Suncor Energy reports fourth quarter 2018 results

Unless otherwise noted, all financial figures are unaudited, presented in Canadian dollars (Cdn$), and have been prepared in accordance with International Financial Reporting Standards, specifically International Accounting Standard 34 Interim Financial Reporting as issued by the International Accounting Standards Board. Production volumes are presented on a working interest basis, before royalties, except for Libya, which is on an entitlement basis. Certain financial measures referred to in this news release (funds from operations, operating earnings, Oil Sands operations cash operating costs, Fort Hills cash operating costs and Syncrude cash operating costs) are not prescribed by Canadian generally accepted accounting principles (GAAP). See the Non-GAAP Financial Measures section of this news release. References to Oil Sands operations exclude Suncor’s interests in Fort Hills and Syncrude.

CALGARY, Alberta, Feb. 05, 2019 (GLOBE NEWSWIRE) — “Suncor generated funds from operations of $2 billion in the fourth quarter as our integrated downstream business and market access helped to mitigate upstream crude price volatility, including the further widening of the differentials for Canadian crude,” said Steve Williams, chief executive officer. “We continued to return value to our shareholders through nearly $1.2 billion in share repurchases and $574 million in dividends paid during the quarter.”

Financial Results

Operating Earnings

Suncor’s fourth quarter 2018 operating earnings were $580 million ($0.36 per common share), compared to $1.310 billion ($0.79 per common share) in the prior year quarter. The decrease was primarily a result of unfavourable western Canadian crude oil differentials, including a substantial widening of synthetic crude oil (SCO) differentials, which resulted in the following:

Other factors reducing operating earnings included the addition of operating and transportation costs for new production from growth projects and acquisitions, a decrease in Oil Sands operations SCO production, lower overall Exploration and Production (E&P) sales volumes, and a decrease in the capitalization of borrowing costs. These factors were partially offset by a recovery of share‑based compensation costs (compared to an expense in the prior year quarter) and increased overall upstream production, driven by 94% plant utilization at Fort Hills, record production at Syncrude and the continued ramp up of operations at Hebron.

Net (Loss) Earnings

The net loss was $280 million ($0.18 per common share) in the fourth quarter of 2018, compared to net earnings of $1.382 billion ($0.84 per common share) in the prior year quarter. In addition to the factors explained in operating earnings above, net earnings for the fourth quarter of 2018 included a $637 million unrealized after‑tax foreign exchange loss on the revaluation of United States (U.S.) dollar denominated debt, as well as a non‑cash impairment loss on one of the company’s equity investments. Net earnings in the prior year quarter included a net $124 million deferred income tax recovery related to a decrease in the U.S. corporate tax rate from 35% to 21%, an unrealized after‑tax foreign exchange loss of $91 million on the revaluation of U.S. dollar denominated debt, after‑tax property damage insurance proceeds of $55 million, an after‑tax loss of $18 million for early repayment of debt and a net after‑tax gain of $2 million on interest rate swaps associated with debt issued in the fourth quarter of 2017.

Funds From Operations and Cash Flow Provided By Operating Activities

Funds from operations were $2.007 billion ($1.26 per common share) in the fourth quarter of 2018, compared to $3.016 billion ($1.83 per common share) in the fourth quarter of 2017, and were influenced by the same factors impacting operating earnings noted above, excluding the recovery of non‑cash share‑based compensation, as well as unrealized gains on crude optimization activities.

Cash flow provided by operating activities was $3.040 billion ($1.90 per common share) for the fourth quarter of 2018, compared to $2.755 billion ($1.67 per common share) for the fourth quarter of 2017, with changes in non‑cash working capital representing a source of cash to the company in the fourth quarter of 2018, as compared to a use of cash in the prior year period. The source of cash in the company’s non‑cash working capital balances was primarily due to the declining crude price environment in the fourth quarter and the associated decrease in accounts receivable balances, as well as the decline in refinery inventory value as the company replaced crude feedstock inventories purchased in the prior period with less expensive crude.

Operating Results

Suncor’s total upstream production represents a new quarterly record at 831,000 barrels of oil equivalent per day (boe/d) during the fourth quarter of 2018, compared to 736,400 boe/d in the prior year quarter, with the increase primarily due to the addition of Fort Hills production, improved reliability and an additional working interest at Syncrude, and the continued ramp up of operations at Hebron.

“Fort Hills achieved plant utilization of 94% for the quarter, exceeding our accelerated target of 90%, and production from Syncrude was strong, with the assets attaining a new quarterly record,” said Mark Little, president and chief operating officer. “Our refining assets continue to outperform due to continued reliability, achieving a new quarterly throughput record and allowing us to maximize the impact of strong refining margins.”

Oil Sands operations production was 432,700 bbls/d in the fourth quarter of 2018, compared to 446,800 bbls/d in the prior year quarter. The decrease was primarily due to lower SCO volumes as a result of planned and unplanned maintenance at Upgrader 2, partially offset by an increased volume of non‑upgraded bitumen from the company’s In Situ properties, with Firebag and MacKay River continuing to achieve solid reliability. Planned maintenance at Upgrader 2, which commenced in the third quarter of 2018, was completed during the fourth quarter and the unplanned maintenance was resolved by the end of the quarter. Upgrader utilization in the fourth quarter of 2018 was 79%, compared to 93% in the prior year period, as a result of the maintenance discussed above.

