Suncor Energy Inc. (SU) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to Suncor First Quarter 2016 Financial Results Call and Webcast. I would now like to turn the call over to Mr. Steve Douglas, Vice President, Investor Relations. Mr. Douglas, please go ahead.

Well, thank you, Wayn, and good morning, everyone. Welcome to the Suncor Energy Q1 earnings call. With me here in Calgary are Steve Williams, our President and Chief Executive Officer, along with Alister Cowan, EVP and Chief Financial Officer. Before we begin, I need to say that you note today's comments contain forward-looking information. Actual results may differ materially from the expected results because of various risk factors and assumptions and those are described in our Q1 earnings release, as well as our current AIF and these are available on SEDAR, EDGAR and our website, suncor.com. Certain financial measures that we refer to are not prescribed by Canadian Generally Accepted Accounting Principles, and for a description of these, please see our first quarter earnings release as well. After our formal remarks, we will open the call to questions, first from members of the investment community, and then if time permits, members of the media. With that, I'll hand over to Steve Williams for his comments.

Good morning and thank you for joining us. About a year ago, we started using the term lower for longer in relation to crude price. And that's certainly proven to be the case. First quarter of 2016 saw Brent crude fall by more than 20% from Q4 2015 levels and more than 35% versus Q1 of last year. Now at Suncor, we responded to the difficult price environment with an absolutely laser focus on operational excellence and we continue to improve reliability, growth reduction and sustainably reduce our costs. We've also taken advantage of the market conditions to undertake acquisitions at accretive valuations. Now these deals significantly increase our leverage to an improving oil price and enhance our competitive position relative to our peer group. So, with that in mind, let's take a look at the operational and strategic highlights for the quarter. We reached record Oil Sands operations production of just over 450,000 barrels per day. And that included record In Situ production from both Firebag and MacKay River, following the successful and low cost debottleneck projects that we completed last year. Reliability of our upgraders continued to be strong as we averaged 92% throughput for the quarter. And even as we grew production, we'll continue to take absolute costs out of the process. Oil Sands cash costs fell low $1 billion for the quarter to average just $24.25 per barrel. So that's than US$18 per barrel, the lowest quarterly cash costs recorded since 2007. And it included record low In Situ costs of just below $10.40 per barrel. So at Syncrude we also saw the best production rates in five years as utilization exceeded 91%. And that strong reliability helped us to sharply reduce Syncrude's cash, which came in at $31.35 per barrel for the quarter. So that was a timely performance as Suncor increased its stake in the project from 12% to just under 49% during the quarter with the closing of the Canadian Oil Sands acquisition. And of course, as we announced yesterday, we'll increase that working interest a further 5% in the second quarter with the purchase of Murphy's share of Syncrude. In E&P, our offshore projects all achieved strong production. Buzzard and Golden Eagle combined for 72,000 barrels per day at an average lifting cost of just $5.75 (5:06) per barrel. Our East Coast production totaled over 53,000 barrels per day at an average cost of $13.72 per barrel. So the strong performance leaves us tracking slightly ahead of production guidance for the year. In the downstream, our refining operations continue to run reliably, achieving average utilization of over 91% and reducing operating cost to just over $5 per barrel. And this performance was particular notable given the relatively weak distillate demand we experienced in the first quarter as a result of the mild winter weather in the East and weak demand primarily driven by energy sector in the West. So you'll notice I've made more of a point of mentioning our costs for each of our business segments than I normally do. Disciplined cost management is an important part of the Suncor story. A year ago, we committed to reducing operating costs by $600 to $800 million over a two-year period. By the end of 2015, we'd actually delivered almost $1 billion in savings. And this year, we set target of the further $500 million in reduction and we're on track to achieve that goal. So, with the current price environment, I'm often asked how low can you take these cash costs. And it's an interesting question, but to be frank, it's much too narrow. Reducing our cost is not simply a major response to low oil prices. That's an integral part of the continuous improvement journey we've been on and have demonstrated for several years. We're squarely focused on safe, reliable, competitive – cost competitive operations. And I'm confident that we'll continue to raise the bar on performance in all areas. Our strong operational performance provides a solid foundation for profitably growing the company and we're making excellent progress on that front. At Fort Hills all critical milestones continue to be met, engineering is substantially finished and construction has now surpassed 55% complete. And the low oil price environment has allowed us to contain our contracting costs, improve the construction productivity and attract very high quality labor. And as a result, we remain on target on both costs and schedule and we continue to expect first oil in the fourth quarter of next year. Meanwhile on the Hebron project, construction of the gravity base structure and topside continued in the first quarter. Like Fort Hills, Hebron continues to target production of first oil by the end of next year. Now, of course, I couldn't possibly talk about growth without spending a few minutes on the Canadian Oil Sands acquisition, which we successfully closed late in the first quarter. This was the culmination of over a year's work by a very dedicated team of people. It took tremendous effort to complete the deal, but in many respects the real work has only just begun. In the past few weeks, we've been working closely with other Syncrude owners and the operator to chart the best path forward towards improved performance and profitability. And we believe there is significant potential to reduce costs, improve reliability and capture the synergies between Syncrude and Suncor's operation. It's still very early days in what will be a multiyear performance improvement journey, but we have considerable reason for optimism. The very strong first quarter provides a glimpse into the potential of Syncrude. Now, we expect it will take both time and effort to reach a point where the operation can sustain this level of performance, but we have the knowledge, the experience and have no doubts we are definitely up for the challenge. With our increased stake in Syncrude and the Fort Hills and Hebron projects on target for first oil next year, Suncor expects to profitably grow production by over 40% versus 2015. We now forecast our total production to exceed 800,000 barrels per day by 2019. That's a growth trajectory that very few companies of our scale can hope to equal. More importantly, it's growth that gives us even more leverage to rising oil prices. I actually think that this is something very few fully appreciate about Suncor. Our integrated model is widely recognized as providing a hedge against low oil prices, which has made us a good defensive investment over the past 18 months. However, many people are under the mistaken impression that the integrated model somehow limits our upside as oil prices recover, nothing could be further from the truth. In fact, with our recent acquisitions, we now have over 700,000 barrels per day of production. In fact, just as a quick aside, in March, we produced just under 740,000 barrels a day. And that number is going to increase, as I say, to an excess of 800,000 barrels per day as Fort Hills and Hebron ramp up in 2018, and more than 99% of that production is oil, and the majority of oil is high quality, low cost, low decline and have access to market. So as a result, our leverage to any increase in benchmark oil prices is greater than our Oil Sands peers and among the industry leaders globally. As oil prices recover to more sustainable levels, we fully expect Suncor to continue to outperform. We've had a strong operational start to 2016 and we're tracking very well against our various guidance metrics. So I've summarized there our operational performance and progress on the strategy. I'm now going to ask Alister Cowan to provide some color on the financial results.

