Earnings Call: Q1 2016

Apr 28, 2016

Good morning, ladies and gentlemen. Welcome to the Suncor First Quarter 2016 Financial Results Call and webcast. I would now like to turn the call over to Mr. Steve Douglas, Vice President, Investor Relations. Mr. Douglas, please go ahead. Well, thank you, Wayne, and good morning, everyone. Welcome to the Suncor Energy Q1 earnings call. With me here in Calgary are Steve Williams, our President and Chief Executive Officer along with Alistair Cowen, EVP and Chief Financial Officer. Before we begin, I need to say that you should note today's comments contain forward looking information. Actual results may differ materially from the expected results because of various risk factors and assumptions, and those are described in our Q1 earnings release as well as our current AIF and these are available on SEDAR, EDGAR and our website suncor.com. Certain financial measures that we refer to are not prescribed by Canadian Generally Accepted Accounting Principles. And for a description of these, please see our Q1 earnings release as well. After our formal remarks, we will open the call to questions, first from members of the investment community and then if time permits, members of the media. With that, I'll hand over to Steve Williams for his comments. Good morning and thank you for joining us. About a year ago, we started using the term lower for longer in relation to crude price. And that's certainly proven to be the case. The Q1 of 2016 saw Brent Crude fall by more than 20 percent from Q4 2015 levels and more than 35% versus Q1 of last year. Now at Suncor, we responded to the difficult price environment with an absolutely laser focus on operational excellence. And we continue to improve reliability, grow production and sustainably reduce our costs. We've also taken advantage of the market conditions to undertake acquisitions at accretive valuations. Now, these deals significantly increase our leverage to an improving oil price and enhance our competitive position relative to our peer group. So with that in mind, let's take a look at the operational and strategic highlights for the quarter. We reached record Oil Sands operations production of just over 450,000 barrels per day. And that included record in situ production from both Firebag and Mackay River following the successful and low cost debottleneck projects we completed last year. Reliability of our upgraders continue to be strong as we average 92% throughput for the quarter. And even as we grew production, we continued to take absolute costs out of the process. Oil Sands cash costs fell below $1,000,000,000 for the quarter to average just $0.24 $0.25 per barrel. So that's less than $18 per barrel. The lowest quarterly cash cost recorded since 2,007, and it included record low in situ costs of just below $10.40 per barrel. So at Syncrude, we also saw the best production rates in 5 years as utilization exceeded 91%. And that strong reliability helped us to sharply reduce Syncrude's cash costs, which came in at $31.35 per barrel for the quarter. So, that was a timely performance as Synacor increased its stake in the project from 12% to just under 49% during the quarter with the closing of the Canadian Oil Sands acquisition. And of course, as we announced yesterday, we'll increase that working interest a further 5% in the second quarter with the purchase of Murphy's share of Syncrude. In EP, our offshore projects all achieved strong production. Buzzard and the Golden Eagle combined for 72,000 barrels per day at an average lifting cost of just $5.75 per barrel. Our East Coast production totaled over 53,000 barrels per day at an average cost of $13.72 per barrel. So, the strong performance leaves us tracking slightly ahead of production guidance for the year. In the downstream, our refining operations continued to run reliably, achieving average utilization of over 91% and reducing operating costs to just over $5 per barrel. And this performance was particularly notable given the relatively weak distillate demand we experienced in the Q1 as a result of a mild winter weather in the East and weak demand, primarily driven by energy sector in the West. So, you'll notice I've made more of a point of mentioning our costs for each of our business segments than I normally do. Disciplined cost management is an important part of the Suncor story. A year ago, we committed to reducing operating costs by $600,000,000 to $800,000,000 over a 2 year period. By the end of 2015, we'd actually delivered almost $1,000,000,000 in savings. And this year, we set target of a further 500,000,000 in reduction and we're on track to achieve that goal. So with the current price environment, I'm often asked how low can you take these cash costs? And it's an interesting question, but to be frank, it's much too narrow. Reducing our costs is not simply a knee jerk response to low oil prices. It's an integral part of the continuous improvement journey we've been on and have demonstrated for several years. We're squarely focused on safe, reliable, competitive cost competitive operations. And I'm confident we'll continue to raise the bar on performance in all areas. Our strong operational performance provides a solid foundation for profitably growing the company. And we're making excellent progress on that front. At Fort Hills, all critical milestones continue to be met. Engineering is substantially finished and construction has now surpassed 55% complete. And the low oil price environment has allowed us to contain contracting costs, improve the construction productivity and attract very high quality