Suncor has released a corporate update, including revised 2020 corporate guidance for capital, operating costs and production outlook, reflecting the significant decline in the crude oil price and uncertainty surrounding the economic impact of COVID-19.
"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.
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.
CORPORATE & FINANCIAL UPDATE
Safety is at the core of Suncor values. As a result, the Investor Showcase, previously planned for May 2020, has been deferred to manage the risk of COVID-19 transmission. The AGM will be held on May 6, 2020 but the Board and full executive team will not be present in person at the meeting. Unlike prior years, the AGM will not be open to the general public and will be limited to registered shareholders only. Suncor is discouraging physical attendance and instead requests shareholders view the meeting via webcast with details to be provided at a later date.
The corporate target of $2 billion of incremental free funds flow by 2023 continues to be a critical target of Suncor's by enhancing margin, improving business processes, and reducing operating and sustaining capital costs. However, in order to maintain balance sheet strength, financial flexibility and liquidity, the execution timeline of a number of these initiatives has been revised, as outlined in the capital section above. As a result, full achievement of the $2 billion target is anticipated to be delayed by up to 2 years to 2025.
Disciplined capital allocation remains core to delivering value to shareholders. Given the current business environment, share repurchases have been suspended.
Suncor's strategy of maintaining a strong balance sheet and liquidity throughout all market environments remains a key focus. As of December 31, 2019, Suncor had approximately $6.7 billion of liquidity, no debt maturities in 2020, $1.4 billion in 2021, and $225 million in 2022. As of March 31, 2020, Suncor has significantly increased its liquidity securing an additional $2.3 billion of credit facilities with its key banking partners. This increased financial flexibility ensures the company will have access to adequate financial resources should it be required.
"Our strategy has been, and continues to be, to drive shareholder returns through our integrated model while maintaining financial strength and flexibility," said Mark Little. "Our actions are intended to ensure the long-term health of our business while reliably delivering critical energy to consumers."