Good day, ladies and gentlemen, welcome to the Suncor Energy fourth quarter 2018 financial results conference call. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session, instructions will follow at that time. If anyone should require operator assistance during the call, please press star then zero on your touch-tone telephone. I would now like to introduce your host for today's conference, Mr. Trevor Bell, VP Investor Relations. You may begin.
Thank you operator, good morning. Welcome to Suncor's fourth quarter earnings call. With me this morning are Steve Williams, Chief Executive Officer, Mark Little, President Chief Operating 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 fourth 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 fourth quarter earnings release. Information on the impact of foreign exchange, FIFO accounting, and share-based compensation on our results can also be found in our Q4 report to shareholders. Following the formal remarks, we'll open the call for questions. Now I'll hand it over to Steve Williams for his comments.
Good morning, thank you for joining us. Looking back, 2018 market was volatile certainly very interesting. We entered the year with increasing benchmark prices, supported by an improving global supply demand outlook. However, as we all know, the second half of 2018 saw a significant reversal of those trends, combined with global trade disputes market access issues and prices ultimately hitting a low at the end of December before reversing yet again in the past few weeks. The Alberta business environment in the fourth quarter was also volatile, with our realized pricing for bitumen and synthetic crude down over 80% and 45% respectively versus Q3. Pipelines at capacity, storage inventory near capacity, of course, competitor uneconomic production being shut in. These headwinds, while strong in the quarter, have occurred before.
I know that both investors and analysts want to look forward to 2019. We do have a great deal of good news to report for the fourth quarter. Once again, the resiliency of our business model in difficult environments was clear as we generated CAD 2 billion in funds from operations and returned value to our shareholders with over CAD 1.7 billion in dividends and share repurchases. We did this and maintained a strong balance sheet.
Being able to generate cash flow through a volatile commodity cycle is a strength. We're able to do so because of our long-term focus on integration between upstream and downstream assets and because we've secured strategic long-term pipeline commitments, mitigating our market access risk. Our ongoing focus on safe and reliable operating performance was highlighted in Q4. We achieved quarterly and annual performance records in many of our upstream and downstream assets. I'll now hand it over to Mark to provide more context on our solid operating performance.
Thanks, Steve. Good morning, everybody. Our fourth quarter operational results demonstrate Suncor's unwavering commitment to operational excellence, which we've talked a lot about. A long list of achievements highlight the production capabilities of our assets with a record total upstream production of 831,000 bbls a day, including record total oil sands production of 741,000 bbls a day. Syncrude had a production record of 210,000 bbls per day net to Suncor or 101% of nameplate capacity. Fort Hills achieved utilization of 94% for the quarter, exceeding our accelerated midpoint guidance of 90%. Hebron continued its successful ramp-up, achieving average production of more than 15,000 bbls per day net to Suncor following the completion of the fourth production well. Finally, in the downstream, we achieved record crude throughput at our refineries of 468,000 bbls per day.
This performance reflects the hard work of Suncor employees and the contractor community. I'd like to take a moment just to thank the team and all their personal commitment to operate safely and reliably, which clearly drove the outstanding quarterly results. I'm also extremely proud of the successful ramp-up of Fort Hills, which achieved the increased target of averaging 90% utilization in the fourth quarter. We just bumped it up to that level in the third quarter of last year and gave the team a new challenge. We also saw a successful return to more reliable operations at Syncrude following unplanned outages earlier in the year. Strong reliability leads to low operating costs. That was certainly the case for both of these assets in the fourth quarter.
Fort Hills cash operating costs of CAD 24.85 per bbl and Syncrude cash operating costs of CAD 31.75 per bbl, representing a decrease of 25% and 50% respectively from the third quarter. Remember, those costs are in Canadian dollars, so converted to U.S. dollars, Fort Hills cash operating costs were $19 a bbl and Syncrude's were $24 a bbl. As you know, there are some minor operational challenges at our Base Plant during the quarter.
Total oil sands operations production of 433,000 bbls per day reflects both planned and unplanned maintenance at our Upgrader two, which resulted in overall upgrader utilization of approximately 80% for the quarter. The Base Plant returned to normal operating levels following the completion of the unplanned maintenance in late Q4. Our in situ assets continue to operate reliably, albeit slightly below the record levels achieved in the third quarter.
This was a result of seasonal volatility and planned upgrader maintenance. On a full year basis, Suncor's in situ assets achieved a new bitumen production record of 240,000 bbls per day on a nameplate of 241,000 bbls per day. They had a fabulous year. Moving to the offshore E&P, our East Coast assets were impacted by a severe storm that required all platforms in the region to be safely shut in for approximately one week. These events, coupled with an unplanned outage at Buzzard, which was resolved by the end of the quarter, resulted in average total E&P production of 90,000 bbls per day for the quarter. On a full year basis, total upstream production of 732,000 bbls per day represents a new annual record and an increase of 7% over our 2017 production.
