Suncor Energy Inc Q2 FY2023 Earnings Call

Thank you, operator, and good morning. Welcome to Suncor Energy’s second quarter earnings call. Please note that today’s comments contain forward-looking information. Actual results may differ materially from the expected results because of risk factors and assumptions that are described in our second quarter earnings release as well as in our current Annual Information Form, both of which are available on SEDAR plus 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 second quarter earnings release. We will start with comments from Rich Kruger, President and Chief Executive Officer; followed by Kris Smith, Suncor’s Chief Financial Officer. Also on the call are three of our senior operating leaders: Peter Zebedee, Executive Vice President, Oil Sands; Dave Oldreive, Executive Vice President, Downstream; and Shelley Powell, Senior Vice President, Operational Improvement and Support Services. Following the formal remarks, we’ll open up the call to questions. Now, I’ll hand it over to Rich to share his comments.

Good morning. The second quarter was a very active time for the company. We made material progress in a number of areas we’ll share with you today. First, creating an organization-wide focus on the fundamentals of safety, operational integrity, reliability, and profitability. Second, we took a number of tangible actions to construct a simpler, more focused, lower-cost organization that we’ll describe today. And last but not least, we found time in the second quarter to deal with a cybersecurity incident. I’ll have more on each of these topics shortly. I want to give you a few general comments though. During our first quarter call, I referenced having visited 50% of our major operating facilities. Since that time, I’ve continued to go to the field; I’ve now set foot on essentially all our major sites, meeting operational leaders, engaging frontline employees, touring the facilities, whether at our mines, upgraders, in-situ operations, drilling rigs, refineries, or the Terra Nova FPSO. In all locations, our conversations were centered on the fundamentals and what those of us above the field or above the operating site can do to help improve overall performance. I want to comment on fundamental number one, safety, for a moment, in particular, what did I see when I went to locations. First of all, safety. Why is this so important? We care about people; management has a moral obligation to provide a safe workplace, and quite frankly, it’s good for business, with a very strong correlation between safety performance and business performance. So, what did I see on-site? I observed strong site leadership, worker engagement, a very active near-miss reporting system, and comprehensive root cause investigations. I also saw technology highlighting the mines, collision awareness training, and fatigue management strategies. By the end of this year, we’ll have 1,000 pieces of mobile equipment with these technologies installed. That should make us the first to implement these technologies at full scale in oil sands, and they have been proven around the world to reduce safety risks. Our approach is not based on hope or faith but relies on tangible actions, starting with leadership, engagement, technology, and training. Other observations from the sites include the evident level of physical integration our company has, which is a unique opportunity and an unparalleled advantage. Furthermore, what I like most is that I observed opportunities to improve our financial and operational performance in almost every aspect of our business. I also managed to meet face-to-face with several of our major shareholders, had trips to Toronto, New York, Boston, and a series of other virtual meetings. I shared my approach, areas of focus, initial assessments of the company, and the highest priority plans while also taking time to listen to concerns and expectations regarding our shareholders’ assessments of the company. So, bottom line, what I’d say is 120 days in Suncor is 'pedal to the metal.' Our opportunities are abundant and clear. Let me talk about some specific actions taken in the second quarter, starting with the leadership team. We announced yesterday a series of changes to the composition and responsibilities of our senior executive team, namely those reporting directly to me. The changes are consistent with developing a simpler, more focused, high-performing organization. You’ll recall, I used those words in our first quarter call. The changes are designed to improve clarity and alignment on strategies, priorities, fundamentals, and execution excellence. We will have clear accountabilities with fewer internal interfaces. We’re delayering the organization while concentrating centers of expertise. The senior executive team will now be composed of eight individuals, including myself, with four newly externally sourced this year; three of the four are now on board. A quick summary of the changes: Kris Smith, CFO, will take on additional responsibilities for IT and supply chain; Peter Zebedee, our EVP of Oil Sands, will be adding both in-situ and drilling operations to his remit, giving him oversight of all oil sands operations; Dave Oldreive, EVP of Downstream, joined us in June and will oversee all of our refineries directly; Shelley Powell, Senior VP of Operational Improvement and Support Services, will retain her E&P portfolio but will now revamp our operational improvement and associated support functions. Karen Keegans is our new Chief Human Resources Officer, and Jacquie Moore remains General Counsel and Corporate Secretary, with both individuals expanding their portfolios. We will add a new senior executive role to lead strategy, sustainability, commercial, and development initiatives. These changes were enabled by the retirement of three senior executives this month, with one more retiring later in the year. I’d like to reflect on some advice from a mentor who once told me, 'Simplicity creates clarity, clarity creates consistency, and consistency creates success.' I believe this senior executive