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Suncor Energy (NYSE:SU)

Q1 2012 Earnings Call

May 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

Brian C. Dutton - Crédit Suisse AG, Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

George Toriola - UBS Investment Bank, Research Division

Mark Polak - Scotiabank Global Banking and Market, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Gil Alexandre

David McColl - Morningstar Inc., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Suncor First Quarter 2012 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

Well, thank you, Matt, and welcome, everyone. With me here in the room in Calgary we have Rick George, our outgoing CEO; Steve Williams, our President and incoming CEO; Bart Demosky, our Chief Financial Officer; and we also have Jolienne Guillemaud, our Controller; and Greg Freidin, our Assistant Controller, along with Jenna van Steenbergen, our IR Analyst. Just before we get started, I will advise you of the following.

You should note that today's comments contain forward-looking information. Actual results may differ materially from expected results because of various risk factors and assumptions described in our Q1 earnings release. And both of these are available on SEDAR and EDGAR and our website, suncor.com.

Certain financial measures referred to in the comments are not prescribed by Canadian generally accepted accounting principles, and for a description of these, please see also our first quarter earnings release. With that, I will hand over to Rick George for his comments.

Richard L. George

Thanks, Steve, and good morning, everyone. As you're all aware, this is my final quarterly call with Suncor. It was -- we announced last December that I'd officially be retiring at today's AGM, and that is going to happen. Steve Williams will become Suncor's new CEO. Since that announcement, we've worked hard on a smooth transition, and I think it's been very successful. Steve and his team are already driving tremendous results. In just a few minutes, I'll hand it over to Steve and to Bart to talk about the strong start to 2012.

Before I do that, I just thought I'd take just a couple of minutes to have a look at where Suncor finds itself as we begin this next chapter here. When we took Suncor public 20 years ago, it was in 1992, we had a little over 70,000 barrels a day of oil production and a market cap of about $1 billion. Today, of course, we're over 550,000 barrels and have a market cap of just over $50 billion. It's a track record that obviously I'm very proud of. And when I thought about today's call, I thought, listen, even though you got to kind of sit through this, I thought I would give kind of my very short list of what I'm the most proud of in terms of from a shareholder's perspective.

So the 3 things are, first of all, over that 20-year period since becoming public in 1992, we've actually averaged a compounded annual return in excess of 20%, that is per year, something I'm very proud of over that time period. The fact is that if you'd invested $100 in Suncor in 1992, that today would be valued at over $4,500 if you had reinvested all your dividends. Over that same period of time, Suncor has paid out over $3.5 billion in dividends, and, of course, we'll get to that later in this call about what happened yesterday at the board meeting.

Now Steve Williams has been instrumental in driving Suncor's improved reliability through our operational excess management system, a program which he spearheaded. Thanks to the engaged employees, a strong operational reliability, prudent cash management and a superb set of assets, Suncor has been able to take advantage of high oil prices to fortify our balance sheet and deliver what I see as very strong free cash flow, which will be continuing here for the years ahead.

Looking forward, Suncor is blessed with great people, a great resource base and a balance sheet to deliver tremendous return to shareholders for many years to come. Even as I turn over the reins, I'm excited about what's in store for the future for this great company. I know that Steve and his entire ELT, Executive Leadership Team, will continue to drive this company forward on a course that maximizes long-term shareholder value.

Before I pass it onto Steve, I'd just like to thank all of my colleagues at Suncor, our Board of Directors, our investors, many of you who have stuck with me over the 20-year period, many of our other stakeholders who have contributed greatly to the Suncor success story. It's been an incredible ride and I'm genuinely -- believe that the best is yet to come. So we're off to a great start for 2012, and I'm going to pass it over to Steve who will tell you all about that. Thank you very much.

Steven W. Williams

Thanks, Rick, and before I begin, I should take a moment to acknowledge your leadership these past years. You've been the driving force behind Suncor's transformation from a small oil sands pioneer into Canada's largest energy company. I'm both honored and excited as we prepare to write the next chapter in the Suncor story. With all we've accomplished in the past years, Suncor is in a great position now to move forward with a high-performing base business, a strong balance sheet and a disciplined and profitable growth strategy. The strength of our integrated business model shone through once again this quarter, as we were able to put up strong results despite significant discounts on Canadian crudes, an unplanned outage in our oil sands plant and relatively soft downstream demand.

