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Suncor Energy reports first quarter 2019 results
Suncor reported a solid first quarter of 2019, increasing earnings over the year prior despite challenges such as production curtailments that faced the Alberta oil and gas market to start the year.
"Suncor's integrated model has consistently generated positive results through changing market conditions, including mandatory production curtailments in Alberta, and the first quarter of 2019 was no different," said Mark Little, president and chief operating officer. "Funds from operations increased to $2.6 billion in the first quarter of 2019 as we continue to execute on our long-term strategy."
- Funds from operations were $2.585 billion ($1.64 per common share) in the first quarter of 2019, compared to $2.164 billion ($1.32 per common share) in the prior year quarter.
- Cash flow provided by operating activities, which includes changes in non-cash working capital, was $1.548 billion ($0.98 per common share) in the first quarter of 2019, compared to $724 million ($0.44 per common share) in the prior year quarter, reflecting the impact of higher commodity prices on accounts receivable and inventory.
- Operating earnings were $1.209 billion ($0.77 per common share) and net earnings were $1.470 billion ($0.93 per common share) in the first quarter of 2019, compared to operating earnings of $985 million ($0.60 per common share) and net earnings of $789 million ($0.48 per common share) in the prior year quarter.
- Refining and Marketing (R&M) delivered record quarterly funds from operations and operating earnings of $1.253 billion and $1.009 billion, respectively.
- Total Oil Sands production was 657,200 barrels per day (bbls/d), compared to 571,700 bbls/d in the prior year quarter. Increased production from the ramp up at Fort Hills and improved Syncrude asset utilization of 90% more than offset the impact of mandatory production curtailments implemented by the Government of Alberta.
- Oil Sands operations achieved 98% upgrader utilization and synthetic crude oil (SCO) production of 341,200 bbls/d, despite the impact of mandatory production curtailments on bitumen production.
- Hebron production in the first quarter increased to 18,300 bbls/d, net to the company, and is continuing to ramp up following the completion of the fifth production well during the quarter.
- First oil was achieved ahead of schedule at the Oda project offshore Norway in the first quarter of 2019.
- The company distributed $662 million in dividends to shareholders and repurchased $514 million of common shares in the first quarter of 2019.
Suncor's first quarter 2019 operating earnings were $1.209 billion ($0.77 per common share), compared to $985 million ($0.60 per common share) in the prior year quarter, and included the impact of the Government of Alberta's mandatory production curtailments, as well as after-tax insurance proceeds of $264 million related to the company's assets in Libya. Operating earnings were also favourably influenced by an inventory valuation gain associated with improving crude prices, increased overall upstream production and sales volumes, narrower heavy crude oil differentials and strong sales from the company's refining assets. These factors were offset by lower WTI benchmark crude pricing and higher overall operating and transportation costs, predominantly attributed to the production ramp up at Fort Hills, an increase in share-based compensation costs and an additional 5% working interest in Syncrude acquired partway through the first quarter of 2018. Operating earnings were also unfavourably impacted by higher royalties associated with the improvement in both bitumen pricing and production.
The overall impact of crude oil and refined product inventory valuation had a net positive impact on operating earnings of $288 million in the first quarter of 2019, compared to $86 million net positive impact in the prior year quarter. The increase was due to a favourable first-in, first-out (FIFO) inventory valuation adjustment associated with the consumption of less expensive crude feedstock in R&M, partially offset by a deferral of profit on intersegment sales from Oil Sands to R&M remaining in inventory, recorded in the Corporate and Eliminations segment.
Net earnings were $1.470 billion ($0.93 per common share) in the first quarter of 2019, compared to net earnings of $789 million ($0.48 per common share) in the prior year quarter. In addition to the factors explained in operating earnings above, net earnings for the first quarter of 2019 included a $261 million unrealized after-tax foreign exchange gain on the revaluation of U.S. dollar denominated debt. Net earnings in the prior year quarter included an unrealized after-tax foreign exchange loss of $329 million on the revaluation of U.S. dollar denominated debt, and a $133 million non-cash after-tax gain in the Exploration and Production (E&P) segment associated with the exchange of the company's mineral landholdings in northeast British Columbia with Canbriam Energy Inc. (Canbriam). The company's investment in Canbriam was subsequently written down to nil in the fourth quarter of 2018 following an assessment of forward natural gas prices and the impact on estimated future cash flows.