team is prepared to drive success. The next area I’d like to address is above-field costs. On June 1, we announced internally plans to reduce above-field costs by $400 million a year. On a corporate breakeven basis, this equates to about $1.50 per barrel. Staffing will be reduced by 1,500 employees, or 20%, by the end of this year based on performance and business needs. In the quarter, we took a one-time pretax charge of $275 million, roughly $210 million after tax, representing a nine-month payout. This effort is internally led, eliminating work we consider to be unaffordable or low-value. We are scrutinizing what we do, why we do it, how we do it, and the value it adds; nothing is off-limits. Reductions are occurring at all levels and include the senior-most executives. We are on schedule, having completed about a third by August 1, and 535 individuals have already left the company, leading to a cost reduction of about $125 million so far. I would note that these actions are not easy and certainly are not taken lightly, but they are essential for our competitiveness. Another area we dedicated time to this quarter was a strategic reexamination. We initiated a comprehensive reassessment of our strategies and articulated objectives. Currently, we believe that our existing strategic framework is insufficient for us to win. We realize we need to place a greater emphasis on today's business drivers. While the longer-term energy transition is important, we see the necessity for a shift in focus toward creating value through our vast integrated asset base, particularly within oil sands. Discussions with our Board of Directors have been supportive of this revised direction and tone. Expect further updates, but I assure you that you can look forward to a sharper, clearer, more tangible articulation of how Suncor plans to succeed. Additionally, we encountered a cybersecurity incident in the quarter. On June 25th, we confirmed an incident stemming from unauthorized third-party access to our IT network. We promptly isolated our operational IT systems and backup databases. Following this, we successfully established a safe, secure IT environment free from any incursions or corruption. While the incident undeniably caused disruptions, it did not materially impact our financial or operational results. Our organization responded remarkably well at all levels, from our IT professionals to operations staff in terms of maintaining business continuity with the assistance of third-party support teams. As of today, we’re largely back to normal operations, aside from a few exceptions, with valuable lessons learned from the experience. Looking toward the remainder of the year, I’ll highlight a few focus areas that exemplify what you can expect from our company. First and foremost, our focus on the base business remains steadfast, as we continue to seek ways to enhance our financial performance, measured in free cash flow per share. In operational areas, we have around 900 trucks operating across five mines and three operational cycles. We’re examining our truck fleet's makeup, ownership, leasing arrangements, and contracting. We believe there’s a significant opportunity to lower our overall cost per ton for all earth movements. Peter Zebedee is the senior executive responsible for this initiative. Second, I would like to highlight our approach toward turnaround planning and execution. We conduct major annual turnarounds at nearly all our upstream and downstream facilities, amounting to about $1.3 billion per year, roughly 20% of our capital budget. Benchmarking studies from Solomon and others show that we are well below average in turnaround planning and execution, which presents major opportunities for us to enhance cost efficiency, scheduling, and volumes. Dave Oldreive and Shelley Powell are co-leads on this crucial initiative. Further beyond our immediate operations, as I look further ahead, I want to highlight two key areas. The long-term recovery plan for Fort Hills was set last year with definitive actions defined for the next several years. Given our confidence in the value of this long-life resource, we’re now concentrating on years 4 through 40. The critical strategic question is how can we best and most valuably navigate into the northern mining areas? More details will follow on Fort Hills. The last area I’d like to address is Pathways Alliance. We remain committed to achieving net-zero greenhouse gas emissions from our operations by 2050. There is alignment within the Pathways Alliance and increasingly with federal and provincial governments. This fall is crucial for agreeing upon a competitive fiscal framework for infrastructure investment. Kris Smith and Arlene Strom are the senior executives overseeing this important initiative. Before I turn it over to Kris, I want to share a few comments on guidance. For upstream production, we’re tracking to the low end of our range, which is 740,000 to 770,000 barrels per day, with the midpoint at 755,000. The delays in the start-up of Terra Nova, along with our reduced interest in Fort Hills due to the Teck acquisition, collectively result in about a 20,000-barrel per day decline, bringing us to the low end of that range. In downstream operations, our Commerce City refinery is recovering from the incident that occurred in December 2022, making it challenging to achieve guidance. However, it’s important to note that Commerce City volumes do not significantly impact downstream profitability due to their relatively low contribution. Nonetheless, we are dedicated to meeting our targets and fulfilling our commitments. To date, there have been no revisions to guidance. Looking ahead, I expect to provide updates when we have sufficient information and clarity to make any changes, if necessary. Given the substantial impact that turnarounds have on our upstream and downstream operations, it makes sense to make updates after the majority of them are completed each year or at least well underway. For us, this generally means at the end of the third quarter. With that said, I’ll turn it over to Kris.

