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

Suncor Energy Inc. (NYSE:SU)

Q2 2008 Earnings Call

July 24, 2008 9:30 am ET

Executives

John Rogers – Vice President, Investor Relations

Rick George – President and Chief Executive Officer

Ken Alley – Senior Vice President and Chief Financial Officer

Maureen Cormier - Corporate Comptroller

Greg Friedman – Comptroller Department

Tim Maw - Comptroller Department.

Analysts

Brian Dutton – Credit Suisse Securities, Inc.

Brian Singer – Goldman Sachs

Robert Plexman – CIBC World Markets Corporation

Ryan Todd – Deutsche Bank

Paul Cheng – Lehman Brothers Holdings Inc.

William Lacey – FirstEnergy Capital Corporation

Gordon Gee – RBC Capital Markets

Operator

Welcome to the Suncor Energy Inc. second quarter results conference call. (Operator Instructions). I will now turn the conference over to John Rogers, Vice President, Investor Relations.

John Rogers

Good morning, everyone and thank you for listening into our second quarter conference call. I have the usual suspects with me today. Actually, Ken Alley and Rick George are in remote. They are up in the Fort McMurray location, so Rick and Ken are up there and in the Calgary office with me is Maureen Cormier, our Corporate Controller, Greg Friedman and Tim Maw from our Controllers Department.

We wanted to follow the normal pattern. Rick will give his introductory comments. Ken also. I will give you a bit of insight into the outlook and then we will return it over to you to ask questions of Rick and Ken. So Rick, why don’t you kick it off?

Rick George

John, thank you very much. Delighted to be here, and Ken and I are obviously in Fort McMurray. We have had a Board meeting here the last couple of days and we had a good chance to get our Board around all of our operations here in Fort McMurray, which has been a great trip.

So listen, we are going to talk about the second quarter earnings. We have obviously knew, and the market knew as well that are second quarter results would be impacted by the turnaround at the Upgrader 1 at Oil Sands. It was one of the largest turnarounds of work that we have ever completed. It did come back a little bit late. It did take us a number of extra days to bring that unit back on. And it really was around the amount of work that we have found once we opened up the unit and also the availability of labor which is certainly very tight in this region. You know, if you think about it in a two-year context, we had a big turnaround in Upgrader 2 in the second quarter last year.

So both this year and last year impacted by those turnarounds. They are a very important part of this business. It is very important that they get done right, and they are very important in terms of us being able to operate safely as we go forward.

The turnaround is now behind us. We are feeling very good about that. We still are bringing the unit up to full production and so, the month of July will not look quite as strong as you might expect. But what I would say that the rest of this year looks extremely good as we line out these facilities.

So obviously, we are not very happy with the production in the six months of this year. We do know we have disappointed. And what I would say about it is, listen, this is temporary. This is one of the challenges that corporations go through. It is not permanent. We do feel like we have this well under control. We have the right people on the right assets and we will give this line out and we will move forward towards that 350,000 barrels a day, which will come later part of next year.

So we are disappointed on that. Some of the root causes include a very severe winter. We did have the restrictions on Firebag, which you would have noted got lifted just two days ago. We are very happy that got lifted. We worked very hard to make sure that happens. And our track record since restrictions was on has been very, very good. So I think that all helped us.

Production at Firebag this month will be around 42,000 barrels a day. And have already started steaming new Wells. It takes about three months to get communications between the well bores, so then we will start to see it ramp up after that. We are very happy with the production numbers at Firebag, this restriction order, we are not happy with, but it did give us a chance to fix a number of things, to really kind of steady down on the Wells.

We had some general problems. We got all of those fixed, and so very happy with that. If you look at Firebag, it is one of the biggest SAGD production, if not the biggest in Canada, at above 40,000 barrels a day, and will be ramping up from there.

Really like the reservoir performance. Really like the technology, although, we are still going up a technology curve there. So if there is any silver lining around the restriction, it is that. And we certainly made full use of that cap to the extent that we can. So the group up here is working very hard. It is not an easy environment. It is very busy up in the Fort McMurray region generally.

All the industry is pushing hard up here to get volumes up. Very proud of the team here in terms of what they are doing and what they are getting accomplished. And so I feel very solid about where we are on a go-forward basis.

Just to move on to major projects for a moment, and of course that is a big part of Suncor work these days. If you will remember, we did a project we called the MCU, the Millennium Unit. It was $2.3 billion project. And virtually it is complete now and it was on time and on budget. Not something you can say about a lot of these projects.

