Q3 2021 Suncor Energy Inc Earnings Call

October 28, 2021

Good day, and thank you for standing by welcome to the Suncor Energy third 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.

Please be advised that today's conference maybe recorded.

To ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Trevor Bell Vice President of Investor Relations. Please go ahead.

Okay.

Thank you operator, and good morning, welcome to Suncor is third quarter earnings call.

With me. This morning are Mark Little President and Chief Executive Officer, and Alister Cowan Chief Financial Officer.

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 that are described in our third quarter earnings release as well as our <unk> and annual information form both 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 third quarter 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. Thanks, Trevor and good morning, everyone and thank you for joining us.

<unk> third quarter results delivered in three key areas.

Operational excellence increased shareholder returns and significant debt reduction.

Suncor delivered $2 6 billion of funds from operations for the third quarter. While also completing the most significant maintenance year in our history on budget.

But downstream produced nearly $1 billion of funds from operations, which included approximately $80 million of FIFO gains.

This performance marks the third best set of Q3 results for the downstream in its history.

Year to date, we have reduced the company's net debt balance by more than $3 billion and returned over $2 6 billion to shareholders in the forms of dividends and buybacks by allocating over 70% of our funds from operations, including the tax refund received earlier this <unk>.

Order.

Reviewing the progress we made on our commitments from earlier this year, our nine months annualized cash return is 9% we've bought back over 4% of the company's shares since the program's initiation in February the.

The company's net debt level has been returned to year end 2019 levels and we remain on target to deliver our capital in line with expectations.

In short, we are meeting or exceeding our commitments our confidence in our operations and the pace in which we're executing our plan allows us to increase shareholder returns by doubling the current dividend to annually $1 68 per share.

Or back to the 2019 levels.

Increasing the buyback by a further 2% to 7% by February of 2022, all well expecting our net debt to be near the top end of our 2025 target range by this year end given the favorable macro backdrop.

Turning to operating performance ups.

Upstream delivered 700000 barrels per day of production in the third quarter.

Oil sands operations production of 370000 barrels per day reflects the planned five year Youtube turnaround.

This was partially mitigated by 90% utilization for the since you inspite of completing the planned maintenance at fire Bank.

Looking at year to date cash operating costs of $25 per barrel Canadian we are progressing extremely well towards the bottom end of our full year cash operating cost per.

Per barrel guidance.

Syncrude achieved 185000 barrels a day of production with 91% utilization for the quarter and cash operating costs of $31 per barrel at.

At the end of the quarter on September 30th we assumed operator ship of Syncrude.

Critical milestone towards achieving the previously communicated $100 million in annual synergies in the first six months of operator ship and 300 million and total annual synergies by the end of 2023. These synergies will contribute to achieve the cash operating costs.

Target of $30 per barrel at Syncrude.

Fort Hills production of 51000 barrels per day reflects a one train operation.

We have made significant progress on overburden removal and slope stability and as a result anticipate achieving full rates by year end.

We're right on plan with what we stated before and we will have both trains at full rates intermittently in November and December to ensure a seamless transition to full operating mode.

Our expectation for 2022 cash operating cost per barrel is in the mid twenty's with an incremental 45000 barrels per day of production.

In our E&P operations Q3 production of 94000 barrels per day, whereas an increase from Q2.

However, our funds from operations of $360 million reflects an inventory build associated with the timing of cargo sales.

Sale of Golden Eagle was completed on October 22nd with cash receipt of approximately $250 million U S.

In the downstream you will recall that we completed significant maintenance at all of our refineries in the second quarter and as a result, we're very well positioned to take advantage of the demand recovery in the third quarter and the refineries operated at 99% utilization with nearly $1 billion.

From operations.

Compared to the three eight to $3 9 billion for full year funds from operations in 2018 in 2019 from the downstream.

Third quarter is in line with that run rate with slightly better cracking margins, but also with some significant headwinds.

Average sweet and heavy differentials were $4 a barrel U S narrower.

Canadian dollar was 5% stronger and natural gas prices were 125% higher.

In short while.

The headline funds from operations. This quarter is comparable to our 2018 2019 run rate there were considerable headwinds that we were able to offset through strategic improvements and investments in our supply and trading and logistics assets to further our competitive advantage.

As discussed during Investor day, the investments, we've made and continue to make to achieve our $2 billion of incremental free funds flow initiatives are building a business, that's more resilient and stronger than ever before.

As incremental demand continues to recover we expect to capture higher margins.

Afflicting back on the second and third quarter of this year, we delivered 5 billion of funds from operations or nearly $3 50 per share. Despite completing the highest maintenance activity across base plant and syncrude and all of the refineries in our history.

And with Fort Hills operating at one train.

Our assets continue to operate at strong rates, which positions us for significant improvement to our free funds flow generation in the fourth quarter and into 2022 and beyond.

I'll now hand, it over to Alister to go through our financial highlights.

Thanks, Mark and good morning, everyone for the third quarter, we continued to exceed our plan to increase shareholder returns.

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We returned over $1 billion to shareholders in the form of a $310 million in dividends and $700 million in share repurchases.

During the quarter, our buyback amounted to 28 million shares.

20% more than in Q2.

Average of $25 per share and.

In addition to the nine month annualized cost return of 9%. We have also reduced our net debt balance by over $3 billion and $2 billion that came in Q3.

Oil sands delivered approximately $1 $6 billion of funds from operations during the quarter.

Although price realizations were higher during the quarter. These were partly offset by higher royalties, especially firebug, which turned to post paid during the quarter.

We had anticipated as well as the teams to be the middle of 2022 I remember at current prices postpaid has been achieved much sooner.

So just to clarify all of it except Fort Hills.

Most of the cash flow from these off it really reflects the royalty charges.

As Mark mentioned, our oil sands operations cash operating costs continue to trend very well with year to date Q3 sitting at $25 per Boe, despite increasing natural gas costs.

You can see from the disclosures.

So gasco audio over <unk>.

Over one dollar to our oil sands operations cash operating costs in the third quarter, but nearly half of it would be an offset elsewhere in our business, including through higher power Robyn.

We have updated our natural gas sensitivity to reflect the $160 million funds from operations impact for every one dollar Canadian Giga Joule changed in April.

<unk> integrated model.

Includes power revenue, which is correlated to it does mitigate a portion of the natural gas costs.

The E&P segment generated $360 million of funds from operations with price realization of approximately $90 Canadian per barrel delivering $300 million of free funds flow net of capital expenditures. These.

These results included an inventory build due to lifting schedules, which we expect to come through as additional funds flow in the fourth.

As Mark noted we recorded our third best Q3 results in <unk> history, despite the less than normal business environment I.

I would like to print these results in the context of the demand.

If I look at the Q3, 2021 versus Q3 2019.

<unk> product demand across Canada was down nearly 7%.

But suncor sales channels remained relatively similar to the same period Q3 'twenty to 2019.

This strong performance is a considerable driver towards capturing higher margins.

As a direct result of strategic investments in our supply trading and logistics assets.

We expect this trend to continue into 2022 with some curtains downstream costs being higher demand and higher margins and continuing to outperform the industry.

Ending the third quarter, our net debt is $67 billion, which includes capital leases.

Once the Golden Eagle sale proceeds of approximately 200 U S $250 million of seeds in October the net debt balance stands at $16 $4 billion Canadian similar to EBITDA in 2019 levels.

As it relates to our guidance only change to the business environment for increasing commodity prices, which of course does increase their cash tax and royalty ranges slightly.

Lastly, as I look at our performance for the remainder of the year. We are on track or ahead on both the net debt and buybacks.

On our Investor day.

The five year target to buy back approximately 12% of the outstanding shares.

By the completion of the current program in February 2022, we expect to purchase 7% over the phone or said another way achieving 60% of our planned buybacks over five years.

With that I'll pass you back tomorrow.

Great. Thanks Alastair.

Downstream delivering strong results our assets operating at expected rates and Fort Hills ramping up as planned.

I'm really confident in our near and long term business outlook.

Further we are resolute in driving down our cash break even by capturing the 2 billion of annual free funds flow initiatives and Syncrude synergies, we detailed at our Investor day, Although I do acknowledge that the impact of higher commodity prices are impacting both revenue and cost side of our business.

In 2021, we are on track to deliver $450 million of incremental annual funds flow largely through margin enhancements. For example, the fire bag in Edmonton de bottlenecks are trading optimizations, lower reclamation spend and interconnecting pipelines.

Meanwhile, we're also on track to buy back the highest annual percentage of stock in the history of the company, while expecting to reduce our net debt by almost $5 billion by the end of this year and be at the top end of our 2025 target range.

