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Suncor takes a huge Q3 write-down on foreign exchange losses

Suncor takes a huge Q3 write-down on foreign exchange losses

Calgary-based Suncor Energy delivered decent third quarter results on Wednesday, buoyed by continued strength in their downstream refining business. However, the weak Canadian dollar continues to drag on the bottom line resulting in a $376 million net loss for this past quarter. 

Operating revenues (net of royalties) came in at $2.2 billion, down 37% from the same period last year. Cash flow from operations was reported at $1.9 billion, down 13% from 2014. The strong operating results were driven by favourable crack spreads and strong refinery utilization rates. Operating earnings were $410 million in Q3, down 68% from the same time last year due to the sharp drop in oil prices.

Free cash flow for the past 12 months declined to $467 million, down from $3.1 billion reported in the third quarter of 2014.

The company booked another foreign exchange loss on the revaluation of US dollar denominated debt. The $786 million write down for the third quarter is in addition to a $762 million charge taken for the first half of 2015. Taking the forex losses into account, the company reported a net loss of $376 million in the last quarter.

Suncor’s total upstream production for the past quarter was reported at 566,100 barrels of oil equivalent per day (boe/d), versus 519,300 boe/d in the prior year quarter. The increase was attributed to higher production out of the UK and strong reliability in their oil sands devision. Refinery utilization was reported at 96% in the third quarter, thanks to fewer maintenance activities.

 
SUNCOR THIRD QUARTER OPERATING RESULTS (COURTESY SUNCOR ENERGY)

SUNCOR THIRD QUARTER OPERATING RESULTS (COURTESY SUNCOR ENERGY)

 

OIL SANDS OPERATIONS

Oil sands production rose to 430,300 barrels per day (bpd) in the third quarter versus 411,700 bpd in the previous year quarter, thanks in part to better performance at Suncor's in-situ division and improved reliability across all oil sands operations.

Cash operating costs for the oil sands averaged $27 a barrel in Q3, down from $31 for the same quarter last year. The company credited higher production rates, lower natural gas prices and various cost reduction initiatives for the continued decline in operating costs. Third quarter oil sands operating costs were the lowest reported since 2007.

Mining Operations

Bitumen production from oil sands mining operations increased to an average of 303,300 bpd in Q3, up from 296,900 bpd in the prior year quarter. The increase was attributed to better reliability at its Fort McMurray mining operations. Suncor did not split out operating costs specifically for its mining facilities.

Thermal In-Situ Operations

In-situ bitumen production increased to 219,100 bpd in the third quarter, versus 199,100 bpd in the previous year. The increase was attributed to good performance at Firebag, which saw improved reliability, improved infill well performance and favourable steam-to-oil ratios. Production at MacKay River declined slightly to 27,400 bpd (versus 28,200 bpd in the previous year) due to a planned maintenance turnaround. Steam-to-oil ratios improved at both Firebag and MacKay River.

Cash costs for in-situ operations declined to $8.80 a barrel, down from $9.45 for the same period last year.

FORT HILLS UPDATE

Suncor acquired an additional 10% stake in the Fort Hills Project from French energy giant Total for $310 million in the third quarter. Once the transaction is complete, Suncor will own a 50.8% stake in the mega-mine located north of Syncrude's Mildred Lake Mine.

The project remains on schedule with detailed engineering reported at 94% complete and construction 43% complete by the end of the third quarter. Total Q3 capital expenditures for project came in at $494 million, spent mostly on engineering, procurement, module fabrication and site construction. The project is now expected to deliver approximately 91,000 bpd of partially de-asphalted bitumen net to Suncor, revised up from 73,000 bpd due to the additional 10% working interest purchased from Total. First oil remains on track for the end of 2017, with 90% of capacity expected to be reached within 1 year of start-up.

 
CONSTRUCTION OF THE FORT HILLS PRIMARY EXTRACTION PLANT (PHOTO COURTESY SUNCOR ENERGY)

CONSTRUCTION OF THE FORT HILLS PRIMARY EXTRACTION PLANT (PHOTO COURTESY SUNCOR ENERGY)

 

THE SYNCRUDE SAGA

Earlier this month, Suncor launched a hostile take-over attempt of Syncrude's largest owner Canadian Oil Sands (COS), offering 0.25 Suncor shares for each COS share. Suncor claims the transaction will help improve profitability at Syncrude and offer better value to COS shareholders.

"We believe that we can drive real improvements in Syncrude’s performance with a larger ownership interest. We have been disappointed with Syncrude’s performance for some time now. The asset ran at only 67% of capacity during the third quarter, and about 70% so far this year, in stark contrast to Suncor’s upgrading operations that have been consistently achieving above 90% reliability this year."

- Suncor CEO Steve Williams

The COS Board of Directors promptly shot down the offer, calling it "undervalued, opportunistic and exploitive" and far less than Suncor paid for Total's 10% share of the Fort Hills Project.

COS owns a 36.74% interest in the Syncrude operation, which includes a state-of-the-art upgrader that produces a light synthetic crude oil. Earlier in the year, COS had declined a friendly takeover offer of 0.33 Suncor shares per COS share, leaving many to question why Suncor returned in early October with an even lower offer.

Suncor currently owns a 12% stake in the Syncrude operation, which is operated by Imperial Oil. Imperial has 25% stake in the facility.

If Suncor's takeover of COS is successful, Suncor would then own 48.74% of Syncrude, making it by far the largest shareholder in the consortium. Suncor has stated it has no intention or desire to take over management of the Syncrude operation. This has left many investors wondering how will Suncor improve performance of a facility it does not plan on operating.

So where does the takeover currently stand? COS has adopted a Shareholder Rights Plan (aka "poison pill") which prevents anyone from buying more than 20% of COS shares in the next 4 months. Suncor's offer is set to expire on December 4th and the company has so far not returned with a better offer. Imperial Oil has also clearly stated it has no intention of buying out COS shareholders.

At the time of the announcement in early October, the transaction was valued at $6.6 billion including COS debt.

FORWARD GUIDANCE

Suncor lowered expectations for crude oil pricing in 2015 from its initial estimates in July. The company expects oil prices to average US$55, US$50 and US$37 for Brent, WTI and Western Canadian Select, respectively.

The impending reversal of Enbridge's Line 9 will allow Suncor to feed heavy oil from Alberta to the Montreal-East refinery in Quebec. About 75% of Suncor's production is upgraded into sweet or sour synthetic crude oil (SCO). The remaining 25%, produced primarily at its thermal in-situ facilities, is blended with diluent or SCO and sold directly to market.

 
CRUDE OIL MARKETING AND DISTRIBUTION (COURTESY SUNCOR ENERGY)

CRUDE OIL MARKETING AND DISTRIBUTION (COURTESY SUNCOR ENERGY)

 

By the end of September 2015, the company's debt load has increased to $14.96 billion.

Suncor Energy is Canada's largest integrated energy company, a title it took from Imperial Oil when the company merged with Petro-Canada in 2009. The company stock trades on both the TSX and NYSE (ticker:SU) and pays a dividend of $1.16 per share, yielding approximately 3%.

ALL FIGURES IN CANADIAN DOLLARS UNLESS OTHERWISE STATED
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