Earnings Call: Q2 2021

Jul 29, 2021

Good day and thank you for standing by. Welcome to the Suncor Energy Second Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to your speaker today, Mr. Trevor Bell, Vice President of Investor Relations. Please go ahead. Thank you, operator, and good morning. Welcome to Suncor's 2nd quarter earnings call. With me this morning are Mark Little, President and Chief Executive Officer and Alistair Cowen, Chief Financial Officer. Please note that today's comments contain forward looking information. The actual results may differ materially from the expected results due to various risk factors and assumptions that are described in our second quarter's earnings release as well as our current Annual Information Form. Both of these are available on SEDAR, EDGAR and our website, suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian GAAP. For a description of these financial measures, please see our 2nd quarter's earnings release. Following formal remarks, we'll open up the call to questions. Now I'll hand it over to Mark for his comments. Great. Well, thanks, Trevor, and good morning, and thank you, everybody, for joining us. In late May, we held our Investor Day. And at that event, we detailed our 5 year plan, which focuses on value capture of our integrated business model. Building on the growth phase from 2015 to 2019, this optimization phase is governed by Extracting increasing value from our business through enhancing margins, lowering our cost structure, Providing increased shareholder returns and fortifying the balance sheet with significant deleveraging. In comparison to the growth phase, we will lower our economic capital by 40% and add new revenue streams at mid teens returns. The optimization phase is expected to deliver significantly higher shareholder returns, including a 25 At the same time, we'll maintain a $35 WTI Breakeven and Retired Debt, strengthening the long term financial health of the company. Foundational to this performance is our steadfast focus on operational excellence. By increasing the productivity and efficiency of our operations, Optimizing the value of each barrel and thereby increasing free funds flow, we will grow cash returns to shareholders and fortify our financial position. The 2nd quarter results delivered our focused objectives, namely operational excellence, Lower costs and increased shareholder returns. I'm going to go into each area in a bit more detail. Our focus on operational excellence continues to result in strong operating performance. In our company's history, that's the best 8 months of production in 50 plus years. Base plant utilization was 98% over this period, and we had yet another quarterly record at insitu 253,000 barrels per day. We also completed significant turnarounds at all of our refineries as well as at Approximately 40% or $1,000,000,000 of these funds was returned to shareholders in the forms of dividends and buybacks. Since we began the buyback program in early February through to the end of July, we have bought back over 42,000,000 shares $1,200,000,000 representing approximately 3% of the outstanding shares. Turning now to operating performance. Oil Sands operations production of 460,000 barrels per day was approximately 10,000 barrels per day Higher than the Q1, reflecting strong and reliable operations. From a utilization perspective, base plant Meanwhile, the operating performance at insitu from November 2020 to June 2021 Average 250,000 barrels per day, making it the highest daily production period in nearly 20 year history for Firebag and MacKay. Executing the nameplate capacity increase at Firebag last October contributed to this record production. In terms of costs, 2nd quarter cash operating costs at Oil Sands operations were $23.85 per barrel. Looking at the last 8 months, Oil Sands operations averaged $23.50 in cash operating cost per barrel. We've achieved these types of unit costs before, but what makes our 2021 performance stand out is that we fully absorbed over a 100% increase natural gas price versus the previous periods with similar unit cost results. That's approximately $1 a barrel increase Being absorbed by reducing costs elsewhere, Syncrude production of 110,000 barrels per day Includes the impact of significant turnaround at their largest coker. All planned scope, including some of the Our plan for this fall was completed within budget. All three cokers are online and operations are fully lined out for a solid second half of the year. While we went through this in detail at Investor Day, it's important to recall that this asset's operating performance is Steadily improved, and we have a clear line of sight into synergies and reliability to achieve sustainable $30 per barrel cash operating costs. At Fort Hills, production of approximately 45,000 barrels per day reflects the updated mine plan that we discussed On the Q1 call, specifically building ore inventory for ramp up towards a 2 train operation. By the end of the quarter, the ore inventory build was slightly behind schedule with access