Thanks, Steve. As everyone knows that the first quarter features the lowest benchmark crude oil prices in well over a decade, and which in turn proves bitumen realizations down to levels well below cost in the early part of the quarter before recovering somewhat in March. At the same time benchmark refining cracks in the downstream was down approximately 40% versus the first quarter of last year, largely as a result of weak distillate margins and narrowing crude differentials. Despite these pricing headwinds, we were able to generate solid cash flow across the business, thanks to reliable operations and continued cost reductions in both the upstream and the downstream. Oil Sands produced $263 million of operating cash flow in the quarter at over $5 per barrel of production. Exploration and Production generated $261 million in cash flow or over $22 per barrel of production. And in the downstream, Refining and Marketing produced $404 million in cash flow despite the $192 million FIFO loss as a result of the falling oil prices versus the previous quarter. When corporate costs are factored in, Suncor generated total cash flow from operations of $682 million for the quarter. This equates to almost $11 of cash flow for every barrel of upstream production, in a period when upstream pricing and downstream cracks were at a cyclical low. And both oil prices and refining cracks have staged modest recoveries in the past few weeks, although the impacts of these improvements have been somewhat muted by the weakening U.S. dollar. Obviously, we do welcome any improvement in the pricing environment, but it's not something over which we have any influence. Our focus as Steve has mentioned is very much on the thing we can control. We are rigorously managing both our operating and capital expenses while maintaining the strength of our balance sheet. Now earlier on the call Steve went into some detail on the progress we're making to drive costs out of the business. And it's important to note that it's not just the cash cost per barrel that's falling, we're sustainably reducing operating expense right across the company. If you normalize for the costs associated with acquiring Canadian Oil Sands, our first quarter operating selling and general expense is down approximately $150 million versus Q4 of last year, putting us on pace to achieve the further $500 million cost reduction target we set at the beginning of this year. Importantly, the majority of that total is related to controllable cost savings that we expect to sustain into the future. We also continue to capture capital efficiencies. In February, we announced a $750 million reduction in our 2016 capital spending plan, bringing the guidance range down to between $6 billion and $6.5 billion. In the first quarter, we invested just over $1.4 billion of CapEx to sustain our operations and drive our major growth projects forward on schedule. Of note, we also assumed the capital spending associated with our increased stake in Syncrude as a result of the two recent acquisitions. Given the savings we're achieving, we're now confident we can absorb the approximately $300 million of additional Syncrude capital within our existing capital guidance range. For the past several years, Suncor has been able to comfortably fund their capital commitments and generate significant free cash. With prices at the low end of the cycle and peak growth spending on both Fort Hills and Hebron, 2016 does present a funding gap. However, we believe that gap is manageable, given the strength of our balance sheet. Our net debt to cash flow is running at 2.5 times and our total debt to capitalization is just over 29%. We have almost $10 billion in liquidity, including over a $3 billion in cash. And importantly, we continue to attract a strong investment grade credit rating, while many others in the sector have endured multiple notch downgrades. While I'm comfortable with our current financial position, we do plan to bolster our balance sheet through the divestment of some non-core assets. We have identified a number of potential divestitures in our portfolio. These are non-oil producing assets, which we believe will command premium valuations in the current marketplace. We expect to achieve proceeds of $1 billion to $1.5 billion over the next 12 to 15 months, which will provide us with added financial flexibility. I do see these divestitures as a continuation of the disciplined portfolio management and capital allocation that have seen us opportunistically divest over $4.5 billion of non-core assets since the Petro-Canada merger. As part of that portfolio management, we've also made a number of timely value accretive acquisitions the complement our existing asset base and increase our leverage to oil price. Moving forward, we'll continue to look for opportunities to take advantage of market conditions and profitably grow the company without compromising our strong balance sheet. So, to sum up, the business is running well. The balance sheet is strong. We're steadily growing production, Costs are being reduced and we're poised to take advantage of any improvement in market conditions. So with that, back to Steve Douglas.

