Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Suncor Energy third quarter 2019 financial results Conference call.

This time, all participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone. Please be advised to today's conference is being recorded if you require further assistance. Please press star zero.

I would now like that had the conference over to your speaker today, Trevor Bell Vice President of Investor Relations. Please go ahead Sir.

Thank you operator, and good morning, welcome to some corps third quarter earnings call with me. This morning are Mark Little President and Chief Executive Officer, and Alister Cowan Chief Financial Officer.

Please note.

That today's comments contain forward looking information actual results may differ materially from the expected results because of various risks factors and assumptions that are described in our third quarter earnings release as well as in our current annual information form and both of those are available on SEDAR and Edgar and our website.

Suncor Dot com certain financial measures referred to in his comments are not prescribed by Canadian County for a description of these financial measures. Please see our third quarter's earnings release.

Following formal remarks, well open the call to questions I'll now hand, it over to Mark little for his comments.

Good morning, everybody and thank you for joining us in a volatile quarter for commodity and refined product prices.

Uncork continued to deliver strong and consistent results in the third quarter, we generated $2.7 billion a funds from operations and $1.1 billion, an operating earnings which marks the ninth consecutive quarter, where we've generated over $2 billion of funds from operations.

The reliable nature of our cash flow combined with disciplined capital management resulted in $1.4 billion being returned to shareholders through dividends and share buybacks in Q3.

We continue to see significant value in our company and given the market conditions accelerated our buyback program in the corner to repurchased 1.2% of our outstanding shares for approximately $760 million.

At the same time, we continued to strengthen our balance sheet, reducing our debt by $570 million all of which yet again demonstrates the value of our integrated model and our ability to create substantial cash flow and value for shareholders and various market conditions.

Reliable production from our upstream oil sands assets contributed to our strong results. Despite the impacts of planned maintenance in the quarter and continued mandatory production curtailment, which has been much higher than we anticipated at the started the year.

Given our planned maintenance there was limited availability and opportunity to purchase production quotas from other operators in the quarter.

As a result total oil sands production of 670000 barrels a day was approximately 20000 barrels per day lower compared to Q2.

Consistent with prior quarters, we were able to transfer production quotas, among our oil sands assets generating 1.6 billion of funds from operations and $500 million of operating earnings in our oil sands segments.

Throughout 2019, Suncor is unique footprint and asset flexibility has allowed us to make the strategic choice to optimize the mix of our allocated production during mandatory curtailment.

We focused on value over volumes, producing the highest margin barrels given market conditions.

We've increased the production of higher sales price, but higher cost FCO barrels at the expense of lower price and lower cost regimen barrels.

Well this is put pressure on our 2019 volumes and cost per barrel. Our results have benefited by a net margin increase of $2 per barrel or more than $200 million of operating cash flow at based flat year to date.

Moving to our offshore assets production in the third quarter was approximately 90000 barrels per day down almost 20000 barrels per day from the second quarter, primarily due to an unplanned outage at hibernia and higher maintenance at buzzard.

Both of these assets are now back online.

Well, our Hebron and OTA growth projects continue to ramp up and partially offset these unplanned outages crude prices weakened in the quarter, resulting in $380 million of funds from operations and $170 million of operating earnings from our NPS segment.

In the downstream, we achieved a refinery utilization of 100% during the quarter generating 885 million of funds from operations and 670 million of operating earnings.

This is an outstanding operational performance and it also drove our refinery operating expenditures below $5 per barrel.

In the quarter.

Following the Alberta governments clarification on the electricity market regulations, we announced the sanctioning of a cogen investment at our oil Sands based plant in September making significant progress towards achieving too ambitious goals.

Increasing structural cash flow by $2 billion by 2023, which has a 20% increase over last year's funds from operations and secondly, reducing our greenhouse gas emissions intensity by 30% by 2030.

The Cogen facility will reduce greenhouse gas emissions intensity associated with steam production at our oil Sands base plan and is expected to be a significant contributor to reaching our greenhouse gas goal getting us one quarter, if the way there.

At the same time, the Cogen facility will reduce Alberta as provincial greenhouse gas emissions by displacing more greenhouse gas intensive electrical sources.

The combined benefit is a reduction of Alberta is greenhouse gas emissions by approximately 2.5 million tons per year, which is the equivalent of taking 550000 vehicles off of the road.