So very proud of the major projects group and what they have done that. That is a very tough project because it is right in the middle of the operating plant. I know the operation, guys, are glad to have that work and mostly behind them and those guys out of the essential operational parts of it.

Our Millennium Naphtha Unit, which is about a $650 million project, is 30% completed and is targeted for a mid-2009 completion. The $850 million Steepbank extraction plant project, engineering is essentially complete. Construction about 30% complete and it is again targeted for a 2009 completion.

At Firebag, the sulfur plant that we are putting in that will handle all of the sulfur from all six stages. The engineering is 85% complete. Construction is about 30% complete, and it is targeted, again, for a 2009 completion.

So a number of these smaller projects, other than Voyageur, are going to be done here in the mid to the latter part of 2009. Again, it will be a great milestone for us to have those behind us. With regard to Voyageur itself, the product is split into two pieces. The Upgrader, the engineering is 77% complete and construction is about 5%. We are in the field doing deep undergrounds, a lot of piling work. We have already done one of the largest concrete pours on the project in terms of the coker structure. And so the Voyageur product is off to a good start. Early days, but a good start.

Firebag Stage3, and you have to remember, in this Voyageur project we have 3, 4, 5, and 6. Stage 3 is the first one. The engineering is 90% complete. Construction is 30% complete. And we are targeted to have first oil at the very end of 2009. So you will start to then see those stages ramped out about a year at a time after that.

So, I am very proud again of the project work we are doing. Very tough environment from a labor availability viewpoint, but we are managing this, I think, as best we can in this environment. I am very proud of that.

If you think about the other two businesses, natural gas, a very strong quarter, and obviously we increased the outlook in terms of performance for the full year. And so very, very happy with that particular operation, and in the downstream, Refining and Marketing, solid operational results. If you look at refinery utilization, that was good. Obviously, we are impacted by refining margins just like everybody else. You cannot escape that. Refining margins are down.

We are seeing some demand reduction, and we are certainly seeing margins on gasoline in particular down. If there is any bright light to any of that side of the businesses, diesel margins hanging in pretty solid and Suncor is a large diesel producer. If you look at the oil sands and our two refineries together, so, if you take a look at it, really good results with one exception and that is the operational result in oil sands. I can just tell you, this is a big focus of Steve Williams, our Chief Operating Officer, our entire team. And I think, I am absolutely convinced we are turning the corner here and you will see much better results as we head into the last six months of this year.

So that is kind of on an operational basis. Ken, over to you.

Ken Alley

Thanks, Rick and good morning everyone. Rick covered it pretty well. Clearly, the financial results reflect the planned turnaround and the impact on production at oil sands. That was offset by very high crude prices, so I mean, that continues to be the story here as we go forward. Rick talked about our offset some of the production shortfall from the turnaround. A good performance from the natural gas business. I am pleased to see that performance.

You go to the downstream business, Rick talked about the softening of gasoline demand and margins clearly impacting that business year-over-year. Clearly, masked to a certain extent by the change in accounting to FIFO, so inventory gains are showing stronger results from the downstream than we would see if we were on a LIFO basis. I think that really gives a true picture of what is happening to margins on the downstream

Given that we had the turnaround, cash flow was pretty strong at $1.4 billion and capital spending very much in line with our expectations. So overall, the balance sheet is about where we thought would be the stage of Voyageur expansions. So we feel very good about our ability to finance that project and all of our capital spending going forward.

We did take the opportunity to put some long-term debt on the balance sheet in the second quarter. Really to finance Voyageur, but it is really part of building out the overall capital structure of preparation going forward and what will be a very much larger corporation once we complete Project Voyageur. So overall, the balance sheet is about where we expected it to be and in good shape.

John, I think I will just pass it over to you now.

John Rogers

Great, back to Calgary here. The only thing I was going to comment on was the outlook. It is on page 3 of the release, obviously, we did adjust the production outlook for oil sands, given our year-to-date production. I think everybody, with us publishing monthly production numbers, knew or anticipated we are going to change that range 240 to 250 if the range that we are now predicting will come in for the year.

It will be a build through the year. We would expect that we would exit the year at 300,000 so we are kind of building from July through to the end December with an exit in the range of about 300. The mix was as it is stated here in the realizations, are a little better than I think we had originally anticipated, with WTI@Cushing off about $250 to $350.

