Q2 2021 Suncor Energy Inc Earnings Call
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Good day, and thank you for standing by welcome to the Suncor Energy second quarter earnings 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.
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.
You had a conference oversee our speaker today, Mr. Trevor Bell Vice President of Investor Relations. Please go ahead.
Thank you operator, and good morning, welcome to the Suncor second 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 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 website Suncor.
Officer from 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.
Building on the growth phase from 2015 to 2019 this optimization.
<unk> phase is governed by extracting increasing value from our business through enhancing margins lowering our cost.
Cost structure, providing increased shareholder returns and fortifying the balance sheet with significant deleveraging.
In comparison to the growth phase, we will lower our economics.
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% dividend CAGR through 2025 and continued stock buybacks.
At the same time, we'll maintain a 35 dollar U S.
W Ti breakeven and retire debt strengthening the long term financial health of the company.
Roundhay channel to best performance is our steadfast focus on operational excellence by increasing the productivity.
Economic shouldn't see 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 cost 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 2021 marks the best months of <unk>.
Reduction from our oil sands operations asset in our company's history.
That's the best 8 months of production and 15 plus years base.
Base plant utilization was 98% over this period.
And we had yet another quarterly record I didn't fit you with too.
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% or 1 billion.
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% of the.
Standing 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 use.
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 2021 average 200.
1000 barrels per day, making it the highest daily production period in nearly 20 year history for fire bag and Mackay.
Securing the nameplate capacity an increase at the fire bag last October contributed to this record production.
In terms of costs.
Second quarter cash operating cost at oil sands operations were $23.85 per barrel looking.
Looking at the last 8 months oil sands operations averaged $23.50 in cash operating costs per barrel we've.
We've achieved these types of unit costs before.
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 operations.
Fully lined out.
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>.
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 our inventory for ramp up towards a 2 train operation.
By the end of the quarter the.
Our 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.
Subsequent.
Sequent to the quarter, we realized that we would need to change the slope of the south mine face to maintain slope integrity. As this part of the mine will form a critical permanent pillar between Fort Hills, and the Syncrude and Aurora mines.
This will delay our ramp up of Fort Hills to 2 trains until the.
2021 at the South mine face contained approximately 60% of our ore inventories that we thought was available.
So to access this ore will need to mine more overburden, which is just going to take some additional time.
Obviously, given the mine is very early in its life.
And the ability to ramp up earlier is limited.
As a result.
<unk> 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.
Flex in early 2022.
2021 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, namely we expect 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.
The continued challenged macro environment.
As we discussed previously we built refined product inventories to support the planned turnarounds with turnarounds complete and demand increasing across Canada. As COVID-19 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 increased.
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.
The operations 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 plant turnaround.
We have completed 1 of the most significant maintenance schedules in our history during this quarter.
While this has had an.
The 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 then into 2022.
And in closing I wanted to emphasize that our business model and philosophy.
Regardless of short term volatility.
We 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 debt reduction.
I'll now hand, it over to you for the financial highlights.
1 small can do.
Moving on from 1.
For the second quarter, we returned approximately $1 billion.
And the volume of 350 million dividend from 6.
$150 million in share repurchases.
During the quarter, our buyback amongst approximately 22 million share.
Although the average price.
Martin country those per share.
In addition, we have received approval from a Toronto stock exchange to increase our share buyback program from 44 million shares or approximately 3% of suncor issued debt and it's done he called me says to 76 million shares.
Approximately 5%.
And then second quarter it was about to finalize with Suncor generated $2.4 billion of funds from operations.
The business environment and continued to strengthen in the quarter with volume increasing EBITDA per Boe from 14%.
This flow through to realize loosens.
Average price of.
It sounds crude basket, increasing by $10 per barrel or approximately 16% versus Q1, despite the strengthening Canadian dollar averaging 81 since joining the club zone.
This translate into approximately $300 million of additional upstream oil sands funds flow when compared to the first quarter results.
So even though production was 75000 barrels per day lower due to the planned maintenance.
Our Q2 financial results reflects a solid cost and reliability performance and demonstrates our lotteries increasing oil prices.
The E&P segment generated $410 million of funds from.
While playing with price realizations of nearly 82 those.
Canadian per Boe, delivering approximately $350 million.
A free funds flow of cash.
The bandages.
And finally downstream recorded approximately $600 million of funds from operations was 70%.
The operation.
Flagged this significant turnaround activity across the refineries on the continued lower consumer demand.