In addition to them many tangible environmental benefits. The Cogen facility is expected to be a significant contributor toward some course goal of increasing structural cash flow by contributing more than 10% of the 2 billion dollar target we have for 2023.

Along with the deployment of autonomous haul trucks are tailings technology advancements that construction of the suncor and Syncrude interconnecting pipeline and optimization of our supply and trading processes.

We're now executing on projects that are expected to deliver approximately 60% of the $2 billion cash flow growth target.

Just to emphasize that again.

The.

Oh checks that are in execution represent 60% of the $2 billion.

So in addition to the approach those projects we have a number that are in developments that are nearing sanction or deployment, representing an additional 25% of our goal with many focused on building standard digital platforms and leveraging data to extract value from our existing businesses.

Finally, we have numerous initiatives in the identification stage, which we expect will contribute to the final 15% of the goal.

Investing in projects across our integrated business that are largely independent of oil price and pipeline he grass.

Demonstrates our ability to grow cash flow and shareholder value with high return projects in a variety of market conditions.

Our progress to date should provide confidence that we can achieve our cash flow growth target over the next four years, which in turn will enable increasing returns to shareholders and continued investment in our business.

At the same time, we remain focused on our operational performance by delivering safe and reliable operations through a volatile business environment.

Planned maintenance and ongoing mandatory production curtailments.

One last comment.

I was very pleased this morning to see that the Alberta government has agreed to provide curtailment relief for oil ship by added rail.

This is aligned with the industry proposal that we've been working with the Alberta government now for some time.

This is a very significant development for the industry and the province, and the sets the stage for the government to remove itself from the Alberta crude markets.

So I'd certainly like to pass on a special thanks to the Premier and the energy Minister for providing this support to the industry.

So with that I'll pass it along to Alister to provide some financial context to our third quarter results.

Thanks Mark.

You previously highlighted suncor was able to generate 2.7 billion of funds from operations on $1.1 billion of operating earnings in the third quarter mile was despite the impact of where we can business environment. We continued higher levels of mom to treat production curtailment.

Upon maintenance we hung.

Once again, we demonstrated this trends that were interviewed module in various market conditions.

In addition to returning more than 50% of or funds from operations to shareholders. During the quarter in the form of dividends and share buybacks. We also fairly funded $1.5 billion of capital expenditures.

Strengthened the balance sheet.

Repaid $570 million of debt.

So year to date, we have returned approximately $3.8 billion to shareholders and dividends or share buybacks or roughly 46% of or funds from operations. While at the same time rupee nearly 1 billion goals.

No as Mark mentioned, we continue to see significant upside value in our company shoes and as a result, we accelerated our share buyback program during the quarter spending approximately 760 million bills to reports its 1.2% over understanding shoes of less than 40 barrels per share.

Year to date, we've spend $1.8 billion on share buybacks.

Reports this almost 3% novo's standing shoes.

We remain on track to complete the authorized $2 billion program. This sounds dude.

In May and expires next spring, but how the ability as in prior years to approach the board for an increase Bob will be dependent on future commodity prices.

Looking to the bonds, so 29 to maintain their capital guidance range, but we did not grow our total production range, but as you see which opened to 797 Boes per day.

820000 Boes per day.

We increased our oil sands operations consciously operating cost per Boe rooms by approximately $2.

These changes really reflect the ongoing impact of higher monetary production curtailment than we expected on the product mix start to do that Mark just discussed earlier.

We've also adjusted the guidance range for East Coast, Canada.

Well to 213% to 17% not done four person and I really reflects the impact of third party outages on these calls.

Consistent with prior years, we expect to release of 22 any corporate guidance in the coming weeks.

We will obviously be loosening of a with additional color to this morning on real from Neuberger Berman.

And a further information on real demand or two production curtailment program will be for 2025.

From our perspective the results some of the third quarter onto a track record and demonstrated are ongoing commitment to sustainably increasing cash flow on shareholder returns on the short to medium on the long term.

Thank you Alister and Mark I will turn the call back to the operator to take questions first from the analyst community. Then if time permits from the media operator. Thank you as a reminder to ask a question you'll need to press star one on your telephone.

So your question. Please press the pound cake, please standby, while we composites Q and a roster.

Our first question comes from Neil Mehta with Goldman Sachs. Your line is open.

Hi, guys. This is Emily checking on behalf of Neal Hill.

