Ladies and gentlemen, thank you for standing by, and welcome to the Suncor Energy Third Quarter 2019 Financial Results Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Trevor Bell, Vice President of Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning. Welcome to Suncor's third quarter earnings call. With me this morning are Mark Little, President and Chief Executive Officer, and Alister Cowan, Chief Financial Officer. Please note that today's comments contain forward-looking information. Actual results may differ materially from the expected results because of various risk factors and assumptions that are described in our third-quarter earnings release, as well as in our current annual information form. Both of those 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 third quarter's earnings release. Following formal remarks, we'll open the call to questions. I'll now hand it over to Mark Little for his comments.
Good morning, everybody, and thank you for joining us. In a volatile quarter for commodity and refined product prices, Suncor continued to deliver strong and consistent results. In the third quarter, we generated CAD 2.7 billion of funds from operations and CAD 1.1 billion in operating earnings, which marks the ninth consecutive quarter where we've generated over CAD 2 billion of funds from operations. The reliable nature of our cash flow, combined with disciplined capital management, resulted in CAD 1.4 billion being returned to shareholders through dividends and share buybacks in Q3. We continue to see significant value in our company and, given the market conditions, accelerated our buyback program in the quarter to repurchase 1.2% of our outstanding shares for approximately CAD 760 million.
At the same time, we continued to strengthen our balance sheet, reducing our debt by CAD 570 million, all of which, yet again, demonstrates the value of our integrated model and our ability to create substantial cash flow and value for shareholders in various market conditions. Reliable production from our upstream oil sands assets contributed to our strong results, despite the impacts of planned maintenance in the quarter and continued mandatory production curtailment, which has been much higher than we anticipated at the start of the year. Given our planned maintenance, there was limited availability and opportunity to purchase production quotas from other operators in the quarter. As a result, total oil sands production of 670,000 barrels a day was approximately 20,000 barrels per day lower compared to Q2.
Consistent with prior quarters, we were able to transfer production quotas among our oil sands assets, generating CAD 1.6 billion of funds from operations and CAD 500 million of operating earnings in our Oil Sands Segment. Throughout 2019, Suncor's unique footprint and asset flexibility has allowed us to make the strategic choice to optimize the mix of our allocated production during mandatory curtailment. We focused on value over volumes, producing the highest-margin barrels given market conditions. We've increased the production of higher sales price but higher-cost SCO barrels at the expense of lower price and lower-cost bitumen barrels. While this has put pressure on our 2019 volumes and cost per barrel, our results have benefited by a net margin increase of CAD 2 per barrel, or more than CAD 200 million of operating cash flow at base plant year to date.
Moving to our offshore assets, production in the third quarter was approximately 90,000 barrels per day, down almost 20,000 barrels per day from the second quarter, primarily due to an unplanned outage at Hibernia and higher maintenance at Buzzard. Both of these assets are now back online. While our Hebron and Oda growth projects continue to ramp up and partially offset these unplanned outages, crude prices weakened in the quarter, resulting in CAD 380 million of funds from operations and CAD 170 million of operating earnings from our E&P segment. In the downstream, we achieved refinery utilization of 100% during the quarter, generating CAD 885 million of funds from operations and CAD 670 million of operating earnings. This is an outstanding operational performance, and it also drove our refinery operating expenditures below CAD 5 per barrel in the quarter.
Following the Alberta government's clarification on the electricity market regulations, we announced the sanctioning of a co-gen investment at our Oil Sands Base plant in September, making significant progress towards achieving two ambitious goals. Increasing structural cash flow by CAD 2 billion by 2023, which is a 20% increase over last year's funds from operations. Secondly, reducing our greenhouse gas emissions intensity by 30% by 2030. The co-gen facility will reduce greenhouse gas emissions intensity associated with steam production at our Oil Sands Base plant and is expected to be a significant contributor to reaching our greenhouse gas goal, getting us one quarter of the way there. At the same time, the co-gen facility will reduce Alberta's provincial greenhouse gas emissions by displacing more greenhouse gas intensive electrical sources.
