Earnings Call Transcript - SU Q4 2023

Operator, Operator

Good day, and welcome to the Suncor Energy Fourth 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. Troy Little, Vice President of Investor Relations. Mr. Little, the floor is yours.

Troy Little, Vice President of Investor Relations

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 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 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 & 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.

Rich Kruger, President and CEO

Thanks, Troy. Good morning. For the fourth quarter, I would characterize it as strong results across the board: safety, upstream production, downstream reliability, and cost management. We finalized the Fort Hills purchase. It was about delivering on commitments for our company. Kris will detail the Q4, but first, I’d like to provide a little bit of a look back at 2023 overall. For context, on my first earnings call ten months ago, I outlined four things you could expect to see from Suncor. One, an intense focus on the fundamentals; Two, a simpler, more focused organization; Three, a shareholder-oriented executive leadership team; and Four, an overall urgency to improve performance. So how are we doing? Let me start with the focus on the fundamentals, and first and most importantly, the fundamental of safety. The fourth quarter of the year was our safest quarter in 2023 and 2023 was the safest year in the company’s history. We had no life-altering or life-threatening injuries for the first time since 2015. We had a nearly 50% reduction in lost time incidents year-on-year. We had our best ever recordable incident rate in the downstream and our second best ever in the upstream. How? Leadership, workforce engagement, risk management, procedures, and technology. I’ll continue with the second fundamental: asset reliability, starting with the upstream. Our bitumen upgraders are our moneymakers; full year utilization was 92%, our best ever. We had 91% of the Base Plant and 93% at Syncrude. This is the first time in our history that both assets were at or above 90%. And combined, they were 3% higher than our previous best ever. How? Operational excellence by our site teams and our unique inter-site physical integration. I’ll continue with the downstream reliability. Crude unit utilization was 90% for the full year. Nothing to brag about, but it’s a tale of two halves: 82% utilization in the first half and 99% utilization in the second half. For the full year, Sarnia refinery had its best ever utilization; Edmonton had its second best ever, and Montreal, its third best ever. How? Again, leadership and workforce commitment to perform. I’ll continue with delivering on commitments, and I’ll highlight upstream production. We finished the year at 746,000 barrels a day, the second highest in our company history, including 808,000 in the fourth quarter. We achieved external guidance for the first time in six years, highest ever annual production at Syncrude in its 45-year history and at Firebag in its 20-year history. Fort Hills delivered on year one of a three-year plan, full year was at 147,000 barrels a day and the fourth quarter at a very strong 186,000 barrels a day. How? I’ll begin to sound like a broken record: Leadership, clear priorities, workforce focus. We understand that trust and credibility are based on delivering on commitments. The second area I highlighted you could expect from Suncor was a simpler, more focused organization. Well, we have a new executive leadership team, smaller at eight versus the previous nine, four of us were new in 2023; a one-fifth in 2022. Individually, the functional expertise on this team is outstanding, but we’re even better collectively in terms of team competency. Our newest member of the team, Kent Ferguson, joined us here a month ago as our Senior VP of Strategy, Sustainability, Commercial and Development, and Kent is in the room with us this morning as well. We reorganized and refocused our above field, or our non-operating workforce, a 20% reduction in headcount was completed in five months last year between June and November. And we did this through the elimination of work that was judged to be low priority or simply unaffordable. We spent $275 million in severance costs to achieve a $450 million annual savings starting this year, $50 million above our target. You do the math on that; that’s about an eight-month payout. Our central above field teams have clear priorities, and they are very intensely focused on operational support and improvement. Another change we made above field is we consolidated corporate-wide strategy, commercial, sustainability, and development work—not only to increase efficiency—but even more importantly, to ensure we focus on the highest value work. Simultaneously, in the second half, an area we haven’t talked about, we restructured and reorganized our upstream and downstream operational site teams. So we now have a common site design across the company: operations, maintenance, engineering, etc., with crystal clear site accountabilities. The benefits of this are our common operating standards, applications of best practices, and natural improvement networks across the company. I would say the early results in this are positive: greater clarity and accountability; we’re seeing it in the improvements in the execution of our work. An example, although early 2023, our cost per barrel was at or below guidance across all upstream oil sand sites. And for the first time in our company history, we executed our turnaround scope upstream downstream, $1.3 billion in aggregate on budget and on schedule. Our third area, I promised you could see, was a shareholder-oriented executive leadership team. Well, in the year we high-graded our asset portfolio to strengthen our competitive advantage and add shareholder value. We did that in part by acquiring the remaining 46% interest in Fort Hills in two separate transactions that totaled $2.2 billion, both transactions we consider to be at attractive prices. The second one, Total Canada, also provides large and immediate tax benefits as articulated in our release. These acquisitions address our long-term bitumen supply uncertainty, but in addition, they enable material regional synergies with the large footprint of our operations. In the year, we also sold non-core UK North Sea upstream assets for $1.1 billion and the solar and wind business for about $700 million of our combined $1.8 billion. In the year, profitability and shareholder returns: we had AFFO of $13.3 billion, the second highest in our history, despite oil prices being the seventh highest over the same period of time. We generated free funds flow of $7.5 billion, second highest, and we executed a $5.7 billion capital program, again within our guidance. We distributed $5 billion to shareholders—$2.8 billion in dividends, $2.2 billion in buybacks, and when combined, this is a 9.1% cash return in the year. Where we are today and going forward? Continued priorities are to lower our overall corporate WTI breakeven and increase free cash flow, free funds flow per share. In terms of continuing to improve and the urgency to do that, I’ll talk a bit more about that when Kris is done. But I would say that despite overall strong financial and operating performance in 2023, I look at it as we also left some on the table. We missed our refining utilization guidance by a couple percent, really attributed to a slow recovery in the first half of the year at Commerce City. And we had disappointing project execution at Terra Nova and the subsequent delayed startup, with the ramp-up of that asset now ongoing. So in summary, 2023, I would say, was a good year in many areas, and very good in other areas, but I believe we can do better, and that’s exactly our plan. So I’ll come back to 2024 in a few minutes, but first, I’ll turn it over to Kris, who will talk about our Q4 summary.

