Earnings Call: Q2 2018

Jul 26, 2018

Good day, ladies and gentlemen, and welcome to the Suncor Energy Second Quarter 2018 Financial Results Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call may be recorded. I would now like to turn the call over to Trevor Vail, Vice President of Investor Relations. You may begin. Thank you, operator, and good morning, everyone. Welcome to Suncor Energy's 2nd quarter earnings call. With me here in Calgary this morning are Steve Williams, President and Chief Executive Officer Mark Little, Chief Operating Officer and Alister Cowen, Chief Financial Officer. Please note that today's comments contain forward looking information. Actual results may differ materially from the results because of various risk factors and assumptions that are described in our Q2 earnings release as well as our current annual information form, and 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 Q2 earnings release. After our formal remarks, we will open the call to questions, first from members of the investment community and then, time permitting, to members of the media. I'll now hand it over to Steve Williams for his comments. Good morning and thank you for joining us. Our strong second quarter financial results show the earnings potential of our assets. Although we experienced some operational challenges, we were able to post the best ever second quarter funds flow in our company's history. During the quarter, the business environment had rising commodity prices supported by decreasing global inventory levels. There was also significant volatility in relation to differentials and pipeline egress across North America. This was particularly the case in Canada where short term impacts of operational disruptions and extensive turnarounds during the quarter created significant volatility for Western Heavy and Synthetic barrels. However, with industry turnarounds in the region complete and operations ramping up to normal levels, we expect the longer term fundamentals of a wider light heavy differential to emerge with continued near to medium term pipeline access restrictions. For Suncor, our tightly integrated strategy coupled with our strong logistics capability allow us to minimize downside and capture value in volatile markets, while positioning us to maximize the value of our oil production over the long term. Our results this quarter underscore the strength of our business model and we delivered the best second quarter cash flow ever with funds from operations of $2,900,000,000 and produced operating earnings of $1,200,000,000 even with the largest turnaround activity in our history. We also mitigated the light heavy differential with minimum impact on our quarterly earnings or cash flow and we're able to provide pipeline market access to accommodate all of our oil sands production, including all of the Fort Hills barrels. Turning to our operations. Fort Hills and Hebron ramped up ahead of our expectations and delivered production that exceeded our guidelines in the quarter. Both operations became free funds flow positive in the quarter. And that's a significant accomplishment. And I do want to take just a moment to recognize the teams involved for their dedication, careful planning and execution in achieving this remarkable result. We completed, as I said, the most significant turnaround maintenance schedule in our history. And while this had a short term impact on production and cost, our base plant and refineries are now running at full rates positioning us for strong results over the second half of twenty eighteen and into the future. Late in the quarter Syncrude experienced a site wide disruption, which resulted in a complete shutdown of all processing units. Working with the operator, we outlined a restart plan earlier this month and Syncrude is on target to meet that plan. The first coker with a capacity of 150,000 barrels per day started to produce finished product on the 16th July. The second coker with an additional 100,000 barrels per day of capacity is expected to return to service in the first half of August and full production with the last coker online is expected in early to mid September. We were disappointed with the outage and to be frank, I am not satisfied with the assets operational performance. We continue to engage with the Syncrude owners on the need to accelerate the necessary strategic initiatives, which we believe will drive long term reliability of this plant. Progress has been made and I continue to believe that all of the operational challenges observed are items that can and will be fixed. We were on this journey with our base plant reliability in the early part of the decade and we learned the path to operational sustainable utilization rate of 90% and cash costs of $30 per barrel or less. I remain convinced that these targets are achievable. However, this recent event emphasizes the need to accelerate Syncrude's strategic plan to ensure reliability. We continue to aggressively pursue the necessary improvements, but this does require the full cooperation of the other owners. With the majority of the short term production issues in the rearview mirror, we enter the second half of the year and what we see in the longer term is a very positive business and operational environment for our business. We remain confident we have made the right and sometimes difficult business decisions. These decisions have positioned the company to provide strong and increasing returns to shareholders whilst maintaining a healthy balance sheet and investing in future value creation. Our confidence is grounded in the fact that our major growth projects, which were constructed in a low price environment, are now ramping up ahead and doing so in a stronger price environment. Fort Hills and Hebron operations are free funds flow positive in the quarter, ahead of our expectations and their contribution will increase as they continue to ramp up. We have a series of projects in 2020 to 