Q4 2020 Suncor Energy Inc Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to Suncor energy fourth quarter, 'twenty and 'twenty financial results call. At this time, all participant lines on a listen only mode and.
After the speaker's presentation, there will be a question and answer session to ask the question. During the session you will need the press star one on your telephone.
If you require any further assistance. Please press star zero I would now like the hand the conference over to your Speaker today, Trevor Bell Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you operator, and good morning, everyone welcome to Suncor and <unk> fourth 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 the actual results may differ materially from the expected results because of various risk factors and assumptions that are described in our fourth quarter earnings release.
As well as and our annual information form and both of those are available on SEDAR and Edgar and on our website and Suncor Dot com certain financial measures referred to and these comments are not prescribed by Canadian GAAP for a description of these financial measures. Please see our fourth quarter earnings release, following formal remarks well.
Open up the call and the questions now I'll hand, it over to Mark for his comments.
Good morning, and thanks for joining us.
During the third quarter call at the end of October I noted that the recent operational performance did not reflect our focus on operational excellence.
And we committed to operate our assets safely and reliably.
Well I'll discuss reliability, a little later and the spirit of our value of safety above all else I wanted to address safety first and the recent incidents at our two sites.
And the matter of weeks, we've had two tragic safety incidents.
And which three of our contractors lost their lives.
Taylor draw.
Lastly, Miller.
And Patrick point true.
After the incidents.
And I met with the people involved and the operations and those involved and the response and recovery efforts.
Suncor leadership has also engaged with the families.
And as devastating as this has been and for all of us.
I can't even comprehend how difficult this is on the families and loved ones.
Pulse, whose lives are changed for ever.
And I'll tell you on behalf of myself and the Suncor of leadership team, our heartfelt condolences and thoughts and prayers go out the Taylor Lastly, Pat.
Patrick's families.
Friends and co workers.
We're gravely concerned about the tragic events, which occurred despite suncor is commitment to a strong safety culture and safety standards.
Calls and practices.
This performance is unacceptable.
Through us and our employees and our contractors and our shareholders.
We expect better of ourselves.
The executive leadership team and I are committed to making sure we have a safe workplace.
So we've taken action with the following measures.
We're investigating to understand how these incidents occurred and most importantly, what must be done and to prevent them from ever happening again.
Our investigations are rigorous.
We will work closely with our contractor organizations and implement the changes required.
Yeah.
We have initiated of third party review of our safety procedures, and specifically and the mining area.
Where are these incidents occurred.
And thats expected to be completed by the end of the first quarter.
Our executive team has mapped with the Suncor senior leaders from across the entire organization to review the incidents discussed the concerns and recommit to our safety journey.
This is a critical part of our focus on operational excellence.
And we've also held a series of safety stand downs across the company to refocus on recommit ourselves.
And free workplace.
And carrying for each other.
The most recent one we just held on Monday this week.
And which over 6000 of our personnel attended.
We are committed to.
Safety, and and a safe workplace and insist that every employee and contractor share of this commitment.
Let me assure you.
We are taking all appropriate actions to ensure safe and reliable operations of <unk>.
All of our assets.
As we've stated in our values.
And safety above all else.
I would ask that you join me and taking a brief moment of silence to remember Taylor Lastly, and Patrick.
Thank you.
Yeah.
I would now like to change gears and talk about Suncor <unk> fourth quarter results.
Which clearly demonstrate the value of our physically integrated model we.
We delivered strong operational results, reflecting reliable performance across our assets.
We achieved 95% utilization and the downstream and the industry passed that outpaced the Canadian peers I almost 20%.
Throughout the volatility of 2020, our downstream business continued to outperform its peers.
Demonstrating the global access and competitiveness of our asset base and the benefits of integration with our connection to the customer.
As we indicated on our last quarterly call. We completed the work at base plant and made the tough decision to take of maintenance outage at fire bag to address some operational issues and complete the debottleneck of the facility.
Well, that's created variability and the fourth and the fourth quarter. The average performance was quite strong with our upstream business is producing 769000 barrels a day, despite completing the significant maintenance and October.
Combined the base plant and Syncrude operators produced over 514000 barrels a day of synthetic crude oil the.
The second best quarterly synthetic production and.
And our history.
Supporting our continued value over volume strategy and maximizing the value of each barrel.
Oil Sands base plant achieved 91% utilization, despite the maintenance which concluded in October.
Syncrude also had an excellent quarter with 101% utilization and cash cost of almost $28 a barrel one of the lowest unit quarters and some time.
As planned and Fort Hills recorded over 62000 barrels a day of production net to Suncor.
