Q1 2021 Suncor Energy Inc Earnings Call
Good day, and thank you for standing by and welcome to the Suncor Energy first quarter 2021 financial results conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Mr. Trevor Bell V. P Investor Relations. Please go ahead.
Thank you operator, and good morning, welcome to Suncor is first 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 risk factors and assumptions.
<unk> and they are described in our first quarter earnings release as well as our current annual information form both of these are available on SEDAR, Edgar and our website Suncor dot com certain financial measures referred to in these comments are not prescribed by Canadian GAAP for a description of these financial measures. Please see our first quarter earnings release.
Following formal remarks, we'll open the call up to questions now I'll hand, it over to Mark for his comments.
Great. Thanks, Trevor and good morning, Thank you for joining us.
Four I get into our opening remarks, I would like to note that we'll be hosting an investor and analyst community at our virtual Investor day on May 26 on that day, we will address in detail the outlook for our business from an operating and capital allocation and the ESG performance perspective.
As a result, our remarks today will be focused primarily on our first quarter results.
In the first quarter, we executed upon the commitments, we have made to our shareholders, namely operational excellence financial resilience shareholder returns and fortifying our book.
Percent rec.
Record in situ production of 252000 barrels a day and a disciplined focus on costs across the company.
This performance was supported by increased upgrading flexibility achieved through certain crude and base plant interconnecting pipelines.
Within our downstream business, we generated nearly $1 billion of funds flow from operations as our 92% utilization at our refineries continue their industry leadership position.
Our physically integrated model generated $2.2 billion of funds from operations, excluding the restructuring charge of approximately 125 million after tax related to our previously announced head count reductions.
We reduced our total debt by $1 1 billion and returned approximately $640 million to shareholders through dividends and share buybacks or roughly 30% of funds from operations or.
Our buyback resumed at the beginning of February and including purchases made in April we bought back approximately 20 million shares for $530 million, representing a buyback yield of 5% on our market cap on an annualized basis.
Focusing on operating performance.
Our fourth quarter call I mentioned that the combined base plant and Syncrude Upgrader set the second best quarterly SCO production in our history with 514000 barrels a day. This trend continued into the first quarter with even stronger production of 520000 barrels a day.
Together these two quarters, mark the highest ever SCO production at our combined upgrading facilities over a six months period. This performance reflects our strategy to maximize the value of each barrel.
We have a similar good news story on costs, which we continue to drive down. Many of you had recognized the improved cost performance in Q4 closing out the year at the bottom end of our 2020 guidance range, the first quarter trend and 12% below these levels, reflecting the significant strides made in 'twenty.
<unk> 20 on the initiatives to structurally improve the cost of our business.
As a result, the first quarter oil sands operations costs averaged $23 a barrel Canadian.
More than absorbing the 20% quarter over quarter natural gas price increase.
Syncrude achieved 94% utilization with cash operating costs of $32 a barrel during the first quarter.
Along with the other owners and personnel at Syncrude, we are making good progress on the smooth transfer of operator ship of Syncrude to us by the end of the third quarter.
At Fort Hills, our net production averaged 51000 barrels a day, reflecting a change in the mine ramp up strategy.
With full partner support a decision was made to reset the mine plan.
Over the next four months, we will increase the available ore inventory to provide a consistent feed to the plant while keeping our production flat.
Appropriate or inventory levels are required to operate the plant at 90% of nameplate capacity on a two train operation. This change does not impact our production guidance range for the year. It barely changes the production profile throughout the year.
Our downstream had another good market, leading quarter generating nearly $1 billion of funds from operation. Despite continued stay at home orders across Canada.
Leveraged our midstream assets and expertise to capture robust margins and export it significantly higher volumes I am confident that as youll see the cracks improve in the Canadian economy unlocks as vaccinations pick up we will continue to build on this level of profitability both in volumes and margin increases.
Finally, and most importantly, we hold the health and safety of our employees and contractors above all else currently the third wave of the pandemic in Canada is significantly impacting the region of Fort Mcmurray.
Given this situation and with Syncrude in the middle of a turnaround schedule, we've delayed the start of our Youtube turnaround at base plant until at least June we won't see when this gets finalized.