This includes the successful ramp-up of Fort Hills and Hebron and the completion of the most significant planned maintenance program in Suncor's history. Looking forward, we will focus on facility debottlenecking, cost reductions, and margin improvements that will increase annual cash flow between 2020 and 2023, with a target of CAD 2 billion of incremental cash flow per year thereafter.
We'll continue our operational excellence journey, including persistently improving our maintenance and reliability practices, reducing operating costs across all our assets, and that includes the support that we have for Syncrude on their reliability journey. Deploying and implementing technology such as the autonomous haul systems, or our tailings management system, PASS, and the leveraging digital technology across the enterprise will be instrumental to our continued progress in improving reliability and reducing costs. We also have a number of growth projects in the works.
For example, our sanctioned offshore developments off the East Coast of Canada and in the North Sea, pre-investment analysis on the replacement of our coke fire boilers with low-cost, high-efficiency cogen, and the construction of the Syncrude bi-directional pipeline, which we expect to be operational by the end of 2020. All of these projects are expected to improve productivity and increase margins and are not affected by current egress challenges in Western Canada. In summary, through cost reduction, margin improvement, and production debottlenecks, we have the potential for significant cash flow growth over the next several years, regardless of market conditions. I can assure you that the team is all over it. With that, I'll pass it on to Alister, and he can provide some color on our financial results.
Thanks, Mark. I know as Steve mentioned, the business environment during the fourth quarter was volatile, with average Brent, WTI, and WCS benchmark prices declining 10%, 15%, and 60% respectively from the Q3 level. While those levels have occurred before, the widening of the Western Canadian light oil differential to an average of more than $25 during the quarter was unique. This volatility translated directly into significantly lower price realizations across the upstream energy industry. This declining price environment for crude oil and finished products also resulted in a net CAD 385 million after-tax charge associated with FIFO accounting and related inventory valuation adjustment. Despite these headwinds, Suncor demonstrated the resiliency of our business model, we generated 2 billion in funds from operations and CAD 580 million in operating earnings in the quarter.
This brings our annual totals to a record CAD 10.2 billion in funds from operations and CAD 4.3 billion in operating earnings. These quarterly and annual financial results are a testament to the value of our integrated business model, which is able to capture much of the value of widening differentials with record downstream annual operating earnings and funds from operations of CAD 3.2 billion and CAD 3.8 billion, respectively. During the quarter, we saw significant value in our stock price and continued to execute aggressively on the stock buyback program. We are purchasing CAD 1.2 billion of shares at an average price of just under CAD 44. On an annual basis, we repurchased more than 64 million shares for CAD 3.1 billion, which was funded by the CAD 3.9 billion of discretionary free funds flow generated in 2018.
Given the accelerated purchasing of our stock in the fourth quarter, we expect to complete the current CAD 3 billion stock buyback program by the end of February. Accordingly, our board of directors has approved an additional CAD 2 billion of stock buybacks. Our board also authorized a substantial 17% increase in our dividend, which marks 17 years of consecutive annualized dividend increases. This dividend increase is supported by the structural improvements to our free fund flow through strategic countercyclical investments and operating performance of Fort Hills and Hebron and additional interest in Syncrude. Our dividend is not dependent on a high oil price. We are able to fund our dividend and sustaining capital at a $45 per bbl oil price. With that, I am going to hand you back to Steve for some closing thoughts.
Thanks, Alister. Looking back to 2018, I think the resiliency of our business model was tested through high and low realized price environments. As Alister emphasized, we achieved record funds from operations of CAD 10.2 billion and returned over CAD 5.4 billion of that to our shareholders. That represents more than a 50% of funds from operations being returned to shareholders. It is this past performance that provides us with the confidence as we look forward to 2019 and beyond. Our business is built to mitigate the volatility the industry has experienced and the cyclical nature of this commodity business. It allows us to focus on creating long-term shareholder value. We will remain capital disciplined. The midpoints of 2019 capital and production guidance represents a flat capital spend compared to 2018 and a year-over-year production increase of approximately 10%.
That includes the estimated effects of the Alberta government mandatory production curtailment. We will also continue to operate our assets in a safe and reliable manner in keeping with our operational excellence standard. We remain committed to returning value to our shareholders. The execution of our CAD 3 billion stock buyback program, a further CAD 2 billion stock buyback program, and a 17% dividend increase demonstrates the ability of our business model to substantially grow shareholder returns.
We plan to invest capital in 2019 through to 2023 to grow production through debottlenecks, enhance margins, and reduce costs. In turn, we expect to generate incremental cash flow in each year during this period, culminating in more than CAD 2 billion of annual cash flow in 2023 and beyond. This will enable us to continue to grow dividends, continue stock buybacks, and continue to invest in our business, all whilst maintaining a strong balance sheet. With that, I'll pass back to Trevor.