2023 that we believe will grow our free cash flow from our existing assets by $500,000,000 annually, which is $2,000,000,000 cumulatively. We have no market access challenges as we have pipeline access for all of our oil sands production, including the Fort Hills barrels. And our downstream business and strong logistics capability will continue to capture value in the long term with light heavy force. We believe that the impacts of IMO 2020 will benefit Suncor. Reflecting our confidence in the second half of twenty eighteen and the anticipated increase in free funds flow, our Board has authorized an increase to our existing annual NCIB program to a total of 3,000,000,000 dollars We are also increasing our capital guidance to $5,200,000,000 to $5,500,000,000 as we accelerate growth investments and reflects some increased costs from the recent operational issues. In closing, I want to emphasize that our business model and philosophy, irrespective of short term volatility, will remain laser focused on operational excellence, capital discipline, long term shareholder value creation and returning that value to our shareholders. I'm now going to ask Mark to provide some color on our operational performance in the Q2. Great. Thanks, Steve, and good morning, everybody. As Steve mentioned, the 2nd quarter operational results were mixed. And notably, we continued with the successful ramp up of our major growth projects. We also saw strong production from our in situ and offshore assets. However, those accomplishments were tempered by the recent challenges coming out of our planned turnarounds and Syncrude. As noted in our release last month, we completed a 7 day test of the Fort Hills facility running the asset in excess of 90% capacity and successfully proving out the gross nameplate capacity of 194,000 barrels a day. Fort Hills has produced 131,000 gross barrels per day in the quarter and that 71,000 barrels per day net to Suncor, significantly exceeding our 2nd quarter guidance of 30,000 to 50,000 barrels per day. Fort Hills also achieved cash operating costs of $28.55 per barrel, which was well below Q2 guidance of $40 to $50 per barrel. With the plant ramping up earlier than anticipated, the team is working now to accelerate the pace of the mine and expects to enter the 4th quarter at 90% utilization. So our target is to achieve 90% utilization for the whole quarter, 4th quarter. That timing has been reflected in our updated full year production and cash cost guidance. I also want to take a minute just to acknowledge the Fort Hills team, including our major projects and the operating team and the development functions and all of our contractors. So far, at least from my experience, in my career, this has been the best start up we've seen, although it's not over and we got to get it fully ramped up and get to our 90%. Our in situ assets continued to perform extremely well during the quarter producing 236 1,000 barrels per day of bitumen. They also achieved cash operating costs of $7.90 per barrel, which marks the Q4 in a row where our costs were below $10 a barrel. What's more, this is was accomplished while advancing Mackay River plan maintenance that has been originally scheduled for the Q3. Suncor's offshore assets contributed 114,000 barrels per day to our upstream production and continue to demonstrate their value with our diversified portfolio of assets. In fact, they generated 545,000,000 dollars of funds from operations, while other segments of our business were undergoing significant turnarounds. The strong performance from our offshore assets was consistent with the Q1. Natural declines for some assets and planned maintenance at Whiterose were almost entirely offset by the ongoing ramp up of Hebron, which averaged 13,500 barrels per day during the quarter. In the downstream, crude throughput was 344,000 barrels per day or 75 percent of nameplate capacity, reflecting the impact of significant maintenance across our refineries. However, as we discussed in the Q1, we built refined product inventories to support this planned maintenance. During the Q2, we completed significant planned maintenance, which impacted both our upstream production and downstream throughput. This is the first 5 year turnaround cycle for the U1 upgrade at our base plant and the first time we did a full plant Edmonton refinery turnaround at one time for all of the assets. There are a couple of items that extended our turnarounds. First, unseasonably cold weather at the beginning of April delayed timelines and impacted productivity. And secondly, we found additional work that exceeded our expectations and given our focus on reliable operations, good decisions were made to address these items before returning to normal operations. With that considered, Oil Sands operations produced 359,000 barrels a day. Finally, I wanted to spend some time discussing the Syncrude, which had a utilization of 58% and produced an average of 118,000 barrels per day to Suncor during the Q2. This reflects the impacts of planned maintenance as well as the power disruption that occurred on June 20, which has been included in the narrowing of our full production guidance, cash operating costs and royalty guidance. While the investigation into this incident is ongoing, we continue to work closely with Syncrude and the other owners to assist in meeting the return to service plan, which was outlined in our news release on July 9, and Steve summarized at the start of this. Suncor has contributed numerous senior personnel and resources to support Syncrude with Suncor's VP of Montreal Refinery co leading the investigation. To date, Suncor has seconded a total of 8 people into Syncrude, including the new Vice President of Production Upgrading. As a result of the incident, he is now on-site assisting with the restart. We are supporting Syncrude to improve the asset performance, building on our experience at base plant, and we continue to work with the other owners to get