Visible strategy execution: how Suncor is defining performance

Remarks by

Steve Williams
President and CEO
Suncor Energy Inc.

Barclays CEO Energy/Power Conference
September 5, 2018

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Steve Williams, President and CEO

Thank you, and good morning everyone. It’s great to be here again in New York.

I always look forward to this conference. Barclays does a great job in bringing us together. A special thanks to you, Paul and the organizers for hosting this event.

First, here’s a quick Suncor commercial for those of you who may not be familiar with us. We’re Canada’s leading integrated energy company. With a focus on long life, low decline oil sands, we currently have about 940,000 barrels per day of nameplate production capacity, with a 100% weighting in oil.

We have a uniquely integrated, high quality portfolio of assets, which includes:

Oil sands mining and in situ production and upgrading
E&P operations off the east coast of Canada and in the North Sea
A strong midstream and marketing business which connects our upstream production with our industry leading refining business with refineries located in Edmonton, Sarnia, Montreal and Denver
And finally, we’re a leading branded retail marketer in Canada, with our Petro-Canada service stations comprising about 18% of the Canadian market

Our current enterprise value is about US $80 billion.

A lot has happened since we were here last September:

We have seen rising commodity prices, supported by decreasing global inventory levels.
There has also been a significant amount of global market volatility. This is particularly the case in Alberta where pipeline access issues have caused widening light/heavy differentials in Western Canada.
While we did see some progress on the line 3 pipeline expansion, recent judicial decisions will result in delays on Transmountain and Keystone XL.
Suncor has adequate market access on existing pipelines for all of our production including Fort Hills when fully ramped up and minimal exposure to light heavy differentials due to our integrated model.
However, as a Canadian the delays are troubling as Canada is not receiving full value for our energy resources and these decisions add uncertainty associated with our regulatory environment which impacts investor confidence.
In refining and marketing, opportunities to generate further significant free cash flow continue to emerge. Some are even calling this “the second golden age of refining.”
The past 12 months at Suncor have been particularly busy as we executed on our strategic plan. We’ve achieved the successful startup of two major developments – Fort Hills and Hebron – and completed the purchase of additional interests in Syncrude and the North Sea. We also implemented the first ever commercial fleet of autonomous haul trucks used in the oil sands, and created an historic half billion dollar partnership on the East Tank Farm with the Fort McKay and Mikisiw Cree First Nations.
On the financial front, we increased our dividend by over 12%, we continue to aggressively buy back our shares, and we have taken action to further reduce our debt. Just recently, our Board approved an increase to our share repurchase program from $2.15 billion to $3 billion, which we believe demonstrates our confidence in Suncor’s ability to generate free cash flow and our commitment to return value to shareholders.
Overall, the strong market environment has led to improved industry and investor sentiment, which is certainly encouraging.
With the improved environment, it would be tempting to say that the pressure on the industry is starting to ease, but now, more than ever, we’re reminded of the importance of operational excellence, capital discipline and a flexible integrated model in responding to challenges and opportunities. These are Suncor’s core foundational elements that will not shift with the oil price cycle.

This morning, I’d like to share how Suncor has built a strong business model, a strong financial position and gained the confidence of investors through our visible execution of strategy.

Our success has been built on our integrated business. This integration leverages our upstream oil sands operations with the optionality of closely-tied refining and marketing assets. We’re able to do this while maximizing the profit of our offshore barrels by selling into strong global markets. It’s a distinct advantage which we believe is unique within our industry.

Suncor’s degree of integration has made us resilient to the Western Canadian light/heavy differential, shielding us from significant fluctuations.

Also, our strong mid-stream logistics team has ensured that we have logistical flexibility to move production to market on existing pipelines, including all Fort Hills barrels.

The strength of our integrated business was demonstrated in the last quarter, when we generated the best second quarter cash flow ever for Suncor, with funds from operations of $2.9 billion and operating earnings of $1.2 billion, despite the largest turnaround activity in our history.

There’s two particular benefits of Suncor’s integrated business I’d like to point out:

First, it helps insulate us from movements in the light-heavy crude differential. We process a majority of our produced bitumen in our upgraders where it is converted to a premium light crude and we also run a significant diet of heavy crude through our refineries where it is converted to transportation fuels.
Second, it positions us to generate additional funds from operations once IMO 2020 regulations come into play. Our refineries produce very little bunker fuel – less than 1% of our total refinery output.

So, the impact of large sulfur discounts to Suncor is minimal. Also, our refining system delivers relatively higher proportions of diesel in our product mix, which will be a benefit from the expected increase in low sulfur diesel margins. Finally we produce a significant amount of sweet synthetic oil which has a large distillate cut and should attract premium pricing with refineries looking to increase their diesel output.