to additional contractor equipment And labor taking more time to ramp up than expected. We now have most of the additional contract resources in the mine, and we We'll be fully ramped up by the end of August. Subsequent to the quarter, we realized that we would need to change the Slope of the South mine phase to maintain slope integrity as this part of the mine will form a critical permanent pillar between Fort Hills and the Syncrude Aurora Mines. This will delay our ramp up of Fort Hills to 2 trains until the end of 2021 As the South mine phase contained approximately 60% of our ore inventory that we thought was available. So to access this ore, we'll need to mine more overburden, which is just going to take some additional time. Obviously, Given the mine is very early in its life, our flexibility to ramp up earlier is limited. As a result, Fort Hills plans to continue on one train at the current production level for the remainder of the year, with the transition to both primary extraction 2021 annual guidance for Fort Hills production and Kosch operating costs have been updated to reflect these changes. There is no change to our long term view on costs as discussed at our May 26 Investor Day. Namely, we expect cost to continue to improve every year towards a cash cost target of $20 a barrel by 2024. In our E and P operations, generally, volumes were consistent with the Q1 Other than Buzzard, which fully executed its turnaround in the second quarter, with our Downstream segment, Throughput of 325,000 barrels per day included planned turnaround activities across all our refineries. This was an opportune time for this activity as stay in place orders continued in Canada throughout the quarter and broader North American refining complex Face the continued challenged macro environment. As we discussed previously, we built refined product inventories to support With turnarounds complete and demand increasing across Canada as COVID restrictions are lifted, We are confident about our downstream strength and positioning for the second half of the year. We expect the U2 turnaround at base Plan to begin in early August, having a production impact of approximately 125,000 barrels per day in the 3rd quarter. We anticipate partially offsetting the impact of the turnaround via increased bitumen sales to market. Our decision to swiftly respond And stagger maintenance activities when COVID cases surged in the region, specifically pushing the U2 turnaround from Q2 to Q3, Enabled us to complete the planned scope at the Syncrude turnaround and ensure safe and reliable operations across the assets. This was the right approach considering the strong operational performance at base plant and no material change to the scope or cost of the planned turnaround. We have completed one of the most significant maintenance schedules in our history during this quarter. While this has had an impact on production and costs at Syncrude and refineries in the quarter were now running at full rates and sets the stage for strong results in the second half of twenty twenty one and into 2022. In closing, I wanted to emphasize that our business model and philosophy, Regardless of short term volatility, we'll remain laser focused on operational excellence, capital discipline, Long term shareholder value creation and returning that value to shareholders, while fortifying our balance sheet by continuing debt reduction. Alsair, I'll now hand it over to you for the financial highlights. Thanks, Mark, and good morning, everyone. For the Q2, we have returned approximately $1,000,000,000 to shareholders in the form of $350,000,000 in dividends and $650,000,000 in share repurchases. During the quarter, our buyback amounts to approximately 23,000,000 shares at an average price of $28 per cent. In addition, we have received approval from the Toronto Stock Exchange To increase our share buyback program, 44,000,000 shares or approximately 3% of Suncor's Issued an outstanding common shares to 76,000,000 shares or approximately 5%. In the Q2, as Mark highlighted, Suncor generated $2,400,000,000 of funds from operations. The business environment continued to strengthen in the quarter with WTI increasing $8 per barrel or 14%. This was due to realization. The average price of oil sands crude basket increasing by $10 per barrel or approximately 16% versus Q1 despite the strengthening Canadian dollar averaging $0.81 during the quarter. This translated into approximately $300,000,000 of additional upstream oil sands funds flow when compared to the Q1 results. Even though production was 75,000 barrels per day lower due to the planned maintenance. Our Q2 financial results reflect our solid cost The E and P segment generated $410,000,000 Funds from operations with price realizations of nearly CAD82 per barrel, delivering approximately CAD350 1,000,000 for free funds flow net of capital expenditures. And finally, Downstream recorded approximately $600,000,000 of funds from operations With 70% utilization, this reflected the significant turnaround activity across the refineries