Delivering results: how Suncor’s integrated model, focus on capital discipline and operational excellence are generating value for shareholders
President and CEO
Suncor Energy Inc.
Barclays CEO Energy/Power Conference
September 9, 2015
CHECK AGAINST DELIVERY
Steve Williams, President and CEO
Thank you, Paul (Paul Cheng from Barclays) and good afternoon everyone.
It’s great to be here again in New York. Barclays is very consistent in putting on an excellent conference. I always look forward to our discussions here. A special thanks to you, Paul and the organizers for bringing us all together.
A lot has happened since we met here last year:
- On the energy front, there’s been a steep drop in oil prices from over one hundred dollars to under forty dollars. That has led to a significant retrenchment in the industry, both in terms of capital investment and growth.
- The market access question remains, with debates intensifying over the operation and development of pipeline infrastructure… on both sides of the border.
- On the environmental front, jurisdictions around the world are grappling with the emissions challenge. This, of course, is all happening as we ramp up to the UN climate change conference in December in Paris.
- On the political front, it’s been anything but quiet. The US presidential election is now in full swing, and the federal election in Canada has been announced for October 19th. And of course, we’ve had a new government elected in Alberta, defeating the previous government that had held power for almost forty-five years.
Each of these developments, on their own, represents a significant change for our industry. And yet, they’re all linked. That makes it even more challenging for our industry to respond.
When I was here in 2014, I talked about Suncor’s integrated model and how our disciplined approach was delivering results for shareholders.
I’m here to tell you that our approach hasn’t changed in the face of all of this uncertainty. I’m also here to say that we’re delivering on the commitments we’ve made.
And, finally, I want to demonstrate how our investor proposition is more appealing than ever, given our focus on operational excellence... capital discipline… and profitable growth.
We are that steady ship that more and more investors should turn to, as waters become more turbulent.
Suncor’s resilience in these uncertain times is based on an integrated model that is focused on growing our oil sands business with complementary upstream and downstream operations.
As many of you heard on our second quarter call, we continue to make significant progress, posting reliable operating results, generating strong cash flow from operations, investing in profitable growth and returning increasing cash to our shareholders.
Our financial strength has set us apart, with a strong balance sheet, excess liquidity and a conservative debt structure.
Our debt to capitalization stands at 25% while net debt to cash flow is 1.2 times. Suncor’s cash and cash equivalents on hand, as well as unutilized credit facilities, total almost 12 billion dollars in liquidity.
Our efforts are being noticed by others. We’re pleased to continue to attract a strong investment grade credit rating.
Suncor’s steady progress is based on a well-defined strategy, which is focused on:
- optimizing the base business,
- pursuing profitable growth,
- returning cash to shareholders, and
- being an industry leader in sustainability
We’ve said integration has always been top of mind in the strategic decisions we make around our operations. It allows us capture earnings across the value chain.
We continue to deliver on that objective, including a recent deal to bring power generation facilities in-house at our oil sands operations. That transaction will contribute to improved reliability and efficiency at our oil sands plant.
We’ve also recognized the importance of our midstream operations in getting our products to market. And we’ve delivered … making strategic investments in rail unloading facilities and pipeline and storage infrastructure.
In 2014, this model allowed us to capture global-based pricing on volumes equivalent to 97% of our upstream production.
The power of integration is reflected in our Refining and Marketing business, where we’ve been working to lower our feedstock costs for our refineries. When you look at the R&M realization for the first six months of 2015, given prices and costs, you get a sense of the size of that prize. In Q2, the downstream generated 70% of our operating earnings.
As you can see, our efforts are paying off. Suncor has consistently ranked number 1 in refining and marketing in North America in terms of net earnings per barrel of capacity.
We’ve spent a lot of time speaking about operational excellence. Operational excellence is more than just running our business well. It’s about maximizing reliability, minimizing costs, and operating sustainably. We continue to make progress on all those fronts, including driving down environmental and regulatory non-compliances and improving safety performance.
At Oil Sands, we’ve been focused on getting to 90% throughput in our upgrading complex, as part of a five year journey. And we’ve started to deliver, comfortably exceeding that threshold in the past two quarters, even when maintenance downtime is factored in. Throughput in Q2 was 94%, with total Oil Sands production averaging 424 thousand barrels per day.
In our Exploration and Production business unit, Buzzard continues to deliver strong results. With production from Golden Eagle ramping up, our international production is tracking well ahead of guidance year to date.
In the downstream, we continue to focus on enhancing already strong performance at our refineries. In Q2, we averaged 90% utilization despite turnaround maintenance at both the Sarnia and Edmonton refineries.
Of course, none of this performance matters if it’s not done safely and responsibly and safety remains a core value at Suncor.
We’re also conscious of the importance of being trusted stewards of valuable natural resources. We continue to aim for improved environmental performance through our operations... and voluntary goals we’ve set for ourselves,while collaborating with others to accelerate this performance.