Bart will get into the financial details a bit later, but I would like to take a minute just to hit a few of the headlines. We had record net earnings of almost $1.5 billion, with operating earnings just slightly lower at $1.3 billion; another very strong quarter for cash flow, over $2.4 billion; continued improvements to our balance sheet metrics; and an 18% increase to our dividend as part of our commitment to steadily increase the cash we return to shareholders. All this has been made possible through a strong business model operating with improving reliability.

So let's take a look at our operations in a bit of detail. I want to start with our safety and environmental performance because that really is the foundation of our operational excellence efforts. Now keep in mind that 2011 was a very good year for Suncor on both a safety and environmental front, but we've continued to improve in 2012 and make progress on what we call our journey to 0 incidents. Total injuries across the company were down 13% in Q1 versus 2011, and high-risk incidents, which are a leading indicator of the safety issues, are trending down by over 13% versus 2011.

Likewise, on the environmental front, we managed to continue to reduce our incidents of regulatory noncompliance, with quarter one trending down by over 26% versus 2011. Our continued focus on operational excellence contributed to record oil sands production in both January and February and strong operational and financial results across our entire business. We did experience an unplanned outage to one of the upgraders in March, which was certainly disappointing. But it is important to point out that we were able to identify the issue, implement a controlled shutdown, execute the repairs and return to production in a very safe and disciplined manner. And be assured that the learnings from this incident will assist us as we move forward on our operational excellence journey.

Despite the nearly 5-week upgrader outage, it's fair to say that our Oil Sands business enjoyed a very strong quarter. As I mentioned, we had record production in January and February, thanks in part to the steady growth of our Firebag in-situ production. During the quarter, we took full advantage of the integrated facilities at Firebag complex, with productive infill wells in stages 1 and 2 combined with the ramp-up of stage 3. Firebag exited the quarter at close to 100,000 barrels a day of bitumen production. Continued steady production at MacKay River put us on track to meet our year-end and in-situ production goal of somewhere between 140,000 and 150,000 barrels a day. So despite the upgrader outage, we were able to maintain our cash cost for the quarter within our guidance range of $37 to $40 a barrel, and we have maintained the annual guidance ranges for both cash cost and production unchanged.

During the outage to the U2 complex, we were able not only to complete the repairs to the fractionating unit, but also bring forward other planned maintenance, as well as complete additional prestripping in the mine. So that positions us well to meet our production and cost forecasts going forward.

At Syncrude, production fell just shy of budget due to continued operational challenges with a coker unit. Repairs were completed and the unit returned to operations in April.

Turning to our Oil Sands growth projects. The North Steepbank mine extension continued to ramp up towards its expected capacity of 125,000 barrels a day of bitumen, and we began to see its positive impact on cash costs. Firebag 3 production grew in line with expectations and is on schedule to hit full rates by the middle of next year. At the same time, Firebag 4 is moving forward according to plan and is on track to begin steaming in the fourth quarter of this year and produce first oil in the first quarter of next year.

During the quarter, we continued to make progress on our joint venture projects, Fort Hills and Joslyn mines and the Voyageur upgrader. As you've heard us say many times, our focus remains on cost and quality, so we'll take whatever time is required to ensure we have high-quality projects that deliver strong returns on investments.

At this point, we expect to bring these projects forward for sanctioning in the middle of next year. One of the key strengths of the Suncor model is our integration. With the unprecedented crude differentials in quarter one, our integrated refining operations again proved to be extremely valuable. While our oil sands crude sold at a discount of almost $12 a barrel to WTI, our inland refineries benefited from the lower crude prices and recaptured the majority of that spread in the sale of finished products at global prices.

Our Refining and Marketing group took full advantage of favorable feedstock costs, strong refining cracks and reliable operations to overcome softening consumer demand and produce exceptional financial results, including almost $0.75 billion in cash flow.

Moving on to E&P, we were able to take full advantage of Brent crude prices that averaged over $118 a barrel during the quarter to generate very strong results. Our production exceeded expectations, thanks to reliable offshore operations in Canada and the North Sea combined with all major fields in Libya returning to operations.

Our Natural Gas operations were faced with prices that dipped below $2 an MCF during the quarter, and at these prices, we were shutting in a small amount of production. However, given that our companywide production is over 90% oil and that we're now a net consumer of natural gas, the low current prices are actually a net positive for Suncor.

So to sum up, I think it's fair to say that we're off to a strong start here in 2012 and well positioned to meet or exceed our goals for the year. I'll pass it along to our CFO, Bart Demosky, to go into the key financial details.