Next year through significant cost savings being improved productivity and synergies and further margin enhancements, we expect to generate an additional $400 million of annual funds flow.

Additionally, on capital, we expect to be 300 million lower than the $5 billion ceiling, we discussed at our Investor day.

As I mentioned earlier.

Increase to the dividend and continuation of our buyback program, we are planning to accelerate the pace of achieving the net debt targets.

This reflects our confidence in the performance of our asset base and our strong free funds flow generation across our integrated model, taking advantage of strong commodity prices.

To put this into perspective.

Suncorp today is on track to deliver similar debt levels and a lower number of outstanding shares than it had in 2015, however, with 35% higher production, a resilient downstream and a lower breakeven.

Our integrated model is stronger today than ever before and we are now well into the execution of optimization strategy that maximizes the value from this model.

As I look forward I'm confident in our plan to ensure long term value for our shareholders and a stronger and more resilient future for suncor.

So with that Trevor I'll turn it back to you.

Great. 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 with.

Your question. Please press the pound key please standby, while we compile the Q&A roster one moment.

Our first question is from Neil Mehta of Goldman Sachs. Please proceed.

Good morning team and congratulations on the announcement here today, what would you what youre talking about market is a 7% buyback yield or up to that level and now a 6% dividend yield can you kind of talk about what changed in the room to move from the 25% CAGR.

To this increased return of capital strategy, and just talk about the oil price bands at which we can think about you're executing at certainly at current constructive commodity price environment. It makes sense, but if we dip lower again.

Still see the ability to execute towards the top end of that capital return deals.

Yeah. Thanks, Neal I appreciate it.

It's interesting because when we looked at it there were really four factors that we looked at when we thought about setting this dip.

Dividend increase first of all the confidence in safe and reliable operations and the and you've seen that in executing the maintenance program or on Fort Hills ramp up in <unk> and the progress that we're making there secondly, the downstream is is back and delivering on the cash flow that we expected that business.

As to do we havent seen that for some time given the impact of Covid. So it has provided significant been stable cash flow going forward.

Execution of our $2 billion of funds from operations and you can see that in the comments I made about the downstream and it delivering this cash flow. Despite the significant headwinds that I had highlighted and finally when you look at it.

All of the cash allocation other than our investments has been accelerated so you've seen it in our share buybacks. When alister was talking about the share buybacks. We're now working on the 'twenty 'twenty three share buybacks by the time, we get to the end of this year from what we said before we're actually.

Working to get to the top end of our 2025 debt target. So all of that cash and and allocation of capital is being accelerated in all areas and we felt it was appropriate to do that and the dividends as well. So this is fully consistent with the 25% CAGR that we outlined and in fact this is.

75% of what we said we would deliver by 2025.

So it's not inconsistent it's just accelerated just like it is on debt repayment and share buybacks.

And then Mark can you talk a little bit about the oil price bands and how how we should think about the durability of this strategy, even in a lower lower commodity price environment.

Plays out.

Yes, thanks Neil.

So when you look at.

The.

Durability Abbott, we went back and looked at this around okay, well what does this mean at $55 oil that we talk that and and so given the fact that we've made so much progress on that one of the one of the challenges at $55. As you don't have that cash flow to restructure that data at the company.

And to be able to buyback your shares and such so given the fact that it's all accelerated if we went to $55 tomorrow. This is sustainable we still generate free cash flow and we can still continue to push forward on our debt and our share buybacks through that so we view that it's very sustainable.

The other piece associated with it if you look at the work that we've done. We said we were just $465 million of our $2 billion has been delivered this year. So just under $500 million, we have a similar amount next year associated with it and then with cutting our capital by 300.

Versus the cap that we outline this also gives us.

Over this period of time, approximately $1.2 billion essentially that we've turned over in to the dividend. So even in this environment, we view that we're earning our way to actually deliver this.

Dividend increase, albeit very accelerated just like we're seeing in depth and in share buybacks.

Thank you and then the follow up question is around Fort Hills. That's the next big catalyst from our perspective to help to reset the story.

It sounds like based on your comments Youre feeling good about the progression I know Marc you could spend some time up there, but can you can you give us an on the ground perspective, and the milestones we should be watching for to get confidence you'll get back to two trains.

Yeah, Yeah. Thanks, Neil it's interesting with Fort Hills, because we've seen some significant progress. The team is really doing well, we're moving an awful lot of dirt there at this stage of the game. It's interesting just how much this has changed and so the whole cell space, we have all sorts of equipped.

And they're working so we've really been able to deal with that so we've been able to manage that whole piece associated with it and they're getting ready now to do test runs as I mentioned, both in November and then we'll start staging the asset up in December so you'll start to see nomination, particularly in December Youll see an increase in <unk>.

As we get ready to and shipping on the pipelines as we get ready to bring that asset into full production before year end and so and we also remain on track to achieve our $20 a barrel cost target in 2024 and next year, we expect it to be in the mid twenties.

Thanks, guys.

Yes.

Thank you. Our next question comes from Greg Pardy of RBC capital markets. Please proceed.

Thanks, Good morning, and I'd Echo, what Neil said I mean, just a very very strong a strong quarter. So I don't want to get ahead of myself here, but does the mark is the reset of the dividend.

Now negate consideration for the typical adjustment that you would do it at year end in other words are we good sort of on the dividend for the next year or so or would you go through a normal planning cycle as you go.

Go into year end and into next year.

Yes, Greg Thanks for your question.

And I guess some of this is kind of picking up on my answer to kneel that when we did the investor day, we talked about the 25% CAGR through 2025, and essentially this accelerates and delivered three quarters of that.

Now a short time after our Investor day, So and we did we felt we had highlighted that this is going to be front end loaded, but obviously this is a lot more front end loaded than we ever dreamt, although the commodity prices significantly higher so all of these things debt repayment share buybacks and such has all been siggi.

<unk> accelerated.

The management and board regularly assess our progress on where we're at and look at shareholder returns and how we're positioned all of that said given the significance of the movement and stuff, we're really not expecting that the board would choose to make any further decisions coming up in the next quarter.

Okay I appreciate that very very clear.

Other thing is I mean, you look at all the moving parts in the oil market right now obviously cost inflation just costs in general and I guess, the thinking on year ended Ben.

You need a 35 ti breakeven to cover sustaining capex and so on with the dividend adjustment in there all the other moving pieces, how should we think about that breakeven price now.

Yes.

That's actually a great question.

Obviously this is around affordability right. It's one of the reasons that we had the breakeven and looked at doing that along and this included all of our operating costs sustaining capital and the dividend and our focus was to be able to pay that in a 35 dollar world with substantially.

Higher prices in the current environment, and such including things like increased natural gas and FX rates and everything else. Obviously, our breakeven is higher than that essentially everybody says that's consuming energy because energy is up so much.

But we remain very confident in delivering our $2 billion, but in this high priced environment and very high commodity prices.

That's actually a challenge so our breakeven is higher but we don't see that as an issue in this environment. Obviously, if the entire energy market declined our breakeven will decline as well so you'll see us continuing to work on changing the <unk>.

<unk> of the company going forward, we lowered our capital in 2022, and we're confident that we can accelerate other aspects of our five year plan and so we haven't given up on it but in the short term for sure our breakeven is higher than the $35.

Okay makes sense thanks Mark.

Thanks.

Thank you. Our next question comes from Phil Gresh of Jpmorgan. Please proceed.

Hey, good morning.

My first question just to follow up on some of your balance sheet commentary.

The $12 billion to $15 billion.

Our long term target.

Is that something that you would consider also.

Bringing down with.

With the excess cash flow or would you rather kind of keep that target maybe hit the low end of that target and returning incremental cash to shareholders. How do you kind of compare and contrast, those two ideas.

Yeah. Thanks, Phil.

And you know as we look at it.

You'll recall, we said two targets where we.

Set of 20 to 25 target of $12 billion to $15 billion and as Mark said.

We are on track to achieve the 15 the tail end of that range. This year. So that's an acceleration we will continue to drive that down over the next few years.

But we also set a 2030 target, which was an 8% to $12 billion and we will continue to drive to that.

The commodity price environment, whereby we can drive down to those levels faster, we will do that but we're also cognizant of.

And shooting the shareholders get a return and you saw us make a comment that our free cash flow after capex and dividend will be allocated 50% to buybacks and 50% to debt reduction next year that will be pretty consistent going forward.

Got it got it Okay, and then just to follow up on some of the operating cost commentary.

The higher price environment leads to some inflationary pressures for everybody.

It looks like your Opex. This year based on your guidance, probably will be around $11 billion for the total company.