and the continued lower consumer demand. The profitability in the Q2 reflects the lower demand due to COVID restrictions, which were maintained throughout the quarter in Canada And also the reduced volumes due to the planned turnaround activities. However, as Mark noted, we were able to partially offset some of the maintenance impacts By executing on our inventory build strategy, we outlined in our previous quarterly call. Gasoline demand has steadily been improving in Canada with Q1 at 20%, Q2 at 15% And gasoline demand in July 5% below 2019 levels. Diesel demand has recovered, While jet current jet demand still remains 50% below 2019 levels, however, it is important to remember that less 5% Our refined products volume is jet fuel. This improving demand trend, paired with our strong utilization expected in the second half of the year, Thank you. The debt reduction in the quarter was more than Q1. We are managing our debt reduction and share buyback strategy on an annual basis and remain on track For our 2 thirds debt reduction and 1 third buyback strategy, we outlined the investment. Apart from Fort Hills, which Varun discussed, the only guidance changes relate to updating the business environment. Strip commodity prices have increased since Q1, resulting in higher forecast profitability and cash flow. And as a result, higher forecast profitability and cash flow. And as a result, we've updated the cash tax range for 2021. Lastly, I'd like to note a couple of items for the second half of the year. We expect to close the Golden Eagle sale in September. The production will continue to be reflected as part of Suncor's volumes until the sale closes, at which point it will be purchase price adjusted. There's no change in our full year volume guidance either specifically for E and P or overall for Suncor. Secondly, we expect the tax refund for the 2020 tax year in the Q4, which will reduce our working capital. Total cash proceeds of approximately $1,000,000,000 from these two items will be used for debt reduction in the second half of the year. Before I close, I'd like to note that we have updated disclosure related to our Rack Forward business and our operating summaries supporting the financial statements and also in our supplementary IR deck. We hope you'll find this additional disclosure useful as it does add some more transparency on a significant part of our integrated model. And with that, I'll pass it back to Trevor. Thank you, Mark and Alistair. I'll now turn the call back to our operator so we Your first question comes from the line of Greg Pardy from RBC Capital Markets. You may ask your question. Thanks. Good morning. Mark, I was wondering if we could maybe just dig back into Just wondering if we can come back to Fort Hills. Does the timeline in terms of ramp up just in the Q1 presented the issues? And maybe could you talk as well just around when it became evident around the instability just in the scope that you mentioned earlier? Yes, Greg, thanks for your question. So let me just step back for a minute on this because The focus is on getting Fort Hills fully ramped up to 2 trains. And yes, that's been delayed So we're not expecting any impact in 2022 production. And so we found out about this In July, as we got later in the month associated with it, and this is really around focusing to ensure that The slope has stability and because as I mentioned, this is a critical pillar between the south end of the Fort Hills lease And the north end of the Syncrude Aurora lease. And because that mine face has about 60% of what we thought was The available ore and it's not going to be available until we clear more of the overburden associated with it. So this is just a time issue. We don't think it has any fundamental impact beyond just delaying the ramp up of Fort Hills To add that incremental production to what you're seeing in our results now. So that's kind of where we're at. And this south Mine phase after we've mined it, it's just so critical that we don't want it moving and becoming unstable. In a lot of places, It's not nearly as relevant, but this is a very critical piece of infrastructure going forward. Okay. Terrific. And I'm going to switch gears on the entire lead here. Just to come back, I mean, you're a part of the quintet on the oil sands pathways to net 0 back in early June, you guys announced that. What are the milestones we should be looking for in terms of progression and so forth? Well, it's interesting, Greg, if you just step back, essentially, this is about taking the whole oil sands industry To net 0 by 2,050, it's like I view this as an unprecedented collaboration between the oil sands It represents 90% of the operators today, though I fully expect that we will have the remaining operators join this Journey as we go forward. There's one very significant foundational set of infrastructure that we see is critical for this, And it's around building the carbon capture and sequestration capability for the industry. We think this is about 50% of the industry solution as we go forward, as we think to