Q2 2021 Suncor Energy Inc Earnings Call
[music].
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 1 on your telephone if you require any further assistance. Please press star zero.
I would now like to hand, the conference or Where's your speaker today, Mr. Trevor Bell Vice President of Investor Relations. Please go ahead.
Thank you operator, and good morning, welcome to the Suncor is the second quarter earnings call with me. This morning are Mark Little President and Chief Executive Officer, and Alister Cowan Chief.
Initial officer.
Note that today's comments contain forward looking information actual results may differ materially from the expected results due to various risk factors and assumptions that are described in our second quarters earnings release as well as our current annual information form both of these are available on SEDAR Edgar and our web.
My name is 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 second quarters earnings release following formal remarks, we'll open up the call to questions now I'll hand, it over to Mark for his comments.
Great well thanks Trevor.
And good morning, Thanks, Sir Thank you everybody for joining us.
In late May we held our Investor day and at that event, we detailed our 5 year plan, which focuses on value capture of our integrated business model.
Building on the growth phase from 2015 to 2019 best.
The optimization phase is governed by extracting increasing value from our business.
Through enhancing margins lowering our cost structure, providing increased shareholder returns and fortifying the balance sheet with significant deleveraging.
In comparison to the growth phase we.
It will lower our economic capital by 40% and add new revenue streams at mid teens returns.
The optimization phase is expected to deliver significantly higher shareholder returns, including a 25 per cent dividend CAGR through 2025 and continued stockpiling.
Tax.
At the same time, we'll maintain a 35 dollar U S. A W. T I break even and retire debt strengthening the long term financial health of the company.
Foundational to this performance is our steadfast focus on operational excellence by increasing.
Creasing, the productivity and efficiency of our operations optimizing the value of each barrel, thereby increasing the free funds flow, we will grow cash returns to shareholders and fortify our financial position.
The second quarter results delivered are focused objectives, namely operational.
Excellence lower costs and increase shareholder returns.
I'm going to go into each area in a bit more detail.
Our focus on operational excellence continues to result in strong operating performance.
Our operating performance from November to June of 2021marks.
The best months of production from our oil sands operations asset in our company's history.
That's the best 8 months of production and 15 plus years.
Base plant utilization was 98% over this period and.
And we had yet another quarterly record at <unk>.
And since you with 253000 barrels per day.
We also completed significant turnarounds at all of our refineries as well as at Syncrude and buzzard and at the same time generated funds flow from operations of $2.4 billion.
Approximately 40%.
A cent or 1 billion of these funds was returned to shareholders in the forms of dividends and buybacks.
Since we began our buyback program in early February through to the end of July we have bought back over 42 million shares for $1.2 billion, representing approximately 3.
3% of the outstanding shares.
Turning now to operating performance.
Oil Sands operations production of 460000 barrels per day was approximately 10000 barrels per day higher than the first quarter, reflecting strong and reliable operations.
From a utilization perspective base plant operated at an average utilization of 96% in Q2, continuing a strong trend.
Meanwhile, the operating performance at <unk> since you from November 'twenty 'twenty, 2 June 2021average.
750000 barrels per day, making it the highest daily production period in nearly 20 year history for fire bag on Mackay.
Executing the nameplate capacity an increase at the fire bag last October contributed to this record production.
In terms of costs.
200, <unk> second quarter cash operating cost at oil Sands operations were $23.85 per barrel.
Looking at the last 8 months oil sands operations averaged $23.50 in cash operating cost per barrel we've.
We've achieved these types of unit cost before.
But what makes our 2021performance stand out is that we fully absorbed over a 100% increase in natural gas price versus the previous periods with similar unit cost results.
That's approximately 1 dollar a barrel increase being absorbed by reducing costs elsewhere.
Syncrude production of 110000 barrels per day includes the impact of significant turnaround at their largest coker.
All planned scope, including some of the.
Planned for this fall was completed within budget.
All 3 kocur's are online and operate.
<unk> are fully lined out for a solid second half of the year.
Well, we went through this in detail at Investor Day, it's important to recall that this assets operating performance has steadily improved and we have a clear line of sight into synergies and reliability to achieve sustainable $30 per barrel cash operating.
<unk> costs.
At Fort Hills production of approximately 45000 barrels per day reflects the updated mine plan that we discussed on our first quarter call, specifically building or inventory for ramp up towards a 2 train operation.
By the end of the quarter.