The profitability in the second quarter.
That's the lower demand due to COVID-19 restrictions, which were maintained throughout the quarter in Canada.
The reduced volume due to the plant.
Activities.
However, as Martin noted you were able to partially offset some of the maintenance impact.
Executing on our inventory build starting to flow.
In our previous quarterly call.
Gasoline demand has steadily been improving in Canada with Q1, 20% Q.
Right at 15% on gasoline demand in July 5% below 2019 level.
Diesel demand does recover while jet coming jet demand still remains 50% below 2019 levels.
It is important to remember that less than 5 per se.
Finding products volume is Jack.
2.
This improving demand trend and were there some utilization expected in the second half of the year gives us confidence in the operational and financial performance of our density business going forward.
As we expected or debt reduction during the quarter was small in Q1, we are monitoring our debt reduction this.
Your buyback strategy on an annual basis and remain on track with our 2 thirds debt reduction buybacks from here.
From Investor Day.
Apart from Fort Hills, which Bob discussed the only guidance changes related to or do you think the business environment.
Commodity prices have increased since Q.
Resulting in higher forecasted profitability and cash flow.
And 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 of the year, we expect to close the Golden Eagle sale in September.
We will continue to be reflected as part of Sun coast.
1 of them until the sale closes at which point it will be part of his points suggest.
Oh changed enough for all your 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.
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 rock former business and our operating summary to supporting the financial statements and also in our supplementary all day.
We hope you'll find this.
Additional disclosure useful as it does add some more transparency on a significant part of our integrated model.
With that I'll pass it back to Trevor.
Thank you Mark and Alister 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 line to withdraw your question. Please press the palanquin. Please.
Please standby, while we compile the Q&A Ross.
Yeah.
Yeah.
[laughter].
Okay.
Right.
Okay.
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 line.
Were killed tier just growth sorry.
[noise] just just wondering if we can come back to Fort Hills, just the timeline in terms of <unk> from.
Ramp up just in the first quarter, because they had any issues and.
Maybe could you talk as well just around when he when it became evident around the instability just in the slope that you mentioned earlier.
Yes, Greg Thanks for your question.
<unk>.
So.
Let me just step back for a minute on this because.
The focus is on getting Fort Hills fully ramped up to 2 trains and yes, that's been delayed until the end of 2021, so we're not expecting any impact in 2022 production.
And so we found out about this.
In July.
As we got later in the month 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 end of the Fort Hills lease and the north end of the second.
Crude alert Aurora lease and because that mine face has about 60% of what we thought was the available or and.
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 up of Fort Hills to add that incremental production from what Youre seeing in our results now so that's kind of where we're at.
This south mine phase after we've mined debt.
It's just so critical that we don't want it moving and becoming unstable.
In a lot of.
It's not nearly 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 are a part of the quintet on the oil sands pathways to net zero back in early June you guys announced that what are the what.
Place milestones, we should 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.
Most of them did collaboration between the oil sands producers. It represents 90% of the operators today. So I fully expect that we will have the remaining <unk>.
Operators joined this journey as we go forward, there's 1 very significant foundational setup.
Set of infrastructure.
Net that we see as critical to this and it's around the 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.
We can drop the cost of this significantly 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 2000.
And if 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 and some of it's around 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.
Thanks, a lot mark.
Thanks, Greg.
Your next question comes from the line of Neil Mehta from Goldman Sachs. You May ask your question.
Good morning, Mark Alistair and good morning team.
The first question is around how Fort Hills sacs into the production guide you did maintain the $740 to 780000 consolidated.
Stream number is it 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.
The other day, it's in the high Ninety's utilization Syncrude has a proven strong record post turnaround that we've just gone through that coming in to their turnaround in the second quarter. So with the completion of that work, where we're expecting that the assets have performed very well. So we're not we're maintaining the corporate guidance associated.
You're going with it but we're not at the top end 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 to better part of last 2 years, our free cash flow yield is very.
Our robust so it seems like you guys are going to lean into the buyback and should average AR to the top end of that 5 per cent a.
Limit just talk about your buyback strategy and how you take advantage of.
The valuation.
Yeah, Neil I'll take that 1.
Yeah.
I will share the wear.
We're headed what almost 3% already executed we got approval to go into 5 from Sun, we will be executing on the provider you obviously commodity price.
And.
Current level. So you should expect to see at the top end of a read through to February.
Okay.
Bye bye.
Really the strategy is more of a ratable buyer.