Bart W. Demosky

Great. Thank you, Steve, and good morning, everyone. First off, I'd just like to begin by acknowledging Rick George as he passes along the baton and embarks on a new chapter in his life. For me, it's been a genuine honor to work alongside you, Rick, these past few years, and your leadership and mentoring have been invaluable, and not only for me but I think the company, and I'm extremely proud of what we've accomplished together. I'm also very much looking forward to the future, and as Rick and Steve have both mentioned, we've certainly begun 2012 on a positive note. We were able to take advantage of a strong crude pricing environment and refining margins to generate very strong financial results, with operating earnings coming in at over $1.3 billion, cash flow of over $2.4 billion and return on capital employed of 14.8%, which is our highest return since the Petro-Canada transaction, and I think is evidence of just how well the strategy is working.

With another solid quarter in the books, our financial metrics continue to look very, very good, with net debt now down to just under $6 billion, debt-to-cash flow ratio at a ratio of 0.6:1 and almost $4.6 billion of cash sitting on the balance sheet. Clearly, I think the balance sheet is in excellent shape, and therefore, we're in a very, very good position to continue to increase the amount of cash that we return to shareholders.

To that end, in February, we announced a $1 billion extension to our normal course issuer bid, and that brings the total of that bid up to $1.5 billion. In addition to the $500 million that we purchased last year, we're now up to just over $300 million purchased in just over the past 2 months and canceling almost 10 million more of our common shares. As I've mentioned before, we are value buyers and we believe that opportunistic share buybacks are certainly an excellent investment that can add genuine shareholder value.

Now of course, our share buybacks are an event, and -- whereas dividends are a long-term commitment to our shareholders. And on that front, I'm very pleased that the Suncor board yesterday approved an 18% increase to our quarterly dividend. And that brings our 5-year compound annual growth rate for our dividend up to 21%, which is one of the best in the business.

Today, I can tell you that given the clear success of Suncor's integrated model and the great strides we've made in increasing our operational reliability, we are very confident that we can achieve our goal of continuing to increase the value we return to shareholders. With the latest dividend increase, I hope everyone on the line will agree that not only have we taken a significant step towards that goal, but we have also reinforced our belief that Suncor is in a very unique position. And that's one to offer shareholders an unmatched combination of both growth and income. The dividend increase and the share buyback program are a testament, I think, to our confidence in the long-term strength of our company and in our ability to deliver sustained and profitable growth, while steadily increasing total shareholder returns. And we certainly think that Suncor has an opportunity to carve out a unique position in terms of total shareholder return.

That said, we don't ever want to get ahead of ourselves, and I want to stress that we will continue to take a very disciplined approach to managing our balance sheet and to allocating our capital. And on that end, our priorities remain unchanged, with the first being to fund an operationally excellent base business and drive improved return on capital employed. To do that, we plan on keeping a relentless focus on costs and continuous improvement in our operations.

Second priority is we want to continue to carefully manage the balance sheet to maintain our conservative debt ratios, ample cash on hand and sufficient liquidity to allow us to spend right through the cycle.

Finally, we want to invest in a disciplined way that maximizes return for shareholders. And as Steve mentioned earlier, the focus will be on cost and quality in order to lay down capital efficiently. We're on track to meet our planned capital expenditures for this year of $7.5 billion and we fully expect to fund all of those costs from internal cash flows. And assuming our growth projects move forward according to plan, our capital spending will likely move up somewhat in the next couple of years, but we still anticipate that we'll be in a position to largely fund the program with internal cash flow. And as we move out beyond 2014, all other things being equal, we would certainly expect to generate a considerable amount of free cash flow.

Now we have released updated guidance for 2012 today, and I just want to highlight a couple of things for those on the line. The first thing to note is that we have not adjusted our forecast for oil sands production or our cash costs, even though we experienced an unplanned outage last month. We've been very pleased with our trend on reliability and costs and we'll certainly be striving to meet our original target ranges for both production and cash costs. We have made a slight adjustment to the sweet and sour production ratios at oil sands, and that really just reflects the impact of the outage that we mentioned. We have reduced the realized price on the oil sands basket of goods as a result of the ongoing discounting of Canadian crudes. But again, and I'll reiterate what Steve said, it's very important that everyone take note that Suncor is effectively hedged against these crude discounts because we're able to recapture the majority of the spreads at our inland refining operations.

And finally, for our outlook, we've increased our WTI crude forecast from $90 to $95 per barrel and reduced our natural gas forecast from 409 a CJ down to 243. So in summary, we absolutely remain on track to meet our goals for 2012. Our strategy is working very well in this volatile environment and we're looking forward with confidence.

And as the CFO of Suncor, I can tell you that I will continue to focus on capital discipline as the cornerstone of our continued success. So with that, I'll pass it back over to Steve Douglas. Thank you.