Well, thank you, Alister and Steve. Just before we open the line for questions, there are few points I want to reference. As Steve mentioned, we did have a LIFO/FIFO impact. It was a net after tax expense of $192 million due to falling crude prices and product prices in the first quarter. Stock-based compensation was a net after tax expense of $102 million in the quarter, and the weakening U.S. dollar and strengthening Canadian dollar resulted in an $885 million after tax gain on currency. Finally, I would reference the changes to our guidance. The full guidance, of course, is available on the website. We have adjusted Syncrude production. It's been updated to reflect our increased working interest associated with the COS acquisition. We now have 125,000 to 135,000 barrels per day as the guidance range. And that brings our total production range to 620,000 to 665,000 barrels per day. The additional volumes that would be associated with the Murphy transaction we just announced are not yet reflected in the guidance because the transaction is not expected to close until late in Q2. While our production and cash cost are currently running well ahead of the annual guidance, it is important to remember we have major maintenance scheduled this quarter at both our Oil Sands Base plant and at Syncrude. And those are ongoing as we speak. This plant maintenance will reduce our overall Oil Sands production and it will increase our unit costs in the second quarter. And of course, that is factored into the guidance. We've added a Syncrude cash costs guidance range and that is $35 to $38 per barrel for 2016. And we've also made a handful of changes to various assumptions to reflect market conditions and this include lower royalty rates on the East Coast, lower refining cracks, natural gas prices are down and a stronger Canadian dollar FX assumption. As I mentioned, the complete details you can find on suncor.com. So I'll turn it back to Wayn to open up the mic for questions. I'd remind you that if you have detailed modeling type of questions, we'll be available throughout the day to answer those. Wayn, you can go ahead.

Thank you. We will now take questions from the telephone lines. Our first question is from Neil Mehta from Goldman Sachs. Please go ahead. Neil Mehta - Goldman Sachs & Co.: Hey. Good morning, guys. So, I wanted to kick it off on Syncrude and just the improved utilization in the first quarter was terrific, 91%, just wanted your thoughts on how sustainable that improvement is as it exceeded our expectations. And just talk a little bit about how you plan on financing your increased stake here in Syncrude from Murphy. And then the final question as it relates to Syncrude is just what does this give you, the increased stake, now that you have a majority ownership of the asset, do you have more control over the operations and are you in a better position to control its destiny?