I guess is it fair to think that from there we should be looking at these call it $400 million.

Free funds flow improvement would be off that baseline as we move forward into 'twenty two.

Looking at the absolute targets for me because of that.

Yes, the cost environment has changed or just any further color on that would be helpful.

Yeah, I mean, it's interesting when you look at the overall cost structure. It's interesting when you look at OS in <unk>, because as Alistair pointed out we changed the natural gas sensitivity. It was for every $1 change in natural gas. It was 240 million dollar impact in <unk>.

We've revised it down to 160.

These two pieces of it one is the power revenue that comes shows up in our revenue line and the <unk>.

Costs actually show up in our <unk> cost I mean, this is actually one of the complexities of it. So you don't really see it when you look at our op unit operating costs, you'll see some of the impact of that but it's mitigated by the revenue. So we're far more focused on our unit operating costs and staying on track to deliver.

The cost outlooks that we've had associated with it and so we are seeing some impacts associated with that a lot of the challenge with our $2 billion. This year is a lot of it showed up on the revenue side and and very little in the cost side, So youre not seeing the movement and the operating cost.

<unk> that some expect because I think some people have just taken this that it's all coming out of cost and such so anyway. That's one of the challenges I don't know Alastair did you want to add anything to that.

I think it is important to.

Do you realize you know obviously, we have had some impacts this year, but everything is really forward to next year I would say.

A couple of things that are that we're focused on and working our way through availability of labor I think youre seeing that across the industry.

Just some color issue I would say that we're probably in an advantaged position compared to others, we have a largely in source their workforce.

Limits, our exposure to service providers, where I think we've seen others, who are pretty significant.

Cost increases were not experiencing those you don't agree.

What extent because of that largely in the north.

Labor Force.

And our general CPI and kind of is around beefing up to four 5%.

So as we work through our planning and we get to guidance in December. We're also going to give you. Some more details around those costs. So I think there's more to come on this but.

I'm not expecting a significant increase in costs here, we will be offsetting that are in place and buy some of the partially offsetting that inflation by some of these additional cost reductions of Mark Kaufman.

Alright, just one last one just on the operating cost you said this is obviously the biggest turnaround here.

History would you say that there is.

Like a material impact on cost or more was it more just the lost volumes they.

It came from that that would be incremental tailwind.

Okay.

Well, Phil you actually see it on both sides of the coin part of it is actually the turnaround itself. Obviously has some impact on the volume side, but you'll see a bunch of the same capital because a lot of the sustaining capital is actually done.

The work that we're doing physically on the assets that said, we work really hard to try and normalize that from year to year. So that we don't have these huge swings in sustaining capital and such associated with it. So I would say youre going to see it more on the volumetric side than you would see it year to year on the capital side.

Okay. Thanks, a lot.

Yes.

Thank you. Our next question comes from Dennis Fong of CIBC World markets. Please proceed.

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

Couple of them already have already been asked but.

There is two that I have quickly on Fort Hill that I'd like to just probably about and hopefully I'm not getting too ahead of myself here is first.

Just with respect to the components around the wall stability kind of pictures and so forth is there any has there been any changes in terms of mine plan going forward as well as has that changed the thought process around any debottlenecking or further optimization once.

Project is able to ramp up to full capacity.

As well as maybe timing around doing about incremental.

Debottlenecking or efficiencies that you could gain.

Yes, Thanks Dennis.

It's interesting with this because the mine plan has changed.

Just because the south face was so rich with or we took a little different approach around how we are planning to mine that and obviously, we're well into that now there's been an enormous amount of work done since in the last quarter and compliments to the team they've really been going hard at.

It and making tremendous progress.

That said and to some degree I would say, it's a little bit of a separate issue.

When you set that aside that's really around getting this asset ramped up getting a default rates and delivering on 90% of nameplate capacity that we've always stated then the issue about the Debottleneck is there are opportunities or we believe there will be opportunities to debottleneck the facility on a few occasions.

We've had it running at full rates. So that's very positive and and we've made some tremendous progress looking at that facility and such.

We're looking for this really to be the first year coming up in 2022 where we're running the facility at 90% of nameplate capacity through that we are getting the the more we run the facility and in the more circumstances and conditions, we run it we see more and more opportunity around <unk>.

Better understanding about how we could debottleneck the facility.

Anytime you put this much capital on the ground there is an opportunity to debottleneck in line. It out it's always a little different than what it looked like on paper or in.

The math models. So that's what we'll be paying a lot of attention to over the next year and we fully expect that we will find opportunity going forward.

Great Great. Thanks, and then maybe shifting gears.

To discuss syn crude here now that.

Hugh I mean, not a lot.

A lot of time, specifically operating asset that you've given the timing of when you've taken over operator ship I was just curious in terms of the we'll call. It. The first nine months of this year as well as kind of what you understand with respect to the assets already.

Given your interest in it.

Have you found anything with respect to the interconnect beyond.

Being able to showcase the strong utilization.

Help improve the quality of the feedstock into the Syncrude facility as well as mitigate downtime between bulk base plant and Syncrude.

Is there anything further that we need to understand about that.

Just given that it's operated for several months with year, thus far.

Yeah, Dennis I don't think that Theres anything beyond improving the feedstocks, increasing the utilization and driving higher profit.

And then what you've outlined.

But those are super significant right.

<unk> business, and we're seeing more and more opportunities I think one of the things. We're really excited about is we essentially had two separate organizations looking at the assets trying to identify opportunities and then drive that.

Discussion about okay, well how could we do this can we get a deal get things going and everything else now we essentially have it all in the same organization. So we think that we'll be able to drive up the utilization of the asset and really.

Leverage and maximize the value of the interconnecting pipeline. This is our first year. We've made some good progress it's interesting how the opportunities come and go sometimes they're in very short term, but.

We're excited about the interconnecting pipeline, it's a huge lever and helping to improve the syncrude asset and and we think that with operator ship. This even sets a better foundation to maximize its value.

Great I appreciate the color and congrats on the returns as well as hitting your target goals.

Thank you.

Thanks Dennis.

Thank you. Our next question comes from Menno <unk> of TD Securities. Please proceed.

Hi, good morning, everyone and thanks for taking my questions. So there's lots of chatter out there on the impact of higher natural gas prices on refinery processing costs for heavy oil in particular, it sounds like that's been a key driver of widening heavy differentials as refineries bid up.

Light feedstock over over heavy so my question for you is how were higher gas prices impacting your downstream margins and decisions on whether or not to sort of thought about whether or not but whether the prices process lights lights versus hobbies and focusing on.

On the downstream side of things in particular I understand that you did provide that $160 million sensitivity for a for natural gas for the for the quarter.

Yeah.

Yes, Menno, it's interesting because I actually think that to a large degree youre seeing that commentary would come out of Europe, where their pain.

Orders of magnitude higher natural gas prices. Because this is an area that has very constrained access to natural gas essentially no storage there their storage volumes and are way below historical levels, and and I would say to some degree the region is struggling.

With energy access just in its entirety.

So I really don't see it and in fact, that's one of the reasons that we kind of pointed out is that in my downstream commentary, we talked about delivering at Q3, the third highest in our in our history, but we also talked about yet, but one of the challenges as natural gas prices up 125%. The Canadian dollar is up five.

5%.

And you've seen.

Much narrower spreads than what we've seen by $4 on the light heavy so so I really don't think in North America. This is really a dynamic but in Europe, you'll see it much more and so.

Maybe there's been a little bit widening of the differential the beauty of our model as well.

Our whole model is designed that whether the differentials are wide or narrow or whether the prices are absolutely higher not we actually can extract the money within our model associated with it and so we view that our model actually helps protect us against this just as we talked about on the power side its one.

The reasons, we modified our sensitivity before we're just showing you the impact on OS and G. But the offset here is in revenue. So we think we're very well positioned to be able to manage this but.

But in North America, I don't see that as a really significant factor, although it may have some impact.

And just on a related note.

Would you ever consider getting back into the into the gas business I know it was a big part of the business model back in the day just to hedge out that price risk or is it just is.

Just not enough.

Enough.

Not in that sensitivity to to even have that be a consideration.

Yes, Menno, it's interesting because I think you will see that our model, although very unconventional to a lot of folks.

We see that we actually have impact as you see the co Gen come on our sensitivity to natural gas will change again and be mitigated further associated with it.

When you when you ask would you ever I mean.

Maybe I'm getting old enough to know that they never answered the question in an apps.

Maybe there's a circumstance, where obviously, we're a big consumer of natural gas and we continue to look at our positioning within the markets. All the time our primary focus at this stage of the game is how to mitigate obviously increased natural gas prices and power is the way that where we are.

