Vision and focus: How Suncor’s long-term view and disciplined strategy execution are delivering value
Alister Cowan, EVP and Chief Financial Officer
Annual General Meeting
April 27, 2017
CHECK AGAINST DELIVERY
Steve Williams, President and CEO
Thanks Jim and Casey, and good morning everyone.
Welcome to Suncor’s 2017 AGM here in Calgary, the traditional territory of the Treaty 7 Peoples.
I’d like to start by expressing my appreciation to our Board Chair, Jim Simpson. As you may have heard, Jim announced his retirement from our Board in early February. He retires at the end of today’s meeting after eight years on the Suncor board and five years before that on the Petro-Canada board.
Jim’s impact on Suncor has been considerable, both as a director and as our Chair. He is well-known for his strong focus on governance and collaborative, solutions-oriented approach. Jim, we’ve sincerely appreciated your thoughtful contributions over the years, and wish you and your family the very best.
I’d also like to introduce our incoming chair, Michael Wilson, who has been a member of our board since 2014. Michael, a very warm welcome to you – we look forward to working with you in your new role.
Looking back over the past year, 2016 was anything but dull, proving to be full of challenge and opportunity. Thanks to a focused strategy, an integrated business model, and operational and capital discipline, Suncor delivered strong results in an increasingly complex external environment. Let me take a brief moment to provide you with that 2016 context.
As we expected, the average oil price was the lowest in over a decade. While prices did stabilize and strengthen somewhat over the year, we maintained our focus on cost management and capital discipline.
2016’s oil price environment also created favourable conditions for acquisition and divestments. Thanks to the strength of our balance sheet, we were one of the few companies able to take strategic advantage of that market opportunity at the bottom of the price cycle. With the transactions we executed in the past year, we enhanced our portfolio of assets and generated significant value for our shareholders.
It’s impossible to reflect on the past year without mentioning the wildfires around Fort McMurray. The fires tested industry’s, government’s and communities’ response capabilities. They also proved – without a doubt – our resolve and our resilience in the face of adversity.
Climate change continued to be top of mind in 2016, with various regions introducing legislation to address this challenge. We continued to support policy promoting economic prosperity, competitiveness, and regulatory certainty, while protecting the environment.
This past year was also marked by energy infrastructure decisions. In November, two key pipeline applications were approved, while another was denied. And as we all heard recently, a Presidential permit has been issued for the Keystone XL project.
If nothing else, 2016 demonstrated the importance of vision and focus.
For us at Suncor, we’ve taken those words to heart, building an incredibly resilient company. That was tangibly evident in our response to the Fort McMurray wildfires. Our “safety first” value guided our efforts in the response. While our assets were undamaged by the fires, we took the precaution of commencing an orderly shutdown of operations in the area, and then safely restarted our operations.
Our response and our efforts to help the community recover wouldn’t have been possible without our strong focus on operational excellence. I’ve never been more proud of our company, of Fort McMurray and our team.
Our employees’ focus also helped to drive solid operating and financial results in 2016. That includes just under 623,000 barrels of oil equivalent per day in total production, an 8% increase over 2015. We also generated $6 billion in funds from operations in 2016, even with an average WTI crude price of just US$43.35 per barrel.
A significant focus for us has been on managing our costs. We’re making meaningful progress, achieving significant and sustainable cost reductions in line with our vision of operational excellence. For example, average oil sands operations cash operating costs for 2016 were $26.50 per barrel – a 5% improvement over the previous year. We’re taking steps to further reduce costs through operational, productivity, business process and supply chain improvements.
Meanwhile, our downstream business delivered strong results, including throughput of 428,600 barrels per day and a 93% refinery utilization rate. Our E&P business made solid contributions in 2016, including 117,900 barrels of oil equivalent per day. As you heard with our first quarter results, that strong performance continues.
While these are independent business units, together they form a proven integrated model – one which helps Suncor optimize profit through each part of the value chain. Combined with a capital discipline focus, our integrated model is helping us build considerable financial strength.
This strong financial position has enabled us to strategically grow the company. A major accomplishment for us in 2016 was increasing our interest in Syncrude through the acquisition of Canadian Oil Sands and the purchase of Murphy Oil’s interest. Those transactions resulted in our ownership rising from 12% percent to almost 54%. Suncor’s focus on the Syncrude asset and operations has increased accordingly.
In 2016, we acquired a 30% interest in Rosebank, an off-shore development in the U.K. North Sea. Should it proceed, Rosebank could add 30,000 barrels of oil equivalent per day of high-quality, light sweet crude oil to our portfolio.
Taken together with the sale of our Petro-Canada lubricants business and other sales, these transactions reflect a strong record of counter-cyclical acquisitions and divestments.
We also continued to invest through the commodity price cycle in two key long-life growth projects: Hebron and Fort Hills.
Located off Canada’s East Coast, Hebron achieved a significant milestone late last year with the towing of the platform to the deep water construction site. We expect the platform will be towed out to the production site in the second quarter and that first oil will be achieved in the fourth quarter.
Our Fort Hills project advanced significantly throughout 2016 and into 2017:
- 83% of the construction is now complete,
- four of six major project areas have been turned over to operations,
- 69% of operations personnel have been hired,
- we’ve achieved just under 48 million construction hours without an environmental, health and safety or regulatory enforcement action, and
- the project is still on track for first oil in Q4 of this year.
We’re very pleased to have entered into agreements with Fort McKay and Mikisiw Cree First Nations for a combined equity interest of 49% in the project. For these two Nations, this project will be a substantial business investment that will provide a stable source of income over the long term – to fund essential community programs, services and infrastructure.