Thank you, Steve, Alister, and Mark. I will turn the call back to the operator now to take questions.
Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Neil Mehta with Goldman Sachs. Your line is now open.
Good morning, thanks for taking the time this morning. The first question I had this morning was about the Alberta production curtailments. Steve, curious, your views on the duration of these cuts. Talk a little bit about what's happening on the ground from your asset portfolio. Where are you curtailing production? How are you actually executing the mandates that have been provided to you?
Okay. Yeah. Thanks, Neil. I think I'm going to get a lot of questions over the next half an hour on curtailment. If you forgive me, what I think I'll do is make a few general comments which will context the situation, both generally and specifically for Suncor, I think it will answer your questions, Neil. The first thing I would say is Suncor is unique in this particular sector because of that integrated model we have. We have the 600,000 bbls a day of upgrading. We have 460,000 bbls a day of refining. We have strong, very strong pipeline access logistics. We're very well positioned. Of course, I am on the record. I do not support these curtailments. I'm disappointed in the fact that the Alberta government has got us into this situation.
We are working with the government to make sure that the unintended consequences are minimized. Let me start to answer your question. First off, I'll take it even higher level than just curtailment. I expect everything else broadly equal. That 2019 for Suncor will look very similar financially to 2018. That won't surprise anyone because we put out our 2019 guidance, we took into account the curtailment. Our expectation is we will produce between 780 and 820,000 bbls a day. That's a 10% growth from 2018 to 2019, that takes fully into account what we anticipate from the curtailment. In direct answer to your question, I suspect, you have to talk to the Alberta government, that what they're seeing is that the unintended consequences we highlighted are happening a bit faster than they expected.
If you look at what's happened, the differential corrected and over-corrected very quickly. The unintended consequence of that is that the rail economics are seriously damaged, a lot of the rail movements are stopping or have stopped. That's going to have the opposite impact to what the government want. What we've seen is, I think, ahead of everybody's expectations, they've started to reduce the curtailment already by that 75,000 bbls a day. Our advice to government has been, you're seeing these impacts. We take them through the unique lens that we in industry have on it's time to start planning for what we call a soft landing or a soft exit. That the strategy to remove these curtailments, the strategy needs to be fair, transparent, and understood.
Every indication that we can see is from these first moves, is it's starting to happen. If I summarized all that lot, I would say nobody's immune to it. We're relatively immune because of the upgrading, refining, and logistics we have. We have the vast majority of all of our materials, including products, moving by pipelines. We still think our guidance is good. We're not anticipating, for now, moving away from the 780-820. If anything, we see curtailment coming off a little bit early.
To paraphrase a little bit, Steve, is what you're saying from a cash flow perspective for Suncor specifically, is that you will see some lost cash flow, obviously, from the loss in production, given that the differentials have tightened up, should we think of this as a net neutral from a cash flow perspective of Suncor?
Of course, it depends on all of your assumptions in there. I'd probably say, if anything, I'd be a little bit more bullish than that. It depends on your assumption where you believe differentials end. With differentials moved so significantly, like everyone else in a sense, even with the curtailment, everything else equal, we were a benefactor because the increase in margin applied to 90% of our production. I think in the worst case, we are neutral, maybe even slightly positive to it. It depends on where you think the differentials end up. Our view is that the market should be allowed to work. Even to meet the Alberta government's objectives, these differentials need to come back so that rail economics work. Right now there are rail facilities capable of moving crude and bitumen, which are not in operation.
Thanks. Looking out a little longer term, appreciate the guidance that you provided here on slide three, which gives us cash flow growth out through 2023. A couple questions on this. Is this a cash flow per share CAGR or an absolute cash flow number? As you think about the pluses and minuses, it seems to us like this could be a conservative number even in a flat price environment where there's some upside risk to it. Just any thoughts on how you think about this long-term cash flow guidance?
I agree with you. I'll let Alister answer, but I think you're right. I think it is a conservative number.
Yeah, Neil, on that slide three, that's an absolute increase in cash flow over that period of time. To the extent that we're buying stock, and we obviously expect to continue to do that over the next several years, those numbers would increase, yes. I agree with Steve. I think they're probably conservative.
Thank you.
Our next question comes from Greg Pardy with RBC Capital Markets. Your line is now open.
Thanks. Good morning. Steve, I was just hoping to jump into some of the operating side of the business. You did touch on the Syncrude bi-directional pipeline. It sounds like the commercial side of things is there. Can you just walk us through what the next steps are, when construction might start, that kind of thing?
Yeah, I'll let Mark take us through the details, Greg. Yeah, the partners are pretty much agreed on it. We're actually doing the detailed work on it now, but let Mark take us through what the program looks like.