This decision supports the completion of Syncrude turnaround and minimizes the overlap between the two assets.
Measures have been taken to ensure our planned maintenance can be performed safely and efficiently. We currently expect no material impact to our 2021 guidance.
We also continue to work with the community of Fort Mcmurray, and with governments and other industry players to accelerate rapid testing and now vaccinations in the region.
We'll continue to provide assistance to the community and its citizens during these trying times.
Now I'll hand, it over to Alister to go through our financial highlights.
Thanks, Mark in the first quarter as Mark highlighted suncor generated $2 $2 billion of funds from operations. Yeah. This is Marc said excluded approximately $125 million of after tax restructuring charges, resulting from staffing reductions that we announced in 2020 corporate call.
We do expect to record another restructuring charge Atlanta. This unit in the third quarter as we progress on Syncrude operated a simple integration.
The company wide processes and technology investments across the company.
Consistent with our plans we outlined for 2021, we allocated approximately two thirds of our free funds flow to debt repayment and one third to share buybacks.
Strengthened the balance sheet by reducing our total debt balance by approximately $1 $1 billion.
Also termed out a portion of our short term commercial paper by issuing 30 year debt in the U S and Canadian markets, what I'm equivalent $1 $5 billion Canadian.
A very appealing three 8% average rate.
I believe this issue and this demonstrates the market's confidence in the long term viability of the oil sands and are physically integrated models.
Restarting our share buyback program at the beginning of February we repurchased approximately 12 million shares of $26 per share.
In April we purchased an additional $8 2 million Jews, Florida $215 million, so year to date, that's $530 million of stock repurchases or just over 20 million shares.
Our strong operational results supported our Sydney significant but arent through progress made in the quarter oil sands operations generated $1 4 million of funds flow nearly doubled Q4 levels.
This realization improving approximately 75% quarter over quarter.
SCO and bitumen realizations were nearly $70 per barrel Canadian Unfortunately, though per barrel Canadian respectively.
As Mark noted, we continue to progress our cost improving performance.
I can be in Iraq oil sands operating selling and general cost to Q1, 'twenty 'twenty four seasonality.
Not only out of the per unit cost coming down, but also our absolute costs are down by nearly $300 million. This was achieved while increasing production by 60000 barrels per day.
<unk> being a 50% increase and not some gas prices.
The E&P segment generated $285 million of funds from operations with price realizations of nearly $75 per volume Canadian.
As you will see from our financial statements. Our sales are lower than production E&P. This is purely a timing issue loadings in loss sales were delayed in the quarter given some challenging students.
This to reverse which will provide an uplift to funds from operation in the second quarter.
And finally, our downstream recording approximately $1 billion of funds from operations. So this is a healthy improvement from 2020 levels. Despite the continued and extended stay at home orders across months who've, Canada. They do recognize we benefited from a FIFO tailwind, but our industry leading utilization rate on a rift.
Blacks and of our integrated model, our midstream capabilities in our logistics net.
Our model allows us to place volumes with the end consumer that others will simply not able to do.
But as I said in February given the current market pricing environment, and our solid operating performance and the additional free funds flow is expected to be allocated to debt repayment and share.
Our buy box.
Our capital guidance for 2021 will not change and we maintain our free funds from the allocation of approximately two thirds to debt repayment of one third to share buyback for 2021.
With that I'll pass them by Tomorrow for some closing comments.
Great. Thanks Alastair.
Our first quarter results demonstrate a sharp focus towards operational excellence financial resilience shareholder returns and further fortifying.
Particularly in Canada, we are positioned to benefit from the large tailwind is expected in 2021 to both our upstream and downstream business and our financial performance.
Combined with our focus on cost margin enhancement and capital discipline in the form of our 2 billion dollar improvement target the free funds flow generation capability of our business is stronger than ever.
I do hope everyone can join us on our Investor day on May 26th we're looking forward to sharing more details about the plans, including the initiatives.
That are structurally lowering our cost and our capital base, increasing the funds flow generation capability of our business and adding financial resilience, while targeting increased shareholder returns and achieving all of this with better environmental performance with that Trevor back to you.
