Suncor Energy Inc. (NYSE:SU) Q1 2024 Earnings Call Transcript May 8, 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 First Quarter 2024 Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker, Mr. Troy Little, Vice President of Investor Relations. You may begin, sir.
Troy Little: Thank you, operator, and good morning. Welcome to Suncor Energy’s first 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 detailed in our first quarter earnings release as well as in our current 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 first 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 Peter Zebedee, Executive Vice President of 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.
Richard Kruger: Good morning. First quarter, following a strong fourth quarter 2023, I would characterize our first quarter as even stronger. So how so I recognize I’m going to start sounding like a broken record here, but by focusing on the fundamentals of safety, reliability, profitability, coupled with the determination to brand commitments. Kris will highlight our results in more detail in a moment. So what I’d like to do is highlight some of the more notable achievements starting, of course, with the fundamentals, safety. No life altering or life-threatening injuries, lost time incidents down 50% year-on-year, recordable incidents down 20% year-on-year, process safety events down greater than 50% year-on-year achieving first quartile U.S. fuel and petrochemical manufacturers performance.
How so? This is really a tribute to our people, our processes, our priorities and site leadership. Second fundamental I’d like to continue with reliability. I’ll start with refining. Refining throughput 455,000 barrels a day, up 88,000 barrels a day from a year ago or 24%. Higher first quarter in our company’s history, driven by best ever first quarter utilization of 98% and led by Edmonton in excess of 100% achieved by operational excellence, improve winterization and once again, the focus of our people. Product sales, 581,000 barrels a day, our highest quarter ever. A tribute to Dave Oldreive’s sales and marketing team for aggressively moving barrels and capturing value. Upstream production, 835,000 barrels a day, up 93,000 barrels a day or 13% for the quarter a year ago, highest quarter in our company’s history.
There are many, many multiple best-evers. Kris will detail a few shortly, but I’ll continue. I’d like to highlight one in particular. Upgrader utilization combined at an impressive 102% achieved in part via a very tangible competitive differentiator. I am growing to understand and recognize more of the longer I’m here. And this is our physical integration. Reminds situ operations interconnected to 2 large upgraders. The flexibility and optionality that this integration provides us is truly unparalleled. The ability to move molecules bitumen, partially processed hydrocarbons, water, steam, again, all to maximize value. I guess to say it differently, there’s integrated and they’re Suncor integrated and they are not the same. The last thing I’ll mention is it’s one thing to have a physically integrated kit, but it’s something entirely different to capitalize on it.
And that’s exactly what Peter Zebedee’s entire Oil Sands’ team did throughout the first quarter, well done. So if you look at where we are on the production reliability, the year-to-date, the first quarter, everything is consistent with the first quarter’s expected contribution to our full year guidance. In fact, I would say every major asset upstream and downstream delivered at or above our own internal expectations. The third fundamental I’ll comment on profitability. Kris will dig into AFFO, free funds, shareholder distributions. So I won’t steal his thunder, but I would like to comment on one essential aspect of profitability, cost management. OSG in the first quarter all in, top to bottom, was $3.4 billion, for all practical purposes essentially flat with the first quarter of 2023.
However, as I mentioned, we produced 93,000 barrels per day more in the upstream essentially 3 MacKay Rivers, we refined 88,000 barrels a day more in the downstream, essentially an additional Sarnia, and we sold 66,000 barrels a day additional of products — refined products this year versus last year. We did all of that at essentially no extra cost, 0, not. That’s leverage. In fact, all major assets, every single one upstream and downstream operated safely and efficiently at lower unit costs in the first quarter of 2024 than they did at the first quarter of 2023. I got to say I love free barrels. Bottom line, 2024 of to a strong start good momentum, and we intend to keep it going. You may have seen or may be aware that on May 21, we’re going to provide an update via webcast on our overall story and our near-term outlook.
Specifically, our management team will outline the next 2 to 3 years’ expectations, financial and operating. Our outlook on volumes, CapEx, or $5 a barrel reduction in breakeven, et cetera. We’re also going to detail expected shareholder returns and capital allocation at various prices. Later in the year, we’ll see at this point, but we anticipate a more comprehensive Investor Day with a longer-term outlook. So stay tuned. Troy Little and his IR team will provide further details in the days ahead. As I look at the second quarter, recognizing that the is only a couple of weeks away, I’ll skip my usual detail on performance improvements and highlight only a couple of items. We’ve talked at length on earlier calls about mining fleet upgrades in the cost savings opportunity they provide.
