Suncor posts 80% drop in fourth quarter earnings due to falling oil prices
Canada’s largest integrated oil company Suncor Energy released fourth quarter earnings today. As expected, earnings and cash flow from operations were significantly lower than the same period in 2013 due to lower crude oil prices. However, the company remains committed to growing its production through the end of this decade.
Fourth Quarter Summary
- Free cash flow declined to $2.097 billion, a 20% drop from the previous year.
- Cash flow from operations dropped to $1.492 billion, down 30% decrease from the fourth quarter of 2013.
- Operating earning declined to $386 million, down 60% from the fourth quarter of 2013.
- Net earnings declined to $84 million (or $0.06 per share), down 80% from the previous year.
Lower oil prices were obviously to blame for the drop in earnings. The weaker Canadian dollar also increased carrying costs for US denominated debt.
Cash Operating Costs
- Operating costs for their oil sands operations declined to $34.45 per barrel, down from $36.85 for the same period in 2013. Cost savings at their mining operations were partially offset by higher natural gas prices for the last quarter.
- Operating costs for their East-Coast (off-shore) operations were reported at $13.11 per barrel in the fourth quarter. North Sea operating costs came in at $6.42 per barrel.
Production Results and 2015 Guidance
- Upstream production was largely unchanged at 557,600 barrels of oil equivalent per day (boepd).
- Production from upstream oil sands operations was reported at 384,000 barrels per day (bpd) in the fourth quarter of last year, down from 409,600 bpd for the same period in 2013. The production miss was attributed to unplanned maintenance work at Upgrader 2 at the Suncor Base Plant near Fort McMurray, AB.
- Guidance for total production in 2015 was set at 540,000 to 585,000 boepd. Production from its oil sands operations is expected to be in the range of 410,000 to 440,000 bpd, excluding the company's share of the Syncrude facility.
- Suncor did not provide guidance on where it expects oil prices to average for 2015.
Accelerated Spending Reduction Program
The company had announced in mid-January its plans to reduce capital expenditures by $1 billion to a range of $6.2 to $6.8 billion for 2015. Much of the savings will arise from the deferral of the MacKay River Expansion Project and the White Rose Extension Project off the coast of Newfoundland.
- Projects already under construction such as Fort Hills and Hebron are said to not be directly affected by the spending reduction program. A capital budget of $2.4 billion is already earmarked for Fort Hills and Hebron in 2015.
- Operating expenses will be cut by $600 to 800 million over the next two years. Suncor reiterated its intention to reduce cash operating costs to $30-$33 per barrel for its oil sands operations.
- The company also announced its intention to reduce its total workforce by 1000 people, primarily through contract employees, and also implemented a hiring freeze for non-essential positions. Suncor has over 14,000 employees around the world.
- Firebag had a record fourth quarter, averaging 182,000 bpd of heavy oil production (2,000 bpd higher than the plant’s nameplate capacity of 180,000 bpd).
- Well pad development at MacKay River and debottlenecking of the SAGD facility continues to ramp up as planned.
- Suncor deferred investment decision for the MacKay River Expansion project as part of their 2015 spending reduction program.
Fort Hills Update
The company remains committed to the Fort Hills Project and has so far not indicated any plans to slow down construction. Suncor did note that it expects to take full advantage of the recent downturn which should help keep construction costs under control and reduce competition for skilled labour.
Detail engineering was reported at 60% complete. On-site construction activities are 20% complete to-date.
- Foundations in the Ore Preparation and Extraction plants are essentially complete.
- Site construction manpower was reported at 3000 people and is expected to continue to ramp up this year. Workforce is expected to peak in 2016.
- First oil is still planned for late 2017, adding 73,000 bpd to Suncor’s total oil sands production profile.
Fort Hills is a joint venture with Total E&P and Teck Resources. Suncor inherited the Fort Hills lease and 25% of Syncrude through its acquisition of Petro-Canada in 2009. Suncor has a 40.8% ownership of the project.
Production Growth Profile
Over the next 5 years, the company has the potential to grow production to as much as 590,000 boepd through various phases of expansion, debottlenecking and reliability improvements.
- Fort Hills will be the biggest growth engine for the company; once complete, the new mine will add 73,000 bpd to Suncor’s total oil sands production profile.
- The Suncor Base Plant can grow capacity by 30,000 bpd through improvements in reliability.
- Firebag can add another 5,000 to 10,000 bpd as its ramps up to nameplate capacity and potentially add another 20,000 bpd through further debottlenecking.
- MacKay River will add another 8,000 bpd as it ramps up to full capacity and can potentially add another 20,000 bpd through future phases of expansion.
Suncor also successfully delivered its first marine shipment of crude oil to the US Gulf Coast in the fourth quarter, through the St. Lawrence Seaway. The company continues to supply crude-by-rail to its Montreal-East Refinery.
The company declared a dividend of $0.28 per share for the first quarter of 2015, unchanged from the previous quarter. Suncor Energy stock (TSX:SU) currently yields a 3% dividend. So far, the dividend looks safe but the company will hold off on share buybacks until oil prices recover.
All figures quoted are in Canadian dollars. The complete fourth quarter press release can be found on the Suncor website [click for link].