Oil Sands operations cash operating costs per barrel were $24.50 in the fourth quarter of 2018 and were comparable to the prior year period of $24.20, with lower overall production being offset by lower operating, selling and general expense, after adjusting for non‑cash items.

Suncor’s share of production from Fort Hills averaged 98,500 bbls/d for the fourth quarter of 2018, which represents 94% utilization. As a result of the increase in production, Fort Hills cash operating costs per barrel decreased to $24.85 in the fourth quarter of 2018 and were $31.20 for the year.

Suncor’s share of Syncrude production was a record 209,600 bbls/d in the fourth quarter of 2018, compared to 174,400 bbls/d in the prior year quarter. The increase in production was primarily due to strong reliability, as well as the additional 5% working interest in Syncrude acquired earlier in 2018. Upgrader utilization at Syncrude was 101% in the fourth quarter of 2018 compared to 94% in the prior year quarter.

Syncrude cash operating costs per barrel were $31.75 in the fourth quarter of 2018, a decrease from $32.80 in the prior year quarter as a result of higher production.

Production volumes at E&P were 90,200 boe/d in the fourth quarter of 2018, compared to 115,200 boe/d in the prior year quarter. In addition to natural declines, the decrease in production was due to a temporary production interruption at the company’s East Coast Canada assets as a result of a major storm system in the period, as well as an unplanned outage at Buzzard in the United Kingdom, partially offset by the addition of production from Hebron. The production interruption at the White Rose field extended into 2019, with partial production restarting at the end of January 2019.

Refinery crude throughput achieved a new quarterly record of 467,900 bbls/d and refinery utilization was 101% in the fourth quarter of 2018, compared to 432,400 bbls/d and a utilization rate of 94% in the prior year quarter. The increase was due to strong reliability at all of the company’s refineries, in addition to the prior year quarter being impacted by a third‑party power outage.

Strategy Update

Suncor’s 2018 capital program was 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 effective and efficient ramp up at both of Suncor’s major growth projects, Fort Hills and Hebron.

The company spent $1.119 billion on capital expenditures, excluding capitalized interest, during the fourth quarter of 2018, a decrease from $1.444 billion in the prior year quarter, primarily due to the decrease in growth capital with the commissioning of Fort Hills and Hebron. Sustaining capital expenditures in the fourth quarter of 2018 were comparable to the prior year quarter.

“We remain focused on capital discipline and ensuring safe and reliable operations across our business,” said Williams. “Through our integrated model and the value‑driven investments we’ve made in our business, Suncor is well positioned to continue to grow production and cash flow, and to increase returns to shareholders across a wide range of market conditions.”

Downstream integration continues to be a fundamental component of Suncor’s strategy, and the overall impact of wider crude differentials in Alberta was partially mitigated by a combination of improved refining margins, driven by 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 where higher prices are realized. However, due to the impact of the FIFO method of inventory valuation, the full benefit of lower feedstock costs at R&M has not yet been realized due to the time lag associated with processing higher value crude inventory.

Drilling activity at Hebron is ongoing, and production continues to ramp up. The fourth production well came online during the fourth quarter and contributed to increased volumes. Other E&P activity in the fourth quarter included development drilling at Hebron, Hibernia, White Rose and Buzzard, and development work on the West White Rose Project and the Norwegian Oda and Fenja projects.

Development of the Oda project has progressed ahead of schedule and first oil is now anticipated in the second quarter of 2019, as compared to the original target of the third quarter of 2019.

During the fourth quarter of 2018, Suncor and its joint venture partners reached an agreement in principle for interconnecting pipelines between Syncrude’s Mildred Lake site and Suncor’s Oil Sands Base plant. The lines will transfer bitumen and gas oils between the two plants providing increased operational flexibility and enabling higher reliability and utilization. The pipelines are expected to be operational by the end of 2020, subject to finalized commercial terms and regulatory approval.

Subsequent to the end of the quarter, the company received $300 million in risk mitigation proceeds for its Libyan assets (approximately $260 million after‑tax). The proceeds may be subject to a provisional repayment which is dependent on the future performance and cash flows from Suncor’s Libyan assets.

Following the approval from the Board in the third quarter of 2018 to increase the company’s share repurchase program from $2.15 billion to $3.0 billion, the Toronto Stock Exchange accepted a notice filed by Suncor during the fourth quarter of 2018 to increase the maximum number of shares the company may purchase pursuant to its normal course issuer bid. The increase to the program reinforces the company’s ongoing ability to generate cash flow and return value to shareholders. Under Suncor’s expanded normal course issuer bid, the company repurchased and cancelled $1.166 billion of its own shares in the fourth quarter of 2018. Subsequent to the end of the quarter, Suncor’s Board of Directors approved a further share repurchase program of up to $2.0 billion.

In the fourth quarter of 2018, Suncor continued to return value to shareholders through dividends of $574 million, and subsequent to the end of the quarter, Suncor’s Board of Directors approved a quarterly dividend of $0.42 per share, which represents an increase of 17% over the prior quarter dividend.

In addition, during the fourth 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) that were acquired as part of the acquisition of Canadian Oil Sands Limited. The aggregate principal amount of 2019 Notes that remains outstanding has been reduced to US$140 million as a result of the purchase.

Operating Earnings Reconciliation⁽¹⁾

Corporate Guidance

No changes have been made to Suncor’s previously announced 2019 guidance. For further details and advisories regarding Suncor’s 2019 guidance, see suncor.com/guidance.