Steve Douglas

Thank you, Bart, and thanks to Rick and Steve as well. Just, Bart mentioned, he referenced the updated guidance, the complete guidance is available on the website. We did include the LIFO/FIFO adjustment in this release. But just in case you missed it, it was an after-tax positive impact of $7 million in Q1. Also, the stock-based compensation, which was an after-tax cost of $124 million in Q1. And finally, exchange impact, which was a positive impact of $128 million in Q1. If you have further detailed questions, we'll be available throughout the day, but I'm going to open the lines now for the higher-level questions for Rick, Steve and Bart. Matt, if you'd like to open the lines to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Brian Dutton from Crédit Suisse.

Brian C. Dutton - Crédit Suisse AG, Research Division

So Rick, after being warned all these years not to ask you a model question on the call, it's kind of really tempting to ask you one here because this is your last call. So take your pick, either to answer a question on the depreciation rate on truck tires at oil sands. Or maybe instead, if you look back and -- to 2009, you received a lot of flak from investors on the Petro-Canada merger. Maybe you could -- well, what would you say to those critics now? And how do you think that deal has positioned Suncor for the future?

Richard L. George

Listen, first of all, on the Petro-Canada merger, it really one that I think has paid off huge dividends for this company. The integration approach of this company today, where we feed oil sands into Edmonton into Sarnia, eventually we should be able to get that into Montréal and today move product to Denver, really goes to what Steve was talking about earlier in terms of this integrated model, where despite where you have big differentials on light heavy or sweet sour, you're going to capture most of that value going through that chain. And unlike other integrated companies around the world, this is actually physically integrated as opposed to financially integrated. And I think it's a huge advantage. I think it also gave us a great chance to cut corporate overhead. We went from -- we actually cut on an annualized basis between -- after the merger, $800 million of expenses out of the system. We also cut down capital spending as we combined Fort Hills, Voyageur and then I mentioned with Total, the Joslyn inclusion in that. And so if you think about it, reduced overhead, it's reduced capital spending, consolidation of the industry, and all of that has fit extremely well. Mergers are never easy. I would say it's the largest one done in Canada, and I feel very proud of what we've done. What I will say, and I don't want to lay too much of a burden on the ELT here, but it's not over. I mean, there's lots of efficiencies to be gained as we go forward here, and there's still lots of work to do. But I think if you look at it, it's been kind of an amazing merger. I often tease Steve and the new team here that the great advantage they have is they actually have cash on the balance sheet. So the 20 years that I spent at the helm of this thing, I think it's only the last 18 months we actually had cash on the balance sheet. And it is that difficult when you're growing a company. This company today is very different. It's a very solid company, the cash flows are amazing and the path forward quite clear. I think a lot of the risk is taken out of it and the need to take big bets, we took in a number of cases through the last 20 years, with the merger of the truck and shovel, initially, the going of Project Millennium. I think those kind of big bet era is kind of over. So, Brian, I hope that kind of sums up where I am.

Operator

The next question is from Arjun Murti from Goldman Sachs.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Had a question on the balance sheet and the cash generation. It's obviously been a very strong period here of cash flows, and that looks like it'll continue. You boosted the dividend. You're starting to buy back some stock. Couple of questions around that. I think you mentioned that you are "value buyers of the stock." Wondering if you can at least conceptually put any parameters around that. Is it some discount to asset value or cash flow valuation or just periods where the stock sells off? And then secondly, as you think about the balance sheet going forward, is the goal to run it at what I might call ultra-strong levels going forward? You are giving more cash back to shareholders, but is the goal here to have kind of an ultra-strong balance sheet to ensure you can withstand the occasional down cycles like we had in '08?

Steven W. Williams

Arjun, why don't I take the first part and then I'll get a bit of help from Bart as we get into some detail. So yes, I mean, the priorities are very clear. In terms of what we want to do with that cash, it is about focusing hard first on the sustaining and growth CapEx requirements that we have. Then -- and we've actually used the words "to manage debt conservatively," particularly because of 2 things at the moment. One, the volatility of crude prices and our ability to be able to forecast what earnings will be. But secondly, because we're making some very big decisions as we go into this capital program next year. So to have firepower on the balance sheet is a good time to have it. Our plan is that we keep enough flexibility on there so that we can ride the cycle, the commodity cycle. We never want to get in a position where once we've made a decision to go, where for financial reasons, we have to stop. And then I hope what you've seen is we've been willing to demonstrate that we are committed to returning free cash to shareholders. So you've seen it with the $1.5 billion of share buybacks we've announced and the increase in dividend, with some optimistic words around the dividend that we continue to believe we will have increases as we go forward. So those are the main strategic consideration. I think Bart may just add to them.

