Far From Boring: How Suncor’s integrated model and disciplined approach are delivering results for shareholders
Barclays CEO Energy/Power Conference
Presentation by Steve Williams, President and CEO, Suncor
Wednesday, September 3, 2014
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Thank you, Paul and good morning everyone.
It’s great to be here. Thanks to Barclays for hosting this conference. This is a terrific event and one I look forward to every year. There’s never any shortage of interesting topics on the agenda.
My presentation today will focus on the oil sands, Suncor and some exciting work that is helping drive our company’s investor proposition.
But before I get into it, I’d like to share a quick story. A while ago, I gave an interview about our company to a trade publication. I explained how over the course of our history, we’d evolved in our decision-making from huge - and sometimes risky business decisions - to incremental ones with a focus on profitability. Things like capital investments in operational improvements and debottlenecking projects.
At the time, some commented that the new approach didn’t sound overly exciting. That it didn’t inspire. To put it bluntly, they thought it was boring.
The fact is nothing could be further from the truth. You need to look closer at our company. At our record of generating cash and at the decisions we’re making. It’s quite clear we’ve moved well beyond boring.
Thanks to our integrated strategy and disciplined approach to capital allocation, we’re successfully and consistently delivering shareholder value. It’s a terrific time to be at Suncor. And I’m excited to share the reasons why.
Reasons for optimism:
To begin with, demand for oil continues to grow around the world. In fact, the International Energy Agency is predicting global demand to increase 33 percent by 2035. And while the share of renewables will grow, fossil fuels will remain the dominant energy source at 76 percent of the energy mix. Combine that with a shortage of heavy oil processed on the US Gulf Coast, and you can see why Canada is well positioned to fill that gap.
Energy demand is a curious thing. Many of us take energy for granted. We hop in a cab, we get on a plane, we turn on a light switch, we open the fridge, and we turn the thermostat up or down. All with little thought of what it takes to power or fuel our standard of living. But none of us can imagine a world without energy.
The bottom line is that energy has a huge impact on our lives. It’s allowed us to dramatically increase food production, by fueling farm machinery. It’s afforded better education, whether it’s lighting up classrooms, or in many countries, contributing to education systems. In health and dental care, it’s enabled everything from better equipment, to better medicines, to refrigeration, x-ray, MRI and autoclave technologies. It’s brought nearly 700 million people out of poverty in the past two decades and increased the standard of living for many around the globe.
Energy is part of our electronic world, whether it’s powering smart phones, shipping tablets to new markets, or providing materials for use in 3D printers. Energy allows us to be dramatically more productive, meaning that fewer resources are used to produce more goods and services for more people.
Everyone in this room consumes it. But how many of us pause to reflect on where it comes from? And how many of us think about how we’re going to meet the energy demand of a growing population?
The oil sands, the world’s third largest oil reserves will be an important part of meeting that demand and fueling our economies.
As you know, the oil sands industry has a demonstrated and continuing track record of growth. And Suncor is a major part of that. The key to unlocking the oil sands has been a steady stream of successfully better and more sophisticated technologies driving down cost of production and reducing our environmental footprint.
So, despite the voices of some critics, there’s plenty of reason for optimism in the industry.
And Suncor is particularly well-positioned to play an important role in producing energy, contributing to the economy... creating shareholder value in the process. That is anything but boring.
Suncor’s competitive strengths:
Our ability to play that role is based on a number of competitive strengths.
First - our leading resource position. While many companies are focused on reserve replacement, we are fortunate to have extensive reserves in place – the largest in Canada’s oil sands. Unlike others, we don’t have to expend significant capital to acquire or locate resources.
To give you some context, if you assume that all 7.7 billion barrels of our proved and probable reserves are produced at existing rates, we could maintain production for more than 37 years. It truly is the core growth engine of our company.
A second competitive strength is our high degree of integration. Our upstream production is closely connected to our refining and marketing business, helping us adjust to changing market conditions and create shareholder value.
That’s demonstrated in an R&M business with a consistent track record of operational excellence and industry leading profitability. This integrated network enables us to be price makers rather than price takers.
Our R&M business includes refineries in Alberta, Ontario, Quebec and Colorado, with a thriving lubricants business, a renewable energy portfolio, and a retail presence which includes 1,450 Petro-Canada stations.
Our geographically dispersed Exploration and Production assets feature low cost production, and attract Brent-based pricing.
Put all of these elements together, and you have an integrated model which allows us to routinely capture global oil prices for over 95 percent and recently 100 percent of our upstream production.
We’re very proud of the high degree of integration in our business model. It generates value in both the upstream and downstream – more than any of our competitors.