the future. And so it's really Important, by working together, we realized we can drop the cost of this significantly because we can all use a lot of common infrastructure And we can go faster and we can do it cheaper, all of which I think is super important in this journey going forward. So If you look on the there's a website now, the Oil Sands Pathways to Net 0 by 2,050. And if you look on that website, you'll see the map of the carbon sequestration system And such, so you're going to see that that's going to be a common piece associated with it. Other parts are independent. So if you look at it, there's a whole strategy there. Some of it's around carbon sequestration, some of it's around fuel switching like our cogen up north, some of it's switching to things like Clean hydrogen, like our announcement that we made in Edmonton. So some of this you'll see through the company window, But the big foundational project is what's being worked on. But we also have things like sharing solvent infrastructure, Clean hydrogen infrastructure, those sorts of things. So if you watch that website, you'll start to see more and more details come out. And we've just With some of the details around the carbon sequestration system. We're in the 90 day consultation period with the feds, And we're working to sort out the details around the investment tax credits associated with it. So We're making good progress and we've been very happy with the cooperation between the province and the federal government. Thanks a lot, Mark. Thanks, Greg. Your next question comes from the line of Neil Mehta from Goldman Sachs. You may ask your question. Good morning, Mark, Alastair. Good morning, team. The first question is around How Fort Hills stacks into the production guide, you did maintain the 740,000 to 780,000 consolidated upstream number. Is it fair to say that you guys are targeting, based on what you know right now, the low end of the guidance range? Yes. I think that's probably fair, Neil. Like the assets have performed very well, as I went through in my prepared remarks. You're seeing oil sands year to date. It's in the high 90s utilization. Syncrude has a proven strong Record post turnaround that we've just gone through that coming into their turnarounds in the Q2. So with the completion of that work, we're That the assets will perform very well. So we're not we're maintaining the corporate guidance associated with it, but we're not at the top end of guidance. And so but we're comfortable with the total guidance range. Okay. That's great. And then the follow-up is just around the buyback strategy. Obviously, Stock has lagged peers here over the last 2 the better part of the last 2 years. Free cash flow yield is very robust. So It seems like you guys are going to lean into the buyback and should average to the top end of that 5% Just talk about your buyback strategy and how you take advantage of the valuation. Yes, Neil, I'll take that one. Yes, I mean, we if you look at where we're headed, we're also 50% already We've got approval to go to 5%. We will be executing on that, providing obviously commodity prices We remain at current levels, so you do expect to see is that the top end of that range due to February of next year, The buyback period. Really, the strategy is more of a ratable buyback through the period, which is why you saw us do $600,000,000 odd in the quarter. We continue to execute as our rate always, I guess, in the remainder of the buyback. Your next question comes from the line of Phil Gresh from JPMorgan. Your line is open. You may ask your question. Hi, yes. Good morning. I wanted to follow-up on Fort Hills. Your one of your partners on the project was referencing some issues with groundwater. And so I just want to understand the technicals of this a little bit better. You're talking about slope stability. So I just want to make sure I fully understand why This could be a one time issue as opposed to a recurring issue. Yes. It's interesting, Phil, on the south mine phase, it's just the south mine phase, right? Like this is the one that we're building the corridor between the two mines. So the integrity of that mine phase is important. Anytime you're building a dam structure, It's super important that it have integrity and can be managed accordingly. Water management in oil sands It's a very common issue, and whether it's from rain events, but anytime you have soft rock mining, we are getting some egress of water from Ground sources and such into the mine. So we have procedures to be able to manage it. Some events are more challenging than others associated with But this is common across, I would say, almost all of the mines, if not all the mines in oil sands associated with it. So This is following protocol. We don't expect this to be a fundamental issue any more than what we've seen. And in fact, as we go north and head into Center Pit and stuff, we expect the vast majority of this to diminish associated with it. So yes, I mean, it's just it needs to be managed. And that's what we've done, and we have the procedures