Looking Forward: How Suncor’s Integrated Model And Focused Approach Are Delivering Shareholder Value
Steve Williams, President and CEO
Bart Demosky, Chief Financial Officer
Suncor Annual General Meeting
April 30, 2013
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Steve Williams, President and CEO:
Thanks John, and good morning everyone,
I appreciate all of you joining us today at our AGM. I view this as an excellent opportunity to give you an insight into Suncor’s strategy and an update on how we are performing.
It’s an exciting time to be in the energy industry. Our company is well-positioned:
- we have significant financial strength
- we have a powerful integrated business model which ensures we capture value wherever it is being generated in the value chain – whether upstream, midstream or downstream
- and we’re successfully executing our plans using a rigorous disciplined approach.
All of this is delivering on our investor value proposition:
- superior returns through well-run operations
- profitable growth
- and return of cash both in the short and long-term.
The reason for my optimism is grounded in the fundamental role energy plays in our lives, here and around the world. In fact, none of us can imagine a world without energy.
Depending on the season, energy provides the warmth or cooling we need. It transports us to where we want to go. It creates jobs and drives our economy. It also brings an increased standard of living whether through taxes that support improved health care and education or the iPads and internet that we all take for granted.
The United States, Canada’s biggest trading partner, will continue to need oil. And, with a global population expected to grow to 9 billion people in the next 20 years, further energy development is not optional. We must meet that need in Canada, in the U.S. and abroad. And make no mistake, when it comes to oil, it will make its way to markets.
That’s good news for shareholders and more broadly. Developing resources takes significant investment, and doing so safely and responsibly, brings economic return, social well-being, and a healthy environment, for today and tomorrow.
Suncor is uniquely positioned to deliver value, and grow profitably for decades to come, using our existing extensive reserves. Our focus will be in the context of three key areas:
- Operational excellence
- Capital discipline
- and profitable growth.
I believe we’ve made significant strides in each of these over the past year.
First, Operational Excellence continues to be front and centre for us. This past year, we’ve continued working hard to implement our Operational Excellence Management system across the company.
The system is based on the principle that consistent standards, processes and procedures can help us reduce risk and enable continuous improvement. Particularly in safety, environmental performance, reliability and cost reductions.
Let me give you a few examples of what we’ve been able to achieve.
I’ll start with safety – a core value for us and an indicator of operational discipline. Thanks to our Journey to Zero program, we continue to make good progress. Total injury frequency improved across the company 21 percent over 2011. Recordable injury frequency improved 19 percent for the same period. We’re very encouraged by these results. We know, however, this work needs unrelenting commitment.
On the environmental front, we continue to take steps forward. We’ve cut greenhouse gas emissions per barrel at our mining operations by half since 1990. We’ve reduced our freshwater intake by more than 30% over the past six years. And the work will continue to achieve our environmental performance goals on:
- water consumption
- reclamation of disturbed land area
- energy efficiency
- and air emissions.
Reliability is a key component of Operational Excellence. For example, Suncor’s refineries have demonstrated world-class reliability, with 95% utilization rates this past year. That strong reliability has allowed us to safely increase nameplate capacity at three of our four refineries in the past few years, adding an additional capacity of 17,000 barrels per day.
Leaders from Refining & Marketing have joined the Oil Sands leadership team to help accelerate their reliability improvements. The progress is encouraging. We have seen record production and record upgrading reliability. And, we are optimistic about continued improvements.
We’re also focused on reducing costs. In 2012, we were successful in driving down operating costs at our oil sands operations by 2 dollars per barrel to just over 37 dollars, versus about 39 dollars in 2011.
In 2013, we’re on track to further lower that number, driving profitability in this major part of our business. As you saw in our quarterly results, cash operating costs for oil sands operations decreased, averaging $34.80 per barrel, compared to $38.10 per barrel in Q1, 2012. In essence, we’re focused on doing things smarter – achieving better results for less.
When it comes to project execution, I’m particularly pleased with results at our Firebag in situ facilities. We successfully grew production there by 75 percent with the ramp up of Stage 3 and the commissioning of Stage 4. Firebag 4 was commissioned three months ahead of schedule. Final project costs are coming in approximately 15 percent under budget, which saved over 300 million dollars.
All of the examples I’ve mentioned highlight the importance of Operational Excellence to us. I can’t stress enough, however, that Operational Excellence is a journey rather than a destination in and of itself.
Recently, we had a series of environmental spill events at our company. Frankly, they were disappointing to us and our stakeholders. I’ve personally challenged my team to fully understand what happened and then do whatever it takes to learn and make sure these events don’t happen again.
The second area of focus for us is capital discipline. We see careful stewardship of significant financial resources as a critical element of our business success. So what does that mean?
Simply put, it means spending money wisely:
- selecting the best growth projects
- executing the projects well
- aligning our assets with our strategic objectives
- and, of course, returning cash to shareholders
Thanks to a strong focus on capital discipline and effective project execution, we reduced our capital spend in 2012. We spent 6.37 billion dollars of a 7.5 billion dollar budget.