As the second train ramped up with continued focus on cost discipline on.
Current guidance reflects average gross production of 122 of 130000 barrels a day for the first half of 2021 ramping to full rates by the end of the year.
I believe a better indication of our solid performance, though is the production volumes for the two month period from November and December once maintenance activities were completed.
During this period, we averaged 846000 barrels of production, which is an all time two months of production record for the company.
This level of operating performance has continued in January.
One of the contributing factors to this production what's the capacity upgrade at fire bag to 215000 barrels a day so our timing on that was very good.
We continued to deliver strong cost performance and the quarter exceeding our targets for operating cost reductions and ended the year towards the low end of our unit cost guidance range for all of our assets.
For the year, our total operating costs were $9 9 billion compared to 11 2 billion and 2019, a reduction of one 3 billion, which exceeded our target reduction by $300 million.
And the downstream, we had another quarter of reliable operations, which we leveraged through our marketing and the logistics expertise and in fact, despite the market volatility we averaged 95% utilization for the quarter.
Lastly, we completed several highly accretive investments, including the berard BC storage terminal expansion and increasing our flexibility and global access capacity.
We commissioned the interconnecting pipeline between Suncor oil sands base plant and Syncrude.
The increased the nameplate capacity at the fire bag by 6%, we increase the nameplate capacity of Edmonton refinery by 3% and we deploying autonomous haul trucks at Fort Hills.
Throughout 2020, we continued to invest and projects to drive increased funds flow rather than reducing our capital program to sustaining capital levels or below.
As a result, we expect these and other completed investments to generate 400 millions of dollars of incremental free funds flow and 2021 as part of the $1 billion incremental annual cash flow target by 2023, and $2 billion by 'twenty and 'twenty five.
Looking to 2021, we've restarted construction of the Covid co Gen facility at base plant and a 40 mile Wind project, which is already accounted for within our current capital guidance.
That said, despite the commodity price outlook will be well.
Despite the commodity price outlook being well above our planning basis for 2021, I can assure you that we will not increase our 2021 capital guidance above our current range.
Let me say that again, we will not increase our 2021 capital guidance above the current range and in fact, we continue to target the middle of our capital range.
I am confident and the value that our co Gen and wind investments will add the suncor is annual free funds flow and the long term value to our shareholders. While also making some material steps and addressing our greenhouse gas emissions.
Continuing to prudently invest and these types of projects strengthen some of course okay.
And and increasingly volatile environment.
Now I'll hand, it over to Alister to go through our financial highlights.
Thanks, Mark and the fourth quarter Suncor generated $1 4 billion of funds flow from operation. Despite the maintenance of the beginning of the quarter.
Now this excludes the onetime provision for the future payment of $186 million related to a box of guarantee you provided and two thirds of them 18, and two thirds of the 19 for the Keystone XL pipeline can you share of the continued to progress of.
Yeah.
These results demonstrate solid performance across the portfolio and the value of our physically and reviewed and model and the world with volatile commodity prices.
Generated $300 million of cash flow after the sustaining capital on dividends.
Our price realizations remained strong during the fourth quarter, we saw bitumen price realization.
Proved by $4 and 60 per Boe Canadian.
And some of our crude prices improved by all the way $1 per Boe Canadian.
<unk> recorded $450 million of operating funds flow.
<unk> seasonally weaker of headline cracks and lower margins on higher volumes of exports of bottles.
This also reflected through the smaller FIFO lift uplift as compared to Q3, which was driven by relatively flat benchmark pricing and Q.
And for it.
Adjusted utilization with BOE bolstered by taking advantage of our broad terminal expansion the Mark mentioned.
And Q4, with Susan and weaker demand and in advance of of 'twenty 'twenty, One plan maintenance, we leverage the fixed cost nature of our business and story.
The build refined product inventory, you'll recall that we successfully implemented the strategy for the Edmonton refinery turnarounds and <unk>.
We expect to capture maximum value for the inventory.
And we sold into the summer driving season and then.
And the improving economic environment.
As Mark said, our full year operating expenses of $9 $9 billion came in the lower target. This is the reduction of $1 $3 billion from 2019.
This 300 million or 30% more than our previously communicated target.
Similarly, the 'twenty and 'twenty capital spend was comfortably within our guidance range, which removed $1 $9 billion and capital from the midpoint of the original guidance range for 'twenty two 'twenty.
We achieved these reductions while continuing to prudently invest and future cash flow growth completing several highly economic and initiatives.
And as highlighted.
And as you saw on our December guide, we had estimated at that time the Reed.