better alignments and accelerate the improvement plan. Looking beyond these short term challenges, we have confidence in the ability of our assets to run reliability reliably. We plan to remain within our production guidance and realize that we need to make up for some of the operational upsets that occurred in the first half of the year. Looking forward, we will continue to research and invest in strategic projects and such, such as the autonomous haul trucks, digitalization, new in situ technology and cogen opportunities. That work will be focused on the optimization of all of our assets, reducing our carbon footprint and generating additional sustainable cash flow for our shareholders. So with that, I'll turn it over to Al sir to provide some context on our financial results. Thanks, Mark, and good morning, everyone. The business environment, as we know, continued to strengthen in the Q2 with Brent increasing US7.60 dollars per barrel and both the WTI and New York Harbor 3Q1 benchmarks increasing US5 dollars per barrel compared to the Q1. Realizations were also positively impacted by the weakening Canadian dollar, resulting in the average price of our oil sands crude basket and our offshore E and P assets both increasing by approximately 15% versus Q1. This translated into more than $500,000,000 of additional upstream funds from operations when compared to the Q1 results, even though production was almost 30,000 barrels per day lower, demonstrating our leverage to increasing oil prices. In the first half of the year, the WTI WCS spread widened by US7 dollars per barrel, But as Steve mentioned earlier, this location differential continues to have minimal impact on our results. Downstream achieved strong funds from operations of $884,000,000 which as Mark noted benefited from the sale of refined product inventories strategically built in advance of the turnarounds. An additional profit of $35,000,000 after tax on the sale of intercompany inventory related to the strategy was also recorded in the corporate segment during the quarter. Suncor also successfully resolved some outstanding historical tax disputes during the quarter and recognized after tax interest income of $44,000,000 $235,000,000 of prepaid taxes that will be refunded to us in the 3rd quarter. In total, Suncor generated funds from operations of $2,900,000,000 operating earnings of $1,200,000,000 and a return on capital employed excluding major projects of just under 10%. Together, they contribute to one of the strongest second quarter results on record, which we achieved despite undertaking, as Mark and Steve have outlined, a significant planned maintenance schedule. Our confidence in the performance of Suncor's integrated model for the remainder of the year and the strengthening business environment are expected to result in significant additional funds from operations to return to shareholders, advance the capital projects and also strengthen the balance sheet. In the 1st 3 months of the current NCIB or stock buyback program, we have repurchased approximately 15,800,000 shares for $830,000,000 With this pace in mind and our confidence in our structural free funds flow growth, we have received Board approval to increase our share repurchase program by just under 50% from 2,150,000,000 dollars to $3,000,000,000 over the period May 2018 to April 2019. This underscores the strength of our integrated model and our bias to return that increased value to our shareholders. But we've also allocated some of the increasing free funds flow to capital projects and have increased our capital guidance modestly to $5,200,000,000 to $5,500,000,000 As we've stated in Q1, working interest in additional working interest acquired in Syncrude and Feinia combined with the capital versus operating cost treatment of the 3 week delay in commissioning Fort Hills took us to the high end of our guidance range of $5,000,000,000 Increasing some spend on growth capital, including advancing the purchase of autonomous haul trucks for the Fort Hills mine and pre sanctioning work of Meadow Creek and Buzzard 2 in the later part of this year amounts to another $200,000,000 to $250,000,000 And finally, the productivity issues and additional final work that Mark referred to during our turnaround added an additional $150,000,000 to $200,000,000 to our capital, which I consider to be one off costs and not indicative of general cost increases. In addition to increasing share repurchases and advancing growth projects, we also expect to further strengthen the balance sheet in the second half of the year. Our financial health remains robust and we continue to attract a strong investment grade rating. However, the ramp up of major growth projects, combined with heavy turnaround activity and acquisitions in the first half of the year, have temporarily impacted our balance sheet metrics. I remain confident, however, that with both growth projects now generating free cash flow and the heavy turnaround activity out of the way, we are well positioned to generate strong funds from operations for the remainder of the year. And with that, I'll hand you back to Trevor. Thank you, Alistair, Mark and Steve. There's a couple of items to note before we take questions. We saw the crude price continue to rise during the Q2, and as a result, we recorded an after tax FIFO gain of $151,000,000 making the year to date gain $204,000,000 after tax. Share based compensation expense during the quarter was $117,000,000 after tax, bringing the full year after tax expense to $199,000,000 We also saw the Canadian dollar weakened by $0.02 in the quarter, which resulted in a non cash after tax foreign exchange loss of $218,000,000 The full year non cash after tax foreign exchange loss is 547,000,000 dollars While Mark and Alistair addressed the tightening of our production guidance, cash costs and capital guidance, we have also adjusted the business environment to reflect the actual pricing for the first half of the year