Our integrated business continues to be a source of strength, providing us with a distinct advantage and serving as a foundation on which we’ve built our company.

Suncor’s strategy has, and continues to be, underpinned by operational excellence – essentially optimizing the base business – and capital discipline, which we achieve through a rigorous capital allocation process.

Focusing on both of these has ensured we have the capacity to pursue and deliver on another element of our strategy – profitable growth. As you can see, we’ve achieved strong production from projects in flight.

And of course, we’ve dedicated significant time and attention in returning value to shareholders through increasing dividends and opportunistic share buybacks.

Many of you have heard me say it – judge us on what we do, not just by what we say. As I dig a bit deeper into each area of our strategy, I hope you’ll see how we’re focused on delivering results.

I’m particularly proud of what we’ve achieved on our reliability journey at our base plant. Our journey to reliability was not a straight line and as you can see, we’ve made a significant step change from the early part of this decade, moving from 80 percent upgrader reliability to over 90 percent. We achieved this improvement through a combination of reliability initiatives and an essential interconnect pipeline from our Firebag in-situ operation to the upgrader, providing feedstock flexibility.

Operational excellence is also about keeping a close eye on costs – an area where we’ve had unrelenting focus.

This has been demonstrated by the success we’ve had in driving total OS&G costs about 5% below 2014 levels, while production has increased by approximately 30%. We’ve done this through operational, productivity, supply chain and business process initiatives. This includes steadily streamlining business processes, eliminating non-value added work and increasing productivity. This isn’t a one-time event – we believe that 65% of these savings are attributable to controllable costs and are sustainable.

At the same time, we’ve been successful in driving down capital and opex costs through new lean in situ pad designs, improved drilling and completion operation efficiencies and optimizing turnarounds with connected worker technologies. As you can see, we’ve lowered oil sands unit operating costs from $37.05 in 2012 to $23.80 in 2017. And we’ve also achieved success in driving down costs in our E&P and Refining and Marketing operations.

We’re about to celebrate one of the more visible examples of operational excellence and successful project executions with the official grand opening of our Fort Hills operation on September 10th.

As you may have heard on our last quarterly call, the plant continues to ramp up ahead of our expectations. During the quarter, it delivered 71,000 barrels per day net to Suncor, exceeding our Q2 guidance of 30,000 to 50,000 barrels per day. Cash operating costs, meanwhile were $28.55 per barrel, well below the Q2 guidance of $40 to $50 per barrel.

This performance, combined with the results from a seven day reliability test where we ran the plant in excess of 90% capacity to prove out its gross nameplate capacity – is a significant accomplishment.

Fort Hills, in many ways, is the new face of oil sands. For example, it employs paraffinic froth technology, resulting in lower GHG emissions intensity – a GHG intensity that is on par with the average refined barrel in North America. It also reflects an evolved relationship with Aboriginal Peoples. That’s been made clear at the East Tank Farm, which facilitates the transportation and distribution of product, where we’ve formed historic equity partnerships with two First Nations worth over half a billion dollars.

I’d just like to extend my thanks to the dedicated team that were involved in the project’s careful planning, phased approach to handover, commissioning and start-up.

Our journey on reliability, cost and project execution at our existing operations form the basis for the reliability and cash cost plans for the Syncrude asset.

As you are aware, we’ve seen some performance issues there, which remind us that the journey to operational excellence, particularly when it comes to asset reliability, is never complete and must continue with laser focus.

It’s important to note that we have always set the year 2020 as the target to achieve greater than 90% reliability and cash costs below $30 per barrel. Given our own operational experience, we knew that we’d see success and challenges along the way and that it would take four to five years to achieve. To drive improvements, we’ve seconded eight senior people to support Syncrude in addition to lending other senior resources in investigating its most recent outage and assisting in the re-start of the operations. We also continue to engage with other owners on the need to accelerate the necessary work to drive long term reliability.

I remain convinced we can leverage learnings that we’ve gained over the early part of this decade with the Base plant, Fort Hills and corporate successes. And with the full co-operation of the owners, we believe accelerating the strategic initiatives, such as a planned pipeline interconnect, is necessary if these targets are to be achieved.

Our journey on operational excellence is not the only journey we’ve been on. We have also been on a sustainable development path since the 1990s, working to raise the bar on our economic, environmental and social performance.

Whether it’s been performance improvements we’ve achieved through air, water, energy efficiency, and land reclamation improvements or now a new GHG goal… or whether it’s been changing the way we think and act to strengthen our relationship with Aboriginal Peoples, sustainability has been a central tenet to our vision in creating energy for a better world.