Another competitive strength is Suncor’s long history as an oil sands company. We’re the largest single miner, we’re the largest single in situ producer, and we operate the world’s largest upgrading complex.
We’re also the only producer that tailor blends its products to meet our customers’ needs. While production remains important to us, the decisions we’ve made at our oil sands operations are helping us to achieve value over volume.
In many respects, it’s similar to how we’ve operated our refineries – maximizing the bottom line instead of just focusing on throughput. When our product mix is optimized in relation to demand, we’re in a great position to drive further profitability.
For example, we’ve done work in our secondary upgrading facilities to increase the amount of diesel production. While it actually results in slightly lower production, it increases profitability.
Debottlenecking projects are another way we’re taking advantage of facilities in place to drive profitability. At MacKay River, we’re leveraging infrastructure and excess steam capacity to grow production by 20 percent at a capital cost of less than $10,000 per flowing barrel.
Boring? When it comes to making strategic decisions to support shareholder interests, I think not.
MacKay River is just one of a series of debottlenecking projects that will provide us with low cost, high return growth across our oil sands business in the next few years.
We’re also focusing capital on high return reliability projects. We firmly believe that our upgrader complex can consistently achieve utilization rates of 90 percent or more and we’re making great progress in that direction.
We’re unlocking significant and highly profitable volumes of upgraded material. At the same time, we’re improving our returns. Looking further out at our in situ operations, we’re planning lower cost, modular plants that can be replicated across multiple sites, including Firebag, MacKay River South, Lewis and Meadow Creek.
And we’re using a manufacturing approach to drive down capital costs. We can engineer once and build the same project many times over, driving productivity and leveling manpower requirements.
Achieving market access through mid-stream logistics:
We make all project decisions with a laser-sharp focus on building shareholder value. But those investments only make sense if they create production that has access to markets.
In the past few years, we’ve spent considerable time and effort on enhancing our deep mid-stream capability. Our mid-stream strategy not only leverages our integrated model; it also provides us with operational flexibility, which in turn creates value.
We invest in and operate a network of pipelines and have secured shipping rights on other lines. We have significant storage capability and trade extensively across the continent. We’ve also invested in rail facilities and a fleet of cars. And, we’re supporting a range of market access projects.
The progress we’ve made is encouraging. In the second quarter, we succeeded in significantly lowering the feedstock costs to our Montreal refinery.
We moved an average of over 45,000 barrels per day of lower cost inland crude to the Montreal refinery rail from the mid-continent and by ship from the US Gulf Coast. For these shipments, we realized an average benefit of over seven dollars per barrel versus the internationally sourced barrels they replaced.
With work moving forward on the reversal of the Line 9 pipeline, we look forward to increasing our integration and realizing cost advantages on 100 percent of the Montreal refinery’s feedstock. We expect these benefits by early next year.
In the end, our mid-stream objective is to take full advantage of arbitrage opportunities to maximize the value of every barrel we produce. And thanks to the deep mid-stream capability we’ve put into place, we’re delivering on that objective.
Some might ask that with delays in infrastructure development – Keystone XL being a high profile example – whether there is an impact on Suncor and our growth plans. Oddly, Keystone XL seems to be the only pipeline or fossil fuel-related project, for that matter, that the current administration has subjected to a greenhouse gas test before granting approval.
As a Canadian, I believe pipelines need to be built – pipelines are the safest and most environmentally effective way to transport oil. And yet, as CEO of Suncor, I also point out that that an individual project like Keystone XL is not critical to our plans to get our products to market. Nor is it hampering our efforts to expand our production.
That’s all due to the strategic choices we’ve made and the investments we’ve carried out to develop our mid-stream capability. By the end of 2014, we expect to be able to deliver over 600,000 barrels per day to our refineries and other globally priced markets across North America.
Operational Excellence: a disciplined approach:
The strength of our integrated model is complemented by a disciplined approach to how we run our business and make our investment decisions.
For us, operational excellence is a disciplined way of running our business using consistent standards and practices to continually improve our performance. It also helps leverage the business model we’ve put into place:
Sound Strategy times Operational Excellence equals Leading Performance.
Operational excellence is more than just running our business well. It’s about maximizing profit, optimizing value and sustainable development. It’s reflected in the wastewater treatment plant at our oil sands operations pictured here. It’s in the strong commitment and unwavering focus of our employees. And it’s demonstrated in our results.
This past year, we achieved step changes in both productivity and reliability. For example, the commissioning of new hot bitumen facilities has allowed us to begin blending Firebag bitumen for direct shipment to market.
This, in turn, allowed us to ramp up bitumen production from our mine to feed the upgraders. The net result was an increase of approximately 40,000 barrels per day of bitumen production in 2013.