Buybacks moving beauty, which is why you saw us do $601 million in the quarter. We continued to execute about obviously from some of the remainder of the buyback.
Thanks, guys.
Your next question comes from the line of Phil Gresh from J P. Morgan. Your line is open you may ask your question.
Hi, Yes, good morning, I wanted to follow up on Fort Hills.
Your.
Partners on the project was referencing.
Some issues with groundwater.
And so I just wonder if standard 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 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. So the integrity of that mining faces is important any time, you're building a dam structure.
It's super important.
Well, if you have an integrity and can be managed accordingly.
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.
We are getting egret, some egress of water from ground sources and such and from the mine. So we have.
It's about 8 years to be able to manage it some events are more 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 and oilsands 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, as we go north and and head into central pit and stuff. We expect the vast majority of debt 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, its water and issue yes. It always is and we manage it accordingly.
Yeah.
Okay. Okay. Thank you for that line.
Question is just on an opex.
Obviously acknowledging the strong performance for.
For oil sands overall.
The total company Opex run rate is tracking a little bit over $10.8 billion you.
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.
And where the run rate looks and seasonality and other considerations.
Yeah, I'll take that it went from I mean, if you look at every other day numbers move about $250 million in there, though 1 time, what we would consider 1 time items related to restructuring remember the big sovereigns.
Restructuring provision.
Give energy Q1.
Sure.
Workforce reductions.
Some additional costs from the first half of the year related to some of the Covid restrictions get obviously easing and we expect those to be significantly less in the second half of the year. So we are calling for that in a very long trend from the second.
And as you yourself from a year to be able to achieve a run rate or the numbers other than we just closed and our Investor day, and then obviously as you move forward into 'twenty 2 'twenty 3 'twenty 4 continuing trend downwards as we execute on our $2 billion of it there's no cash flow improvement plan.
The other thing I would say on the gas side.
You correctly said everybody will face.
As you.
We got a benefit on they are afraid of us through our power revenue.
We should always be tied to gas prices in Alberta. So we are all there.
From a revenue there's not constantly nonetheless.
There was some confusion 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 do do though is we focus more on a run way above and including 1 time restructuring items in there.
Right.
Okay. Thank you very much.
And your next question comes from the line of Matt of desktop from Credit Suisse. You May ask your question.
I guess my question is a little bit of a follow up on me to my third question, but.
Looking at the quarter I think you guys have given the guidance that 66 per cent of the discrete any cash that's supposed to dividend cash goes to debt reduction and 30 sequels to buyback and when we look at this quarter. There was about $750 million of discretionary cash and 640 went to buybacks and hungry to debt production. So.
I'm just wondering if there's a change in strategy. There are you basically expect a billion in tax and Golden Eagle sales do come next quarter. So this was just a 1 off quarter and there's no change to strategy.
Yeah. Thanks Manav.
Allow me to clarify there's no change to that on your allocation and it's a non U.
<unk> allocation to debt repayments and 1 third 1 third buybacks so quarter to quarter. It will move around it. Obviously Q2, we always you would be impacted by the maintenance higher capital and lower cash flow and so that's why we're looking at annual but youre absolutely right, we have $1 billion of cash proceeds coming.
And then the second half of the year from tax refunds and the Golden Eagle fail, and we're going to use those for the debt reduction.
Okay.
A quick follow up it is in the last 1 year or so.
While most of the U S refiners have lost money.
Encore has been.
Believably resilient in its downstream I think it's a function of kind of integration and how value run and you've consistently generating like 4 or 500 million MAU. This quarter was Laura I'm, hoping it is this just a function of the downtime because I think that 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, with the Lockdowns or something else.
Well I I think manav, it's our it's really twofold and you've touched on it here is obviously, we had all of our refineries doing turnaround work through this period of time and you saw on Investor day.
Talking about.
When you looked at refinery utilization, we said that we were to access profitable as the next Pierre when we benchmark that from a cash perspective that didn't count.
Our rack forward business associated with it so that the environment has improved significantly as Alistair.
We talked about 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.
Alastair bed in 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 perform well in the back half of the year.
And you guys are not doing better that makes those so.
I'll play you think that's too much for taking my questions.
Thanks, Mike.
And there are no further questions at this time I will turn the call back to Trevor Bell.
Great. Thank you operator, thanks, everyone for attending today I know, it's a busy day for earnings and I. Appreciate you listening in we're around all day, if you have any follow up questions.
Thank you.
Yeah.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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