Bart W. Demosky

Arjun, great questions, and we have said, and I think I reiterated it here today, that we're value buyers when we look to repurchase stock. I'm not going to give you how we define that, Arjun, and I think you're a pretty good judge of that as well. But what I would say is this, that our approach will be one that's disciplined. I think one of the challenges companies find themselves in when they start to buy back stock is that they chase it up. We're looking at this as an investment on behalf of our investors, and so we will stay disciplined on that front. And to the degree that we then have significantly more free cash flow, as Steve said, he's outlined the priorities for us very well. The balance sheet itself, I think, today, obviously, is in the best shape it's ever been. And for us, it's what will underpin our ability to not only deliver high growth for shareholders going forward but a much higher return of cash as well. And so, yes, I would say that we want to sustain very strong balance sheet metrics as we move forward from here.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

That's great. Maybe one quick follow-up. We're very familiar with your kind of robust project pipeline. You have a lot of projects in the oil sands, you're pursuing, I guess, Steve, you will be the new CEO here. Can we assume that will remain your overwhelming focus? You did buy Petro-Canada, which gives you a little bit more diversified options around the world. Will Suncor look to pursue other projects that could come up? Or is the focus going to be overwhelmingly still the oil sands?

Steven W. Williams

No. I think you can continue to look forward that the core of Suncor's growth program going forward is around its oil sands. That doesn't mean, as you say, we don't have other opportunities. If you look particularly in the North Sea and the East Coast of Canada, we have very good reservoirs there, and there are step-out opportunities around those reservoirs. So you will see some capital investment in that part of E&P as well. And we keep open minded to other opportunities, but the core will be in oil sands. We don't preclude, as production starts to come up, the integration model has been very strong for us, and we will continue to look at opportunities to reinforce that. So whilst at the moment, we're able to hedge effectively the majority of our oil sands production today against these volatile differentials, we do effectively have a spare refinery in Montréal where we could further integrate physically that refinery. So we'll keep that on the radar screen as we go forward as well.

Operator

The next question is from George Toriola from UBS.

George Toriola - UBS Investment Bank, Research Division

Three questions here. The first is on the U2 upgrader. Could you go through sort of what you found and your confidence around things like this not reoccurring in the future? Or sort of how we'd look at this and these types of outages that aren't planned? That's the first thing. Second thing would be, if you could quantify the contribution around the Millennium Naphtha Unit, and especially in this market, how you see that contributing to cash flow in the second half of the year. And then lastly just around as you progress through your projects in your Oil Sands JV, what you're seeing on the cost front and if there's anything you can shed the light on, on that front?

Steven W. Williams

Yes, let me pick those up, George. And of course, I won't be commenting on forward cash flows, but I'll give you a feel for the event. So Unit 2, disappointing. What I have said and will continue to say is we are focused on continuous improvement. All of the underlying trends, when we look at mining, extraction and upgrading, are moving in the right direction. It won't be a journey without any events whatsoever. We factor in those events normally in terms of service factor assumptions when we give guidance, and the good news here is on several fronts. Firstly, this wasn't a loss of containment. It wasn't a fire. Our technical people picked up a pressure drop in the bottom of the fractionator. We addressed it. We shut down safely. We fixed -- there were no mechanical repairs. It was just a coke buildup in the bottom of the fractionator tower. We took the coke back out. We -- and have returned the plant to full service in the time we expected. And all of that is within guidance. So we haven't reguided on volumes or cost. In terms of the -- so some good news in there. But overall, I'm disappointed, and we've been working hard on getting that continuous improvement continuing in all the plants. In terms of the issue itself, we fully understand the issue. We made some modifications when the plant was down, which will help us avoid it. And we'll fully execute those modifications when we take the plant down for its next full turnaround in the coming years. So we understand it, we fixed it and have a degree of confidence going forward. These plants will not have 100% service factor, but the overall reliability trend will continue, and this is a long journey. It doesn't take weeks and months. It takes months and years. So all the trends are in the right direction. Millennium Naphtha Unit, I won't talk specifically about economics. The plan for the plant is the hydrotreater itself will come up during the second quarter and will use the hydrogen from the existing plants we have, and hydrogen plant itself will follow shortly after in the third quarter. We did start it up in the first quarter. There were some relatively minor design issues and we've gone back in and we're fixing those. We're fixing those as we speak. So we'll see that plant come on. And of course, generally, what it does is it gives us more flexibility around the quality control of our products. I think your third question was on costs, and 2 comments I would make. The first one on operating costs. We've talked about targeting this mid-30s range. And I think if you look at the first quarter numbers, what it's telling you is actually in January and February at the very high levels of operation and reliability, we are getting -- we're starting to get down into the low to mid-30s. And then with the shutdown, that brought the average back up, but brought into the guidance range. So we're seeing some very encouraging things now as we're starting to bring these units up to their full throughputs. The other cost comment I would make is just a brief one around major projects. Clearly, we're watching very carefully what the inflationary pressures look like there. We're not seeing the same inflationary pressures we were seeing in 2008, but that doesn't mean there aren't some there, particularly around labor. Working hard with government to make sure we can get the right levels of labor into the region. But overall, as we speak, we're not seeing the same inflationary pressures that we saw in the last cycle.

