Resilience: How Suncor’s integrated model and focus on capital discipline are delivering value for shareholders in today’s low crude price environment
Steve Williams, President and CEO
Alister Cowan, EVP and Chief Financial Officer
Annual General Meeting
April 30, 2015
CHECK AGAINST DELIVERY
Steve Williams, President and CEO
Thank you Jim, and good morning everyone. Thanks for joining us at our AGM.
I’d like to start by expressing my appreciation to our two departing board members, Paul Haseldonckx and Jacques Lamarre. Both have played a very important role in guiding our company always with shareholder interests in mind. They have been active members of the board, engaging in constructive debate on our strategy and providing thoughtful input. To both of you, thank you for contributing to our success.
I’d also like to welcome our newest Board member, Jacynthe Côté. Jacynthe, we’re very excited to have you as part of our team. And we look forward to working with you in the future.
Our AGM is almost always about providing perspective both on the past year and on what lies ahead. As we move through 2015, the need for perspective and the resilience to deal with the challenges of a low crude price environment have never been more important.
As we’ve all seen, the drop in prices has created a lot of change in a very short period of time:
- capital spending plans have been revisited
- companies have reduced their workforces
- and suppliers and contractors have seen their work slow or even stop
- across this country, revenues to governments have also fallen, affecting their ability to fund services
In short, the impact of the low crude price environment has been significant and far-reaching.
Our strategic focus and commitment to deliver value to shareholders has prepared Suncor to be resilient in this type of environment. We came into the downturn with a sound balance sheet, integrated model and focused strategy. And of course, an unwavering commitment to operational excellence and capital discipline.
Cost management has always been a focus at Suncor. In fact, we had been working to drive down costs in our business for many years. However, in response to the low crude price environment, we accelerated those efforts, including:
- a $1 billion reduction in our capital budget
- operating budget savings of $600 million to $800 million, and
- a reduction of our workforce by 1000 positions.
It’s important to emphasize that we are implementing these reductions without affecting our focus on safe, reliable and environmentally sound operations.
I’m pleased to report that these cost management initiatives are very much on track. For example, we expect our operating budget savings to be substantially realized in 2015, well ahead of the planned two-year period. And, our workforce reductions have already been largely completed.
We achieved a 20% decrease quarter over quarter in cash operating costs per barrel at our Oil Sands operations, due in part to our efforts to contain costs. Our Q1 results also included record oil sands production of 440,000 barrels per day reflecting strong reliability and minimal unplanned maintenance. We also saw record upgrader reliability and robust refinery utilization rates. The quarter demonstrated our ability to generate solid cash flow even in a low crude price environment. Cash flow from operations in Q1 was almost $1.5 billion, or $1.02 per common share.
These accomplishments come at a time when others in our industry are grappling with the realities of the lower crude price environment. Whether it’s a reduced ability to generate cash flow or whether it’s facing challenges in attracting capital for investment, various companies have had to make very tough choices, sometimes destroying value in the process.
At Suncor, our resilience stems from being in a favourable position. That’s due to a number of factors:
First, our strategy, which is focused on:
- optimizing the base business,
- pursuing profitable growth,
- returning cash to shareholders, and
- being an industry leader in sustainability
You’ve also heard us talk about the importance of our integrated model, which helps us capture earnings across the value chain.
Integration has always been top of mind in the strategic decisions we make around our operations. That includes the investments we’ve made in our network of pipelines, in rail unloading facilities and in our marine terminal on the St. Lawrence. It has also driven our decision to secure additional storage capacity on the U.S. Gulf Coast.
Our integrated model is a competitive advantage, helping us adjust to changing market conditions and deliver value for shareholders. In 2014, it allowed us to capture global-based pricing on volumes equivalent to 97% of our upstream production.
Another competitive strength is our rigorous approach to capital discipline. Suncor’s unwavering focus on costs has helped to drive the strength of our balance sheet. When it comes to capital, our priorities remain the same:
- fund the base business
- invest in profitable growth, and
- the return of cash to shareholders.
The decisions we made in 2014 reflect that unwavering focus. Those included deferral of capital spending at MacKay River 2 and White Rose Extension, pending more favourable market conditions. Together with the project operator, we also deferred a sanction decision on the Joslyn Mine, while we looked to optimize the development plan.
These decisions, while difficult, allowed us not only to preserve the health of our balance sheet, but also to increase our dividend for a twelfth, consecutive year. They also helped us fund long-life projects already in-flight, including Fort Hills and Hebron. We view both of these projects as essential elements of our profitable growth plan.
At our existing operating assets, we continue to make progress on our operational excellence journey. In addition to reduced operating costs, we’ve seen improved reliability, including Firebag achieving average production rates in late 2014 in excess of its 180,000 barrel per day nameplate capacity.
Safety, a key element of operational excellence, remains a high priority. We’ve been hard at work implementing 16 solutions recommended by our Oil Sands Safety Step Change Task Force, following tragic fatalities at or near our operations early last year.
We’re conscious of the importance of being trusted stewards of valuable natural resources. That’s why we’re driving performance on air, water, land and energy efficiency and we’re actively engaged in discussions about broader environmental issues like climate change.
And we’ve made progress. For example, we achieved a 20% decrease in water use at Oil Sands versus 2013. We remain keenly aware of the need to be part of the conversation and getting to solutions.
The work in these areas hasn’t always been easy. But it’s critically important and I’m proud of how the Suncor team has delivered results in each of these areas.