The combined benefit is a reduction of Alberta's greenhouse gas emissions by approximately 2.5 million tons per year, which is the equivalent of taking 550,000 vehicles off of the road. In addition to the many tangible environmental benefits, the cogen facility is expected to be a significant contributor towards Suncor's goal of increasing structural cash flow by contributing more than 10% of the CAD 2 billion target we have for 2023. Along with the deployment of autonomous haul trucks, our tailings technology advancements, the construction of the Suncor and Syncrude interconnecting pipeline, and optimization of our supply and trading processes, we are now executing on projects that are expected to deliver approximately 60% of the CAD 2 billion cash flow growth target. Just to emphasize that again, the projects that are in execution represent 60% of the CAD 2 billion.
In addition to those projects, we have a number that are in development that are nearing sanction or deployment, representing an additional 25% of our goal. With many focused on building standard digital platforms and leveraging data to extract value from our existing businesses. Finally, we have numerous initiatives in the identification stage, which we expect will contribute to the final 15% of the goal. Investing in projects across our integrated business that are largely independent of oil price and pipeline egress, demonstrates our ability to grow cash flow and shareholder value with high return projects in a variety of market conditions. Our progress to date should provide confidence that we can achieve our cash flow growth target over the next four years, which in turn will enable increasing returns to shareholders and continued investment in our business.
At the same time, we remain focused on our operational performance by delivering safe and reliable operations through a volatile business environment, planned maintenance, and ongoing mandatory production curtailment. One last comment. I was very pleased this morning to see that the Alberta government has agreed to provide curtailment relief for oil shipped by added rail. This is aligned with the industry proposal that we've been working with the Alberta government now for some time. This is a very significant development for the industry and the province, and it sets the stage for the government to remove itself from the Alberta crude markets. I'd certainly like to pass on a special thanks to the Premier and the Energy Minister for providing this support to the industry. With that, I'll pass it along to Alister to provide some financial context to our third quarter results.
Thanks, Mark. As you previously highlighted, Suncor was able to generate CAD 2.7 billion of funds from operations and CAD 1.1 billion of operating earnings in the third quarter. That was despite the impact of a weakening business environment, the continued higher levels of mandatory production curtailment, and the planned maintenance we had. Once again, we demonstrated the strength of our integrated model in various market conditions. In addition to returning more than 50% of our funds from operations to shareholders during the quarter in the form of dividends and share buybacks, we also fully funded CAD 1.5 billion of capital expenditures and strengthened the balance sheet by repaying CAD 570 million of debt. Year to date, we have returned approximately CAD 3.8 billion to our shareholders in dividends and share buybacks, or roughly 46% of our funds from operations, while at the same time repaying nearly CAD 1 billion of debt.
As Mark mentioned, we continue to see significant upside value in our company shares. As a result, we accelerated our share buyback program during the quarter, spending approximately CAD 760 million to repurchase 1.2% of our outstanding shares at less than CAD 40 per share. Year to date, we have spent CAD 1.8 billion on share buybacks and have repurchased almost 3% of our outstanding shares. We remain on track to complete the authorized CAD 2 billion program that started in May and expires next spring, but have the ability as in prior years to approach our board for an increase, but that will be dependent on future commodity prices. Looking to the balance of 2019, we've maintained our capital guidance range, but we did narrow our total production range by reducing the top end to 790,000 barrels per day from 820,000 barrels per day.
We increased our oil sands operations cash operating cost per barrel range by approximately CAD 2. These changes really reflect the ongoing impact of higher mandatory production curtailment than we expected and the product mix strategy that Mark discussed earlier. We've also adjusted the guidance range for our East Coast Canada royalties to 13%-17%, net down 4%, and that really reflects the impact of third-party outages on the East Coast. Consistent with prior years, we expect to release our 2020 corporate guidance in the coming weeks. We will obviously be looking at that with additional clarity this morning on rail from the Alberta government and further information on where the mandatory production curtailment program will be for 2020.
From our perspective, the results in the third quarter are a track record and demonstrate our ongoing commitment to sustainably increasing cash flow and shareholder returns in the short, medium, and the long term.
Thank you, Alister and Mark. I will turn the call back to the operator to take questions, first from the analyst community, then as time permits from the media. Operator?
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Neil Mehta with Goldman Sachs. Your line is open.
Hi, guys. This is Emily Chang on behalf of Neil here. Just my first question on CapEx. What do you think is an early read on 2020 spend, and how should we be thinking about the co-gen annual spend profile of CAD 1.4 billion over the next couple of years?