Great. Thanks, Rich, and good morning, everyone. I’ll provide a high-level overview of the numbers and some context. Suncor generated $2.7 billion of adjusted funds from operations in the second quarter. This includes a one-time restructuring charge of $210 million after tax due to workforce reductions. Excluding severance costs, adjusted funds from operations were $2.9 billion, or $2.19 per share. While not as strong as the previous year, the quarter benefitted from a constructive business environment, with WTI averaging US$74 a barrel and light/heavy differentials strengthening compared to Q1, averaging US$15 a barrel. Additionally, we continue to see synthetic crude oil trading at a premium to WTI. Although refining margins decreased from Q1, the 2-1-1 cracking margins remained robust at around US$30 a barrel. Natural gas, a key input cost for our operations, remained low, with AECO averaging $2.35 per GJ during the quarter. Looking ahead, we anticipate a strong business environment, with both crude and refining cracks strengthening since Q2, supported by healthy supply-demand fundamentals, and we expect this trend to continue. Now, turning to operations. Our upstream segment delivered 742,000 barrels of total production in the quarter. Regarding oil sands operations, we delivered $2.6 billion of adjusted funds from operations, with oil sands realizations averaging C$94 per barrel, about 94% of WTI. Oil Sands produced 679,000 barrels a day during a quarter that included a major turnaround at Syncrude, which was executed safely, successfully, and ahead of schedule. We saw strong upgrading performance in the quarter, achieving 94% upgrading utilization, which included that turnaround and also saw 100% utilization at base plant upgrading, yielding a total of 505,000 barrels a day of synthetic crude oil production. Our in situ operations continued their trend of strong production, with 102% utilization at Firebag. Meanwhile, the Fort Hills asset is performing as expected, ramping up quarter-over-quarter to 110,000 barrels a day net, incorporating 14,000 barrels a day of internal transfers to base plant upgrading. As we look ahead, Fort Hills initiated its five-year full plant turnaround in late July. We’re pleased with the progress thus far and are on track to complete it on schedule later this week. Our base plant Upgrader 2 will commence a major turnaround in early September, extending into Q4, which has been reflected in our guidance. In the Exploration and Production segment, we generated adjusted funds from operations of $521 million with production of 63,000 barrels per day and average realizations of C$108 per barrel, about 102% of Brent. Additionally, we finalized the sale of our UK North Sea assets on June 30th for gross proceeds of C$1.1 billion. The asset life extension work on the Terra Nova FPSO was completed in the quarter, with the vessel setting sail just a couple of days ago on Sunday. Once it arrives at its destination, subsea reconnection activities will commence, continuing throughout Q4. Finally, in our Downstream operations, we generated adjusted funds from operations of $781 million on a FIFO basis in the quarter, or $897 million on a LIFO basis. Average refinery utilization was 85%, reflecting planned turnaround activities. Now that all refinery assets have returned from spring turnarounds, we're positioned for a strong run for the rest of the year. In July, we observed average refining utilizations across the network exceeding 100%. The margin capture rate was 89%, attributable to a reduced heavy feedstock mix and increased intermediates during turnarounds and inventory rebuilding. Our refined product sales accounted for 547,000 barrels per day during the quarter. Regarding overall costs, as Rich mentioned earlier, managing and reducing costs is a fundamental focus of this management team, and we see positive progress and anticipate trending towards the lower end of our Oil Sands cash cost per barrel guidance for the remainder of the year. Year-to-date capital expenditures through Q2 were $2.7 billion. As previously discussed, we remain committed to driving capital discipline, although we are likely heading towards the upper end of our guidance range due to unplanned expenditures arising from the Commerce City outage and extended life extension work at Terra Nova, combined with inflationary pressures. In terms of shareholder returns, we returned $1.4 billion to shareholders in the quarter, comprised of approximately $700 million in dividends and about $700 million in share buybacks. Year-to-date, we’ve repurchased almost 3% of our shares. At the end of Q2, our net debt stood at $14.4 billion—reflecting a $1.3 billion decline from the end of Q1. Along with safety, reliability, and profitability, we are devoting attention to prudently managing our balance sheet and reducing debt while consistently providing competitive returns to shareholders through dividends and share buybacks. With that, I’ll turn it back to you, Troy.

