Suncor Energy Inc. (NYSE:SU) Q2 2023 Earnings Call Transcript

Suncor Energy Inc. (NYSE:SU) Q2 2023 Earnings Call Transcript August 15, 2023

Operator: Good day, and welcome to the Suncor Energy Second Quarter 2023 Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host, Mr. Troy Little, Vice President of Investor Relations. Please go ahead.

Troy Little: 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.

Rich Kruger: 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 what I would refer to as 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, been at our mines or upgraders or in situ operations or drilling rigs, refineries and the Terra Nova FPSO. In all locations, our conversations were 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, very strong correlation between safety performance and business performance.

So, what did I see on site? I saw strong site leadership. I saw worker engagement. I saw a very active near miss reporting. I saw a comprehensive root cause investigations. I saw technology highlighting the mines, collision awareness, fatigue management. 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 a full scale in oil sands, and they have been proven around the world to reduce safety risk. Our approach is not hope or faith-based but relies on tangible actions, starting with leadership, engagement, technology and training. Other observations from the sites. It’s evident, our company’s level of the physical integration is a unique opportunity and an unparalleled advantage.

But what I like the best is I saw opportunities to improve our financial and operating performance in most all aspects of our business. Also made time in the second quarter to meet face-to-face with several of our major shareholders, had trips to Toronto, New York, Boston, a series of other virtual meetings, shared my approach, areas of focus, initial assessments of the Company, highest priority plans, but equally spent time listening to concerns, expectations and our shareholders’ assessment 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 they’re clear. So let me hit on — let’s get to some meat, and I’ll talk about some specific actions in the second quarter, and I’ll highlight four areas starting with the leadership team.

We announced yesterday a series of changes to the composition and responsibilities of our senior executive team, i.e., 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, fewer internal interfaces. We’re delayering the organization, and we are concentrating centers of expertise. The senior executive team will be 8, including me, 4 newly externally sourced this year, 3 of the 4 on Board now. A quick summary of the changes, Kris Smith, CFO. Kris will take on additional responsibilities for IT and supply chain.

Peter Zebedee, our EVP, Oil Sands, will be adding in situ and drilling to his remit, giving him all oil sands operations. Dave Oldreive, EVP Downstream joined us in June, eliminated a layer of senior management, so all of our refineries now report directly to Dave. Shelley Powell, Senior VP of Operational Improvement and Support Services. Shelly retains her E&P portfolio but takes on the important role of revamping 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, both individuals with expanded portfolios. We will add a new senior executive role to lead strategy, sustainability, commercial and development. These changes were enabled by three senior executive retirements to this month, one later in the year.

And I’ll step it back a little bit. I once had a mentor who used to say simplicity creates clarity, clarity creates consistency and consistency creates success. This senior executive team is ready to create success. The next area I’d like to talk about is above field costs. On June 1, we announced internally plans to reduce above field costs by $400 million a year. If you think of it on an overall corporate breakeven basis, that would equate to about $1.50 a barrel. Staffing will be reduced by 1,500 or 20% by the end of this year based on performance and business need. In the quarter, we took a onetime pretax charge of $275 million, about $210 million after tax. This would represent a 9-month payout. This is an internally led effort, eliminating work we consider to be unaffordable or low relative value.

We are looking at 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, top to bottom, including the senior most executives. We are on plan, a third complete as of August 1, 535 individuals have left the Company and a cost reduction of about $125 million so far. Now, I would note, these actions, they aren’t easy, and they certainly aren’t taken lightly, but they are necessary for our competitiveness. Another area we spent time in during the quarter was a strategy reexamination. In particular, we’ve taken a — we’ve started a comprehensive relook at our strategies and our articulated objectives. Where we stand is we judge that our current strategic framework is not — or is insufficient in terms of what it takes to win.

The lack of emphasis on today’s business drivers, and while important, we have a bit of a disproportionate emphasis on the longer term energy transition. Today, we win by creating value through our large integrated asset base underpinned by oil sands. Discussions have occurred with our Board of Directors, who are supportive of our revised direction in tone. And I would just leave this with more to come but you can expect a sharper, clearer, more tangible articulation of how Suncor plans to win. In addition to the above, we encountered a cybersecurity incident in the quarter. On June 25th, we confirmed a cyber incident stemming from unauthorized third-party access to our IT network. We immediately isolated our operational IT systems as well as backup databases.

