Suncor Energy Inc. (NYSE:SU) Q4 2022 Earnings Call Transcript

Suncor Energy Inc. (NYSE:SU) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Suncor Energy Fourth Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. At this time, I would now like to hand the conference over to your host today, Mr. Troy Little, Vice President of Investor Relations. Please, go ahead.

Troy Little: Thank you, operator, and good morning. Welcome to Suncor Energy’s fourth quarter earnings call. Please note that today’s comments contain forward-looking information. Actual results may differ materially from the expected results, because of various risk factors and assumptions that are described in our fourth quarter earnings release, as well as in our current annual information form, both of which are available on SEDAR, EDGAR and our website, suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian Generally Accepted Accounting Principles. For a description of these financial measures, please see our fourth quarter earnings release. We will start with comments from Kris Smith, Interim President and Chief Executive Officer, followed by Alister Cowan, Suncor’s Chief Financial Officer.

Also on the call are three of our senior operating leaders; Peter Zebedee, Executive Vice President, Mining and Upgrading; Shelley Powell, Senior Vice President, In Situ and E&P; and Arnel Santos, Senior Vice President, Refining and Logistics. Following the formal remarks, we’ll open the call to questions. Now, I’ll hand it over to Kris to share his perspectives on the quarter.

Kris Smith: Thanks, Troy. Good morning, everyone, and thank you for joining us. Since taking on the Interim CEO role of Suncor in July of last year, I have been fully committed to improving the safety and reliability of our operations. We’re also maximizing our value capture by leveraging Suncor’s difficult to replicate integrated model and driving fit and focus across our asset base. I want to begin our discussion today with an update on several initiatives we discussed at our recent Investor Day. First, on safety. As planned, collision awareness systems are scheduled to go live at Syncrude’s Aurora mine by the end of the first quarter, and we are on track to complete implementation of collision awareness and fatigue management technology systems across all nine sites.

As well, we continue to drive sharp focus on safety performance across the entire company. And to that end, we have doubled the safety component weighting of our 2023 employee annual incentive program to ensure alignment with that focus. Second, with respect to costs. We are making progress on contractor workforce reductions in our mining and upgrading business and remain on track to achieve a 20% reduction by mid-2023. And to be clear, these reductions will not be replaced by in-sourced workforce. Third, with respect to reliability. Our upstream assets performed well overall during our very cold weather at the end of Q4. Syncrude achieved the highest full year production in its history, while our Firebag in situ assets had a new quarterly production record.

With respect to Fort Hills, while there will be variability between quarters during the next three years, as outlined in our recent Investor Day, our performance improvement plan is progressing as expected. By mid-2023, volumes will start to ramp up, as our mine inventory increases until our planned five-year fixed plant turnaround in July and August. Last, we continue to adjust our asset portfolio to focus more on our core integrated business. We completed the sale of our wind and solar assets and are making progress on the potential sale of our UK North Sea assets. We also closed the acquisition of an additional stake in Fort Hills from Teck Resources. Considering the smaller than expected interest we acquired, we are updating our annual production guidance for Fort Hills to reflect a corresponding decrease of 5,000 barrels per day for an annual range of 85,0000 to 95,000 barrels per day.

Now on to the quarter. Looking at the fourth quarter results, Suncor generated adjusted funds from operations of $4.2 billion or $3.11 per share. Total upstream production averaged 763,000 barrels per day. 70% of this was Syncrude crude oil or synthetic crude oil, which commanded premium pricing due to higher distillate cut relative to WTI. 20% was non-upgraded bitumen from our In Situ operations in Fort Hills. And lastly, 10% came from our E&P segment and reflects the disposition of our Norway assets, which was completed in the third quarter. Downstream generated $1.7 billion of FIFO adjusted funds from operations with an average refinery utilization rate of 94% and margin capture was strong at 99%. As previously communicated, our Commerce City refinery was put into safe mode, following the impact of the extreme weather in late December.

It has begun a progressive restart and we expect it to come back to full production later in the first quarter. For the full year 2022, Suncor generated record adjusted funds from operations of $18.1 billion, which is 67% higher than our previous annual record. We paid down $3.2 billion of debt through the year, further strengthening our balance sheet. And at the same time, through dividends and share buybacks, we returned record cash to shareholders of $7.7 billion, representing nearly 45% of adjusted funds from operations for a 13% cash yield. We also continue to drive capital discipline across the company, and our capital expenditures for the year were $4.9 billion, which is at the bottom end of our updated guidance range. Now before turning things over to Alister, I would like to highlight the significant progress we’ve made to date on the oil sands pathways alliance to net-zero, a key lever in our sustainability leadership and the long-term decarbonization of the oil sands industry.