Thank you, Kris. I’ll turn the call back to the operator to take some questions.

Thank you. The first question today will come from Greg Pardy with RBC Capital Markets.

Thanks. Good morning. And thanks for the detailed rundown. Kris, I mean, you delved into just what turnaround activity looks like in the third quarter. Are there any initiatives that you’re taking to, I guess, mitigate the impacts of production being offline? I guess, is there anything special— or any modifications maybe that you’re making to the maintenance plan for the third quarter that you might not have done in previous years?

Yes. Thanks for the question, Greg. What I’d say is that the team has been super focused on delivering the turnaround as we planned them. If anything, if you look at the Syncrude turnaround in the spring and the delivery of that, I think it’s a great indication of that type of focus. That turnaround, as I mentioned in my comments, not only resulted in good quality but also good safety and came in a bit ahead of schedule. That’s what we like to see. So, looking down at my colleagues at the end of the table, Peter Zebedee and Dave Oldreive, I know that they’re equally focused on delivering the turnaround we’ve outlined. We’ve included those turnarounds in our guidance. The significant one this quarter is the U2 turnaround, which will start in September and continue into October. Fort Hills, as I just mentioned, underwent a full plant turnover last year, so we remain pleased with what we’ve been seeing and expect it to come back this week as we anticipated. So, I would say there’s been a double down focus on good planning for these turnarounds and on executing them effectively.

Okay. Thanks for that. And then, maybe just completely shifting gears, there’s a reference in the release, obviously, to acquiring the balance of Fort Hills. I’m just interested in what your thoughts are there generally, how you think about it strategically? And then, whether there’s any possibility of getting a deal done this year? And I’m not asking you to negotiate publicly here. I’m just curious as to whether that is something that could be sooner than later or whether it’s just going to take some time.

Yes. Greg, this is Rich. I think a couple of things I’d say are the long-term bitumen supply to the upgraders remains a focus area for us, and between the ability to move Firebag volumes, Fort Hills, or incremental Fort Hills, we would generally prefer to operate with 100% ownership of our assets. That’s typically where we believe we can add the most value and be the most competitive. So Fort Hills would fit into that framework. With ConocoPhillips exercising their rights of first refusal, the originally announced deal has been altered. We acknowledge that, and Total acknowledges it as well. Discussions are ongoing, and I appreciate you not asking me to speculate on where that will end up, but we are continuing to negotiate. The strategic value remains largely unchanged for both us and Total. When the time is right, we’ll announce any developments related to it. I’d say expecting a resolution on this within the year is reasonable.

Thank you. One moment for our next question. And that will come from the line of Dennis Fong with CIBC.

The first one really here is, Rich, you’ve outlined a number of, we’ll call it, strategic opportunities ahead of you. And also in light of the changes to the management team, can you talk about how some of these decisions can or will be made, or at least how you envision them being made? And maybe while comparing or contrasting to how some decisions were made in the past.

Yes. Dennis, I think the key focus is on disaggregating our business, examining our cost structure, efficiency, and the value we add from top to bottom. For instance, when discussing our mining fleet management, there is considerable scale and opportunity. Peter essentially breaks down performance into the mining, extraction, and upgrading components. The most significant concentration of costs is within mining, and there’s also a high level of performance in upgrading, as you’ve heard Kris articulate. So, we’re focusing sharply on where the largest opportunities lie, which represents a significant prize. The goal through all of this is to enhance profitability, but I’d ask you to also consider it in terms of our breakeven point, specifically, understanding what we require to cover all operational costs, especially our dividends, to maintain reliable and growing payouts, as well as fund the ongoing capital required for our assets. Thus, we’re emphasizing improving quality, enhancing efficiency, and lowering our cost structure to ensure resilience in challenging times, which will enable increased free cash flow during favorable periods. That’s the mentality we’re adopting here. I want to emphasize that we are aligning our actions very closely with this vision.