And we pay at least 500 million to $1 billion of debt and make 500 million barrels of share repurchases.
A bunch of lower commodity prices and today's levels.
As we all know the macro pricing environment has improved since our guidance release.
Should this be sustained or allocation of incremental funds flow.
We'll be to debt reduction and further increasing the buyback.
I will reiterate Mark's comment the other okay.
Capital guidance range will not increase with higher commodity price.
Let me address shareholder returns.
At this time, we will not increase the dividend.
Referring to use of funds flow to increase the share buyback as we believe our stock is deeply discounting both on an absolute and relative to sales.
We remain committed to providing our shareholders with a.
The 68% on your cash return.
Dividends remain a big part of our shareholder returns and does reduce costs and enhance margins from the existing off the base. This will provide the foundation to increase the dividend going forward.
So for clarity on our updated ranges of current commodity prices.
And for debt repayment or one to $1 5 billion of share buybacks $500 to $1 billion.
No I do recognize the value analysts and investors user on commodity price assumption.
For guidance should commodity prices increase further we expect additional funds flow to be allocated approximately two thirds to debt repayment and one third to share buybacks again of Mark has said and I have said, we will not increase of capital from occurring.
The guidance range.
Market went and hand, it back to you and talk about the outlook.
Thanks Alastair.
To emphasize and important point, both Alistair and I have made as prices improve and cash flow increases we will allocate those funds to the balance sheet and shareholder returns.
I don't think I need to say that our capital program will not change, but it won't.
Reflecting on the 2020 performance.
Across all of our assets it did not necessarily meet our expectations nor of that of the shareholders.
Further crude price weakness and of collapsing consumer demand unusually impacted both sides of our physically integrated model our share price and its relative underperformance to peers reflects these challenges the management team and I are committed to restoring our performance to not only historic levels, but the.
Further strengthened and I delivering on the $2 billion cash flow commitment, we made previously and.
In fact, I am very encouraged by the progress, we're making to become a stronger more resilient organization.
Since the completion of maintenance and October our asset performance has been extremely strong and January upstream production and downstream utilization was consistent with the performance and November and December reflecting the best three months production period and the company's history.
Several actions taken in 2020, we will have a positive impact of cash flow and 21 and beyond including lowering our cash breakeven to maintain financial health and committing to significantly reduce our operating costs and capital spend and we successfully exceeded these targets in 2020 and we will.
Continue to structurally lower costs this year and going forward.
Changes, we made to operate Fort Hills resulted in significant cost reductions the.
The increasing production from the second train, which is focused on ramping up the mine capacity will continue with cost discipline and order to maximize the value of this asset.
Fire bag maintenance and capacity upgrade were carried out Jerry and base plant upgrader maintenance to fully realize the new infrastructure and achieve higher production rates.
As I stated in Q3, we believe the timing was right as we expected the price going forward would be higher than what it would be in October.
This was the right call.
Following the brief maintenance activity the asset has been operating at over 210000 barrels a day or 98% utilization capturing the full potential of the asset and higher pricing and late 2020 and into this year.
The announcement of Suncor, taking over as operator of Syncrude and Q4 of 2021. This is a very significant step forward for the asset and in fact, it'll be the most significant cupboard governance change and the history of Syncrude.
Similarly to the.
The structure.
To the structure and roll. This operator is Fort Hills, So it's very similar to that and.
So we will operate syncrude and a very similar way.
It is anticipated to generate approximately $300 million of incremental cash flow on an annual basis for syncrude by capitalizing on the collective advantages of our regional operations.
We're looking forward to realizing this value by building on the increased reliability of the asset over the past few years and lastly.
And this is unique to suncor, we continue to invest and high return economic projects successfully completing several initiatives initiatives that I mentioned earlier.
This not only focused on generating positive returns for our investors, but it will also help us drive down the carbon footprint of our business restarting the co Gen investment and a 40 mile Wind farm are great. Examples of this as we work to deliver on our commitment to add $1 billion of incremental cash flow by 2000 and <unk>.
And three growing list of <unk> 2 billion of year by 2025, and reducing our carbon intensity by 30% by 2030.
As consumer demand and pricing steadily improve and gained momentum we have significant tailwind to both our downstream and upstream businesses. In fact, I can't think of being in a better position than we are as we come into 'twenty and 'twenty one day.
Free funds flow generation capability of our business remains intact and in fact was enhanced during 2020.
I'm confident that we'll deliver on our plans, namely significantly better safety and operational performance strengthened financial position and increasing shareholder returns and with that Trevor I'll turn it back to you.