Thank you Mark and Alister I'll turn the call back to the operator to take some questions operator.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q&A roster.
And your first question comes from the line of Greg Pardy with RBC capital.
Hey, good morning.
Really just one question for me Mark and it's I guess digging a little bit back into into Fort Hills. So what I'm wondering is whether you've moved from on a sustained basis from a sort of a just in time inventory.
Inventory methodology right in terms of war versus a sustained buffer and then kind of a follow up is with the plan that you have laid out what does that mean for exit rates and then ultimately.
Yes.
Yeah.
Thanks, Greg Yes. It is.
An interesting way you characterize that I guess that that's a fair way of talking about it part of the issue with it is when you're slowly ramp up where we literally are constantly changing the operation of the two trains and in some cases running trains for periods of time shutting them down to average below.
Two.
<unk> minimum so so our view was this is look this is creating an enormous amount of variability within the plant, let's just clear off the overburden get the mine ready to go at full rates and then in mid Q3 or in September we're expecting to be at full rates and be within 90%.
<unk> of plant capacity at year end, and we're expecting that as you get into 2022, although we don't have all of our cost reductions implemented, but we expect to be very much in the range that we had initially stated for Fort Hills, which is in the 20 to $23 a barrel.
As you get into 2022.
Okay terrific and then the last piece of that that's helpful.
The last piece of that is just on the autonomous haul trucks I think you've deployed all of them. How is that how is that working and are you seeing cost savings flipping into that as it when it smoothed.
Yes, we stated before Greg we structurally we're driving down the costs at Fort Hills.
Part of that is autonomous haul trucks, but there's also lots of changes around staffing and supported the operation and such so yes, they are up and operating theyre going well and they're delivering on cost reductions.
Okay terrific, thanks very much.
Thanks, Greg.
And your next question comes from the line of Neil Mehta with Goldman Sachs.
Yeah.
Thank you. So the first set of questions just around capital returns a good deleveraging in the first quarter. It looks like you picked up the pace of buybacks here in April. So just can you talk about how you're thinking about approaching the buyback in 2021 and are you pulling forward some of the share repurchase relative to European plants.
Yeah Neil.
We.
Oh, it was pretty consistent with the numbers that we were buying back in March I would say that.
We are generating and realizing free cash flow, we are deploying it into two thirds to one third that we said so it's pretty consistent with thought I wouldn't say, we're currently drilling anything forward as we generate the cash flow.
<unk> to debt repayment on buybacks and the allocations that we said.
And then the follow up is just around the COVID-19 cases in the Fort Mcmurray area can you give us a sense of the conditions on the ground at this point what are you doing to manage risks around that.
And I know you talked a little bit about managing your turnaround schedule, if you could flush that out.
Yeah. Thanks Neal.
As we've stated before there is a massive amount of things that we've changed to be able to operate in a COVID-19 world everything from vaccine working protocols masks Sanitizers mission all sorts of different things. This has been augmented recently with rapid testing we were part of the Canadian CDL.
Screening consortium and so we implemented that in I would say that that is now being used across the industry up in Fort Mcmurray to help in testing asymptomatic individuals we're finding them.
About one 4% of the people that are testing positive.
With our rapid testing and such and then from that just recently, we've been working in collaboration with governments and the communities and Alberta health to be able to accelerate COVID-19 vaccinations within the region. I think this is hugely important and certainly would encourage all of the people in <unk>.
Mcmurray to get vaccinated as soon as possible, but this is a key focus area and all of that all the companies are working together on coordinating and accelerating rapid testing and vaccinations.
They turned around specifically to your question about the turnaround.
Part of the issue is there's a number of turnarounds going on within the industry right now sitting crudes into their big turnaround. Our view was is that the labor situation was already stressed the last thing. We wanted to do is overstress that so focusing on syncrude and getting the vast majority of it that way before.
We started the Youtube turnaround made a lot of sense to us.
Just being able to manage within COVID-19 and such I'm, we're hoping with acceleration of vaccinations and such will be in a much better situation to efficiently and safely execute the turnaround.
