want to kind of walk you through kind of where we got to on those in 2011. First of all, operational excellence across our entire business. Our safety and environmental excellence are the foundation of operational excellence and we've made great progress. For example, the total injury across the company came down 21% year-over-year and high-risk incidents, which are kind of a leading indicator of safety issues, were reduced by a remarkable 71%. Likewise on the environmental front, we managed to reduce our incidences of regulatory noncompliance by over 17%. It's never a perfect world, but that kind of steady improvement in operations and as a result of an improved reliability across the company, allowing us to set a number of production and throughput records, and really leaves us in good shape on a go-forward basis. Operational Excellence led by Steve has been a really important part of the cultural change here, and no doubt will be a big part of how we continue to do that in the future.

And the second goal we had of the 5 goals was improving our performance of Firebag in our in-situ projects. So with the ramp-up of production at Firebag 3 and the very successful infill drilling program at Firebags 1 and 2, we've really turned the corner in that business. It's actually quite exciting. We exited the year with in-situ production at both Firebag above 110,000 barrels a day, and it's expected to steadily grow from there. Actually, over the next couple -- 2 or 3 years, we expect in-situ to drive that profitable growth for Suncor, and you'll start to see that quarter-over-quarter and year-over-year as we go forward.

The third goal was managing our costs, our cash costs at oil sands and in-situ. And Steve can talk about this a little bit more later, but we remain very focused on heading towards that $35 a barrel oil sands cash cost. Then we had that major turnaround work in the second quarter. We've got, currently, in the middle of a lean zone in the mine, which makes the mining costs a little bit more difficult. And also the costs around the ramp-up of Firebag 3, our 2011 costs, averaged just over $40 a barrel. Just do know we're forecasting much -- a lower number at 2012. And with the opening of the North Steepbank Extension, growing Firebag production and continuous focus on reliability, we expect that we're going to achieve those kind of targets.

The fourth goal was an effective project execution, particularly on Firebags 3 and 4. We did have a slight increase in costs at Firebag 3, but the Firebag 3 production is ramping up very steadily. So listen, it has come online very well and we're able to take those lessons learned from Firebag 3 and hand them over directly to Firebag 4, which is now over 60% constructed and looks like it's going to be brought in on or under budget.

The fifth one is implementing Total joint venture and the growth plan. As you know, this company's got an amazing kind of growth plan going forward in terms of 10 years ahead of us, and the one thing you can be assured is that we're going to take our time here in terms of making sure that we don't go to the field without complete engineering and that we get the bases of these projects down well. And going forward, and I know we've said this before, I'm just not sure the market quite believes us, but what I'd say is we really expect to be cost and quality driven, not schedule driven, when we bring these projects in. One thing, we're well underway on our pre-sanction work on Fort Hills, Voyageur and the Joslyn projects and expecting sanction in the early part of 2013. But rest assured, most importantly, we're focused on investing this capital efficiently to get an adequate return for our shareholders. We have said that a couple of times. I'm, again, not sure that the market totally believes us, but if we can't do it efficiently, if we can't do it with the return well above our cost of capital, it won't be spent. So with that, Steve, over to you.

Steven W. Williams

Okay. Thanks, Rick. Well, we certainly did make a great deal of progress in 2011, and the fourth quarter capped what for us was an exceptional year. So what I plan to do is just take a look at our operations in a bit more detail and I'll start with oil sands. Our base operations are performing very well. It was another quarter of reliable production, as our Operational Excellence initiatives continue to visibly pay dividends. Record in-situ production, as Rick said, over 100,000 barrels a day, the second best quarter in our history for oil sands mined. The all-time record of 485,000 tons per day we set in the previous quarter. So 2 really strong quarters in mining.

Record upgrading performance of 312,000 barrels a day, including our best sweet and sour mix in several years. It will be a couple of days before our January numbers are posted, but I can tell you that it will be another very strong month for production as this performance continues. So that trend of reliable operations and steady production growth is establishing itself. At the same time, our growth projects are moving ahead very well. Firebag 3 is ramping up as expected. Full capacity by the second half of next year. Firebag 4, as Rick said, is on schedule for initial steaming towards the end of this year and first oil in early 2013. The MNU hydrogen plant is in the process of starting up, and that's going to provide us with even more flexibility around hydrogen and then the ability to produce a higher value sweet material. The North Steepbank expansion opened ahead of schedule in December and is already supplying over 25% of the bitumen we're producing.