Thank you Mark and Alister I'll turn the call back to the operator to take some questions. Operator. Thank you Sir as a reminder to ask the question you'll need the press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A and Q&A roster.
Again that is star one if you'd like to ask the question.
And our first question comes from Neil Mehta from Goldman Sachs. Your line is now open.
Thanks, guys and and appreciate the opening remarks here on safety and maybe that's a good place to kick off on just the operational reliability.
The 20 market you said with the tough year, where there was a lot of lost opportunity process across asset by asset.
On a go forward basis that could represent an opportunity. If you can capture back some of that debt cash flow. So can you go through each of the core assets and.
And what you're doing to drive operational improvement and any quantification of that upside with the great.
Yes, thanks for the question Neil.
Clearly and we've spent a lot of time and the last month or two talking about our priority for me and the leadership team and the entire organization is operational excellence, we're committed to safety above all else and delivering on the reliability that's consistent across the entire platform.
Form and all of the assets.
Including Syn crude.
And and so and each situation, where something's gone wrong, we focused our attention on how do we move forward and improve the asset performance and structurally integrate that so that we learned from things that have gone wrong. We are very encouraged by the progress that we're making.
Can see it in our results in November and December and January and even at Syncrude you've seen there.
Reliability and 2019 was the second best in their history, and we have additional steps that we're taking to improve it further so it's whether it's at Fort Hills, where were now and the process of working with all of the owners to ramping up to full rates or whether it's capturing the $300 million.
Of gross savings for the partnership at Syncrude or delivering on the reliability and production expectations at base plant the.
Our focus is exactly the same it's the <unk>.
Number one priority for the company and and that is where our attention will be.
Alright, I'm sure there'll be more questions on that I guess the follow up is just the the framework around cash flow. So and 22019, you produce $10 $8 billion of cash flow and a $57 of WPS environment today were sitting.
Minus that price and I know 2021 is a noisy year, but as you look out the 2022.
<unk> got at least $6 million to $700 million of cost savings. The team's tests that are going to flow through and then you have another couple of hundred million dollars of.
Have upside from Syncrude, and even if you back out FX and weaker refining margins sensitivities would suggest the $11 billion of cash flow and around that same oil price does any of that math seem off to you and then.
Of course, you know I'm not asking for a hard number but just the framework around published sensitivities and to the extent and you get back to those 2019 levels of cash flow of that $11 billion number.
Is it fair to assume that Capex will stay in that $5 billion range is that or do you do you see that biased higher and.
I'll, let you take it wherever you want to with that.
Yeah, Thanks, Neil I'll talk to the one.
You know, we don't we're not going to gauge of the cash flow, but if you think about of the assumptions you laid out there.
I don't think bus and unreasonable.
Level.
And as Mark said structurally improved the operating costs of the business.
And it will drive additional cash flow as we go forward and obviously the.
The other.
As we ramp up Fort Hills, and fill rates and will also help.
What I would say on on the allocation of we've been very clear.
Every payment.
And the balance sheet and returning cash to the shareholders is there a priority here.
Do I think the couple of going through increased materially from the levels and said for 'twenty one no I don't think it'll be.
Pretty consistent with those levels of Youre seeing at this point in time. So I think your assumptions would be for a very positive 22, and I would and Gulfport.
Thanks, guys.
And thank you and our next question comes from Greg Pardy from RBC Capital. Your line is now open.
Yeah. Thanks, good morning, and I'll Echo, what Neil seeing the Mark I know how much you care about your book your workers and so forth. So I appreciate you addressing the safety issues head on because they are so important.
Im wondering and I wanted to take that and kind of opened opened up the door. There on Syncrude I was going to ask about that anyway.
But it kind of gives you a bit of of forum what is the path to.
The success looks like for Syncrude dimension, and the operator ship, which is being end of this year you've done the bi directional pipeline, but you're also starting to open up on governance and I'm just curious as to how how and what those changes are and then what you would see coming from them.
Yeah, Thanks, Greg and I appreciate it.
And with Syn crude.
The.
The original structure of it had a entire separate corporation.
Oversee it because none of the owners actually did anything around the oil sands mining or running up graders from oil sands mine material.
Both of which are somewhat unique.
And now over 80% of the ownership with ourselves and Imperial where the owners are directly mining oil sands and for US. We're also upgrading the material.
So after a long extensive assessment by the owners we concluded that the best way to maximize the net present value of that asset to all of the owners was to collapse the overhead structure and integrated and eliminate the duplication of the overhead there and the Corp.
And structure with.
The suncor and eliminate that duplication and just extract a lot more cash out of the asset and we would if we had all of that duplication.