We're doing that and obviously, we're further investing to manage that further so would we ever maybe we would not at this time.

Okay. Thanks for that Mark.

Thanks.

Thank you. Our next question comes from Manav Gupta of Credit Suisse. Please proceed.

Hey, guys. So I wanted to switch gears, a little you and some of the other operators in Canada have come out with projects on carbon capture and sequestration and I understand it's pretty early but just trying to understand like what kind of support do you would need from the government of Canada to move ahead with.

This is at the farm carbon pricing is it do you think needs to booking you with some kind of Capex you know the debate in so I'm just trying to understand if these negotiations are proceeding what kind of help do you expect from government to move ahead with the carbon capture program.

Yes, Thanks Manav.

Obviously I mean this is an area. We're quite excited about obviously, we are a large emitter of cotwo and and it's been fantastic to see the alignment amongst the industry peers and really being able to get an unprecedented alliance in the history of our industry within Canada to be able to.

Chart, a clear path moving forward that that plan is to take the whole industry to net zero by 2050.

Obviously, theres a lot to that plan, but one of the key points in that is carbon capture and sequestration. We realized as we worked on it that as we worked as an industry. If we work together, we can drive down the costs significantly and this is about keeping the industry competitive if you look at Norway as in <unk>.

Ample two thirds of our capital in two thirds of the operating costs for the first 10 years are actually provided by the government in the United States with Q45, we actually have incentives to be able to do carbon sequestration and that deals with both capital and operating costs. So we need to have something.

That's competitive.

We want to ensure that we can afford to be investing below our weighted average cost of capital of course and <unk>.

The Great thing is is we have a plan and I think we have a great relationship with both the federal and provincial government and we're looking to get alignment. So that we can move forward.

Thank you for that question here on the refining side.

You were generating free cash in refining even during the worst of pandemic and now obviously you are adding a lot of free cash from refining, but if you look at your refining is actually three box, it's defining its logistics and it's reaping and I wanted to understand from the retail perspective is this a business you want to grow is this.

The business you want to keep as it is or is it the business that you could potentially look to divest at some stage. So if you can help us understand your views on your retail business within refining.

Yeah, it's interesting manav, because we actually talked about this on our Investor day, So that I think there's some good material there that helps provide.

Some context to it.

I would actually add a fourth piece to this as our trading capability and.

You saw that in the last year is that we were able to run disproportionately high utilizations in the refineries leveraging our logistics network and our trading capability to deliver free cash flow when nobody else was and that I think in our Investor day, we talked about how we delivered twice as much operating.

Cash flow and refining than our next nearest competitor within North America because of the combination of all of this capability that we've outlined retail is an important part of that we have the number one brand in the country we have.

The largest.

Coast to coast network, we have direct relationships with the customers that we can leverage as we think about adding energy options for the future. So we see that says they are an important part of our model and and and so I think I would just refer you back to that our team can act.

<unk> walk you through some of those slides and stuff we did on Investor day, but we think this is an important part and we recognize that a lot of people have just sold this often taken the cash out of it.

But we don't think that's the right answer for Suncor and the more we see the integrated piece associated with it. This was very helpful. When we went through Covid.

Anyway, but that's kind of where we're at with it manav and and that's where we've that's why we've continued to position and continued to invest in this part of the business.

No I completely agree I don't think it should be moved out it's integral part of the business. It gives you that access to the end markets are placing a battle is important.

Last and final quick question is 2021 was a year of very heavy turnaround for you upstream and downstream as we look at 2022 do we think the level of maintenance in both upstream and downstream should be lower how do you expect to run in 2022 at both upstream and downstream versus 2012.

One.

Okay.

Yeah.

It's interesting when you look at it the downstream and upstream have lower turnaround activity, we still have a lot of maintenance going on but we have lower turnaround activity than what we had in both sides of the house associated with that same crude still has some substantial maintenance and turnaround work within the year.

And fire bag actually is going to be off.

We have a big piece of work associated with fire bag I think the impact something like 15000 barrels and so and you keep in mind Golden Eagle with it out that's about a 10000 barrel hit so there's puts and takes across the platform turnarounds are lower but we're still executing a bunch of work and some of this is what I said earlier.

One of the previous questions just about trying to flatten out and optimize our sustaining capital going forward. So we don't have huge swings in that so.

So anyway, so that's where we're at.

The beauty of it is that overall as we talked about during Investor day. This optimization phase, 40% less capital than the growth phase, we had and DAP and next year as we've highlighted we're spending $300 million below our 2022 ceiling. So.

I think where we're trying to manage this well so that we can continue to deliver.

Very strong returns to our shareholders.

Thank you for taking my questions.

Thank you. Our next question comes from Harry Mateer of Barclays.

Yeah.

Thanks Al.

Also I think this one's for you, but one of the questions. We often get is the concept of net debt versus gross debt. Then you have net debt targets for 2025, and 2030 as you've laid out but your capital allocation framework for next year also indicates paying down debt with cash and presumably there's a limit out how high you want the cash needs to go.

As opposed to just doing gross debt reduction so.

Curious how youre thinking about that and then the follow up is you know when I look at your debt schedule.

We still have a couple of billion of short term debt, but at these sorts of prices you spend through the pretty quick so how do we think about the willingness.

Let's do more alami, such as do it did with the 24 in the third quarter, maybe not paying make wholes, but waterfall tenders et cetera.

Yeah, that's a great question Harry.

Youre right on there no net versus gross.

<unk>.

We obviously don't want our cash balance to grow significantly, but somewhere in the $2 billion to $3 billion is probably reasonable.

Just two.

I emphasize to everybody when we talking about in that.

Our debt until we include our leases of about $3 billion is not a.

Companies in the U S and do the same thing I would say that as we're looking at all options. As we go forward. We have short term debt Paydown. We've got some maturity I think were looking at liquidity management events. So that we can.

I think some of that longer term data, you'll see us manage the debt profile you may see us issue some longer term debt.

Just determinate an increase from synergies at the same time as we're taking sort of temporary but all of those options are firmly on the table.

Got it thanks very much.

Thank you. Our next question comes from lack your read of Wells Fargo. Please proceed.

Hey, good morning, and good.

Congrats on the on the better results.

I missed the first part of this call in quite a number of reports this morning, but I would like to come back to the decision to reinstate the dividend.

The pre reduction level, what the what was the thinking kind of at the time of the cut and whats the thinking today, bringing all the way back one of the reasons I asked we expect that the dividend raise next year, but we didn't really think you can get all the way back. So I'm just trying to understand the confidence level that you have here and how that all came together.

Sure.

Yeah. Thanks, Roger I appreciate it really if you go back to the dividend cut and I think we've been through this on several occasions as you know our focus was hey, we're in a global pandemic is having a dramatic effect on global demand and our view is we needed to keep the company financial.

A strong we took that decision essentially any company in our analysis any company that cut the dividend has underperformed in the market.

But then when you look at it we really looked instead there were four key factors when we looked at reinstating the dividend one is just our confidence in the safe and reliable operations.

We've just concluded the most significant maintenance year in the history of the company Fort Hills is on track to ramp up and so the business is looking really strong and then when you look at consumer demand.

Although it's off a little bit youre seeing the downstream recover and providing significant and stable cash flows as we look to the future and so we saw that downstream deliver in line in the third quarter with what we saw in 2018 in 2019, it's the third best Q3 in the history of the company for the downstream.

Despite challenges of higher dollar and such and then the last piece of it.

The other two pieces is our confidence in the execution of delivering on our $2 billion of free funds flow $465 million. This year and we're on track to deliver that and another amount similar to that next year. So that's going very well and then the last one is really.

When you look at our share buybacks and paying down our debt.

We're working to and Alastair went through versus when you look at that we're looking to be at the top end of our 2025 debt targets on net debt.

By the end of this year, we're actually now looking to buyback up to 7% of our shares and we're working on the 2023 share buybacks that we talked about at Investor day. So we're just taking advantage of the high commodity price environment. We have made so much progress on restructuring the data and such our view.

This we needed to keep the dividends up at the same pace. So you're seeing that what we talked about on Investor day. The dividend increase is 75% of their dividend increase we talked about doing between now and 2025, but it's in line with the progress, we're making on share buybacks and debt. So.

Thanks for your question.

Yes can I follow up just an operational question Theres theres been.

Kind of a crude diff question, you know a lot of improvements in pipeline volumes to the U S. With some of the stuff going on with line three I'll presume line five doesn't face any particular issues and then obviously you've got the pipeline to the West Coast expansion can you just give us an idea of how you think about differentials moving whether.

