Suncor Energy: Taking the long view
Steve Williams, President and CEO
Suncor Energy Inc.
Barclays CEO Energy/Power Conference
New York City, NY
September 11, 2013
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Thank you, Paul and good afternoon everyone.
It’s a pleasure to be here with you today. First, a thank you to Barclays for putting on this conference. It’s a great opportunity to have some in depth discussions about important energy issues. I’m pleased to be part of it.
I’m excited to be talking about Suncor’s journey and what lies ahead. For those of you who have been following our company you know that we have been systematically laying a strong foundation for profitable growth with a razor sharp focus on capital discipline.
We are seeing the fruits of this effort, and our shareholders are starting to be rewarded for their patience.
Today I’d like to provide you with a brief overview of Suncor, and then touch on three areas of focus for the company:
- operational excellence
- capital discipline
- and profitable growth.
These are linked and guide the strategic choices that drive shareholder value. And those choices, I believe need to be made in the context of a long term view.
When I say that, I mean looking at the bigger picture, based on decades of experience: planning for what’s on the horizon, rather than being forced to react to a current situation; looking beyond short-term market conditions; and committing to a triple bottom line vision of resource development. In the end, a long term view requires focus, rather than being distracted by what others call “something shiny.”
But first, a bit about Suncor, Canada’s leading integrated energy company. We have operations that include:
- oil sands development and upgrading
- conventional and offshore oil and gas production
- petroleum refining
- and product marketing primarily under the Petro-Canada brand.
What sets us apart and what we believe is a distinct competitive advantage is that high level of integration. Our business model has been built by looking at the bigger picture, rather than a single operation or market segment.
The majority of our production is from oil sands, which is upgraded into more valuable crude blends. Three of our refineries, soon to be joined by our Montreal refinery, process oil sands production into refined fuels and specialty blends. And with offshore and international production sold into premium-priced markets, we’re geographically diversified.
This integrated model means we have many sources of profit and the flexibility to take advantage of market conditions as they change. The benefit? We can balance volatility as well as reduce our financial risk through both good and bad economic cycles. It also allows us to capture global prices for well above 90 percent of our output.
Another differentiator is our enviable resource position, including what we believe is the most favourable position in Canada’s oil sands.
This strong resource position will help us generate profits and grow in a disciplined manner for decades to come. In fact, if you assume that all 6.9 billion barrels of our proved and probable reserves are produced at existing rates, we could maintain production for more than 34 years. With contingent resources of 23.5 billion barrels, that could mean production for more than a century. The bottom line is that we have resources available for development that are well in excess of others, and by others, I mean countries, not just companies.
With that stretching out ahead, it shouldn’t be a surprise that we do take a long term view when it comes to the three principles I mentioned.
The first, operational excellence, is quite simply doing the right thing, the right way, every time to create long-term shareholder value. A sustainable profitable energy company must have zero tolerance for accidents, absolute environmental integrity, and reliable operations. And that can’t be a short term focus.
Safety is a core value for us – in fact, it’s above all else. We’ve consistently reduced lost-time injuries and recordable injury frequencies at our company. In the second quarter, we successfully completed the largest maintenance turnaround in Suncor's history. That involved over 3.5 million person hours at our oil sands operations without a single lost time injury.
That long term view is also part of our efforts as we seek to raise the bar on the environmental front:
- we reduced our sulfur dioxide flaring, we’ve cut greenhouse gas emissions per barrel, and we’ve substantially reduced our river water withdrawal
- and with TRO, our new tailings management technology we are targeting surface land reclamation in a third of the time it now takes
- a long term view of sustainable development led us years ago to develop a climate change action plan.
Of course, when it comes to the environment, what we do both now and in the future is directly linked to our long-term business success. Every barrel of water that we handle, every bit of energy we consume has a cost. With that in mind, we’ve developed environmental performance goals for 2015, including:
- reducing fresh water consumption by 12%
- increasing reclamation of disturbed land area by 100%
- improving energy efficiency by 10%, and
- reducing air emissions by 10%.
Of course, operational excellence at Suncor also includes a firm commitment to improving reliability. As a result of our successful preventive maintenance program and significant plant improvements, we now expect to safely extend our run time between major upgrader turnarounds from four to five years, and we'll be able to run at higher rates of throughput.
And I’m pleased to say we’re taking advantage of that opportunity:
- we achieved record oil sands production at our base operations in August, at 443,000 barrels per day – 11 percent higher than our previous record this July
- the synthetic crude oil portion of that production exceeded 330,000 barrels per day, representing a 95 percent utilization rate at our upgraders – world class levels of reliability.
Operational excellence helps us reduce costs. Our objective is to be the lowest cost operator and we’re making great progress through reliability, productivity and technology initiatives. We’ve made tangible improvements, driving down oil sands cash operating costs per barrel from just over 39 dollars in 2011 to a 2013 guidance range of 33.50 to 36.50.