Yeah. Thanks, Greg. We went through and ended up getting the agreement in place. You can appreciate we're swapping commodities between the two sites and picking up uplifts between the two sites and dealing with maintenance events and all that kind of stuff. The commercial agreement was actually quite involved to try and sort out, okay, who's paying for the line? How do you split the benefits and those sorts of things. All that's behind us. We're in the process of doing the engineering and such and preparing for the field work. We expect construction to begin in the not too distant future, and we'll end up putting the line in service towards the latter part of 2020. We expect it to be fully in place. That's a little later than what we originally said.
We were hoping to have it in place and operational for all of 2020, so it's a little later, and a lot of that was just held up on the commercial work. The work is progressing very nicely now, and all the partners are working hard to get that in place, because everybody realizes this is significant to us achieving our 90% utilization, our CAD 30 a bbl operating cost that we committed to quite some time ago.
Okay, thanks. That will then mean that you'll have feedstock redundancy at Syncrude then that will come from what, Fort Hills, MacKay, and Firebag? Will you have just kind of a cocktail in terms of what you can choose from?
Well, we will have the ability to do that. Right now, we view that it'll be Firebag as the way that it's kind of constituted now to be able to move it in, but we have the flexibility. Unlikely we would do MacKay, but we certainly have the capability to move in Fort Hills. Whether that particular connection's in place by then or not is still in debate.
Okay.
It does give us feedstock flexibility. It also allows, during Syncrude turnarounds with their cokers, to be able to move bitumen from Syncrude to our base plant and run it, and then us export more bitumen. We also have the ability to move sour synthetics from our base plant into Syncrude and hydrotreat them and sell sweet synthetics. There's a lot of different ways we can manage it. All the scenarios I just talked about don't account for upset conditions. Upset conditions is where you could make very significant amounts of money because it can be the difference between running and not running.
Okay. You guys also have quite a plan with respect to autonomous haul trucks, I think in your Millennium as well as Fort Hills. Could you talk about that program? Do you see any plan to run autonomous haul trucks at Syncrude eventually?
It's interesting. One of the things that opened up the opportunity for us to do autonomous haul trucks right now was we came to the end of the natural life of our fleet. We had to decide how we were going to move forward, and our view was if we were going to invest in a new fleet, we should make sure that it was autonomous and we worked all the various technologies. Syncrude isn't at that stage. We would expect that this would be something they would look at significantly, and we have a lot of experience with it by the time they get to their fleet turnover, which is several years out. Right now, in the North Steepbank Mine, we have autonomous haul trucks operating there, and I think we have about 20 autonomous haul trucks that are operational.
We're in the process now of getting ready to start turning on some of that at Fort Hills. At Fort Hills, we never actually hired permanent staff to operate the trucks in anticipation of us putting in autonomous haul trucks. So we have some people doing contract work today. The intent would be over the next several years to be able to roll this through and turn all of our operated mines at Base Plant and at Fort Hills to fully autonomous.
Okay. Terrific. Last question from me then is just shifting gears to realizations at Fort Hills. Significantly better as we expected. Could you give us any color in terms of where you would have placed those barrels? Was that kind of a combination then of PADD 2 and U.S. Gulf Coast?
Yeah. It's interesting, the yield. Because we cut off the bottom almost 10% of the barrel, which is asphaltenes, and put it back into the ground, a couple of things happen. When that barrel gets run through an upgrade or a refinery, your product yield is about 6%-7% higher. So you're going to get a premium of 6%-7% just on yield. Your diluent requirements to ship it on a pipeline are better, and so because of that, it's more efficient, lower cost. So because we use less pipeline space, we gain on the logistics. Then the other issue is we were able to send a bunch of that to the U.S. Gulf Coast, not exclusively, and so we were able to access a premium market. So it's product yield, logistics, and the premium market that drove the differential.
Terrific. Thanks very much.
Thanks, Greg.
Our next question comes from Paul Cheng with Barclays. Your line is now open.
Hey, guys. Good morning.
Good morning.
Mark and Steve, I know that you guys have been driving operational excellence all this year. If we look at the base mine operation and the upgrader, last year is about 80% utilization rate, versus that the year before in 2017, you hit close to about 91%. 2016, you were about 75%, and 2015 you were roughly about 91%, 92%. It look like that you remain inconsistent in terms of your reliability. If we look back, is there anything that we learn or that we would just say, oh, the low utilization rate or the unplanned downtime is just purely unlucky? There's something that we learn throughout that process and will be able to help us in the future in terms of whether it's changing the procedure, the process, or that introduce new technologies.
No, I would say, overall, there's nothing sinister about those numbers. There's not been any major issues there that are concerning us. I think operational excellence are addressing them. Of course, last year was a major turnaround year for us. I think Mark actually used the words we took across all of our assets, not just the Base Plant upgraders. We took the largest turnaround program that we've executed. Not surprisingly, in a sense, because Suncor has more assets now as we brought on more facilities. Nothing sinister there. We're working on it, and we would expect to see those utilizations continue to increase.