That productivity focus has continued into 2014. I’m particularly pleased with the performance of our Firebag in situ project, which has been producing reliably at nameplate capacity with reduced steam oil ratios.
The reliability of our operations also continued to improve. After planned maintenance last year at one of our upgraders, we began to achieve daily utilization rates above 90 percent. That mirrors rates we’ve seen in the first six months of this year at our four downstream refineries. Process improvements at these facilities, by the way, have also allowed us to add over four percent to their nameplate capacity in the past two years.
With no major turnaround maintenance at Oil Sands planned until 2016, we’re well-positioned for a lengthy run of continued production growth.
Our focus on operational excellence is helping us drive down costs across our Oil Sands business. We’re targeting a range of $31.50 to $34.50 cash operating costs per barrel of oil sands production. Careful cost management is consistent with our unwavering approach to allocating capital.
Our disciplined approach is also reflected in our capital program. As you heard in our last quarter, we’ve reduced our projected capital spend by a billion dollars without compromising our growth plans. Reductions have been in three categories:
- Reduced capital intensity, such as in our SAGD drilling program where we’ve seen cost reductions of 15 percent or more.
- Deferred spending to optimize cost and schedule, as demonstrated in decisions on new well pads at Firebag and Mackay, and
- Focusing on core assets, which means redirecting capital away from the Kobes gas project in British Columbia.
Being strategic about how we grow doesn’t mean there aren’t options to choose from. In fact, we have a rich suite of growth projects, which includes new projects, debottlenecking, reliability and modular growth.
Our Fort Hills mining project with our joint venture partners is an excellent example of the focus we’ve placed on profitable growth. One of the best undeveloped oil sands mining reserves in the area, we expect it to be a significant source of cash flow.
The project has steadily ramped up this year. Engineering and procurement have advanced significantly and a majority of long lead procurement orders have been placed.
Importantly, contracted pricing to date has been substantially within our expectations. Our capital and schedule outlook has not changed since we sanctioned the project last October. Another growth project underway is the Golden Eagle project in the UK North Sea. It’s made excellent progress this quarter and remains on track to produce first oil around the end of the year.
Another is the Hebron project off the East Coast of Canada, which is also progressing well and continues to target first oil by the end of 2017.
As we grow, we recognize that energy development needs be to be about a prosperous economy, but also a healthy environment and social well-being.
We`ve learned over the years that how we produce, deliver and use energy has a very real impact on our planet. We also know that we are all a part of it.
All of us – governments, industry, academics, environmental organizations and the public – need to be actively engaged in the conversation and focused on solutions to the challenges we all face.
As we engage in those conversations, we also recognize we need to do our part. That’s why we’re working hard to deliver on environmental performance goals, which are focused on air, land, water and tailings.
We’re making good progress, but we can’t do it alone. What’s become clear is that when it comes to the environment, no one has a monopoly on good ideas.
And that`s where collaborative organizations like Canada’s Oil Sands Innovation Alliance, which we`re a part of, come into play. COSIA’s member companies have shared over 550 distinct environmental technologies worth over a billion dollars. Exciting stuff.
I started out by talking about how Suncor has moved beyond boring, when it comes to making strategic decisions.
The fact is we’re delivering results for our shareholders and it’s demonstrated in a number of ways, including:
- Consistent and growing cash flow generation going back over a dozen quarters
- As you saw recently, we were successful in delivering another quarter of strong cash generation. In fact, we once again produced over $50 of cash flow and over $16 US of free cash flow for every barrel of oil production across the company.
- Our integrated model which produces strong cash flow throughout the cycle
- Strong free cash flow generation for three consecutive years. What this does mean is that Suncor has become a unique offering – a large oil producer that can sustainably grow both its production and its dividends. We think that’s a very attractive combination for investors.
I’m proud to say that in terms of absolute dollars, Suncor is the most profitable energy producer in Canada and our company has the top spot in the net earnings category on Alberta Oil’s top 100 ranking with $3.9 billion earned in 2013.
We continue to be seen as a good buy, and I firmly believe we still have a good deal of run room.
All of this is to say that I believe our corporate strategy is more than ho-hum.
We have a well-defined plan that’s focused on operational excellence, capital discipline and profitable growth. Our strategy is an exciting one, which is delivering results thanks to:
- a leading resource position,
- significant financial strength, and
- a powerful integrated business model that captures value from the upstream to the downstream.
That is all backed up by a strong leadership team and employees who continue to look forward to the future with optimism and excitement. And with what we’ve achieved to date, I have no doubt in our ability to deliver on our strategy.
Thanks for your time today and I’d be happy to answer any questions you may have.