Kris Smith, Chief Financial Officer

Great. Thanks, Rich, and good morning, everyone. While we saw crude prices and refining margins weaken versus the prior quarter, the fourth quarter still saw a robust price and margin environment. WTI averaged $78 a barrel in the quarter, while the light heavy differential widened versus Q3 averaging about $22 a barrel. We also saw synthetic crude oil premiums retreat in Q4 on the back of strong regional upgrading production and egress constraints, across the basin averaging about $0.30 a barrel above TI. On the refining side, while we saw weakening gasoline cracks in the quarter, distillate cracks continued to be strong, and our 5-2-2-1 refining index was USD 33.45 a barrel, which was about USD 2.55 a barrel below Q3. Finally, natural gas, which is a key input cost to our operations remained low with AECO averaging CAD 2.15 at GJ in the quarter. With this business environment and very strong operations, Suncor delivered strong financial results in the Q4 generating $4 billion in adjusted funds from operations or $3.12 a share and adjusted operating earnings of $1.6 billion or $1.26 per share. During the quarter, we also returned nearly $1.1 billion to shareholders. This was comprised of $704 million in dividends, which represented a 5% increase over the previous quarterly dividend, as well as $375 million in share repurchases. In 2023, we bought back $2.2 billion of shares, which was almost 4% of our float. Our net debt ended at $13.7 billion, reflecting the closing of the acquisition of Total Energy Canada in the quarter for CAD 1.5 billion, plus closing adjustments and closing costs. And we continue to remain focused on our capital allocation framework, of allocating free cash flow to continued debt reduction and cash returns to shareholders, through share buybacks. Turning now to operational performance in the quarter. We saw very strong operational performance in both the upstream and downstream as outlined by Rich. Our upstream delivered total production of 808,000 barrels per day in the quarter, the second highest in our history. This included 875,000 barrels per day in November and 904,000 in December, which were the highest months of production in company history. The Q4 also saw record quarterly production in our Oil Sands segment. The Base Plant Upgrader 2 turnaround was successfully completed on time and on budget early in the quarter, while we also completed our Firebag turnaround successfully. Additionally, Syncrude had a very strong upgrading quarter, achieving over 100% utilization, another record. With the successful completion of the Fort Hills full plant turnaround in Q3, and the mine plan being set up to maximize ore delivery in the quarter, we saw very strong production at Fort Hills, with total production averaging 186,000 barrels per day, or about 96% utilization, a quarterly record. In addition to high reliability across our Oil Sands assets, we also optimized inter-asset volume transfers, to maximize value across those assets. This included internal bitumen transfers of about 45,000 barrels per day in Q4, demonstrating an increased level of integration within Oil Sands. This increase was primarily driven by bitumen transferred from Fort Hills to the Base Plant upgrader, taking advantage of the SCO yield uplift from the paraffinic froth treated Fort Hills barrels. Also in the quarter, we saw the return to operation of the Terra Nova asset in our East Coast E&P segment, and that asset continues its ramp-up of production into this quarter. With respect to the downstream, refining utilization was an impressive 98% in the quarter, which included two smaller turnarounds at Edmonton and Montreal that were successfully completed. Downstream margin capture was strong in the quarter at 103% on a LIFO basis when compared to Suncor’s 5-2-2-1 refining index, primarily driven by higher realizations from seasonal diesel differentials as compared to the previous quarter. And with diesel cracks continuing to outperform gasoline, Suncor is structurally advantaged as our network produces a higher distillate cut, when compared to the average North American refining. As mentioned, we closed the purchase of Total Energy Canada on November 20 for CAD 1.5 billion before closing adjustments and other costs, making Suncor the sole owner of Fort Hills. In the quarter, we recognized an initial tax benefit of $880 million associated with the transaction, which supports the strong acquisition economics. With the asset now in 100% Suncor ownership, we are focused on continuing to drive the mine improvement plan and maximizing value through integration with our other regional operations. Now for a brief update on the Oil Sands Pathways Alliance to Net Zero carbon capture and storage project. As we continue to work closely with federal and provincial governments on necessary fiscal and regulatory framework, major regulatory applications for the CO2 transportation network and storage hub are being prepared and are expected to be filed in the first half of this year. While front-end engineering and design of the proposed CO2 transportation line is now more than half complete. As well, more than 2,000 hours of environmental field work have been completed so far, and formal consultation with indigenous groups along the proposed transportation corridor and storage hub began in 2023 and continues. Now finally, before handing it back to Rich, I just wanted to make a few comments on our 2024 guidance released this past December. As set out in the guidance, we expect production to grow by about 6% or 44,000 barrels per day versus 2023. The key drivers to that are the ramp-up in Fort Hills production as we move into the second year of our improvement plan, our increased ownership in Fort Hills as we move from effectively 70% of gross production in 2023 to 100% in 2024, and increased SCO production at Base Plant as it has a shorter maintenance schedule this year. As well, while we sold our UK E&P business in 2023, we now have Terra Nova ramping up, which has us guiding fairly flat with 2023 E&P volumes. That guidance includes a number of large maintenance activities in the year. At Base Plant, we have a large turnaround in Upgrader 1 in the second quarter, and Upgrader 2 annual coker turnaround in Q3 and Q4. At Syncrude, we have an annual coker turnaround starting in late Q1. And in the downstream in the second quarter, we have large turnarounds at the Sarnia and Montreal refineries this year. With regards to our cash operating costs for 2024, we are essentially holding our costs flat with 2023, while bringing on additional Fort Hills working interest and growing production. That’s an example of moving costs in the right direction, and we continue to be laser-focused on driving costs down across the company. And finally, our capital guidance for 2024 is $6.3 billion to $6.5 billion. This includes asset sustainment and maintenance capital largely consistent with what we saw in 2023, and higher economic investment capital versus the prior year, which reflects a number of key investments that will drive value for our shareholders. These include the Fort Hills Mine Improvement Plan, the Upgrader 1 coke drum replacement project, the Mildred Lake mine extension at Syncrude, finishing up the Base Plant cogeneration project this year, the West White Rose project, and SeaRose asset life extension. Our sales and marketing growth plan, and investment in new mining trucks at Fort Hills and Base Plant, including the continued rollout of autonomous trucks at the Base Plant. I am confident that the team is 100% focused on delivering against these commitments, and is building on the strong momentum we finished up in 2023. And with that, Rich, I’ll hand it back to you.