Great. I appreciate that color. My second question, I guess, moving in a slightly different direction. As we saw a significant amount of volumes being transferred using the intertech pipelines in the second quarter, really probably managing volumes around the planned turnaround, we also saw a higher throughput of Fort Hills volumes through the upgraders as well. I think curiosity, how is the strategy of balancing the flow of all these crews determined? And then secondly, are there opportunities to potentially increase that integration or even increase the— I guess, the interconnect between your various assets as you look at strategies going forward?

I may ask Peter here to comment in a minute. But first, I want to mention that what I observed during my site visits was our integrated system offers tremendous value. Whether it's routing from Syncrude to the base plant, Firebag bitumen to the base plant, or especially through Fort Hills, these highlight major opportunities. This integration provides flexibility not only during planned maintenance but also in unplanned events, allowing us to capture value. What you observed in the quarter are tangible examples of that synergy. As we look ahead to future opportunities, Peter may want to elaborate on how things might unfold.

Yes. As you saw in the quarter, we're flowing volumes and effectively keeping our upgraders operational while optimizing our integrated production network. This also extends into our downstream refining network. Our teams prioritize maximizing value for the company by strategically placing volumes where they bring the highest benefits. We’ve seen significant value from transferring Fort Hills volumes into the base plant upgrader, enhancing yield. Are there opportunities to expand that? Yes, our development teams are intensely focused on identifying more regional physical integration opportunities and interconnections downstream.

And Peter, that yield uplift is from paraffinic froth treatment process, yes?

Yes, from the paraffinic froth treatment process. It’s material and significant.

Thank you. One moment for our next question. And that will come from the line of Neil Mehta with Goldman Sachs.

Yes. Good morning, team. Rich, your insights into the cyberattack were very helpful. If you could share some perspective with the investment community regarding lessons learned from this incident, how your new team managed the challenge, and how we should evaluate your team’s ability to handle challenges in the future.

Well, first of all, I would prefer a root canal over experiencing a cyberattack again; they are not pleasant at all. Let me start with the tail end of that experience. I had just joined a couple of months prior, and Dave Oldreive in the Downstream was only four days into his new role. I have to commend Suncor management for their performance in triggering what we call our business continuity plan, executing it promptly, and making decisive, key decisions early on. That involvement encompassed our IT team, led by Peter, and I wish to emphasize that during June, we actually achieved our highest upstream production month of the year, despite the incident. The organization functioned effectively even when others were scrambling or struggling. Now, regarding lessons learned, we conducted an extensive discussion with our Board 1.5 weeks ago, where John Hill, our Senior Vice President of IT, shared insights. I’ve also expressed that John is more than welcome to recount the lessons learned with peers in the IT community, and I'm also prepared to share them as well. However, I would encapsulate a few key points. Quick action is paramount; as with any emergency response, err toward over-responsiveness. It’s straightforward to readjust if overreactions occur, while underplayed actions would likely yield poor outcomes. Also crucial is the establishment of a safe, secure IT environment. I'm not alone in remarking that during the aftermath, I acquired more knowledge about IT hardware, software, and interconnectivity than I ever anticipated, which was critical for making informed decisions as the situation evolved. Therefore, we emphasize a swift response, decisiveness, and thoughtful resumption of operations. I wouldn't want anyone to endure this again, but if it were to happen, this is the team I’d choose to face it with.

That’s really helpful, Rich. And then, the follow-up is your perspective on Fort Hills as you’ve spent time now touring all the assets. Investors are trying to evaluate whether the issues here are structural or if there’s a clear path toward fixing them. How does that affect how we should consider 2024 capital spend as well as your plan to reach full capacity?

Well, I believe the overall reset developed and communicated last year is strong and has no margin for error; execution is everything. I’m confident in the value of this asset, and as we look ahead, I made earlier comments about years 4 through 40, focusing on how best to maximize that value over time. Specifically, within the northern part of the mine, we’re exploring whether to initiate two pits and blend bitumen volumes over time for more predictable production profiles instead of facing unpredictability associated with variable bitumen supply. This is a strategic consideration we’re analyzing. Regarding capital expenditures, while we may shift some funds around, I don't foresee drastic changes to our fundamental plans or overall capital profile. We will have more insights on that as we finalize our work, predominantly within the year. However, it’s reassuring to move beyond short-term reactive measures and to now have clarity on executing our immediate plans and identifying how to close the gap on maximizing long-term value.

One moment for our next question. And that will come from the line of Manav Gupta with UBS.