in place, And we're executing according to those procedures. So yes, is water an issue? Yes, it always is. And we manage it accordingly. Okay. Thank you for that. My follow-up question is just on OpEx. Obviously, acknowledging the strong performance For oil sands overall, the total company OpEx run rate is tracking a little bit over 10,800,000,000 You mentioned the natural gas headwinds, which I think everybody is dealing with, obviously. But are you still confident in the $10,600,000,000 guidance you laid out Yes, I'll take that one, Phil. I mean, if you look at our year to date numbers, there's about $250,000,000 in there of one time what we would consider one time items Related to restructuring, remember the big severance restructuring provision we took in Q1 to do with our Workforce reductions, there has been some additional costs in the first half of the year related to some of the COVID restrictions. They're obviously easing, and we expect those We are confident about that trend for the second half of the year To be able to achieve our run rate of the numbers that are that we disclosed in the Investor Day. And then obviously, As you move forward into 2022, 2023, 2024, a continuing trend downwards as we execute on our $2,000,000,000 of additional cash flow Improvement plan. The other thing I would say on the gas side, which you correctly said everybody will face, Is that we get a benefit on the other side of that through our power revenue, which is obviously tied to gas In Alberta, so we are that net revenue is now captured in our OSG is included in our revenue line. Great. And just to confirm, the $10,600,000,000 guide adjusts out all the one time factors that you're talking about? Yes, Phil. We executed those. We focused more on the run rate of our loan including one time restructuring items in there. Okay. Thank you very much. And your next question comes from the line of Manav Gupta from Credit Suisse. You may ask your question. Hey, guys. My question is a little bit of a follow-up on Neel Mehta's question. But looking at the quarter, I think you guys have given a guidance that 66 Percent of the discretionary cash that's post dividend cash goes to debt reduction and 33 goes to buyback. And when we look at this quarter, there's about $750,000,000 of discretionary cash and $640,000,000 went to buybacks and $100,000,000 to debt reduction. So I'm just wondering if there's a change a little bit in strategy there or you basically expect $1,000,000,000 in tax and Golden Eagle sales to come next quarter. And it's an annual allocation, 2 thirds debt repayments and 1 third buybacks. So quarter to quarter, it will move around. And obviously, Q2, We always knew we'd be impacted by the maintenance, higher capital and lower cash flow in the period. So that's why we're looking at annual. But you're absolutely right. We have $1,000,000,000 of cash proceeds coming in, in the second half of the year from tax refunds and the Golden Eagle sale, and we're going to use those Okay. So a quick follow-up here is in the last 1 year or so, While most of the U. S. Refiners have lost money, Suncor has been unbelievably resilient It's downstream. I think it's a function of your integration and how well you run. And you've consistently generated like $400,000,000 $500,000,000 now. This quarter was lower. I'm hoping it's just a function of the downtime because I think your utilization was dropping to 70,000,000 and once you go back to 90,000,000 again we'll get back into that run rate of 5,000,000, 600,000,000 Free cash? Or was there anything else, especially happening in Canada with the lockdowns or something else? Well, I think, Manav, it's really twofold. And you've touched on it here is, obviously, we had All of our refineries doing turnaround work through this period of time. And you saw on Investor Day, we talked about when you looked at refinery utilization, we Said that we were 2x as profitable as the next peer when we benchmarked that from a cash perspective. That didn't count Our Rack Forward business associated with it. So the environment has improved significantly, as Alistair talked about in his comments As we go into the Q3 here, the turnarounds are complete, the cracking margins are robust and demand has Covered significantly even in July versus the second quarter. So we think we're set up really well for the back half of the year. And it's just the fact that between COVID and the turnarounds, you've seen a much weaker market in the second quarter. We think we're in very good shape to be able to perform well in the back half of the year. And you guys are not even that running exposed. So Great setup for you. Thank you so much for taking my questions. Thanks, Mark. And there are no further questions at this time. I will turn the call back to Trevor Bell. Great. Thank you, operator. Thanks, everyone, for attending today. I know it's a busy day for earnings, and we appreciate you listening in. We're around all day if you have any And this concludes today's conference call. Thank you for participating. You may now disconnect.