Rich Kruger, President and CEO

Thanks, Kris. Okay, 2023 is in the books. It’s all about 2024 and beyond. Let me talk about what we’re doing right now to continue to add shareholder value. As we look at the year, I think first and foremost, we have achieved our volume growth commitments. I won’t go through those in detail; Kris just did. It’s a 6% year-on-year versus a midpoint of our guidance. That will require continued strong upgrader utilization, continued strong in situ, and then, of course, the growth that comes along with Fort Hills. In the downstream, we’re about a 4% year-on-year growth versus the midpoint of guidance. This will require continued strong performance at each of the Edmonton, Sarnia, and Montreal refineries and a full year of successful operations at Commerce City. And then, of course, last but not least on volume, it’s about executing the turnarounds across all of our major sites. A second area that I’ve talked about before, I want to give you a bit of an update on, is mining. Fundamentally, we as a company will improve our cost performance as our mining business improves its performance. And for context, again, I’ve said it before, the cost of moving ore from a mine to a crusher is the single highest cost component in bitumen production. And where we sit today, we know exactly what our unit cost competitive gap is relative to best-in-class. There are really two components: a structural gap due to the relative age and configurations of our mines, which deals with things like haul distances and strip ratios, and then there’s a performance gap, which relates to simply how well we plan and execute our work. Peter has a very definitive plan focused on closing our performance gap, with a specific list of tangible actions to bring about improvement. We’re also evaluating alternatives to address our structural gap via alternate mining scenarios or different technologies in our mines. More to come each quarter on the mining business. But I want to share two specific examples on closing the mining performance gap, and how we plan and execute our work. We’ve mentioned the trucks; the addition of 55 new 400-ton ultra-class trucks through the rest of this year. New and bigger trucks, 55 will displace about twice as many less efficient smaller third-party trucks. We’ve received and are operating 13 of those 55 trucks, or about 25%. They are the Komatsu 980s. Recall, I’ve said before, with all 55 in operation, that will lower our overall corporate breakeven about $1 per barrel when they’re all up and running by the end of the year. I’ve also commented on autonomous operations. We’re continuing to ramp up autonomous operations of haul trucks at our base mines. Last time we talked about this three months ago, we had 31 trucks operating autonomously. Today, it’s 45. We’ll be at 91 by the end of the year. By the end of the year, 100% of the ore at the Base Plant will be moved autonomously. Recall that conversion delivers about $1 million per truck per year in sustainable annual cost savings, so it’s a material improvement. Along with autonomy, we believe there's a productivity increase where we will effectively move the same ore tonnage, but with fewer trucks. Specifically, our estimate is it will be the equivalent of three free 400-ton haul trucks through the conversion to autonomy. You recall these trucks cost $10 million plus each. In practice, we will move these surplus trucks to displace higher cost third-party vehicles elsewhere in our operation. So the winning formula in mining continues to be fewer trucks, bigger trucks, and more efficient trucks, coupled with an industrial engineering-like focus on all aspects of today’s business: existing fleet availability, utilization, maintenance, and all the ancillary equipment reliability. Perhaps in the Q&A, I can ask Peter to address some of the specific things we’re working on to bring about further improvement. I’ll comment a bit more on turnarounds, which I’ve shared, to give you a bit of an update on our effort there. You will recall, I mentioned we have formed a new central group under Shelley Powell in 2023, and they’re singularly focused on turnaround performance. Dave and Shelley, combined, have been our executive co-leads across both upstream and downstream to elevate our overall accountability on turnarounds. We are completing extensive third-party benchmarking to identify improvement opportunities and establish expectations. We are holding monthly reviews on scope, cost, duration, and readiness, where previously these reviews had been held at an asset level. Along with our theme and our unique competitive value proposition, we’re capturing regional synergies or efficiencies because of the proximity of our operations and the ability to coordinate turnarounds. Examples are early on, but of some of the improvements we’re seeing. I’ll use refining as an example. Montreal, in the second quarter this year, we’ve got a material turnaround dealing with heavy crude processing. Through benchmarking and pre-planning, we’ve cut the duration from the original 62 days to 53 days, and we’re very comfortable with it. A second example at our Sarnia refinery, where again, we have a second quarter turnaround looking at risk-based work selection; our scope challenge led us to cut 66,000 hours out of that turnaround—15%. That would equate to about a $21 million cost avoidance, and because we’ll be up and running earlier, about another $12 million in value addition. It’s early in our improvement process here, but I want to share some of those examples. We’re already starting to see the benefits, and as I’ve said, our goal is to be best-in-class in turnaround performance across our business. Bottom line, there