Steve, maybe I would just add to that. The other year that you pointed out that was down a bit was 2016, which was also a turnaround year. Right now we're on a five-year time window. The next two years, we're upgrading utilization, we expect to be down a little bit is 2021 and 2023. Paul, you know we've talked about a few of the little operating issues and such that we had through this period. There are some learnings and things that we incorporate and continue to strengthen our position on. The biggest issue in that pattern is the turnarounds.
Mark, that means that there will only be, because I think the company has been talking about on a sustainable basis on a 90%+ utilization rate. Is that what it means is that during the relatively light turnaround year, you could achieve that, but in a heavy turnaround year that you won't be able to do it? On an average for a five-year cycle, you actually will be less than 90% utilization rate?
Well, I think, Paul, you noted in there is that we're actually working to ensure that we can achieve 90% over that cycle. Some years, as you already commented on, it's over 90%, some years it's at under 90%. We continue to work to optimize this, to try and make sure that we maximize the utilization of these assets.
You're still targeting, say, on an average for the five-year cycle, you'll still be able to get to 90% or better?
Yes.
Okay. You think that in the next five years that that is achievable?
Yes.
Okay. I know you guys normally don't get into the quarterly production guidance, but given all the curtailment and everything, is there some number that you can share in the first quarter? Because the curtailment seems like it's asset by asset. I think actually a little bit surprised that, given you anyway, that cannot run at the full capacity. Is that we have no ability there for us to push some of the turnaround that we may need to do later the year into the first quarter?
As you say, Paul, for this call, and just generally, Suncor is a long-term player. Our strategy is all about the mid and long term. We've got our balance sheet in a position where we can manage the long term. We don't normally get into monthly or quarterly guidance. We've been very clear about our guidance. We expect to be 780 to 820 for the year, which is a 10% increase year-over-year, taking account of the curtailment. If anything, it could be towards the top end of that as we're seeing curtailment come off a little bit faster than was originally planned by the government. We wouldn't get into quarterly guidance.
Okay. Understand.
Paul, maybe I'd just add one point to that is, there's a reason why in late Q4 and Q1, we run everything 100% of the time. A lot of this equipment has water in it. With the very cold conditions, we don't view it safe to be able to take these assets offline. Obviously, if an incident happens and we have to deal with it, we have to deal with it. It's interesting this past week in Fort Mac, I think with wind chill, it was -52 degrees Celsius, and absolute it was -38 degrees Celsius. You can imagine if we shut down during that period, just how unproductive it would be. We view unsafe. That's why we don't do it.
Great. A final question from me. For Fort Hills, your production is already 94% utilization rate, so incrementally, the benefit from a higher volume seems like it's going to be somewhat limited. Your cost is about CAD 25, and I think you have a target down to about CAD 20 or less. Assume moving into the driverless truck will save about CAD 1. What else that we should be looking at that will help you to drive it down to below CAD 20?
It's too early to be doing those calculations from a distance, Paul. The plant is not in equilibrium yet, so we haven't got the mine in equilibrium with the operation. Because we came up much faster, or at the very fast end of what we were anticipating, we've had to get ahead in terms of getting the size of the pit and the overburden in a position where we like it. We still see the costs coming down below CAD 20 a bbl, obviously, much less U.S.
Autonomous trucks is potentially part of that. We also haven't talked yet about where we think we can take the plant. Mark talked about his CAD 2 billion a year by 2023. Part of that is going to be a much lower than greenfield cost debottleneck of Fort Hills. We think we've got some significant scope there that we're working on as well. We think there's much progress can be made on per barrel operating costs.
Thank you.
Our next question comes from Dennis Fong with Canaccord Genuity. Your line's now open.
Hi, good morning, and thanks for taking my questions. Just quickly to follow on the Fort Hills component. You've spoken in the past in terms of the about 40,000 bbl a day, the bottlenecking, and given, kind of in the past, you've mentioned that you're testing the pieces of equipment both in, we'll call it, warmer weathers in the summer, as well as the colder temperatures now. Are there any specific takeaways in terms of saying that you could potentially push that 40,000 bbl a day as a bottlenecking volume further than that, given how much redundancy you actually have built out in terms of the mining side of things?
I would just say it's just a little bit early, Dennis, to be coming to any conclusions. Here we are, just completing the first year when most of the industry's plants haven't even been up to full capacity by that stage. We've got it up to full capacity. It's going very well. We can already see that 20,000 to 40,000 bbl a day debottleneck. We won't rest at that point. We'll be looking for what else is available.