So I just wanted to comment on our conversion to autonomous haul trucks at the base plant. That continues as planned. Six months ago on a call, we were talking about how we had 30, 31 trucks operating autonomously. Today, that number is 56 trucks. And at year-end, we’re on plan for 91 or the full base plant oil fleet. Recall the impact is $1 million per truck per year in sustainable savings and an additional productivity gain. During the Q&A, I would urge someone to ask Peter Zebedee on what he has seen in autonomous productivity. We’ve also commented about acquiring 55 new 400-ton trucks to replace twice as many less efficient third-party trucks. The first 16 of those are now in operation, 21 more are on their way to Fort Hills over the next many months through November.
And the final 18 of the 55 will arrive at the base plant starting in the fourth quarter of this year continuing into the first quarter of ’25. Recall, in total, these trucks will lower our overall corporate breakeven by on the order of about USD 1 per barrel. Turnarounds in the second quarter Second quarter is our big turnaround quarter for the year, upstream and downstream. In fact, about 75% of our 2024 turnaround activity, if you look at it on a spend basis is scheduled in the second quarter. Our priority here will be to safely cost-effectively execute on schedule and position for a strong second half. At this point in time, we’re a month into the second quarter. Turnarounds are going well. We still have more work to do. So I really won’t have any more detailed comments at this point.
If you look back in time, 15 years ago about the time of Petro-Canada merger, Suncor implemented an enterprise-wide system management system to manage operational risk, reliability and overall performance. Internally, we refer to it as OEMS. In essence, this system provided each site with a standard list of operational requirements or expectations, largely leaving each site to determine exactly how to achieve the expectations. Today, we sit back and we’ve judged that our original system is too complex and fundamentally insufficient in meeting our high performance expectations of today. Consequently, we’re implementing a new revised operational excellence management system. It consists of 21 processes associated with the work we do and how we want it done.
Processes like managing maintenance, addressing risk, completing turnaround. Each process consists of a standard how to embedded with industry best practices. We’ve developed this with subject matter experts, frontline employees and leaders across the organization, and our fundamental objective is to reduce site-by-site performance variations and institutionalized improvements. In other words, operationally, our vision is to become consistently and boringly excellent. Our new system is clear, simpler and more focused with tangible leader-specific accountabilities. Implementation has started at each and every operating site and will continue throughout 2024 and throughout the bulk of the first half of 2025. I want to shout out to Shelley Powell and her leadership team for driving what I believe will be this game-changing work.
So with that, I’ll turn it over to Kris, who will provide additional comments on financial and operating performance.
Kristopher Smith: Great. Thanks, Rich, and good morning, everyone. Well, while we saw synthetic crude prices weakened versus the prior quarter, it still remained a strong price and margin environment in the first quarter of the year. WTI averaged USD 77 a barrel in the quarter, and the light heavy differential tightened slightly versus Q4, averaging USD 19 a barrel. However, we also saw synthetic crude oil price in weaken, averaging USD 7 a barrel, low WTI in Q1 and on the back of strong regional upgrading production and egress constraints across the basin. However, we’ve already seen suites in to strengthen as we have moved into the second quarter, recovering to a premium over WTI and we expect that to continue going forward.
On the refining side, 211 cracking margins remained robust with some softening of diesel cracks being offset by strengthening gasoline cracks. Our 5 221 refining index was USD 35.95 a barrel, which is about $2.50 a barrel above Q4, helped by discounted synthetic crude oil pricing. And finally, natural gas, which is a key input cost to our operations really low, with AECO averaging $2.20 a GJ in the quarter, and we continue to see in AECO pricing into the second quarter. With this business environment and the very strong operations that Rich just outlined in his opening remarks, Suncor delivered solid financial results in the fourth quarter — or first quarter, generating $3.2 billion in adjusted funds from operations or $2.46 per share and adjusted operating earnings of $1.8 billion or $1.41 per share.
