Suncor has reported a solid third quarter, including earnings of more than $1.5 billion and a new quarterly production record from its oil sands operations of more than 476,000 barrels per day.
"Strong operational performance was foundational to our success in the third quarter, resulting in over $3 billion in funds from operations," said Steve Williams, president and chief executive officer. "Our downstream integration and favourable market access position continue to significantly mitigate the impact of wider crude differentials at Oil Sands. This helped generate significant discretionary free funds flow, which we returned to investors through close to $900 million in share repurchases while also reducing our debt by $1.2 billion."
- Suncor established a new quarterly funds from operations record of $3.139 billion ($1.94 per common share) in the third quarter of 2018. Cash flow provided by operating activities, which includes changes in non-cash working capital, was $4.370 billion ($2.70 per common share).
- Operating earnings were $1.557 billion ($0.96 per common share) and net earnings were $1.812 billion ($1.12 per common share) in the third quarter of 2018.
- Oil Sands operations achieved a new quarterly production record of 476,100 barrels per day (bbls/d), driven primarily by strong operational reliability and record In Situ production. Upgrader utilization improved to 95%, resulting in a higher value product mix, and Oil Sands operations cash operating costs per barrel were $22.00.
- Refining and Marketing (R&M) delivered record quarterly funds from operations of $1.119 billion, with crude throughput of 457,200 bbls/d, which represents a 99% utilization rate, and an average refining margin of $34.45 per barrel.
- Fort Hills production averaged 69,400 bbls/d, net to Suncor, (128,300 bbls/d, gross) in the third quarter of 2018. Fort Hills cash operating costs per barrel averaged $33.45. Subsequent to the end of the third quarter, Fort Hills production successfully ramped up to target operating rates of 90% of nameplate capacity.
- At Hebron, production was 14,400 bbls/d and drilling of the fourth production well began in September.
- During the third quarter of 2018, the company reduced total debt by $1.2 billion.
- The company distributed $582 million in dividends to shareholders and repurchased $889 million of shares in the third quarter of 2018.
Suncor's third quarter 2018 operating earnings were $1.557 billion ($0.96 per common share), compared to $867 million ($0.52 per common share) in the prior year quarter. The increase was a result of improved crude oil pricing and increased refinery margins, the addition of sales from the Fort Hills and Hebron projects and record Oil Sands operations production, despite planned upgrader maintenance which began at the end of the quarter. These factors were partially offset by lower Syncrude production, the addition of operating costs at Fort Hills and Hebron, and at Syncrude for the additional 5% interest acquired earlier in the year, a decrease in capitalized borrowing costs, higher depletion, depreciation and amortization (DD&A) and impairment charges, and planned offshore asset maintenance. The decrease in production at Syncrude was due to the impact of the power disruption that occurred late in the second quarter of 2018 and the staged return to service of the asset. Production at Syncrude has returned to normal operating rates following accelerated planned maintenance and the restart of the third and final coker.
Funds from operations were $3.139 billion ($1.94 per common share) in the third quarter of 2018, compared to $2.472 billion ($1.49 per common share) in the third quarter of 2017, and were influenced by the same factors impacting operating earnings noted above, excluding the impact of higher non-cash DD&A and impairment charges. Cash flow provided by operating activities was $4.370 billion for the third quarter of 2018, compared to $2.912 billion for the third quarter of 2017, and was positively impacted by an inflow of cash associated with a larger reduction in the company's non-cash working capital balances than the prior year quarter which was the result of lower accounts receivable, an increase in taxes payable on improved earnings, an overall draw of inventory, and higher accounts payable and accrued liabilities.
Net earnings were $1.812 billion ($1.12 per common share) in the third quarter of 2018, compared to $1.289 billion ($0.78 per common share) in the prior year quarter. Net earnings for the third quarter of 2018 included an after-tax gain on the sale of the company's interest in the Joslyn Oil Sands mining project of $60 million and a $195 million unrealized after-tax foreign exchange gain on the revaluation of U.S. dollar denominated debt. Net earnings in the prior year quarter included a $412 million unrealized after-tax foreign exchange gain on the revaluation of U.S. dollar denominated debt and a non-cash after-tax gain of $10 million on interest rate swaps and foreign currency derivatives.
Suncor's total upstream production was 743,800 barrels of oil equivalent per day (boe/d) in the third quarter of 2018, compared to 739,900 boe/d in the prior year quarter.
Oil Sands operations production was 476,100 bbls/d in the third quarter of 2018, compared to 469,300 bbls/d in the prior year quarter, and represents a new quarterly production record. The increase was due to strong operational reliability and record In Situ production. Upgrader utilization was 95% in the third quarter of 2018, compared to 93% in the prior year period, despite the start of planned maintenance at Upgrader 2 in September that has subsequently been completed. Improved upgrader utilization resulted in a favourable product mix, with the company producing and selling an increased proportion of higher value sweet synthetic crude oil and diesel in the third quarter of 2018.
Oil Sands operations cash operating costs per barrel were $22.00 in the third quarter of 2018, and were comparable to $21.60 in the prior year quarter, with improved upgrader reliability and lower natural gas prices partially offsetting higher planned maintenance costs.