George Toriola - UBS Investment Bank, Research Division

Maybe just a follow-up question, Steve. Just when you talk about service factors on your Oil Sands business around the upgraders, what are you thinking? And how are you -- how do we quantify that? What are you using for your guidance right now?

Steven W. Williams

I mean, it's such a -- there's so many units there. Again, I'll just talk generally. Normally, we're assuming up in the 90s, and that's where we've seen these plants go. So if we look at our new plants, for example, Firebag, you get them up to that over the first few years of operation, and that's what we're starting to see now. So we target up in the 90s, and the benchmarks we use are world-class operations.

Operator

Your next question is from Mark Polak from Scotiabank.

Mark Polak - Scotiabank Global Banking and Market, Research Division

Actually, all my questions have been answered.

Operator

Your next question is from Paul Cheng from Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

Steve and Bart, couple of question. On the dividend and buyback, on the longer-term basis, is that a target ratio, what you expect as a payout to the shareholder from cash flows, 20%, 30%, 40%? Or is there any target ratio that you have in mind? And also that in terms of the split between the dividend and the buyback?

Bart W. Demosky

Paul, it's Bart here. I'll take that first question. So look, we're -- I think as Steve said earlier on the call, what we're focused on right now is, first and foremost, investing in very, very reliable operations, and that's what drives the higher cash flows for this company, along with our integrated assets. So we're in a position that is probably never better than it's been before to start to deliver more and more cash back. And you've seen that in 2 forms for us. First is buybacks, and as I've said, we'll continue to do that so long as we think there's very, very good value there. But we are looking to increase the dividend quite steadily. We don't have a specific target that we're guiding to, but let me give you the principles. So first is, we want the dividends to be meaningful. The second is we want them to be very competitive. And the third is that they absolutely need to be sustainable. So if you look forward at the cash flow that this company can generate and the opportunities we're going to have, for us, sticking to those principles, we expect to be very competitive on that front. And I'm sure you can look at where our peers are at and take some guidance from that. The management team here and the board are all very committed to this path forward to raise our return of cash flow and to drive returns for shareholders much higher over the long term. Sorry, Paul, what was the second question again?

Paul Y. Cheng - Barclays Capital, Research Division

Before I get into the second question, Bart, on the competitiveness on the dividend, who are you using as your competitor? Are you using the global major oil companies? Or are you using the Canadian oil company as the base in terms of the comparison?

Bart W. Demosky

Yes. So Paul, we look at a group of companies that are of similar size, but I would just point back to my earlier comment that returns are only -- are made up of 2 parts. First is, that we're looking to, at least, is our ability to grow. And I think when you look at companies of similar size to us, there's arguably no one out there who will grow at the pace we will. And in combination with that is a greater return of cash to shareholders, but we will target ourselves more in line with companies of our size. So that's kind of how we're looking at it.

Paul Y. Cheng - Barclays Capital, Research Division

I see. Okay. The second question, I think this is for Steve. Steve, if we're looking at over the last, say, 10 years or so, I think that the investment community started getting a feeling on the upgrader operation because of the complexity and also the harsh environment. Normally, that is pretty difficult there to keep them much more than, say, 90% uptime. And when upgrader are down, that the entire batch of the operation there will be down. So from those standpoint, that when you're looking at, I just wondering that whether you guys agree with that, and if you do, how that may change the way how you're looking at the future mining operation. Whether you think that the upgrader, maybe that you want to change it to satisfy [ph] maybe of the economy of scale and go with a multitrain of smaller units. So each one, if they are down, is not going to have as big impact. Or maybe that ultimately that you'll totally eliminate the upgrader and just boost up your investment in the refiner and have the refiner there to take care on light heavy defense [ph]. So just want to see that also how you guys view on the investment or the design on the mining operation going forward.

