Suncor Energy Inc Q1 FY2023 Earnings Call

Good day and welcome to the Suncor Energy First Quarter 2023 Results Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Rich Kruger, Interim President and Chief Executive Officer.

Thank you, operator, and good morning. Welcome to Suncor Energy’s first 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 first 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 first quarter earnings release. We will start with comments from Kris Smith, Suncor’s Incoming Chief Financial Officer, and Alister Cowan, Suncor’s current Chief Financial Officer. Following the formal remarks, we will open the call to questions. Now, I will hand it over to Kris to share his comments.

Thanks, Troy. Good morning. Thanks for joining us. I know many of you on the line and I look forward to reconnecting with those of you that I don’t know. Maybe a very brief background. I come to Suncor with nearly 40 years in energy. 31 of those were with ExxonMobil around the world. The last 7 have been with Imperial Oil here in Canada as their Chairman and CEO. My experience includes everything from operations, capital projects, commercial corporate strategy, upstream, downstream, oil gas, onshore offshore, conventional, LNG oil sands, and the geography started out in North America, Southeast Asia, Middle East, West Africa, and the former Soviet Union. Now, I am back to where I am supposed to be, North America and Canada. I wouldn’t say I have seen it all, but I have seen and done a lot. My assessment, this is week six on the job. It’s been quite a time. I see a very proud company here at Suncor, excellent people, and quality assets with some very unique competitive advantages. However, I also see a company with untapped potential. My objective is simple; lead the company to be the best of the best, the undisputed industry leader, number one. I believe that in our business, there are four foundations or pillars key to that: safety, operational integrity, reliability, and profitability. You can expect an intense focus on costs, organizational efficiency, and operational support from our center. We will become a simpler and more focused organization. We will look hard at reducing spending where value isn’t added, whether that’s operating costs or capital expenditures. In terms of capital allocation philosophy, I believe in a reliable and growing dividend, selective high quality, well-timed investments, and returning surplus cash to shareholders. You can expect a lot of words around clarifying, simplifying, and focusing on what we do, why we do it, and how we do it. You can expect a sense of urgency to improve, strengthen our competitiveness, and produce results. My first five weeks in the job have been quite busy. I visited about 50% of our major facilities, met with employees who wear hard hats and boots for a living, and started coaching. My general sense is that this organization is ready to respond and step up to perform. I am quite honored and excited to lead it. And I can assure you we won’t leave anything on the table. So with that, I will turn it over to Alister.

Thanks for the kind words, Kris. I have certainly appreciated all of the relationships I formed with members of the investment community over these last nine years while I have been at Suncor, as well as before that time. Overall, we generated $3 billion of adjusted funds from operations. The oil sands segment delivered $2.6 billion of adjusted funds from operations, with production of 675,000 barrels per day. This performance reflects the new quarterly in-situ production record of 261,000 barrels per day and average base plant and sink operator utilization of 23%. At Fort Hills, we completed the acquisition of the additional working interest from Teck Resources, and production remains on track to ramp up in Q2 prior to starting a 5-year turnaround in July. Oil sands realizations averaged $91 per barrel or 89% of WTI. I will say it, by small U.S. dollar, $1 per barrel, not only in the WCS heavy differentials versus Q4 of last year. Our E&P segment generated adjusted funds from operations of $500 million, with production of 67,000 barrels per day and an average price realization of $108 per barrel or 98% of Brent, downstream generated adjusted funds from operations of $1.2 billion on a FIFO basis. Excluding the $130 million of FIFO loss, this would be about $1.3 billion on a LIFO basis. During the quarter, we returned $1.6 billion to shareholders, including $700 million in dividends and $900 million to share buybacks. Suncor’s net debt position as of quarter end was $15.7 billion. Our final 2022 cash top-up payment was $500 million as we paid the majority of our cash taxes of $4.2 billion during 2022. With the acquisition of Total’s Canadian upstream assets, we now expect to remain at a 50:50 capital allocation between share buybacks and debt reduction until we return to $12 billion of net debt, at which point we will switch to 75:25 allocation. Thank you all.

