Suncor Energy Inc. (SU) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the Suncor Energy Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session . I would now like to hand the conference over to your speaker today, Mr. Trevor Bell, Vice President of Investor Relations. Please go ahead.
Trevor Bell: Thank you, operator, and good morning. Welcome to Suncor's second quarter earnings call. With me this morning are Mark Little, President and Chief Executive Officer; and Alister Cowan, Chief Financial Officer. Please note that today's comments contain forward-looking information. The actual results may differ materially from the expected results due to various risk factors and assumptions that are described in our second quarter’s earnings release, as well as our current annual information form. Both of these are available on SEDAR, EDGAR and our Web site, suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian GAAP. For a description of these financial measures, please see our second quarter earnings release. Following formal remarks, we'll open the call up to questions.
Mark Little: Great. Well, thanks, Trevor and good morning, and thank you, everybody for joining us. In late May, we held our Investor Day. And at that event, we detailed our five year plan, which focuses on value capture of our integrated business model. Building on the growth phase for the 2015 to 2018, this optimization phase is governed by extracting increasing value from our business through enhancing margins, lowering our cost structure, providing increased shareholder returns and fortifying the balance sheet with significant deleveraging. In comparison to the growth phase, we will lower our economic capital by 40% and add new revenue streams at mid teens returns. The optimization phase is expected to deliver significantly higher shareholder returns, including 25% dividend CAGR through 2025 and continued stock buybacks. At the same time, we'll maintain a $35 US WTI breakeven and retire debt, strengthening the long term financial health of the company. Foundational to this performance is our steadfast focus on operational excellence. By increasing the productivity and efficiency of our operations, optimizing the value of each barrel and thereby, increasing free funds flow, we will grow cash returns to shareholders and fortify our financial position. The second quarter results delivered our focus objectives, mainly operational excellence, lower costs and increase shareholder returns. I'm going to go into each area in a bit more detail. Our focus on operational excellence continues to result in strong operating performance. Our operating performance from November to June of 2021 marks the best months of production from our oil sands operations asset in our company's history. That's the best eight months of production in 15 plus years. Base Plant utilization was 98% over this period. And we had yet another quarterly record at in situ with 253,000 barrels per day. We also completed significant turnarounds at all of our refineries, as well as at Syncrude and Buzzard and at the same time, generated funds flow from operations of $2.4 billion. Approximately 40% or $1 billion of these funds was returned to shareholders in the forms of dividends and buybacks. Since we began the buyback program in early February through to the end of July, we have bought back over 42 million shares for $1.2 billion, representing approximately 3% of the outstanding shares. Turning now to operating performance. Oil sands operations production of 460,000 barrels per day was approximately 10,000 barrels per day higher than the first quarter, reflecting strong and reliable operations. From a utilization perspective, Base Plant operated at an average utilization of 96% in Q2 continuing its strong trend. Meanwhile, the operating performance at in situ from November 2020 to June 2021 averaged 250,000 barrels per day, making it the highest daily production period in nearly 20 year history for Firebag and MacKay. Executing the nameplate capacity increase at Firebag last October contributed to this record production.
Alister Cowan: Thanks, Mark and good morning, everyone. For the second quarter, we’ve returned approximately $1 billion to shareholders in the form of $350 million in dividends and $650 million in share repurchases. During the quarter, our buyback amounted to approximately 23 million shares at an average price of $28 per share. In addition, we’ve received approval from Toronto Stock Exchange to increase our share buyback program from 44 million shares or approximately 3% of Suncor's issued and outstanding common shares to 76 million shares or approximately 5%.
Trevor Bell: Thank you, Mark and Alister. I'll now turn the call back to our operators so we can take some questions. Operator?
Operator: Your first question comes from the line of Greg Pardy from RBC Capital Markets.
Greg Pardy: Mark, I was wondering if we can maybe just dig back into -- just why don’t we can come back to Fort Hills. Does the timeline in terms of ramp up just in the first quarter present any issues? And maybe could you talk, just around -- when it became evident around the instability, just in the slope you mentioned earlier?