Funds from Operations and Cash Flow Provided By Operating Activities
Funds from operations were $2.585 billion ($1.64 per common share) in the first quarter of 2019, compared to $2.164 billion ($1.32 per common share) in the first quarter of 2018, and were influenced by the same factors impacting operating earnings noted above.
Cash flow provided by operating activities was $1.548 billion ($0.98 per common share) for the first quarter of 2019, compared to $724 million ($0.44 per common share) for the first quarter of 2018, reflecting the impact of higher commodity prices on accounts receivable and inventory. In addition to the items noted with respect to funds from operations, cash flow provided by operating activities was further impacted by the use of less cash in the company's working capital balances in the current quarter, as compared to the prior year quarter. This was due to a decrease in taxes paid and a smaller increase in the company's inventory value, with the prior year quarter including a substantial build of product inventory in preparation for the full turnaround at the Edmonton refinery in the second quarter of 2018.
Suncor's total upstream production was 764,300 barrels of oil equivalent per day (boe/d) during the first quarter of 2019, compared to 689,400 boe/d in the prior year quarter, with the increase primarily due to the ramp up of Fort Hills production, improved asset reliability at Syncrude and the Hebron ramp up. This was partially offset by the impact of mandatory production curtailments in the province of Alberta, which took effect at the beginning of the year.
"Our upgraders achieved strong reliability throughout the first quarter and our refining business generated record funds from operations, illustrating the resiliency of Suncor's cash flow and operational flexibility when broader industry challenges exist," said Mark Little.
Oil Sands operations production was 396,600 bbls/d in the first quarter of 2019, compared to 404,800 bbls/d in the prior year quarter. The decrease was due to mandatory production curtailments, which primarily affected the company's non-upgraded bitumen sales as the company maximized the production of higher value SCO barrels. Upgrader utilization improved to 98% in the first quarter of 2019, compared to 80% in the prior year quarter, with the prior year quarter being impacted by a weather-related outage. Higher upgrader utilization resulted in a decrease to total Oil Sands operations production due to the approximate 20% yield loss associated with the bitumen upgrading process.
Oil Sands operations cash operating costs per barrel were $29.95 in the first quarter of 2019, an increase from $26.85 in the prior year quarter, reflecting the impact of mandatory production curtailments and the change in production mix associated with a higher proportion of SCO production and lower bitumen volumes, in addition to an increase in operating, selling and general (OS&G) costs. Oil Sands operations OS&G costs in the first quarter of 2019 included an increase in overburden stripping expenses during the optimal time of the year to complete this work. The company expects the increase in this activity in the current period to partially offset Oil Sands operations cash operating costs in subsequent periods, bringing Oil Sands operations cash operating costs per barrel in line with guidance for 2019. Total Oil Sands operations cash operating costs were $1.074 billion, compared to $982 million in the prior year quarter, and were also impacted by higher natural gas pricing.
Suncor's share of production from Fort Hills averaged 78,400 bbls/d in the first quarter of 2019, compared to 24,600 bbls/d in the prior year quarter, with the increase in production attributed to the ramp up of operations throughout the past year, partially offset by mandatory production curtailments. Fort Hills cash operating costs per barrel were $29.60 in the first quarter of 2019, compared to $53.65 in the prior year quarter, with the improvement primarily attributed to the increase in production, despite the mandatory production curtailments.
Suncor's share of Syncrude production was 182,200 bbls/d in the first quarter of 2019, compared to 142,300 bbls/d in the prior year quarter. The increase in production was primarily due to stronger asset reliability, with the prior year quarter impacted by a constrained bitumen feed line and the advancement of upgrader maintenance, partially offset by the impact of mandatory production curtailments. Upgrader utilization at Syncrude improved to 90% in the first quarter of 2019, compared to 71% in the prior year quarter. To help achieve this, Suncor allocated a portion of its mandated production limit by the Alberta government to Syncrude, which reduced lower value bitumen sales at Oil Sands operations.