and the forward curve pricing through the end of the year. This has resulted in increases in our cash taxes as well as our oil sands operations and Fort Hill royalty ranges. With that, I'll turn the call back to the operator to take questions, first from the analyst community, then if time permits from the media. Our first question comes from Neil Mehta of Goldman Sachs. Your line is open. Hey, thanks guys. Good morning and congrats on a good quarter here. First question was related to the Syncrude. Just curious, team, how you think about what the lessons learned are from the thin crude outage? And as an investment community, how do we get comfortable that we shouldn't be capitalizing a lower availability or utilization rate beyond 2018 as there have been issues over the last couple of years with the asset? Hi, Neil, Steve. Thanks for the question. Yes, let me try and context the whole of the Syncrude journey because I can tell in your question and similarly I'm frustrated with the performance of Syncrude. Overall, we're not seeing any great surprises in what's happened there. We've done it, been on a very similar journey with our base plan. That's why we'd forecast the 90% utilization and $30 for 20.20 and not earlier and I think there were some questions of us as to why we put that back into 2020. I mean I'll give you a few specific examples if you like of things that we were working through. Things like winterization standards. We actually had the electrical and distribution system as part of our program as we were working forward. And so disappointment, no great surprises and if you recall, we bought Canadian Oil Sands at a discounted price knowing full well there was a potential for improvement, but we have to put some hard work in to get that. I've been pleased with the commitments of the partners on that underlying maintenance and reliability program. I'm not so pleased on the aggressive plans that we put forward and the support we are getting for that. So the most the easiest example is we know we will get a step change in the performance of Syncrude when we put these pipelines between Syncrude and our base plant and we will put that pipeline in. We're not getting the sense of urgency or support we would like from our partners at the moment. So we're working hard to try and get that. But there are some areas where we're having to push the partners because of its governance structure to start thinking differently. You can tell from the tone of our script, we're confident we're going to get there. It is taking us a little bit longer than we expected. So we fully expect to get to 90% $30 by 2020, but we do need their help in cooperation. So all the things we've seen so far would have been picked up. Of course, the interesting thing about and the investigation is not fully complete yet. The most interesting thing about this electrical failure is it's nothing really to do with oil sands. It's not normally which is about electrical distribution and it's the same there as it is in most other locations where we have similar facilities around the world. So these are soluble problems. I'm comfortable with getting to them. But that's why we advise we put in 2020, not earlier in 2019. That's really helpful. And then one of the places relative to our forecast that the quarter beat was just the strength on operating costs. Fort Hills, oil sands, even thin crude to some extent, given the higher turnaround activity, we thought you'd see a higher dollar per barrel operating cost. Can you talk about some of the things that you're seeing on the ground? And again, how do we take what's happened in the Q2, the better performance on cost and think about extrapolating that going forward? You really sort of nailed it in that question, Neil. There is some great underlying news here. Net net, we are not seeing the inflationary pressures you might have anticipated at this time. Not to say there aren't some areas where we're seeing some movement, but our overall program has been able to mitigate that and get that trend continuing down. So if you look at Fort Hills, which is operated better than we expected. If you look at Mackay River or Firebag, what we're seeing is we're continuing to be able to reduce those costs. The only thing which has pushed the headline number up on the base plant and Syncrude is largely to do with the service factor in the way we're able to distribute the fixed costs. So overall the trends there are in the right direction as well. So that is very encouraging for the mid and long term. A bit frustrating in the Q2 which has been noisy but the underlying direction and trend is very encouraging. And of course a big piece of that $500,000,000 a year building up to the $2,000,000,000 we've been talking about is to do with that program of cost management and cost focus that we've been working on. So we're greatly encouraged by where costs are at the moment. And last question, Steve, when you and I were talking last month a little bit about IMO 2020 and talking about the WCS differential, which at that point was tight and your view was that it was going to widen out and it certainly has. Can you just talk about where you think we are from a WCS differential environment, recognizing that you're agnostic to it, that certainly has a big implication for the overall Canadian oil industry? Yes, I mean, I'll offer a comment. As you say, we are largely agnostic because we can mitigate that through the integrated model. We just think the fundamentals will work, Neil. As Syncrude is coming back on, as Fort Hills ramps up to its 90% by as Mark said, we're going to average we think 90% for the Q4. We're going to start to take up a lot of that pipeline capacity that we have. We've been the others in industry have been able to take advantage of. So our feeling is that as the industry comes back from turnarounds, us in particular, then that market will that differential will start to increase again. And I think we're starting