labor. And as a result, we remain on target on both cost and schedule, and we continue to expect 1st oil in the Q4 of next year. Meanwhile, on the Hebron project, construction of the gravity based structure and topside continued in the Q1. Like Fort Hills, Hebron continues to target production of first oil by the end of next year. Now, of course, I couldn't possibly talk about growth without spending a few minutes on the Canadian Oil Sands acquisition, which we successfully closed late in the Q1. This was the culmination of over a year's work by a very dedicated team of people. It took tremendous effort to complete the deal, but in many respects, the real work has only just begun. In the past few weeks, we've been working closely with other Syncrude owners and the operator to chart the best path forward towards improved performance and profitability. And we believe there is significant potential to reduce costs, improve reliability and capture the synergies between Syncrude and Suncor's operation. It's still very early days in what will be a multi year performance improvement journey, but we have considerable reason for optimism. The very strong first quarter provides a glimpse into the potential of Syncrude. Now, we expect it will take both time and effort to reach a point where the operation can sustain this level of performance. But we have the knowledge, the experience and have no doubts, we are definitely up for the challenge. With our increased stake in Syncrude and the Fort Hills and Hebron projects on target for first oil next year, Suncor expects to profitably pro production by over 40% versus 2015. We now forecast our total production to exceed 800,000 barrels per day by 2019. That's a growth trajectory that very few companies of our scale can hope to equal. More importantly, it's growth that gives us even more leverage to rising oil prices. I actually think that this is something very few fully appreciate about Suncor. Our integrated model is widely recognized as providing a hedge against low oil prices, which has made us a good defensive investment over the past 18 months. However, many people are under the mistaken impression that the integrated model somehow limits our upside as oil prices recover. Nothing could be further from the truth. In fact, with our recent acquisitions, we now have over 700,000 barrels per day of production. In fact, just as a quick aside, in March, we produced just under 740,000 barrels a day. And that number is going to increase, as I say, to an excess of 800,000 barrels per day as Fort Hills and Hebron ramp up in 2018. And more than 99% of that production is oil and the majority of oil is high quality, low cost, low decline and has access to market. So as a result, our leverage to any increase in benchmark oil prices is greater than our oil sands peers and among the industry leaders globally. As oil prices recover to more sustainable levels, we fully expect Suncor to continue to outperform. We've had a strong operational start to 2016 and we're tracking very well against our various guidance metrics. So, I've summarized there our operational performance and progress on the strategy. I'm now going to ask Alastair Cowen to provide some color on the financial results. Thanks, Steve. As everyone knows, the Q1 featured the lowest benchmark crude oil prices in well over a decade, and which had turned put vitamin realizations then to levels well below cost in the early part of the quarter before recovering somewhat in March. At the same time, benchmark refining cracks in the industry was down approximately 40% versus the Q1 of last year, largely as a result of weak distillate margins and narrowing crude differentials. Despite these pricing headwinds, we're able to generate solid cash flow across the business, thanks to reliable operations and continued cost reductions in both the upstream and the downstream. Oil Sands produced $263,000,000 of operating cash flow in the quarter or over $5 per barrel of production. Exploration and production generated $261,000,000 in cash flow or over $22 per barrel of production. And in the Downstream, Refining and Marketing produced $404,000,000 in cash flow despite a $192,000,000 FIFO loss as a result of the fall in oil prices versus the previous quarter. When corporate costs are factored in, Suncor generated total cash flow from operations of $682,000,000 for the quarter. This equates to almost CAD11 of cash flow for every barrel of upstream production in a period when upstream pricing and downstream cracks were at a cyclical low. Now both oil prices and refining cracks have staged modest recoveries in the past few weeks, although the impact of these improvements have been somewhat muted by the weakening U. S. Dollar. Obviously, we do welcome any improvement in the pricing environment, but it's not something over which we have any influence. Our focus, as Steve has mentioned, is very much on the things we can control. We are rigorously managing both our operating and capital expenses, while maintaining the strength of our balance sheet. Now earlier on the call, Steve went into some detail on the progress we're making to drive cost out of the business. And it's important to note that it's not just the cash cost per barrel that's falling. We're sustainably reducing operating expense right across the company. If you normalize for the costs associated with acquiring Canadian oil sands, our Q1 operating, selling and general expense is down approximately $150,000,000 versus Q4 of last year, putting us on pace to achieve the further $500,000,000 cost reduction target we set at the beginning of