Suncor Energy Inc. (SU) Q2 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Suncor Second Quarter 2016 Financial Results Conference 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.

Thank you, Wayn, and good morning to everyone. Welcome to the Suncor Energy second quarter earnings call. I have with me here in Calgary Steve Williams, our President and Chief Executive Officer, along with Alister Cowan, our Executive Vice President and Chief Financial Officer. I'd ask you to note that today's comments contain forward-looking information that our actual results may differ materially from expected results because of various risk factors and assumptions and they are described in our Q2 earnings release, as well as our current AIF. Both of these are available on SEDAR, EDGAR and suncor.com. There are certain financial measures referred to in these comments that are not prescribed by Canadian Generally Accepted Accounting Principles, and these are described in our Q2 earnings release. 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. I think as everyone is aware, the second quarter dealt to say considerable challenge in the form of forest fires in Northern Alberta, which forced an evacuation of the Fort McMurray area and impacted the majority of Oil Sands operations in the region. However I think both as industry and as a company we were able to respond in a manner that demonstrated the ingrained and deep value and culture of safety, social responsibility that is developed in the Canadian Oil Sands. And let me just take a moment to put this in perspective. So consider the scale of event and core response. Fires impacted an area of roughly the size of province of Prince Edward Island or the State of Delaware with a perimeter of 1,000 kilometers. We shut down all of our Oil Sands production in order to focus on the safety of employees and Fort McMurray residents and protect our assets from the fires. We hosted more than 14,000 guests in our lodges. Our Firebag Aerodrome handed almost a 1,000 flights. Suncor employees joined over 2,000 firefighters from around the globe in responding to the place. And perhaps most importantly, we responded successfully to this unprecedented situation without a single Suncor loss-time injury, recordable injury, or even medical treatment associated with the fire. So when the evacuation order was lifted by the province, we safely remobilized thousands of employees and contractors, completed plants maintenance, a second upgrade on budget and returned to full production across all our Oil Sands facilities including Syncrude by the middle a July. All of that was accomplished in line with our updated guidance which we issued on June 06. The forest fires were without question a significant event that tested our battle on many front and resulted in one-time reduction in production and cash flow. But the important takeaways are actually very positive. We sustained as I said no recordable injuries and no damage to any of our assets and we were able safely restore production and return to normal operating rates in relatively short order. The event represented a comprehensive test of our emergency capability. It confirms that we have well trained people and robust plans in place to efficiently and effective to respond. In the spirit of continuous improvement we're also incorporating learnings from this event into our emergency response plans that going forward. The results of the fire and mitigation efforts that we took, I mean that the threat of damage from the future forest fire incidents has been dramatically reduced. We shut in approximately $20 million barrels of Oil Sands production across all of our operations but we were able to mitigate the financial impact through excellent cost management. In fact our updated guidance for the year maintains our original cash cost range of $27 to $30 per barrel and we fully expect to meet that target. So that gives you an indication of what our trend was prior to the Oil fire. And despite the sharply reduced Oil Sands production, we were still able to generate over $900 million in cash flow in the quarter. Thanks to the integrated business model. And this underscores the fact that all though our operating model is integrated, it is made up of highly efficient but independent upstream and downstream businesses which can each generate strong standalone profitability while effectively mitigating the impact of crude price differentials. So even though our Oil Sand production was short in for a extended period, our refineries were able to secure alternate feedstock and continue to outperform the peer group in terms of realized margins and profitability. Effectively, the forest fires were a quarter two event and with the number two upgrade major turnaround completed on budget, we're now poised for multiple quarters of strong profitable production. So once the forest fires attracted a lot of focus this was also an eventful quarter on other front as well. Our offshore production is tracking ahead of plan, thanks to strong reliability at Buzzard and Golden Eagle combined with new well coming on line at Hibernia. And as result we recently increased our production guidance for E&T. In the downstream, reliable operating performance and solid local refining cracks enabled us to generate strong earnings and cash flow and that was supplemented by FIFO accounting gain as a result of the increase in crude prices during the quarter. These results were particularly notable given the completed plant maintenance at the Montreal, Sarnia and Denver refineries and dealt with forest fire related crude shortages and unplanned maintenance at Edmonton during the quarter. So, as I said it reinforces the point I made earlier that Suncor's downstream will into integrated but our Oil Sands production