are big prizes here: lower costs, shorter durations, higher margins. To achieve those, it’s about benchmarking, knowing who’s the best and why, quality risk assessments, advanced quality pre-planning, very clear accountability, and then high-quality disciplined execution. Now, as I wrap up, I want to share with you two less visible, but also I believe very, very fundamental changes we have and are making at the company that will contribute to continued improved performance. My objective from day one was to create alignment between our strategies, organizational structure, and corporate culture with the goal being to achieve a team-based, results-oriented, high-performance culture. So, with that in mind, in the second half of 2023, we implemented a new redesigned employee performance evaluation system designed to evaluate individual performance based on impact versus effort or the activity behind their work. The goal is to better differentiate individual performance and recognize and reward individuals accordingly. The outcomes of the performance evaluation system are directly linked to individuals’ compensation in terms of base salary increases and the individual component of their annual incentive. Also, effective going into 2024, we are implementing a new redesigned employee annual incentive program. Our previous program had multiple scorecards, even at the level of those sitting around the table with me this morning, each with a separate series of measures. Our new program has one single Suncor scorecard. We win and lose as a team. It will be applicable to all and have far fewer priority measures. What measures? Surprise: the fundamentals—safety and environmental performance, production and throughput, cost and profitability. We want to ensure that we incentivize what’s most important and that we have an entire workforce focused on delivering on commitments, and that our performance parallels the experience of the shareholder. Our new annual incentive program is very much aligned with my philosophy to clarify, simplify, and focus, which I think is the key to consistently delivering superior results. So as I sit here today, I feel as an organization we’ve got the right people, the right leadership, we’re focused on the right work, and we’re committed top to bottom to perform. My final comments: employees, I’d like to thank our employees for, first and foremost, working safely and their commitment and dedication to making Suncor the best it can be. To our shareholders, I’d like to thank our shareholders for their trust and confidence. We don’t take it for granted, and we know it must be continually earned. So with that, I’ll pause, and I’ll turn it to Troy. Go ahead, Troy.

Troy Little, Vice President of Investor Relations

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

Operator, Operator

Thank you. Our first question will come from Greg Pardy with RBC Capital Markets. Your line is open.

Greg Pardy, Analyst

Thanks. Good morning. And Rich, there is a lot of content in there. I don’t think I could write fast enough. I got a couple of questions for you, but maybe just before I start, obviously a big welcome to Mr. Ferguson now in the Suncor business. There are really two things. I want to come back to the question I asked you the last time. I think a lot of the things you’ve already said would reinforce this change that’s going on in the company. But what inning do you think you’re at now, maybe versus when you arrived? That was probably the first inning when you arrived. But I’m curious where you’re at now in terms of the turnaround, and then what are the steps you need to take maybe over the next year or two to maybe get back to the leadership position that Suncor used to be in?

Rich Kruger, President and CEO

Thanks, Greg. If I look at it, I would say in 2023 there was just a large amount of change. We’ve talked about that. But I would describe a lot of that change as disruptive and potentially distracting: new leadership team, people coming and going. We had a workforce reduction. A lot of things that could distract people from performing. So given that, I am really proud of how the organization performed despite that. As we turn the page on 2024, I think we’ve built a lot of momentum in the fourth quarter. I think our starting pitcher is throwing strikes, and I think we’re well into the game. I think the momentum that we’ve created, and I can comment on how we’re doing through the first half of the first quarter if folks would like, I think we’re in a really good position to focus. Some of these other things that I mentioned, we’ve got a lot of very tangible operational things. But a lot of these things that I would refer to as cultural, the performance evaluation system, the annual incentive program—things like this. I think those are part of the secret sauce to getting 16,338 people focused like a laser on performance. I feel really good that we've put a lot of that in place now, and our best days are ahead of us. I don’t think it’s so much of a trust us, believe us, have faith. I think you’re going to start seeing that. I think the fourth quarter gave you a pretty good glimpse of that. What’s next? Just doubling down on things we’re doing. Keeping the pedal to the metal on improvement efforts, lowering that cost structure, maintaining the highest levels of operational excellence and safety, and just continuing to create value. We’ve got examples; maybe I’ll let Dave and Peter comment on some of the things we’re doing to create that clarity deep, deep into the organization about what we’re trying to achieve. I wake up every day feeling pretty excited to come to work. Ten months in, I feel more excited every day than I did ten months ago.

