Marking Milestones: Gauging Suncor’s Progress And Charting The Road Ahead
Steve Williams, President and CEO
Steve Reynish, Interim Chief Financial Officer and EVP, Strategy and Corporate Development
Annual General Meeting
April 29, 2014
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Steve Williams, President and CEO
Thank you John, and good morning. We appreciate you joining us at our Annual General Meeting here in Edmonton.
AGMs are an important part of our interaction with shareholders, stakeholders and the public. They’re also a point of reflection – on what we’ve accomplished over the past year and what lies ahead.
As you heard, we’re marking a significant milestone this year, with the retirement of our Board Chair, John Ferguson. John has been a member of our Board since November, 1995 and has served as Chair since 2007.
Throughout his tenure, John has seen us overcome the challenge of developing the oil sands, pushing the boundaries of technology to make it a viable energy source. He guided and supported us as we:
- started trading on the New York Stock Exchange,
- launched the Suncor Energy Foundation,
- commissioned Project Millennium,
- acquired a business in Colorado,
- opened our Firebag in situ facility, and
- made investments in renewable energy.
These were among many significant milestones in our company’s development on John’s watch. However, the biggest milestone had to be our merger with Petro-Canada. It was the largest Canadian corporate transaction of its kind at the time. When our companies merged operations and work forces, we created Canada’s largest energy company and the fifth largest in North America. John – you were a key leader throughout that period and your sage advice and guidance was invaluable.
John, on behalf of the entire team at Suncor, I can say that you’ve been a huge asset to Suncor:
- you have always been a strong voice for the interests of our shareholders.
- you are laser-focused on good governance.
- you recognize and champion sustainability.
And, as our Board members will tell you, you’ve brought a strong spirit of collaboration, discipline and integrity to our Board discussions. Your extensive experience, thoughtful advice, and careful stewardship of our shareholder’s interests have had a profound impact on our company. From all of us at Suncor, we wish you the very best as you retire from our Board.
Ladies and gentlemen, please join me in thanking John Ferguson for his many years of dedicated service to Suncor and our industry.
I’d also like to take a brief moment to welcome our new chair, Jim Simpson, who John will introduce later. Jim – I’m looking forward to working with you as you take up your new responsibilities.
According to Webster’s dictionary, a milestone is an important point in the progress or development of something. As you may know, the term comes from a stone being set beside a road to mark a distance in miles to a particular place.
What’s notable to me is that milestones remind us of our progress on a journey - what we’ve accomplished, and also, what remains to be done - when it comes to future challenges and opportunities.
I’m pleased to say that 2013 was a year where we marked some significant milestones for Suncor. And, as we look to the rest of 2014 and beyond, I’m optimistic about the journey that lies ahead.
In a global context, 2013 was one marked by changing dynamics. The world’s population continued to expand. We’re well on our way to nine billion people living on the planet by the middle of this century.
Meanwhile, energy demand continued to grow - particularly in Asia. And while growth will be impacted by whatever direction the global economy takes, growth is still a safe bet. By 2035, the International Energy Agency is forecasting that demand will increase by over 30 percent.
As the industry works to meet that growing demand, we are reminded that public attention to the environmental impacts of resource development hasn’t gone away. In fact, it’s as much a concern as ever. And it is abundantly clear that industry needs to focus time, people and capital on being trusted stewards of valuable natural resources.
Unfortunately, the energy debate has become increasingly polarized. In the midst of demonizing, rather than deliberating, I’m concerned we may find ourselves in a worse place than where we started.
We know our stakeholders expect us to have a strong sustainability focus. We’ve been on that path at Suncor for a long time – and we know it’s the right one. It means taking an integrated view, or systems approach to energy. For us and our stakeholders, energy development needs be to be about a prosperous economy, a healthy environment and social well-being.
When it comes to the environment, we recognize the challenges presented by climate change. How we produce, deliver and use energy has a very real impact on our planet. We are all a part of it, and all of us – governments, industry, academics, environmental organizations and the public - need to be actively engaged in the conversation and focused on solutions.