Cash costs really just fall out of the production numbers in the neighborhood of $35 to $36. So probably see something like $31 to $32 in the second half of the year. Natural gas production in the range of 210 to 220, as Rick mentioned, just up a little higher. We have seen some really good performance out of that group, and chose to update the guidance for the year.

So really that is all I was going to comment on. What we would like to do now, Joanne, is open the lines for questions. Again, Maureen and Greg and Tim and I would like to answer your detailed modeling questions after the call when we can give a little more time, a little more consideration. So if you have any strategic questions you would like to put up for Rick and Ken, we would be happy to entertain them now. So over to you, Joanne.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions). One moment please for your first question and your first question comes from Brian Dutton, Credit Suisse. Please go ahead.

Brian Dutton – Credit Suisse Securities, Inc.

Yes. Good morning, Rick. I think you have made it pretty clear this year that your key priority is improving the reliability of the base business and operational last month. Along that line, could you remind us of the issues that you have been facing at extraction? And with the turnaround now behind you, have those issues now been resolved?

Rick George

Brian, yes. So a lot of our problems at extraction have been around our handling of sand, and we have had a couple of instances particularly early in the year, where we actually plugged off one of the major plants there with sand and very heavy production. Funnily enough, as a direct result of having very rich ore in one instance, where we carried that rich ore carried over a lot of sand into the second part of what we call Plant 4, where we actually plugged it off with sand. So, we know a lot of the issues that we had in the first quarter particularly, and then the second quarter, we feel like we have got a real bead on, whether that is erosion in our tailings lines or whether it is plugging off Plant 4.

So a lot of terrific work. And it is not just one thing. There is about eight different items that the extraction plant has been working on in terms of continuous improvement to make sure that we get that done. I feel very good about that. In fact, if you look at that. That is not the limiting factor over the last several weeks and so coming out of the turnaround. And they did a lot of work on the extraction plant in the turnaround. Feel pretty good about where we are with that.

Having higher volumes from Firebag going into the plant will help, I will say that. I mean, we are probably 20,000 barrels, a little lower than we would have expected of the Firebag would have had full liftoff by now. Maybe a little bit lower than that. And that would have helped you ride through some of the extraction plant problems.

So as we ramp Firebag on up continuously, that will take a little bit of the pressure off the extraction plant. Also taking in petrochem volumes, which start later this year, into the plant, that means you then have two mines, two extraction plants, Firebag, and Petro-Canada, all feeding the plant. All that should help steady off in terms of feed into the plant. Go ahead and probably we can have a very important break.

Brian Dutton – Credit Suisse Securities, Inc.

Thank you. Could you give us an idea what your cash operating cost per barrel will be once you get the 300,000 barrels?

Rick George

We would expect it to be somewhere in that $27 a barrel range when we have sort of steady-state production at about 300,000 barrels a day.

Brian Dutton – Credit Suisse Securities, Inc.

I thank you very much, and good luck.

Rick George

Thank you. And I would like to correct the previous answer; it will probably be US$27 when we get to 350,000.

Operator

I am sorry. The next question will come from Brian Singer, Goldman Sachs. Please go ahead.

Brian Singer – Goldman Sachs

Thank you. Good morning. Can you guys hear me okay?

Rick George

Absolutely.

Brian Singer – Goldman Sachs

Fantastic. I wanted to focus on Firebag. Could you discuss, I guess, as you remediated the sulfur issue, if there are any larger takeaways, either for Firebag or just more broadly for SAGD in terms of sulfur management and timing of some of these sulfur issues?

Rick George

Sure. What happened to us was when did all the core-hole-drilling across Firebag and did all the sampling as a result of that, we did not see any significant amount of sulfur in that. And so at one point, the decision was made that we did not actually need sulfur handling. Then when, we started steaming and this just shows you, this is a very young technology. I am talking about the industry in general, in terms of SAGD. When we started the steaming, then we going to conclude the different kind of reaction underground in terms of producing more sulfur than we ever projected from the reservoir modeling.