So this is the first major structural change we're by far the most significant since it was originally constituted back and the seventies and so this is a substantial change and as I mentioned now it will look a lot like how Fort Hills looks and the way that it's managed and governance.
Okay, and I'm going to ask a follow up because I want to ask anything on the other assets, but then so the decision, making just correct me if I'm wrong that under the JV structure was and in essence did you have to get to unanimous decisions. Despite.
Some of owners owning relatively little.
And as a result of this thing or are you much more on the driver's seat then too you know what.
And between yourselves and I know the kind of drive the decision, making and the timing of that Youre looking for.
And there's really three different categories. There are certain decisions that we could take unilaterally and just move forward to operate the asset. There is other decisions that require three of the owners and 51% of the ownership to get through and there is other decisions that require unanimous.
The pork from all of the owners.
And most of the ones that require unanimous support are actually quite small so a lot of these decision, making and have it hasnt changed but it allows us to drive.
Day to day decisions inflammation implementation of technology alignment around how the functional support and decision, making leveraging supply chain and and business support. This is why it generates.
Significant value without actually having to build any new assets or create a massive transaction associated with it. So we're very optimistic about it. This is just about <unk>.
Getting far more effective and efficient management structure for the organization and I'm Super encouraged by how the Syncrude team has been responding and all of the great progress they've made and the last couple of years. So we're very optimistic about the step.
Okay terrific, thanks very much.
And thank you and our next question comes from Manav Gupta from Credit Suisse. Your line is now open.
Hey, guys. So I wanted to focus on and then I think on the filings.
Utilization went up and occasionally.
But the actual product sales and was down I'm trying to understand was this the decision taken because and you saw the vaccine announcements and you talked probably and that's holding back some and lengthy so you'll get much better prices in the <unk> and this was on all of the reasons. You also saw a little bit of looking capex. The headwind this will all of the.
And obviously the commodity prices are high and so the volume has actually already book, but I'm just trying to understand was this the thought process of holding back some inventory.
Okay.
Yeah.
I mean, maybe I'd just say, there's two factors that are driving the increase in working capital one was inventory outcome to that and a minute and the other is the fact that just commodity prices went up when commodity prices go up our receivables go up our working capital goes up.
So I guess in many ways, we would say that's a very good thing.
On the inventory side you know.
There's a couple of pieces to it some of it's just cargo of timing, but we're getting ready for some fairly significant work and then the upstream.
And the upstream organization, we actually have the.
The most significant turnarounds, we ever have so and.
And are you two upgrader at base plant, which is two thirds of our capacity at base plant is going into turnaround for the first time and five years and Syncrude is also taking their big Coker offline. This year as well for for a turnaround and then we also have a bunch of turnarounds and the.
Refining some of which we pushed from last year and so as a result of that we built inventory. If you go back and look at how we dealt with this in 2018, we built inventory leveraged our entire asset base to use our own assets to build the inventory versus pushing net onto our competitors' assets and increasing their use.
<unk>. When you think this is just prudent management, we're expecting to draw down this inventory and the first and second quarter as we move forward here and and we are very optimistic that we'll be selling a lot of the product inventory into the primary of driving season as we get towards the summer.
And it makes perfect sense I have a quick follow up on the depth of reduction target and I'm trying to understand is this one to one $5 million debt reduction target basically be on organic.
Discretionary cash flow generation, because as I understand as you talked about just looking capital of 400, Linda loves you would have guessed get probably 200 million and asset sales proceeds from Golden Eagle and then you have one or the $1 billion coming in from tax receivables. So there's the additional one five to 2 billion and cash comes.
And on top of the free cash flow generating so I'm just trying to understand is the guidance of one to one five debt reduction purely based on the organic free cash flow.
Yeah, Thanks for that I'll take that.
And I mean.
What I would say the.
And our commitment to the market and obviously based on I think lower commodity prices and many of you are using which is why I gave you the.
The two thirds of debt reduction and one third of the stock buybacks, if you hope of higher commodity price, but certainly.
And when we're looking at other we look at it from cash flow from operations I recognize the hub of tax repayment coming.
In Q4, and obviously, we just announced the sale of Golden Eagle. The use of additional cash flows that will come in and we will.
And we allocated and the same monitors.
David.
Thank you so much for taking my questions.
Thank you and our next question comes from the state.
And from Bank of America. Your line is now open.
Thanks, and good morning, everyone of Mark you mentioned investments and midstream opportunities and highlighted the broad terminal and just wondering if you could elaborate on the strategy of how you're thinking about synergies investments and value at.
Anything incremental.