to see that. And then we could have debates about what that level is, but I think it will get back to the sorts of levels we would expect it to be given the volumes that will be coming out of the region. Thanks a lot, Steve. Our next question comes from Phil Gresh of JPMorgan. Your line is open. Yes. Hi, good morning. My first question is around the capital allocation framework update you provided in the slides where you went through a higher price level and gave some new thoughts around return of capital and capital spending. I was just hoping maybe you could highlight what you would characterize as some of the differences versus the old framework. And I'm thinking around some of the capital spending numbers at the higher price levels. Should I attribute that to an expectation of in situ replication coming on or Alistair maybe some of the factors you're talking about in your prepared remarks? Just any color would help. All right. Thanks, Phil. Let me start and I'll let Alistair pick it up if he wants any more detail. I mean, what I would say is, first of all, let's come into 2018. And I think what we've seen is a little bit of pressure for a number of reasons. So we've seen seen we've bought the Fenja share, we've bought an extra share in Syncrude and so a portion of capital it came it came across as clearly as we would have liked it because of the 3 week delay, accounting rules cause us to classify that expense in February from expense to capital. So the costs never went up. We just transferred them from one section to another. And I was to give a good explanation this morning, but we haven't told that story too much in the past. So it's really just a reclassification. It's not extra funds, but it shows up in that CapEx number. And then the rest of it, I would view as we're buying an auction. We're more encouraged about medium and long term prices. We are not making final investment decisions at the moment on any of these projects. But what we have done is we're going to take the project through its early development stages and you can think of that as Rosebank as the in situ projects, so that we have the option to make a call on those projects next year and the following year. So that's what that modest CapEx increase is about. What I would say, don't think for one second this is a move away from our capital discipline. We are committed to returning money to shareholders. In fact, we have a bias to move to return that money to shareholders. You've seen a significant increase in the share buyback and we are executing against it. So that commitment to the $3,000,000,000 And we've talked over a long period Phil about what would get the dividends moving. Of course, what gets the dividend moving is the underlying long term cash generative capability of the business. So as this production has been coming on, then our ability and we talked about testing that at the $40, dollars 45 a barrel type level for affordability. So we're very comfortable that you're going to be of course it's a Board decision, but you'll be seeing some significant movement in dividend as we take our dividend review in the New Year. Okay. And if I guess I could just maybe clarify that there was a slide where you said in a higher price level that the capital spending could be up to 7,000,000,000 dollars going forward versus $5,500,000 in the prior slide deck? And so just to clarify that Yes, let me just comment on it and Alastair is champing at the bit to get in here. Yes, really what we were asked to do was to start to look at a framework because we'd always had that chart, the one you're referencing on just looking for the page number there, on Page 7 in our new investor deck. We always had it up to the sort of mid range there and we wanted to take it up to a higher level. What this isn't is a commitment that we're spending that money. We're really talking about from an affordability and a priority point of view. We have vast reserves and projects and the capability to grow the business. What we're trying to demonstrate there is you're going to see your model will show you the cash generation of the corporation at sort of price and we're starting to see it and it's really just arithmetic from where we are today. So if we were to view that long term sustained price outlook, what we're trying to say is you'll see we're actually trying to look at it. You'll see some caps coming in there. It's not that we're going to that level. You'll see us restricting capital and still continuing to do significant buybacks and move dividend. Alistair? Yes, just a comment there, Phil. I mean, the last version, this is a response to a loss of crisis we go on the road as Steve said, as people began to think the prices may be slightly higher. I really wanted to just point out the last version I think was capped off at $65 WTI and that had a bit 5.5 $1,000,000,000 of capital. So you raised the question $7,000,000,000 Well, a $7,000,000,000 number I think goes with around about an $80 WTI number, which would be another $3,000,000,000 $3,500,000,000 of free cash flow. I would put it in the context of if you think we're going to spend $7,000,000,000 we're generating 15 plus $1,000,000,000 of cash flow. So that's the context you really need to think about that number in, not a spending $7,000,000,000 and generating 12,000,000,000 dollars Understood. Very fair. And then my second question, I guess, would be for Mark, just on Syncrude. If I look at the guidance for the year and if I think I kind of roll in the numbers that you've described for the Q3, It looks like you're assuming a very high level of utilization for the Q4. Correct me if I'm wrong on that, but was there I believe there was also maybe some consideration of pulling forward some maintenance at Syncrude. So just any thoughts on that, both elements? Thanks. Yes. Phil, thanks for your question. There is some work that was scheduled here for the fall that is getting accelerated into this timeframe. So the