Greg Pardy, Analyst

Very good. And then maybe just to shift gears a little bit, because you touched on the first quarter. So I guess the simple question would be, how much of a weather impact, how much did favorable weather impact fourth quarter production? Because it was warmer, but this quarter has been different. And then within that context, could you give us an update just on how operations are going thus far in 1Q?

Rich Kruger, President and CEO

Yes, absolutely. We did have good weather in the fourth quarter, but typically, we don’t have a lot of our more severe time. The mining business likes it when it’s minus 10 or 15 degrees. You know, everything operates best then. They don’t like it when it’s minus 43, as it was in January. I would say the fourth quarter weather played a bit of a role, but not a big bit. When we came into the New Year, the first couple of weeks, we had a very uniquely cold spell, there. Seems like that’s expected, but what I’m really pleased about is, although we had some issues with the mobile equipment, fuel filters, plug-in, things like that, the plants kept running really, really well. The upgraders kept all the refineries up and running. Yes, we had a bit of a slow spot in the mining in the first couple of weeks of the year. But as I sit here at the midpoint of the first quarter, refining is at 98% utilization for the first six to seven weeks of the year. You can do the math on throughput, but they are continuing the very strong performance we saw in the second half of last year. On the upstream, despite a little bit of slowdown in the mining in the first week or two of the year, we are now at or above for the first quarter to deliver a quarter that is higher than our fourth quarter was. We kind of started out a bit slow the first couple of weeks, but we’re gaining week by week. I don’t know exactly where we’ll end the first quarter, but I think when we put it in the books, you are going to see that operational momentum has continued, quite frankly, through the entire second half of last year and on into the first quarter.

Dennis Fong, Analyst

Hi, good morning and thanks for taking my questions. My first one here focuses on Fort Hills. Production in Q4 reached near nameplate capacity and we understand that the focus in 2024 is—and maybe the early part of 2025—is opening up two phases in the North Pit to access sufficient ore more consistently into the facilities. My question here is, can you discuss how you see the opportunity set at Fort Hills, once you’ve— we’ll call it, fixed or remediated—the feedstock bottleneck in addition to applying the trucks and smoothing out operations?

Rich Kruger, President and CEO

Yes, thanks, Dennis. I’ll turn it over to Peter in just a second. But I think what the fourth quarter showed is that when we can feed the plant, just how good that plant is. We averaged, what, 186 or something for the quarter? If you squeeze Peter hard, he would tell you he had days over 200. So that plant is quite strong. So you’ve rightly said that the challenge is ensuring that we feed it, and that’s why opening the two pits in the North Mine is so important. We’re able to do that. But Peter, you want to maybe comment a little bit on kind of the whole mining and where you are in the mining and confidence in continuing to feed this beast?

Peter Zebedee, Executive Vice President, Oil Sands

I think it is a good point. Rich is absolutely correct. The fixed plant assets at Fort Hills are extremely robust, and we’re confident that we can push high volumes to the back end of that facility. Our focus is indeed on the mine. As you said, it is opening up, ultimately delivering ore from the North Pit and reducing the mining bottleneck. Hence, our focus at Fort Hills is really on mining efficiency improvements. The purchase of the ultra-class haul trucks obviously helps that. But beyond that, we’re focused, as Rich would say, on the fundamentals. We’re really focused on the little things that drive mining efficiency, that extra ton on the trucks, that extra kilometer per hour in the haul cycle. Leveraging that efficiency, not only to deliver ore into the production facility, but to reduce our unit costs, and remove higher-cost mining volumes out of our fleet and deliver that with our own trucks.

Rich Kruger, President and CEO

And the two pits in the North Mine will give us that opportunity to blend ore. So, we won’t have the natural up-and-down variation of a variable input. As we improve the capacity to deliver ore, we’ll also have a bit of stability, because of the approach Peter’s taking in mining it.

Peter Zebedee, Executive Vice President, Oil Sands

Yes, one of the key factors is to reestablish a robust inventory of mineable oil sands in front of us so we have lots of options for the shovels that we can bring into the fixed plant. That has been key to the success that we’ve seen at Fort Hills. And that team has done a fantastic job at opening up those pits, reestablishing the inventory, managing the risks, and now driving productivity improvements.

Dennis Fong, Analyst

My second question, and shifting focus more to the base mine. Rich, I really appreciate the context around the oil sands mining fleet, as well as any adjustments you’re making to operations to drive controllable costs lower. I know in a previous conference call, Peter discussed the cadence of production through time as well as the need to balance that with sourcing ore to build tailings ponds and other earth-based infrastructure. Can you talk a little bit about how, again, some of these tweaks and changes to improve controlling costs may impact, or affect, or even maintain or improve some of the flexibility and development, specifically with North Sea bank and the other areas of the base mine?