It's the the light or the heavy crudes down South and then.

I understand you Havent changed some of the same differential issues that others have the transportation issues, but you know a better market is a better market and just how we should think about that affecting suncor as we look forward over the next couple of years and how that maybe factors into your cash flow expectations. If it does at all.

Yeah, Roger I mean, I think to some degree this goes right to the heart of our model.

Predicting differentials is very challenging and we've seen that in all of these different markets. We saw an inventory build in Q2, which I actually found a bit surprising because.

There was lots of maintenance that whats happening in the second quarter within the industry and such and so it was seasonally high when you look at it relative to the last three years and <unk> and then when you get into the <unk>.

My comments in the prepared remarks, and as such you saw that downstream perform really well with narrower depths strong Canadian dollar and in a much higher gas price.

I think there are several factors that are actually driving depths around.

Greg actually pointed one out in his in his question about natural gas and whether that's affecting lights and heavies and demand for lights I think in some markets. It is I don't see it as a significant factor in North America Youre seeing increased crude coming in from OPEC I think most of that is going to be on the heavy side and then.

And then on the positive for narrowing the deaths Youre seeing better access with line three coming on so.

So theres pushes and takes to it we don't see a dramatic effect in the deaths one way or the other they issue with it for US is we're fairly indifferent. We have an integrated model is designed to be able to pick up the cash either in the upstream or the downstream depending on where the defense and so we really don't focus on it all that much.

Okay. Thank you.

Yes.

Thank you I think more or less to turn the call back to Trevor Bell for closing remarks.

Great. Thank you operator, and thanks, everyone for attending the call I know, it's a busy part of earnings season. So I appreciate your support and we're around all day, if you have any follow up questions.

Again operator.

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

[music].

Good day, and thank you for standing by welcome to the Suncor Energy third 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. Please.

Today's conference maybe recorded to ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Trevor Bell Vice President of <unk>.

That's the relations. Please go ahead.

Thank you operator, and good morning, welcome to some quarters third quarter earnings call.

With me. This morning are Mark Little President and Chief Executive Officer, and Alister Cowan Chief Financial Officer.

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 that are described in our third quarter earnings release, as well as our and annual information form both are.

<unk> 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 third quarter 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. Thanks, Trevor and good morning, everyone and thank you for joining us.

<unk> third quarter results delivered in three key areas operational excellence increased shareholder returns and significant debt reduction.

Suncor delivered $2 6 billion funds from operations for the third quarter. While also completing the most significant maintenance year in our history on about yet.

But downstream produced nearly $1 billion of funds from operations, which included approximately $80 million of FIFO gains.

This performance marks the third best set of Q3 results for the downstream in its history.

Year to date, we have reduced the company's net debt balance by more than $3 billion and returned over $2 6 billion to shareholders in the forms of dividends and buybacks by allocating over 70% of our finance from operations, including the tax refund received earlier this quarter.

Yeah.

Reviewing the progress we made on our commitments from earlier this year, our nine months annualized cash return is 9%.

We bought back over 4% of the company's shares since the program's initiation in February.

The company's net debt level has been returned to year end 2019 levels and we remain on target to deliver our capital in line with expectations.

In short, we are meeting or exceeding our commitments our.

Our confidence in our operations and the pace in which we're executing our plan allows us to increase shareholder returns by doubling the current dividend to annually $1 68 per share or back to the 2019 levels.

Increasing the buyback by a further 2% to 7% by February of 2022, all while expecting our net debt to be near the top end of our 2025 target range by this year end given the favorable macro backdrop.

Turning to operating performance ups.

Upstream delivered 700000 barrels per day of production in the third quarter.

Oil sands operations production of 370000 barrels per day reflects the planned five year you do turnaround.

This was partially mitigated by 90% utilization for and set you in spite of completing the planned maintenance at fire bag.

Looking at year to date cash operating costs of $25 per barrel Canadian we are progressing extremely well towards the bottom end of our full year cash operating cost per barrel guidance.

Syncrude achieved 185000 barrels a day of production with 91% utilization for the quarter and cash operating costs of $31 per barrel.

At the end of the quarter on September 30th we assumed operator ship of Syncrude.

Critical milestone towards achieving the previously communicated $100 million in annual synergies in the first six months of operator ship and $300 million in total annual synergies by the end of 2023. These synergies will contribute to achieve the cash operating costs.

<unk> of $30 per barrel and Syncrude.

For Hills production of 51000 barrels per day reflects a one train operation.

We have made significant progress on overburden removal and slope stability and as a result anticipate achieving full rates by year end.

We're right on plan with what we stated before and we will have both trains at full rates intermittently in November and December to ensure a seamless transition to full operating mode.

Our expectation for 2022 cash operating cost per barrel is in the mid twenty's with an incremental 45000 barrels per day of production.

In our E&P operations Q3 production of 94000 barrels per day with an increase from Q2.

However, our funds from operations of $360 million reflects an inventory build associated with the timing of cargo sales.

Sale of Golden Eagle was completed on October 22nd with cash receipt of approximately $250 million U S.

Items from operations.

Compared to the three eight to $3 9 billion for full year funds from operations in 2018 in 2019 from the downstream.

Third quarter is in line with that run rate with slightly better cracking margins, but also with some significant headwinds.

Average sweet and heavy differentials were $4 a barrel U S narrower the Canadian dollar was 5% stronger and natural gas prices were 125% higher.

In short while the headline funds from operations. This quarter is comparable to our 2018 2019 run rate there were considerable headwinds that we were able to offset through strategic improvements and investments in our supply and trading and logistics assets to further our competitive.

<unk>.

As discussed during the Investor day, the investments, we've made and continue to make to achieve our $2 billion of incremental free funds flow initiatives are building a business that is more resilient and stronger than ever before.

As incremental demand continues to recover we expect to capture higher margins <unk>.

Afflicting back on the second and third quarter of this year, we delivered $5 billion of funds from operations or nearly $3 50 per share. Despite completing the highest maintenance activity across base plant and syncrude and all of the refineries in our history.

And with Fort Hills operating at one train.

Our assets continue to operate at strong rates, which positions us for significant improvement to our free funds flow generation in the fourth quarter and into 2022 and beyond.

I'll now hand, it over to Alastair to go through our financial highlights.

Thanks, Mark and good morning, everyone for the third quarter, we continued to exceed our plan to increase shareholder returns and reduce debt.

We returned over $1 billion to shareholders in the form of a $310 million in dividends and $700 million in share repurchases.

During the quarter, our biomarker amounted to 28 million shares.

That's 20% more than in Q2.

Average of $25 per share and.

In addition to the nine month annualized cash return of 9%. We have also reduced our net debt balance by over $3 billion and $2 billion of that came in Q3.

<unk> delivered approximately $1 $6 billion of funds from operations during the quarter.

Although price realizations were higher during the quarter. These were partly offset by higher royalties, especially firebug, which turned to propose the payout during the quarter.

We had anticipated as well as the teams to be in the middle of 2022 I remember at current prices postpaid has been achieved much sooner.

So just to clarify all of our assets, except Fort Hills.

<unk>.

Thus the cash flow from EBITDA.

It really reflects the royalty charges.

As Mark mentioned, our oil sands operations cash operating costs continue to trend very well with year to date Q3 sitting at $25 per Boe, despite increasing natural gas costs.

You can see from the disclosures with higher natural gas costs.

It over just over one dollar to our oil sands operations celebrating cost in the third quarter, but nearly half of it would be an offset elsewhere in our business, including through higher power revenue.

We have updated our natural gas sensitivity to reflect the $160 million.

Funds from operations impact for every $1 <unk>.

Alright, Thank you don't change in April.

Sensitivity update reflects our integrated model.

Power revenue, which is correlated to a dozen mitigated a portion of the natural gas costs.

The E&P segment generated $360 million of funds from operations with price realizations of approximately $90 Canadian per barrel delivering $300 million of refunds for net of capital expenditures.

These results included an inventory build due to lifting schedules, which we expect to come through as additional funds flow in the ports.

As Mark noted we recorded our third best Q3 results in <unk> history, despite the less than normal business environment.

I would like to print these results in the context of the demand.

If elected the Q3 2021 versus Q3 2019.

<unk> product demand across Canada was down nearly 7%.

But suncor sales channels remained relatively similar to the same period Q3, 22 and 2019.

This strong performance is a considerable driver towards capturing higher margins and is a direct result of strategic investments in our supply trading and logistics assets.

We expect this trend to continue into 2022 with southern Curtis downstream, capturing higher demand and higher margins and continuing to outperform the industry.