Thanks, Emily. In the second quarter, I think we were asked that question, and somebody asked about whether the range from CAD 5.5-CAD 6 was good, and I would say, given the fact that we haven't published our guidance, and Alister just spoke to that, I'd say right now, notionally, that's a good range. One of the reasons our range is going up is because of decisions like co-gen, and so it's incorporated in that capital spend.
Great. Thank you. Just one follow-up, please, on the crude-by-rail announcement this morning. Does this change the way you guys think about using rail as a means of crude export to increase production, or is it still really an economic decision here?
The economic decision we're faced with is really around should we leave crude shut in or should we produce it and ship it to market by rail? When you compare those two options, it's economic, which is the whole point of this is that although the natural spread in the marketplace might not say that rail's economic, you're considering that against whether you should. It assumes that you're already producing the barrel. The opportunity here and the whole design of the program is to allow us to produce above our quotas if we can move the volume out. We're comparing, we either leave it shut in the ground or we move it by rail. I think this is a very positive development because the whole purpose of curtailment was to reduce production to align with the takeaway capacity.
I think we all know that ever since that was implemented, the takeaway capacity in Western Canada has declined, which is the exact opposite of what you want to have happen when you have excess production. The design of this system is to incent operators like ourselves and the 16 in total that are curtailed to go get rail, increase the takeaway capacity from the entire basin so that we can access markets. Then once the industry's demonstrated that all the production's on and we can move it all and we have all of the takeaway capacity, the government then has the ability to leave the markets. When everybody has all their production flowing, then they're incented to invest to grow their production. Right now, none of those 16 companies are incented because if they grow production, they're just going to leave it shut in.
The whole design of the program is to try and help get the markets going, allow us to get full value, increase royalties and taxes for the provinces, allow the companies to demonstrate that with market forces, we can clear the market. On top of this development, there's about 200,000 barrels a day of increased pipeline capacity that's coming to market early next year through the work that's happening on Line 3, on the Canadian portion of Line 3, Keystone, and Express. When you look at the incremental rail capacity, which we think is somewhere in the neighborhood of 200,000-300,000 barrels a day of additional rail that could be brought to market and another 200,000 barrels a day of pipe, this is super positive for the industry to move forward, and hopefully we'll get some investment going.
That's why we're very thankful for the leadership that the Premier and the Energy Minister have put to this.
Great. Thank you.
Thank you. Our next question comes from Dennis Fong of Canaccord Genuity. Your line is open.
Hi, good morning, and thanks for taking my question. Just maybe as a bit of a follow-on to Emily's question. The thought process for me is that you guys don't necessarily transport very much crude oil by rail, but do have a fairly robust rail operation more geared, frankly, to the refined product side. With respect to your current, obviously, or fairly little exposure to the crude oil transportation side, how should I be thinking about your maybe strategy or approach to potentially gaining incremental capacity via maybe some of your peers, if they have available capacity to ramp up production via their rail over curtailment quotas?
Dennis, thanks for the question. That was certainly missing in my response to Emily. I think as we've stated many times, prior to this, we were moving all of our production by rail. Clearly, with the government intervention, we're not able to do that. We will be taking advantage of this development and the curtailment relief that's been put out by the Alberta Government this morning. In anticipation of that and our longstanding relationship in the rail markets and working with the railways, we actually have direct contracted capacity of 30,000 barrels a day with the rails to move crude by rail. We will plan to be getting that operational in the next month or two. I haven't talked to the folks this morning about how long it will take, but I think it will take a couple of months, plus or minus.
We plan on taking advantage of this for sure to get our production moving.
Okay, perfect. I suppose the other side of it would be is, given that there are other producers that may be producing and have maybe excess rail capacity, that could probably also mean that they have incremental credits that they could potentially sell for you as well.
Yeah. The design of the system is to allow the market to actually solve this. Clearly, people that are sitting with rail without the production are incented to find people with production to move it by rail. It also incents producers to go get rail contracts and such. I think you'll see that this is significant in the Alberta government getting rid of its rail contracts because if people sign up for them, they want to be able to use the rail. All of these pieces are tied together.