Suncor's share of production from Fort Hills averaged 69,400 bbls/d for the third quarter of 2018, consistent with the second quarter of 2018, and the company anticipates the operation will produce at approximately 90% utilization during the fourth quarter.
Fort Hills cash operating costs per barrel averaged $33.45 in the third quarter of 2018, and include increased mine development costs to catch mine production capability up to the accelerated ramp up schedule achieved by the extraction plant. In addition, planned extraction plant maintenance was advanced from the fourth quarter of 2018 to coincide with the ramp up of mining operations. Suncor anticipates annualized Fort Hills cash operating costs to remain within the full year guidance range.
Suncor's share of Syncrude production was 106,200 bbls/d in the third quarter of 2018, compared to 159,100 bbls/d in the prior year quarter. The decrease in production was primarily due to a power disruption that occurred late in the second quarter and the asset's staged return to service over the course of the third quarter of 2018, partially offset by the additional 5% working interest in Syncrude acquired earlier in 2018. All three of Syncrude's cokers have resumed operations and production has returned to normal operating rates. Upgrader utilization at Syncrude was 52% in the third quarter of 2018 compared to 84% in the prior year quarter.
Syncrude cash operating costs per barrel were $63.85 in the third quarter of 2018, an increase from $35.00 in the prior year quarter as a result of lower production and higher maintenance costs, partially offset by lower natural gas prices.
Production volumes in Exploration and Production (E&P) were 92,100 boe/d in the third quarter of 2018, compared to 111,500 boe/d in the prior year quarter. The decrease in production was primarily due to planned maintenance at Buzzard and Hibernia, and natural declines in the United Kingdom North Sea, partially offset by the addition of production from Hebron, which averaged 14,400 bbls/d in the quarter, and new production resulting from development drilling at existing East Coast assets.
Refinery crude throughput was 457,200 bbls/d in the third quarter of 2018, compared to 466,800 bbls/d in the prior year quarter, with operations in both periods achieving exceptional utilization rates of 99% and 101%, respectively.
"Our Oil Sands operations and refining assets returned to strong production rates following the completion of planned major maintenance in the spring, performing at greater than 95% utilization in the third quarter," said Williams. "We have also worked closely with Syncrude to safely return the asset to normal production rates."
Suncor's 2018 capital program is focused on improving the safety, long-term reliability and efficiency of the company's operating assets, including execution of major turnarounds, in addition to the efficient and effective ramp up at both of Suncor's major growth projects, Fort Hills and Hebron.
The company spent $1.180 billion on capital expenditures, excluding capitalized interest, during the third quarter of 2018, a decrease from $1.513 billion in the prior year quarter primarily due to the commissioning of the company's significant growth projects, Fort Hills and Hebron. This was partially offset by an increase in sustaining capital expenditures, predominantly associated with maintenance at Syncrude.
Fort Hills operations continued to progress during the third quarter as the company focused on mine development and optimization to allow for reliable and sustained production of approximately 90% of nameplate capacity during the fourth quarter of 2018. In addition, the company advanced early-stage extraction plant maintenance originally scheduled for the fourth quarter to coincide with the additional work being executed in the mine.
"The ramp up at Fort Hills has gone exceedingly well and the asset is now operating at target rates," said Williams. "As Fort Hills reaches sustained target production rates, it is important to note that we have sufficient pipeline access to move all of our Fort Hills barrels to markets in Canada and the U.S. that extend down to the Gulf Coast, where we are able to obtain maximum value for our product."
Downstream integration continues to be a fundamental part of the company's strategy, and the overall impact of wider heavy crude differentials in Alberta was minimal as they were predominantly offset by a combination of improved refining margins on lower feedstock costs and the company's favourable market access position, which allows a significant portion of bitumen sales to be moved to the U.S. Gulf Coast and realize higher prices.
Drilling activity at Hebron is ongoing, and production continues to ramp up ahead of expectations. The third production well came online early in the third quarter, which contributed to increased volumes, and drilling of the fourth production well began in September. Other E&P activity in the third quarter included development drilling at all offshore producing assets, and development work on the West White Rose Project, and the Norwegian Oda and Fenja projects.
The Buzzard Phase 2 project, in which Suncor is a non-operating partner with a working interest of 29.9%, was sanctioned in the third quarter of 2018 by Suncor and the other project partners. The partners anticipate first oil production in early 2021.
During the third quarter of 2018, the company sold its 36.75% interest in the Joslyn Oil Sands mining project for total proceeds of $83 million. The transaction closed at the end of the third quarter, with nearly half of the proceeds already received and the remainder to be paid evenly over the next five years.
During the third quarter of 2018, Suncor's Board of Directors approved an increase in the company's share repurchase program from $2.15 billion to $3.0 billion, reinforcing the company's ongoing ability to generate cash flow and return value to shareholders.
During the third quarter of 2018, Suncor continued to return significant cash to shareholders through dividends of $582 million and, under Suncor's normal course issuer bid which commenced on May 4, 2018, repurchased and cancelled $889 million of its own shares.
Subsequent to the end of the third quarter, as part of the company's commitment to debt reduction, Suncor repurchased US$83 million of 7.75% Senior Notes due in 2019 (2019 Notes). The aggregate principal amount of 2019 Notes that remain outstanding has been reduced to US$140 million as a result of the purchase.