We know the tremendous potential of the oil sands. It is recognized as the third largest oil reserve on the planet. According to the Canadian Association of Petroleum Producers, new oil sands development is expected to contribute over $2.1 trillion to the Canadian economy over the next 25 years. To put that number into context, that would be an annual contribution of almost $2400 for every single person in Canada today for the next 25 years.
That same development could mean over 900,000 jobs, goods and services spending across the country, and over $780 billion in taxes and royalties to support health, education and social programs.
Suncor is a good case in point. Together with our refineries in Alberta, Ontario, Quebec and Colorado, with a thriving lubricant business, a renewable energy portfolio, and a retail presence which includes 1,450 Petro-Canada stations, we make a sizeable contribution to the economy. We employ approximately 14,000 people and in 2013, spent over $10.5 billion with approximately 7,200 Canadian vendors.
The economy, the environment and social well-being are all critically important factors in open and honest conversations. Conversations across the stakeholder spectrum. Conversations about the energy choices we make and the kind of society we all want to create. We’ve learned that we need to forge better relationships with stakeholders and Aboriginal communities. We need to listen.
We’ve learned that industry, policymakers and stakeholders working together and using collective talents and skills have great power. Together, we can accomplish great things - whether it’s building capacity in the non-profit sector or improving educational outcomes for Aboriginal youth.
That spirit of collaboration is what’s helped us already make progress – and it’s demonstrated in the 13 companies that have come together to form Canada’s Oil Sands Innovation Alliance.
With the sharing of over 560 distinct environmental technologies and innovations that cost over $900 million to develop, we’re demonstrating on a world scale what can be done when we work together and are inspired by possibilities.
For us at Suncor, 2013 was a year of learning, but just as importantly, about delivering tangible results for shareholders. And that’s due to an integrated strategy that took full advantage of our leading resource position, including the largest in Canada’s oil sands.
To give you some context, if you assume that all 7.7 billion barrels of our proved and probable reserves are produced at existing rates, we could maintain production for more than 37 years. With contingent resources of over 23 billion barrels, that could mean production for more than 100 years. It truly is the core growth engine of our company. In fact, 99 percent of our business is focused on oil.
That upstream production is tightly integrated with our refining and marketing business, helping us adjust to changing market conditions and create value for shareholders. That’s demonstrated in an R&M business with a consistent track record of operational excellence and industry leading profitability.
Our geographically dispersed Exploration and Production assets feature low cost production, and attract Brent-based pricing. Put all of these elements together, and you have an integrated model which allows us to capture global oil prices for about 90 percent of our output.
Our ability to successfully leverage this model was a key driver in building shareholder value in 2013. We also saw results from our focus on operational excellence in 2013.
I’ll start with safety – a core value for us. Normally, I would tell you about the progress we’re making in recordable injury and lost time injury frequency over the previous year. But today, I feel no satisfaction in recounting any steps forward.
We have been deeply saddened by recent fatalities at Oil Sands. It has been a difficult and emotional time for the Suncor family. Yesterday was a national Day of Mourning, reminding us that one workplace fatality is too many. We need to redouble our efforts to ensure employees and contractors go home safely to their families. Personal and process safety must be an integral part of our work, every minute …every hour…every day.
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 at oil sands by more than 50 percent since 2004. And work will continue towards environmental performance goals on:
- water consumption
- reclamation of disturbed land area
- energy efficiency
- and air emissions.
This past year, we achieved step changes in both productivity and reliability. For example, the commissioning of new hot bitumen facilities allowed us to begin blending Firebag bitumen for direct shipment to market. This, in turn, allowed us to ramp up bitumen production from our mine to feed the upgraders. The net result was an increase of approximately 40,000 barrels per day of bitumen production in 2013.
The reliability of our operations also continued to improve. After planned maintenance last year at one of our upgraders, we began to achieve daily utilization rates above 90 percent.
In the downstream, average utilization rates at our four refineries last year was 94 percent.