Okay, perfect. Then just quickly, subsequent to that, in terms of, we'll call it, they're obviously fairly capitally efficient projects to kind of unlock that incremental value there. How should we think about, we'll call it, maybe trigger points in which you would look at sanctioning some of those projects? The thought shouldn't be, I don't believe, is that you require incremental egress, but it's like, what are some of the checkboxes that you feel like need to tick off to feel comfortable sanctioning some of those
Yeah. A couple of comments I would make. Some of them are capital, some of them are not capital. Some of it is in progress right now, and you will start to see some of that cash appear this year and next year, which is sort of the very front end of what you could spend in a capital sense. We'll obviously talk as we trigger because Several reasons why we are doing this program at this time, and it's not a coincidence.
We viewed that market access would be challenging through this period until Line three comes on this year, until the rail capacity comes on, and then at least one of the other pipelines comes on. We deliberately targeted, and of course, we brought big investments on anyway. As part of our capital discipline, it made sense. Okay, we've made the big investments.
Now we'll start to bring that program in. We'll start to focus on projects. They're margin projects, not purely production projects. There is a small amount of production in there, but not of the sort of Fort Hills size. Right now, we have all of our production covered by pipelines. We're looking at alternatives, and to trigger the next major capital and major growth phase, we will want to see some real progress on pipelines.
This program fits perfectly with that. I don't know if Mark wants to comment, but Mark is right in the midst now of the detail of that program, which is the CAD 500 million each year, adding up to CAD 2 billion additional cash flow a year by 2023. We have the detail. I wouldn't propose we go through it here, but we can do as we come out on the road. We have the details of that program now. We're very optimistic about being able to achieve it.
Okay, perfect. Last question here, and maybe this one's a little bit more for Alister, is obviously Q4 had a bunch of kind of FIFO, LIFO adjustments and so forth. How should we be thinking about, we'll call it, purchase product costs for the downstream segment kind of going into Q1, but as well as potentially the sourcing of, we'll call it, cheaper diluent and potentially bitumen realizations as you go through on a quarter-over-quarter basis and maybe even kind of transitioning through the rest of the year? Thanks.
Yeah, Dennis. On the FIFO, the inventory adjustments, it was a net negative CAD 384 million after tax for the quarter. As you think about it, you started Q4 coming in at roughly just under CAD 70, high 60s WTI, and it went down to, I think into the mid 40s. Roughly a CAD 25 fall generated at net, so just under CAD 400 million of FIFO loss. As you see WTI beginning to move back up and we're already up to mid 50s, 54-ish, you're going to see that begin to come back in.
There is a roughly two-month lag between the prices coming up and it getting reflected through into our results. You'll see some of that come back in Q1. If you don't go beyond the current levels, you're probably not going to get it all back in 2019. If we continue to run up into the 60s, you should see most of it come back. It will take some time. It probably depends on where the price of WTI goes. On the diluent side, I think that just yes, certainly that will help us as we move through and move our product down the pipes, but I don't think it has a significant impact to us.
Okay, perfect. Thank you.
Our next question comes from Roger Read with Wells Fargo. Your line is now open.
Yeah, thank you. Good morning. Steve, I was wondering if we could come back. You mentioned unintended consequences of the proration in the near term. Any thoughts on what some of the unintended consequences may be in the medium and longer term of the proration cut?
Well, I'll take longer term to go beyond these problems we're seeing with rail, I'm guessing that this curtailment will be pulled back quite rapidly to make sure that rail economics can work. Otherwise, it's having the opposite effect to what it was intended to do. I think the biggest one is around confidence, and it's the most difficult for anybody to quantify. I hope what you can see is that our model, in a sense, it rises above that. Our discretionary capital is targeted at marginal incremental growth through this period, as we just talked about. We need some pipeline access. What we've been able to demonstrate, and I wish we didn't have to see the extremes of these cycles to demonstrate it, is that we are a very cash-generative company.
We're able to cover our non-discretionary capital and our dividends at very low crude prices, probably setting a benchmark in the industry. We've been able to demonstrate confidence in our model. I think the thing I would say is, there has been, without doubt, an off Canada signal, I hope what this performance is going to show that we really don't deserve that we are impacted, the extent of that impact is largely mitigated by our business strategy and our access.
We really belong in this context more alongside the super majors than we do our peers in Canada, our cash flow is very strong, even at the bottom of this cycle when things are difficult. That's the message you're going to hear us trying to get out there, that we're not completely immune, but we're largely immune to these cyclical impacts. I think the other comment I would make is, it's a signal we're trying to get into government, is find a way out of this it's going to start to look very difficult. You've seen from the commentary from the industry, some are affected to a far greater extent than we are. What's most important about this exit strategy is that it's fair and transparent.
Okay, great. Thanks for that. I don't know, Mark, if this is a question for you or not. I know you don't like to get into the quarterly guidance, but as we think about refining the downstream here in the first half of the year, the much narrower differentials for the heavy crude is obviously going to have some impact on profitability. As we think about a cash margin, not so much the change LIFO to FIFO, how should we think about throughputs in the downstream, particularly coming off what was a record quarter on volumes?