And it should actually open up the labor pool. So that's why we've decided to defer.
Makes sense Mark in a few weeks.
Thank you Neil.
And your next question comes from the line of Phil Gresh with J P. Morgan.
Yes, hi, good morning.
First question is just on the operating costs.
As you've talked about as you show in your slides you are expecting those to be pretty flattish.
For the full year of the first quarter, obviously, it was down year over year, but we do lap some extraordinarily low opex and <unk> and <unk>. So maybe you could just remind us how youre thinking about.
Ability to continue to knock out some permanent cost saves versus some of the temporary costs that we'll be lapping that will come back this year.
Yeah, Phil Thanks for the question clearly, our focus and generating the $2 billion of incremental free cash flow.
A lot of this is around restructuring the cost structure of the company that applies on the ground with things like autonomous haul trucks, but it also affects things like our supply chain. So we're trying to take a couple of hundred million dollars out of our supply chain and that's actually been going quite well, it's actually effect.
Being our tailings technologies, so we're driving down our sustaining capital and <unk>.
And some of our arrow by actually using the past technology, our supply and trading organization as is.
Doing a bunch of work on the trading systems and strategies associated with them, we're expecting to generate a bunch of money out of that as well and then we're working on structural changes at the corporate level. So.
Obviously, we are working at this as quickly as possible youll get a much better sense, when we get into Investor day, because we'll get into that how this actually shows up in a little bit more detail associated with it but we're very confident.
That we're going to deliver our $1 billion by 2023, and the $2 billion by 2025, So and I think that's one of the joys that we've continued to invest through this period, because it's going to offer ongoing and increasing cash flows.
Okay.
Got it.
And then just on the.
E&P business.
We had oil prices.
Return.
<unk>.
Close to 2019 levels in the quarter, but the cash flows and E&P.
We're still kind of more consistent with what we were seeing last year.
So I was just curious.
How would you describe the puts and takes of.
The performance of M. P. I recognize you know to the production is a bit lower especially versus 2019, but any other thoughts you could share on E&P.
I think we lost half of your question, Phil, but let me give it a try and you can follow up if I don't address your point.
I think part of it we view that we're kind of a pure E&P player associated with it because we really don't care, whether production goes up or down we really don't care, what the resource space looks like we're not short of resource in the company that's for sure and so the focus is is making the right decisions at the right time clearly.
We're in the process of selling Golden Eagle and that's just following our disciplined execution process associated with Terra Nova.
<unk> is one that we're working to get back online, but nothing's finalized there and we continue to work with the partners and the government around how that could potentially move forward and as Alastair mentioned in his comments, we built inventory in.
In the quarter and so we'll see some of that so you didn't see all the cash flow from what we are producing so.
Its in any particular quarter, it's not necessarily fully representative of the business.
Okay does that answer your question Phil.
Yeah.
I mean, it just it seemed like the.
Cash flow was not quite as consistent with.
Ah $60 oil period, but I guess as you said there was there were some inventories factors and other things but.
And I figure currency is also a factor as well nowadays, but I was just curious if theres anything I was missing that was it. Thank you.
Yeah.
Phil maybe I'll just jump in there the impact of the.
Sales and production and the inventory build was about 75 million in cash alone just to give you. Some quantum there. Okay. Okay. Now that's helpful. All right. Thank you.
And your next question comes from the line of Matt is Gupta with credit Suisse.
I just wanted to quickly focus a little bit on downstream.
What we saw all of last year wasn't Canada, managing COVID-19, a lot better than U S and it's kind of startup. This year, it's flipped a little U S is a managing stuff slightly better than Canada. Now you have a refining operations in both regions I'm trying to understand is suncor are going to be trying to sell more products and U S. Now that.
The demand is looking a little stronger on this side of the border and how you would manage the situation there are some.
Currently U S demand is looking a little better than Canadian demand.
Yeah, Manav I actually think you've described that quite well is when.
When you look at it I think what Youre seeing is a strengthening of U S demand as the as everyone's coming out of Lockdowns and in Canada.