In the days thereafter, we established a safe, secure IT environment free of incursion and corruption. The incidence certainly caused disruption. However, it did not have a material impact on our financial and operating results. Our organization responded extremely well at all levels. Our IT professionals, our operations staff in terms of business continuity and third-party support teams brought in to assist. Today, we’re largely back to normal with a few exceptions and the benefits of significant lessons learned. As I look to the rest of the year, I’ll comment on a few areas. These are examples only, not all inclusive, that you can expect focus from our company. First and foremost, base business. Continued focus on the fundamentals and continuing to determine ways to improve our financial performance, which I would measure in free cash flow per share.

Looking at the operational areas, mining fleet management. We have in the order of about 900 trucks operating in 5 mines and 3 operational trucks. We’re examining the makeup of our truck fleet, sizes, ownership, leased, contracted. We’re — we believe there’s a material opportunity to lower our overall cost per ton on all earth movements. Peter Zebedee is the senior executive with the ball on this initiative. A second area I’d like to highlight is turnaround planning and execution. And for context, we conduct large annual turnarounds at essentially all of our upstream and downstream facilities. We spend about $1.3 billion per year, roughly 20% of our capital budget. When we look at benchmarks, Solomon and others, we are well below average in turnaround planning and execution.

So, we see a major opportunity to improve cost schedule volumes. Dave Oldreive and Shelley Powell are our senior executive co-leads on this important initiative. Beyond the operation, and when I look a little bit further on the radar screen, I’ll flag two areas that are top of list. Fort Hills long-term plan. The near-term recovery plan was set last year with clear and definitive actions for the next several years. Given our confidence and the value in this long-life resource, our focus is now on years 4 through 40. The key strategic question is, what is the best, most valuable way to move into the North mining areas? More to come on Fort Hills. The last area I’ll comment on is Pathways Alliance. We continue to work to achieve net zero greenhouse gas emissions from our operations by 2050.

There is alignment within the Pathways Alliance and increasingly the federal and provincial governments. This fall is key to agree on a competitive fiscal framework for infrastructure investment. Kris Smith and Arlene Strom are the senior executives on this important file. Before I turn it over to Kris, I want to offer a couple of comments on guidance. On upstream production, we’re tracking to the low end of our range, a range of [740,000 to 770,000 midpoint of 755,000]. Our Terra Nova start-up delay and our lower stake in Fort Hills been planned due to the Teck acquisition in total add up to about 20,000 barrels a day, which together would take us at or below the low end of the range. Downstream, our Commerce City refinery recovery from the incident in December of 2022 makes achieving guidance a challenge, although I’ll note that Commerce City volumes don’t have a proportional impact on downstream profitability, simply given relative value contribution.

That said, make no mistake about it, we are focused on meeting our targets, delivering on commitments. There are no revisions to guidance to date. Looking ahead, I envision updating when we have information and clarity on which to base any changes, if there were to be changes. And given that turnarounds have such a material impact, both upstream and downstream for us, it makes sense to tend to upgrade after majority are completed each year or at least well underway. For us, for this year, that would essentially mean at the end of the third quarter. So, with that, I’ll turn it over to Kris.

Kris Smith: Great. Thanks, Rich, and good morning, everyone. Well, I’ll just provide some high-level overview of the numbers and some color. Suncor generated $2.7 billion of adjusted funds from operations in the second quarter. This includes a onetime restructuring charge of $210 million after tax related to workforce reductions. Based on our expected annual savings, as outlined by Rich in his comments, this will have about a 9-month payback. Now, when severance costs are excluded, AFFO was $2.9 billion or $2.19 per share. While not as strong as the previous year, the quarter still saw a very constructive business environment, we saw WTI averaging US$74 a barrel in the quarter and light/heavy differentials strengthened versus Q1 and averaging US$15 a barrel.

As well, we continue to see synthetic crude oil trade at a premium to WTI. And while refining cracks were down from Q1, 2-1-1 cracking margins remained robust at around US$30 a barrel. Natural gas, which is a key input cost to our operations, remained low, with AECO averaging $2.35 a GJ in the quarter. Looking forward, we continue to see a strong business environment with both, crude and refining crack strengthening since Q2 on the back of healthy supply-demand fundamentals and expect to see this continue. Now, turning to operations. Our upstream operations delivered 742,000 barrels of total production in the quarter. With respect to oil sands, we had strong operations, delivering $2.6 billion of adjusted funds from operations with oil sands realizations averaging C$94 a barrel, which was about 94% of WTI.