Thanks to ongoing process improvements, we’ve added over four percent to the nameplate capacity of our refineries in the past two years alone.
And, with no major turnaround maintenance at Oil Sands planned until 2016, we’re well-positioned for a lengthy run of continued production growth.
Our focus on operational excellence is also helping us drive down costs across our Oil Sands business. As you heard with our 2014 guidance, we’re targeting a range of $31.50 to $34.50 cash cost per barrel of oil sands production. Careful management of costs is consistent with our unwavering approach to allocating capital, which Steve Reynish will speak to in a minute.
I’d like to focus on one area of capital allocation, though and that’s growth. As we make decisions on how we’re going to use capital going forward, we’re conscious of the need to spend within our means. Smart, profitable growth for us also means a focus on cost and quality, rather than schedules.
Our 2014 capital plan calls for investment of $7.8 billion, including just $4.2 billion for growth projects, and $3.6 billion towards sustaining capital investments focused on improving reliability and sustainable operations.
We’re particularly excited about our rich suite of growth projects, which include new projects, debottlenecking, reliability and modular initiatives.
Our Fort Hills mining project with our joint venture partners is an excellent example of the focus we’ve placed on profitable growth. One of the best undeveloped oil sands mining projects in the area, we expect it to be a significant source of cash flow and produce more than 50 years of strong, stable cash flow. And yet, construction of Fort Hills is expected to represent only about 15 percent of our capital budget in any given year.
Debottlenecking projects are another way we’re taking advantage of facilities in place to drive further production and profitability.
The McKay River debottleneck project leverages infrastructure and excess steam capacity to grow production by 20 percent at a capital cost of less than $10,000 per flowing barrel. We’ve begun steaming on the new wells and expect first oil later this year. This is just one of a series of debottlenecking projects that will provide us with low cost, high return growth across our oil sands business in the next few years.
We’re also focusing capital on high return reliability projects. We firmly believe that our upgrader complex can consistently achieve utilization rates of 90 percent or more and we’re making great progress in that direction. We’re unlocking significant and highly profitable volumes of upgraded material. At the same time, we’re improving our returns.
Looking further out, we’re planning lower cost, modular in situ plants that can be replicated across multiple sites, including Firebag, MacKay River South, Lewis and Meadow Creek. And we’re using a program approach to drive down capital costs. The thinking is that we can engineer once and build the same project many time using a manufacturing approach that drives productivity and levels manpower requirements.
With delays in infrastructure development – Keystone XL being a classic example – you might wonder what the impact is on Suncor and our growth plans.
Let me say first that as a Canadian, I believe pipelines need to be built – pipelines are the safest and most environmentally effective way to transport oil. And yet, as CEO of Suncor, I also point out that that an individual project like Keystone XL is not critical to our plans to get our products to market. Nor is it 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. By the end of 2014, we expect to be able to deliver over 600,000 barrels per day to our refineries and other globally priced markets across North America.
We’re also pleased about the National Energy Board’s approval of the reversal of Line 9. That’s great news for our company and in particular our Montreal refinery. Having full access to inland crudes, in addition to the rail unloading facilities we’ve put in place, will increase the competitiveness of that facility and support its continued profitability. That, in turn, makes for good returns for shareholders.
When I speak with shareholders, I’m conscious of the confidence you’ve placed in us through your investments. I understand that the concept of milestones – what progress and where we’re headed – is something that’s important to you.
I believe Suncor is worthy of your confidence.
We have a well-defined plan that’s focused on operational excellence, capital discipline and profitable growth. And it’s delivering results thanks to a leading resource position, significant financial strength, and a powerful integrated business model that captures value from the upstream to the downstream.
All of this is delivering on our investor value proposition:
- superior returns from well-run operations
- profitable growth
- and a very competitive return of cash both in the short and long-term.
As we move forward, we do so with the confidence of 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 Steve Reynish, I’d like to thank you for your continued support and confidence.
Steve Reynish, Chief Financial Officer
Thanks Steve. I’m pleased to be able to present Suncor’s financial results for the past year.