Rich Kruger, President and CEO

Sure. Let me, I’m going to give Peter the opportunity here in a second. But one of the things I want to start a little broader, Dennis, with now with 100% ownership of Fort Hills and our level of physical integration, Fort Hills bitumen to the Base Plant, Firebag to it, we increasingly are looking at this basin as one large bitumen supply source. What’s the optimum way, the lowest cost, the greatest value way to do it? And what that does is it gives us flexibility at each individual site where we’re optimizing the whole versus what would previously have been optimizing the site. That’s where the options at the Base Plant come in. I’ve talked about how we are moving to more autonomy. We are looking at where we deploy new trucks and shovels. We’re looking at the rate at which we deplete the remaining ore at the Base Plant. It’s that physical integration that allows us to do this. Everything we’re going to be looking at is going to be ultimately about long-term value. But maybe that’s kind of a broad setup to your question. Peter, do you want to comment a little bit more specifically on some of the things at the Base Plant?

Peter Zebedee, Executive Vice President, Oil Sands

Yes, no, absolutely, Rich. As you said, really, the Base Plant is the nexus of our bitumen supply into the region. We are leveraging that integration with Fort Hills and with Firebag to really flex which bitumen goes to the upgraders and when. That obviously translates back into additional mining flexibility at Base Plant. I think with the investment that we have made in the trucks, as I mentioned before, and the productivity improvements the team is driving, coupled with autonomy, that gives us more mining flexibility. It will give us more choices in the future on the rate at which we want to mine bitumen at Base Plant. That’s something that our teams under Kent are evaluating as we look to what we’re going to do in the future regarding the Base Plant mine.

Rich Kruger, President and CEO

I’ve got maybe just another comment. It’s a little bit from the Base Plant, away from the Base Plant. But, you know, I mentioned we produce 746,000 barrels a day. I know all of you on the line had complete confidence with us last fall that we were going to meet guidance, I know that. But Peter, running his upgraders at record high utilization, he actually put more bitumen from Firebag and Fort Hills into it that have a shrinkage component to it. Because there’s more value in it. But absent that, Peter, we’ve been over 750,000 barrels a day. But there again is an example of that physical integration. It’s all about value for us, not volume. I think that was a, to me, as I saw through the fourth quarter as they redirected barrels to capture what was in the market, that again is something that makes us different. I know that’s not on your question, Dennis, but I couldn’t help but mention it.

Dennis Fong, Analyst

Appreciate the color as always. Thanks, Rich and Kris. I will turn it back.

Operator, Operator

Thank you. And that will come from the line of Doug Leggate with Bank of America. Your line is open.

Doug Leggate, Analyst

Thank you. Rich, tremendous continued progress. So congratulations on everything you’ve done and the changes you’ve made. I feel like I ask you this question every quarter, so forgive me for being predictable. But I guess, I’m not sure I’ve seen the Analyst Day yet. So maybe we’ll get it there. But the $5 target you originally set out, where do you think you are? I guess it’s a different way of asking the question about what inning you’re in, was earlier. But how much of the $5 do you feel you’ve now achieved at this point?

Rich Kruger, President and CEO

Yes, I think, Doug, we’ve talked about things like the workforce reduction, which was more than a $1, about $1.50. So that has happened. I think with many of the other things, I think we’ve captured a couple bucks of that already is kind of where I’m at. We do have some headwinds; we’ve got inflation and things like this. Our $5 goal is a net goal. We’ve got to offset whatever headwinds we’re facing. I think we’ve captured a couple of that, but we have an urgency over the rest of this year with the new trucks we’ve talked about, improvements in turnaround performance. Dave Oldreive has got a list of value-capturing opportunities in the downstream. I don’t have an absolute timeline on the $5, but no better time than the present. I think this will be a big year in continuing to see that accumulate. Quite frankly, you know, when we get to $5, well, what number is better than $5? $6 is better than $5, and $7 is better. So, it’s going to be a continued priority. I think we’re off to quite a good start on it.

Doug Leggate, Analyst

I am I right in thinking you haven’t given us an Analyst Day yet? Troy’s going to kill me for that, but maybe we’ll get clarification later.

Rich Kruger, President and CEO

Doug, you’re always right. Here’s what we’re thinking of doing. We have some big decisions, some big analytics: the base mine, the rate at which we mine it toward depletion. We’ve got some big things that we’re tackling right now. What’s the priority on our continued development? I’m looking long and hard at in situ opportunities. I like what I see. We can hold an Analyst Day sooner and tell you the things we’re looking at or hold it later and tell you where we land on these. What we’re inclined to do right now is probably in the second quarter, to have a pretty comprehensive update. I don’t know what we’ll call it. It wouldn’t be a full-blown Analyst Day, but we’ll dig in in detail, particularly thinking about this $5 a barrel, etc. Later this year, we can have a full blown Analyst Day that looks at answering a lot of these longer-term key strategic questions. Don’t think we can wait until late this year and do all that. So I’m feeling we’re going to need to give you something sooner, but that’s where Troy and I’s heads are right now, and we’re trying to land on those dates. That’s what we’re thinking.

Doug Leggate, Analyst

Well, Rich, I didn’t intend to ask you my second question, but you did address some of the portfolio questions, which I guess you haven’t resolved yet. So I will pass it back—

Rich Kruger, President and CEO

You get another one, Doug.

Doug Leggate, Analyst

It was actually then...

Rich Kruger, President and CEO

That was a freebie.