For us, sustainability means in part, taking a long term view and being transparent in how we communicate our aspirations and performance. If you haven’t had a chance, I’d encourage you to check out our recently released Report on Sustainability and our Climate Risk and Resilience Report. They’re both available on our website.

Technology has an important role to play in helping us reduce our environmental footprint, as well as reduce costs. We aim to be an oil sands technology deployment leader, and we’re making good strides in that area as evidenced by our deployment of Autonomous Haul Trucks at our mines.

The roll out of this new technology at our mines in the first quarter was a first in North America – and to our knowledge is the first application of autonomous trucks in the world’s soft-rock mining industry. We put this into place after several years of comprehensive testing. With our North Steepbank Mine now fully AHS operational, we believe it will result in safer, more productive mining operations, with improved fuel efficiency and lower emissions.

This just scratches the surface. We could talk about our plans for a digital plant and mine and how using powerful data analytics could further improve efficiency. We could also talk about advanced in situ technologies, with the potential to reduce emissions intensity by as much as 75%. Our technology plans are ambitious and we believe key in making us globally cost and carbon competitive over the long term.

The technologies we’re exploring point to an exciting future for the company, which bring me to what’s next for Suncor in the near, mid and long term.

As you can see, our plans stretch well into the 2030s.

In the near term (2018-2019), we’ve completed our major growth capital program – Fort Hills and Hebron – with the projects successfully ramping up to full production rates. Production is expected to grow by 10% in 2018 and a further 10% in 2019.

In the medium term (2020-2023), we’ll shift our focus to “free funds flow” growth with lower capital intensity projects that generate margin improvements, opex and sustaining capex savings and increased production through debottlenecks. We expect the cumulative impact of these projects will increase our free funds flow by $ 2 billion annually by 2023.

Longer term, that is 2024 and beyond, we have significant production growth opportunity with the sanctioning of more than 350,000 barrels per day of in situ projects.

Our strategy is simple yet strong. We are currently growing production with significant capital spend behind us and the ability to move product to market. We then have the opportunity to move to a cash flow growth mode with high return margin improvement and cost cutting initiatives highly independent of market conditions and egress constraints. We then move back into a significant phase of production growth post 2024.

Throughout this entire period, we won’t be making sharp turns. We will maintain a strong balance sheet. We will sanction capital projects provided they have significant returns and will continue to fund dividend growth, share buybacks and opportunistic M&A activity.

As we grow the company, we continue to be committed to strong capital discipline and increasing shareholder returns. As funds from operations grow, we see the ability to increase dividends and share buybacks with a modest increase in high return projects.

As always, balance sheet strength is a focus in all of our scenarios and we view our balance sheet as a strategic asset. The value of this strategy was evident during the downturn when our balance sheet was one of the strongest in the industry allowing us to transact some counter cyclical M&A at attractive valuations.

The most important lever in our plan is the ability to return cash to shareholders through our consistently increasing dividend and our opportunistic buyback program which has, over the last 2 years, been executed as planned.

A financial metric which has always been on both our and investors’ minds – throughout price cycles, is Return on Capital Employed. The increasing commodity price is lifting returns across the industry. At Suncor, we’re finding our ROCE to be at an inflection point. There are three main drivers for this:

First, spending on Fort Hills is complete and we expect to enter Q4 2018 at 90% of nameplate capacity
The majority of spending on Hebron is also completed and it is expected to produce 31,000 barrels per day once fully ramped up
Near-term capital spend will be focused on low capital intensity high return projects

Our company’ strength has been reflected in our commitment to a competitive, sustainable and growing dividend. And our track record in delivering on our dividend, including increases has been consistent. I’m pleased to report we have increased the cumulative cash dividend for 16 consecutive years through multiple price and business cycles.

We’ve also repurchased $2.4 billion in shares from May 2017 to June 30, 2018 and continue to purchase shares under our expanded NCIB.

Together, our competitive dividend and opportunistic buybacks result in a 6% cash yield for investors – levels in line with the supermajors and superior to the oil sands peer group.

All of what I’ve described this morning – the strength of our integrated model, our strategy focused on operational excellence, capital discipline, profitable growth and returning value to shareholders, and our track record of executing on our strategy combine to make for a compelling investor proposition.

Our strong balance sheet, long life and low decline reserves, strong management team and deep industry expertise support the leadership position we’ve established for Suncor. We like to sum that up as the Suncor Advantage.

Thanks for your time today and I’d be happy to answer any questions you may have.