this year. Importantly, the majority of that total is related to controllable cost savings that we expect to sustain into the future. We also continue to capture capital efficiencies. In February, we announced a CAD750 1,000,000 reduction in our 2016 capital spending plan, bringing the guidance range down to between $6,000,000,000 $6,500,000,000 In the Q1, we invested just over $1,400,000,000 of CapEx to sustain our operations and drive our major growth projects forward on schedule. Of note, we also assume the capital spending associated with our increased stake in Syncrude as a result of the 2 recent acquisitions. Given the savings we're achieving, we're now confident we can absorb the approximately $300,000,000 additional Syncrude capital within our existing capital guidance range. For the past several years, Suncor has been able to to comfortably fund our capital commitments and generate significant free cash. With prices at the low end of the cycle and peak growth spending on both Fort Hills and Hebron, 2016 does percent of funding GAAP. However, we believe that GAAP is manageable given the strength of our balance sheet. Our net debt to cash flow was running at 2.5x and our total debt to capitalization is just over 29%. We have almost $10,000,000,000 in liquidity including over $3,000,000,000 in cash. And importantly, we continue to attract a strong investment grade credit rating, while many others in the sector have endured multiple non interest in grades. While I'm comfortable with our current financial position, we do plan to bolster the balance sheet through the divestment of some non core assets. We have identified a number of potential divestitures in our portfolio. These are non oil producing assets, which we believe will command premium valuations in the current marketplace. We are expected to achieve proceeds of $1,000,000,000 to $1,500,000,000 over the next 12 to 15 months, which will provide us with added financial flexibility. I do see these divestitures as a continuation of the disciplined portfolio management and capital allocation that has seen us opportunistically divest over $4,500,000,000 of non core assets since the Petro Canada merger. As part of that portfolio management, we've also made a number of timely value accretive acquisitions that complement our existing asset base and increase our leverage to oil price. Moving forward, we'll continue to look for opportunities to take advantage of market conditions profitably grow the Company without compromising a strong balance sheet. So to sum up, the business is running well, the balance sheet is strong, we're steadily growing production, costs are being reduced and we're poised to take advantage of any improvement in market conditions. So with that, back to Steve Douglas. Well, thank you, Alastair and Steve. Just before we open the line for questions, there are a few points I want to reference. As Steve mentioned, we did have a LIFO FIFO impact. It was a net after tax expense of $192,000,000 due to falling crude prices and product prices in the Q1. Stock based compensation was a net after tax expense of $102,000,000 in the quarter and the weakening U. S. Dollar and strengthening Canadian dollar resulted in an $885,000,000 after tax gain on currency. Finally, I would reference the changes to our guidance. The full guidance, of course, is available on the website. We have adjusted Syncrude production. It's been updated to reflect our increased working interest associated with the COS acquisition. We now have 125,000 to 135,000 barrels per day as the guidance range. And that brings our total production range to 620,000 to 665,000 barrels per day. The additional volumes that would be associated with the Murphy transaction, which was just announced are not yet reflected in the guidance because the transaction is not expected to close until late in Q2. While our production and cash costs are currently running well ahead of the annual guidance, it is important to remember we have major maintenance scheduled this quarter at both our Oil Sands base plant and at Syncrude, and those are ongoing as we speak. This planned maintenance will reduce our overall Oil Sands production and it will increase our unit costs in the Q2. And of course, that is factored into the guidance. We've added a Syncrude cash cost guidance range, and that is $35 to $38 per barrel for 2016. And we've also made a handful of changes to various assumptions to reflect market conditions. And these include lower royalty rates on the East Coast, lower refining cracks, natural gas prices are down and a stronger Canadian dollar FX assumption. As I mentioned, the complete details you can find on suncor.com. So I'll turn it back to Wayne to open up the mic for questions. I'd remind you that if you have detailed modeling type questions, we'll be available throughout the day to answer those. Wayne, you can go ahead. Thank you. We will now take questions from the telephone Our first question is from Neil Mehta from Goldman Sachs. Please go ahead. Hey, good morning guys. So I wanted to kick it off on Syncrude and just the improved utilization in the Q1 was terrific, 91%. Just wanted your thoughts on how sustainable improvement is as it exceeded our expectations? And then just talk a little bit about how you plan on financing your increased stake here in Syncrude from Murphy? And then the final question as it relates to Syncrude is just what does this give you the increased stake now that you have a majority ownership of the asset? Do you have more control over the operations? And are you in a better position to control its