Okay. Thanks. And let me – I'll have the first go at all three of those. So, in terms of reliably increasing upgrader capacity, I mean Suncor in its base business has been on a journey and that journey was a five plus year journey and now we're able to regularly exceed the 90% levels. I think the duration of the journey is the same for Syncrude, but, of course, we don't start from here, we've actually been engaged in that process for a number of years already. So the first quarter is not necessarily something we can expect to do every quarter, but that's clearly the objective of the groups that are working on it now, that we sustainably increase the reliability of that business up into the 90%-plus levels. I'm very encouraged by the work that's going on. I personally sat down with the Chief Executive of Imperial. We've also sat down with the Chief Executive of Syncrude and we've got great alignment between what we are trying to achieve over there. So, good work. The project groups are working through the detail of it now. And I'm greatly encouraged that our expectations will be met in the mid-term and that we will be able to assist Imperial and Syncrude in that process. So early days, first steps are looking good. And what it has done is given us a glimpse of the potential of that asset to perform at higher levels. In terms of financing, I don't plan to answer in any detail, rather than to say, if you look at the materiality of this last 5% to the health of our balance sheet, it's less than $1 billion deal. Alister talked about the $10 billion plus of liquidity we have on our balance sheet. It's really not material. Our record is one of prudence and discipline around our balance sheet and you will absolutely continue to see those go ahead. So finance we don't see as a major issue and our plans haven't changed going forward in a sense that our primary objective is to get the reliability of that asset up by working with Imperial and Syncrude, and I'm greatly encouraged by the progress has been made. Neil Mehta - Goldman Sachs & Co.: That's great. Thank you, Steve. And then, the follow-up for me is as it relates to non-core asset sales. You have identified a number, including wind storage assets, pipelines and logistics. What's the potential to monetize those in the near-term and then over the longer term, how you think about other assets like retail?

Again, it's always very difficult to talk to very specific either acquisitions or divestments because it impacts the commercial negotiations that are going on. What I would do is reference you to our track record. Since the Petro-Canada merger, we've sold $4.5 billion of assets. And if you draw the curves of what that looks like in the context of each of the businesses of those assets, you will see we've been very successful. It's simply selling at the top of the market and buying at the bottom of the market. So, the track record of buying at low prices and selling at high prices is very well established there. You will see that discipline and rigor continue. We're not in fire sales of assets. What I will say is that the three we have talked about are all progressing to the schedule we expected. So when Alister talked about realization of significant funds in the next 12 to 15 months, we're confident of those numbers. So we're in good shape and you'll see the same rigor in capital discipline applied going forward as you've seen over the last couple of years. Neil Mehta - Goldman Sachs & Co.: That's great guys. Thank you so much.

Thank you. The following question is from Benny Wong from Morgan Stanley. Please go ahead. Benny Wong - Morgan Stanley & Co. LLC: Yeah, thanks. In the release, you've signaled that you guys are kind of continuing looking for more acquisitions. I guess my question is, do you see more potential to further consolidate the Syncrude project? And outside that project, could you maybe provide an update on what you're seeing in terms of opportunities? Are you seeing more or less interesting opportunities today than say maybe six months ago?

I would say, I mean, first of all, I'll make the general comment about the M&A market and then I'll talk just a little bit about specifics. I mean, generally, the market is – I think the Canadian market is seeing the lowest level of M&A activity in the first quarter that it's seen for a long while. And that's a reflection of the condition in general of people's balance sheet. And they have difficulty in being able to take those types of transactions on, given the state of the market and their finances. Suncor quite different in that we'd – at $100 we didn't believe that that was sustainable. We'd put our balance sheet into extremely good health and that's afforded us the opportunity to leverage it where appropriate. Our strategy hasn't changed. Our balance sheet is still in good health. We will be opportunistic in looking at things in the market. We're chasing nothing in particular. I was very pleased with the Canadian Oil Sands acquisition and I'm equally pleased that we've now been able to get in excess of 51% of the Syncrude asset. That comes with some governance benefit, but it doesn't actually change our objectives. As I said, our primary objective is to work with the operator and with Syncrude, to apply our joint expertise to get that asset fully performing. So the market hasn't changed that much. There are still opportunities, but they will have to be very attractive opportunities for us to be interested. Benny Wong - Morgan Stanley & Co. LLC: Great. That's great color. And then just going through the growth profile you guys laid out to 2019 of 800,000 barrels per day, how are you guys thinking about becoming increasingly long upstream? Is this something that you'll want to offset in some way with investment, or is that just a natural evolution of Suncor that it's just going to move away from the full integrated model?