Ending the third quarter, our net debt is 16 $7 billion.

Which includes capital leases.

Once the Golden Eagle sale proceeds of approximately 200 U S $250 million received in October.

<unk> stands at $16 4 billion Canadian similar to year end 2019 levels.

As it relates to our guidance, our only change to the business environment for increase in commodity prices, which of course does increase their cash taxes and royalty ranges slightly.

Lastly, as I look at our performance for the remainder of the year. We are on track or ahead on both the net debt and buybacks.

On our Investor day, we outlined.

The five year target to buyback approximately 12% of the outstanding shares.

By the completion of the current program in February 2022, we expect to purchase 7% of the loans are.

Or said another way achieving 60% of our planned buybacks over five years.

With that I'll pass you back to Mark.

Great. Thanks, Alastair with downstream delivering strong results our assets operating at expected rates and Fort Hills ramping up as planned.

I'm really confident in our near and long term business outlook.

Further we are resolute in driving down our cash breakeven by capturing the $2 billion of annual free funds flow initiatives and Syncrude synergies, we detailed at our Investor day.

Although I do acknowledge that the impact of higher commodity prices are impacting both revenue and cost side of our business.

In 2021, we are on track to deliver $450 million of incremental annual funds flow largely through margin enhancements for example, the fire bag in Edmonton Debottleneck, our trading optimizations, lower reclamation spend and interconnecting pipelines.

Meanwhile, we are also on track to buyback the highest annual percentage of stock in the history of the company, while expecting to reduce our net debt by almost $5 billion by the end of this year and be at the top end of our 2025 target range.

Next year through significant cost savings being improved productivity and synergies and further margin enhancements, we expect to generate an additional $400 million of annual funds flow. Additionally.

Additionally, on capital, we expect to be $300 million lower than the $5 billion ceiling, we discussed at our Investor day.

As I mentioned earlier, given our execution to date and our confidence in achieving our plan.

<unk> has increased the dividend back to 2019 level.

The next dividend will be payable on December 24, 2021.

This dividend will increase.

<unk> set a new quarterly dividend payment at <unk> 42 per share up from the current 21 per share.

The Board has also increased the current buyback program to 7% of outstanding shares a further 2% increase to be purchased by February seven 2022.

We fully expect to renew the current share buyback program upon its expiry on February seven.

And anticipate continuing the buyback program at approximately 5% of outstanding shares at that date.

Even with a significant increase to the dividend and continuation of the buyback program. We are planning to accelerate the pace of achieving the net debt targets.

This reflects our confidence in the performance of our asset base and our strong free funds flow generation across our integrated model, taking advantage of strong commodity prices.

To put this into perspective.

Suncorp today is on track to deliver similar debt levels and a lower number of outstanding shares than it had in 2015, however, with 35% higher production are resilient in downstream and a lower breakeven.

Our integrated model is stronger today than ever before and we are now well into the execution of optimization strategy that maximizes the value from this model.

As I look forward I am confident in our plan to ensure long term value for our shareholders and a stronger and more resilient future for suncor.

So with that Trevor I'll turn it back to you.

Great. 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.

Your question. Please press the pound key please stand by while we compile the Q&A roster.

Our first question is from Neil Mehta of Goldman Sachs. Please proceed.

Yeah. Thanks, Neal I appreciate it it's interesting because when we looked at it there were really four factors that we looked at when we thought about setting this divvy.

Dividend increase first of all the confidence in safe and reliable operations and <unk> seen that in executing the maintenance program or on Fort Hills ramp up in <unk> and the progress that we're making there secondly, the downstream is is back and delivering on the cash flow that we expect that that business.

It's to do and we haven't seen that for some time given the impact of Covid, So, it's providing significant and stable cash flow going forward.

All of the cash allocation other than our investments has been accelerated so you've seen it in our share buyback when alister was talking about the share buybacks. We're now working on the 2023 share buybacks by the time, we get to the end of this year from what we said before we're actually.

Working to get to the top end of our 2025 debt target. So all of the cash and and allocation of capital is being accelerated in all areas and we felt it was appropriate to do that and the dividends as well. So this is fully consistent with the 25% CAGR that we outlined and in fact this is.

75% of what we said we would deliver by 2025.

So it's not inconsistent has just accelerated just like it is on debt repayment and share buybacks.

And then Mark can you talk a little bit about the oil price bands and how how we should think about the durability of this strategy even in a lower lower commodity price environment, if that plays out.

Yes, thanks Neil.

So when you look at.

The.

Durability of it we went back and looked at best around Okay, well what does this mean.

At the $55 oil that we talked that ends and so given the fact that we've made so much progress on that one of the one of the challenges at $55 is you don't have that cash flow to restructure that debt at the company and to be able to buy back your shares and such so given the fact that it's all accelerated if we went to $55.

Tomorrow. This is sustainable we still generate free cash flow and we can still continue to push forward on our debt and our share buybacks through that so we view that it's very sustainable.

The other piece associated with that if you look at the.

<unk>.

Work that we've done we said we were just $465 million of our $2 billion has been delivered this year, so just under $500 million.

We have a similar amount next year associated with it and then with cutting our capital by $300 million versus the cap that we outlined this also gives us.

Over this period of time, approximately one $2 billion essentially that we've turned over into the dividend. So even in this environment. We view that we're earning our way to actually deliver this dividend increase, albeit very accelerated just like we're seeing in depth and in share buybacks.

<unk>.

Thank you and then the follow up question is around Fort Hills. That's the next big catalyst from our perspective to help to reset the story.

It sounds like based on your comments Youre feeling good about the progression I know Mark you had spent some time up there, but can you can you give us an on the ground perspective, and the milestones we should be watching for to get confidence you're getting back to two trains.

And they are working so we've really been able to deal with that so we've been able to manage that whole piece associated with it and they are getting ready now to do test trends as I mentioned, both in November and then we'll start staging the asset up in December so you'll start to see nominations, particularly in December Youll see an increase in non.

As we get ready to and shipping on the pipeline. So as we get ready to bring that asset into full production before year end.

So and we also remain on track to achieve our $20 a barrel cost target in 2024 and next year, we expect it to be in the mid twenties.

Thanks, guys.

Thanks.

Thank you our next question comes.

From Greg Pardy of RBC capital markets. Please proceed.

Thanks, Good morning, and I'd Echo, what Neil said I mean, just a very very strong a strong quarter. So I don't want to get ahead of myself here, but does the mark does the reset of the dividend.

Now negate consideration for the typical adjustment that you would do it at year end in other words are we good showing up on the dividend for the next year or so or would you go through our normal planning cycle as you as you.

Go into year end and into next year.

Yes, Greg Thanks for your question.

And I guess some of this is kind of picking up on my answer to nail that when we did the investor day, we talked about the 25% CAGR through 2025, and essentially this accelerates and delivered three quarters of that.

Now a short time after our Investor day, So and we did.

We felt we had highlighted that this is going to be front end loaded, but obviously this is a lot more front end loaded than we ever dreamt, although the commodity prices significantly higher so all of these things debt repayment share buybacks and such has all been significantly accelerated.

The management and board regularly assess our progress on where we're at and look at shareholder returns and how we are positioned all of that said given the significance of the move and stuff, we're really not expecting that the board would choose to make any further decisions coming up in the next quarter.

Okay I appreciate that very very clear.

The other thing is I mean, you look at all the moving parts of the oil market right now obviously cost inflation just costs in general and I guess the thinking on year ended Ben that you need it to 35 Ti breakeven to cover sustaining capex and so on with the dividend adjustment in there all the other moving pieces.

How should we think about that breakeven price now.

Yes.

That's actually a great question.

Prices in the current environment as such including things like increased natural gas and FX rates and everything else. Obviously, our breakeven is higher than that essentially everybody says that's consuming energy because energy is up so much.

But we remain very confident in delivering our $2 billion, but in this high priced environment and very high commodity prices.

<unk> of the company going forward, we lowered our capital in 2022, and we're confident that we can accelerate other aspects of our five year plan. So we haven't given up on it but in the short term for sure our breakeven is higher than the $35. Okay.

Okay makes sense thanks Mark.

Yeah.

Thanks.

Thank you. Our next question comes from Phil Gresh of Jpmorgan. Please proceed.

Hey, good morning.

My first question just to follow up on some of your balance sheet commentary.

$12 billion to $15 billion.

Long term target.

Is that something that you would consider also.

Bringing down with.

Yes, thanks, Phil.

As we look at it Youll recall, we said two targets, we set in 2025 target of $12 billion to $15 billion and as Mark said.