For Suncor, these agreements demonstrate an evolution in our relationship with these Nations. They will become partners in Suncor assets, and will be well-positioned to realize long term economic prosperity and greater participation in energy development.I’d like to extend my personal thanks to Chief Jim Boucher, Chief Steve Courtoreille, and Mark Little, our President, Upstream for their commitment and leadership in working to make these business agreements a reality.
As we work to grow Suncor, we’ve recognized that access to markets is not just an engineering and financial discussion, but something that needs to happen in a broader societal context. We support the responsible development of pipeline infrastructure not only to move our products, but as an important contributor to the provincial and national economies.
We were encouraged by the Government of Canada’s recent approval of two pipelines and a Presidential permit being issued for a third project. These pipelines will move oil produced to the highest standards while staying under the oil sands emissions limit of Alberta’s Climate Leadership Plan.
We know that ongoing consultation, listening to communities, and understanding ways to address concerns and explore opportunities need to be part of the path forward. That means working closely with Aboriginal Peoples so that they are involved in developing resources, from the start and then through the lifecycle of developments - something you’ve seen us do with the East Tank Farm Development investment by Fort McKay and Mikisiw Cree First Nations.
We need to change the way we think and act in order for Aboriginal Peoples to play a greater role in energy development. That’s the heart of our new social goal, introduced last year. We have committed over the next 10 years to further Aboriginal employee recruitment, training and development, partner with Aboriginal youth, and advance mutually beneficial marketing arrangements. This is not the work of a small group in Suncor. It is the work of all of us. It’s early days, but by inspiring all our employees to take action, we are uncovering new ideas and opportunities.
Another important area of collaboration is on climate change. And we’re doing our part:
- first, through a new greenhouse gas goal – to reduce total GHG emissions intensity of our oil sands and petroleum production by a further 30% by 2030,
- second, by working with others, such as Canada’s Oil Sands Innovation Alliance (COSIA), to accelerate new environmental technology development and deployment
- third, by raising the bar in how we report our progress. We recently published a Climate Report which outlines Suncor’s strategy to be resilient in a carbon constrained world. The preparation of this report took transparency to a new level as we engaged in broad-based dialogue with a cross section of stakeholders,
- the fourth area is by promoting sound public policy through organizations like Canada’s Ecofiscal Commission. We fully support their view that a healthy environment, social well-being and a prosperous economy go hand in hand.
Our vision is to be trusted stewards of valuable natural resources. Guided by our values, we will lead the way to deliver economic prosperity, improved social well-being and a healthy environment for today and tomorrow.
That vision has served us extremely well in generating value for shareholders. Looking back at what we achieved in 2016, and reflecting on what lies ahead, I remain optimistic.We’re well on the path to achieving our vision, thanks to our strategy and the disciplined focus our leadership team and employees demonstrate each and every day. As I turn the floor over to Alister, I’d like to thank you for your continued support and confidence.
Alister Cowan, EVP and Chief Financial Officer
Thanks Steve and good morning everyone.
I’m pleased to present Suncor’s 2016 operating and financial results for the past year, which demonstrate how our business strategy is ensuring Suncor’s continued success.
Thanks to our integrated model, our financial strength, and our ongoing focus on operational excellence and capital discipline, Suncor remained well positioned to respond to the significant dynamics of the year, and delivered significant value for shareholders.
As Steve mentioned, we grew our production in 2016, thanks to an increased stake in Syncrude and strong performance across all of our operations. Our total upstream production was just under 623,000 barrels of oil equivalent per day – an 8% increase over 2015.
Our production included more than 117,000 barrels per day in E&P, more than 378,000 barrels per day at Oil Sands operations and 130,000 barrels per day at Syncrude. In the downstream, refining utilization remained consistently at the top end of peer performance at 93%, driving throughput of more than 428,000 barrels per day.
Turning to our financial performance, we generated $6 billion in funds from operations, even with an average WTI crude price of just US $43.35 per barrel. Due to the impact of the forest fires and the decline in oil prices, we incurred an operating loss of $83 million or $0.05 per share.
I should note, however, that our cash flow generation more than covered our sustaining capital and dividend requirement of $4.2 billion.
Being able to generate cash to the degree that we have doesn’t mean we rush out to spend it. Suncor continues to maintain a strong focus on controlling costs and rigorous capital allocation.
Therefore it should come as no surprise that our capital allocation priorities haven’t changed over the course of the past year – and won’t in the coming year. Just as a reminder, they are:
- sustain our asset base and production,
- return cash to shareholders through growing dividends and value-based share repurchases,
- maintain our strong balance sheet,
- fund profitable growth, including mergers and acquisitions.
Our capital discipline has also ensured our ability to maintain our strong balance sheet and strong investment grade credit rating. At the same time, our capital discipline and financial strength have enabled us to take advantage of market opportunities and return significant value to shareholders.
That includes a history – 15 consecutive years to be exact – of annual dividend increases. It also includes preserving the ability to maintain and increase our dividend through the downturn, and also staying true to our philosophy of being able to sustain capital expenditures and dividends at a US$40 per barrel oil price.
The sum total of our financial strength, our long-term strategy and our disciplined execution is an indicator of the leading company Suncor has become and we believe represents a strong investor proposition. Investors can rely on Suncor to continue doing the right things:
- delivering strong returns to shareholders,
- maintaining our balance sheet strength and flexibility,
- driving profitable growth; and
- ensuring risks are appropriately managed.