Doug Leggate, Analyst

It’s kind of on that exact topic actually. Because when you and I have chatted about this before, you’ve said, look, we don’t necessarily have to replace bitumen, because we could use that capital commitment to buy back an enormous amount of stock with the capital and grow and basically shrink the share count. And I guess my question is, are you any further forward in that thought process? And I guess, you’ve kind of addressed it in your last question, but any updated thoughts on that would be appreciated?

Rich Kruger, President and CEO

Well, I think you’re spot on. For us, it’s all about value. I think the one area that is just pretty intuitively obvious to us is keep the upgraders full, because in doing that, the value uplift from a barrel of bitumen to a barrel of synthetic crude, whether it’s sweet or sour, is kind of obvious by inspection that that creates tremendous value. Going beyond that, it’s just like anybody else, whether we were in West Texas or the South China Sea, does adding new capacity make economic sense? We don’t have a bias toward maintaining production levels at a given level or not, but it will be about value. I also believe that as we have good, valuable development opportunities, they can create more long-term value, but we don’t have a bias one way or another. The upgrader is full, yes. Anything beyond that will have to stand on its own two feet in terms of the value it creates to shareholders. We’re going to look at that at the end of the day on free cash flow per share.

Manav Gupta, Analyst

Well, my first question here is, it looks like you don’t have too much downtime in the refining segment in 1Q. Your fourth quarter capture number was 103%. Every time the capture goes over 100%, we view that very favorably. Looks like a lot of North America is in a turnaround and you are running all out in 1Q. Does that set you up very well for at least the first half of the year as far as downstream earnings are concerned?

Rich Kruger, President and CEO

Yes, I think we like the 100% too. That’s good, right, Dave?

Dave Oldreive, Executive Vice President, Downstream

Sure is.

Rich Kruger, President and CEO

We like more than 100%. Yes, I will ask Dave to comment. We do have turnarounds at Montreal and Sarnia that come on this year in the kind of second quarter-ish. But you are right, for the bulk of the first quarter we are going to be up and running. But Dave, comment on that. I have also asked you to give your quarter a pint of blood on the $5 a barrel. So answer that question, but also talk about what the downstream is doing to contribute to our $5 a barrel corporate breakeven reduction. So Manav, sorry, you still get another question. But I want Dave to comment on what his team is doing in that regard as well.

Dave Oldreive, Executive Vice President, Downstream

Sure. Thanks Rich and thanks Manav for the question. Well, that’s actually a lot of material to go work with. I could probably spend a bit of time on this one. But you mentioned margin capture, and I think the story for the first quarter is going to be fairly similar to the story for the fourth quarter. For the fourth quarter, we delivered a strong margin capture. When I think about it, we—Kris mentioned some reasons why we were able to run our refineries full, why they are economic. We’ve got some structural advantages in terms of our G2D, our location, our connectivity to upstream, as well as our retail business. But we ran full and saw a strong margin capture. I would also flip that around; running full allows you to capture strong margin capture. Strong margin capture gives you the economics to run full, and we saw both. In the downstream, in the fourth quarter, we have optimization that our downstream teams do aggressively every day, and we saw some really good examples of that. First off, reliable operations allowed us to optimize our molecules through our refineries and integrate the value chain to the customer. We were also able to give economic full signals to all of our refineries despite falling gasoline prices. That was assisted by deeper West Can crude discounts, particularly on SCO, our lower G2D ratios relative to our competition, and our ability to export diesel across both coasts, and that will continue through the first quarter as well. Our Edmonton Refinery is highly integrated with our upstream assets, and we optimize that every day to make sure we fill out the refinery to all of its constraints as well as try to tailor to meet our customer demands. That’s a unique capability in the industry. Our trading organization has done a great job in the fourth quarter and continues in the first quarter to move volumes off the coast at really good netbacks. We saw that in December; we see that through January while gasoline cracks were low. Gasoline cracks have picked up. That should continue to help us. Our rack forward business continues to be strong and provides a nice cushion. It also provides a bit of cushioning in the following pricing market, which we saw through the fourth quarter in our wholesale pricing when our street price lagged wholesale pricing, and so really good fourth quarter in terms of margin capture. We would expect that to continue through the first quarter. In terms of value capture, that’s a really exciting thing for us in the downstream. If we think about where our opportunities are—Peter talks a lot about how we reduce costs of mining; that’s the big opportunity in the upstream. In the downstream, our volumes are a little bit smaller, and the cost of production is a smaller piece to work with to begin with. So, there are some opportunities in the dollar per barrel OpEx side of things, but our bigger opportunity is our ability to capture value. That’s really where we are focused and our team is really excited about it. We are building plans to capture value in a number of key areas. That value will turn into cash, which is important to the bottom line of the enterprise and overall helps our breakeven for the enterprise. We are looking at structural reliability improvements at all of our assets in the refining business. We're looking at supply and logistics opportunities. We’re taking a look in the supply side at many of our contracts that maybe we haven’t looked at in a number of years to ensure they still serve us well, and we are seeing some opportunities in that space. We spend a lot of money in logistics moving large volumes of product across North America and even at export. There are vessel leases, rail car leases, and pipeline contracts. There’s a lot of money being spent there; we think there’s some opportunity to squeeze some of that, and find some good value there. Our trading organization is world-class, and we’ve been growing that over the last few years. We continue to see opportunities to capture more value through that organization. On the refining side, we have several really small investment opportunities, low CapEx, high-return that we’re going to look at at each of our assets to continue to grow that. And of course, folks are aware of our retail growth strategy. We began implementing that in 2023, and that’s going to deliver very well for us. We are seeing really promising signals on some of the early sites that we have developed, and we’re going to continue that through the next few years. We see a lot of opportunity to contribute upwards of a couple dollars a barrel to that $5 a barrel challenge over the next few years through downstream value capture.