You also saw us announce the sale of the majority of our conventional natural gas business in Western Canada. That one billion dollar deal is subject to regulatory approval and is expected to close in the third quarter of this year. We expect to see a gain on the sale and see the transaction as further proof of our commitment to capital discipline and aligning assets with strategic objectives.
Overall, our focus on capital discipline is reflected in a very strong balance sheet. Combined with record low debt to cash flow ratios, we have the ability again this year to fund our entire capital program from internal resources. Our capital investment decisions are focused on delivering strong, long-term returns for shareholders.
Another way we drive improved investor returns is by returning cash to shareholders. This past year, we returned over 2.2 billion dollars in cash through share repurchases and dividends. Just yesterday, we increased the quarterly dividend by 54 percent to 20 cents per common share.
We also announced a further 2 billion dollar share buyback – the largest in our history. It comes on the heels of 3 other issuer bids that have returned 2.5 billion dollars to shareholders.
We firmly believe the purchase of our own shares is currently an attractive investment opportunity in the best interests of our shareholders. Returning meaningful cash to shareholders through competitive dividends and value-driven share buybacks is an important capital allocation priority for Suncor and an important element of our capital discipline strategy.
Our third focus area - profitable growth – goes hand in hand with capital discipline. When I was first appointed President and CEO, you heard me say I was not interested in growth for growth’s sake.
To profitably grow, we needed to take a hard look at every one of our projects. Cost and quality, rather than schedule, drives our decisions. And our aim is to deliver the highest possible returns for shareholders.
Focusing on profitable growth also meant we had to make strategic choices. We carefully reviewed the Voyageur project and the challenging economics for this new upgrader project informed our decision to not proceed. Not proceeding with Voyageur allows us to deploy capital in other areas to ensure continuous improvement in returns for shareholders. An important example lies in the multiple de-bottlenecking projects at oil sands.
We see these relatively low-cost and low-risk projects as an excellent means of delivering high rates of return. At our MacKay River and Firebag in situ projects, we see opportunities to increase throughput by up to 20 percent. These projects are extremely attractive because they come at a fraction of the cost of greenfield development.
At the same time, we have projects underway at our base plant to increase extraction capacity. We’re strengthening logistics to move more barrels to market. All of this is designed to increase the profitability of our oil sands business.
We currently estimate that we can add close to 100,000 barrels per day of new capacity over the next four years. And we’re excited about the potential impact these projects will have on our overall returns. As you’ve previously heard, we also expect that growth capital will be deployed on projects to prepare the Montreal refinery to receive shipments of western crude feedstock.
We’re profitably growing our business. And, we have an attractive suite of growth projects to choose from through this decade and beyond. We do recognize, however, that growth has to be responsible. And we have to respond to environmental challenges. Technology, innovation, and collaboration are the keys to our success.
In the early days of oil sands, efforts were almost entirely focused on making resource recovery viable. More recently, we’ve focused on improving how we extract the resource. We want to reduce our impact on land, water and air.
From bucketwheels to truck and shovel, from SAG-D to solvent-based technologies, from water based extraction to the potential for waterless extraction – innovations continue.
At Suncor, our track record shows a strong commitment to continuous improvement. This will continue. We’ve set ambitious goals to achieve improvements on water use, air emissions, land reclamation rates and energy efficiencies. These goals, by the way, were born out of discussions with our stakeholders. They reflect our belief that solutions start with engaged and constructive dialogue.
And more is going on across industry. About a year ago 14 companies came together to form Canada’s Oil Sands Innovation Alliance, or COSIA. Suncor was a thought leader in its formation. COSIA’s mandate is to collaborate on environmental performance. What excites me about COSIA is this:
- 14 companies which account for 90% of oil sands production
- 14 CEOs are committing to step-change performance improvements in tailings, water, land and GHG emissions.
- 14 competitors who in just a year, have shared 446 distinct technologies with associated development costs of $703 million.
This is unheard of. 14 companies determined it is better to share environmental intellectual property than compete on environmental performance. To our knowledge, COSIA is the largest collaborative effort of its kind, anywhere in the world. And it’s happening in the Canadian oil sands.
So, to sum up, the path forward is a promising one – both for Suncor and for our industry. While there are challenges to overcome, I have no doubt we will succeed.
And that’s due to a strong, experienced and ambitious leadership team who together with an extremely motivated group of employees are dedicated to the success of this company and delivering value to you, our shareholders.
As I turn the floor over to our Chief Financial Officer, Bart Demosky, I’d like to thank you for your continued support and confidence.
Bart Demosky, Chief Financial Officer
I’m excited to be here to talk about Suncor’s results for the past year. And, as a member of the senior leadership team, we share your enthusiasm about where the company is headed.
As Steve noted, 2012 was again a strong year of financial performance for Suncor. We continue to make significant progress on our financial strategy, which is aimed at:
- supporting the business plan
- managing risk
- providing financial flexibility
- and optimizing our cost of capital.
We believe executing successfully on that strategy delivers a long-term competitive advantage for the company. The strength of our balance sheet is an indication of that success. With low net debt and strong liquidity, we’re well-positioned to invest through the commodity cycle and execute on Suncor’s key capital allocation priorities:
- sustaining and optimizing the base business
- investing in profitable growth
- and consistently returning more of our free cash to shareholders.