I wanted to switch a little to that refining side. You are one of the most profitable North American refiners. In the third quarter, we are seeing a very strong rebound in cracks, almost $5 to $6 higher quarter-over-quarter. And then you indicated you’re running much harder in 3Q. So, when we look at the third quarter in terms of refining, should we think of earnings closer to the first quarter versus second quarter? I think in the first quarter, your cash flow is about $400 million higher. So, trying to get a hang of the refining looking into the third quarter from you guys.

Yes. I’m going to turn it over to Dave for further insights. Dave has been with us for a couple of months, which is sufficient time to get acclimated. His focus is aligned with what we discussed: safety, operational integrity, and reliability. Kris noted how, despite the cyberattack impact, our refining business ran over 100% of capacity in July and we expect to maintain close to capacity for the remainder of the year. We have two minor turnarounds planned, a small hydrocracker turnaround in Edmonton and a reformer turnaround in Montreal, both of which have solid plans. From this, I expect continued strong performance for the refining business moving forward.

Yes. Thanks, Manav, for the question. We have a robust refining network at Suncor, strategically positioned to achieve profitability. For the third and fourth quarters, as Kris highlighted, July experienced strong returns regardless of the cyberattack events; our refining sector ran above 100% of capacity. We expect overall close to capacity operation until year-end. We plan two small turnarounds: one hydrocracker maintenance in our Edmonton facility and one reformer maintenance in Montreal, both of which are optimally scheduled. I anticipate strong performance in refining for the rest of the year.

Dave, can you elaborate on what we can improve? We have a good network, with great locations; could you provide insight on what additional enhancements can be made?

Yes. We have a robust refining operation and several chances to improve our focus in driving strong work processes, adherence to standards, and operational excellence throughout that line of business. As for our Commerce City refinery, we dealt with an event back in December which caused delays, but we managed to resolve that issue and restore operations. Our recent management and leadership changes are committed to improving that refinery and enhancing the overall business focus. I am optimistic about optimizing our operations and maximizing value.

I want to emphasize that we also discussed refining and retail synergy. For instance, the recent Canadian Tire deal announced prior to the last quarter exemplifies our potential for driving the value per barrel and volume provided effectively.

We completely agree, you have one of the best integrated downstream models out there. My quick follow-up question here is you have taken ownership of the Syncrude; you have announced some good measures over there. The cash cost at Fort Hills came down significantly quarter-over-quarter. Syncrude costs are still on the higher side. Is there a plan to make the Syncrude cash cost even more competitive from where we are right now? And I’ll turn it over after that.

Peter, do you want to comment on the segment’s cash cost on a per barrel basis?

No, I'm happy to do that, Rich. The significant component driving cash cost per barrel at Syncrude, as with all our operations, relies on our mining expenses. We're striving for better efficiency in this area, especially at Syncrude. With a mining operation moving 1.3 billion tons per year, minor improvements can yield substantial results. We'll be focusing on enhancing efficiencies in our mining activities at Syncrude while evaluating the balance between internal fleet operations and third-party contractors, leveraging the benefits of in-sourcing mining operations and looking ahead, potentially implementing autonomous haulage technology to boost fleet productivity and lower mining expenditures.

Also, the 2Q figures were influenced by turnaround costs, which should be taken into account on a unit cost basis.

Yes, indeed. The turnaround impact was notable; we had a coker out for 63 days, completing the turnaround in two fewer days than planned. This offers opportunities such as reducing turnaround duration significantly while improving our risk-based approach, and we’ll be collaborating closely with our downstream colleagues and the corporate team to enhance turnaround efficiency.

Thank you. One moment for our next question. And that will come from the line of Menno Hulshof with TD Securities.

I’ll start with a question on shareholder capital returns. You were quite active on share buybacks in the first half. Is it reasonable to assume that the second half will skew more toward debt reduction, given your 50-50 target? When do you expect to hit your secondary $12 billion net debt target on the strip?

Yes. Thanks, Menno. It’s Kris here. As you pointed out, we focused more on buybacks in the first half compared to debt reduction. However, we did make progress in reducing debt, as I previously mentioned. I think in the latter half of the year, you’ll likely see slightly more focus on debt reduction, while still being committed to both strategies. Our 50-50 capital allocation will act as a guidepost in this regard. You will continue to see us toggle between both focus areas, although you are correct that there is likely to be a shift towards debt reduction instead of share buybacks in the second half, albeit still with an effective buyback program ongoing. With respect to the $12 billion net debt target, of course that will be influenced by how you perceive pricing trends moving forward. If pricing remains consistent, we may see movement towards that target by early next year. It’s important to note that while we mentioned the potential Fort Hills transaction could influence our profile, it would be on a much smaller scale than initially anticipated.