I mean, that's a great strategic question and, you know, because the conversations we've had previously, it's something we're constantly looking at. What I would say is don't forget that all of the volumes we have brought recently are in a sense partially integrated because they come with full upgrading. So their product is a very high-quality sweet synthetic crude. So they are partially integrated already and don't expose us to some of the margins which have been more difficult in the business. And that is part of the strategy. We continue to look at that balance and we have a target range in our mind for integration to protect the integrity of the margins of our business. And we're still broadly within the ranges that we're okay with. We are constantly looking at that downstream market to see if opportunity is there, but the same capital discipline and rigor will apply. And these particular acquisitions don't trigger any great concern for us. Benny Wong - Morgan Stanley & Co. LLC: Great. That's great color. And just as a final question, a little more nitty, just notice with the incremental Syncrude CapEx kind of baked into your guide, but your guide didn't really move. Did I read it right there's some changes in there, or is a part of that driven by cost savings you guys are achieving?

Actually, Benny, as you – really, we're achieving cost savings on our existing capital program as we execute it. So we're able to absorb the extra $300 million odd from the Syncrude stake within the existing guidance range. So it's all due to cost savings on the existing base. Benny Wong - Morgan Stanley & Co. LLC: Got it. Great. Thanks, guys.

Thank you. The following question is from Greg Pardy from RBC Capital Markets. Please go ahead.

Yeah. Thanks. Good morning. Just I guess really a couple of questions, but, Steve, you mentioned everything on track with Fort Hills and so on. So, when that project was sanctioned, I think it was 2013, I believe there was about $1.5 billion or so in terms of like contingency costs and so forth, is it possible those will now start to come out, just given the productivity and the cost environment you're seeing?

It's far too early to be that explicit, Greg. I mean, what we are seeing is – if this project comes in on cost, on schedule, it'll be the first mega project in Alberta, in the Oil Sands industry to do that and it's looking good for that at the moment. We are seeing some real benefits in terms of executing the project at this time. One is, of course, the big challenges in the project is its exposure to exchange rates and part of that contingency is for exchange rates. And with a very low Canadian dollar, then depending on how each of the partners are set up, their corporations have different exposures to exchange rate. So it won't – things are encouraging. I think that's too optimistic to think that all of that contingency will come out. We still haven't applied all of it to the project yet. So things are looking good and the formal position is we're on cost, on schedule.

Okay, great. And I think you've already answered this, just kind of get it on the record though. But it doesn't sound as though even with the move now to 54% that you're going to seek operatorship at Syncrude anytime soon. Is that fair?

That's fair. It's not our primary objective. Our primary objective is to work with the existing operator and Syncrude to get to the reliability levels, and we're actually in that process and I'm encouraged by it. But this is a very important part of the Suncor business now and we will progressively work harder and harder until we start to achieve our goals.

Okay, great. And the last one for me, and it kind of comes back to the integration question, but Montreal, right, which has largely been a tidewater refinery now has kind of shifted gears with respect to the Line 9B reversal. But how are you thinking about Montreal on a longer term basis? I mean, it did sound as though you guys were perhaps more serious about contemplating a coker at Montreal than we had thought initially, but what is the plan for Montreal longer term?

I mean, we see Montreal as a keeper refinery, a long-term part of our integration. The Line 9 has been very effective. It's largely running now on inland crudes, which means we can take absolute advantage of whatever those margins will offer us. We like Montreal. It's a complex refinery. It has the capability for putting the coker in that we talked about. So, as we look at our downstream integration options going forward, we put the coker right alongside potential other acquisitions when we look at the suite of alternatives, and the coker screens very well. So, it's still there. It's back in our plans now a year or two into the early 2020s, but it's still there as a potential option for us to exercise in the future.

That's great. Thanks very much.

Thank you. The following question is from Guy Baber from Simmons. Please go ahead. Guy Allen Baber - Simmons & Company International: Thank you very much. Guy Baber with Simmons, AKA Guy (35:45). Steve, I wanted to dive a bit deeper into your comments that the market does not fully understand or appreciate the leverage to oil price improvement, as I tend to agree with you. So to in a sense check our model and what we see, is there any way you can help frame or quantify for us the incremental operational leverage to higher oil prices you're picking up relative to the portfolio before the Syncrude acquisition? Just wondering if you could frame that so we could have a sense check for our models?