Some of you might be wondering what this progress might mean in terms of market access. I’ve said it recently on our quarterly call, but let me say it again:
Simply put, access to markets is not an issue for Suncor. We have ample market access to handle both current production and our future growth. By the end of 2014, we expect to be able to ship over 600,000 barrels per day to our refineries and other globally priced markets across North America.
By the end of this year we plan to begin shipping western crude to our Montreal refinery. At the same time, we expect to ship heavy barrels to the US Gulf Coast by the new Keystone South Pipeline.
As an aside, that is separate and distinct from Keystone XL, where a decision still rests with President Obama. The debate continues, but my personal view is that approval is in the best interests of Americans and Canadians, both in terms of energy security, job creation, and trade.
When it comes to operational excellence, safety, environmental care, reliability and productivity play an important part, and must be considered with a long term view. They set the foundation for better overall performance and higher quality earnings.
The second area of focus for Suncor, as I mentioned, is capital discipline. That means a relentless discipline to allocating capital. Our priorities are simple:
- fund the base business
- fund profitable growth projects, and
- accelerate the return of cash to shareholders through growing dividends and value-based share repurchases.
And when assets or projects are outside of these priorities, you will see us take decisive steps. As you’ve seen, we have announced plans to divest the majority of our North American Onshore conventional gas business. This is part of our ongoing practice of reviewing our portfolio and identifying assets that are not meeting our profitability thresholds and are not core to our strategy.
As we look to deploy capital, we have an extensive set of assets in the oil sands that offer all kinds of integration synergies and debottlenecking opportunities. For example, we’re focusing capital on high return reliability projects at our upgraders. We’re augmenting our logistics infrastructure with a suite of assets. This prudent approach is allowing us to unlock significant new volumes from our existing operations.
And with a step change in production in August, we’re seeing the results of some of that capital already put into place. We have and will continue to deliver value through a series of debottlenecking and expansion projects announced earlier this year, to add 100,000 barrels per day. These include:
- continued improvements to our logistics
- higher bitumen throughput from additional water handling capability at MacKay River
- several new units at Firebag
- as well as an expansion to the MacKay River operations.
The average capital intensity for these projects is expected to be between 20-30,000 dollars per flowing barrel.
We are applying the same stringent capital discipline to a suite of growth opportunities across the company. Fort Hills, the next mining project on our books, is the most visible to the market today.
Since a decision with our joint venture partner is still ahead of us, I can’t speak to specific plans. I can tell you, however, that a rigorous approach is being taken to all aspects of the project.
It’s important to put this into context of our growth plan. Fort Hills provides long term sustainable growth. Construction is expected to represent no more than 15 percent of our capital budget in any given year. And, at 67,000 barrels per day, represents only 20 percent of our 300,000 barrel per day growth plan.
We continue to target a sanction decision later this year. Looking again through the lens of the long term, we will only move forward with the project if we are fully confident it will deliver strong returns for our shareholders.
All of these efforts are targeted towards building the business and returning value to shareholders.
Earlier this year, you saw us increase our dividend by 54%, moving from 13 to 20 cents per quarter. We also renewed our share buyback program to allow for the repurchase and cancellation of up to 2 billion dollars of common shares. Both decisions were very well received by the market. You can expect more of the same going forward.
As a strong cash generation company, with a rock solid balance sheet, we’re uniquely positioned to not only fund profitable growth, but steadily grow the cash we return to shareholders.
Our view is that dividends should be sustainable, predictable, competitive and steadily growing. Our approach to maximizing long-term value is increasingly attracting serious investors who value quality assets, sound capital choices and a visible path for sustained dividend growth.
Suncor’s value proposition is built on a strong financial foundation:
- reliable cash flow from operations of 2.25 billion dollars in Q2 2013 – our eighth consecutive quarter at that level
- modest net debt of just over 7.1 billion dollars, representing a net debt to cash flow from operations of just 0.7 to one
- a prudent capex program of 7 to 8 billion dollars annually, that will fuel corporate annual growth of about 8 percent in the next few years
- significant free cash flow that we will continue to return to shareholders in the form of dividends and share buybacks.
But just as important, is what is behind the numbers – the team that makes them possible. I’m very proud of Suncor’s leadership and the 14,000 plus employees at Suncor who continue to look forward to the future with optimism and excitement. Their dedication continually inspires me and reminds me of their unwavering commitment to our shareholders, customers and other stakeholders.
With their help, I’m confident that Suncor will succeed in delivering on that long term vision in the three areas that I’ve talked about:
- operational excellence
- capital discipline
- profitable growth.
Just as we are focused on the long term, I hope I’ve given you some reasons to think the same way when it comes to our company. It should be no surprise to you that we want you to buy and enjoy the benefits of being a long-term Suncor shareholder.
If you are already an investor in Suncor, I encourage you to consider adding to your position. If you aren’t, I ask that you take a closer look at our company. I think you’ll be pleased with what you discover. You’ll see a strong commitment to creating energy for today and tomorrow… and creating strong shareholder value in the process.
Thanks for your time today. I’d be happy to answer any questions you may have.