Mark Little: So let me just step back for a minute on this, because the focus is on getting Fort Hills fully ramped up to two trains. And yes, that's been delayed until the end of 2021. So we're not expecting any impact in 2022 production. And so we found out about this in July as we've got later in the month associated with it. And this is really around focusing to ensure that the slope has stability. And because as I mentioned, this is a critical tiller between the south end of the Forest Hills lease and the north end of the Syncrude Aurora lease. And because that mine space has about 60% of what we thought was the available ore and it's not going to be available until we clear more of the overburden associated with it. So this is just a time issue. We don't think it has any fundamental impacts beyond just delaying the ramp up of Forest Hills to add that incremental production to what you're seeing in our results now. So that's kind of where we're at. And this south mine phase, after we've mined it, it's just so critical that we don't want it moving and becoming unstable. In a lot of places, it's not nearly as relevant but this is a very critical piece of infrastructure going forward.
Greg Pardy: And I'm going to switch gears entirely here just to come back, I mean, you're a part of the quintet on the oil sands pathways net zero back in early June, you guys announced that. What are the milestones we should be looking for in terms of progression and so forth?
Mark Little: Well, it's interesting, Greg, if you just step back. Essentially, this is about taking the whole oil sand industry to net zero by 2015. I view this as an unprecedented collaboration between the oil sands producers. It represents 90% of the operators today. So I fully expect that we will have the remaining operators join this journey as we go forward. There's one very significant foundational set of infrastructure that we see is critical for this. And it's around building the carbon capture and sequestration capability for the industry. We think this is about 50% of the industry solution as we go forward as we think to the future, and so it's really important. By working together, we realize we can drop the cost of this significantly, because we can all use a lot of common infrastructure and we can go faster and we can do it cheaper. All of which I think is super important in this journey going forward. So if you look on the -- there's a Web site now the oil sands pathways to net zero by 2050. And if you look on that Web site, you'll see the map of the carbon sequestration system and such. So you're going to see that that's going to be a common piece associated with it. Other parts are independent. So if you look at it, there's a whole strategy there. Some of its around carbon sequestration, some of its around fuel switching like our co-gen up north, some of it’s switching to things like clean hydrogen, like our announcement that we made in Edmonton. So some of this you'll see through the company window but the big foundational project is what's being worked on. But we also have things like sharing solvent infrastructure, clean hydrogen infrastructure, those sorts of things. So if you watch that Web site, you'll start to see more and more details come out. And we've just come out with some of the details around the carbon sequestration system. We’re in the 90-day consultation period with the feds and we're working to sort of the details around the investment tax credits associated with that. So we're making good progress and we've been very happy with the cooperation between the province and the federal government.
Operator: Your next question comes from the line of Neil Mehta from Goldman Sachs.
Neil Mehta: The first question is around how Fort Hills facts into the production guide. You did maintain the 740,000 to 780,000 consolidated upstream number? Is it fair to say that you guys are targeting based on what you know right now, the low end of the guidance range?
Mark Little: I think that's probably fair, Neil. The assets have performed very well as I went through in my prepared remarks. You're seeing the oil sands year-to-date, it's in the high 90s utilization. Syncrude has a proven strong record post turnaround that we've just gone through that coming into their turnaround in the second quarter. So with the completion of that work, we're expecting that the assets will perform very well. So we're maintaining the corporate guidance associated with it, but we're not at the top end of guidance but we're comfortable with the total guidance range.
Neil Mehta: And then the follow-up is just around the buyback strategy. Obviously, the stock has lagged here over the last two -- the better part of the last two years. Free cash flow yield is very robust. So it seems like you guys are going to lean into the buyback and should average to the top end of that 5% limit. Just talk about your buyback strategy and how you take advantage of the valuation?
Alister Cowan: I mean, if you look at where we're headed, we obviously got 3% and already executed. We’ve got approval to go to 5%. We will be executing on that provided obviously, commodity prices remain at current level. So you'd expect to see that the top end of that range through to February of next year and the buyback period. Really the strategy is, one of a ratable buyback through the period, which is why you saw $600 million-odd in the quarter. We continue to execute it that way, obviously, within the remainder of the buyback.
Operator: Your next question comes from the line of Phil Gresh from JPMorgan.
Phil Gresh: I want to follow-up on Fort hills. One of your partners on the project was referencing some issues with groundwater. And so I just want to understand the technicals of this a little bit better. You're talking about slope stability. So I just want to make sure I fully understand why this would be a onetime issue as opposed to a recurring issue?
