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Suncor looks to rebound

Canadian producer aims for recovery after tough period of enforced production restrictions

Mandatary crude curtailments in the Canadian province of Alberta continued to hamstring domestic producers’ profits last year after the government took drastic measures to reduce the discounts of Canadian domestic production to US benchmarks—the result of a severe lack of export pipeline capacity.

The fourth quarter financial results of Canadian oil sands producer Suncor showcased the industry-wide implications of the constraints. Company net losses in the quarter reached $2.34bn, against $280mn in the fourth quarter the previous year. Suncor also suffered a $3.4bn impairment charge due to lower projected returns on heavy oil mining at Fort Hills, in the Canadian oil sands patch.

Total upstream production hit 778,200bl/d oe for the quarter, down by almost 6.5pc from 831,000bl/d oe in the same period of 2018. The most material drop was seen from Suncor’s Syncrude oil sands mining and upgrading joint venture, in which it has a 58.74pc stake, along with Canadian independent Imperial Oil (25pc) and Chinese partners Sinopec (9.03pc) and a subsidiary of Cnooc (7.23pc). Suncor’s share of Syncrude’s output declined by c.53,300bl/d oe. 

There were also smaller production reductions from Fort Hills and its so-called ‘in-situ”—where deeper bitumen deposits are not strip-mined but stimulated to flow to the surface more like conventional oil reserves—oil sands operations. The firm cited a combination of the production curtailments, heavier planned maintenance than in the previous year and an unplanned outage at its Mackay River project.     

The latter is due to resume in the second quarter of 2020, which would boost operating capacity by 38,000bl/d oe on its return—significant given that in-situ operations recorded only a year-on-year drop of just over 10,000bl/d oe in Q4. Again, though, the potential for upping output is dependent on evacuation options.

Making up for lost time

Production in the fourth quarter would have fallen even further had Suncor not optioned the government’s third-party credit scheme—allowing producers to purchase credits from smaller firms. Suncor also benefited from the crude-by-rail campaign, which allows producers to by-pass curtailment limits with the proviso that extra output is only transported by rail.

Both programmes have been extended through 2020 and remain the cornerstone of the company’s growth plan. And analysts feel that Canadian producers are well positioned to recover in 2020, the result of strong capital discipline boosting free cash flow (FCF). Suncor increased its dividend pay-out by 11pc last year, the eighteenth consecutive year of growth.

“We continue to deliver on our commitment to increase shareholder returns” Little, Suncor

“We continue to deliver on our commitment to increase shareholder returns,” said Mark Little, Suncor CEO, on an earnings call. “Suncor returned $1.1bn in the fourth quarter, and $4.9bn in 2019 [as a whole], in dividends and share repurchases to shareholders. This represents approximately 45pc of our annual funds from operations.”

Bank Morgan Stanley predicts that, if Brent averages $62/bl in 2020, WTI $57/bl and the WTI-WCS differential $21/bl, then Canadian firms will generate a mean 7pc FCF versus just 4pc for large-cap US companies.

Falling costs

Last year, lower output—due to mandated cuts and scheduled maintenance—had an inflationary effect on Suncor’s operating costs. Suncor’s headline oil sands opex measure reversed a multi-year downward trend to lift to C$28.20/bl (mining and in situ costs, with certain expenses removed, also perked up to C$26.60/bl and C$9.25/bl respectively). This year, though, a reduced maintenance programme will cut opex in the oil sands to C$25.25/bl. Improved margins through cost reductions are slated to add an extra $2bn to Suncor’s FCF growth between 2020-23.

Also critical for future growth is the midstream deadlock. Three major pipelines—Line 3 replacement, TMX pipeline and Keystone XL—all await final decision, which, if approved, would eliminate the midstream take-off problems. But, even though progress on the three options is uncertain and unlikely to make any meaningful short-term contribution to improve egress options, this year should be much more stable for producers. Increased rail options will allow firms to sidestep the cuts more effectively and further boost output.

In 2020, Suncor is projecting a 5pc increase in production over last year—totalling around 800,000-840,000bl/d. Lower costs and greater output should improve financials. For every $1/bl change in Brent, Suncor’s finances will be impacted by around C$255mn in funds from operations. And it admits that the light-heavy differential could potentially affect profits.

$2bn – funds growth 2020-23

But Suncor claims integration across the vale chain will limit sensitivity to a maximum of $25mn in funds from operations impacted by a $1/b change to the spread. A more diversified upstream portfolio is also seen as a hedge.

In 2019’s final quarter, offshore assets in the North Sea and on Canada’s east coast fared better than the oil sands, posting a slight improvement over 2018—largely the result of the company’s Hebron field off the coast of Newfoundland. Sanctioned projects at Fenja, Buzzard, White Rose and Terra Nova are all projected to start-up post-2021 which will help diversify the company’s portfolio and increase production. In total, Suncor holds over 390mn bl of 2P reserves from its offshore assets.   

Dealing with change

To adapt to a lower carbon future, Suncor has also committed to reducing its carbon footprint by 2030. The firm has set itself an emissions reduction target of reducing levels by 30pc against its 2014 baseline. To contribute to this target, Suncor sanctioned the Forty Mile Wind Power project in southern Alberta and a cogeneration plant to provide power to consumers last year, which could help to meet one-third of its emissions goal.

“Both of these [projects] are going to drive good returns for our shareholders, and they were both done in unique ways to be able to maximise that value for the shareholders,” said Little. “We are spending money and finding economic ways to achieve the environmental goal that we set out.”

While Suncor’s ambitions perhaps look slightly modest in comparison to recent announcements by more European-centric producers, analysts feel that its aims are more than just green-washing. “Suncor has a well-established track record of reducing its per barrel GHG intensity,” says Randy Ollenberger, managing director at financial services firm BMO Capital markets. “Its cogen plant now under construction will significantly reduce emissions. And it is also one of the largest R&D spenders in Canada, lots of which spending is aimed at reducing GHG emissions.”


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