Suncor Energy Inc. (NYSE:SU) Q4 2023 Earnings Call Transcript
Suncor Energy Inc. (NYSE:SU) Q4 2023 Earnings Call Transcript February 22, 2024
Suncor Energy Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Suncor Energy Fourth 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 speaker, Mr. Troy Little, Vice President of Investor Relations. Mr. Little, the floor is yours.
Troy Little: 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 3 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: Thanks Troy. Good morning. Fourth quarter, I would characterize it as strong results across the board, safety, upstream production, downstream reliability, 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 10 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 of 92%, our best ever. We had 91% of the Base Plant, 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 liability. Crude unit utilization, 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 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, second highest in our company history, including 808,000 in the fourth quarter.
We achieved external guidance for the first time in 6 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 1 of a 3-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 8 versus previous 9, 4 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, or in terms of a team competency.
Our newest member of the team, Kent Ferguson joined us here a month or so 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 completed in 5 months last year between June and November. And we did this through the elimination of work, 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 8-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, etcetera, with crystal clear site accountabilities. The benefits of this is 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, 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 2 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 enabled 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 start-up, with the ramp up of that asset now going on. So in summary, 2023, I would say, was a good year in many areas, 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: Great. Thanks, Rich and good morning, everyone. Well, 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.
As well, 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, over 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 closing 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 continue. 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 ‘23. 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 ‘23 to 100% in ‘24, 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 ‘23, 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 plans’ 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, Q4. And 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 ‘24, we are essentially holding our costs flat with ‘23, 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 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, 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 base plant.
I am confident that the team is 100% focused on delivering against these commitments, and is building on the strong momentum we had finished up in 2023. And with that, Rich, I’ll hand it back to you.
Rich Kruger: Thanks, Kris. Okay. 2023 in the books, it’s all about ‘24 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, it has 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 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, we 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, that’s 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. And there is really two components. A structural gap that’s due to the relative age and configurations of our mines, and deals with things like haul distances, and strip ratios.
And then there’s a performance gap that’s, related to simply how well we plan and execute our work. Peter has a very definitive plan focused on closing our performance GAAP, with a specific list of tangible actions to bring about improvement. And what we’re doing is we’re also evaluating alternatives, to address our structural gap via alternate mining scenarios, or our 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, the how we plan and execute our work. We’ve mentioned the trucks, the addition of 55 new, the 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. And recall that 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, the haul trucks at our base mines. The last time we talked about 3 months ago, we had 31 trucks operating autonomously. Today, it’s 45. And we’ll be at 91 by the end of the year. We’re in essence 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. We’ll also get with autonomy what we believe to be a productivity increase where we will effectively moving the same ore tonnage, but with fewer trucks. Specifically, our estimate is it will be the equivalent of 3 free 400-ton haul trucks through the conversion to autonomy. And you recall these trucks cost $10 million plus each. What we will do in practice is 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, more efficient trucks, autonomous haul trucks, but coupled with an industrial engineering like focus, on all aspect of today’s business. Existing fleet availability, utilization, maintenance, all the ancillary equipment reliability across the board and maybe 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, 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, Dave Oldreive and Shelley are 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 our 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. And along with our theme and our unique competitive value proposition, we’re capturing regional synergies, or efficiencies, because of the proximity of our operations, the ability to coordinate turnarounds.
Examples, early on, but of some of the improvements we’re seeing, I’ll use refining as an example. Montreal, second quarter this year, we’ve got a material turnaround dealing with heavy crude processing. Through benchmarking, preplanning, we’ve cut the duration from the original 62 days to 53 days and are very comfortable with it. A second example I’ll share is at our Sarnia refinery where, again, we have a second quarter turnaround looking at risk-based work selection, our scope challenge. We’ve 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, another $12 million, or so 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’s big prizes here, lower costs, shorter durations, higher margins. And to achieve those, it’s about benchmarking, knowing who’s, the best and why, quality risk assessments, advanced quality preplanning, 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 1 was to create a level of alignment between our strategies, our organizational structure, and our 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 an individual’s performance based on their impact, versus their 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 it will have far fewer very 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, focus, which I think is the key to delivering – 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. 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: Thank you, Rich. I’ll turn the call back to the operator now, to take some questions.
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