Steven W. Williams

Okay, Paul, well, yes, let me just give you a few comments. There are no reasons why we can't improve the reliability of these upgrader units. And we are seeing, from the efforts we're making, very targeted efforts, benchmarked to the best in the world, we're still seeing continuous improvement. But that doesn't mean it will hit 100%. It will get -- our belief is it will get up into the mid-90s. We're confident of that because, of course, we have an older upgrader, Unit 1, which operates up in those ranges regularly. And we've seen Unit 2, as we've started to learn lessons into it, start to come up and approach those levels. So I'm confident we get there, the focus on continuous improvement in the midterm. Of course, the points you make are a critical component of Suncor's strategy. We've always said, and I know Rick and myself have been saying for a number of years, it's about multiple parallel trains. So having one upgrader, then a second upgrader, and we're talking about a possibility of a third Upgrader is very important in terms of minimizing the consequence of any particular impact. The other key component of our strategy is, and you've seen it with Firebag and Mackay River, that bitumen is fungible. So it used to be that a mine had to be connected into an upgrader because of its minerals. Now we have the flexibility already within our assets to be able to export bitumen, and that's the power of having in situ. And of course, on the 2 mines we're looking at going forward, Joslyn and Fort Hills, we're looking at putting a paraffinic extraction in there, which again gives us the flexibility to export that bitumen or put it to an upgrader. So going forward, that type of flexibility, with reasonable assumptions about upgrader service factors, is all part of the plan.

Operator

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

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Maybe just on the leadership side. Steve, as you're now the CEO and President and so on, what are the plans, then, for a Chief Operating Officer?

Steven W. Williams

No plans in the short term. So the full executive leadership team is announced, Greg, and is in place. Rick and myself worked hard to get those in place soon after the announcement. So the full team has been in place since January 1 of this year. So no plans to have a COO.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Okay, no problem. With Libya, the rates are up there. What is your expectation? Or how much higher - would -- in Libya could you get to 50,000, 60,000 barrels a day? I know in the past you were constrained.

Steven W. Williams

In our minds, we have a belief that we could get up towards 60,000.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Okay, great. And maybe just the last question, it was good to see the field rates with Firebag and Mackay and so on. What is your targeted SOR then at Firebag? And I know with Stage 3 and Stage 4 still coming up, the SOR is going to remain elevated, but what would be your expectation? Like 3x, 3.5x? And when would you get there?

Steven W. Williams

I mean, a few comments I'd like to make actually around Firebag. First of all, I want to start to guide around thinking about it as an interconnected plant. So we've historically thought about Stages 1 and 2 and now 3. It becomes more important. We took the decision, as we were constructing Stages 3 and 4, to completely cross-connect the units. And if you think of it in its simplest form, you have the steam-raising capability, you have the underground piece and then you have the returns, the water and oil separation. And it becomes really important when you integrate them because you get all sorts of cross-connection benefits, which is what we're seeing now. So the improvement in rates you've seen, and we exited the quarter at nearly 100 on Firebag, and that continues to move very positively, partly because of those cross-connections. So we were -- we brought the -- some in-fill wells, as you know, 7 of them on Stages 1 and 2. But in order to be able to do that, we used some of the steam-generating capability of 3. We also used some of the oil-water separation capability. So we have to start thinking about them as a complex. We're still aiming to see Firebag come down into the low 3s, but it's very distorted for the next couple of years because, of course, when you bring a stage on, you put steam in and get no returns to start with. And then depending on your ramp-up, you start to get down to lower numbers. You can see that happening now, and we're ahead of our expectations at this stage in terms of seeing those steam oil ratios come down. But as I mentioned earlier, Stage 4 we start to steam in the fourth quarter, and then we've got 24 months of ramping up Stage 4. So SORs, you have to look at an average across this complex. In the long run, we're still targeting down in the low 3s, and in fact, we've seen lower levels than that on Mackay River. So we know how to do it. It's just a question of getting there.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Okay. And the last question from me is just, I know it's early, but 2013 CapEx, any idea where that range could fall?

Bart W. Demosky

Greg, look, we've outlined 2012. We're still working through the process of towards sanction of our other projects, and we'll come out later in the year with specific targets that'll give you better guidance at that time.

Operator

Your next question is from Gil Alexandre from Darphil Associates.

Gil Alexandre

I was just wondering, for the fourth quarter of this year, do you have a feel where your operating costs will be? Will they be in the low 30s?

