Mapping the road ahead: How Suncor is charting the path for continued success through its focused business strategy
President and CEO
Suncor Energy Inc.
New York, New York
September 7, 2016
Check against delivery
Steve Williams, President and CEO
Thank you, and good morning everyone. It’s great to be here again in New York. Barclays always puts on an excellent and thought-provoking conference. A special thanks to you, Paul and the organizers for bringing us all together.
It’s been quite a year, to say the least, since we were last here talking with you.
- In the macro environment, oil prices remained low, then recovered somewhat, but appear range bound at levels that do not support most growth projects.
- Energy companies around the world have been challenged to adapt to swings in the markets – and having to make difficult choices to remain viable.
- There’s also been increased focus on climate change, with the COP21 conference in Paris representing a significant milestone.
- The American electoral campaign continues – one we in Canada and the rest of the world watch with interest.
- And closer to home, Suncor returned to full operations by the end of June, after temporary wildfire disruptions. None of our assets were damaged and oil sands performance since the fires has been strong from a production and cost perspective, demonstrating our operational excellence focus.
But first, a brief commercial about Suncor.
You probably know us best as Canada’s leading integrated energy company and the sixth largest in North America. With over 700,000 barrels per day of production, weighted 99% to oil, our enterprise value is approximately $75 billion Canadian, or $57 billion U.S.Our high quality portfolio of assets includes:
- development of Canada’s oil sands through both mining and in situ technologies.
- E&P operations off the east coast of Canada and in the North Sea, and
- a strong midstream business which integrates our upstream production with refineries in Edmonton, Sarnia, Montreal, and Denver. Together, they have a capacity of 462,000 barrels per day.
- We also have a renewable energy portfolio of wind farms and operate Canada’s largest ethanol plant.
- Rounding out the portfolio, we’re a leading branded retail marketer in Canada, with our Petro-Canada service stations comprising about 18% of the Canadian market.
Our company’s strength is based on a well-defined plan, focused on operational excellence, capital discipline and profitable growth.
Our strategy, which has served us so well through the price cycle, remains very much in play. That strategy is focused on:
- Optimizing the base business
- Pursuing profitable growth
- Returning cash to shareholders, and
- Being an industry leader in sustainability
On that note, I should point out that following the temporary shutdowns to our oil sands operations as a result of the wildfires in May, we successfully ramped back up to full production in July and our cash operating costs resumed their downward trend moving below the $24.24 per barrel mark we posted in Q1 of this year.
Discipline and prudence are the hallmarks of our financial strategy. It’s our very disciplined approach to the allocation of capital that’s providing competitive advantage. Carefully managing our resources allows us to profitably grow production through organic projects already underway and countercyclical acquisitions. Importantly, it also allows us to continue to return cash to shareholders through a competitive dividend.
We’re also demonstrating leadership when it comes to sustainability. That includes pushing ourselves by setting long-term goals to improve our environmental footprint by leveraging technology, aspiring to better relationships with Aboriginal communities, and collaborating with others, generating solutions in support of effective public policy.
All of our efforts wouldn’t be possible without an outstanding team of leaders and employees who help us to consistently and effectively execute on our strategy. With their help, I have no doubt we’ll continue to responsibly develop resources and deliver strong returns for our shareholders in the process.
Our Integrated Model
Our strategy leverages a very strong integrated model. I think it’s important to point out that although our model is integrated, it is made up of highly efficient, independent upstream and downstream businesses, which can each generate strong, standalone profitability, while effectively mitigating the impact of crude price differentials.
The standalone element of our model became even more clear during the recent wildfires in Northern Alberta. Even though our oil sands production was shut in, due to the evacuations, our refineries were able to source alternate feedstock and continue to outperform the peer group in terms of realized margins and profitability.
Our investor proposition
Our focused strategy and our ability to leverage an integrated model point to the fact that Suncor is very well positioned competitively.
Our financial strength has set us apart, with a strong balance sheet, ample liquidity and a conservative debt structure. That’s thanks to a balance sheet that continues to be in excellent condition with metrics appropriately positioned for this point in the oil price cycle.
During the second quarter we issued $2.9 billion of equity to fund the acquisition of Murphy’s 5% interest in Syncrude and to reposition the balance sheet for further potential acquisitions. The equity offering was heavily oversubscribed with existing shareholders taking almost 80% of the issue.