Mark Little: It's interesting, Phil. On the south mine phase, it's just the south mine phase, right? Like this is the one that we're building the corridor between the two mines. So the integrity of that mine phase is important. Anytime you're building a dam structure it’s super important that it have integrity and can be managed accordingly. Water management in oil sands is a very common issue and whether it's from rain events. But anytime you have soft rock mining, we are getting some egress of water from ground sources and such into the mine. So we have procedures to be able to manage it. Some events are more challenging than others associated with it. But this is common across, I would say, almost all of the mines, if not all the mines in oil sands associated with it. So this is following protocol. We don't expect this to be a fundamental issue any more than what we've seen. And in fact as we go north and head into central pit and stuff, we expect the vast majority of this to diminish associated with it. So yes, I mean, it needs to be managed and that's what we've done and we have the procedures in place and we're executing according to those procedures. So yes, it’s water an issue. Yes, it always is. And we manage it accordingly.
Phil Gresh: My follow-up question is just on OpEx. Obviously, acknowledging the strong performance for oil sands overall. The total company OpEx run rate is tracking a little bit over 10.8 billion. You mentioned, the natural gas headwinds, which I think everybody's dealing with obviously. But are you still confident in the 10.6 billion guidance you laid out for the year that you gave at the Analyst Day, given where the run rate looks and seasonality and other considerations?
Alister Cowan: So if you look at our year-to-date numbers, it was about $250 million and then a one time -- we will be consider one-time items related to restructuring, remember the big severance restructuring provision we took in Q1 actually with our workforce reduction. And some additional costs in the first half of the year related to some of the COVID restrictions that are obviously easing and we expect those to be significantly lap in the second half of the year. So we are confident about that trend for the second half of the year to be able to achieve that run rate or the numbers that we disclosed in Investor Day. And then obviously, as you move forward into '22, '23, '24, a continuing trend downwards as we execute on our $2 billion of additional cash flow improvement plan. The other thing I would say on the gas side, which you correctly said, everybody will face is we get a benefit on the other side of that through our power revenue, which is obviously tied to gas prices in Alberta. So we are -- they’re not part of revenue, they’re now captured in other that is included in our revenue line.
Phil Gresh: And just to confirm, the 10.6 billion guide just out of the one-time factors that you're talking about?
Alister Cowan: Yes, Phil, we excluded those. We focus more on the run rate rather than including one-time restructuring items in there.
Operator: And your next question comes from the line of Manav Gupta from Credit Suisse.
Manav Gupta: My question is a little bit of a follow-up on Neil Mehta's question. But looking at the quarter, I think you guys have given a guidance that 66% of the discretionary cash that’s post dividend cash goes to debt reduction and 33% goes to buyback. And when we look at this quarter, there's about 750 million of discretionary cash and 640 million went to buybacks and 100 million to debt reduction. So I'm just wondering if there's a change a little bit in strategy there or you basically expect a billion in get backs and Golden Eagle sale to come next quarter, so this was just a one off quarter and there is no change to strategy?
Alister Cowan: There's no change to that annual allocation and it's an annual allocation to those debt repayments and one third buybacks. So quarter to quarter it will move around and obviously Q2, we always knew we'd be impacted by the maintenance higher capital and lower cash flow increase, so that's why we're looking at annual. But you're absolutely right, we have $1 billion of cash proceeds coming in, in the second half of the year from tax refunds and the Golden Eagle sale and we're going to use those for the debt reduction.
Manav Gupta: So if we follow-up in the last one year or so, while most of the US refiners have lost money, Suncor has been unbelievably resilient in its downstream, and I think it's functionally for integration and how well you run. And you've consistently generated like 400 million or 500 million. Now this quarter was lower. I'm hoping is this just a function of the downtime, because I think your utilization was dropping to 70 and once you go back to 90, again, we'll get back into that run rate of 500 million, 600 million in free cash? Or was this anything else, especially happening in Canada with the lockdowns or something else?
Mark Little: Well, I think it's really twofold. And you've touched on it here is obviously, we had all of our refineries doing turnaround work through this period of time. And you saw at Investor Day we talked about when you look that refinery utilization, we said that we were 2x as profitable as the next year when we benchmark that from a cash perspective, that didn't count our rack forward business associated with that. So the environment has improved significantly, as Alister talked about in his comments, as we go into the third quarter here. The turnarounds are complete. The cracking margins are robust and demand has recovered significantly even in July versus the second quarter. So we think we're set up really well for the back half of the year. And it's just the fact that between COVID and the turnarounds, you've been a much weaker market in the second quarter. So we think we're in very good shape to be able to perform well in the back half of the year.
Operator: And there are no further questions. At this time, I will turn the call back to Trevor Bell.
Trevor Bell: Great. Thank you, Operator. Thanks everyone for attending today. I know it's a busy day for earnings and I appreciate you listening in. We're around all day if you have any follow-up questions. Thank you.
Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.