Now, that is not actually a massive problem, except that we just did not install the facilities to handle that. As I mentioned, those facilities are being installed and will be complete by second quarter of 2009. And again, that sulfur pipe that we are putting in will handle all six stages. So it is still not a massive amount of sulfur, but it is enough that it caused an odor problem. So do not think about this. It is a highly sulfur reservoir. It is just more sulfur than we actually designed in the facilities. But if you look at Firebag overall, this was our average well as over 2,000 barrels a day. So this is a great reservoir. It is got a great caprock, in the beginning stages of this. And very little water. And if you look at well production rates compared to any of the other SAGD projects. We are more than double, sometimes quadruple or 10 times what other SAGD producers are producing per well pair.

What I would say is every reservoir is different, and so you cannot generalize this across all of the industry because the thicknesses, the amount of water, the overburdening you have, the pressure of that reservoir is different in absolutely every single case. So you cannot generalize about any of this. We are still very happy with our reservoir. Very happy with the well performance. It looks very solid. This is just one of those adjustments very early in the stages of a 9 billion barrel reservoir development. And again, feel very confident about where we are going with this overall.

If you look at Firebag over the last three, four months, it has been very solid, very steady operations in terms of production.

Brian Singer – Goldman Sachs

Great. And then secondly on costs, could you give us an update, just, I guess, given higher steel costs and maybe some update on where the labor market stands in terms of labor cost inflation, what that potentially could mean relative to what you already have locked in for Voyageur?

Rick George

Yes. That is a great question. So, we still see. You are asking really Voyageur on the construction on a go-forward basis. And we still, subject to inflationary rates which far exceed anything you read on the other industry that I know about, we certainly would be seeing inflationary rates on materials in this 7% to 10% rate. So that is hard and we put in the initial estimate. We are not giving up on it yet, I can tell you that. And we certainly have quite a bit of equipment ordered on the Voyageur Upgrader already and certainly on Firebag stages 3 and 4.

We will probably more impacted in terms of that in terms of stages 5 and 6 on Firebag than anything because we have so much of the material ordered. So it is still an issue. And I am not announcing a number except to say, listen, there is plenty of pressure on the inflationary front.

On the manpower front, we are really impacted this year by the turnaround. We put a lot of those resources on a human basis over onto the turnaround. That has been moved back. Again, very rapidly pleased with both where we stand on engineering and the fact we have engineering pretty far ahead of construction both of Firebag, at the Voyageur Upgraded side. And very early days, but very pleased with the progress we are making there. So just know, inflationary pressures, absolutely, one way to look at this is of the $20.6 billion of our project. We already have $4 billion spent. So you are 1/5 of the spending way through. At the end of this year, you will probably be closer to $7 billion spent of the $20.6.

So we are heading there, I can tell you that. What does help us a little bit as Firebag being staged in four different stages and the fact that you have the first stage and the production from that coming out in 2010 and then it will come on in stages. So that is actually helping that somewhat. And of course the big piece then is, of course the Upgrader but you walk up on that Upgrader site, which I did recently, you would be very impressed with the amount of activity going on there already.

Brian Singer – Goldman Sachs

Thank you very much.

Operator

(Operator Instructions). And your next question comes from Robert Plexman, CIBC World Markets. Please go ahead.

Robert Plexman – CIBC World Markets Corporation

Okay. Good morning. I had two Firebag questions, Rick. First of all, just wondering if there is any risk that the government could re impose the restriction between now and when the sulfur plant is completed? Also, wondering if the restrictions at Firebag have had any impact on the ability to start commissioning the MCU, if there is any relationship there.

Rick George

Okay. Thanks, Rob. I would say on the second question, none. No restrictions at all in terms of starting up the MCU at all. No actual tie at all there. On the other, you have got to remember, what this controller was about, was about odor, odor exceedence. And so this is not a safety issue, it is not an environmental issue and it is not an operational issue, save the fact that we had more odors coming out of the plant and that is allowed. We have had except for one upset in January. We have had virtually no exceedences since December of last year.

So as long as we can keep in that operating mode, then we should be able to keep our license. Listen, I think we have learned our lesson, is what I would say it is. We will not be tolerant of exceeding those limits. And the temporary fix we put in has worked extremely well. We do not see, why that cannot work very well all the way until we get the sulfur plant done. So, listen, it is an operational issue. You can always have upsets. But what I would say is, we would not sacrifice short-term daily production over that odor issue.

The odor issue is one that we feel like we have under control, and as long as we very careful with that. We should not have any further restrictions on that.

Robert Plexman – CIBC World Markets Corporation

Thanks, Rick.

Operator

And your next question comes from Ryan Todd, Deutsche Bank. Please go ahead.