Yes, thanks for the seats.
And it's interesting because part of the issue with it is we have highly competitive assets and.
And the downstream side, so you're and you're seeing that right now is that despite the fact that product markets are oversupplied, some refineries of temporary shut down some of actually permanently shut down.
You've been using some of this export infrastructure both off the off the west coast, essentially and the east coast to be able to export some product and and be able to keep our utilization high and were doing that and making money off of the exports and so obviously the returns are lower but.
That's actually we see that as very positive. If you look at the New York Harbor crack strength were up.
$2, a barrel higher than we were and the November and December timeframe. So we're very optimistic that one as we built inventory. It's a good position to be able to sell at high prices as we go forward into the driving season and.
Two we're expecting strong recoveries associated with vaccines and such and easing of the lockdown. So so our view is that this infrastructure is an important way of managing the long term profitability of these assets, having the flexibility and it's allowing the stay stronger and a relatively weak of market.
And because we have such a competitive downstream. So that's why we think it's been a very good investment for us.
And that's very helpful. Thanks, Mark.
Also wanted to get your thought process on this north sea asset sales, which was which was nice.
Just wondering if you could touch upon the strategic rationale.
Valuation consideration and further opportunities in the region, given the stronger macro how youre thinking about the entire portfolio.
Yes, the thing with the Golden Eagle is for every one of our assets, we have and end of life.
Right.
We view that we kind of time out because we're not really and end of life player and all of this and so we've this has just been very disciplined with what we've always said.
We're kind of and early too to make life, but not end of life player and so if we felt that Golden Eagle and we've talked about this before that we would be exiting the asset or looking to exit the asset around this time.
It kind of been a little sooner it could have been a little later, we like the transaction and we feel that it doesn't and sell it at distressed prices that we would've seen last year and so this is just the disciplined and following our normal course the.
<unk> for US is this is actually all about making the right economic decisions for the shareholder and.
And whether our reserves go up and down and all of that kind of stuff and it doesn't really matter to us.
We've always said E&P, it's about driving cash flow for the shareholder and that's why we're exiting and Golden Eagle versus just disciplined execution of our strategy.
Very clear thank you Mark.
And thank you and the next question comes from Phil Greece from J P. Morgan. Your line is now open.
Hey, good morning, how are you.
Very good thanks Bill.
And.
The first question and I know theres been a lot of questions on costs.
And I hate to be redundant, but you know.
A lot of energy companies through the downturn took temporary cost actions.
And I was just curious how should we think about the structural cost reduction actions that you're taking moving.
Moving forward relative to potentially the return of any of these are you know.
More transitory.
The cost actions that you took.
Yeah.
Thanks, Phil I'll take that one yes, we are.
As you saw we exceeded of brilliant target by 30%. So we reduce their costs by one point some billion compared to 2019 levels of you talked initially although we thought about a third of those were really structural reductions.
And the rest would come back and overtime.
Gone through the year I would say the more above 50% and no I would say our structural reductions and the costs. So.
Being able to significantly improve of the structural reductions as we go forward.
The other 50% and I think will take some time and come back and over the next two to three years.
The other thing as we go forward youre going to Youre, starting to see the execution of all of the implementation.
All of the.
The 2 billion barrels of additional cash flow some of which is obviously further cost reductions across our business and the next couple of years some of which are margin of additions and then and some of which are of your business such as the investment and co Gen. The.
The 40 mile Wind project, which will come in and 25. So you began and they just see the real execution and the delivery of the benefits of the strategy.
And also maybe I would just add to that is as you look on 2021, we have several initiatives underway to continue to increase the structural change associated with it and this is part of the Suncor 4.0 of strategy implementing.
Company wide processes to drive further efficiencies and structurally drive down the the cost structure, which is exactly what Alastair said, it's part of the $1 billion of incremental cash flow by 2023. So so we continue to increase the structural cost changes here.
And.
Even in this calendar year.
No. That's helpful. If I think about other times in the past when you've talked about say of $20 a barrel opex target for oil sands and Fort Hills, and the I think of $30 per barrel or lower targeted at Syncrude.
How would you calibrate those targets today relative to the to the 2 billion of of cash flow improvements you've talked about in terms of timeline.
Yeah.
The interesting we see these and it's basically and incorporated and these targets that we've sat around and structurally changing it.
And Syncrude as an example, we said 90% and $30.
We think we basically have the capability to deliver on 90%. This year. The high end of our range on that asset shows the 90% utilization, although it's a big turnaround year and and we still have some challenges associated with executing big work with COVID-19, but the the cost structures lagged associated with it and.