Rich Kruger, President and CEO

I just wrote that down, Dave. Thank you.

Manav Gupta, Analyst

My quick follow-up—and thank you for the detailed response. My quick follow-up is, it looks like the net debt just went up a little because of the Fort Hills. I think you took on some more debt for that transaction, and maybe there was some lease liability things. I am just trying to understand now that Fort Hills is in there, that you are crossing higher volumes, like what would be an optimal debt level after which you would say we are very comfortable holding to this amount of debt and then most of the other proceeds can just go to buybacks?

Kris Smith, Chief Financial Officer

Hi Manav, it’s Kris here. Similar to the question we had earlier from Neil Mehta, our capital allocation framework is quite clear. We are driving to $12 billion net debt as our next target, and then we will change the capital allocation framework from 50-50 to 75-25. Our goal is to get down to $9 billion net debt, including capitalized leases. So that’s the framework we have in place. As I have said earlier in the call, this is all about people. As you’ve listened for the last period of time, we are looking to release as much free cash flow as we can so that we can drive to that net debt target and return more cash to shareholders. Yes, that’s right. Our net debt at the end of the day was flat year-over-year, and we had the acquisition, which was CAD 1.5 billion plus closing adjustments and closing costs. You pointed out there were some capitalized leases that came with that. When you look at that on that basis, we did the transaction; we kept the net debt level. Our debt, excluding capitalized leases, actually went down.

Manav Gupta, Analyst

Thank you so much.

Kris Smith, Chief Financial Officer

Thanks.

Operator, Operator

Thank you. And that will come from the line of Roger Read with Wells Fargo. Your line is open.

Roger Read, Analyst

Yes, good morning. I’d like to just follow-up on one thing. As you mentioned, being able to supply Fort Hills and Firebag to Base Plant and others, does it matter what you’re putting through the upgraders in terms of bitumen and bitumen quality? What’s the flexibility there as we think about the long-term question of replacing Base Plant production? I know it’s a next decade kind of question, but it’s out there. I’m just curious; are you learning something about the ability to be more flexible with the feedstock?

Rich Kruger, President and CEO

The upgraders have the capability of handling whatever the feed is, but the cocktail that comes from Firebag is not exactly the same as the cocktail that comes from Fort Hills. What we’ve learned with the paraffinic froth treatment at Fort Hills is that it takes the heavier asphaltenes out of it before it comes. What Peter is getting at Base Plant when he runs that through. We’ve talked in the past about getting an uplift in volume when it goes through there, but literally, we’ve been testing that long and hard, and with more Fort Hills barrels going through. Peter, keep me honest, we’ve been talking about the volumetric uplift of bringing a Fort Hills barrel in on kind of the 4% range. Increasingly, we’re thinking it’s more than 6%. We think that we’ve been getting that 4%, but as you stir those Fort Hills barrels in with the other barrels, they have a synergistic effect that gets an uplift from a larger volume. The value proposition when you can look at where a paraffinic froth treatment bitumen gets in the market versus a Firebag is significant. We have the ability to move barrels literally day-to-day, week-to-week to get the highest value.

Peter Zebedee, Executive Vice President, Oil Sands

And actually, the results are showing a north of 6% yield uplift on those paraffinic froth treatment barrels from Fort Hills. Again, we can bring those into the upgrader at a maximum of 60,000 a day right now, and that’s what the teams do: look every day at where we can generate the most value for the company and what the mix is—what the cocktail is—so we are bringing it to those upgraders.

Rich Kruger, President and CEO

Absolutely. Yes, no doubt about it. We will look at the most holistic way to ensure we can accurately see what value can be captured. Here again, this is part of what makes us a bit different than others is the way we can look at a barrel of bitumen and what we can do with it. We have options and that will be part of our consideration as we look at the best long-term sources of bitumen.

Roger Read, Analyst

Alright, appreciate it. Thank you.

Operator, Operator

Thank you. I am showing no further questions in the queue at this time. I would now like to turn the call over to Mr. Rich Kruger for any closing remarks.

Rich Kruger, President and CEO

Yes, I’ll just wrap up very quickly before giving it back to Troy. Thank you for the time, the questions today. We had a lot to cover. I’ll just reiterate really where Greg started us. Where we are right now as we get into 2024, I believe we’ve got the right leadership, the right people. We’re focused on the right work. We have an inventory of things that can make a good operation great, and that’s exactly what we intend to do. So with that, I’ll just turn it back to Troy.

Troy Little, Vice President of Investor Relations

Thank you, everyone, for joining our call this morning. If you have any follow-up questions, please don’t hesitate to reach out to our team. Operator, you can end the call.

Operator, Operator

Thank you. This concludes today’s program. Thank you all for participating. You may now disconnect.