Just my first question on Capex, what do you think is an early read on 2020 spend and how do you how should we be thinking about the the cogen annual spend profile of $1.4 billion over the next couple of years.

Thanks, Emily it.

In the second quarter I think we were asked that question and somebody asked about whether the range from five and a half to six was good and I would say given the fact that we havent published our guidance and Alister just spoke to that.

Say right now Notionally, that's a good range one of the reasons our range is going up it's because of decisions like cogen and so it's incorporated in that capital spend.

Great. Thank you.

And just one follow up please on crude by rail announcement this morning.

Does this change the way you guys think about using relevant means is crude export to increase production or is it still really an economic decision Hill.

Well the economic decision. We're faced with is really around should we leave crude shut in or should we produce that and ship it to market by rail. So when you compare those two options its economic which is the whole point of that says that although the this natural spread and the.

Marketplace might not say that rails economic you're considering that against whether you shed.

It assumes that you're already producing the barrels and so that the opportunity here in the whole design of the program is to allow us to produce above our quotas. If we can move the volume of so we're comparing we either leave at shut in the ground to remove it by rail I think this is a very positive development because.

The whole purpose of curtailment was to reduce production to align with the takeaway capacity, but I think we all know that ever since that was implemented the takeaway capacity in Western Canada has declined.

Which is which is the exact opposite of what you want to have happened. When you have excess production that design of this system is to incent operators like ourselves in the 16, others are the 16 in total that are curtailed to go get rail increase the takeaway capacity from the.

Entire basin.

So that we can access markets and then once the industry's demonstrated that all the productions on and we can move at all and we have all of the takeaway capacity. The government then has the ability to leave the markets and when everybody has all their production flow and then they are incented to invest to grow their production right now nobody.

None of those 16 companies are incented, because if they grow production theyre just going to leave at shut in.

So the whole design to the program is to try and help.

Get the market's going.

Allow us to get full value increase royalties and taxes for the provinces allow that companies to demonstrate that with market forces, we come clear the market and on top of this development. There is about 200000 barrels a day of increased pipeline capacity, that's coming to market.

Early next year through the work that's happening on line three on the Canadian portion of line three.

Keystone and express so when you look at the incremental rail capacity, which we think is somewhere in the neighborhood of two to 300000 barrels a day of additional rail that could be brought to market.

And another 200000 barrels a day of pipe.

This is this is super positive for the industry to move forward and hopefully we'll get some investment going so that's why were very thankful for the leadership at the Premier and the energy Minister have what to this.

Thank you.

Thank you. Our next question comes from Dennis.

Of Canaccord Genuity your line is open.

Hi, good morning, and thanks for taking my question.

Maybe as a bit of a follow on to families question.

The thought process for me is that you guys don't necessarily trend.

Very much crude oil by rail, but do have a fairly robust rail operation more geared frankly to the refined products side.

With respect to your current obviously.

The little exposure to the crude oil transportation side.

How should I be thinking about your maybe strategy or approach to potentially gaining incremental capacity.

Maybe some of your years, if they have available capacity to ramp up.

Production by their real over curtailments quota.

Yeah, Dennis Thanks for the question and that was certainly a missing in my response to Emily So I think as as we've stated many many times prior to this we're moving all of our production by rail, but clearly with the government intervention were not able to do that so we were.

We'll be taking advantage of this.

Development and.

Curtailment relief, that's been put out by the Alberta government. This morning, and in anticipation of that and our longstanding relationship in the rail markets and working with the railways, we actually have direct contracted capacity of 30000 barrels a day with the rails to move crude by rail.

And and we will plan to be getting that operational in the next month or two I don't I haven't talked to the folks. This morning about how long it will take but I think it will take.

A couple of months plus or minus.

And so we plan on taking advantage of this for sure did get our production moving.

Okay, perfect and I suppose the other I guess the other side of it would be is given that there are other producers that may be producing and have maybe accessed rail capacity that could probably also mean that they have incremental credits that they could potentially sell for you as well.

Yes, the design of the system is to allow the market to actually solve this so clearly people that are sitting with rail without the production are incented to find people with production to move it by rail and and it also incense producers to go get rail contracts and Sachin and I think you'll see.

Say that this is this is significant and the Alberta government getting rid of its rail contracts because if people sign up for them they want to be able to use the rail and ER and so all of these pieces are tied together.

Okay. If you'll indulge me I was just two quick more just quickly on kind of free cash flow and so forth.