During the quarter, we also returned nearly $1 billion to shareholders. This was comprised of about $700 million in dividends as well as about $300 million in share repurchases. Our net debt, including leases, ended at $13.5 billion, which is down about $200 million versus the end of the prior quarter and also included a $200 million increase from changes in FX on our U.S. dollar-denominated debt. We continued the commitment of our current allocation framework during the quarter by both reducing debt and returning cash to shareholders through share buybacks. Turning now to operational performance and building on Rich’s comments, we continue to see very strong operations in the quarter, including a number of records. Our Upstream delivered total production of 835,000 barrels per day in the quarter, which was up 13% versus Q1 ’23 and was the highest in our history.
This included a record quarterly production in our Oil Sands segment with 240,000 barrels per day of bitumen and 545,000 barrels per day of synthetic crude oil and diesel. Fort Hills had a very strong quarter, producing 178,000 barrels per day of paraffinic froth treated barrels, and which was in line with our 3-year improvement plan. Per that plan, Q1 is expected to be the highest producing quarter of the year as there is planned maintenance in Q2 and in the second half of the year, we will be moving more overburden as we accelerate opening the North pit. Overall, we remain very pleased with the progress and the focus of the Fort Hills team on delivering against our plan. Our Firebag asset also had record quarterly production of 229,000 barrels per day, including an all-time monthly record in the quarter.
Syncrude had a very strong upgrading quarter, achieving over 96% utilization while our base plant upgrader also had a record quarter with 107% utilization. Our internal bitumen transfers reached a new high at 58,000 barrels per day in Q1, demonstrating our increased level of integration within the region to maximize value. This was primarily driven by 42,000 barrels per day of bitumen transferred from Fort Hills to base plant Upgrader, which also provided a yield uplift and contributed to that record I just mentioned. Our E&P segment produced 50,000 barrels a day, which included 10,000 barrels a day in production from Terra Nova as it continued to ramp up through the quarter. We continue to see Terra Nova improved through the quarter with flush production, and in April, it was at 20,000 barrels a day net production.
Now with respect to the downstream, refining utilization with an impressive 98% in the first quarter, which was 19% higher than Q1 ’23, as we saw high availability across all the refineries. And this supported record refined product sales of 581,000 barrels a day. Downstream margin capture was also strong in the quarter at 94% on a LIFO basis when compared to Suncor’s 5 221 refining index, and our integrated business model enabled by downstream, partially negated the impact of weaker synthetic pricing in our Oil Sands business. Capital and cost remain on plan. And as Rich pointed out in his remarks, essentially held our costs flat year-over-year while substantially increasing production and our cost and capital discipline focus continues. Rich mentioned turnarounds.
And in late March, we commenced the planned coker turnaround at Syncrude and turnarounds at Montreal and Sarnia refineries. All of these are going as planned and are reflected in our guidance. And next week, we’ll be starting the planned major turnaround at base plant Upgrader, which will also include prework for the U1 Coke drum replacement project that is scheduled to be completed in ’25. There are no changes to our production, capital or cost guidance for the year as the team remains laser focused on delivering on our commitments and building on this momentum which is And with that, Rich, I’ll hand it back over to you.
Richard Kruger: Okay. A few final comments before we go to the Q&A. Tomorrow marks the anniversary of my first earnings call with Suncor for port in the book. The #1 question we keep getting asked is what’s different at Suncor today than a year ago. And I would answer that as a lot. In a nutshell, we’ve been undergoing a transformation or a turnaround where we’re integrating aspects of strategy, structure and culture. So what’s different? We’ve got a new top-notch executive leaders team. We have top to bottom unwavering focus on the fundamentals. Our strategies and priorities are clearer and simpler. We have a smaller, more focused above field support organization. We have very tangible and accelerated operational performance improvement plans.
We’ve revised how we evaluate and compensate accordingly and we have a leadership commitment and accountability to deliver on commitments. So the bottom line, today, Suncor is increasingly Amcor. We’ve made significant progress in a year. But make no mistake, we’re not done. So if I would comment on what’s next? In addition to achieving continued financial and operating performance with a sense of urgency, 2024 will be about cultural and leadership development within the company. In terms of the exhibiting the attributes of strong leaders, including but not limited to acting with integrity business acumen, quality decision-making, strong people. Culture in terms of developing a team-based results-oriented, high-performance culture and a work environment that enables all to contribute, recognize and rewarded for it.
My prediction, 2024 will be a very good year for Suncor and a fun year to be a part of. So with that, I’ll turn it over to Troy to kick off our Q&A.
Troy Little: Thank you, Rich. I’ll turn the call back to the operator to take some questions.
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