destiny? Okay, thanks. Let me I'll have the first go at all three of those. So, in terms of reliably increasing upgrader capacity, I mean, Suncor and its base business has been on a journey and that journey was a 5 plus year journey and now we're able to regularly exceed the 90% levels. I think the duration of the journey is the same for Syncrude. But of course, we don't start from here. We've actually been engaged in that process for a number of years already. So, the Q1 is not necessarily something we can expect to do every quarter, but that's clearly the objective of the groups that are working on it now that we sustainably increase the reliability of that business up into the 90% -plus levels. I'm very encouraged by the work that's going on. I personally sat down with the Chief Executive of Imperial. We've also sat down with the Chief Executive of Syncrude and we've got great alignment between what we are trying to achieve over there. So good work, the project groups are working through the detail of it now and I'm greatly encouraged that our expectations will be met in the midterm and that we will be able to assist Imperial and Syncrude in that process. So early days, first steps are looking good and what it has done is give us a glimpse of the potential of that asset to perform at higher levels. In terms of financing, I don't plan to answer in any detail other than to say, if you look at the materiality of this last 5% to the health of our balance sheet, It's less than $1,000,000,000 deal. Alistair talked about the $10 plus 1,000,000,000 of liquidity we have on our balance sheet. It's really not material. Our record is one of prudence and discipline around our balance sheet and you will absolutely continue to see those go ahead. So, finance, we don't see as a major issue And our plans haven't changed going forward in the sense that our primary objective is to get the reliability of that asset out by working with Imperial and Syncrude and I'm greatly encouraged by the progress that's being made. That's great. Thank you, Steve. And then the follow-up for me is as it relates to non core asset sales. You have identified a number, including wind storage assets, pipelines and logistics. What's the potential to monetize those in the near term? Retail? Again, it's always very difficult to talk to very specific either acquisitions or divestments because it impacts the commercial negotiations that are going on. What I would do is reference you to our track record. We've since the Petro Canada merger, we've sold $4,500,000,000 of assets. And if you draw the curves of what that looks like in the context of each of the businesses of those assets, you will see we have been very successful. It's simply selling at the top of the market and buying at the bottom of the market. So, the track record of buying at low prices and selling at high prices is very well established there. You will see that discipline and rigor continue. We don't we're not in fire sales of assets. What I will say is that the 3 we have talked about are all progressing the schedule we expected. So, when Alistair talked about realization of significant funds in the next 12 to 15 months, we're confident of those numbers. So, we're in good shape and you'll see the same rigor and capital discipline applied going forward as you've seen over the last couple of years. That's great guys. Thank you so much. Thank you. The following question is from Benny Wong from Morgan Stanley. Please go ahead. Yes, thanks. In the release, you signaled that you guys are kind of continue looking for more acquisitions. I guess, my question is, do you see more potential further consolidate the Syncrude project? And outside that project, can you maybe provide an update on what you're seeing in terms of opportunities? Are you seeing more or less interesting opportunities today than say maybe 6 months ago? I would say, I mean, first of all, I'll make a general comment about the M and A market and then I'll talk just a little bit about specifics. I mean, generally, the market is I think the Canadian market is seeing the lowest level of M and A activity in the Q1 that it's seen for a long while. And that's a reflection of the condition in general of people's balance sheet and their difficulty in being able to take those types of transactions on given the state of the market in their finance is. Suncor quite different and that we'd $100 we didn't believe that that was sustainable. We put our balance sheet into extremely good health and that's afforded us the opportunity to leverage it where appropriate. Our strategy hasn't changed. Our balance sheet is still in good health. We will be opportunistic in looking at things in the market. We're chasing nothing in particular. I was very pleased with the Canadian Oil Sands acquisition and I'm equally pleased that we've now been able to get in excess of 51% of the Syncrude asset. That comes with some governance benefits, but it doesn't actually change our objectives. As I said, our primary objective is to work with the operator and with Syncrude to put our joint expertise to get that asset fully performing. So, the market hasn't changed that much. There are still opportunities, but they will have to be very attractive opportunities for us to be interested. Great. That's great color. And then just going to the growth profile you guys laid out to 2019 of 800,000 barrels per day. How are you guys thinking about becoming increasingly long upstream? Is this something that you want to offset in some way with investment? Or is that just a natural evolution of Suncor that's just going to move