Ryan Todd – Deutsche Bank

Morning, gentlemen. A question for you. I know the past couple of years have been pretty heavy on this turnaround side and operations have been a bit rough. Going forward, I know there will continue to be a certain amount turnarounds and normal operations. What do you think of the reasonable target utilization rate in terms of versus total capacity for the oil sands operations going forward?

Rick George

That is a good question. I mean, you have the capacity obviously, but you are always going to have various issues, catalyst replacements, or other issues. Because of the fact, we have two Upgraders going to three Upgraders. We will have the maximum amount of flexibility. And you have to remember, every three years potentially four, if we can stretch if that far or you have to take these things down for between 30 and 60 days to do the correction.

Upside of that, a normal run rate would be certainly in the 90% of your kind of nameplate value. Now, the trouble with this business is that is not a steady-state number and but some utilization in that 90% range should be something that you should target for. And that is certainly where our budgeted numbers would look at.

John Rogers

One thing we could say to, is the production numbers that we do put out are with our anticipated utilization rates, so they are not the maximum production. They are anticipated utilization rates.

Ryan Todd – Deutsche Bank

Okay. Great, thanks. That is very helpful. And then one more, I am sure, and I know you get asked this all the time but refinery valuations, very, very cheap out there. In terms of refining and acquisitions, any interest on anything? Specifically on, maybe you cannot comment on this. But on Frontier’s refineries, would you anticipate any sort of antitrust issues down in the Rockies regions? Or do you think if you were interested you would be able to do something like that?

Rick George

That was unlikely to maybe some specific companies. I guess, I have been talking about this sometime. We continue look at downstream assets. It has to really be asset-specific. And if you will recall, we bought the Denver refineries before the big run-up in refinery margins. I think we have got most of that margin and feel great about the timing of that. As I said, and we are right through the middle of the peak refining margins that they looked way too high for me and we did not pull the trigger on anything. And so for us, it is a very patient game and it is about asset fit. So it has the fit with us and production coming out of oil sands.

Continue to look at individual assets, number interested in companies at the current time. What I would say is with increased ethanol production and with demands dampening, as I would put it. Then, I do not know that I see refining margins roaring back anytime soon. So this maybe a game of patience as much as anything, but I am really happy with the two refineries we have. I would sure love to have a couple refineries, which I am not going to identify on the phone. But it is a price value issue for Suncor not a real drive to be in the downstream and so, I think that is probably the best way that I can put. I do not want to talk about specific companies or specific assets for the obvious reason.

Ryan Todd – Deutsche Bank

Great. Thanks very much. I appreciate it.

Rick George

Thanks, Ryan.

Operator

And your next question comes from Paul Cheng, Lehman Brothers. Please go ahead.

Paul Cheng – Lehman Brothers Holdings Inc.

Hi. Good morning, gentlemen.

Rick George

Good morning, Paul.

Paul Cheng – Lehman Brothers Holdings Inc.

Okay. Well, John, before I forgot. After the call, can you or someone that send me, whether e-mail or phone call. A stock-based compensation by segment and also the FIFO inventory gain for the downstream?

John Rogers

We will be happy to do that for you.

Paul Cheng – Lehman Brothers Holdings Inc.

Thank you. Rick, I know it is still early, but I think you have to indicate that after Voyageur you are not sure that building upgrade in Fort McMurray or even in Edmonton or anywhere in Alberta. That makes sense going forward, so wondering, have you guys thought to contemplating beyond Voyageur that what is the growth plan for the Company?

Rick George

Right. Good point. Paul.

Paul Cheng – Lehman Brothers Holdings Inc.

Or that is still too early?

Rick George

No, it is not too early. No, no, in fact we are working very hard on that. We have a number of options in terms of what we are looking at. One is a mining project we call Voyageur South. There is further expansion, possibilities in Firebag. We have also, a mining opportunity which was located just north of Firebag. And so we have got three or four different projects that have the potential to that. Probably, most likely and we are still working on this, would be what we call Voyageur South, which is just south of the Voyageur Upgrader. This would not be, the one that I would say about that, what we are looking at is mine using completely new technologies throughout. A lot of which we are developing currently, so those plans are there.

One of the reasons it is not too early to talk about some of that is because we are getting to the point where to get environmental permits to do a project is moving out from probably 36 closer to some other number. And I do not know where that number is. But we are certainly well beyond 36 months just to get environmental permits, not to mention engineering and constructions to follow. So it is not too early.