Recently, you have seen that pathways has signed an evaluation agreement with the Province of Alberta, allowing further delineation of our allocated floor space. We hope to further advance this with the formal lease agreement before the end of 2023. As well, front-end engineering and design of both the pipeline and sequestration facilities progresses as we continue to work with both the Canadian federal and Alberta provincial governments on the required fiscal and regulatory frameworks to enable these important projects. And with that, I’ll now pass it over to Alister to go through the financial results.

Alister Cowan: Thanks, Kris, and good morning, everyone. In the fourth quarter, oil sands delivered approximately $2.9 billion of adjusted funds from operations with an average realization of CAD97 per barrel. The quarterly performance reflects, obviously, lower commodity prices compared to Q3 specifically, a decrease in WTI of US$9 per barrel as well as US$5 per barrel decrease in the SYN premium. We also saw the light heavy differentials widened by US$6 per barrel, but the upstream impact was offset by a benefit in downstream due to our physical integration. Softening commodity prices quarter-over-quarter were partially offset by higher production following completion of significant turnaround activities at the base plant and Syncrude upgraders.

On an annual basis, cash cost per barrel for Oil Sands operations, Fort Hills and Syncrude came in as forecast, reflecting industry-wide inflationary pressures as well as main progression work that we discussed in some detail at our Investor Day last November. As benefits from our enterprise-wide systems implementation and other digital initiatives start to come through, we continue to focus on employee and contractor workforce reductions over 2023 and 2024. Our E&P segment generated $720 million of adjusted funds from operations in the quarter reflecting average price realizations of CAD 122 per barrel. As Kris said, Downstream generated $1.7 billion of adjusted funds from operations. And excluding a $440 million FIFO loss in the quarter, this would have been $2.1 billion on a LIFO basis.

This performance demonstrates the strength and competitive advantage of our integrated model, which enabled us to capture robust benchmark cracks and lower feedstock costs with widening heavy differentials. As a result, we achieved margin capture of 99% through the quarter. Suncor returned $1.4 billion to shareholders, including $700 million in dividends and $725 million in share buybacks in the fourth quarter. On a full year basis, that’s 117 million shares repurchased and $7.7 billion of total value retune shareholders or approximately 13% of our market cap. Our quarterly dividend is now the highest in the coming history after the most recent increase of 11% to $0.52 per share. And as Kris said, we continue to strengthen the balance sheet and reduced net debt during the year by $3.2 billion, excluding FX impacts on US dollar culminated debt.

As previously noted, we intend to increase excess funds to buybacks to 75% by the end of Q1. And subsequent to the fourth quarter, the Board approved a renewal of the company’s share repurchase program for up to 10% of Suncor’s issued and outstanding common shares as of February 3, 2022. And this program is planned to begin on February 17, 2023. With that, I’ll pass it back to Kris for his closing comments.

Kris Smith: Great. Thanks, Alister. Over my last six months as interim CEO, I’ve placed my focus on setting the foundation for improved performance through operational excellence and a strong safety and performance culture with focus and follow through. Our continued focus will be not only to build on that momentum, but to accelerate it, driving delivery of safe, reliable operations, capital discipline, reducing our cost structure and growing shareholder returns. Suncor has an unparalleled set of assets in the Canadian oil sands, coupled with an unmatched integrated model. We see great opportunities in front of Suncor to leverage those competitive differentiators to drive value for our shareholders in both the short and the long-term, and that is our focus. And with that, I look forward to any questions you may have, and I’ll turn it back over to you, Troy.

Troy Little: Thank you, Kris and Alister. I’ll turn the call back to the operator to take some questions.

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Q&A Session

Operator: Thank you. And our first question comes from the line of Dennis Fong with CIBC.

Dennis Fong: Hi, good morning and I appreciate you answering our questions this morning. First and foremost, understanding that there were some comments around margin capture from the refining business. I was hoping that you could outline some of the operational impacts from the supply and trading business unit really given the combination of price volatility and some of the other, we’ll call it, items like potentially ramping up Commerce City?

Kris Smith: Yeah. No, thanks very much, Dennis, for that question. We’re very proud of our supply and trading organization. It’s that organization has been in place for over 20 years, and we’ve been putting a lot of work and focus on growing it and creating greater impact from that part of the organization. It’s based in Calgary, but we also have significant trading and marketing operations in Houston as well as an office in London, UK. What I’d say is that organization as we manage the operations, it looks to increase the value capture and maximize that margin by leveraging our logistics positions, working closely with both upstream and downstream, and also ensuring that we’re maximizing our asset backed trading activities around that as well.

Examples would be, I mean, obviously, we had the shutdown of the Commerce City refinery that we put into safe mode, because of the extreme weather events that happened in late December in the Midwest and Gulf Coast. Our supply and trading organization was able to react quickly to manage both crude feedstock supply into that facility, but also product supply into the PADD 4 region. Another example would be with the Keystone outage that occurred at the end of December. We were able to react very quickly and very flexibly to that in terms of looking at our product mix in our oil sands business and using our asset positions, our logistics, our tankage positions to actually mitigate the impact of that and maximize margin through that event. So it’s a great part of the organization.