away from this full integrated model? I mean, that's a great strategic question. And because the conversations we've had previously, it's something we're constantly looking at. What I would say is, don't forget that all of the volumes we have bought recently are in a sense partially integrated because they come with full upgrading. So, their product is a very high quality sweet synthetic crude. So they are partially integrated already and don't expose us to some of the margins which have been more difficult in the business. And that is part of the strategy. We are we've continued to look at that balance and we have a target range in our mind for integration to protect the integrity of the margins of our business. And we're still broadly within the ranges that we're okay with. We are constantly looking at that downstream market to see if opportunity is there. But the same capital discipline and rigor will apply and these particular acquisitions don't trigger any great concern for us. Great. That's great color. And just as a final question, a little bit more nitty. Just notice with the incremental Syncrude CapEx kind of baked into your guide, but your guide didn't really move. Did I reiterate there's some changes in there or is a part of that driven by cost savings you guys are achieving? Actually, Benny, it's really we're achieving cost savings on our existing capital program as we execute it. So we're able to absorb the extra $300,000,000 odd from the Syncrude stake within the existing guidance range. So all due to cost savings on the existing base. Got it. Great. Thanks, guys. Thank you. The following question is from Greg Pardy from RBC Capital Markets. Please go ahead. Yes, thanks. Good morning. Just I guess really a couple of questions, but Steve, you mentioned everything on track with Fort Hills and so on. When that project was sanctioned, I think it was 2013, I believe there was about $1,500,000,000 or so in terms of like contingency costs and so forth. Is it possible those will now start to come out just given the productivity and the cost environment you're seeing? It's far too early to be that explicit, Greg. I mean, what we are seeing is, if this project comes in on cost on schedule, it will be the 1st mega project in Alberta, in the oil sands industry to do that. It's looking good for that at the moment. We are seeing some real benefits in terms of executing the project at this time. One of, of course, the big challenges in the project is its exposure to exchange rates and part of that contingency is for exchange rates and with a very low Canadian dollar, then depending on how each of the partners are set up, their corporations have different exposures to exchange rate. So, it won't things are encouraging. I think that's too optimistic to think that all of that contingency will come out. We still haven't applied all of it to the project yet. So things are looking good and the formal position is we are on cost, on schedule. Okay, great. And I think you've already answered those to kind of just get it on record, though. But it doesn't sound as though even with them moving out of 54% that you're going to seek operatorship at Syncrude anytime soon. Is that fair? That's fair. It's not our primary objective. Our primary objective is to work with the existing operator and Syncrude to get to the reliability levels and we're actually in that process and I'm encouraged by it. But this is a very important part of the Suncor business now and we will progressively work harder and harder until we start to achieve our goals. Okay, great. And the last one for me and it kind of comes back to the integration question, but Montreal, right, which is largely been a tidewater refinery now has kind of shifted gears with respect to the Line 9b reversal. But how are you thinking about Montreal on a longer term basis? I mean, it did sound as though you guys were perhaps more serious about contemplating a coke at Montreal than we had thought initially. But what is the plan for Montreal longer term? I mean, we see Montreal is a keeper refinery, a long term part of our integration. The Line 9 has been very effective. It's largely running now on inland crudes, which means we can take absolute advantage of whatever those margins will offer us. We like Montreal. It's a complex refinery. It has the capability for putting the coker in we've talked about. So as we look at our downstream integration options going forward, we put the coker right alongside potential other acquisitions when we look at the suite of alternatives and the coker screens very well. So it's still there. It's back in our plans now a year or 2 into the early '20s, but it's still there as a potential option for us to exercise in the future. That's great. Thanks very much. Thank you. The following question is from Guy Baber from Simmons. Please go ahead. Thank you very much. Guy Baber with Simmons, AKA Guy. Steve, I wanted to dive a bit deeper into your comments that the market does not fully understand or appreciate the leverage to oil price improvement as I tend to agree with you. So to since check our model and what we see, is there any way you can help frame or quantify for us the incremental operational leverage to higher oil prices you're picking up relative to the portfolio before the Syncrude acquisition? Just wondering if you could frame that so we could have a sense check for our models. Okay. Let me frame it. Alastair is then going to pick it up and then we'll refer you to something in the future because we recognize that we have a big part to play in trying to get a clear understanding of what that leverage to the upside looks like. I gave the simple math that right now, we are 99% leveraged. We've had 7%, 8% growth for the last 3 or 4 years. I've outlined that 40% growth between 2015 2019. And I tried to give an indication in there that actually all of this is not sort of San Manana in the future. It is a we actually reached and it was a very good month. So we can't expect to do that every month of the year. But we did achieve 738,000 barrels a day through March. So a lot of it is there and I think there's an under recognition of what the capability of the assets we now have in our ownership are capable of achieving. So that was the first point. I think the second point is then and I'll let Alistair talk to it about what the actual business is looking like today. And there are some fairly detailed assistance we can give you there. And what I would say is in what you should actually have the conversation with our detailed modeling guys because we started to do some work now to be able to better tell that story of what it looks like. So I'll hand you over to Alastair and he can give you the intermediate there. Thanks, Steve. Just I'm going to give you a number. If you went to our annual report, you would have seen we have a sensitivity table and they showed for 2015 our sensitivity to a $1 movement in the crude oil price from a cash flow perspective was $165,000,000 Post zinc crude, we are currently sitting at an exposure of $220,000,000 So every dollar that crude goes up, our cash flow will go up by $220,000,000 That's very helpful. Thank you, guys. And then my follow-up, I wanted to talk about the retail business. So from a strategic level, how do you view the value uplift that your retail asset provides your overall downstream arm in house from an integration standpoint, from a margin uplift or offtake security standpoint? And what I'm really trying to understand and better appreciate are the benefits you may or may not be realizing by having that asset integrated that could be difficult for us to appreciate with the disclosures that we have. Okay. Again, I'll make a few strategic comments and then I'll let Steve just pick up and talk a little bit of detail. I mean strategically, we like our integrated model. And in order to capture all of the margins, we've really enjoyed having the model, which takes it from bitumen right the way to customer. And I mean, Steve will say a little bit more, but our retail business itself is a very successful and profitable business. Now, of course, we're very cognizant of the fact and I'm sure everyone else on the call is as well. There are examples, very recent examples of people monetizing their retail businesses. And often there are different reasons for that. That is clearly a possibility for integrated oil companies to do that. We've looked at it. We've looked at the opportunities and we retain it there as an option. It's not at the top of our list in terms of what we want to do because we see it as a business which is contributing. Thanks, Steve. And just to add to that, I'd say, we have a value from a couple of perspectives on the retail business. One is, it provides a controlled channel of sale for the production out of our refinery. So we're not simply merchant refiners selling the production at the refinery gate, but we have a high value added channel, controlled channel sale through our wholesale and retail assets. The second is, frankly, they give us a very strong return. And if you look at quarter in, quarter out for the past 4 or 5 years, our refining and marketing network has easily led the pack in North America in terms of net earnings per barrel of throughput. So it certainly adds value and we're not currently, although we keep a very close eye on the market and we're well aware of the value, we're not currently marketing the retail assets. Thank you guys very much for the comments. Thank you. The following question is from Phil Gresh from JPMorgan. Please go ahead. Hey, good morning. First question on Syncrude is how you might think about a free cash flow breakeven there? I think you're at the moment probably investing at maybe a sustaining capital level, but what price do you think you need to breakeven there? And I apologize I hopped on late, but maybe you could just talk about now that you have a larger stake, what's really different now? I feel like I get that question a lot from folks. What's different moving forward? Okay. Yes. And I mean a couple of those are sort of hinted at Phil. So I mean the first in response to your first question, let me give an answer to the blended answer rather than Syncrude because we're very happy to talk about those in more detail offline. But it depends on so many assumptions you make in terms of reliability, operating costs, crude price, etcetera. But let me give you a broad answer, which I think sometimes surprises. I mean, for Suncor, including the Syncrude assets, we look at our what we would call the cost at which we could cover our dividend and our sustaining capital. And that price is a Brent price of less than $40 a barrel. So we think we're free cash flow generative on that definition at below $40 a barrel. And that tends to surprise people how low that is. And that's one of the characteristics of the type of nature of business we're in. So, it's one of the reasons we've been a little bit more pushy on trying to get this understanding of how significant our improvements would be as crude price go up because we think there's a misinterpretation. In fact, if you look at the cash operating costs of Syncrude in the documents there And Q1 was a good Q1, I accept that. They were $31 a barrel and their sustaining capital is very low levels. That's one of the very successful pieces of work that's been going on over the last few years that they've largely completed a lot of their bigger projects and they're relatively low levels of capital. And as Alistair said, we're able to take those into our capital budget without actually moving our capital budget that they're so low. So the number I would take is for the blended business of Suncor, it's less than $40 a barrel breakeven for dividend and sustaining capital. And what sustained number are you using there? Yes, that's using $250,000,000 this year for our total sustaining capital for our Syncrude working interest. And total company? Total company would be about $2,000,000,000 for our production side of the business and another $700,000,000 for refining and marketing. Got it. Second question is just around the balance sheet priorities. In your slides that you put out, you talked about a below 3x net debt to cash flow target, you're around 2.5. I think that was end of quarter and before the additional 5% stake. Maybe just talk about your priorities there and whether you see that 2.5% as kind of a trough or where you want to get to through the cycle? Yes. So, Phil, that's a good question. I think we've put out some targets there. Through the whole cycle on a debt to cap basis sort of 20% to 30% on a net debt to cash flow sort of 2x to 3x. So we're kind of sitting at 2.5 times, we're kind of in the middle of that range. So I'm quite comfortable with that. As we move forward, it will go up slightly as we talked about. But as we move into higher oil prices, clearly those numbers will begin to come down to the bottom end of our ranges. And so if you have excess cash as oil price goes up, how do you think about those priorities then? Well, that goes back to your capital allocation that we've talked about. Where do we allocate free cash flow? And it's as Steve has talked about, it's a mixture of investing for profitable growth, looking at the dividend as we grow the underlying production of the company and then obviously sell buybacks. And you've seen us do a combination of all those. I mean that goes back to our value proposition, which is growth plus returning cash to shareholders. Okay. Thanks a lot guys. The only bit I would just add is a final comment is, if you look at, we've got 2 very big growth projects which are coming to a conclusion. It is difficult in the current economic environment to see how you would be approving those types of projects in the current environment. So I think you will see us coming back to much more of a model of operating the business really well and investing in these selective high return debottleneck projects. You'll see us maintaining the facilities to a very high standard, so the reliability comes up. But you will see us taking breath around growth projects because what the market is offering is a cheaper alternative in terms of buying capacity. So, there isn't a go back to how we were. You'll see the same discipline and rigor, but you won't see us going back to the same mix. The following question is from Mike Dunn from FirstEnergy. Please go ahead. Good morning, everyone. Steve, just on the acquisition of the Murphy interest in Syncrude, is it fair to say that you guys were motivated to do that deal to get your ownership stake to be a majority. The metric looks, I guess, similar, maybe a little bit premium to what you did with Canadian Oil Sands. But is that a fair assumption or not? And we should assume that you'd be open to doing to acquiring more stakes in Syncrude at a similar metric? I don't know. I'll just make a few comments, Mike. I mean, If you look at the calculation, it's on the same terms as Canadian Oil Sands, but in Canadian dollars. So, you do have to look at the fact that there was a relatively significant change in exchange rates through the last period. So that's to our benefit. The primary objective is we think it's a very attractive asset where we think it will be accretive on the assumptions we are making. There's no doubt that there is our primary objective is to work with Imperial and Exxon and Syncrude to get it up to the reliability we want. But there's no doubt having in excess of 51% does improve the position. And really it's a reflection of how good we think that asset is at this price. So I am very pleased that we've been able to take it up above 51%. Thanks, Steve. And just the final one from me. Your cash flow statement noted $159,000,000 in asset sale proceeds in the quarter. I didn't see any disclosures of what those were. Forgive me if I've missed something, but any color to add there? Yes, Mike. It's kind of normal business. You'll recall we did come down slightly on the Hebra on high Bania interest and that's just really the repayment of capital from prior year. Okay. Thank you. That's all for me. Thank you. The following question is from Paul Cheng from Barclays. Please go ahead. Hey, guys. Good morning. Hi, Paul. Steve, just curious, now that we you get to 50 4% in Sengkru and after the Murphy deal about 59% and you have said that the primary objective is trying to improve that operation, become a very large chunk of your business. So from that standpoint, how's the priority shift between focusing on debt and also that looking at the next wave of your sector growth projects that how is it a concurrent parallel line and one doesn't really impact all? I mean after all you still have limited organizational capability as well as capital that how much you want to effectively spend. So just trying to understand how that priority may have moved? You sort of answered the question very well there, Paul, in that it really hasn't affected our capability going forward. Again, it's often not realized when you look at competitors in the business. We are the largest SAGD operator. We've got the combination of Firebag and Mackay River put us up as you know in the 2,040,000 barrel a day type range. It's a we're very pleased with the way it's going. We've got major technology development going on in those regions and we have probably if not the best amongst the best assets going forward that can be developed. So, we're in a very powerful position. It's a very important strategic part of our business And it's a question of when, not if we develop those opportunities. The beauty of the Syncrude asset is it's instantaneous. It's there, it's operating and it's operating at a if you look at the overall deal, depending on metrics you like, it's a very low cost per flowing barrel, And we've seen what the operating costs can look like in the Q1. They were down to 31. So, some great opportunities there. We have we will not take the focus off of what I call our base oil sands business. We spent really probably 7 or 8 years, but very, very focused in the last 5 years to earn the right to claim that plant is reliable and to get its reliability up into the 90s. What we've got now is a very accomplished capable team who've achieved that. So, it gives us the opportunity. It's very timely to be able to start to allow some of those guys to concentrate and help on the Syncrude asset. And in fact, we have been doing some of that and we plan to do more of that going forward. So, we've been planning the organizational capability, same with Fort Hills, if you like. I mean, one of the lessons we learned was around when relative to the start up of projects, you develop the operating expertise. We already have a good part of the operating team in on Fort Hills finishing off the facility and so they understand it by the time they need to start it up. So everything you've seen us do, we have the organizational capability to do very well. As we look forward, one of the questions as a team we always ask ourselves is, do we have the organizational capability to be able to deliver without distracting from the other parts of our business? So far, we've been able to act on that very positively. And so, as you mentioned, that is a matter of of when, but not if on the next wave of the Sac D growth projects. Is there a timeline you can provide that when we will hear more about it or that when is that next wave is really going to come? I mean, we are already they're not in our capital budget this year. We're already looking at next year. We're looking at in terms of potential start ups of those projects, we're already back into 2021, 2022. So, and we have things we want to do between now and then. So, and those projects need time. What I like about that is it gives us the opportunity to put the very latest technology in there. So, as we are finishing off the fairly big pilot tests on solvent extraction and these electromagnetic wave extraction techniques, we will be able with that timeframe to put the new technology into the project which is a great advantage of the timing. I mean, we've already seen, we're going to I think we will be one of the highest performing major oil companies in the world in terms of growth rates. We've done that for the last 4 years and now we've got the already got the plans in hand which deliver another this next 40% of growth through to 2019. So, I really like our growth potential and we don't have to rush into these things. We can do it in a way which is very consistent with the strength of our balance sheet. So Steve, based on what you just said, should we assume that the next wave is going to be sanctioned sometime in 2018, 2019, given that it probably take 2 to 3 year for the major pilot projects to complete the testing? Yes, I think that's fair, Paul. Final one, if I may. Since you talk about the CapEx, in the past before the downturn, you sort of talking about $7,000,000,000 to $8,000,000,000 a year in CapEx. Now with the additional us and everything, on a going forward basis that what is the comfortable range of your CapEx budget should be? Is it still $7,000,000,000 to $8,000,000,000 or is actually even though you have the cost that have been shipped out? I think what I would do is just take our track record. You've nailed it. We've spent $6,000,000,000 to $6,500,000,000 for the last 4 years. So, there's a good number in terms of what our project execution capability is. Within that, we've had these very large growth projects. So as Steve said earlier, absent large growth, we will be coming back to smaller numbers than those. So you'll see us start to have the opportunity to allocate capital to different things. But part of the answer depends on what the world looks like in the future. I see for I would use our track record as an indication of what's going to happen in the future for the foreseeable future. Okay. And with that thank you, Paul. Sorry, it's Steve here. We've I'm afraid we've run short of time. We still have a number of analyst questions and media lined up. I would encourage the analysts, please get in touch with me directly later in the day and media, of course, have your Suncor Media contact, who will be very responsive today. With that though, Wayne, I see we're at time. So I'll ask you to close the call, and I'll thank everyone for participating. Thank you. That concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.