Inventory build was slightly behind schedule with access to additional contractor equipment and labor, taking more time to ramp up than expected. We now have most of the additional contract resources are in the mine and we expect that will be fully ramped up by the end of August.
Subsea.
Subsequent to the quarter, we realized that we would need to change the slope of the south mine face to maintain slope integrity as best part of the mine will form a critical permanent pillar between Fort Hills, and the Syncrude Aurora mines.
This will delay our ramp up of Fort Hills to 2 trains until.
The order of 2021 as the South mine face contained approximately 60% of our ore inventory that we thought was available.
So to access this ore we will need to mine more overburden, which is just going to take some additional time on.
Obviously, given the mine is very early in its life on.
And the ability to ramp up earlier is limited.
As a result.
For health plans to continue on 1 train at the current production level for the remainder of the year.
With the transition to both primary extraction trains beginning late 2021 to enable full production.
Our flag in early 2022.
2021 and annual guidance for Fort Hills production and cash operating costs have been updated to reflect these changes.
There's no change to our long term view on cost as discussed at our May 26 Investor day.
Similarly, we expect cost.
Cost to continue to improve every year towards a cash cost target of $20 a barrel by 2024.
In our E&P operations generally volumes were consistent with the first quarter.
Other than buzzard, which fully executed its turnaround in the second quarter.
With our downstream segment throughput of 325000 barrels per day included planned turnaround activities across all our refineries.
This was an opportune time for this activity as stay in place orders continued in Canada throughout the quarter and broader North American refining complex.
It's the continued challenged macro environment.
As we discussed previously we build refined product inventories to support the planned turnarounds with turnarounds complete on the demand increasing across Canada as Covid restrictions are lifted we are confident about our downstream strength.
And positioning for the second half of the year.
We expect the U 2 turnaround at base plant to begin in early August having a production impact of approximately 125000 barrels per day in the third quarter.
We anticipate partially offsetting the impact of the turnaround via Inc.
Increased bitumen sales to market.
Our decision to swiftly respond and stagger maintenance activities when Covid cases searched in the region, specifically pushing the Youtube turnaround from Q2 to Q3 enabled us to complete the planned scope at the Syncrude turnarounds and ensure safe and reliable.
Patients across the assets.
This was the right approach considering the strong operational performance at base plant and no material change to the scope or cost of the planned turnaround we.
We have completed 1 of the most significant maintenance schedules in our history during this quarter.
While this has had.
On impact on production and costs at Syncrude and refineries in the quarter. We're now running at full rates and sets the stage for strong results in the second half of 'twenty, 1 and into 'twenty 'twenty 2.
In closing I wanted to emphasize that our business model and philosophy.
Regardless of short term volatility.
We will remain laser focused on operational excellence capital discipline, and long term shareholder value creation, and returning that value to shareholders, while fortifying our balance sheet by continuing that production.
Alastair I'll now hand, it over to you for the financial highlights.
On smart can do.
Good morning, everyone from.
For the second quarter, we returned approximately $1 billion share holders in the form of a $350 million dividend from $650 million in share repurchases.
During the quarter, our buyback amongst approximately 23 million shares on that.
The average.
$20 per share. In addition, we have received approval from the Toronto stock exchange to increase our share buyback program on Fox 3.4 million shares or approximately 3% of Suncor is issue.
<unk> done an outstanding common share is 276 million shares from approximately 5%.
Price was in the second quarter. It was about on Cryolife with Suncor generated $2.4 billion of funds from operations.
Business environment continued to strengthen in the quarter W. T on increasing $8 per Boe or 14%.
This flow through to realized loosens, but I'll replace of oil.
On the crude basket, increasing by $10 per barrel or approximately 16% versus Q1, despite the strengthening Canadian dollar averaging 81, assuming the clock on.
This translated into approximately $300 million of additional upstream oil sands funds flow when compared to the first quarter results.
Even though production was 75000 barrels per day lower due to the planned maintenance.
Our Q2 financial results reflects the solid cost and reliability performance and demonstrates our lotteries to increasing oil prices.
The E&P segment generated $410 million of funds from operations.
Oil assumptions with price realizations of newly easy to those.
Canadian per barrel, delivering approximately $350 million of free funds flow net of capital expenditures.
And finally downstream recorded approximately $600 million of funds from operations with 70 per cent utilize.
Nation, which reflected the significant turnaround activity across the refineries on the continued lower consumer demand.