So that's a great story as it will reduce the whole distances, congestion, and ultimately, the costs per barrel in our mine operations. Relentlessly managing our costs is our foundation, a bedrock at Suncor, so I'm pleased to say that despite working through the lean patch in the mine and carrying the full operating cost burden for Firebag 3, we were able to keep our cash costs below 40 in the fourth quarter and stay well within our cash cost guidance for the entire year.

Finally, I should mention that we fine-tuned our oil sands leadership team in December. We consolidated the in-situ operations with the base operations under Mark Little, which will support the very integrated approach that we're taking in the Oil Sands business. Mike MacSween, formerly the EVP of in-situ, has taken over our major projects group. His deep projects and oil sands experience will be invaluable as we move our growth projects forward, and we were very fortunate to recruit Steve Reynish to take on the leadership of our Oil Sands Ventures. Steve has extensive industry experience and his international background will be valuable in managing our joint venture relationships with our large multinational company partners such as Total.

Moving on to E&P, I know there's a good deal of interest in the recent developments taking place in the Middle East. It's important to remember that Libya and Syria represent a very small part of the Suncor portfolio, accounting for only about 3% of our total cash flow. Our approach in both countries is to focus on responsible operations and ensuring the safety and security of our employees and contractors. As you know, we declared force majeure in Syria on December 12 in order to comply with international sanctions. We moved all of our employees safely out of the country. And while we continue to monitor the situation there as best we can, we are no longer booking any production.

In Libya, our partner, Harouge, brought production back on stream at 3 of 5 fields, averaging almost 25,000 barrels a day for the quarter and now has reached 35,000 barrels a day. So Suncor is engaging with our partner in the interim government, but we're taking a cautious approach to reestablishing operations and have only a handful of employees on the ground at the present time.

In our East Coast operations, quarter 4 production slightly exceeded the fourth quarter of 2010 despite maintenance work on Terra Nova, which was completed slightly ahead of schedule in October. In the North Sea, we saw improved reliability and production at Buzzard in the fourth quarter after a series of operational challenges earlier in the year. We're continuing to press the operator for long-term improvement, and we expect volumes to stabilize going forward.

The E&P portfolio is made up of very high quality assets that operate at low costs and generate considerable free cash flow, in fact almost $2 billion in 2011. We're fortunate to have a number of promising projects that will allow us to maintain or slightly grow current production levels over the next several years. In October, the preliminary field development for the Gold Eagle was approved by the U.K. Department of Energy and front end engineering continues to progress well. We secured a rig to drill the third appraisal well for the prospective Beta field off of Norway. Drilling is expected to start in the first half of 2012.

So finally turning to our downstream operations, we overcame a number of operational challenges, including a month-long third-party hydrogen outage in Edmonton, but still managed to run at 90% capacity for the quarter. As a result, the downstream posted another strong quarter to cap a record-setting year that saw R&M benefit from Suncor's integrated model to generate over $2.5 billion in cash flow. So as we enter 2012, our operational excellence programs are driving increased reliability, and the integrated model is generating strong profitability. And most importantly, as Rick said, we're achieving strong returns for our shareholders. So with that, I'll turn over to Bart Demosky, our Chief Financial Officer, to get into the financial details.

Bart W. Demosky

Well, great. Thank you, Steve, and good morning, everybody. Q4 certainly was a great finish to a record year for Suncor, with the strong operating earnings we saw of $1.4 billion. That brought us to a total for the year to another record of just under $5.7 billion. So terrific results for the organization, really built off of strong operations. We also had strong cash flow in the quarter of $2.65 billion, which brought the total for the year to a very remarkable $9.75 billion. Rick's right, we were shooting for the $10 billion and I think it's within sight definitely for us, given where this organization is going.