Our demand is off I don't know in gasoline, it's probably off something like 6% in Western Canada, and 17% in Eastern Canada, right now, but but it's actually going the other way right like where we're going into some of the most extreme lockdowns that we've had during the entire COVID-19.
So you are starting to get this to some degree a bifurcated market associated with that what we've been doing is leveraging our logistics to be able to export products into the marketplace. I think that will be even be a bigger advantage as the U S is moving forward and strengthening further.
And so we'll continue to leverage that capability, although insane that much less of an issue in the second quarter, where we have the inventory now in Canada to cover our turnarounds and so our utilization will be much lower as we conclude that work. So I think the timing of our turnarounds is really got in Canada as well.
Okay. A quick follow up if you could update us on the progress on this front, we saw the mix getting slightly delayed and then there's always this issue of line five P keeps coming up how are you seeing line three so if you could give us a broader view on the egress situation in Canada, and then leave it there. Thank you.
Great. Thanks Manav.
And the pipeline situation.
Line three we expect to come on around this time or sorry by the end of this year around that period of time execution timelines are always moving around a bed is a bit dynamic.
Their confidence and certainty of that line coming on has never been higher.
And if you go to Trans Mountain Trans Mountain this is.
View a lot of this is just normal execution variability within executing align we're expecting that on towards at the end of 2022 and maybe early.
Early 'twenty three those two lines add 750000 barrels a day of incremental egress out of the market. So this will be very significant to the Canadian market and App and then finally on line five obviously this is a significant month because of the governor's called for the line to be shut down.
We don't think that they have the authority to do that obviously, we're working with Enbridge, who I think is working very hard and doing a great job.
Keeping the line in service and in one of the things, we keep emphasizing both to the northern states as well as into Ontario, and Quebec that if this line gets shut down it takes half of the oil that flows into Ontario refineries.
Stops it from flowing there this will have a consequence on the people in Ontario, and Quebec, and I think that the politicians, including the Canadian government are very cognizant of that and and working hard to ensure that the laws are followed and that's this line stays in service.
Thank you.
And your next question comes from the line of Chris Tillett with Barclays.
Hey, guys good morning.
First quickly for me can you just clarify the numbers you gave again earlier in terms of the buyback figures from April.
Yeah, So Chris.
April we bought $250 million worth of stock back, but eight 2 million shares so year to date, it's just over 20 million shares.
$530 million.
In dollar terms.
Got it okay. Thanks.
And then I.
Yes in terms of your approach there.
Would you describe it as being more systematic.
Throughout the year and just sort of occurs as the cash flow comes in the door or have you kind of frontloaded that or just I guess generally speaking where your head's at on that.
Chris is more systematic who's just going to flatline that we're not trying to opportunistically time the market.
Said you'd allocate our cash flow two thirds through debt repayment of one third to the buyback when we take a more of an art and your view of that so in this system, obviously going into the market buying back.
Okay. That's helpful makes sense and then last for me I guess just the.
Figures you highlighted in the presentation about the remaining.
Oil sands spend for 2021.
I'm assuming a good.
Good chunk of that is related to.
Some of the asset maintenance and turnarounds you guys are doing but can you give us any indication as to how heavy that may be over the next quarter or two versus.
The shape through the rest of the year.
Yeah, I actually think it's fair to say that if you go back and look at it historically, we spend the vast majority of our money in the second and third quarter every year, because we try and do all our maintenance essentially between April and October.
And do as little as possible through the winter period of time, so you're going to see the vast majority of our capital spend will occur in the next two quarters and certainly with the big turnarounds that that's actually where we're spending a good portion of our money obviously moving the turnaround at base plant could push some more of that into the third.
Third quarter, but most of the money will get spent in the next two quarters.
Got it okay. Thanks, guys.
And I will now turn the conference back over to.
As our moderator.
For closing remarks.
Great. Thank you operator, and thanks, everyone for joining us. This morning, if you have any further questions. Please reach out to myself and our team here at Suncor and we'd be happy to answer them everyone stay safe. Thank you.
See you on May 26 are here you on May 26.
And thank you. This concludes today's conference you may now disconnect.
Yes.
Okay.
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