The profitability on the second quarter.
Next the lower demand due to COVID-19 restrictions, which were maintained throughout the quarter in Canada and on food.
On reduced volumes due to the plant.
Drilling activities.
However, as Martin noted you were able to partially offset some of the maintenance impact.
Executing on our inventory build strategy.
On a previous quarterly call.
Gasoline demand has steadily been improving in Canada with Q1 on 20% Q.
115% on gasoline demand in July at 5% below 2019 levels.
Diesel demand has recovered well Jack Cumming jet demand still remains 50% below 2019 levels. However, it is important to remember that last 5 per cent of our refined products volume is Jack.
To that.
This improving demand trend after the storm utilization expected in the second half of the year gives us confidence on the operational and financial performance of our downstream business going forward.
As we expect you to a day reduction during the quarter was small in Q1, we are managing our debt reduction and share.
Jack Black strategy on an annual basis and remain on track on our 2 thirds of that reduction on once the buyback strategy.
Investor Day.
Apart from Fort Hills respond discussed the on the Guy who's changes related to operating the business environment.
Commodity prices have increased as Q1.
Everybody else, even higher forecasted profitability and cash flow on.
As a result, we've updated the cash tax range from 'twenty to 'twenty 1.
Lastly, I'd like to note a couple of items from the second half on a year, we expect to close the Golden Eagle sale in September.
We will continue to be reflected as part of Sun coast.
Moving to tell the sale closes at which point it will be part of this place suggested.
No change in our full year volume guidance, either specifically for E&P, our overall for Suncor.
Secondly, we expect the tax refund from the 'twenty 'twenty tax here in the fourth quarter, which will reduce our working capital.
Volume total cash proceeds of approximately $1 billion from these 2 items will be used for debt reduction in the second half of the year.
Before I close I'd like to note that we've updated disclosure related to our rack forward business and their operating someone who's supporting the financial statements and also in our supplementary oil out there.
We hope you'll find this additional disclosure useful as it does add some more transparency on a significant part of our integrated model.
And with that I'll pass it back to traveling.
Thank you Mark analysis, I'll now turn the call back to our operator, so we can take some questions operator.
As a reminder to ask a question you will need to press star 1 on your telephone to meet your all your question. Please press the parenting.
Please standby, while we compile the Q&A roster.
Yeah.
Your first question comes from the line of Greg Pardy from RBC capital markets. You May ask your question.
Thanks, Good morning.
Mark I was wondering if we could maybe just dig back into that index.
<unk> sorry.
Yeah.
Yeah.
Just wondering if we can come back to Fort Hills, just the timeline in terms from ramp on testing.
In the first quarter present, any issues and maybe could you talk as well just around Winnie when it became evident around the instability are assisting in the slope that you mentioned oil.
Yeah, Greg Thanks for your question.
So let me just step back for a.
A minute on this because you know the focus is on getting 4 accounts fully ramped up to 2 trains and yes. That's been delayed until the end of 2021, and so we're not expecting any impact in 2022 production.
And and so we found out about this in July.
As we got later in the months associated with it and this is really around focusing to ensure that the slope has stability and because as I mentioned. This is a critical pillar between the south and the Fort Hills lease and the North end of the Syncrude Omar Aurora lease.
And because that mine face has about 60% of what we thought was the available or.
And it's not going to be available until we clear. Moreover, the more of the overburden associated with it. So this is just a time issue. We don't think it has any fundamental impact beyond just delaying the ramp.
On a fort hills to add that incremental production to what youre seeing in our results now so that's kind of where we're at.
<unk> South mine phase after we mined it.
It's just so critical that we don't want it moving and be coming on and stable.
And a lot of places, it's it's not nearly.
Really as relevant but this is a very critical piece of infrastructure going forward.
Okay terrific.
And I'm going to switch gears on the entirely here just to come back I mean, you know you're a part of the quintet on the oil sands pathways to net zero back in early June you guys announce that what is the what are the milestones we should.
<unk>, probably be looking for in terms of progression and so forth.
Well, it's interesting Greg if you just step back essentially this is about taking the whole oil sands industry to net zero by 2050 mm. It's like I I view this as an unprecedented collaboration.
Should be between the oil sands producers that represents 90 per cent of the operators today. So I fully expect that we will have the remaining operators joined on this journey as we go forward, there's 1 very significant foundational.