Particularly, I guess back to my Q1 comment about running the assets. Certainly, our intent is to continue to run the assets hard. The allocation of cash moves around in our model. That's the joy of the integrated model that Steve's talked to. We do expect a lot of the cash generation to shift back to the upstream out of the downstream. The joy is that whatever the market conditions are, whether the spreads are narrow or whether there's curtailment or not curtailment, the machine and the integrated model actually generates cash.
I think from an investor's perspective, that's the key point, is that in all market conditions, we're generating cash, returning cash to shareholders, and continuing to invest in the business and the overall model. We are expecting the Q1 results, that the cash is going to move around in the model significantly, as you pointed out, Roger. We're expecting that that will continue to drive cash flow and value for the shareholder.
Okay, great. That helps on the volume thoughts. Appreciate it.
Our next question comes from Mike Dunn with GMP FirstEnergy. Your line is now open.
Good morning. Thanks for taking my question, folks. Steve, Mark, Alister, just wondering if you could provide some color or insight as to how the board is thinking about the sustainability or what you can afford to pay for a dividend. It's the 17th year in a row of a dividend increase. You've outlined some paths to growing cash flow even without pipeline egress here. I'm just trying to understand. I know your slides present a $45 WTI, call it, free cash flow breakeven to fund sustaining capital and the new dividend level. Is that 45 number not a bad way to think about the threshold that's needed going forward for the next few years? I'm sure it's not that simple, is that one of the considerations, a $45 WTI breakeven? Thanks.
Yeah. Let me just give you a few comments, Mike. If you go back, a promise that we made was as underlying production and therefore cash generation came up, you would see the dividend come up. We've been through a relatively heavy capital period with Fort Hills and Hebron, we've been, in a sense, holding back dividend whilst we were going through that program. In fact, the market gave us more cash than the base case we were planning on. You've seen substantial share buybacks through that period. As you say, what we like to do is, we think we've got a relatively low breakeven price on crude to cover sustaining capital and dividend. We talk about that less than $45, and Mark's talked about our programs to get that number even lower if possible.
We've kept the flexibility, you can see even this year, through a relatively difficult to forecast and volatile period, we're in the process of just completing the first CAD 3 billion, we'll be quickly starting this next CAD 2 billion buyback. You can see a very high degree of confidence from the board because we have a track record of when we say we're going to buy back the stock.
When we put the program in place, we buy the stock back. I think what it says is, of course it's a board decision in the end dividend, we don't feel as though we've used all of it. We still think we have some firepower there. Very happy through this period. We think balance sheet is in great shape. We're happy with the CAD 2 billion and the 17% increase in dividend.
You could see all of those continue to move because I know in your models, your model is a good one. When you put the numbers in, we talk about similar cash flows this year to last year. We've been getting up above CAD 10 billion cash flows per year, even in these markets. You don't have to have big changes before that number can become significantly higher again. We think there's scope to bring the dividend up further and scope to continue significant share buybacks.
Thanks, Steve. Thanks, all. It's all for me.
Thanks, Mike.
Our next question comes from Phil Gresh with JPMorgan. Your line's now open.
Yes. Hi, good morning. First question is just on the Coker project, how you think about that today. I'm thinking about this in light of the production cut impacts and the fact that in an environment where the Coker could have been very economic, that got taken away because of the government cuts. Do you still see it as a strategic project long term if you want to expand upstream production in the long run?
Phil, we sure do. It's interesting with bitumen because it's a bit of a unique commodity. For it to be of value, it needs to be converted into products of value, whether it's jet fuel, diesel, or asphalt. As production of bitumen increases, it needs to get converted. We think this is a good project. Obviously, it takes literally years to be able to build these assets and get them online. As a result of that, as we look forward, the curtailment we just view as a little speed bump in the road. If we believed that the Alberta government was going to be in the markets literally for decades, this would have a dramatic effect, but we don't view that it's relevant to our investment decision.
Is there a particular timeframe where you're hoping to make a decision on the Coker?
We're working through it right now, and we're expecting that we'll likely make that decision by the end of 2019.
Okay, got it. Steve, how about your latest thoughts just on M&A at this point? Are you just mostly focused on these organic opportunities to improve cash flow, or do you still think there are M&A opportunities this cycle?
Phil, I would say business as usual. Judge us by our track record. One of the things we've done through all of what we've been discussing around curtailment and dividend and share buyback, we've kept our balance sheet in a very healthy condition. The biggest impact on debt has been foreign exchange conversions over the last six months. Our record is one of keep a strong balance sheet to the extent you can, buy countercyclically if you're going to do it. We screen everything in the downstream on this continent. We screen everything in and around the oil sands business and around our E&P business. We look at step outs on our existing reservoirs or facilities or small bolt-ons. That strategy isn't changing. I think if anything is changing out there are potential opportunities that we're looking at.