Thanks for asking the question, Dennis. I don’t think it gets enough attention sometimes, because it’s a key component of our integrated model and that margin capture that you see in the downstream, but also our margins we see in the upstream.

Dennis Fong: Great. Thank you. I appreciate that color. And if I would — if at all possible, I’d like to move in a slightly different direction. You’ve now commissioned and completed the PFT hot bitumen transfer pipeline, which now connects Fort Hills to your operating complex in the base plant and the baseline. I was just hoping for some commentary on; A, we’ll call it, the increased flexibility that you have by connecting all of these various assets, and secondarily, I believe the base plant has processed TFT barrels. I believe it was at the start of Fort Hills. But wouldn’t mind understanding kind of again the potential flexibility as well as the upside that that connection could offer?

Kris Smith: Great. Thanks for that Dennis. Actually I’m going to pass that question over to Peter Zebedee.

Peter Zebedee: Yes. Thanks very much, Dennis. So yeah, indeed, you’re correct. We have commissions of TFT jump over line to put Fort Hills barrels over into the base upgrader. We have the flexibility to bring over up to 40,000 barrels per day of Fort Hills bitumen into the upgrader. We have utilized that within the last year. And that, of course, just provides additional flexibility for us on bitumen supply sources into the upgrader. I think that particular line in conjunction with the ICP line that we have between both Syncrude and the base plant offer us differentiated flexibility in the region to offset various unit maintenance activities and really extract them with the highest margin for the barrels that we’re producing in the upstream.

Kris Smith: Thanks, Peter. I’ll just add to that. I like the flexibility that Peter is highlighting with Fort Hills, Syncrude, Firebag, we’ve got all those assets with connectivity into our base plant and into the Athabasca tank terminal. So it’s creating a tremendous amount of optionality for us to move bitumen around. And in the case of Syncrude as well, we — it’s a bidirectional pipeline, and we can move sour gas oils up to Syncrude when we find ourselves an opportunity where we’ve got long hydrotreating in that asset. So it’s been a real win for Suncor, and we’re looking for more and more opportunities to increase that flexibility.

Dennis Fong: Fantastic. I appreciate that. I’ll turn it back.

Kris Smith: Thanks, Dennis.

Operator: Thank you. And our next question comes from the line of Greg Pardy with RBC Capital Markets.

Greg Pardy: Yes, thanks. Thanks. Good morning. And thanks for the run down. Wanted to stay, maybe, just on the operations side right now and two questions there. The first is, Kris, why is 20% reduction in the contractor workforce? Like, how did you guys sort of land on that as being the right number? And I think you probably accomplished probably half of that already? And are you seeing benefits coming from it?

Kris Smith: Yes. Thanks very much, Greg. And 20%, I wouldn’t say is an arbitrary number. It’s working in a very focused way to how low can we get that contractor workforce down, while ensuring we’re maintaining safe, reliable operations and getting the work done. Maybe, I’ll ask Peter to talk to it a bit. Peter’s obviously been leading this, because it’s been primarily in our Mine and Upgrading business, which is really the part of the business that has the largest amount of contract workforce. Peter, do you want to…?

Peter Zebedee: Yes. No, I would say, maybe a couple of things, Greg. First was ensuring that we had the transparency built out across the assets to understand how many contractors we are coming through the gate each and every day. As you can imagine, with these mega sites, the scale is quite significant. So we had to get our arms around the numbers. The second was implementing a robust set of controls and work processes on ensuring that we’re really scrutinizing the release of work to contractors and ensuring that we’re maximizing the capacity that we have within our own Suncor workforce first and foremost. And then, we’re really looking to also build some additional tools to provide to our operators, to provide them with sufficient information to ensure that we’re sequencing maintenance activities, in particular in the most cost-efficient way.

Kris Smith: Thanks Peter. And Greg, I’d add to that as well. So we are making good progress, as you just mentioned, we’re on track. We’ve got high confidence in driving those reductions. But the thing I’d add to it, these reductions do two things in our mind. One, obviously, it reduces cost and increases efficiency. But secondly, and as importantly, it actually improves safety, because there’s less people in the field. And so, we’re getting both the benefits from these reductions.

Greg Pardy: Okay. Terrific. And just really, the second question comes back to the upstream. So as you’ve maybe had a relook under all the rocks in the upstream, where do you see most of the low-hanging fruit as it relates to either output increases or cost reductions aside from safety, I’m just wondering, is there more to come from MacKay, is there more to come from Firebag and so forth. But where do you see the easy wins that maybe you can achieve in 2023?