Set of infrastructure that that we see as critical to.
<unk> and its around building the carbon capture and sequestration capability for the industry. We think this is about 50 per cent of the industry solution. As we go forward as we think to the future and so it's really important by working together, we realized we can drop the cost of this.
Secondly, because we can all use a lot of common infrastructure and we can go faster and we can do it cheaper all of which I think is super important in this journey going forward. So if you look on the there's a website now the oil sands pathways to net zero by 2050 and and if you.
You look on that website, you'll see the math of the carbon sequestration system.
And such so youre going to see that that's going to be a common piece associated with it other parts are independent. So if you look at it there's a whole strategy there some of it's around carbon sequestration on some of it is around.
On the fuel switching like our co Gen up north.
Some of it switching to things like a clean hydrogen like our announcement that we made in Edmonton. So some of this you'll see through the company window, but the big foundational project is what's being worked on but we also have things like.
Sharing solvent infrastructure clean hydrogen infrastructure those sorts of things. So you're you're if you watch that website, you'll start to see more and more details come out and we've just come out with some of the details around the carbon sequestration system. We're in the 90 day consultation period with defense and we're working to sort of the.
Details around the investment tax credits associated with it so we're making good progress and we've been very happy with the cooperation between the province, and the federal government.
Okay. Thanks, a lot mark.
Thanks, Greg.
Your next question comes from.
Neil Mehta from Goldman Sachs, You May ask your question.
Good morning, Mark Alistair and good morning team.
First question is around Hum.
Fort Hills sacs into the production guide you did maintain the $740 to 780000 consolidated upstream number is it fair.
Fair to say that you guys are targeting based on what you know right now the low end of the guidance range.
Yeah, I think that's probably fair Neil like you know the assets have performed very well as I went through in my prepared remarks, you're seeing the oil sands a year to day, it's in the high nineties.
On the line utilization Syncrude has a proven strong record post turnaround that we've just gone through that coming into their turnaround in the second quarter.
With the completion of that work, where we're expecting that the assets have performed very well. So we're not where we're maintaining the corporate guidance associated with it but we're not at.
<unk> agenda of guidance and so, but we're comfortable with the total guidance range.
Okay.
That's great and then the follow up is just around the buyback strategy. Obviously, the stock has lagged peers here over the last 2 years the better part of last 2 years on free cash flow yield is very robust so it seems like.
The talks are going to lean into the buyback and should average to the top end of that 5% limit just talk about your buyback strategy and how you take advantage of.
The valuation.
Yeah, Neil I'll pick on 1.
If you look at where.
Oh.
We're headed we're almost 3% already executed.
On to approval to go to 5%, we will be executing on the provider you obviously commodity prices.
At current levels. So you would expect to see as the total fans of the range due to February of next year the buyback period.
You guys are.
Really the strategy is more of a reasonable volume.
Box food beauty, which is why you saw on June $601 million in the quarter, we continued to execute a gallery oversleeping from.
The remainder of the buyback.
Thanks, guys.
<unk>.
Your next question comes from the line of Phil Gresh from Jpmorgan. Your line is open you may ask your question.
Hi, Yes, good morning, I wanted to follow up on Fort Hills.
Your 1 of your partners on the project was referencing.
And the issues with groundwater.
And so I just want to understand the technicals of this a little bit better you were talking about slope stability. So I just want to make sure I fully understand why.
This would be a onetime issue as opposed to a recurring issue.
Yeah, it's interesting.
I fell on the South mine phase, it's just the South mine face right. Like this is the 1 that we're building the corridor between the 2 mines.
They get integrity about mining faces is important any time, you're building a dam structure.
It's super important that it had been integrity and can be managed accordingly.
Hi.
Water management in the oil Sands is a very common issue and it was whether it's from rain events, but anytime you have soft rock mining.
We are getting egret, some egress of water from ground sources and such into the mine. So we have procedures to be able to manage it some events.
According bar challenging than others associated with it but you know that this is common across I would say almost all of the mines if not all of the mines in oil sands associated with it. So this is following protocol. We don't expect this to be a fundamental issue any more than.
And what we've seen and in fact.
From a go north and and head into central pit and stuff. We expect the vast majority of this to diminish Ah associated with it. So yeah. I mean, it's just it needs to be managed and and that's what we've done and we have the procedures in place and we're executing according to those procedures. So yes.
Yes, its water and issue, yes, it always is and we manage it accordingly.