Before we get your questions, I’d like to commend Kris for his leadership over the last nine months and the focus he has brought to this business, particularly on safety. I can assure you that Kris and I are going to work very well together. Lastly, I want to thank Alister for his dedication and leadership over the last nine years. I look forward to working with each of you and the investment community at large. I will turn it back to Troy to kick off our question period.

Thank you, Rich. I will turn the call back to the operator to take some questions.

Thanks very much. Good morning, everybody. I have a couple of quick ones. Rich, particularly as you have looked at the business, I am wondering if there are areas upstream or downstream where you see low-hanging fruit from an operating performance perspective. And if so, what those might be and how long do you think some of that might be to achieve better performance?

Greg, it's good to be back. Thank you. I have seen opportunities across the organization. On the downstream, there’s a baseball analogy I want to share quick: The downstream here in Canada has been very, very well. I am a baseball fan, and someone told me that we didn’t hit a triple—we were born on third base. We have a lot of structural advantages right now. What is important is whether we are operating to the best of our ability. Reliability is still an opportunity, and I think our cost structure, turnaround performance is equally important. We are focused on getting incrementally better at the basics. On the upstream, mining is a tough business. We have got aging mines and challenges with haul distances. However, I spent a lot of time with Peter, looking at improvement plans through efficiencies and cost reductions. So, I would describe it as lots of little things...not necessarily low-hanging fruit, but tangible improvements. Nothing in my first five or six weeks would indicate we can’t achieve material improvements by focusing on aspects we control.

Okay, understood. The second quick one, maybe it’s not a quick one, the pace which you run the baseline is coming up a lot. There’s a view that it’s about managing ARO, and that you will need to slow down the mine to manage ARO. How are you thinking about that decision?

I’m going to turn it over to Peter for more specifics. However, looking at the recent deal we’ve done, we know that the most valuable barrel is the last barrel through an upgrader. It’s essential we maximize the utilization of those facilities. We’ll have to determine the most economic way of achieving that, whether through continued mining or external bitumen supply.

In the short term, the base mine will continue as is to maximize volumes. This is a tailings-driven facility. Until we can open our tailings plan and improve variability around water management, our ability to throttle the rate of mining is limited. Post that, we will look at maximizing value while considering ore body operating costs.

Good morning, everyone. Congratulations to Kris and Rich on your new roles as well as Alister for a well-deserved retirement. During the quarter, it looks like you had about 5,500 barrels a day of Fort Hills production processed at the base plant upgraders. Can you talk towards the impacts of feeding those barrels through the various upgraders and processing facilities?

Dennis, this is Rich. It's all about value. I look forward to working with Peter on producing a smooth operational cycle by moving molecules around to maximize the value of every barrel.

From a dynamic perspective, we really optimize on market-based conditions through differentials, logistics, and downstream demand. Our integrated production planning team ensures we are maximizing the value derived from our operations.

I was curious about any learnings from the Commerce City Refinery’s downtime during the winter and any operational changes being implemented to prevent future occurrences.

There have been many learnings. The temperature drop happened rapidly, impacting our control systems. The decision to take down the facility was made out of concern for safety and operational integrity. We are now working to implement additional operator training and improvements like heat tracing to prepare for future winter conditions.

Welcome back, Rich. Congrats to everyone and Alister on your retirement. Can you dive into what attracted you to the Surmont and Fort Hills assets and detail what upside you see with this deal?

We looked at the long-term bitumen supply and value in keeping the upgraders full as big factors. This acquisition eliminates the need for large-scale capital projects, promotes immediate value, and is accretive to our total value.

We know the Fort Hills asset well, offering us confidence in the long-term value. Surmont is high quality, and we are both good operators in this space, signaling a strategic fit. We see very good long-term returns from this investment.

Rich and Kris, with so much forward focus on reliability, how much visibility do you have on what needs to be done for improvement? Given recent changes at the top, should we expect a quick impact or more of a multi-year timeline?

What needs to be done is not complicated; it's about executing the basics well and ensuring that people are equipped to operate our facilities effectively. I cannot provide precise timelines, but I expect to see incremental improvements sooner rather than later.