Syncrude cash operating costs per barrel were $37.05 in the first quarter of 2019, a decrease from $50.75 in the prior year quarter due to the combination of higher production and lower OS&G costs resulting from a decrease in maintenance expenses, partially offset by the increase in natural gas prices.
Production volumes at E&P were 107,100 boe/d in the first quarter of 2019, compared to 117,700 boe/d in the prior year quarter. The decrease in production was primarily due to the continuing staged return of White Rose to full operations, as well as natural declines in the United Kingdom, partially offset by the increase in production from Hebron.
During the first quarter of 2019, the company received $363 million in insurance proceeds for its Libyan assets ($264 million after-tax). The proceeds may be subject to a provisional repayment that may be dependent on the future performance and cash flows from Suncor's Libyan assets.
First oil was achieved ahead of schedule at the Oda project offshore Norway in the first quarter of 2019 and is expected to ramp up to an estimated peak of 10,500 bbls/d, net to Suncor, in 2020. Suncor is a 30% partner in the project.
Refinery crude throughput was 444,900 bbls/d and refinery utilization was 96% in the first quarter of 2019, compared to 453,500 bbls/d and a utilization rate of 98% in the prior year quarter, with solid reliability achieved in both quarters. Refined products sales increased in the first quarter of 2019 to 542,800 bbls/d, compared to 512,900 bbls/d in the prior year quarter, with the increase attributed to record Canadian wholesale sales volumes and higher retail sales volumes.
Suncor's 2019 capital program is focused on the enhancement and optimization of the company's operating asset performance, safety and reliability, including projects focused on delivering increased earnings and funds from operations through further cost savings and structural margin improvements. In addition, the company is developing step-out opportunities and asset extensions within the offshore business in E&P.
Excluding capitalized interest, the company invested $875 million on capital expenditures in the first quarter of 2019, a decrease from $1.214 billion in the prior year quarter. This was due primarily to the decrease in capital associated with the staged completion and commissioning of the Fort Hills extraction plants in the first half of 2018, as well as a decrease in asset sustainment and maintenance capital associated with lower overall planned maintenance preparation expenditures following the execution of a more significant maintenance program in the spring of 2018 at both Oil Sands and R&M. Although capital spending was lower in the first quarter of 2019, the company's capital guidance range of $4.9 billion to $5.6 billion remains unchanged.
Drilling activity at Hebron is ongoing, and production continues to ramp up ahead of schedule. Other E&P activity in the first quarter included development drilling at Hibernia, White Rose and Buzzard, and development work on the West White Rose Project and the Norwegian Oda and Fenja projects.
During the first quarter of 2019, Suncor's Board of Directors approved a 17% dividend increase and up to an additional $2.0 billion in authority for share repurchases. Also in the first quarter, the company continued to return value to shareholders through dividends of $662 million, and a repurchase of $514 million of shares under its normal course issuer bid (NCIB).
Late in 2018, Suncor's chief executive officer, Steve Williams, announced that he will retire on May 2, 2019, the date of Suncor's Annual General Meeting. Mr. Williams will be replaced by Mark Little, the company's current president and chief operating officer.
"I want to thank the dedicated and talented team at Suncor for our many accomplishments over the years, and I have the utmost confidence in Mark as he leads this company into the future." said Steve Williams, chief executive officer. "The strategy we've implemented demonstrates economic, environmental and social leadership, and our value-added investments have created opportunities for thousands of employees and contractors, while also generating significant economic benefit for our shareholders, Albertans, and Canadians."
Suncor has updated its full year business environment outlook assumptions to reflect average actual year-to-date realized prices plus forward curve pricing. WCS at Hardisty has been updated to US$45.00 from US$33.00 and New York Harbor 3-2-1 crack has been updated to US$17.00 from US$18.50. As a result of the improvement in WCS at Hardisty pricing, Syncrude Crown Royalties has been updated to 9% - 12% from 5% - 8%. In addition, current income tax expense has been updated to $1.4 billion - $1.7 billion from $1.1 billion - $1.4 billion, reflecting the impact of commodity price changes and taxes payable on the insurance proceeds.
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