Okay. Okay. Thank you for that.
My follow up question is just on on Opex.
Obviously acknowledging the strong performance.
For oil sands overall.
On the total company Opex run.
Rate is tracking a little bit over $10.8 billion.
You mentioned, the natural gas headwinds, which I think everybody is dealing with obviously, but.
Are you still confident in the $10.6 billion guidance you laid out for the year that you gave at the analyst day.
Given where the run rate looks and seasonality and other consideration.
Federations.
Yeah, I'll take that 1 so I mean, if you look at every other day numbers was about $250 million in there of 1 time I will be considered on onetime items related to restructuring remember the big severance.
Restructuring provision you took in Q1.
Due to the.
Workforce reductions there has been some additional costs in the first half of the year related to some of the COVID-19 restrictions that obviously easing and we expect those to be significantly less in the second half of a year.
We are confident about that trend from the second half of the year to be able to achieve that run rate.
On the numbers of the Oh that we just closed on the Investor day on that obviously as you move forward into 'twenty, 2 'twenty 3 'twenty 4 and a continuing trend downwards as we execute on our $2 billion of interest on cash flow improvement from the other thing that I would say on the gas side.
Correctly, saying everybody will face.
Is that you know we get a benefit on the other sides of docs, who are power revenue, which is obviously tied to gas prices in Alberta. So we are.
Not per revenue does not constitute nonetheless on Gs because you didn't our revenue line.
Right and just to confirm that $10.6 billion guide adjust out the 1 time factors that you were talking about.
Yes, so we were extremely low as we focus more on a run rate of all of them.
Including 1 time restructuring items on there.
Okay. Thank you very much.
On your next question comes from the line of Matt of desktop from Credit Suisse. You May ask your question.
Hey, guys. My question is a little bit on the funnel up on Neilmed does question, but well looking at the quarter. I think you guys have given the guidance that 66 per cent of the.
Net discrete any cash that's supposed to dividend cash.
Just to get to production and take a peek, let's do a buyback and then we look at this quarter. It is about $750 million of discretionary cash and 640 range to buybacks and hungry to day production. So I'm just wondering if there's a change in strategy. There are you basically expect a billion in you know the tax and Golden Eagle.
Sales to come next quarter. So this was just a 1 off quarter and there's no change to strategy.
Yeah. Thanks Manav.
Allowing me to clarify there's no change to that on your allocation and it's on on your allocation 2 thirds debt repayments and what 1 third buybacks, so quarter on quarter and well move around it obviously Q2.
We always you would be impacted by the maintenance higher capital and lower cash flow in the future. So that's why we're looking at on you, but youre absolutely right. We have $1 billion of cash proceeds coming in in the second half of the year from tax refunds and the Golden Eagle sale, and we're going to use those for the debt reduction.
Okay.
A quick follow up here is in the last 1 year or so while most of the U S. Refiners have lost money Suncor has been unbelievably resilient in its downstream I think it's a function on a further integration and how value run and you've consistently generated like 4 or 500 million now this quarter.
Water was lower I'm, hoping is this just a function of the downtime because I think your utilization was dropping to 70 and once you go back to 90 again will get back into that run rate of 5.600 million in free cash or anything else, especially happening in Canada, where the lockdowns or something else there.
Sure.
Well I think.
But on average.
It's really twofold.
You've touched on it here is obviously, we had all of our refinery is doing turnaround work through this period of time and you saw on Investor Day, we talked about when.
When you looked at refinery utilization, we said that we were to access profitable as the next peer when.
We benchmark that from a cash perspective that.
<unk>.
Our rack forward business associated with it so that the environment has improved significantly as Alastair talked about it in his comments as we go into the third quarter here. The turnarounds are complete the cracking margins are robust.
And demand has recovered significantly even in July versus the second quarter. So we think we're set up really well for the back half of the year and it's just the fact that between Covid and the turnarounds you've seen a much weaker market in the second quarter. So we think we're in very good shape to be able to.
And perform well on the back half of the year.
And you guys on only when that rent next door. So.
They set up what you think is too much for taking my questions.
Thanks, Matt.
And there are no further questions at this time I will turn the call back to Trevor.
On balance.
Great. Thank you operator, thanks, everyone for attending today I know, it's a busy day for earnings and we appreciate you listening in we're around all day. If you have any follow up questions. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Yes.
Yeah.
[music].