There's nothing particular we're looking at right as we speak at this moment. This market is probably going to throw up some opportunities over the next 12-24 months. One of the benefits of this integrated model is it leaves us strong through this period. Not everybody else is through that. You've seen even with M&A talked about, particularly in oil sands over the last few months, you've not seen Suncor becoming involved in that. I think, clearly, Mark needs to express his position through time. You'll see us sticking to the discipline and the rigor we've applied to M&A.
Okay, thanks. My last question, I guess this would be for Alister. If I look at that 2019 guidance for FFO in slide 11 being flattish with 2018 despite a CAD 7 a bbl reduction in the WTI price. Is that just basically the production benefits and a lower maintenance year or are there any other moving pieces we should be thinking about behind the scenes there?
No. it's essentially, production increases, as Steve outlined where we're at and taking some more costs out of our business.
Okay.
Offsetting the fall and the expected price.
Yep. Okay. Thanks a lot.
Our next question comes from Jon Morrison with CIBC Capital Markets. Your line is now open.
Morning, all. Maybe just to follow on Mike's question, is there anything at this stage outside of a major drop in the crude price or more material widening in Canadian diff than you might have baked into your base case expectations for the coming quarters that would give you pause to not start moving through the incremental buyback program in a fairly linear fashion? Obviously, once you get through the current one that should be done this month.
No, nothing we can see. That's why we're speaking to it so strongly, Jon. As I say, within days, weeks, we're close to completing the first CAD 3 billion. You'll see us move straight into the other CAD 2 billion. No, we can't see anything on the horizon that would cause us to not do that in a relatively ratable fashion. Of course, one of the things we've always talked about from the very beginnings of our share buyback is we don't want to get caught in that trap because where we can't afford to buy it when the stock is low.
For us, it's a return decision we make versus our other best alternatives. We find our stock very attractive at these prices. Actually, when the price is lower, often associated with when day to day, week to week, month to month cash flows are low, that's exactly when we want to buy. That's why we've been buying heavily through this cycle. No, we can't see anything on the horizon which would cause us to hesitate, yeah.
Steve, you made comments in terms of crude by rail volumes slipping, and that's obviously in line with what Imperial messaged last week. Given that backdrop, do you have any concerns about a potential major blow out in diff towards the end of the year? Should we see the Line three replacement get pushed in any way? Secondarily, do you believe that the industry is actually going to be able to ramp back up to something in the, call it, low to mid 300,000 bbl a day for CBR exports if it does, in fact, come down hard in the next two to three months?
I hear the theory of that question. I would say there are some seasonal things which happen, which haven't quite been taken into account yet, which will help the situation in the short term, which I think causes this curtailment to potentially come off quicker than is being anticipated. The first one is the industry goes into maintenance as we get into the second quarter. The pressure on the supply side will start to come off. The other piece that happens is, as temperatures start to come up, the diluent blending ratios on bitumen start to change. We don't have to put so much diluent into the blend. The volumes going down the line will decrease for the same amount of production on the supply side.
You're going to see the pressure starting to come off as we go through the next two or three months on the supply side. Every indication on Line three is it's progressing well. In fact, it could well be calling for line fill, which is quite significant, a lot earlier than the end of the year if the progress continues. If anything, I think the pressure is coming off. There's always the possibility of it. My guess is that this time through, there's a fair amount of crude by rail capacity starting to come on. Of course, it's a major part of some companies' strategies.
That's around the loading facility, buying the locomotives, and getting the manpower to use it. I think the industry does have the capacity. I also think on the demand side, with what's going on in Venezuela and Mexico at the moment, there's going to be a clear pull for it from a demand point of view. I think for us, we're in that situation where I think supply can come up, demand is increasing, and I think the U.S. will see a strong supply from Canada as a strategic benefit.
That's helpful. Maybe if I could squeeze in one last one, and it's probably best for Mark. There was obviously expected downtime at U2 and then unexpected that came through. Can you give any more color on what the unexpected downtime was? Is there anything there that would give you concern of potential hangover effects in future quarters? Is all of the comments that you've previously made in disclosures around planned 2019 maintenance largely hold at this point?
Yeah. We think our disclosures largely hold. Every time there's an unplanned event, there's something that we didn't foresee happen. A lot of this is related to assets that have been on the ground for very long periods of time. We deal with it, we learn from it, we mitigate it happening in other locations and move on. The organization's been very disciplined about that. The disclosures that we have is what we're fully expecting in 2019, and that's where we're at. Thanks, Jon.
Appreciate the color. Turn it back.
I would now like to turn the call back over to Trevor for closing remarks.
Thank you, operator. Thanks everyone for attending the call today. For those who didn't get their questions answered or have follow-up questions, please reach out to the IR team. We'll be around all day and happy to discuss those. Thanks again.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.