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Suncor 2020 Update

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   |    Monday,March 30,2020

Suncor Energy Inc. has updated its 2020 outlook and guidance.

“The simultaneous supply and demand shocks are having a significant impact on the global oil industry.  We are adjusting our spending and operational plans to be prepared in the event the current business environment persists for an extended period of time,” said Mark Little, president and chief executive officer. “Our business model and financial strategy are designed to withstand volatile environments.”

Suncor’s business model is built on long life, low decline assets and capturing the full value of the barrel through integration. This model, paired with disciplined adherence to financial management and capital allocation, has consistently delivered value to shareholders while maintaining a strong balance sheet. Suncor’s credit metric history and strong levels of liquidity through various cycles are evidence of this discipline.

A key strategy for weathering the unprecedented market challenges is remaining focused on creating maximum value from production, rather than being volume focused. Suncor believes this is critical to creating long term shareholder value and that the integrated model is an important competitive advantage. With growing global oil inventories, Suncor’s ability to upgrade, refine, and sell production to consumers through its retail network will continue to generate significant value.

Our actions to respond to these unprecedented market challenges will result in reductions in capital spending and operating costs as well as a significant increase to the financial liquidity of the business in 2020, as detailed below.

CAPITAL GUIDANCE UPDATE

The revised capital program is expected to be between $3.9 and $4.5 billion, a $1.5 billion or 26% decrease compared to the original 2020 capital guidance midpoint. The updated capital spend is concentrated on sustaining capital and continuing with a limited number of low capital intensity, value creating projects, as follows:

  • $2.3 – 2.7 billion related to asset sustainment and maintenance activities;
  • $600 – 750 million on E&P step out developments; and
  • Approximately $1 billion on high return / cost reduction projects largely independent of commodity price volatility.

Suncor’s original capital guidance was $5.4 to $6.0 billion, with approximately 50% allocated to economic investment and 50% to sustaining capital.  By the end of Q1 2020, Suncor is expected to have spent approximately $1.3 billion in capital. In order to sustain the financial strength of the business within the current economic environment, it is crucial to reduce the capital budget. Suncor is able to make these reductions because of the flexibility previously built into the budget. The targeted reductions include a combination of reducing economic investment and sustaining capital by deferring and cancelling projects, while maintaining a focus on safety and asset reliability over the long term.

The Syncrude / Suncor interconnecting pipelines, deployment of autonomous haul trucks at Fort Hills, and investments in technology for the Supply and Trading business and core business systems will continue to be funded and proceed on schedule. The Cogeneration Facility at Base Plant, Forty Mile Wind project, and some offshore E&P step out development timelines have been extended for up to two years. The operator of West White Rose has announced that work has been suspended for an indefinite period. We have also deferred new in-situ well pads until financial conditions improve and cancelled several small economic investment projects across the business.

Capital Expenditures (C$ millions) (1)
  2020 Updated Full Year Outlook
March 23, 2020
% Economic
Investment (2)
 
Upstream Oil Sands 2,650 – 2,900 25%  
Upstream E&P 600 – 750 95%  
Total Upstream 3,250 – 3,650 40%  
Downstream 550 – 650 20%  
Corporate 100 – 200 90%  
Total 3,900 – 4,500 40%  
       
1. Capital expenditures exclude capitalized interest of approximately $155 million.
2. Balance of capital expenditures represents Asset Sustainment and Maintenance capital expenditures. For definitions of Economic Investment and Asset Sustainment and Maintenance capital expenditures, see the Capital Investment Update section of Suncor’s Management’s Discussion and Analysis dated February 26, 2020 (the “MD&A”).

PRODUCTION & OPERATING COST GUIDANCE UPDATE

Across the company, Suncor remains committed to the health and safety of all personnel, and on the safety and continuity of the operations. To limit the risk and transmission of COVID-19, only location essential personnel are working at Suncor sites and offices.

It is evident that as a result of significant efforts to limit the impact of COVID-19 through social distancing and having non-essential personnel stay home across many countries around the world, petroleum demand has declined.  This is particularly true for jet fuel and gasoline.  Product demand in Canada is starting to decline and is expected to continue over the next few quarters. Suncor has begun to adjust refinery utilisations as a result. Due to significant uncertainty, we have not yet updated our guidance in this area, although we anticipate it will be lower.  An update will be provided on the first quarter earnings call in early May.

Suncor’s updated upstream production guidance includes the best estimate, at this time, of the impact on crude markets of lower global product demand and industry wide lower refinery utilizations. Global upstream production will need to be reduced or remain in storage unsold. However, this is highly uncertain and is directly related to how long it will take to significantly reduce the global threat of COVID-19.

The value over volume strategy maximizes integration of Suncor’s upstream production through its upgraders and refineries, while reducing exposure to Alberta bitumen prices. This results in higher per barrel margin even though unit costs may be higher.

Crude by rail is now uneconomic and our updated guidance excludes any production volumes associated with rail transportation under the Province of Alberta’s Special Production Allowance program. Mandatory production curtailment is assumed to continue through 2020, which results in some assets operating at less than efficient rates.

Fort Hills continues to be disproportionately impacted by mandatory production curtailment with the asset operating at lower than optimal facility utilization. The Fort Hills partners have agreed to reduce Fort Hills to a one train operation, running at full utilization. This will increase cash flow, particularly when bitumen prices are extremely low, as we are able to significantly reduce variable costs.  However, unit costs for the remaining production will be higher because of this decision as a result of fixed costs being covered by lower volumes. These assets have far less flexibility versus Suncor’s in-situ assets to ramp up and down. The partners will continue to monitor market conditions and re-evaluate these decisions as market conditions change.

The Syncrude annual coker turnaround was planned in Q2 but is now deferred until Q3 with a minor impact on volumes. The impact of COVID-19 on Suncor’s planned maintenance schedules is currently being assessed. This includes evaluating alternate options for the Terra Nova Asset Life Extension, as Spain is no longer able to accommodate the dry dock slot due to that country’s COVID-19 response. MacKay River’s return to operations has been intentionally extended to May due to COVID-19 concerns and low bitumen prices.

Suncor is also reducing total operating expenditures across the business by more than $1 billion versus $11.2 billion of expenditures in 2019. Updated asset-based cash cost per unit guidance below reflects the revised production guidance and reduced operating expenditures.

Guidance for Oil Sands operations and Syncrude cash operating costs per barrel remain unchanged at $24.00 – $26.50 (US $17.00 – $18.75) and $35.00 – $38.00 (US $24.75 – $27.00), respectively. Fort Hills cash operating costs per barrel have been updated and are now expected to be $34.00 – $37.00 (US $24.00 – $26.25).

The production guidance table below is inclusive of the planned reductions in production volumes as Suncor continues to execute the strategy of generating value over volume.


US Frac Crews Tracking

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