Okay. Let me frame, Alister is then going to pick it up and then we'll refer you to something in the future, because we recognize that we had a big part to play in trying to get a clear understanding of what that leverage to the upside looks like. I gave the simple math that right now we are 99% leverage. We've had 7%, 8% growth for the last three or four year. I've outlined that 40% growth between 2015 and 2019. And I tried to give an indication in there that actually all of this is not sort of some maniana in the future. It is a – we actually reached and it was a very good month. So, we can't expect to do that every month of the year. But we did achieve 738,000 barrels a day through March. So a lot of it is there. And I think there's under recognition of what the capability of the assets we now have in our ownership are capable of achieving. So that was the first point. I think the second point is then, and I'll let Alister talk to it, about what the actual business is looking like today, and there are some fairly detailed assistant we can give there. And what I would say is then what you should actually have the conversation with our detailed modeling guys because we started to do some work now to be able to better tell that story of what it looks like. So, I'll hand you over to Alister and he can give you the intermediate there.

Thanks, Steve. Just I'm going to give you a number. If you went to our annual report, you would have seen we have a sensitivity table in there that showed for 2015 our sensitivity to a US$1 movement in the crude oil price. From a cash flow perspective, it was $165 million. Post-Syncrude, we're currently sitting at an exposure of $220 million. So every dollar that crude goes up, our cash flow go up by $220 million. Guy Allen Baber - Simmons & Company International: That's very helpful. Thank you, guys. And then my follow-up, I wanted to talk about the retail business. So, from a strategic level, how do you view the value uplift that your retail asset provides your overall downstream arm in-house from an integration standpoint, from a margin uplift, or offtake security standpoint? And what I'm really trying to understand and better appreciate are the benefits you may or may not be realizing by having that asset integrated that could be difficult for us to appreciate with the disclosures that we have.

Okay. Again, I'll make a few strategic comments and then I'll let Steve just pick up and talk a little bit of detail. I mean, strategically, we like our integrated model. And in order to capture all of the margins, we've really enjoyed having a model, which takes it from bitumen right the way to customer. I mean, Steve will say a little bit more, but our retail business itself is a very successful and profitable business. Now, of course, we are very cognizant of the fact, and I'm sure everyone else on the call is as well, that there are examples, very recent examples, of people monetizing their retail businesses and often there are different reasons for that. That is clearly a possibility for integrated oil companies to do that. We've looked at it, we have looked at the opportunities and we retain it there as an option. It's not at the top of our list in terms of what we want to do because we see it as business which is contributing.

Thanks, Steve. And just to add to that, I'd say we have a value from a couple of perspectives on the retail business. One is it provides a controlled channel of sales for the production out of our refinery. So, we're not simply merchant refiners selling the production at the refinery gate, but we have a high value-added channel, a controlled channel sale of sale through our wholesale and retail assets. The second is, frankly, they give us a very strong return. And if you look at quarter-in, quarter-out for the past four or five years, our refining and marketing network has easily led the pack in North America in terms of net earnings per barrel of throughput. So it certainly adds value. And we're not currently – although we keep a very close eye on the market and we're well aware of the value, we're not currently marketing the retail assets. Guy Allen Baber - Simmons & Company International: Thank you, guys, very much for the comments.

Thank you. The following question is from Phil Gresh from JPMorgan. Please go ahead.

Hey, good morning. First question on Syncrude is how we might think about a free cash flow breakeven there. I think you're at the moment probably investing at maybe a sustaining capital level, but what price do you think you need to break even there? And I apologize, I hopped on late, but maybe you could just talk about now that you have a larger stake, what's really different now? I feel like I get that question a lot from folks. What's different moving forward?

Okay. Yeah, and in a couple of areas I've sort of hinted at, Phil. So, I mean, the first – in response to your first question, let me give an answer to the – a blended answer rather than Syncrude because we're very happy to talk about those in more detail offline. But it depends on so many assumptions you make in terms of reliability, operating costs, crude price, et cetera, but let me give you a broad answer, which I think sometimes surprises. I mean, for Suncor, including the Syncrude assets, we look at our what we would call the cost at which we could cover our dividend and our sustaining capital, and that price is a Brent price of less than $40 a barrel. So we think we're free cash flow generative on that definition at below $40 a barrel and that tends to surprise people how low that is. And that's one of the characteristics of the type and nature of business we're in. So it's one of the reasons we've been a little bit more pushy on trying to get this understanding of how significant our improvements would be as crude price go up, because we think there is a misinterpretation. In fact, if you look at the cash operating costs of Syncrude in the documents there, and first quarter was a good first quarter, accept that, they were $31 a barrel and their sustaining capital is very low levels. That's one of the very successful pieces of work that's been going on over the last few years, that they've largely completed a lot of their big projects and they're relatively low levels of capital. And as Alister said, we're able to take those into our capital budget without actually moving our capital budget that they're so low. So the number I would take is for the blended business of Suncor is less than $40 a barrel breakeven for dividend and sustaining capital.