I do not want to keep our organization very focused on the here and now, both in terms of operational excellence driven by Steve Williams, but also on the major projects we have. So we have a lot on our plate. But I will tell you, in the background we are working on those issues of where it is next. I think what is different is if we have 500,550 thousand barrels a day of upgrade capacity. Then our ability to take a little bit more risk in terms of producing heavy oil or bitumen and selling that to the market is a different issue than it was if you are 250,000 barrels a day.

So you have a little more flexibility. I think the other thing that is change in the market is if you look at supply issues and production drops in Mexico, and I think Venezuela will follow. Then, what we are also seeing is a lot more pull on Canadian crudes coming out of the Gulf of Mexico. And so you think about it logically, if you have coking capacity either in PAD 2 south of Chicago or in the Gulf Coast that is short of heavy and the better option may be to go with the heavy that you can get down into those marketplaces rather than build an upgrader.

And certainly, Suncor is one that has the flexibility to do both. That is the good news. And you can probably take a little bit more risk about what is happening. We do a lot of work and I know you do, too, Paul. Around what is going to happen to light/heavy differentials. It is hard. It is not an easy call, but I would say, given what I know on a worldwide basis, including what is going on in West Africa and the Middle East. I would probably bet on lower light/heavy differentials on a go-forward basis. Hard to call five years out, but that is certainly something we are looking at.

Paul Cheng – Lehman Brothers Holdings Inc.

I actually agree with you. I think the light/heavy differential is coming down. Rick, how big is the Voyageur South mining? Are we talking about 100,000 or 200,000 or what tile?

Rick George

That only grew actually on public with that. I would just say right now it is in that 100,000 to 200,000 range. We have not actually set a number and gone public. But you can expect later this year that we will be a little bit more definitive about that.

Paul Cheng – Lehman Brothers Holdings Inc.

Okay. In that, another question. You are talking about. I think the earlier question about acquisition of refining. I think that patience is the virtue in maybe you did that and it better payoff. But before we even think about acquiring assets, I mean what is possibility or the potential that Denver, you can organically to expand you to take even more of the sour crude or the heavy oil there. Is it economic at all?

Rick George

Heavy oil is a little bit of a problem since you had have to add cokers. That is a big investment and what is a relatively small market. So, I do not really necessarily see running a lot more heavy than we do today. We run a little bit of heavy down there now. And we have an asphalt plant that obviously takes a lot of that heavy. But continue to look at, is there an opportunity to change that refinery into producing more diesel versus gasoline than it does today. It has some flexibility but not a lot. And so, I do not think, there is a lot of potential for that. I am very happy with that asset and if you look its cash flow particularly in the first six months. It shows you a very solid even in the environment we find ourselves in.

But I do not see a really big opportunity there to change it to, let us say, add cokers or something that makes it large on the scale of Suncor.

Paul Cheng – Lehman Brothers Holdings Inc.

Also, Rick, you earlier mentioned that the severe cost pressure that you guys are facing in the industry. Any update or changes that you look at in terms of the CapEx for this year, as well as the guidance for the next several years?

Rick George

Yes. No not into this year, that our projections over $7 billion of our capital. We look to be on track of that, or maybe slightly under, but it is just a timing an issue more than anything. So not on that. You will see a higher capital budget out of us in 2009, and really that is around Voyageur that is an issue of timing 2009, early 2010 will be our peak spending years in terms of Voyageur. And as you get into late 2010 and 2011, that is where you will have most of the materials bought and you will actually be finishing up a number of the projects.

So the peak comes here in 2009, early 2010. And then after that, a ramp-down but no real change in terms of the profile than we expect on the next couple of years.

Paul Cheng – Lehman Brothers Holdings Inc.

I think previously that the guidance is around in the $8 billion for the next two years. Is that still on the ball park okay?

John Rogers

Paul, it is John. It is probably more on the 8 to 9 range for the next two years.

Paul Cheng – Lehman Brothers Holdings Inc.

Okay. Perfect. Final question, I think that when we are looking at the new production guidance, I mean, the fact that when you look at the first six months and then obviously that you have to rebudget downward. But that appears that it also means that you have revising the second half of the production guidance downward. It there given that you think most of the problems that are facing in the first half is already behind you? Is there any particular reasons causing the second half revision?