But I think one thing to just point out is in a very volatile price and margin environment this year, I think the results do point back to the value that our integrated oil sands operating model will continue to deliver in most operating environments. So it's very, very good news for the future. We generated a record amount of free cash as a company in 2011 and our balance sheet, as a result, is in the best shape in the company's history. So a couple of quick metrics that I know you're familiar with but just to recap and again, net debt is now down below $7 billion. Our debt to cash flow number is now at 0.7x, and we ended the year with cash on the balance sheet of $3.8 billion, which was up $0.5 billion from the $3.3 billion we ended at the end of Q3 last year. So while we were building cash, we were able to accomplish that while also completing spending on our first ever share buyback, which we had announced early in September of last year at a $500 million target level. We did complete that program in the fourth quarter, repurchasing 17.1 million shares, which is 1.1% of our total float, a little bit above what our target was when we set out to execute on that program. So very well done program and we're pleased as we've been able to complete it in the fourth quarter.

We did have a handful of adjustments in the quarter, which are very well explained in the release. I did want to just take a second to talk about 2 of them, though, and that’s around our holdings in Syria and Libya. As most of you would probably recall, we took a partial impairment of $540 million on our Libyan assets in the second quarter of last year. As both Steve and Rick highlighted, those assets are now back in partial production, and we will be reviewing them on an ongoing basis as to whether or not we will be reversing the impairment. We're watching to see how the production ramp-up will take place, and we'll make an assessment as we go forward here once we have a clear picture.

As also previously mentioned, we did declare a force majeure in Syria in December. We are also continuously reviewing our status in that country. And just given the uncertainty, we did choose to take a provision for some receivables that we had outstanding, and that provision was $63 million. I'd characterize that as a very conservative approach, but the right one, we think, in our minds. So obviously, just given where we're at on the metrics, I'm very pleased with the state of Suncor's finances, but I think it's also important that I take a little bit of time to emphasize our focus on maintaining a strong balance sheet and financial metrics as we move forward.

2011 was a very volatile year for pricing and that's something we expect to continue. And in a volatile world, it's critical that we take a very rigorous approach to the balance sheet and exercise very consistent capital discipline. This company now generates a great deal of cash, and I'd like to take a minute just to remind you what our priorities are for that cash.

Our first priority is to fund an operationally excellent base business to drive higher and improving return on capital employed through higher reliability and focused cost management. And as both Rick and Steve mentioned, we will keep a relentless focus on costs and continuing improvements in our operations.

Secondly, we want to continue to carefully manage the balance sheet, to maintain our conservative debt ratios, have ample cash on hand to take advantage of opportunities and sufficient liquidity to allow us to spend through the cycle as we see volatile crude prices ahead.

Finally, we want to invest in a very disciplined way that maximizes returns for shareholders. And we've laid out a suite of very attractive growth programs. But it's not growth at any cost. Our focus will be on cost, quality and returns that meet our shareholders' expectations. And we want to steadily grow our dividend as well, in line with our production.

If we continue, and I do expect we will, to generate excess free cash, we will look at other investment opportunities as well, including share buybacks on a value basis. And of course, any increase to dividends and buybacks are always subject to board approval.

We did issue our 2012 guidance on November 8, including a detailed breakdown on our production and our $7.5 billion capital program for the year. That updated -- that guidance was updated earlier today. Currently no change to our capital spending plans, but I will say at current pricing, we will be generating a significant amount of free cash beyond our capital needs for 2012. No change to the production outlook currently. While we have seen production ramp up steadily in Libya, we are going to take a bit of a cautious approach here and not adjust production guidance upward at this time. But of course, that may change as we see production ramp up from that part of our business. We have made some adjustments to our current income tax and international tax rates as a result of returning Libyan production. And just given the increase in materiality of our Refining and Marketing results, we have also started to include guidance on our downstream sales, utilization rates and throughput.

So with that, in summary, we absolutely met or exceeded all of our key goals for 2011 on the financial front, and we believe we're well, well positioned for another strong year in 2012. And I'd leave this watchword with you for us moving forward. It's discipline. And that's in our operations, in our cost management and in how we manage our capital structure. So thank you very much. With that, I'll turn it back over to Steve Douglas.