Okay. Thanks for that Kris. And then my second question is for clarification on Neil’s Fort Hills question. I believe the original redevelopment plan aimed for completion this year, and the north pit aimed for servicing processes mid-next year. Is that timeline still valid, or is it under reevaluation?

That timeline remains as previously established. While we're analyzing our long-term strategies, we maintain our existing plan as it was communicated.

Thank you. One moment for our next question. That will come from the line of John Royall with JPMorgan.

So, you mentioned on Terra Nova, the subsea connection will occur in Q4, once the platform arrives on-site. Can you provide any expectations regarding the timing for bringing production back online?

Yes. I’ll transfer that question to Shelly Powell. As Kris commented, we dropped ropes on Sunday and should arrive on station today. Following this, our process entails detailed work to reconnect. Shelly, can you describe the steps we’ll take after reaching the site, in terms of integrating or reintroducing hydrocarbons?

Absolutely. While sailing away has marked a significant milestone in our asset life extension project, we have substantial work ahead. The weather is favorable right now off the coast of Newfoundland and Labrador, so sea conditions are good. As Rich noted, if all proceeds smoothly, we aim to reconnect in the coming days. However, further steps involve barrier testing with subsea assets and a series of commissioning tasks we need to undertake, ensuring we commit the necessary time and care to establish a safe, reliable operation going forward.

Once we reconnect, we’ll need to confirm operational functionality with each well center, which we'll detail in our approach. Though this timeline is not set in stone, we might forecast production resuming sometime in Q4 based on what I've mentioned, but we will provide updates as we progressively check off steps.

Great. Thank you. That’s super helpful. Given that Surmont is not included in the deal with Total, and assuming you pursue full ownership at Fort Hills, what are your other options for backfilling the lost production from baseline into the next decade related to Surmont? Can you elaborate on other paths available?

Absolutely. My earlier comments about our strategic reexamination emphasized how critical long-term bitumen supply is among our top priorities. Recently, I’ve discussed in situ options with Shelly and Peter, including some areas like Lewis, and also analysis on Firebag south. We’re also reviewing various options in our mining operations and adjacent leases. We need a comprehensive view of the most profitable approaches, whether they're incremental in-situ or mining projects and what assets we currently own are valuable. As we assess the strategy of the ongoing developments, we're focusing particularly on the potential of Fort Hills to help fill those operational gaps.

One moment for our next question. That will come from the line of Doug Leggate with Bank of America.

This is Kalei on for Doug. Thanks for taking the questions. My first question is also on Syncrude and maybe best for Rich. The trend as we see it in recent years has seen Canadians consolidate oil sands, resulting in synergy gains. Considering your interest in Fort Hills, is this an asset you are highly familiar with? Does the current ownership structure maximize value, or can you identify synergies? Essentially, are you saying you could uncover savings, similar to those identified in wholly owned assets?

Yes. That speaks to my previous comments regarding ownership and partnerships, which arise for various reasons over time. Given a clean sheet of paper, we would prefer to operate and have 100% stake, which allows us to fully capture the synergies and maximizes value at Syncrude. The overall integration provides us with considerable flexibility, and managing resources efficiently across our operations allows the company to benefit significantly from operational synergies. As previously noted, I believe that Suncor's integrated systems and the insights our teams have garnered will allow us to derive substantial synergies, particularly when examining our gas supply and molecule management from extraction to sales.

That’s very helpful, Rich. I appreciate that. My second question is about the breakeven you mentioned earlier. Just wondering if you can quantify where that stands today following the cost cuts and where you believe it can go organically. Do you think that level will be low enough to consider additional downstream support? Thinking back to last November when you opted to retain the retail segment due to its contribution to cash margins.

Yes. I was actually playing around with some numbers last night; I’m a numbers guy. I often text back and forth with Troy’s experts in IR. I believe we’re around the $50 per barrel mark, give or take a few cents. While it would always be better to drive that down further for enhanced resiliency and free cash flow generation, we are focused on improving quality, operational efficiency, and lowering the cost base to ensure we remain competitive against all challenges. Our goal would be to identify the best combination for value generation, whether through retail and integrated channels to reinforce our strength in cash flow through both operational revenue and shareholder returns.

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