focus here is to mitigate this outage as much as possible. We're also looking at or the team is actually looking at what work is going on in 2019, although we haven't sorted all that out at this stage of the game. But they're looking at trying to see whether some of the 2019 work could also get accelerated into this period. So with that, we are assuming that and as I mentioned in my comments, we kind of have to make up some ground here, but we're assuming that it runs at high utilizations primarily because planned maintenance is out. And so we're expecting this to run fairly with really no headwinds in there. So the focus now is to get it up and get it reliable and cranking away. And Syncrude's history has been that we've seen those periods and we're counting on that happening here as we go into the end of the year. Right. Okay. Thanks a lot. Our next question comes from Greg Pardy of RBC Capital Markets. Your line is open. Thanks. A couple of questions, but I mean most of them have been answered. But Steve, you alluded to the bidirectional pipeline in 2020 and then the just I guess the game plan around improved reliability and so on. But is there anything else that you think needs to be are there actions that need to be taken at Syncrude in order to get it where you want it? Greg, I would say there's like a multipronged plan in place. So some of it is what everyone thinks of is excellent maintenance practice. And a lot of that is in pro and has been part of a program that's been going for some while and still continues to progress. So Imperial's focus on that over the last few years as being good and strong and is making progress and we believe will yield results. We've got some things we're adding from our expertise in the industry. So the example was the winterization one. We had different winterization standards. We've taken those standards across to the plant and a lot of that work has been executed. So those programs I'm very comfortable with. There's some of these commercial ones through the joint venture which it struggles to work quickly. So we're asking the partners to work with us to focus on that, get through those commercial debates quickly so that we can start to get the hardware in. And I'm encouraged in the mid and long term we'll get to that. I'd like to see a little bit more focus on those projects now. We've also got, if you can imagine, what I would call a cultural employee program in place where we've been moving some of our practices that we've learned over our 50 years in and Mark talked about a number of senior people going across genuinely to try and help and share some of that experience. We've also done the same in the opposite direction. So we've taken some of the Syncrude leadership and taken them across into Suncor so they can start to see how we address those issues and where appropriate take some of those Thanks Thanks, Craig. Maybe I'd just add to that is, one of the opportunities as these operations have existed literally across the street from each other for decades. And so one of the opportunities that we're really encouraged about is to see people that are in the region working on the same aspect of the business, getting together and collaborating to try and understand where are the opportunities. Because in some cases we're working on the same things, but finding we're getting different results or different cost structures and stuff. We've seen some really interesting opportunities coming out of that where it's worker to worker sharing their ideas and practices. And so there's some great things coming out of it. It just it takes time and what we don't know is we don't know what we don't know, right? And so part of the challenge with it is what is it that we haven't yet uncovered. The focus is, we have a quite a comprehensive program in place and we continue to aggressively pursue it as Steve said, so. Okay. Okay. We'll be patient there. And the second one is, I mean 2018 has just been a big, big year in terms of maintenance turnarounds, etcetera. So is it fair to say that next year, the capital you typically allocate towards turnarounds is presumably is going to be towards the lower end? It didn't sound like 2019 is going to be a big maintenance year at all. We were having a discussion early this morning, Greg, and contexting it for ourselves. We think that 2018 is the biggest maintenance year we've had in the last 10 years and will be the biggest maintenance event we've had for the next 10 years as well. So and part of that was by design as we tried to synchronize the turnaround schedules on these longer runs. So the first 5 year run on Unit 1 at the base plant was important to us to then get it in sync. So absolutely, you'll see 2019 is significantly less than 2018. Okay, tremendous. Thanks very much. Our next question comes from Dennis Fong of Canaccord Genuity. Your line is open. Hi, good morning guys. Thanks for taking my question. Just firstly, just kind of carrying on from a couple of my predecessors' questions there. With respect to you've definitely had a few kind of interesting quarters with respect to production. I was just hoping to understand kind of the level and the reasons for your confidence in hitting at the very least the lower end of your 2018 production guidance from a like more of an operational kind of standpoint? I understand the funding individuals into the group is going to help maybe over a more medium term environment, but just over the next 6 months? Yes. I mean, all I would say is nothing needs to happen in the next 6 months that we haven't seen happen in the past. So we've tightened our production guidance to the lower end. But we still believe we can hit it. We've got a high degree of confidence in the base plant is up and operating very, very well. And I think that's a testament to what Mark said that we didn't rush it. We did take the time to do the maintenance of items we found during the turnaround and it's operating very well. So very