This decision around changing the governance structure of Syncrude. We think is the final piece of that's required to deliver on it at base plant.
A lot of this is incorporated in these decisions that we've made which also includes driving down the overhead structure and the company. So so the $2 billion helps us and actually achieving these cost targets that you mentioned.
Sure.
And one for al or just on on the commentary you made around the dividends.
How should we think about whether it's like maintain and certain breakeven target or and eventual return to growth and the dividend and just any more color as to how youre thinking about that obviously very clear and the debt reduction versus the buyback piece.
Yeah. Thanks, Phil.
And now we are where we reset last year, we said two of $35 of UGI breakeven to cover of sustaining capital and the dividend.
We are executing on our cost reduction and productivity plums, we're driving down the the cost side of the business.
So the other ones is within the satisfied the all of WTO breakeven to increase the dividend. So the breakeven will stay the same but driving down and operating costs driving day sustaining and capital gives us the scope to increase the dividend as we move forward and we're very confident of our capability on the.
The execution of.
Okay. Thank you.
Thank you and our next question comes from Dennis Fong from CIBC World Markets. Your line is now open.
Thank you and good morning, and thanks for taking my questions. The.
First maybe it relates a little bit too I guess and Neil and Phil's question I know you've been very specific about talking about the restart of both of the cogent and the wind farm project not impacting this years capital spending expectations.
How should we be thinking about the balancing act of improving cost structure of both from a cash cost and the capex savings component of things associated with and counterbalanced I guess with the increased spending associated with the restart of both of these projects kind.
Of this year and going forward through the completion of on both projects and I've got a follow up as well. Thanks.
Well, Dennis and this particular case I mean, what are the reasons that we did just plow ahead with them as we wanted to make sure when we announced our guidance last year is we wanted to make sure that if we moved forward with these projects two things were true one is we weren't going to stop again, because it's very disruptive.
You have to have that happen and then secondly, we wanted to ensure that we could deliver on the capital of guidance. So theres been a lot of focus on optimizing capital even since we released guidance, we feel comfortable now that we can deliver these projects.
We're targeting and continue to drive to the middle of the range of the capital targets, we've put out there and we feel very confident that these are great value adds for our shareholders. So you know.
We're excited about moving forward on these.
Okay great.
No that's great color for for this year and and just just to make sure.
I would presume that also carries forward. The subsequent years as some of that spending increases in we'll call. It 22 23 of them just in terms of free cash flow improvements.
Via kind of savings and the cost structure of the business, which could maybe potentially offset some of the impacts of the increased levels of spending just from a of free cash flow basis for the company.
Yes, I mean, if you're referring to these two investments specifically this is kind of peak spending on these two assets.
And as we move things forward. So so we're really we have about $1 1 billion left on the co Gen, but just generally associated with it one.
Of the things, we're setting up for and that's why I feel like we're very well positioned as despite the weak stock price, we positioned ourselves to generate significantly higher free cash flow and even where we were in 2019 if.
If the commodity prices and stopped to support it and as a result of that we can actually pay down on the data as Alastair mentioned two thirds go into that and the and the rest go into share buybacks. We think at this point and time, particularly given the relative and absolute weakness of the share price. This is a great way to allocate cash flow as we go.
Forward, our expectation is to be very disciplined on how we manage the cash as well. So that we can keep this going and and keep very strong free cash flow as we go forward.
Great Great and.
And so my follow up is really on the on the operational side with respect to the the bidirectional pipeline. Obviously, there is a significant amount of turnaround activity that is being driven by I guess, both of you on Youtube and the Syncrude facility.
In Q2, how should we be thinking about the actual utilization of the pipeline.
Through that turnaround period, I guess, unfortunately, just the the timing of these turnarounds happens to be significant and.
What are some of the I guess testing measures or kind of.
The performance metrics that Youre looking for out of this bidirectional pipeline and and how are you planning to integrate that into existing operations and maybe just trying to understand.
The net benefit of happens to be for this year and what the puts and takes off and to be obviously, given and then outlier year with respect to maintenance.
Yeah, a good question I mean, it's interesting because of the complexity of this is and almost allows us this as almost like running a linear program and our refinery we expect the utilization to capture every economic opportunity that presents itself to be able to optimize between the two of <unk>.
And in fact as soon as we started up the line we started moving sour synthetics from base planned into the Syncrude, the hydro treat them and sell them and sweet synthetics and capture the spread and and so depending on the situation around.
The mine throughput refinery utilized or upgrading utilizations hydro treating utilizations and such that the focus is maximizing the value of this line on every opportunity that exists. So we will do it just like we do our other assets what was the economic opportunity and what percentage of of did you capture and and <unk>.