And what sustaining number are you using there?

Yeah, that's using $250 million this year for our total sustaining capital for our Syncrude working interest.

And total company?

Total company would be about $2 billion for our production side of the business and another $700 million for refining and marketing.

Got it. Second question is just around the balance sheet priorities. In your slides that you put out, you talked about a below three times net debt to cash flow target, you're around 2.5 times. I think that was end of quarter and before the additional 5% stake. Maybe just talk about your priorities there and whether you see that 2.5 times as kind of a trough or where you want to get to through the cycle.

Yes, so, Phil, that's a good question. I think we've put out some targets there that through the whole cycle on a debt to cap basis sort of 20% to 30% and on a net debt to cash flow sort of two to three times. So we're kind of sitting at 2.5 times, so we're kind of in the middle of our range, so I'm very comfortable with that. As we move forward, it'll go up slightly as we talked about, but as we move into higher oil prices, clearly those numbers will begin to come down to the bottom end of our ranges.

And so if you have excess cash as oil price goes up, how do you think about those priorities then?

Well, (46:28) capital allocation that we've talked about, where do we allocate free cash flow. And it's – as Steve has talked about, it's a mixture of investing for profitable growth, looking at the dividend as we grow the underlying production of the company and then obviously stock buybacks. And you've seen us do a combination of all of those. I mean that goes back to our value proposition, which is growth plus returning cash to shareholders.

Okay. Thanks a lot, guys.

The only bit I would add to that as a final comment is, if you look at we've got two very big growth projects, which are coming to a conclusion. It is difficult in the current economic environment to see how you would be approving those types of projects in the current environment. So I think you will see us coming back to much more of a model of operating the business really well and investing in the selective high return debottleneck projects. You'll see us maintaining the facilities to a very high standard, so the reliability comes up, but you will see us taking breadth around growth projects because what the market is offering is a cheaper alternative in terms of buying capacity. So there isn't a go back to how we were. You'll see the same discipline and rigor, but you won't see us going back to the same mix.

Right, thanks, Steve. That makes sense.

Thank you. The following question is from Mike Dunn from FirstEnergy. Please go ahead.

Good morning, everyone. Steve, just on the acquisition of the Murphy interest in Syncrude. Is it fair to say that you guys were motivated to do that deal to get your ownership stake to be a majority? The metric looks, I guess, similar, maybe a little bit premium to what you did with Canadian Oil Sands, but is that a fair assumption or not and we should assume that you'd be open to doing – to acquiring more stakes in Syncrude at a similar metric?

I'll just make a few comments Mike. I mean, actually, if you look at the calculation, it's on the same terms as Canadian Oil Sands, but in Canadian dollars. So you do have to look at the fact there was a relatively significant change in exchange rates through the last period. So that's to our benefit. The primary objective is we think it's a very attractive asset where we think it will be accretive from the assumptions we are making. There's no doubt that there is – our primary objective is to work with Imperial and Exxon and Syncrude to get it up to the reliability we want. But there's no doubt having in excess of 51% does improve the position. And really, it's a reflection of how good we think that asset is at this price. So I am very pleased that we've been able to take it up above 51%.

Thanks, Steve. And just a final one from me. Your cash flow statement noted $159 million in asset sale proceeds in the quarter. I didn't see any disclosures of what those were. Forgive me if I've missed something, but any color to add there?

Yeah, Mike, that's kind of normal business. You'll recall, we did come down slightly on the Hebron, Hibernia interest and that's just really the repayment of capital from prior years.

Okay. Thank you. That's all from me.

Thank you. The following question is from Paul Cheng from Barclays. Please go ahead.

Hi, guys. Good morning.

Hi, Paul.