encouraged. Syncrude is progressing well. I mean I talked about the first the biggest of the 3 units was up on the actually producing finished product on the 16th July. We actually had feed in there on the 12th July. So we're encouraged by where it's going. But we still have to deliver it. So I would say reasonable confidence, but we still have to deliver it and that's what we're focusing on. Okay. And then secondarily, just on returning value to shareholders, obviously with the Board's approval of going to $3,000,000,000 on the NCIB this year, how should we think of next year as you guys alluded to that this 2018 is a very significant year with respect to turnarounds, we'll call it production downtime as well as maintenance capital. And given again that Slide 7 to kind of illustrate your ability to both increase the dividend as well as return value back in share buybacks. How should we think about the $3,000,000,000 number characterized next year and presumably a better run time environment with potentially lower maintenance CapEx? Yes. I mean, I would say I'll make a few comments. Firstly, I do take your point. The first half has been very noisy and very difficult to extrapolate from. What I would say is and it was sort of the opening comment I made in my prepared words is in spite of all of that, we still generate incredible cash. So even with that noise around the plans turnarounds and some operational issues, we still generated just under $3,000,000,000 cash, which gives you an indication of the capability of the machine and why we're confident going forward. If you like, I mean in a sense and I know we've had some discussions about it. We Based on our long term sustainable cash generation in that $40 $45 a barrel crude region, we pay we set our dividend. We have had substantial increase in that capability through the year and we haven't moved on it yet. So has Fort Hills has come on as Hebron has come on. The base plant is in great shape and Syncrude, although it's not where we want it to be, is not far from where we expected it to be. So the cash generation of the company is coming up significantly and that's what we base the dividend increase. So you'll see us reflecting very hard and probably moving dividend next year. Beyond that, what we use the share buybacks for then is the additional free cash above and beyond that and you've seen us not sure, we moved on the $2,000,000,000 and we've actually been spending at that rate. We've announced the $3,000,000,000 and our plan is to spend at that rate. So I think what you'll see is now we've got this, we always said we had 10% growth in the underlying production of the company this year and 10% next year. Actually in terms of capability, we probably front ended that a bit because Fort Hills has come up a little bit more quickly than we anticipated. So we're very confident as we move forward. Okay, great. And thanks. If you could just indulge me with one last one there. Just on the tour at Fort Hills, it was mentioned that part of some of the CapEx is going towards the purchase of additional trucks to kind of help with balancing the, I guess, the feedstock and so forth. And given kind of that through the startup procedure you guys have been testing the various pieces of equipment, what's maybe a good kind of timeframe or call it maybe like check boxes in terms of what you guys need for understanding of the capabilities of Fort Hills and to really try and relay that back to The Street? And I'll leave it at that. Thanks. Let me start and then Mark will come in if we need any more detail. Fort Hills is doing extremely well. The simple version of where we are is that we anticipated every plant that started up has started up at certain rates and we predict the rate that this plant would come up and that would be the rate of ramp up would be set effectively by the fixed facilities at the back end of the plant, the solvent extraction itself. In practice, we've not found that. The plant has come up very well faster than we expected. When literally for the layman's version of it is when you're developing a mine, you have a small hole to start with and it gets bigger. And when you develop that first hole, your ability to get down to the bottom of the pit is related to the speed with which you start to wrap the back end of the plant up. In this and that becomes important because if you imagine as you go down through the oil sands itself it's soft and then when you hit the bottom it's harder and on the hard roads you can run the trucks you can run them full and faster. So all that's happened here is we've gone through with the back end of the plant has been able to take everything we've put at it and we've tested it up now to its full capability. So all we're having to do is accelerate that front end piece of getting developing the pit, getting the tailings ready and getting the mine down to the floor of the reserve itself. That's going extremely well. That's a business where we know a lot about. We've got contractors in there. We're using our own trucks. What it says is you can use more trucks more quickly. So we're just bringing those trucks in quicker that we would have brought in slightly later. So all of that is great news. The other bit of good news is that we're starting to see still got to run the plant a little bit more to see exactly where it is. We're starting to see that there will be some debottleneck capability here because we haven't hit limits on the plant yet. I don't know, Mark, if you want to add anything to that. Yes. I think the only thing is and Steve mentioned in the first quarter earnings call that we are at 150,000 barrels a day with or over 150,000 barrels a day with 2 trains on. And so we know that there's aspects of the plant that can run-in the 2 20, 230 ish range. So we're expecting that likely we'll find a debottleneck of 20,000 to 40000 barrels a day. It's just going to take some time to do it. We want to get the plant fully up. We want to see