Oil Sands delivered 679,000 barrels a day of production in a quarter that had the Syncrude turnaround, which turnaround was executed safely with quality and ahead of schedule. We saw strong upgrading performance in the quarter with 94% upgrading utilization, which included that turnaround and which also included 100% utilization at base plant upgrading, delivering a total of 505,000 barrels a day of synthetic crude oil production. Our in situ assets also saw continued strong production, including 102% utilization at Firebag. Meanwhile, the Fort Hills asset was on plan with production ramping up quarter-over-quarter to 110,000 barrels a day net, including 14,000 barrels a day of internal transfers to base plant upgrading. As we look forward into the quarter, Fort Hills started its five-year full plant turnaround in late July, and we’re pleased with the progress and that it’s on track to complete on schedule later this week.

Also, our base plant Upgrader 2 scheduled major turnaround will be starting in early September, stretching into Q4, and that’s been reflected in our guidance. Exploration and production generated adjusted funds from operations of $521 million with production of 63,000 barrels per day and average realizations of C$108 per barrel, which was about 102% of Brent. We also closed 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 continued in the quarter and is now complete with the vessel setting sail actually just a couple of days ago on Sunday. Once it arrives at station, it will then begin subsea reconnection activities through the remainder of the quarter and into Q4.

Finally, Downstream 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%, which reflected planned turnaround activity. All refinery assets are back from spring turnaround activities and set up for a strong run for the rest of the year. And in fact, in July, we saw average refining utilizations across the network of over 100%. Meanwhile, in the quarter, margin capture was 89%, which reflected reduced heavy feedstock mix and increased intermediates during the turnarounds and rebuilding of inventories. And we had refined product sales of 547,000 barrels per day. With respect to overall costs, as Rich said in his comments, cost management, cost reduction is a key focus of this management team, and we’re seeing progress on costs and see ourselves trending towards the bottom end of our Oil Sands cash cost per barrel guidance ranges for the rest of the year.

Year-to-date capital spend to the end of Q2 was $2.7 billion. As with costs, we remain laser-focused on driving capital discipline. Though with the unplanned spend related to the Commerce City outage earlier this year and the extended Terra Nova life extension work, along with some inflationary pressure, we are trending toward the upper end of our guidance range. On shareholder returns, we returned $1.4 billion to shareholders in the quarter which was made up of about $700 million in dividends and about $700 million in share buybacks. Year-to-date, we’ve bought back almost 3% of our shares. And at the end of Q2, our net debt was $14.4 billion, which was a $1.3 billion reduction from the end of Q1. As our shareholders expect, along with safety, reliability and profitability, we remain focused on prudently managing our balance sheet and reducing debt while continuing to provide very competitive returns to our shareholders, through our dividend and reduced share count via buybacks.

And with that, I’ll turn it back over to you, Troy.

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

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Q&A Session

Operator: Thank you. [Operator Instructions] And the first question today will come from the line of Greg Pardy with RBC Capital Markets.

Greg Pardy: 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 maintenance plan for the third quarter that you might not have done in previous years?

Kris Smith: 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. And 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 good quality, really good safety but came in a bit ahead of schedule. And that’s what we like to see. So, I’m looking down at my colleagues at the end of the table, Peter Zebedee and Dave Oldreive, even I know that they’re super focused on delivering the turnaround that we’ve outlined. We’ve outlined them in the guidance. As I mentioned, the big one in the quarter is the U2 turnaround, which will start in September and go into October.

And Fort Hills, I just mentioned, that was a full plant turnaround a 5-year turnaround, really pleased with what we’ve been seeing, and it’s coming back this week as we expected. So, I would say, it’s been a real double down focus on getting good planning into these turnarounds and focus on execution through them.

Greg Pardy: 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.

Rich Kruger: Yes. Greg, this is Rich. I think a couple of things I’d say is the long-term bitumen supply to the upgraders remains focus area for us, and between a combination of the ability to move Firebag volumes there and/or Fort Hills and/or incremental Fort Hills. As we look at it, we generally would prefer to operate and have 100% ownership of our assets. That’s generally where we think we can add the most value and be the most competitive. And so, Fort Hills would fit into that. The — with ConocoPhillips exercising their ROFR, the deal has originally announced and configured, changed. And we acknowledge that. Total acknowledges that. Discussions are still going, and I appreciate you not asking me to speculate where we’ll end up, but discussions are going, continuing.

The strategic value to us and I would say Total is — largely remains the same. So we just — we’ll work through that. And when we — if and when the time is right, we have something to announce, we’ll do that. I think that — but expecting a resolution on all that this year, that’s a reasonable expectation.

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

Dennis Fong: 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 to 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.