That said, we know that our shareholders have a very high value for our capital discipline and prudent balance sheet management. And they can be very critical of equity issues. We understand that view and we are focused on ensuring that equity proceeds are used to support highly accretive acquisitions such as the increased stake in Syncrude.
As of June 30th, we had almost $9 billion of liquidity, including $3 billion of cash. Our net debt to cash flow was three times and our total debt to capitalization was just over 28%. And of course we continue to attract a strong investment-grade credit rating.
Going forward, you can expect more of the same:
- Living within our means
- Not wavering from our disciplined capital allocation priorities
- Maintaining the health of our balance sheet
- Keeping a strong investment grade credit rating, one which is setting us apart from our peers
Value creation has figured prominently in our growth efforts. We continue to make significant progress on Fort Hills construction, which is now well over 60%complete. We continue to target first oil in the latter part of the fourth quarter of 2017 with production expected to ramp up through 2018. When the project is fully ramped up, Suncor’s share of production will be approximately 90,000 barrels per day.
At Hebron, on the East coast, construction of the gravity-based structure and topsides continues with a major milestone – the last major module fabricated overseas shipped on schedule – occurring in late June. First oil is anticipated by the end of 2017 followed by a multi-year ramp up to peak production. Suncor’s share when the project is fully ramped up will be about 30,000 barrels a day.
In addition to these projects, we’ve taken full advantage of recent oil price weakness to invest approximately $9 billion in acquisitions over the past year:
- We’ve increased our working interest in the Fort Hills project by 10%, taking our ownership to 51%.
- We also acquired two additional stakes in Syncrude, bringing our working interest up to 54%.
- And in August, we announced we will acquire a 30% participating interest in Rosebank, a U.K. North Sea project operated by Chevron.
- the purchase of the two Denver refineries back in 2003 and 2005 when refining cracks were in single digits;
- the Petro-Canada acquisition during 2009 when oil dipped below $40 per barrel;
- the sale of our natural gas business when gas prices rallied briefly in 2013;
- the recent Syncrude acquisitions, which were completed as oil prices bottomed out earlier this year;
- and of course, our recently announced participation in the Rosebank project.
This production growth significantly increases our leverage to oil prices and we expect it to put us among industry leaders on free cash flow at forward strip crude prices.
Further growth opportunities post 2019 include debottlenecking and optimization of our existing portfolio along with the in situ replication strategy which we expect to sanction before the end of this decade.
Sustainable Development at Suncor
As we continue to grow the company and develop resources to meet increasing global demand, we’ll continue to be guided by a strong commitment to sustainable development.
We share in the global challenge to tackle climate change head on by reducing emissions while providing energy the world needs. We’re working to harness technology and innovation on a transformational pathway to a low carbon energy system.
Our plan is to measure our progress by reducing the overall GHG emissions intensity of our production of oil and petroleum products by 30% by 2030 - a target we believe will put us on the path to ultimately bending the curve on our absolute GHG emissions as well.
Technology and innovation are a big part of achieving this goal. We continue to:
- spend about $200 million annually on strategic research and development projects;
- collaborate with organizations like Canada’s Oil Sands Innovation Alliance (COSIA) and Evok Innovations on step change technologies to address GHG emissions and other environmental challenges; and
- work closely with joint venture partners to drive improved reliability, safety and environmental performance at our operations.
For us sustainability is about environment, economy and social well-being. Earlier this summer, we launched our first social goal, which is focused on improving relationships with Aboriginal Peoples.
I’m particularly pleased to see the intersection of our social goal with mutual business interest. Yesterday we announced an arrangement by which the Fort McKay First Nation will become an equity partner in our East Tank Farm.
I should be clear that this is not just a storage plant. The East Tank Farm is a large, state of the art, billion dollar synthetic crude terminal. The assets being constructed include seven product tanks, two blenders, cooling facilities, a Vapour Combustion Unit, connections to Enbridge’s Norlite and TransCanada’s Northern Courier pipelines, as well as power connections.
Once operational, the East Tank Farm will receive bitumen from the Fort Hills oil sands mine and ship product to market on behalf of the Fort Hills partners. Through an overall investment of approximately $350 million, the First Nation will have an equity interest of 34.3%.
It’s a major step for the communities and for us. We’re particularly excited about it, as it demonstrates our commitment to increasing Aboriginal Peoples’ participation in energy development.