Okay. If you'll indulge me, I have just two quick more. Just quickly on free cash flow and so forth. I understand that Alister, you did make comments around decisions around the NCIB. I know you guys have, during the context of this year, paid back some significant pieces of term debt. Given that you don't really have any near-term term debt expiries or anything coming due until, I believe, 2021, should the focus or should I read between the lines there that the larger focus will be towards returning cash to shareholders via the share buyback program, which if you're on pace as you are today, could frankly be exhausted by the end of this year.
Thanks for that, Dennis. No, I would say that we're very measured in where we allocate our capital, and we'll be very clear on what is going to the stock buyback. We did accelerate it in the quarter. We're very opportunistic. We saw lots of value in there at these price levels. I wouldn't say that you should assume that the Q3 purchase is now our new run rate. We said CAD 2 billion a year. I did say we could go back to the board if commodity prices would allow that. On the debt side, while we don't have any term debt due till 2021, we do have about CAD 1.5 billion of commercial paper, which we use to flex up and down on. There'll still be a measured allocation to stock buybacks, dividends, capital, and debt repayment.
Okay, thanks. Then just the last little bit here is just on the guidance. It looks like the base mine, specifically at the U2 upgrader, had a bit of an extended turnaround going into Q4. Is there any incremental pieces of prep work or anything like that that you guys are focusing on an operational basis, just given that there's maybe a little bit more, we'll call it downtime with respect to the upgrader component of things? I'll turn it back. Thanks.
No. It's interesting because we're working on a coker set that was down and actually got put back online during the fire. This is kind of an unusual circumstance. It has taken us a little bit of additional time. We don't think that this is characteristic of what we'll see going forward. This just ended up needing a little bit more work than we anticipated going in. Every time you do a turnaround and you open up these vessels, there's a certain amount of work that you find through the process because we don't have perfect knowledge till we get into it. It's caused a little bit of a delay.
Okay, perfect. Thank you.
Thank you. Our next question comes from Phil Gresh with JPMorgan. Your line is open.
Hey, good morning, guys. This is John Royall on for Phil. Can you hear me?
Yes. Thanks, John.
You guys have seen higher cash costs per barrel this year for a variety of reasons, and I think some includes reliability. As we look ahead at the CAD 2 billion CFO improvement target, and the guided per barrel cost targets for each asset, is there any risk of offsetting headwinds like labor inflation or other factors that might lead to fewer net benefits versus the CAD 2 billion target?
No. It's interesting because your characterization of the operating cost is part of the issue with it is we're low in the production range. Curtailment's been much higher than we anticipated. I think we've been foreshadowing that all along. Originally, it was announced that curtailment would be 325,000 barrels a day for the first quarter and 90,000 barrels a day on average for the remainder of the year. We won't get to that number essentially until the end of the year. It's been substantially higher. I think just if you do the math, it's 30%-40% higher curtailment through the year than what was originally stated. Because it's a high fixed cost business, production's lower, operating costs are higher.
Then back to, we've intentionally, as I mentioned in my prepared comments around mixes, we've intentionally shut in low cost, low value barrels and maximized or shifted the allocation so we could produce higher cost, but much higher margin. Our average margin, the net effect of the increased cost and increased margin is we've been able to generate CAD 200 million of incremental cash flow for the shareholder. The issue with it is our focus has been on driving value for the shareholder and generating cash flow, not on how do we make the number lower. If we wanted to make the operating cost number lower, we would have done the exact opposite of what we did do. The only issue is we would have lost a whole bunch of cash generation. We think we've made the right decisions here.
Curtailment has created a bunch of interesting dynamics going forward. Next year with the SPA allowance that I've talked about, it'll help us to move a lot of volumes that we wouldn't have been able to without it.
Understood. Thank you. Just the second one, we've seen reports on the spill at Keystone. Do you guys have any commitments on Keystone? Either way, what do you think the net effect would be on Suncor and how long do you think it would take to resolve the spill?
I would literally be speculating on all of that. We do move some product on Keystone, we'll wait to hear from the operator what it is. I have no idea.
Thank you.
Thanks.
Thank you. I'm currently showing no questions at this time. I'd like to turn the call back to Mr. Trevor Bell for closing comments.
Great. Thank you, operator. Thanks everyone for attending the call. I know it's a busy earnings day and season, but in particular day. Happy Halloween, everyone. IR will be around all day. Should you have any more detailed questions, please give myself or my team a call. Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.