Steve Douglas

Thanks, Bart. And just before we open up the mics to Q&A, a couple of points I just wanted to make, reinforce what Bart said around the 2012 guidance. We have made minor updates to it and it's available in its entirety on suncor.com. And then finally, one or 2 numbers that aren't included in the release but I know are of interest to many of the analysts, and that is the impact of LIFO/FIFO. It was a net gain after tax in the fourth quarter of $65 million, and for the year an after-tax gain of $230 million. So I will turn it back to the operator. I would ask that you keep the questions at a more strategic level. If you have detailed modeling questions, the IR team and controllers will be available later in the day to deal with those. Thomas, I'll give it back to you to open the floor.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from George Toriola from UBS.

George Toriola - UBS Investment Bank, Research Division

I have 2 questions. The first is around the Oil Sands business. We've seen very strong volumes coming out of that business. What is the weakest link in that business now? Is it on the crushing side? Is it -- where do you see the weakest link in that business? That's the first one. And then secondly, on Voyageur, just wondering if there are certain metrics that you would watch that would delay or prevent the progress of that investment. So supposing differentials tightened substantially, would that be something that you reconsider or how do you look at that?

Steven W. Williams

George, Steve Williams. I'll take the first one there. So in terms of the Oil Sands business, I think what you were asking, as opposed to our weakest link, is what sets the level of operation we have there. And of course, it's moving around because our Operational Excellence program has essentially been de-bottlenecking parts of our operation. So it's much more in balance and closely matched than it used to be. Overall, we are still nominally bitumen short, so we had spare upgrading capacity through the fourth quarter. And if we were able to have a continuous supply of bitumen, we still have some capacity left in those upgrading facilities. So as Firebag stage 3 is coming up, and that's why you're able to see us continue to push the upgrading levels. So it's moving, but the simple answer is it's bitumen at the current time.

George Toriola - UBS Investment Bank, Research Division

Okay, maybe I can just follow-up quickly on that. So when you say that in terms of being bitumen short, are we still working with 350 on the upgrader side in terms of capacity, or are you working with something higher?

Steven W. Williams

We're already, on a single day, exceeding 350. It becomes a question now of us staying at those levels for extended periods of time. So we're in exactly that 350 zone that we talked about when we put Millennium in. What we're doing now is we need to see that bitumen supply to test it. So we're already at the short strokes where in total we've got -- we have 345 in December available to us. We upgraded the highest proportion you've seen us do. I think you'll continue to see some small creep as we start to challenge the 350 number.

Richard L. George

So George, on the second question, this really deals around what would delay or postpone the Voyageur upgrader, and you mentioned light-heavy differentials. You know what, you've got to rethink this in a 20-, 30-, 40-year view, and you've got to go back to our strategy. Our strategy is to integrate the company with our base assets in the second largest oil basin in the world. Upgrading is going to be a portion of that. We're going to move to a period here over the next 10 years where we're more bitumen long than we are short. So having more upgrading capacity as you go through that will do it. Yes, and you know what, if you look at the cycles over the last 20 years, not that you make money on this upgrade every year but you've made more money in it in most years than not having it. And so what you've got to think about is that balance, and you've got to go back to the strategy that we've been talking about here for a long period of time and take a look at that. It has nothing to do with today's margins or light-heavy differentials.

Operator

Our next question is from Mark Polak from Scotiabank.

Mark Polak - Scotiabank Global Banking and Market, Research Division

A couple of questions. First was on the sweeter sales mix and just wondered if you could elaborate a bit on what's driving that? And then as the MNU project is completed and ramped up, is there further upside to that, the sweetness of the mix there, or does that just make it a bit more reliable going forward? And then my second question was just as you’re pushing Fort Hills and Joslyn further towards sanction, is sort of that $55,000 to $70,000 per daily barrel range still a good number for us to be keeping in mind or any update to that would be great?

Steven W. Williams

Okay, Mark, let me pick up with the first one. And again, I'll keep it at a relatively high level. I mean, what you're seeing is -- and we talk about the mix and we often talk about percentages. Of course, as the volumes become much higher in the base, then we would hit physical limits on the hydrotreating capabilities. So we actually have to look at the volume of material we are hydrotreating. What we're seeing is consistent with the Operational Excellence drive, we've been focusing on hydrotreating and we are seeing the reliability of both our hydrogen plants and hydrotreaters increase. That's been reflected in the mix that you've seen through the fourth quarter. As the Millennium Naphtha Unit comes on, you will see that further increase. And you'll see it in 2 stages. The first part of the plant to come on, we're deliberately bringing the hydrogen plant up first. We have the flexibility to put that hydrogen into the main hydrogen header on the plant and then we can redistribute it between the existing hydrofiners and the Millennium Naphtha Unit itself. So you will continue to see an increase in that mix as we go through this year and the Naphtha Unit comes on.