Actually on track to achieve the top end of that range. This year. So there is an acceleration we will continue to drive that down over the next few years, but.

But we also set a 2030 target which was named to 12 billion barrels and we will continue to drive to that.

The commodity price environment.

We can drive down to those levels faster, we will do that but we're also cognizant of.

And shooting to show the return on you saw us make a comment that free cash flow after capex and dividend will be allocated 50% to buybacks and 50% to debt reduction next year that will be pretty consistent going forward.

Got it got it Okay, and then just to follow up on some of the operating cost commentary.

The higher price environment leads to some inflationary pressures for everybody.

It looks like your Opex. This year based on your guidance, probably will be around $11 billion for the total company.

Is it I guess is it fair to think that from there we should be looking at these call it $400 million.

Free funds flow improvement would be off that baseline as we move forward into 'twenty two as opposed to looking at the absolute targets for me because of that.

The cost environment has changed or just any further color on that would be helpful.

Yeah, I mean, it's interesting when you look at the overall cost structure. It's interesting when you look at <unk>, because as Alistair pointed out we changed the natural gas sensitivity. It was for every $1 change in natural gas it was $240 million impact in <unk>.

We've revised it down to 160.

These two pieces of it one is the power revenue that comes shows up in our revenue line and and the <unk>.

The cost outlook that we've had associated with it and so we are seeing some impacts associated with that a lot of the challenge with our $2 billion. This year is a lot of it showed up on the revenue side and and very little in the cost side, So youre not seeing the movement and the operating cost.

Costs that some expect because I think some people have just taken this that it's all coming out of cost and such so anyway. That's one of the challenges I don't know Alastair did you want to add anything to that.

I think it is important.

Do you realize you know obviously, we have had some impacts this.

This year, but I think as we look forward to next year I would say.

A couple of things that are there.

We're focused on walking away from the availability of labor I think youre seeing that across the industry.

Just some color issue I would say that we're probably in an advantaged position compared to others.

Largely in source workforce, which limits our exposure to service providers, where I think youll see a pretty significant.

Cost increases were not experiencing those to any great extent because largely in source.

Labor Force.

And our general CPI and kind of is around beefing up to four 5%.

So as we work through our quality and we get to guidance in December. We're also going to give you some more details around those costs. So I think there's more.

More to come on this but im not expecting a significant increase in costs here, we will be offsetting that are influenced by some of the partially offsetting that inflation by some of these additional cost reductions the market ultimately.

Alright, just one last one just on the operating cost you said this is obviously the biggest turnaround year.

History would you say that there is.

Like a material impact on costs or more was it more just the lost volumes that came from that that would be incremental tailwind. Thank you.

On the work that we're doing physically on the assets that said, we work really hard to try and normalize that from year to year. So that we don't have these huge swings in sustaining capital and such associated with it. So I would say youre going to see it more on the volumetric side than you would see it year to year on the capital side.

Okay. Thanks, a lot.

Thank you. Our next question comes from Dennis Fong of CIBC World markets. Please proceed.

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

Couple of them already have already been asked but.

There is two that I have quickly on port Hills that I'd like to just proud about and hopefully I'm not getting too ahead of myself here is first.

Just with respect to the components around the wall stability kind of fixes and so forth is there any has there been any changes in terms of mine plan going forward as well as has that changed the thought process around any debottlenecking or further optimization.

The project is able to ramp up to full capacity.

As well as maybe timing around hearing about incremental.

Debottlenecking or efficiencies that you could gain.

Yes, Thanks Dennis.

It's interesting with best because the mine plan has changed.

Yes.

Does the south face with so rich with or we took a little different approach around how we are planning to mine that and obviously, we're well into that now there's been an enormous amount of work done since in the last quarter.

Compliments to the team they've really been going hard at it and making tremendous progress.

That said and to some degree I would say, it's a little bit of a separate issue.

We've had it running at full rates, so that's very positive.

And we've made some tremendous progress looking at the facility and such.

We're looking for this really to be the first year coming up in 2022 where we're running the facility at 90% of nameplate capacity through that we are getting the more we run the facility and in the more circumstances and conditions, we run it we see more and more opportunity around end of <unk>.

Better understanding about how we could debottleneck the facility, but anytime you put this much capital on the ground. There is an opportunity to debottleneck in line. It out it's always a little different than what it looks like on paper or mass models. So that's what we'll be paying a lot of attention to over the next year and we fully.

We expect that we will find opportunity going forward.

Great Great. Thanks, and then maybe shifting gears.

Just to discuss syn crude here now.

I mean not in sync.

A lot of time, specifically operating yet that you'd given the timing of when you've taken over operator ship I was just curious in terms of the we'll call. It. The first nine months of this year as well as kind of what you understand with respect to the assets already.

Given your interest in it.

Have you found anything with respect to the interconnect beyond.

Being able to showcase the strong utilization to help improve the quality of the feedstock into the syncrude facility as well as mitigate downtime between both the base plant and Syncrude.

Is there anything further that we need to understand about that.

Just given that it's operated for several months this year thus far.

Yes, Dennis I don't think that Theres anything beyond improving the feedstocks, increasing the utilization and driving higher profit than what you've outlined.

But those are super significant right.

We're excited about the interconnecting pipeline, it's a huge lever and helping to improve the syncrude asset and we think that with operator ship. This even sets a better foundation to maximize its value.

Great I appreciate the color and congrats on the returns as well as hitting your target goals.

Thank you.

Thanks Dennis.

Thank you. Our next question comes from Menno <unk> of TD Securities. Please proceed.

Light feedstock over over heavy so my question for you is how.

Were higher gas prices impacting your <unk>.

Downstream margins and decisions on whether or not to sort of thought about whether or not but whether the prices process lights lights versus heavy.

Focusing on the downstream side of things in particular I understand that you did provide that $160 million sensitivities for <unk> for natural gas for the for the quarter.

Yeah.

Yes, Menno, it's interesting because I actually think that to a large degree youre seeing that commentary would come out of Europe, where their pain.

With energy access just in its entirety.

5%.

And you've seen.

Much narrower spreads than what we've seen by $4 on the light heavy so so I really don't think in North America. This is really a dynamic but in Europe, you'll see it much more and so.

Maybe there is spend a little bit widening of the differential the beauty of our model as well.

Our whole model is designed that whether the differentials are wide or narrow or whether the prices are absolute higher not we actually can extract the money within our model associated with it and so we view that our model actually helps to protect us against this just as we talked about on the power side its one.

The reasons, we modified our sensitivity before we're just showing you the impact on OS and G. But the offset here is in revenue. So we think we're very well positioned to be able to manage this but.

But in North America, I don't see that as a really significant factor, although it may have some impact.

And just on a related note.

Would you ever consider getting back into the into the gas business I know it was a big part of the business model back in the day just to hedge out that price risks or is it just it's just not enough.

And now there's just not enough sensitivity to to even have that be a consideration.

Yes menno.

You're asking because I think youll see that our model, although very unconventional to a lot of folks.

We see that we actually have impact as you see the co Gen come on our sensitivity to natural gas will change again and be mitigated further associated with it.

When you when you asked would you ever I mean.

Maybe I'm getting old enough to know that to never answered the question in that.

We're doing that and obviously, we're further investing to manage that further so would we ever maybe we would not.

Not at this time.

Okay. Thanks for that Mark.

Okay.

Thank you. Our next question comes from Manav Gupta of Credit Suisse. Please proceed.

Need from the government of Canada to move ahead with this is at the farm carbon pricing is it basically it's a booking deal with some kind of Capex you know the lipids in so I'm just trying to understand if these negotiations are proceeding what kind of help do you expect from government to move ahead with the carbon capture program.

Yeah. Thanks Manav.

I mean this is an area we're quite excited about it obviously, we are a large emitter of cotwo and and it's been fantastic to see the alignment amongst the industry peers.

And really being able to get an unprecedented alliance in the history of our industry within Canada to be able to chart a clear path moving forward.

That plan is to take the whole industry and net zero by 2050.

Obviously, theres a lot to that plan, but one of the key points in that is carbon capture and sequestration. We realized as we worked on it that as we worked as an industry. If we work together, we can drive down our cost significantly and this is about keeping the industry competitive if you look at Norway as <unk>.

Ample two thirds of the capital in two thirds of the operating costs for the first 10 years are actually provided by the government in the United States with Q45, we actually have incentives to be able to do carbon sequestration and that deals with both capital and operating costs. So we need to have something.

That's competitive.

We want to ensure that we can afford to be investing below our weighted average cost of capital of course.

And.