Steven W. Williams

Gil, I think you were asking about the fourth quarter operating costs. I mean, we have guided. We still expect to hit our guidance for this year. 35 is the target we've disclosed, is our real target. I expect us to be at or below that number for the fourth quarter.

Gil Alexandre

And as you look at future years, could it be lower than 35 or basically you're saying [ph]...

Steven W. Williams

When I look out further, I mean, I've -- in terms of guidance, we've committed to the 30 -- to the mid-30s, and we'll eat inflation through that piece. I still target the plan more aggressively than that. But getting down into the top 20s will be a stretch, but possible.

Operator

[Operator Instructions] The next question is from David McColl from Morningstar.

David McColl - Morningstar Inc., Research Division

I have 3 quick questions for you. Accepting the integrated nature of Firebag, I'm wondering if you can provide any details on the contribution of Firebag Phase 3 to the overall volumes. And then second question, based upon your comments about Joslyn and Fort Hills and the use of paraffinic froth treatment, I'm wondering if you can just give a little bit more color on a potential integration with, let's say, the Montréal Refinery down the road. And just the last question, elaborating on your comments about inflationary pressures relative to 2008, it was obviously a different macro environment back then, so I'm wondering if you can give any additional comments on what you're seeing for labor and material inflation outside of Alberta.

Steven W. Williams

Yes, let me pick up the second of those, the second 2 of those questions first, David. We're still at the stages of design for Joslyn and Fort Hills, and one of the cases we're looking at is the paraffinic froth. And as you know, that, then -- that gives us a bitumen which we can -- is of a quality we can export. So we have lots of choices. In part, the Suncor model has always been to keep flexibility, either to have arrangements with customers or to have the capability to put that into our own facility. One of the powers of the integration and the merger is we have the capability of integrating that more closely with Montréal. We're looking at that possibility. Decisions haven't been made at the moment, and we're looking at the pipeline connections between the 2. And you've probably heard discussion of the Line 9 reversal, which is a key part of being able to get that material to Montréal Refinery. What I would say is I'm optimistic that the pipeline changes will happen, and I'm optimistic that we will be able to integrate some of that operation into Montréal. And of course, that's very important to help us secure the future of Montréal because it's very difficult when you take international crudes in there with the current markets to make a healthy return. So that looks a distinct possibility going forward. In terms of inflationary pressures, just some general comments. One of the big differences on this cycle and the one in 2008, that generally speaking, the world's engineering houses and fabrication shops are not full to the same extent they were. In 2008, all sectors of the economy were booming and there was strong competition and price inflation in those engineering houses and workshops. We're not seeing it to the same extent there, although indications are that they're starting to get more work now. Generally, on the labor front, labor is more pushed in the region. We're working hard because knowing that and knowing what happened last time, we've been working hard with provincial and federal government to find a way through that, and we're optimistic we will. Our plans are we prefer to employ locally. So we exhaust the local markets, we exhaust -- after we've exhausted the provincial market, we exhaust the Canadian market, then we look at the continental market, and then we look even wider. Indications are that we're going to get some relief this time in terms of being able to adequately provide labor for these projects. So encouraging signs, but we're still seeing some pressure around labor. And all I would say on Firebag is we've not specifically identified -- you can't actually see, if you look at the wells, what's going on there. But I wouldn't countenance attributing it specifically to Firebag Stage 3 because we have cross-connections on those plants now. So what you have do is watch the overall level as it's coming up, and we're delighted with how that's going. It's meeting or exceeding our expectations on both the infill wells and the dedicated wells for Stage 3.

Operator

The next question is from Ben Hobratsch from Argus Media.

Ben Hobratsch

According to Suncor postings on the Industrial Association of East Montreal's website, the refinery received large pieces of equipment on February 8 and March 29, ahead of the planned turnaround that began on April 14 and is expected to last for about 6 weeks. I'm wondering if there's any sort of expansion or reconfiguring going on at the Montréal Refinery.

Steven W. Williams

No, it's just a routine turnaround going on. There's no major projects going on in Montréal at the moment.

Operator

There are no further questions registered at this time. I'd like to turn the meeting back to Mr. Douglas.

Steve Douglas

Thank you, Matt, and thanks to everyone participating for your questions. So just before signing off, a reminder that the IR Group and the Controllers will be available throughout the day for any further questions or detailed questions on the financials, and you can simply give Jenna van Steenbergen a call and we will organize that. So thanks to everyone for participating, and we'll sign off. Thank you.

Operator

Thank you. The conference call has now concluded. Please disconnect your lines at this time, and we thank you for your participation.

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