Our common future depends heavily on collaboration and stepping into what I call “the solution space”. Late last year, Suncor and other oil sands producers and members of the environmental community came together to find a way to make joint recommendations on strong climate policy to the Alberta government. As a result of this collaborative work, together we were instrumental in informing and supporting the Alberta government’s Climate Leadership Plan.
That plan calls for a broad-based carbon pricing regime, coupled with an overall emissions limit for the oil sands. Importantly, the plan sets out an ambition:
- to bend the emissions curve over time,
- to advance technology
- and, to ensure Albertans and Canadians receive full value for the resource.
The fine details are still being worked through, but we believe the plan has tangibly demonstrated that leaders in the environmental community and the oil sands industry can work together:
- to problem-solve complex issues and de-escalate conflict;
- to find solutions to ensure environmental and economic competitiveness,
- and, demonstrate that Alberta is a climate leader among major oil producing jurisdictions.
One of the different ways we’ve been talking about resource development is in the context of both environmental and economic terms. With advancements in technology and innovation, we are no longer in an environment of resource scarcity. So, we see “stranding assets” or “leaving some resources in the ground” as an opportunity. It’s an opportunity to leave in the ground those resources that require the most energy and cost to extract.
We’ve begun to have conversations with the Government of Alberta about the current regulatory design, which requires that the maximum resource be extracted, regardless of the higher economic or environmental cost. By changing a regulation grounded in resource scarcity, into a regulation grounded in what’s right for the community, the environment and our shareholders, we can continue to demonstrate leadership in resource development.
Other conversations we are having focus around infrastructure, particularly pipeline development. Bringing resources to market by the safest and most economical means remains a top priority for Suncor.
Currently we have ample pipeline capacity for our production to get to market. In addition, we have approximately 80,000 barrels per day of rail shipping capacity which we make use of opportunistically.
We also have a strong mid-stream group which helps us leverage our integrated model, linking our upstream with the downstream. And we’re supporting all Canadian pipeline projects, including Energy East, Northern Gateway and the TransMountain expansion among others.
As we look ahead, we have good reason to be optimistic:
- We’ve demonstrated strong per annum production growth over the past five years,
- Our growth profile is well-mapped to deliver substantial growth with in-flight projects through to the end of the decade, and
- we’ve been able to consistently return value to shareholders. 2016 is the 14th consecutive year that Suncor has paid an increased dividend.
I want to emphasize that our Board has indicated that it remains committed to ensuring that our dividends will be reliable, sustainable, meaningful and competitive.
Suncor and the Super-Majors
Looking at our company, there are many competitive differentiators. Suncor continues to be recognized for our long life, low decline production and reserves, industry expertise, commitment to sustainable development, integrated business model, and of course, our financial strength.
And yet, in many ways, we could be considered a legitimate peer to the super-majors. Suncor is attractive on a number of fronts in comparison to that peer group. These include:
- Decline rates and reserve replacement – While the super-majors face significant natural declines and despite huge investment are unable to economically replace their reserves; the majority of Suncor’s production has low or no declines and we have ample resources in our ownership for the next century
- Capital efficiency – Since 2005, Suncor has invested an average of $5.4 billion in growth and sustaining capital and acquisitions annually and has grown its production by 180%. During the same period, the super majors have spent an average of $23.4 billion annually per company and seen their average production actually decline by 7%
- Growth – Over the last five years, Suncor has grown its production by 15%, outperforming its closest peer by more than 10%, and a feat that many of the large integrateds would find impossible. We plan to grow our production by over 40% between 2015 and 2019. The production of the super majors as a group, meanwhile, will likely continue to decline.
- Dividends – Suncor has grown its dividend by 164% over the last five years.
- Valuation – Despite our very real and demonstrated advantages, Suncor continues to trade in line with the super major peer group. With strong expected future production, 6% growth CAGR per share through 2019 and the ability to generate significant cash flow in almost any price environment, we believe that Suncor represents a very strong investment opportunity.
Furthermore, we’re positioning our company to be globally cost and carbon competitive over the long term.
Our powerful integrated model, a strong commitment to operational excellence and capital discipline - which continue to deliver results for shareholders - are what gives me confidence in achieving success on the road forward.
Thanks for your time today and I’d be happy to answer any questions you may have.