And so we're working to try and figure out both with the provincial government and the federal government, what's the path forward and it's not just all monetary some of this actually gets into access to poorer space and those sorts of things. The great thing is is we have a plan and I think we have a great relationship with both the federal and provincial government.

And we're looking to get alignment so that we can move forward.

Thank you for that question here on the refining side.

You were generating free cash in refining even during the worst of pandemic and now obviously you are adding a lot of free cash from refining, but if you look at your refineries actually three box, it's defining its logistics and its retail and I wanted to understand from the retail perspective is this a business you want to grow.

This is a business you want to keep as it is or is it the business that you could potentially look to divest at some stage. So if you can help us understand your views on your retail business within refining.

Okay.

Yes, it's interesting manav, because we actually talked about this on our Investor day. So I think there's some good material there that helps provide.

Some context to it.

I would actually add a fourth piece to this as our trading capability and you saw that in the last year is that we were able to run disproportionately high utilizations in the refineries leveraging our logistics network and our trading capability to deliver free cash flow when nobody else was in that.

I think in our Investor day, we talked about how we delivered twice as much operating cash flow and refining than our next nearest competitor within North America because of the combination of all of this capability that we've outlined retail is an important part of that we have the number one brand in the country we.

<unk>.

The largest.

Coast to coast network, we have direct relationships with the customers that we can leverage as we think about adding energy options to the future. So we've seen that says they are an important part of our model and.

And so I think I would just refer you back to that our team can actually walk you through some of those slides and stuff. We did on Investor day, but we think this is an important part and we recognize that a lot of people have just.

Told this off and taken the cash out of it.

But we don't think Thats the right answer for Suncor and the more we see the integrated piece associated with it. This was very helpful. When we went through Covid.

Anyway.

That's kind of where we're at with it Manav and that's where we've that's why we've continued to position and continued to invest in this part of the business no.

I completely agree I don't think it should be moved out it's an integral part of the business. It gives you that access to the end markets. They are placing a battle is important.

Last and final quick question. It is 2021 was a year of very heavy turnaround for you upstream and downstream as we look at 2022 do we think the the level of maintenance in both upstream and downstream should be lower how do you expect to run in 2022 at both upstream and downstream versus 2020.

One.

Yeah.

Interesting when you look at it the downstream and upstream have lower turnaround activity, we still have a lot of maintenance going on but we have lower turnaround activity than what we had in both sides of the house associated with that same crude still has some substantial maintenance and turnaround work within the year.

And fire bag actually is going to be off.

Have a big piece of work associated with fire bag I think the impact something like 15000 barrels and so and you keep in mind Golden Eagle with it out that's about a 10000 barrel hit so there's puts and takes across the platform turnarounds are lower but we're still executing a bunch of work and some of this is what I said earlier too.

One of the previous questions just about trying to flatten out and optimize our sustaining capital going forward. So we don't have huge swings in that so.

Anyway, So that's where we're at that.

The beauty of it is that overall as we talked about during Investor day. This optimization phase, 40% less capital than the growth phase, we had and in next year as we've highlighted we're spending $300 million below our 2022 ceiling. So.

I think where we're trying to manage best wells. So that we can continue to deliver.

Very strong returns to our shareholders.

Thank you for taking my questions.

Thank you. Our next question comes from Harry Mateer of Barclays.

Thanks, Alex.

So I think this one's for you one of the questions. We often get is the concept of net debt versus gross debt net debt targets for 2025, and 2030 as you've laid out but your capital allocation framework for next year also indicates paying down debt with cash and presumably there is a limit out how high you want the cash balance to go.

As opposed to just doing gross debt reduction so.

Curious, how you're thinking about that and then the follow up is when I look at your debt schedule and still have a couple of billion of short term debt, but at these sorts of prices you spin through the pretty quick so how do we think about the willingness.

Two more <unk> such as do it did with the 24 in the third quarter, maybe not paying make wholes, but waterfall tenders et cetera.

Yes, that's a great question Harry.

I think youre right on there.

Versus growth.

We obviously don't want our cash balance to grow significantly, but somewhere in the $2 billion to $3 billion is probably reasonable.

Just two.

Emphasize to everybody when we talk about.

Our debt until we include our leases of about $3 billion.

Water companies.

Companies in the U S to do the same thing.

I would say that as we're looking at all options as we go forward. We have short term debt will be then we've got some opportunities.

We were looking at liquidity management events, so that we can.

Some of the longer term data, you'll see us manage the debt profile.

I see us issue some longer term debt.

Just determined an increase at the same time as we are today the shorter term.

But all of those options are certainly on the table.

Got it thanks very much.

Thank you. Our next question comes from Roger read of Wells Fargo. Please proceed.

Hey, good morning.

Congrats on the on the better results.

I missed the first part of this call in quite a number.

Ports this morning, but I would like to come back to the decision to reinstate the dividend.

The pre reduction level, what the what was the thinking kind of at the time of the cut and whats the thinking today, bringing all the way back one of the reasons I asked we expected a dividend raise next year, but we didn't really think you'd get all the way back. So I'm just trying to understand the confidence level that you have here and how that all came together.

Yes, Thanks, Roger I appreciate it really if you go back to the dividend cut and I think we've been through this on several occasions as you know our focus towards Hey, we're in a global pandemic is having a dramatic effect on global demand and our view is we needed to keep the company.

Financially strong we took that decision essentially any company in our analysis any company that cut their dividend has underperformed in the market.

But then when you look at it we really looked instead there were four key factors when we looked at reinstating the dividend one is just our confidence in the safe and reliable operations.

Just concluded the most significant maintenance year in the history of the company Fort Hills is on track to ramp up and so the business is looking really strong and then when you look at consumer demand, although it's off a little bit you are seeing the downstream recover and providing significant and stable cash flows as we look to the future.

And so we saw the downstream deliver in line in the third quarter with what we saw in 2018 in 2019, it's the third best Q3 in the history of the company for the downstream despite challenges of higher dollar and such and then the last piece of it.

Are the other two pieces is.

Our confidence in the execution of delivering on our $2 billion of free funds flow $465 million. This year and we're on track to deliver that.

Another amount similar to that next year. So that's going very well and then the last one is really when you look at our share buybacks and paying down our debt.

Working to and Alastair went through versus when you look at that we're looking to be at the top end of our 2025 debt targets on net debt by the end of this year, we're actually now looking to buyback up to 7% of our shares and we're working on the 2002.

<unk> three share buybacks that we talked about at Investor day. So we're just taking advantage of the high commodity price environment. We have made so much progress on restructuring the data and such our view was we needed to keep the dividends up at the same pace. So you're seeing that what we talked about on Investor day, the dividend increase is 75.

5% of the dividend increase we talked about doing between now and 2025, but it's in line with the progress, we're making on share buybacks and debt. So.

Thanks for your question.

Yeah can I.

A follow up just an operational question. There is there has been.

Kind of a crude diff question lot of improvements in pipeline volumes to the U S and some of the stuff going on with line three.

I'll presume line five doesn't face in a particular issues and then obviously you've got the pipeline to the West Coast expansion can you just give us an idea of how you think about differentials moving whether it's the light or the heavy crudes down South and then.

I understand you Havent changed some of the same differential issues that others have the transportation issues.

A better market is a better market and just how we should think about that affecting suncor as we look forward over the next couple of years and how that may be it factors into your cash flow expectations. If it does at all.

Yes, Roger I mean, I think to some degree this goes right to the heart of our model.

<unk> differentials is very challenging and we've seen that in all of these different markets. We saw an inventory build in Q2, which I actually found a bit surprising because.

Perform really well with narrower depths.

<unk> Canadian dollar and a much higher gas price.

I think there are several factors that are actually driving depths around.

Greg actually pointed one out in his in his question about natural gas and whether that's affecting lights and heavies and demand for light I think in some markets. It is I don't see it as a significant factor in North America Youre seeing increased crude coming in from OPEC I think most of that is going to be on the heavy side and then.

Then on the positive for narrowing the desk Youre seeing better access with line three coming on.

So theres pushes and takes to it we don't see a dramatic effect in the depths one way or the other they issue with it for US is we're fairly indifferent. We have an integrated model is designed to be able to pick up the cash either in the upstream or the downstream depending on where the <unk> and so we really don't focus on it all that much.

Okay. Thank you.

Yes.

Thank you.

Ill turn the call back to Trevor Bell for closing remarks.

Great. Thank you operator, and thanks, everyone for attending the call I know, it's a busy part of earnings season. So I appreciate your support and we're around all day. If you have any follow up questions. Thanks again operator.

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

Q3 2021 Suncor Energy Inc Earnings Call

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