Steve, just curious, now that you get to 54% in Syncrude and after the Murphy deal of about 59%, and you have said that the primary objective is trying to improve that operation to become a very large chunk of your business. So from that standpoint, how's the priority shift between focusing on that and also then looking at the next wave of your sector growth projects? That how is it a concurrent parallel line and one doesn't really impact or – I mean after all you still have limited organizational capability as well as capital then how much you want to effectively spend. So just trying to understand how that priority may have moved?

You sort of answered the question very well there, Paul. in that it really hasn't affected our capability going forward. Again, it's often not realized when you look at competitors in the business. We are the largest SAGD operator. We've got a combination of Firebag and MacKay River put us up as you know in the 240,000 barrels a day type range. We're very pleased with the way it's going. We've got major technology development going on in those regions and we have probably if not the best amongst the best assets going forward that can be developed. So we're in a very powerful position. It's a very important strategic part of our business and it's a question of when not if we develop those opportunities. The beauty of the Syncrude asset is it's instantaneous. It's there. It's operating and it's operating at a – if you look at the overall deal, depending on metrics you like, it's a very low cost per flowing barrel. It's a – and we've seen what the operating costs going to look like. In the first quarter, they were down to $31, so some great opportunities there. We have – we will not take the focus off of what I'd call our base Oil Sands business. We've spent really probably seven or eight years, but very, very focused in the last five years to earn the right to claim that plant is reliable and to get its reliability up into the 90%s. What we've got now is a very accomplished capable team who've achieved that. So it gives us the opportunity very timely to be able to start to allow some of those guys to concentrate and help on the Syncrude asset. And in fact, we have been doing some of that and we plan to do more of that going forward. So we've been planning the organizational capabilities. Same with Fort Hills, if you like. I mean, one of the lessons we learned was around when relative to the startup of the projects you develop the operating expertise. We already have a good part of the operating team in on Fort Hills finishing off the facility, and so they understand it by the time they need to start it up. So everything you've seen us do, we have the organizational capability to do very well. As we look forward, one of the questions as a team we always ask ourselves is, do we have the organizational capability to be able to deliver without distracting from the other parts of our business. So far, we've been able to answer that very positively.

And so as you mentioned, it's just matter of when but not if on the next wave of the SAGD growth projects. Is there a timeline you can provide that when we will be hearing more about when that next wave is really going to come?

I mean, we are already – they're not in our capital budget this year. We're already looking at next year. We're looking at in terms of potential startups of those projects. We're already back into 2021, 2022. So – and we have things we want to do between now and then and those projects need time. What I like about that is it gives us the opportunity to put the very latest technology in there. So, as we are finishing off the fairly big pilot tests on solvent extraction and these electromagnetic wave extraction techniques, we will be able with that timeframe to put the new technology into the project, which is a great advantage of the timing. I mean we've already seen – I think we will be one of the highest performing major oil companies in the world in terms of growth rate. We've done that for the last four years and now we've got the – already got the plans in hand which deliver another – next 40% of growth through to 2019. So I really like our growth potential and we don't have to rush into these things. We can do it in a way which is very consistent with the strength of our balance sheet.

So, Steve, based on what you just said, should we assume that the next wave is going to be sometime in 2018 to 2019, given that this probably take two to three year for the major pilot projects to complete the testing?

Yeah, I think that's fair, Paul.

Final one, if I may. Since you talked about the CapEx, in the past before the downturn you were sort of talking about $7 billion to $8 billion a year in CapEx. Now with the additional asset and everything, on a going forward basis then what is the comfortable range of your CapEx budget should be? Is it still $7 billion to $8 billion or is it actually, even though you have more assets, have been shift down?

I think what I would do is just take our track record. You've nailed that. We've spent $6 billion to $6.5 billion for the last four years. So there's a good number in terms of what our project execution capability is. Within that, we've had these very large growth projects. So as Steve said earlier, absent large growth, we will be coming back to smaller numbers than those. So you'll see us start to have the opportunity to allocate capital to different things. But part of the answer depends on what the world looks like in the future. I see for – I would use our track record as an indication of what's going to happen in the future for the foreseeable future.

Okay. Okay. Thanks.

And with that – thank you, Paul. Sorry, Steve here.

Okay.

I'm afraid we've run short of time. We still have a number of analysts' questions and media lined up. I would encourage the analysts please get in touch with me directly later in the day and media, of course, have your Suncor media contact who will be very responsive today. With that, Wayn, I see we're at time, so I'll ask you to close the call and I'll thank everyone for participating.

Thank you. That concludes today's conference call. Please disconnect your lines at this time and we thank you for your participation.