it in a variety of how it operates in cold weather conditions and warm weather conditions to understand heat constraints, those sorts of things. So it will take a few years to debottleneck on we do think that within a few years here, we'll figure out a debottleneck on it and we're very excited about it. And in fact, the way we've been starting it up, we've been measuring specific components of the facility to help us understand exactly that. So we've been intentionally moving the constraint around the plant during startup to understand performance of specific units to help us in that assessment. So we're very optimistic about that potential. Great. Thank you. Our next question comes from Asit Sen of Bank of America Merrill Lynch. Okay. Our next question comes from Jason Fruh of Credit Suisse. Your line is open. Hi, Steve. I was wondering if you could give us some color on your new board member, Brian McDonald. Just what skill set you might bring to the organization that isn't already there? Yes. No, thank you. I mean what we've been trying to do just in general around the board is, as we've had members retiring from the board, we've been replacing them with what we see as the skills needed in the future. So you've seen a few new board members come on. We've had Denny Houston come on, a long term senior executive with Exxon. He brings within detailed understanding of refining in North America our program going forward is going to be about what we call within the company digitalization, which is all of the aspects of artificial intelligence, machine learning and our ability to move those tools into place quickly. So Mark has been leading a program of digitalization quietly in the round over the last year, we'll start to expose some of the details of that. I guess the first part you've seen, which was the automation of a mine and the truck fleet. That's gone exceptionally well. It's gone the results we've seen have exceeded our expectation. We're really confidently talking about $1 a barrel now as we bring those automated trucks in. It's a continuation of that program and matching his skills. Brian joined us this week and was able to add some great value. Thanks, Steve. Our next question comes from Asit Sen of Bank of America Merrill Lynch. Your line is open. Thanks. Good morning all. So I have a quick follow-up questions on some earlier answers. So going back to Slide 7, if oil price strength continues, could we see the replication projects start sooner since 2 have already been approved? Or is 2023 a fairly fixed timeline for 1st oil? I would take it as a fixed, fairly fixed and probably the earliest. I mean one of the lessons we've learned through time is that the orderly development and progression of projects is really important. We set some tough guidelines for the economics of these projects and kudos to the group. They've got these projects to work a much lower crude price now because of the extra effort that's been put into the design and the construction philosophy. So really what we're doing with this with our 2018 CapEx is buying that option to start up in we think 2023. It's unlikely you will see that significantly brought forward. That's not part of our plan. We have a program of other small projects and operational excellence focused initiatives, which gives this $500,000,000 a year adding up to the $2,000,000,000 by 2023, which we think gives us cash flow growth without necessarily growing the production of the company at the same rate. Some of it will be about production, but most of it isn't. So it's unlikely you'll see it come forward. Great, Alastair. So just wanted to go back to your earlier comments on cost inflation and you alluded to you guys are doing the right job in managing the supply chain, etcetera. But as we look through 20 nineteen-twenty twenty, are there any particular areas where cost inflation should be watched closely? What are you watching? I mean, we watch it closely. We watch labor, we watch materials, we watch gas. There's no red, there's no real alarms coming up there. We're seeing some types of labor, we're seeing some pressure, but we've been able to mitigate that. We haven't seen anything significant on materials Of course, one of our biggest costs is the price of gas itself and we think gas prices will be relatively low for a very long period. So we keep an eye on it. It's a big area of focus for us as part of the operational excellence program. But as we net it, we think overall you're going to continue to see costs come down in the region and part of that we've been helped with because levels of construction have been down, so our own firestorm of inflation that we'd experienced 10 years ago has gone and we're operating much more within the constraints of the labor and contractor capability here. So overall, we still see prices coming down, not going up. Great. And one quick one, Alistair, on appreciate the increased share buyback, but wondering if you could update us on your thought process on balance sheet gearing. Are we is there a desire to drive it lower? Yes, I mean, I think as we've laid out there, we'll continue to see as manage the balance sheet towards the low end of the range as prices go up. So but that will take some time. I mean very comfortable with where our balance sheet is today, but over the next 2 to 3 years, I would expect to see that drift towards the bottom end of the range. Thank you. That concludes our question and answer session. I'd like to turn the call back over to Trevor Bill for any closing remarks. Great. Thank you, Michelle. So I'd just like to thank everyone again who attended our call this morning. I know it's a busy morning in the market. So really appreciate it. And just to let everyone know that our IR team is around all day to day for those of you who didn't weren't able to ask your questions or have additional questions to take those. So thanks again and we're signing off. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.