As I look ahead, I remain confident in the strength of the company, its strategy and our future growth projects. Our progress on Fort Hills gives me good reason. For example:
- All critical milestones were achieved on the project in 2014, including a majority of long-lead procurement orders being released to market.
- Detailed engineering activities are now 75% complete, while construction activities continue to progress.
- And, the project remains on track to deliver approximately 73,000 barrels per day, with first oil expected in the fourth quarter of 2017.
As we grow, we’re focusing on market access. We continue to be very well-positioned with takeaway capacity to satisfy our short to medium term requirements. However, we recognize the importance of market access to the Canadian economy and are committed to supporting pipeline infrastructure projects.
Resilience can be defined as the ability to recover from or adjust easily to misfortune or change. The price drop which started last year has certainly highlighted the value of this quality of our business. Suncor has, and will continue to demonstrate a resilience that our shareholders can depend upon.
Thanks to a well-defined plan, focused on operational excellence, capital discipline and profitable growth, we’re delivering tangible results for our shareholders.
Behind our business strategy is a dedicated and highly experienced team of Suncor leaders and employees. They continue to raise the bar on performance. They’re focused on building and maintaining strong relationships with stakeholders. They collaborate and leverage technology to advance environmental performance.
As I turn the floor over to Alister Cowan, our EVP and Chief Financial Officer, I’d like to thank you for your continued support and confidence in Suncor.
Alister Cowan, EVP and Chief Financial Officer
Thanks Steve. I’m pleased to be able to present Suncor’s financial results for the past year.
As Steve mentioned, 2014 was a significant year of change, especially in terms of the crude pricing environment. Suncor did, however, deliver another year of solid results in terms of production, earnings and cash flow.
Those results were the outcome of a sound financial strategy which continues to be aimed at:
- supporting our business plan, balancing profitable growth and returns to shareholders,
- managing risk,
- and providing financial flexibility.
Production in 2014 came in at just under 535 thousand barrels of oil equivalent per day, including 113 thousand barrels per day in E&P and 422 thousand barrels per day in Oil Sands.
Our operational excellence journey has included a strong focus on reliability and productivity, and it’s encouraging to see continued improvement, particularly at Oil Sands, where our production is concentrated.
In terms of our financials, Suncor’s financial strength continues to be apparent. That’s demonstrated by 2014 cash flow from operations, which exceeded $9 billion, $5.5 billion of cash on hand and a strong investment grade credit rating.
As we navigate through the low price environment, our intention is to continue to live within our means. Our integrated business model is strong and mitigates risk.
Even at today’s oil prices, we have the ability to generate sufficient cash flow to cover our sustaining capital, dividend, and a large share of our growth capital requirements – as demonstrated by yesterday’s Q1 results.
The free cash flow we generate continues to distinguish us from our peers. This past year, we produced free cash flow of almost $2.1 billion, significantly more than all of our Canadian peers combined.
Operating earnings for the year were just over $4.6 billion, with net earnings of just under $2.7 billion. Our operating earnings, particularly in this new price environment, reflect the strength of our integrated model and ongoing focus on controlling costs.
On the capital side, Suncor has taken a prudent approach to spending. That resulted in us ending the year $300 million below our revised capital budget guidance of $6.8 billion. As we move through 2015 and beyond, we will continue to make decisions with a strong focus on capital discipline.
Our competitive position is reflected in our strong balance sheet. And our team, led by Steve Williams, remains committed to ensuring it stays that way.
Our reason is simple. A healthy balance sheet, backed by a sound strategy and disciplined approach, gives us predictability and flexibility. This is a particular advantage for us as we make strategic allocations around capital.
Our low debt and strong liquidity means we’re able to invest in the business throughout market cycles. And yet, we’re acutely aware that capital discipline is about living within our means. That means we don’t embark on large capital projects unless we have a high level of certainty that we can fund them through to completion out of cash from our operations or on hand. Fort Hills and Hebron are two great examples of being able to take advantage of our position in a strategic fashion.
Our capital allocation priorities remain the same: fund the base business, invest in profitable growth and return cash to shareholders. That approach has served Suncor well, and we believe it will continue to do so going forward.
While others were taking on debt with $100 oil, we were generating free cash flow and returning it to shareholders while building our balance sheet.
Our performance and strategic direction is being recognized by rating agencies, which have maintained our strong investment grade rating.
Suncor continues to set itself apart from our competitors, on the basis of its long life, low decline production and reserves, industry expertise, commitment to sustainable development, integrated model, and of course, our financial strength.
That financial performance has been translated into returns for shareholders of $3.2 billion in 2014. That included $1.7 billion in the purchase of common shares, and $1.5 billion in dividends. The change in dividend reflected a 40% increase compared to the prior year, and highlighted our ongoing commitment to shareholders.
Our board has endorsed an approach to ensure that:
- dividends will be reliable, sustainable, meaningful and competitive
- and that dividends are expected to grow in line with earnings
Over the past five years, we’ve achieved a Compound Annual Growth Rate (CAGR) of over 25% and our dividend has increased in every year from 2003 to 2014 inclusive. We believe our dividend provides an attractive return for our shareholders and is part of the company’s compelling investor proposition.
2014 was certainly a year that saw a significant amount of change. Suncor entered the lower price environment with a strong balance sheet, focused strategy, and emphasis on capital discipline. That solid foundation has served the company and its investors well, and I believe positions it effective to consistently return value to our shareholders.
I too would like to thank you for your ongoing support, and with that, I’ll now turn the microphone back to Jim Simpson.