I understand that Alisha, you did make kind of comments around decisions around the NC IB and I know you guys have during the context of this year paid back some significant pieces of term debt given that that you don't really have any near term.

Term debt expirees or anything coming due until I believe 2021 to the focus or should I kind of read between the lines. There the larger focus will be towards.

Returning cash to shareholders via the share buyback program.

Which if you are on pace as you are today could frankly be exhausted by the end of this year.

Thanks.

For the Dennis.

I wouldn't say, though.

We're very measured in a week allocator of capital and we really clear and we'll we'll go what is going to sell by about we did accelerated in the quarter, but we're very opportunistic we sold also volume there.

The these price levels I wouldn't say that you should assume though the two three.

Parts. This is no were you run rate that we said $2 billion a year.

I did see we could go back to the board and commodity prices will go over on the data. So we have a while we don't have any term to due to a 21 video.

I don't know billing of commercial paper, which we used to flex opened going on so we will still be amazed that allocation to.

No buybacks dividends capital and debt repayment.

Okay. Thanks, and then just the last little bit here is just on.

The guidance it looks like the based mine specifically the you to upgrade or had a bit of an extended turnaround going into Q4.

There any incremental pieces of prep work or anything like that that you guys are focusing on an operational basis, just given that maybe a little bit more we'll call. It downtime with respect to the upgrade or component of thing and I'll turn it back. Thanks.

No that it's interesting because we're working on a coker said that.

Was was down and actually got put back online during the fire and and so this is kind of an unusual circumstance. It has taken us a little bit of additional time, we don't think that this is characteristic of what we'll see going forward. So this just ended up needing a little bit more work than we anticipated.

Going and every time you do at turned around and you open up these vessels, there's a certain amount of work that you find through the process because we don't have perfect knowledge till we get into it and so it's caused a little bit of a delay.

Okay perfect. Thank you.

Thank you and our next question comes from Phil Gresh with Jpmorgan. Your line is open.

Hey, Good morning, guys. This is John Royal on for Phil.

So.

Can you hear me.

Yes, Thanks John .

So you guys have seen higher cash cost per barrel. This year for a variety of reasons and I think some includes reliability.

So as we look ahead at the 2 billion CFO improvement target.

When we guided per barrel cost targets for each asset.

Is there any risk of offsetting headwinds like labor inflation or other factors that might we too.

We were net benefits versus the 2 billion target.

No it's interesting because your characterization of the operating costs as part of the issue with it as were low in the production range curtailments been much higher than we anticipated.

And and I think we've been kind of foreshadowing that all long originally it was announced that curtailment would be 325000 barrels a day for the first quarter and 90000 barrels a day on average for the remainder of the year.

We won't get to that number essentially until the end of year. So it's been substantially higher I think just if you do the math, it's 30% to 40% higher curtailment through the year than what was originally stated.

Because it's a high fixed cost business.

Productions lower operating costs are higher and then back to we've we've intentionally as I mentioned in my prepared comments around mixes we've intentionally shut in low cost low value barrels and and maximize work for shifted the allocation.

So we could produce higher cost but.

Much higher margin and so our average margin the net effect of the increase cost and increase margin as we've been able to generate $200 million of incremental cash flow for the shareholder. So the issue with that is our focus has been on driving value for the shareholder and generating cash flow not on.

How do we make the number lower if we wanted to make the operating cost number lower we would have done the exact opposite of what we did do.

On the issue as we would have lost a whole bunch of cash generation. So we think we've made the right decisions here curtailments has created a bunch of interesting dynamics going forward, we fully expect curtailment to disappear and next year with the spot allowance that I've talked about.

Help us to move a lot of volumes.

That we went to have been able to without it.

Understood. Thank you and.

Just a second when we've seen reports on the spill Keystone.

That's how many commitments on Keystone and either way what do you think the net effect would be on Suncor and.

How long do you think it would take to resolve the spill.

Thank you know I would I would literally be speculating on all of that we do move some product on Keystone and so we'll wait to hear from the operator, what it is and I have no idea.

Thank you.

Thanks, Thank you and I'm currently showing no questions at this time I like to turn the call back to Mr. Trevor Bill for closing comments.

Great. Thank you operator, thanks, everyone for attending the call I know, it's a busy earnings day in season, but in particular day.

Happy Halloween, everyone, an IR will be around all day should you have any more detail questions. Please give myself or my team we call. Thank you.

Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

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