We’ve learned over the years that how we produce, deliver and use energy has a very real impact on the planet. We also know that all of us must be a part of taking action to address environmental impacts.
We’ve therefore been very active in engaging in conversations with others about the environment, climate change and the economy.
This includes working with Canada’s Ecofiscal Commission, an organization that promotes using smart fiscal policy to protect the environment while delivering economic prosperity.
We’re also working closely with the new Alberta government. As mentioned on our Q2 call, we’ve shared our perspective on the importance of looking holistically at the fiscal take to ensure our industry is not competitively disadvantaged – and we know an appropriate royalty structure helps attract investment, creates jobs generates government revenue and builds communities.
I am confident that we’ll get to the right place.
Another competitive strength for Suncor is our rigorous approach to capital discipline and cost management. It’s this focus on costs that has helped to drive the strength of our balance sheet and demonstrate to shareholders that we have their best interests in mind.
For us, cost management isn’t new. 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 dollar reduction in our capital budget
- operating budget savings of 600 million to 800 million dollars, and
- a reduction of our workforce by more than 1200 positions.
This has not been a slash and burn exercise. I’ve been very clear about implementing these reductions without affecting our focus on safe, reliable and environmentally sound operations.
I also want to make sure that we take a long term view and sustain shareholder value. This contrasts with others in our industry who have sacrificed long-term value creation in order to shore up their cash flow in a low crude oil price environment.
Our efforts to deliver on these cost management initiatives are on track, with 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, with net staffing reductions exceeding 1200 people or about 8% of the total direct workforce.
We continue to drive down cash operating costs per barrel at our Oil Sands operations. As many of you heard in our second quarter results, we’ve reduced our costs there by almost 18% in the past year and we’re trending well below our original guidance range of 30 to 33 Canadian dollars per barrel.
Cash costs for Q2 were just over 28 Canadian dollars per barrel, achieved while we increased production year over year by 12%.
The same disciplined approach applies to our capital spending program. We’ve always lived within our means. Through capital efficiencies, deferrals and cancellations of non-critical projects, we’ve covered our capital and dividend outlays with cash flow.
These decisions have helped us preserve our balance sheet, increase our dividend, and have left us with sufficient cash reserves to fund long-life projects already in flight, including Fort Hills and Hebron.
The focus on capital discipline has been critical to positioning Suncor to outperform in a low crude oil price environment.
Interestingly, our competitors have been challenged to deliver growth, given high finding and development costs, combined with natural decline curves. You can see how Suncor has delivered superior growth in oil production over the past decade and half, whether compared to the Super Majors, our large Canadian peers, or the major US E&Ps.
Suncor has also achieved that production growth without excessively ramping up capital spending. Our long life, low decline resources... coupled with our unrelenting focus on cost management and operational excellence... has enabled the generation of substantial free cash flow.
There’s no question that profitable growth can be more challenging in lower crude oil price environments. But our newest oil sands project, Fort Hills, remains attractive because it’s expected to operate with low cash costs and sustaining capital for more than five decades. History tells us that we will go through many price cycles during that time.
Construction on the project is more than a third complete. And, we’re right on target with budget and schedule. That means Fort Hills is expected to produce first oil as early as the fourth quarter of 2017 and achieve 90% of its production capacity of 180,000 barrels per day within 12 months.
Also, Hebron continues to progress towards first oil in 2017. With cash costs expected to be in the 12 to 14 dolllar per barrel range and direct access to Brent pricing, this project remains very attractive.
Our project decisions are made with a laser focus on building shareholder value. But those investments only make sense if they create production that has access to markets.
As mentioned, we have closely integrated our midstream operations with the rest of the business. In the end, our mid-stream objective is to take full advantage of opportunities to maximize the value of every barrel we produce.
As you can see, we’re well-positioned to be able to deliver over 600 thousand barrels per day to our refineries and other globally priced markets across North America.
Given recent deliberations on pipelines, I think it’s important to note that no single pipeline project is critical to our plans to get our products to market. Nor are delays or the prospect of cancellations 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.
As we navigate through all of the issues our industry faces, we’re conscious of the trust that our investors have placed in us. And for that reason, our commitment to return cash to shareholders has been consistent.
Thanks to our integrated strategy and disciplined approach to capital allocation, we’re successfully and consistently delivering shareholder value. This past quarter, we raised our dividend to 29 cents per common share – an increase of about 4%.
Over the past five years, we’ve grown the dividend by 190%. During that same period, we’ve repurchased and cancelled over five billion dollars worth of Suncor stock, representing approximately 10% of the outstanding shares.
I talked earlier about Suncor being the steady ship that investors should look to as we all navigate increasingly turbulent waters.
Suncor’s powerful integrated model, a strong commitment to operational excellence and capital discipline will continue to deliver results for shareholders.
It’s a great time to be at Suncor. I say that with the confidence of a great team of leaders at the helm and employees who look forward to the challenges and opportunities ahead with energy and optimism.
Thanks for your time today and I’d be happy to answer any questions you may have.