John Rogers

Yes. Rick, do you want me to answer that?

Rick George

Sure. John.

John Rogers

Okay. Paul, not really. I think we had looked that, the Firebag restriction and felt that we would be short of bitumen for quite some time. And the control order is now behind us, but it is going to take, as Rick mentioned, three months of steaming before we begin to see some incremental production. So a lot of this has to do with the shortage of bitumen. And as we build that bitumen up, and we now feel that we are probably 12 months behind where we wanted to be. So we will be at 350, anticipated 350, sometime in the second half of next year which backs everything into this year. So we would expect to exit this year at 300, which is probably lower than we thought we would be, say, 12 months ago. But I think, as our operational experiences has unfolded, this is where we kind of think we are. So we are probably 12 months behind that, but I think we had anticipated this a little while ago.

Paul Cheng – Lehman Brothers Holdings Inc.

Okay. Thank you.

John Rogers

Thanks, Paul.

Operator

And your next question comes from William Lacey, First Energy. Please go ahead.

William Lacey – FirstEnergy Capital Corporation

Gentlemen. These two real quick questions, we have seen producers start to get more and more involved in what I will call the midstream running the pipelines, or at least owning equity on the systems. Rick, what is your thought as far as the strategic importance for you guys getting the whole Gulf access, what have you, about owning steel on that particular segment?

Rick George

Yes. I think you have got to be careful. Certainly, we are looking at all of that. I think the strategic advantages I see for Suncor involve the size and scale of our operation, the amount of diluents that we have available, and the fact that we are in both upstream and downstream. And we certainly are taking positions on pipelines on a go-forward basis. Actual ownership is a different issue in the sense that if you look at historically, the returns are much lower than we have in other investment opportunities. So you have got to be really careful.

It will be strategic for us. It will be around having the right storage in the right locations, some other assets that are very important. I am not saying, we will not take a position on pipelines, but they will have to be something where we think we have a distinct competitive advantage. It will not be a wholesale kind of let us take an equity position in a pipeline for a long period of time.

Now, what I would say is virtually most of the pipelines we are taking a look at taking throughput rights on those. But actual equity ownership is, again, if you look at our return on capital numbers, those projects were pretty low. So a better choice for us may be to return cash to shareholders than do that.

William Lacey – FirstEnergy Capital Corporation

Great. Second question, I know you have dealt with this one before, but just your flexibility on your production output. Obviously, diesel pricing is pretty strong. Just how much flexibility you have in sort of tweaking your output towards a bit more diesel, what have you?

Rick George

I would say limited. There is some flexibility at Sarnia in Denver, but not massive. Here, it is just keeping that diesel hydrotreater up and running and turning out the diesel. So, I did a back-of-the-envelope calculation the other day. Because we do not necessarily think about it in these segments, but we would produce about 100,000 barrels a day of diesel between Fort McMurray and the two refineries, something close to that.

So it is an important part, but our flexibility in terms of massively increasing that is somewhat limited without putting in significant new capital.

William Lacey – FirstEnergy Capital Corporation

Thank you.

Rick George

Thanks, William.

Operator

Your next question comes from Gordon Gee, RBC Capital Markets. Please go ahead.

Gordon Gee – RBC Capital Markets

Good morning. Sorry, I might have missed a bit of your prepared remarks, but is it possible for you to give a number for what your LIFO/FIFO adjustments is for the downstream?

John Rogers

That is actually right in the statements, Gordon.

Gordon Gee – RBC Capital Markets

Yes. Sorry, I am just out of the office. I do not have access to the PDF.

John Rogers

One hundred seventy-nine.

Gordon Gee – RBC Capital Markets

Okay. Thank you very much.

John Rogers

Thanks, Gordon.

Operator

Gentlemen, there are no further questions at this time. Please continue.

John Rogers

Okay. Thanks, Joanna. The one thing I wanted to elaborate on just for a second was around our cash costs. And we certainly do expect to be in the $27 range when we are at the full capacity of 350,000 barrels a day.

When we are at 300,000 we are going to be at more like $30 to $31, in terms of cash costs. So again, as we move towards that 350,000, we think our production base does support about $27 cash cost.

With that, just wanted to thank everyone for listening in. again, Maureen, Greg, and Tim and I will be available in my office for your detailed modeling questions, and other than that. Everybody have a good day. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Suncor Energy Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts