Earnings Call: Q2 2015

Jul 30, 2015

Good morning, ladies and gentlemen, and welcome to the Suncor's Second Quarter 2015 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. Thank you, Melanie, and good morning to everyone. Thank you for joining us. Welcome to Suncor Energy's Q2 earnings call. With me here in Calgary are Steve Williams, our President and Chief Executive Officer together with Alastair Cowen, Executive Vice President and Chief Financial Officer. Just before we begin, I would underline for you that our comments today will contain forward looking information and actual results may differ materially from expected results due to various factors and these are described in our Q2 earnings release and our annual information form. Both of these are available on SEDAR, EDGAR and our website, suncor.com. Certain financial measures that we refer to are not prescribed by generally accepted accounting principles in Canada. For a description of these financial measures, again, please see our Q2 earnings release. After our formal remarks, we'll open the call to questions, first from the investment community and then if time permits from the media. With that, I'll hand it over to Steve Williams. Thanks, Steve, and good morning and thanks to everyone on the line for joining us. I'm delighted to share Suncor's strong Q2 results and to have the opportunity to provide some color on what I think is a very successful quarter. During the past few years, we've talked repeatedly about 3 key focus areas for Suncor: operational excellence, capital discipline and profitable growth. In the Q2, despite a very challenging macroeconomic environment, we delivered on our commitments in these areas. And let me give you some highlights. Operational excellence is all about steadily improving reliability and reducing costs. And we've talked about the plan to get to 90 percent throughput on our oil sands upgrading complex by 2017. In 2012, we anticipated it would be a 5 year journey. But 3 years on, we're already seeing encouraging results. Comfortably exceeded 90% throughput for 2 consecutive quarters, even when factoring in maintenance downtime. We've also talked about reducing costs by €600,000,000 to €800,000,000 over a 2 year period and we're well on our way to accomplishing that in this year alone. So clearly, our operational excellence efforts are paying off. Capital discipline has been critical to positioning Suncor to outperform in a low oil price environment. We put tremendous focus on spending capital efficiently and on returning free cash to shareholders over the past few years. Our progress on operational excellence and the low sustaining capital requirements of our long life low decline resource resulted in us generating substantial free cash flow again this quarter even in a challenging price environment. I'm pleased to say that we've continued our focus on capital discipline with the announcement yesterday of a reduction in our capital spending guidance, coupled with a dividend increase and the resumption of our share buyback program. These decisions reflect the confidence we have in our ability to continue to effectively manage costs and generate free cash both now and in the future. A profitable growth can be a challenge in the current low price environment. But with an asset like Fort Hills, it is less so and here's why. Fort Hills will operate with low cash costs and sustaining capital for more than 5 decades. It will generate freight cash flow throughout the price cycle. With construction now more than 1 third complete, we're right on target with both budget and schedule. And we remain fully committed to the project. It's a significant part of our profitable growth over the next few years. Since our last quarterly call, we've also announced some relatively small, but important transactions that are consistent with our efforts in all three areas: operational excellence, capital discipline and profitable growth. Our asset swap with TransAlta, where we acquired control of the Poplar Creek cogeneration facilities at our Oil Sands base plant in exchange for 2 wind projects is consistent with our philosophy of bringing in house infrastructure that is core to the operations of our assets. We did something very similar last year when we purchased the sulfur plant supporting the Montreal refinery. This transaction will contribute to further improvements in reliability and efficiency of the oil sands base plant. In addition, it secures Suncor's position as one of the top power producers in Alberta and increases our ability to sell excess low carbon power back to the grid. We also entered into partnership on 2 other wind farms that will support the growth of our Renewable Power business going forward. In particular, our partnership with the Aungenong First Nation in Southwestern Ontario is a groundbreaking arrangement that combines sustainable power generation with business and community development. Now I'd like to take just a few minutes to have a closer look at our operational results in the Q2. Our oil sands operations ran reliably once again this quarter. We averaged 424 1,000 barrels a day with 94% throughput on the upgraders. At the same time, cash costs declined to CAD28 per barrel And that's CAD28, so just over CAD21, an 18% drop year over year. We accomplished this whilst completing annual maintenance on schedule and under budget. So with 6 months under our belt, Oil Sands year to date production is in the upper half of our annual production guidance range. Upgrading has averaged over 96% throughput year to date. And cash costs for that period are running at just over $28 per barrel, well below the target range we set for 2015. We do have some maintenance scheduled at the oil sands base plant in the fall, but I believe we're very well positioned to meet and in some cases exceed our original guidance. In E and P, we continue to see strong results from Buzzard and Golden Eagle steadily ramped up production during the quarter. As a result, our international production is tracking well ahead of guidance year to date. On the East Coast, we completed our extended maintenance turnaround at Terra Nova more than 2 weeks ahead of schedule. Overall East Coast production is trending slightly below our original guidance year to date due to the extended maintenance at Terra Nova and drilling delays at Hibernia. However, we do expect to see new production in the second half of the year from extensions at Hibernia and White Rose. And of course Hebron, our next offshore greenfield project continues to progress towards first oil in 2017. In the Downstream, it was another quarter of strong reliability and reduced costs. We averaged 90% utilization despite planned turnaround maintenance at both the Syanya and Edmonton refineries. We continue to advance our cost reduction efforts and also benefited from lower input costs. With year over year gasoline prices driving strong demand, refining cracks were sharply higher. The net result was a quarter where the Downstream generated 70% of our operating earnings. I think demonstrating once again the strength of our integrated business model. In summary, we delivered a strong operational quarter marked by improved reliability, growing production and declining costs. Our strong performance and capital discipline supported an increase to the dividend and the resumption of our share buyback program. I think that's fairly conclusive proof that the strategy works just as well in low oil price environment as it does in a high price environment. So going forward, we'll stay focused on delivering more of the same. We're doing an excellent job on the controllables. However, there are always external variables outside of our control that can have a bearing on our results. During this quarter, for example, we saw a new government elected in Alberta and tax increases on both corporate earnings and carbon initiatives. We also saw reviews initiated on royalties and climate change policy. We're working closely with the new government and we have shared our perspective on the importance of looking holistically at the total fiscal take to ensure the sector is not competitively disadvantaged. The new government has made it clear that they share our goal of a competitive and growing oil sands sector with improving access to global markets. We will do everything we can to support them in achieving those goals given the economic importance of the energy sector to both provincial and national economies. And I'm confident that we'll get it to the right place. So with that, I'm going to turn it over to our Chief Financial Officer, Alastair Cowen to take a closer look at the financial results for the quarter. Thanks, Steve. Our strong operational quarter led to equally strong financial results. With production increasing, we took advantage of a crude benchmark increase of more than $8 per barrel versus the Q1 to generate $2,100,000,000 of cash flow from operations and free cash flow of $580,000,000 The downstream impact of narrow or crude differentials was offset by higher priced realizations in the upstream. Our accelerated cost reduction efforts continued. We also benefited from reductions in natural gas prices and stock based compensation. As a result, our total operating selling and general expenses were down by over 18% versus the Q2 of last year. In January of this year, we committed to $600,000,000 to $800,000,000 of reduction in operating expenses over a 2 year period and we're on track to achieve that by the end of 20 15. And this includes net staffing reductions of over 1300 people or about 8% of the total direct workforce. And we are focused on ensuring the sustainability of these reductions as we go forward. At Oil Sands, we've reduced our cash cost per barrel by almost 18% in the past year and we're trending well below our original guidance range of 30 dollars to $33 per barrel. And while we're certainly benefiting from lower natural gas costs year over year, we also achieved real savings as a result of improved productivity and efficiency. In the Q2, our non commodity oil sands costs were lower than Q2 of last year, and we achieved these absolute dollar cost savings while increasing our year over year production by almost 12%. As we implement business process movements both internally and in partnership with our contractors and suppliers, we believe we can continue to realize further savings. And our intent would be to embed these reductions and sustain them going forward. We're taking the same disciplined approach to the management of our capital spending program through a combination of capital efficiencies, deferrals and cancellations of non critical projects, we've limited our capital outlay to $2,700,000,000 in the first half of this year. Now this puts us well on track to capture in excess of $1,000,000,000 of capital reductions we committed to this past January. And we're achieving these savings while we're still investing in the sustainment of our operations and moving forward on schedule with our key growth projects like Fort Hills and Hebron. Now obviously, this performance is helping us to maintain a very solid balance sheet. Our net debt to cash flow is at 1.2 times and our debt to capitalization is 25%. We finished the quarter with $4,900,000,000 in cash and undrawn lines of credit of $6,900,000,000 for total liquidity of almost $12,000,000,000 And of course, we continue to attract a strong investment grade credit rating. The net result of our strong financial performance is a level of free cash flow for the quarter that more than covers our dividend obligation. As a result, we are well positioned to once again increase the level of cash we return to shareholders and we have just done just that with an increase of 3.5 percent to a quarterly dividend and the redemption of our share buyback program with the intention to repurchase $250,000,000 worth of shares through the next 6 months subject to market conditions. Over the past 4 years, we've grown the dividend by 164%. During that same period, we have repurchased and canceled over $5,000,000,000 of Suncor stock, representing approximately 10% of the outstanding shares. What's particularly encouraging is the resiliency of our business model. With our Brent crude price that average less than $60 per barrel in the 1st 6 months of this year, SunCar was able to generate sufficient cash flow from operations to fund our entire capital spending program, over 50% of which is focused on growth and produced over $700,000,000 in free cash flow. These results combined with the strong cash on hand position supported a dividend increase in the renewal of our share buyback program. We believe this is a value proposition, which very few companies in our industry can match. Our business model and our strategy have put us in a position to thrive if as expected oil prices remain lower for longer. But we're also poised to benefit from eventual increases in oil price, thanks to our growing production and our strong leverage to Brent pricing through our integration strategy. Consistent with our strategy, we'll remain focused on prudent cost management and disciplined capital allocation. And as you've seen our commitment to returning cash to shareholders will not waver. And with that, I'll pass you back to Steve Douglas. Thanks, Alastair, and thank you, Steve. Just a few notes before we go to Q and A. On LIFO FIFO with rising crude and product prices, we had a positive after tax impact of $235,000,000 in the quarter and year to date that puts us at a positive $65,000,000 The impact of the U. S. Canadian dollar was actually a positive this quarter of $178,000,000 but year to date it is a net expense of $762,000,000 Stock based comp was a net cost to us of $5,000,000 in the quarter after tax, bringing the year to date cost to $98,000,000 after tax. As both Steve and Alistair mentioned, we did update our guidance on a number of fronts rather. The highlights are as follows. E and P production forecast has been adjusted to reflect the strong performance in the North Sea as well as extended maintenance on the East Coast. The net result is a 10,000 barrel a day increase to the guidance range for the overall company. We've also adjusted the sales mix forecast at Oil Sands as a result of exceptional upgrading performance year to date. We've raised the synthetic crude oil sales range by 15,000 barrels a day to 300 to 330,000 barrels a day. And of course, we've made an offsetting reduction in bitumen sales. As we mentioned earlier on the call, we continue to be disciplined with our capital spend, and we have reduced the guidance range by $400,000,000 taking us to $5,800,000,000 to $6,400,000,000 for the year. Finally, we've reduced the range for oil sands cash costs, reflecting the very strong first half of the year. The range is now $28 to $31 a barrel. There are a few other minor changes around tax rates, and you can find the full updated guidance on our website at suncor.com. With that, I'll turn it over to Melanie to begin the questions. Thank you. We will now take questions from the telephone lines. The first question is from Phil Gresh of JPMorgan. Please go ahead. Hi, good morning. Congratulations on exceptional result there. First question is just the CapEx reductions. How should we think about this in the context of your longer term sustaining capital requirements? Is the reduction related to better management of growth capital? Is it a reduction in the sustaining capital requirements? Maybe just talk about how you think about those sustaining capital requirements. I think maybe the old number was something around $3,500,000,000 run rate in 2015. Thanks, Phil. Yes, no real changes. I mean, what we're seeing is this year's capital reductions were from all classes if you like. We were able to get more efficient on the capital spend both on sustaining and the major projects in execution. We were also able to take the projects at the bottom of our priority list and defer some of those. So it's a mixture of impacts. Sustaining capital has come down and should stay down. That's been a journey we've been on over a few years as we've been working to improve the liability by getting to a higher standard of asset maintenance. And that's clearly been working and that cycle is starting to come to an end. So I would think of and I know when we've been on the road, we've given numbers in that sort of $3,500,000,000 $4,500,000,000 to sustain capital of the existing assets depending on whether we're in a big turnaround year or a smaller turnaround year. And those numbers are good. The only footnote I would put on it, we are still continuing to see overall deflation in costs, particularly around labor and commodities. And although it's not a perfect number, if you just look at Q2 2014 to 2015, you see an 18% reduction on costs, which is sort of reflective of some of the deflation we're seeing. Sure. Okay. Got it. And then the second question just on the buybacks. Obviously, great to see the dividend coverage, the buybacks being reinstituted. Maybe you could just put this in the context of your broader thinking around capital allocation between return of capital versus growth. And obviously, the opportunity to return capital continues to increase with each passing year and with Fort Hills coming on and growth capital potentially coming down. So maybe just where do you stand on that thinking out on a multiyear basis? Yes. And let me go back again to some of the messages we've been putting out. We have a very rich suite of opportunities, organic opportunities there. We have potential and I'll go out in that sort of 2, 5, 10 year timeframe. We've got great opportunities in oil sands around both once Fort Hills comes on more emphasis on in situ development, lots of opportunities. We've got a debottleneck at Firebag, a debottleneck at Mackay River and then we've got a this replication strategy, which is 10, 15 year development program of the in situ resources. So lots of opportunities there. We've also got significant opportunities in our conventional E and P business and we've been lining those up. We've got Hebron coming on in 2017. But beyond that, we still have the opportunities we've talked about in the past where we've been working with Shell and Conoco in the Shelbourne Basin and with Exxon and Conoco in the Flemish Pass. We've got some things over in the North Sea as well. So lots of growth opportunities there within our ownership for development. What we've always done with capital is say, okay, well, where is what's the best use of this cash? And we've been very clinical and dispassionate in that analysis. And that's ended up being a mix of the growth opportunities we have and returning share value to shareholders. And you'll see us continue to do both of those. So dividend our commitment on dividend has been that it will be competitive, meaningful and sustainable. And as we grow the business and the cash flow grows, you will continue to see dividend grow. We've also been opportunistic on buybacks where we just look at it versus the other allocation of other allocations for that capital. And we do we take the basket of analysts' nabs. We do our own calculations and we look to see if we think we get a good return on that investment. Clearly at these prices, we believe our stock is a good investment. And so you've seen us go into share buybacks. But it will be a good investment. And so you've seen us go into share buybacks. But it will be those considerations of comparing the uses of growth company. With the budget we're talking about, even with the CapEx we're talking about, we're fully funding Fort Hills, fully funding Hebron. So we have a relatively flat 2016 because of our turnaround in terms of production. But the underlying business is growing there when we fully utilize in a year. And then in 2017, we have 2 substantial growth projects coming on and then we're still doing the underlying development for the other one. So I still want this to be thought of as a growth company with a very healthy cash flow, which is being then returned to shareholders. And how do you think about what the growth target would be? Is it in terms of perhaps in terms of volume growth? We think plus or minus on 5% is a good number through the period. So you'll see 5% year on year through this through to 2020 and beyond. Okay. Thanks. I'll turn it over. Thank you. The following question is from Guy Baber of Simmons. Please go ahead. Good morning, everybody, and congrats on another strong quarter. I was hoping we could dig a little bit deeper on the CapEx front, but obviously you all have the track record now of driving CapEx lower given the focus on capital discipline in 2015 has consistently trended down. So the question is on the specific read through to 2016, just wondering how much of those savings are permanent versus perhaps getting shifted around and into 2016? And could you talk through some of the drivers of 2016 CapEx so we can better frame our expectations? I know you have the turnaround next year and then Fort Hills will hit peak spending, but any other details that you could provide that will help us understand how CapEx moves from 2015 into 2016 would be very helpful. And then I have a follow-up. Okay. I mean, great questions there, but very tough to be specific in terms of numbers. But I think I can give you some clear indications. So a significant part of the CapEx reductions are deflation. And our reliable operation means that we're able to plan our maintenance and when we get there, there is less of it. So those are sustainable cost reductions into the future. We haven't set or guided on capital for 2016 yet, but my expectation from the first round of reviews I've taken are that it will be in the $6,500,000,000 to $7,500,000,000 range. Included in that will be a fully funded Fort Hills and fully funded Hebron development. And both of those projects are towards the peak of their expenditure in 2017. So what we're sorry 2016 and then drop off as we go into 2017. So what we're looking at now is how we define and then phase the next generation of growth in there. As I said, the projects we're looking at the moment, Fort Hills is largely coming online at the back end of 2017. So the projects are around firebag expansion starts to become more important. We're looking at dusting off the Mackay River, which we're still quietly developing in the background. And then we have a multi phase program of replication around in situ. And think of those as in the 20000 to 40000 barreladay type steps each of the replication steps and we'll be implementing one of those every 1 year to 18 months after 2020. So there's a nice steady development line of projects there. And the balance for CapEx allocation will be the balance of returning that to shareholders and selecting those projects. And those decisions will depend on the competitive climate in Alberta, the competitive climate in those other arenas I was talking about and our share price. And we'll look at those as alternatives. Thanks very much for that detail. Also, I was hoping we could talk a little bit more about the cost reduction initiatives. But obviously, you all are outperforming versus $100,000,000 to $800,000,000 target that you'd set earlier this year, more savings faster than expected. You reduced the OpEx guidance this quarter, which was nice to see. Can you just update us or perhaps just put into context the extent to which you continue to outperform on the cost reduction front or perhaps the size of the prize that you see? And just a reminder of how much you think is sustainable versus what might be more temporary if prices were to begin to recover? Okay. Yes, I'll talk about and Alastair may jump in on the end of this as well. So we're obviously pleased with the progress we've been making. The work we've been doing on operational excellence meant we were in a very strong position to move quickly because we'd already been working on the underlying reliability and getting new work processes in place following the merger. So our belief is that about 2 thirds of these savings are sustainable in time and will not be given back in the higher price environment. So a very high proportion of them. And we haven't finished yet. These are iterative. So what we do is tackle the things at the top of the list first and then we start to continue to move through that program. So if you think about the cost, it's been by getting it lots of different things. First of all, it's about using a more localized workforce, less fly in, less distances to cover. It's about streamlining the benefits and the incentives people get. It's about tackling some of the underlying productivity issues. It's about getting better quality staff in there. It's about lower contracting rates and salary freezes. It's about reducing taking out guaranteed overtime, reducing overtime because we have a longer queue of employees and contractors who want to come and work in these areas. So there are varying degrees of sustainability in those cost reductions. My overall feeling at the moment is it's going very well. There's more to come. We're going to carry these savings forward into 2016 and beyond. So I'm quite encouraged by the progress we've made. Great color, Steve. Thanks again. Thank you. The following question is from Benny Wong of Morgan Stanley. Please go ahead. Yes, thanks. Apologies if you mentioned in your prepared remarks, but can you provide any color around your renewed normal course issuer bid? Is there any target pace you guys are thinking or any kind of ways you guys plan on approaching that? Yes, Benny, it's Alistair. You're seeing that we filed for $500,000,000 just for the TSX renewal. The pace that we expect to be buying back is about $250,000,000 over the next 6 months. Great. Thanks. And just in regards to that asset swap you guys are engaged in, are you able to quantify any savings or efficiencies that you guys are going to get from owning those assets? Thanks. I mean, the simple answer is we're not planning to. I mean, and the reason is because it's complex, very complex. The way you should think about it is it's part of the drive to improve reliability. So if you think about that operational excellence journey, the first part of the journey was about the things which we had in our ownership, making sure they were very well maintained, very well operated and performing as well as they could do. That journey is very successful, still more to come. We then said, okay, well, what is our next highest priority item? And it was 3rd party reliability. So electrical facilities into our plant and all of the service industry around us. So the first one we looked at last year was the sulfur treatment around the Montreal refinery And that was having an effect on our own base plant reliability because of our ability to get sulfur away. So that was one that we tackled early. This is very similar. 1 of our bigger opportunities around the base oil plant is the reliability of the electrical supply. So we're moving back up the supply chain to get control of infrastructure, which affects the reliability of our plant. And that's what this is about. So it's about improved reliability about electrical generation and steam generation. And so what you'll see is, let's continue on improving the reliability of the base plan. So as we get to the mid-90s, you'll see us start to move through that and potentially beyond. Great. Really appreciate that color. And just as a final question, just looking at CapEx, you guys have been very successful in reducing that or cutting it. How much more is there potentially for you guys to cut this year? Are we getting to a point where you can't reduce any more spending on that front? The ability to reduce as you go into the year because one of it this is not slashing and burning. One of the issues with slashing and burning capital budget is it comes with a price later. So it's been a very measured reduction where we're still getting the maintenance on the plants we want, where we're still getting the growth projects we want fully funded. So it's a grinding process of working these costs out through individual contract type negotiations. So you've seen the majority of it. It's possible we could see even more deflation as the year goes on. But our work program is very well is largely fixed and contracted and in place now. So the opportunity decreases as the year goes on. Great. Thanks for the color. Thank you. The following question is from Paul Cheng of Barclays. Please go ahead. Hey Steve, good morning. Several years ago you started with the journey and then coming up with the debottleneck opportunity outlook in whether it's reparable the module, in whether it's reputable the module. My question is that when you're looking at your existing asset, your base, is all the debottleneck opportunity are pretty much already captured at this point? Or that there's actually far more that to go? I don't want to I'm going to answer your question Paul, but I don't want it to sound too cliched, but it is a journey. So, we the reason we came out with the 100,000 barrels a day was not because that was an accurate number, but because it put some scale around it and enabled you guys to be able to compare it to the size of some of the growth steps. I think at the beginning, there was serious skepticism around whether we could achieve it, understandably so, because it was multiple small steps that added up to it. As you say, we are well on our way to achieving that 100,000 barrels a day. And I think now it's started to be built into models and expectations. There's more to come. It's also an iterative process. So the 2 I'll just give you two examples of the next stages. Firebag, we've identified a clear debottleneck project there that we're in the process of finalizing the details on now. But we got it in order to be able to define it, we needed to get the plant to its operating limits. We've got the plant up there and we've had it up as you know above 190,000 barrels a day. We've now been able to identify the next debottleneck step. So there's a very good brownfield debottleneck low cost type project there that we will be bringing forward. We haven't finished on the upgraders. I've always said because of our poor performance if you go back, there was a great opportunity for us to get it up into the mid-90s. But there was nothing particular about 95% or 100%. In fact, we could identify some opportunities to lower than full cost develop those facilities. Those are starting to become clear to us as we operate regularly up in the mid-90s now. So I would say 2 big areas, firebags one good example and further upgrading reliability is another one. So still significantly more to come. Second question, I think this is probably for Emerson. In the cash flow, say the cash flow from operation for the Q2 is like RMB2.1 billion, but your actual cash flow from operation is more like RMB1.7 billion, RMB1.8 due to the change in the working capital and all that. Alison that when we looking out, do you think that the working capital and other area will continue to be a drag in your cash flow or that this is more unique in the first half of the year? Yes, Paul. The changes in working capital I think are probably more isolated to the first half of the year. A couple of things are really driving that. One was as prices ramped up obviously our receivable balances moved up. We have some increases in inventory, which we expect to draw down in the second half of the year. So releasing cash, prices are obviously lower now than they were in the first half. So I think our receivable balances will go down. And the other ironic thing is as we've been very successful in reducing OpEx and CapEx, ironically, our payables balance has gone down. So therefore, that has sort of ironically increased our working capital. That one will continue as we go forward. Final question Steve. When we're looking at your conventional oil and gas certainly there is a number of projects like Hebon coming on stream. But on the longer term basis, is that a core business for you? Or that will you at some point to decide or make a decision whether that you want to stay in the current structure in terms of asset mix or that you just want to be more pure focused on the oil sand? Yes. Thanks, Paul. And again, I would reiterate what I've said in the past. The E and P business is a low cost, very cash generative business, which maintains with the projects we've got in flight, its current level of production through to the early mid-twenty 20s. So it's a great business to have in our portfolio. And of course, we have been reminded recently of the importance of having some diversity in the company's businesses as well as we've seen some question around new government policy in Alberta. So it's served us very well and it is serving us very well now. I think the question is bang on though. If you look at the core of Suncor, the core of Suncor is oil sands integrated to the market. So we think part of the oil sands business is really the downstream in that sense and that it enables us to fully value our questions and regularly take reviews with the board on the strategy around E and P. We're very comfortable with it. We have projects that maintain the production levels as I say. And then we've got these 2 other projects that we're partnered with world class organizations off of the East Coast of Canada. So it's a really good position to be in. We ask ourselves that question. Clearly, it's a key part of our strategy going forward. But there is it's not unusual for companies if that business were to start to decline in the mid-2020s. Clearly, there's a strategic opportunity to monetize it if we want to. So we like the business, no plans to dispose it, but we regularly ask that question. Thank you. Thank you. The following question is from Andrew Capital Markets. It's actually Greg Pardy. Steve, just a couple of questions and fire ups follow ups more than anything else. With respect to the fire bag debottleneck, how large do you think that could be? Or has that just not been determined? We haven't completely defined it yet, but we think it's in the 20,000 barrels a day range, Greg. Okay. Fantastic. And then just with respect to Fort Hills, you've got $1,500,000,000 contingency in there. Just given the environment that we're in now, Things are obviously looking better from a cost perspective. Is it your sense that you're going to be releasing that as you move through 2016 and then into 2017? The project is in really good shape. I spent the day up at Fort Hills on Friday last week and they're making tremendous progress. You're right. In total, we have about $1,500,000,000 of contingency. It's largely unused. The only pressure we've seen on it has been around currency. And there are as a corporation, there are puts and takes around currency and we tend to mitigate an awful lot of that because of the integrated nature of the company. So there's some small pressure around foreign exchange, which is a relatively small proportion. Other than that, we have not consumed the contingency. So it's a little bit too early. We're currently at 34% completion on the project. By the end of this year, we will be close to 50% complete. So what I've said to the project guys is, I steward that contingency on a regular basis. And next year, I want to take a look as to whether we actually remove some of that contingency and give it back. Indications at the moment are very good, but I would say it's a little bit too early. So what I would say is, if you think historically of what's happened around mega projects is, they've tended to blow out on cost and schedule. When with our strategy on this project was we focus on quality and cost and the schedule will be what the schedule will be, but it will be the optimum way of spending the capital. We still maintain those priorities and we're actually on all three quality, cost and schedule. So I think the right time to take that debate is probably in 2016. So we'll update you then. Okay, fantastic. And just the last question, it's a loaded question obviously, but if more of Fort Hills were to become available, is that something you'd be you'd look at? Or are you comfortable with your 41% interest now? I would go back to the original strategy. I mean, clearly, I won't comment on rumors. But if you look at the original strategy, the reason we joint ventured and it was one of the first joint ventures that Suncor had gone into at this scale was to spread the risk. And a lot of that was execution risk. As we move forward on this project, of course, if you when I look at allocating capital, I can only allocate capital on a forward basis. I can't change the path per se. So when I look at it on a cash flow return going forward, of course, Fort Hills gets more and more attractive as you get nearer to the project because you have this 52 year, wall of cash that comes at you once that project is started up. So we have so it is a more attractive project as you get close to it. We have no plans at the moment, but we're very the partners are strongly supporting the project. We're very encouraged by the way it's going. So you will not see us pulling back on the execution of the project. The following question is from Nick Lupic of AltaCorp. I just had a quick question about the Montreal coker expansion. We haven't talked about that in a little while. I guess more specifically in terms of the timing when you expect to sanction that project? And also if you could give us an indication of how you're thinking about it in terms of size? And I guess what I mean by that is more when you look at it on a strategic level, how you're thinking about being fully integrated on a one for one basis or whether or not you want to become long bitumen eventually, given that we have Fort Hills coming online in 20 months or 24 months or so? Okay. Yes. Let me start at a distance and talk about how we think the continent pans out in terms of supply demand balance and that will give you the background for our thinking on the Montreal coker. So a few comments. Firstly, our view is and it has been, it was why we shut the Voyager Upgrader project down is our view is that in the long run, the continent has probably peaked in terms of overall demand for products. So very unlikely to see new refineries unless there's some sort of incentivization for those to be built. The balance of crude is likely to be long, light and sweet crude and short heavy crudes. For that reason, over time, we see ourselves moving more towards heavy products rather than upgrading, which is effectively a light sweeter of crude. So in the long run, we see the advantage we've had from integration will be diluted as time goes on. The extent to which you would be willing to pay to protect that decreases in our view over time. Now having said that, we like the range we're in. So the sort of 60%, 70% integration has been very attractive to us. We have effectively a spare refinery in Montreal, because it's not been physically integrated to any great extent. And so we have the opportunity to protect our level of integration through to the 2020s with assets in our control already. So we'll keep recycling on that view. And as our point of view changes, then we will look at opportunities available. We look at all the refining opportunities available to see if we want to invest in it. And to be frank, nothing has much interested us over the last few years. We tend to be we buy at the bottom of that market. That's been our track record. The last piece of the equation, of course, is around the ability to get crudes, particularly Western Canadian crudes into Montreal. We invested in a rail facility, which has enabled us to get 30,000 or 40,000 barrels a day of material in there. And we've been fully utilizing that since we started it up. Line 9 is the next stage of that. We've been disappointed by the NEB process. Of course, we completely support the need for stringent safety and environmental controls. But the length of this process in our judgment has been too long. I am optimistic that it's still coming. I still believe progress is being made even though the NEB have put very high standards, which I'm pleased they have done around that line and we support them. My expectation is that that line will still be reversed hopefully later this year, but latest should be early next year. So that's just a question of, I think, time. The size of the Montreal coker is still I would expect we slowed that project down. The development is still happening of the project. And I would expect probably in the first half of next year that the business will be presenting that project to us. So that's when we'll look at the final size. But the project is broadly speaking the one that was always planned because the main vessels are actually there on-site already. Perfect. Great color. Thank you very much. Thank you. The following question is from Mike Dunn of FirstEnergy. Please go ahead. Thank you. Good morning, everyone. A couple of questions. So I'll start with the I think you pronounced it the solvents and the radio frequency that you've started up here recently, a commercial test. Can you just comment on what's maybe some more specifics about what you saw with the original pilot? And then I think in your slide deck, you talk about potentially looking at a commercial size phase in 2017. Maybe just talk about that a bit? And then I have a question about your offshore assets after that. Okay. Yes, I mean not too many comments to make, Mike. I mean we see technology as being a very important part of the future for oil sands. Our target, we've been talking about it as an industry not just as Suncor has been to get oil sands on par with conventional crude in terms of its carbon footprint particularly its energy input. And Fort Hills and Kearl are hitting those targets. So, we're then looking at the next generation of technology in in situ. And the of course the key to the value in technology is first of all to develop the technology, but secondly to have the suite of projects that you can then commercialize it on. That's the importance of the multi phase replication we're talking about through the 20s. We're very encouraged by what we're seeing on the solvent technology and still hopeful that we can effectively move to almost a water free extraction of that bitumen through an in situ type process. So very encouraged and that's why we're working so hard the new technology. Radio frequency, again, good news. I mean, we've been trying it for a number of years at various locations. And when you've got a mine and you've got that technology, you do have the opportunity to try it and be able to see some of the results of it. So very encouraged with the way that's going. And one of the things we are reflecting on now is the extent to which we build in the capability to use those new technologies at some stage through that replication rollout process. So my summary would be technology is important. We're really keen to work on it and we have the capital program to commercialize it. Thanks, Steve. And then on the offshore assets, maybe a question I've asked this before, but on Buzzard, strong volumes in the quarter. Has anything changed your outlook on, I guess, the previous outlook that declines would be kicking in imminently here. Is that sort of put back 6 to 9 months? Or is there anything else you've learned there? And then just wondering if there's an update on the Hibernia South project. I think you mentioned some drilling delays at Hibernia this year. Hey, Mike. It's Steve Douglas here. On Buzzard, I wouldn't say it's changed. We actually some maintenance was deferred. And we are we have actually seen the beginning, if you like, of declines there. But with decreased maintenance in the field this year, we will outperform guidance and that's reflected in the fact that we've increased the guidance range. It's also reflective of the fact that Golden Eagle actually ramped up a little more quickly 2016 in Buzzard. As far as South Hibernia goes, yes, there were some drilling delays. So the production that we were expecting to see come on at South Hibernia, you won't see reflected till the very tail end of the year and into 2016. Thank you, Steve. That's all for me. Thank you. The following question is from Ashok Dara of Platts. Please go ahead. Your line is now open. If you're using a speaker phone, please lift up the handset or unmute your line. Hi. Hi. Please go ahead. Hi. Sorry, I lost you there. Actually my question has been answered. So thank you very much. Thank you. The following question is from Chester Dawson of Wall Street Journal. Please go ahead. Yes. Hi. Thanks for taking media questions. Just two questions. First, Steve, could you provide the average second quarter supply cost per barrel? And secondly, a more broad question about M and A. You've got a lot of dry powder, a lot of cash and asset prices are falling across the industry. Are you any more interested in M and A opportunities now than you were, say a year ago? Chester, let me take the second one and then the guys will give you a quick answer on the first one. Just generally, I mean, we look at all uses of capital. And you've heard me earlier in the call talk about the rich suite of organic opportunities we have. We've also talked about the willingness particularly these very low prices to buy our stock back. Clearly, the third thing that which is competing for that capital is other external opportunities. Just generally speaking, because we have such good opportunities within the company, we haven't been aggressive in looking outside. We do take a look at all of the opportunities. Our view was that the prices were still too high and the natural choices we looked at were we were not prepared to pay the prices for. Clearly, as time is going on, they've moved down and there are better opportunities there. We still got nothing really to talk about. We look at the opportunities. We assess that versus internal use of cash and share buybacks, but nothing particular to talk about today. Just on the supply cost, Chester, I mean, as you know, we do give a cash cost, which declined to $28 this quarter for oil sands, bringing the total for year to date to $28.20 If you factor in our overall, the 20% of our production which comes from offshore, the overall cash cost to the business is getting down into the $27 range. And with that, I see we are over time. So Melanie, we will that will be the last question. I'd like to thank everyone for participating. I know it's a very, very busy day of releases. But we will be available as always throughout the day along with controllers. So please feel free to contact us directly with more detailed questions. Thank you folks and I'll sign off. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.