Richard L. George

So the second part of your question really deals with, I think, Fort Hills and what are we seeing around the cost structure and you mentioned the 50 to 70. So we've been very careful not to release early numbers in which we had no confidence, and this is a very kind of systematic staged approach that we've talked about, about how we're attacking these construction projects in a much more disciplined way. So again, we expect to go to full sanctions in early 2013. And I don't want to get too specific, except what I will say is like some of the numbers that you're seeing, for example, on Imperial's Kearl project look extremely high to us. Those look really way out of range, and I'm not sure and I don't have the details of their project to know how that compares. I would just say our current estimates are significantly below those they have announced, and I don't know if that's a delay in the modules in the U.S. or other factors but we're not seeing those kind of numbers. So what I would not do is use those kind of numbers as my modeling tool. Having said that, we're not getting into any great detail and that range you mentioned is a pretty good range to kind of use in your modeling, if you will. But we're not getting very exact until we come out with that number in early 2013.

Operator

Our next question is from Carrie Tait from the Globe and Mail.

Carrie Tait

I'm wondering, you repeated a couple of times that you're not going to grow at any cost. I'm wondering what would give you reason to pause.

Steven W. Williams

I mean, yes, let me just -- I mean, what we're saying is that the value to shareholders and return on capital employed of these projects is very important to us. So where we have an outline plan, which still has all the steps in it, which can get us to a million barrels and beyond, the volume is not the most important piece. What's most important to us is that we have quality facilities that operate at the sorts of standards and levels we want them to and that we lay them down at the right cost. And normally in the projects world, in that triangle, something has to give and we will let the schedule flow through there. So if there were circumstances where we were seeing the quality of the work because of labor, for example, or if we were seeing costs under pressure, then we would work very hard to get those down because it's important we get a good return for our shareholders.

Carrie Tait

And I guess sort of building on that and Mr. George's comments on Kearl where you had said that you're not looking at any of the types of numbers that's coming out of Kearl. What numbers are you looking at when you're saying that? The costs per barrel? What are you pinpointing there?

Richard L. George

Let’s handle that off-line, Carrie. What I would say is the numbers they've announced, the kind of cost per barrel, just I would say just look higher than what we're seeing on Fort Hills.

Carrie Tait

Okay. And my last question is when do you hit the point where growth becomes a concern with respect to Gateway and Keystone XL?

Richard L. George

Yes, so Carrie, when you think about that, you've got to think about the industry is working hard on a number of plans around us. That includes reversal of Line 9 from Ontario into Québec, and it is robbing crudes around in the U.S., in Chicago through space that's available. And the seaway project, which is reversing the lines so we move crudes from cushing down. It is my belief, Carrie, that we actually have a long period of time here, 4, 5 years before it actually gets to be a major concern. There's plenty of plan Bs on the table. And so my own view of this is that is not going to be the bomb. I actually don't see crude getting backed up into Alberta.

Operator

Our next question is from Mark Carium [ph], a private investor.

Unknown Shareholder

More specifically, how will it affect the company if the Keystone XL pipeline is constructed?

Richard L. George

So that's an easy one. So if it is constructed, that will just mean you've got direct access for Alberta crudes into the Gulf of Mexico, and the most efficient and the best way to get crudes down on what is really kind of a bullet line. It goes straight through. So it's about efficiency and effectiveness, and they will replace crudes coming in from West Africa, from the Middle East and from Venezuela. And so from an American and a North American viewpoint, an American security of supply viewpoint, it's great for the U.S. and it's great for Canada.

Unknown Shareholder

Could you elaborate on how it would affect earnings?

Richard L. George

I don't expect a major difference, to be honest with you. I don't see crude getting backed up into Alberta. And crude, as you know, is a worldwide commodity.

Operator

Our next question is from Gil Alexandre from Darphil Associates.

Gil Alexandre

You may want me to take this off-line. You mentioned cash costs for the year 2012 in the mid-30s, could you give any color on cash costs for the first 3 quarters?

Steven W. Williams

I mean, I'll just keep it, again, at a relatively high level. You characterized it well. We, overall, are still targeting and expect to get back to this mid-30s range. We have 2 things currently which are causing that to be higher, both are well understood. The first one is Firebag Stage 3 and 4. Because of the way those plants come on, you have all of their costs -- on the first day, you have all of their costs and none of the production. The production gradually ramps up and then you're able to spread that cost over the barrels you're producing. So over that 18-, 24-month period we've talked about in ramp-up, you see the operating costs come down per barrel. So during 2012, Firebag 3 continues to start up. And then towards the end of the year, you'll see us starting to steam Firebag 4. So that has significant upward pressure on the operating costs just for that period until the volumes are coming on. In addition to that, we also have the lean zone, where we're going through the mine. And literally, the quality of the ore there is about 8% to 10% less than we have in the sweeter spots of the normal part of the mine. So we just have to move that much more volume to get the same volume of bitumen. At current run rates, we expect to work through that lean zone in the latter half of the third quarter. So I would expect us to exit 2012 much nearer to the 35 number we've been talking about.

Operator

Our next question is from Brian Dutton from Crédit Suisse.

Brian C. Dutton - Crédit Suisse AG, Research Division

There seems to be a lot of concern out there on CapEx inflation. I think we're hearing some of it come through in the questions here. So if you look at your growth strategy today and the opportunities lying in front of Suncor at the moment, how are you positioned differently today than back in 2008 when you were last undertaking a big growth initiative?

Richard L. George

Okay, let me take a first cut at that and let Steve jump in on it or Bart will come in as well. So I do actually feel like this cycle is very different from the 2005 to 2008 cycle. First of all, I think the industry in general is showing much more discipline as they go through this. In addition to that, we're not seeing material costs for equipment, pumps, compressors, valves escalating nearly at the rate that we saw in that last cycle. And especially for us, because a lot of the equipment for Voyageur, for example, is already purchased, so -- and our certainty around some of that is actually much higher as we go through that. I think the real challenge as we go forward is really around field productivity and field labor availability. And it will be tight, but we've actually got a better system today around bringing in foreign labor. Our practices are better. Our modulization of equipment and bringing things up there more complete is getting better every single year in every project in the industry. And so generally, what I would say is, to me this does not feel like the same cycle we saw before. And part of it is because we're all so leery of it. Jokingly, Brian, and I think you and I have talked about this, but I’d say, "You know what, usually when the market's worried about something, it's not the right thing to worry about. It's usually something else that gets you." But I'm not saying that we shouldn't be concerned about it, I'm just saying this feels very different on the cycle. And I know Steve wants to add in there.

Steven W. Williams

Yes, I'd just pick 2 things up, Brian. One is, of course, that Total deal helped us a lot because we now have largely within our control, some of what would have been competing projects in the region. So that's helped us a ton. And just to underscore what Rick said there, when we came into that 2007, '08, '09 period, the whole of the world was in significant economic growth. Today, there are very few sectors. So given we get the engineering and a lot of the fabrication done on a global basis, we're not seeing the same inflation in those parts of our business.

Bart W. Demosky

Yes, Brian, it's Bart. The one other thing I'd add to Rick and Steve's comments is that we deliberately post the last downturn and the merger, have worked to significantly change the shape of our balance sheet and our capital flexibility. So as we now launch into our next phase of growth here, we've got a very focused perspective on the discipline around capital management. We want to ratably spend the capital, we've got more than enough flexibility in the balance sheet to withstand almost any foreseeable kind of price environment, if -- and we'll spend that money, if we can get the returns. And we've emphasized that multiple times. So the balance sheet is just in great shape. We've got a much lower cost structure when you look at our operating costs per barrel across the business, far higher cash flow, including significant free cash flow, tons of flexibility, lots of cash on the balance sheet, and of course, it'll come down to us being disciplined around getting the right returns and then we'll spend the money if it's warranted.

Operator

Our next question is from Allen Good from MorningStar.

Allen Good - Morningstar Inc., Research Division

Thanks for the commentary on Syria and Libya. I just wonder, what's the appetite to hang onto those assets over the long term, given the turmoil we've seen in the past year? I know Libya volumes are coming back, but is there any sort of desire to monetize either one of those assets so we get past this rough period?

Richard L. George

Allen, it's Rick here. The answer is no. The assets are not for sale at this time.

Allen Good - Morningstar Inc., Research Division

Okay. And then secondly, I appreciate the commentary long term in sort of Voyageur and the upgrading, but when you look down at the refining, obviously it's been a great year and it's really proving out as far as the value of the integrated model. Is there any interest in additional refining capacity at this point, or are you just sort of looking at this year’s of above average return that'll sort of come back towards the -- come back to the mean as we get past the WTI-Brent spread and some other factors that have really driven performance this year?

Steven W. Williams

We really like the integrated model we have. We think the value we've been able to generate from that has significantly benefited by having the downstream closely integrated, not just connected as well. We actually invest in the refinery so they can take full advantage of the oil sands fee. We're not actively out there looking for downstream capacity at the moment, but we watch every deal that goes on, on this continent. So we look at the assets that have come up for sale. We have a history of buying those at very prudent time when the market is ripe. We keep our eye on those things, but we have no plans.

Allen Good - Morningstar Inc., Research Division

What you're keeping an eye on, is it mainly in your current geographic footprint, or are you looking outside, maybe even down toward the Gulf Coast?

Richard L. George

Yes, Steve, maybe I can jump in and help. So listen, what's really helped our model a lot is having these inland refineries. And so once you get to the Gulf Coast then you're kind of in a different crude environment, and it's a long ways from what this integrated model that both you and Steve have talked about. And so in the face of that, what you've got to remember is in North America, you're not going to see gasoline demand increase from here. If anything, it probably decreases with change in car standards, electric vehicles, other things that are going to come along to change that. Now diesel use might go up, diesel jet. So you know what, that's an industry where you're not going to see a lot of growth. So if you had some asset, it would really have to fit the integration strategy, and I think Steve carried it really quite well about listen, we look at it all but it's not something that we'd necessarily jump out and do.

Operator

Our next question is from Mike Dunn from FirstEnergy Capital.

Michael P. Dunn - FirstEnergy Capital Corp., Research Division

A couple of questions, guys. I guess first, on your Sarnia refinery, is it still the case that you're not getting a deal sort of segmented crude blends that you had been, I guess, before 2011? And second question would be if you can maybe just talk to what you have and what your drilling plans are in your Montney and Cardium areas?

Steven W. Williams

Sorry, I'm not quite sure what the question is you're asking there about the segmented crude.

Michael P. Dunn - FirstEnergy Capital Corp., Research Division

The way I was understanding it, there were some pipeline issues and so you -- I was thinking that you weren't maybe getting all your different sour blends isolated.

Steven W. Williams

Oh, no. No, we're able -- we have good pipeline connections into Sarnia. We've been able to take full advantage by getting the blends right at the oil sands and to run that refinery. Of course we have been talking about, and Rick mentioned, the line between Sarnia and then into Québec, which we call Line 9 and there's the ability -- we're looking at the ability to reverse that line so we could start to take the same sort of advantage with Montréal. But into Sarnia, we've had no issues.

Richard L. George

On the E&P side, so basically we have stopped drilling for gas. I mean, that's kind of fundamentally it, except for a couple of cases where we're trying to prove out a resource up in the B.C. area. We do have one project that's underway, where we're spending a couple of hundred million dollars on an oil play where the rates of return look extremely high to us. It's been very successful. You'll see that continue here over the next 18 months. Again, this stuff is relatively small on the overall scale of Suncor.

Operator

Our next question is from Kam Sandhar from Peters & Co.

Kam S. Sandhar - Peters & Co. Limited, Research Division

A quick question on CapEx and how it fits in relation to dividends and share buybacks going forward. So obviously, you guys have completed the share buyback you've done now. Given that you are quite free cash flow positive going into 2012 here, how should we be thinking about potentially looking at another share buyback program and how your dividend growth fit into that, too?

Bart W. Demosky

Yes, good question, Kam. I'd reiterate the messages I passed along earlier, and maybe I'll try and add a little more here. The first call on our cash is to really run the operations well on our operationally excellent way. And the drive higher in reliability that you've seen in our assets, and I'll use the 2 R&M assets that we upgraded their capacities this quarter. That's an example of where operational excellence is continuing to drive our production levels and reliability higher. That's first call. Of course, we want to maintain the balance sheet and we like the metrics that we have now, Kam. So if we did see prices come off, we'd definitely want to maintain where we're at from a balance sheet flexibility point of view. But if the free cash continues, there's no doubt that we are going to have excess cash available to put to work. So we'll look at the highest return kind of opportunities for our shareholders. We are of the view that we very much want to have a very stable dividend that we will grow through time as with production, likely with the annual increases go forward. That is our plan, subject to board approval, of course. And then if we have excess cash beyond that, the last normal course issuer bid we just executed was very successful, and we would look to do more of those if the value opportunity is there.

Kam S. Sandhar - Peters & Co. Limited, Research Division

Okay. And then just a second question on CapEx, and how you guys decide on looking at future projects. Can you just give me an idea of what sort of thresholds you're using in terms of rate of return on new projects?

Bart W. Demosky

Well it does vary somewhat, but if you look at our approaches to deliver a return, obviously in excess of cost of capital. Rick and Steve are right. We do take a very long perspective when we look at adding assets and how they'll match up from a blended perspective from the integrated strategy and portfolio approach. Generally, we're targeting returns somewhere north of 15%, but it does depend on the specific project and how it fits in with the portfolio.

Operator

[Operator Instructions] We have a follow-up question from George Toriola from UBS.

George Toriola - UBS Investment Bank, Research Division

Just 2 questions. The first is on natural gas. And Rick, you just talked about not drilling for natural gas. So could you talk about how you look at natural gas, particularly with the growing SAGD volumes and what your thoughts are on the volumes going forward. And then the second is very hypothetical, but again, in the light of strong cash flows here, I was just wondering if there was something you'd like to go out and acquire, what would that look like? If you could just talk about that.

Steven W. Williams

Why don’t I -- I'll pick the first one up there, George. On natural gas, historically, again, we like the integrated model where we've had a gas business. As you say, we are a big consumer particularly around our in-situ business. We've never had a fixed volume in mind or a fixed degree of integration. We've always kept a view on the market. As we went through the acquisition or the merger with Petro-Canada, we became long on gas and so we had the opportunity to upgrade the quality of that portfolio. So we sold the lower quality, higher cost stuff down. And it moved us much more towards a balanced position from the long position we were in. We were happy because of our view of the gas market going forward, which is very difficult to predict. But overall, it does appear as though there is some significant length in the market on this continent now. It does appear as though prices almost certainly won't stay down at the levels they're at, but we can see them getting back into that sort of $5, $6 an mcf range. So we feel much less pressured to have our own business and fixed supply of gas given that volumes and prices are significantly different. So we keep looking at that market. We keep a view on that. But we have no desire to match exactly our gas consumption and production.

Richard L. George

That was a very good answer. And George, I guess on the second one, when you think about Suncor, so we have a company here that's going to grow internally with the opportunities we have ahead of us at that 8% to 10% a year kind of range over the next decade. Going around and chasing acquisitions just isn't high on our current list. Listen, I'm actually retiring in May. I don't want to tie Steve and the future management's hands. I would just say our plate’s very full with the opportunities. You can tell from what Bart and Steve have said that our priorities are really around maintaining the balance sheet so that we can work through these projects; if the return on capital look really good, on increasing dividends; and if we have excess cash, buying shares back. So if you think about Suncor today, we've got a growth model that most of the industry cannot match, together with a cash flow generation machine that can support that but then also take advantage of how we give money back to our shareholders. And so that's kind of the current thought process that we have here. What I would say is you can never say never. Companies change and they have different goals, but it's kind of not on our radar screen at the moment.

Operator

We have no further questions at this time. I would now like to return the meeting over to Mr. Douglas.

Steve Douglas

Well, thank you very much, Thomas, and thanks to all the participants. Just before we close out, a reminder that the IR team and controllers will be available throughout the day to answer detailed questions. And if you'd like to book a call with us, you can call (403) 296-6639, or send an e-mail to invest@suncor.com. With that, I'll thank everyone and we'll see you next time. Thank you.

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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