Let me give you a few examples of what we’ve been able to accomplish over the past year in these areas.
For the second consecutive year, Suncor generated just under 10 billion dollars in cash flow.
That in itself is significant, but even more so when you consider this generated approximately 2 billion dollars in free cash flow. This is an important differentiator for our company. Compared to our Canadian competitors, the reality is that we are essentially the only company in our sector generating significant free cash flow. In fact, we generate more than all of this peer group combined.
That cash flow generation has allowed us to invest approximately 4 billion dollars in sustaining capex, helping to drive reliability and throughput in both Oil Sands and Refining and Marketing.
As Steve mentioned, we were able to increase capacity at three of our four refineries in the past few years by 17,000 barrels per day, and we’ve also been able to run our U2 upgrader at oil sands at 96% utilization rates for Q1, and incident-free for the past year.
Looking at the financials, they were strong, with net earnings totaling almost 2.8 billion dollars, and operating earnings reached nearly 4.9 billion dollars for the year. As you saw in our first quarter results, earnings and cash flow remain strong. These solid earnings demonstrate the value of our integrated model, in what was a very challenging and volatile crude pricing environment.
You don’t have to look far to see the result of this volatility on competitors operating only in the upstream environment.
Production for 2012 was strong as well, reaching 549,100 barrels per day, including 359,200 barrels per day at Oil Sands and 189,900 barrels per day from our Exploration and Production operations.
I should note that our performance is being recognized by rating agencies. For example, Moody’s upgraded our long-term debt from Baa2 to Baa1, which is a reflection of improving operating performance and financial strength.
Let me just emphasize that for a CFO, a balance sheet that’s in terrific shape with low net debt and ample liquidity is something we like to see. Removing almost $3 billion of underperforming capital from our balance sheet through the sale of the conventional natural gas business and deciding not to proceed with the Voyageur project allows us to make strategic choices and seize opportunities, including deploying capital to other areas.
And as Steve pointed out, we have a wealth of opportunities to choose from. We’re focused on making prudent decisions and executing projects in a disciplined fashion.
Being disciplined in our approach is a key feature of our capital program. The original 2012 budget called for 7.5 billion dollars in capital spending, but through careful management and disciplined investment choices, we were able to bring in the spend for the year at just over 6.4 billion dollars.
That was demonstrated in our execution on Firebag stage 4. It came in approximately 15 percent under budget and resulted in a cost of 27,000 dollars per flowing barrel, well under the original budget of 32,000 dollars per flowing barrel. A continued strong focus on capital cost control, and only sanctioning projects that materially exceed our cost of capital - like our recent announcements on Hebron and Golden Eagle - will ensure we deliver strong returns for shareholders over the long term.
All of the metrics I’ve mentioned point to the strong progress we’ve made on our financial strategy. This translates into a significant value proposition for shareholders. The increase in the dividend and new share buyback program underscore our commitment in this area. Our board has endorsed a framework to ensure that:
- Dividends will be reliable, sustainable, meaningful and competitive
- Dividends are expected to grow in line with earnings
- An annual dividend review will be conducted in conjunction with our Q4 earnings release.
Following this framework and including yesterday’s announcement has allowed us to achieve a Compound Annual Growth Rate (CAGR) of 30 percent for the past six years, with a dividend increase each calendar year.
It’s also important to point out that to date, we’ve repurchased and cancelled 2.5 billion dollars’ worth of outstanding shares.
I’d like to also emphasize that our financial strategy is made possible by our integrated business model and the stability of financial results it provides. And that integration is what we believe is a significant strength for Suncor. It truly does set us apart from others in the industry.
By operating profitable businesses in resource extraction, mid-stream logistics and refining and marketing, we’re able to capture earnings throughout the value chain, and generate strong returns for our investors. The diversity of the operations helps us respond to volatility in the market and reduces risk throughout fluctuating economic cycles.
There’s a number of factors at play, which are further described in our Annual Report, but let me quickly run through the highlights:
- First, we upgrade the majority of our bitumen production into higher value light synthetic crudes. This strong integration is a strength in today’s volatile markets.
- Second, we have mid-stream expertise and assets, including pipeline access and storage capacity across North America, which allow us to optimize pricing on our oil sands production.
- Third, we are able to process crude, including our own synthetic and heavy oil into more valuable refined products through physical integration of our upstream and downstream assets.
- And finally, we have a broad wholesale and retail network, which allows us to deliver refined fuels and specialty products beyond the refinery gate.
In an environment where West Texas Intermediate has been heavily discounted against Brent crude throughout most of 2012, this integrated model has allowed us to effectively capture prices tied to global crude markets on over 94% of our upstream crude production.
Our integrated model, combined with our sound financial strategy - successfully executed, I should add, creates the conditions necessary for our company’s success. Looking forward, Suncor is well positioned to continue to generate strong returns from our base operations, invest in profitable growth, and consistently return value to our shareholders.
With that, I’ll now turn the microphone back to John.