And, as one of three Steves – Steve Williams, Steve Douglas and I – who have regular opportunities to interact with shareholders and analysts, I can say we share more than a first name. We all believe in the strength of this company, its people, its strategy and where it’s headed.
As our President and CEO just outlined, 2013 was a year of continued strong results for Suncor.
Production, earnings and cash flow were in healthy positions, thanks to a financial strategy which is aimed at:
- supporting the business plan
- managing risk
- providing financial flexibility
- and optimizing our cost of capital.
From an operations perspective, production in 2013 remained strong, reaching 562 thousand barrels of oil equivalent per day. That total included almost 170 thousand barrels per day in E&P and just over 392 thousand barrels per day in Oil Sands.
It’s important to note that underlying that result was a strong focus on reliability and productivity and as Steve mentioned, we believe Suncor is well-positioned for a lengthy run of continued production growth going forward. Equally important, we’re seeing growth in our higher margin oil sands production, which is replacing lower margin barrels such as the conventional natural gas business that we divested in 2013.
I’ll turn now to our financials, starting with cash flow. 2013 was the third consecutive year during which we generated cash flow from operations approaching $10 billion.
Related to this is the free cash flow we generate – truly an area which sets us apart from our competitors. This past year, we produced free cash flow of $2.6 billion, more than all of our Canadian competitors combined.
Operating earnings for the year, meanwhile, remained strong at $4.7 billion, with net earnings of just over $3.9 billion. Our earnings reflect the strength of our integrated model, which continues to deliver returns from across the value chain.
The revenues we generate have provided us with effective means to invest in the business. Capital expenditures for the year were approximately $6.4 billion, versus an initial budget of $7.3 billion.
Our execution of the plan reflects our ongoing capital discipline. We will continue to spend wisely, pursuing only projects that are expected to provide profitable, long-term growth for shareholders.
When assets or projects are outside our strategic priorities, you will see us take decisive steps. With the sale of our North American Onshore conventional gas business, we’re now 99 percent weighted towards oil in our overall business.
In addition, we decided to not proceed with the Voyageur upgrader project this past year. That allowed us to deploy resources in other areas aimed at reliability, productivity and returns.
Our ability to fund our capital program is thanks to a very strong balance sheet. I can assure you that our entire senior management team is dedicated to ensuring it remains in top shape.
A healthy balance sheet means we aren’t constrained by our financial situation when it comes to making strategic decisions. For example, our low net debt and strong liquidity mean we’re able to invest in the business throughout market cycles.
Our investment decisions are driven by clearly defined capital allocation priorities:
- fund the base business
- fund profitable growth projects and
- accelerate the return of cash to shareholders through growing dividends and value-based share repurchases.
We believe this discipline is not only appropriate, but critical to our ongoing success.
Our success is also due to our integrated business model and the stability of financial results it provides. We believe that integration is a significant strength for the company and sets us apart from others in the industry.
And as you’ve seen, we’ve been able to translate that model and its related operational and financial performance into returns for shareholders.
You saw us increase our dividend twice in the past year first in May 2013 by 54 percent and again this past February by another 15 percent. That moved us from a quarterly dividend of 13 cents per share in early 2013 to our current 23 cents per share, a 77 percent increase from Q1 2013 to Q1 2014.
Our board has also endorsed an approach to ensure that:
- dividends will be reliable, sustainable, meaningful and competitive
- dividends are expected to grow in line with earnings,
- and that an annual dividend review will be conducted in conjunction with our Q4 earnings release.
The dividend is an important part of returning value to shareholders. Over the past five years, we’ve achieved a Compound Annual Growth Rate (CAGR) of over 35 percent and our dividend has now increased in every year from 2003 to 2014 inclusive.
We believe our dividend, combined with our share buyback program, provides an attractive return for our shareholders.
2013 in summary was a year of significant financial and operational milestones for the company. Looking forward, Suncor is well positioned to continue to generate strong returns from our base operations, invest in profitable growth and consistently return value.
We thank you for your ongoing support and with that I’ll now turn the microphone back to John.