So that's what we're looking for and that's and it significantly improves the flexibility of syncrude to maximize the value of the example, we've used and the fastest we've literally been selling bitumen at a discount when the upgrader and Syncrude is running below utilization because they've had some mining problem for a period of time.
You know, it's it's crazy when you on both and these assets are essentially side by side now we have the opportunity to capture that.
The relatively significant volumes, that's our focus and and.
This is what drives value for the shareholder.
Great. Thank you.
Thank you.
And our next question comes from Mono hold shelf from TD Securities. Your line is now open.
Good morning, everyone and thanks for taking my questions I'll just.
Start things off with the with a follow up on on low carbon energy.
If we look beyond the co Gen and 40 mile you have four other opportunity buckets, including.
Biofuels enhanced the extraction renewables and energy efficiency. So of those four where are we most likely to see the the biggest push from a.
Capital allocation perspective, and can we reasonably expect that low carbon wedge to to increase overtime.
Yeah. It's interesting this year of like if you take the midpoint of our guidance we're spending about on on these initiatives that we just talked about about 10% of our total capital between the co Gen and the wind farm and such and.
And so that's actually where we're at.
And and you know I would say that that's probably in the ballpark we were still working through our strategy. We have a we're planning on a virtual investor conference coming up in May where we're going to walk through this and some level of detail and where are the areas that we think we could play I mean, obviously it's fairly.
The early days, but and the electrical markets, we already use co gen and export it to the market to drive down coal power generation and the province of Alberta, which is the target of this investment we're already and Biofuels and with the ethanol plants that we have and playing and that so and the.
Energy efficiency is one that pays all day long for the shareholders. If you have and economic return, obviously, that's going to be a key area. So I think it's it's a we will get into a little bit more detail when we get to me.
Menno.
Okay, Thanks, Mark and just to quickly.
Just I guess the follow up question would be related to the market access or are you seeing any notable developments on slide five at the moment and how confident and argue that debt on streaming of line three replacement is still a year on the debt.
Well, it's interesting on line three I mean, clearly just in the last couple of weeks more permits have been issued and and it's moving ahead. So you know I think that our confidence and and that continues to increase and we feel really good about that whether it happens exactly at year end or not I don't think of as all of that.
Relevant.
But we think it's on track for around that timeframe with line five we believe shutdown is of very low probability event the pipeline.
Are the safe or very safe on that system and it serves many consumers both in central Canada, Quebec, and Ontario, as well as Michigan and Ohio. So we think it's very important to those economies.
Enbridge mainline.
And their focus on and so that we use that to get product into Ontario, and such but one of the things. We have is we have this portland pipeline, which we now own exclusively and allows us to bring waterborne crudes into Montreal. So if it turns out that we had of rents we think we're better positioned on any.
Body and this market to keep our refineries moving forward and get crudes of them.
Either through waterborne crudes coming into Montreal, or using what pipeline capacity, we have with outlined five getting into Ontario. So.
We think where we're much stronger position than anybody else and that market and as a result of that if they constrained and the market. We think that will get more than enough from the market to be able to pay for any efficiency of our or squeezed that you get on the crude side going into the refineries. So.
We feel that we have a very good risk management position, there, even though we see it as a very low probability event.
Okay. Thanks for the color Mark.
Thanks, Megan and thank you and our next question comes from Chris Tillett from Barclays.
Your line is now open.
Hey, guys. Good morning, Thanks for taking my call most of my questions actually already been asked but just I was just kind of wanted to revisit.
Some of the comments on capital allocation appreciate the messaging there has been very clear about.
Priorities towards two thirds of debt reduction and one third buybacks and just curious.
Maybe to take a step deeper there.
Is that sort of regardless of where you.
You sit in terms of debt to cap ratio or is that something that you could potentially revisit once you get back inside the 20% to 35% long term range that you guys had talked about.
Yeah, Chris I'll take the book So the question no let me be very clear.
'twenty 'twenty, one because it was the dish.
Cash flow generated keeping capital floor within the range as Mark said.
And if there's no cash flow will go in and two thirds of the reduction and work one zone to the buy box.
Okay.
Appreciate that that was it for me thanks guys.
And thank you.
I would now like to turn the call back over to Trevor Bell for closing remarks.
Alright, Thank you operator, and thanks, everyone for joining us. This morning. Appreciate you taking the time to listen in and my team and I are around all day should you have any follow ups. Please reach out to us and we'd be happy to chat, thanks, everyone and stay safe.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.
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