is not dependent on that production for its profitability. Turning to our major growth projects, we continue to make significant progress on Fort Hills construction which is now over 60% completed at the end of the quarter. The remaining work has been almost entirely Alberta based. The forest fires resulted in demobilizing just over 5,000 people from the Fort Hills site and interrupting the site construction activities for approximately a month. However, the project since been safely run to back up the planned work force levels. We're currently assessing the impact of the forest fire interruption and developing some mitigation plans. We continue to target first oil in Quarter 4 of 2017 with production expected to ramp up through 2018. Suncor's share of production will be approximately 90,000 barrels per day. At, Hebron, on the east coast, construction of the gravity based structure and topside continued during the quarter. A major milestone was achieved in late June with the last major module fabricated overseas being shift on schedule. First oil is anticipated by the end of 2017 followed by a multi-year ramp up to peak production and Suncor's share will be about 30,000 barrels a day. In addition to our organic growth projects, Suncor has taken full advantage of recent oil price weakness to invest approximately $9 billion in acquisitions over the past year. We’ve increased our working interest in the Fort Hills project by 10%, taking our ownership to 51%. We also acquired two additional stakes in Syncrude, bringing our working interest up to 54%. These transactions build on a well-established track record of countercyclical acquisitions and divestments. By exercising patience and discipline and remaining focused on our core business, Suncor had its significant shareholder value through AMD at the right points in the price cycle. This includes the purchase of the two Denver refineries back in 2003 and 2005 when that refining crack were single digits. The Petrol Canada acquisition during 2009, oil price crash, the sale of our natural gas business when gas prices rallied briefly in 2013, and of course the recent Syncrude acquisitions which were completed as oil prices boxed down earlier this year. We are currently working on a plan to improve reliability, reduce cost, and capture the very attractive synergy opportunities between the Syncrude and Suncor operation. And I'm optimistic and pleased with the way that work is going and we expect to be in a position to share that plan with you later this year. We also would continue to look for opportunities to build shareholder value through more opportunistic AMD. Book B, very clear, we will not chase the market. We will only act if we see the opportunity for genuine long term value creation. Between organic growth in-flight and recent acquisitions, Suncor expects to exceed 800,000 barrels per day of production by 2019. So that's over 40% growth in just four years and represents a 6% per share compounded annual growth rate between 2015 and 2019. This production growth significantly increases our leverage to oil prices, and we expect it to put us among industry leaders on free cash flow at forward straight crude prices. So the Suncor strategy, which has served us so well through the price cycle remains very much intact. The relentless pursuit of operational excellence, as demonstrated by the continuous improvements to reliability and ongoing reductions in both capital and operating costs. A very disciplined approach to the allocation of capital as we profitably grow production through organic projects that are in progress at the moment and countercyclical acquisitions. We are continuing to return cash to shareholders though a competitive dividend. So we’ll continue to execute, and I’m confident we’ll deliver strong returns for shareholders. So I’ll now pass over to Alister to provide some additional color on the second quarter financial results.

Thanks Steve. As Steve pointed out, the forest fires in Northern Alberta had a very significant impact on our Oil Sands production in the second quarter. But nevertheless, as you pointed out, we are still able to generate healthy cash flow from operations of $960 million. A number of factors contributed to this positive result. They included reliable, low cost production from E&P has continued to exceed our expectations. Strong downstream profitability at our refining and marketing network actually realized improved gross margins after the second quarter of 2015 despite a decline of over 30% in the New York harbor crack spread and a continued focus in cost management because to try to exceed our target of a further $500 million in cost reductions this year across the enterprise and this is in addition to $1 billion of cost reductions we banked in 2015. We’re equally focused to cost savings and the execution of our capital spending programs. As Steve noted earlier we were able to complete the major Upgrader turnaround of the Oil Sands on budget despite having to demobilize and remobilize our turnaround workforce as a result of the forest fires. Major maintenance on the downstream but was also completed on budget. Overall when I look at our capital spending it’s tracking towards the low end of our reduced guidance range of $6 billion to $6.5 billion for 2016. Now that includes absorbing the additional capital related to our increased working interest in Syncrude. As we’re talked today before this is a peak year for spending on Fort Hills and Hebron and we anticipate a significant reduction in CapEx as we look to 2017 and beyond. The Suncor’s strong balance sheet has been competitive differentiator through these past years of weaker oil prices. During the second quarter we took a number of actions to ensure this continued strength going forward. We issued $2.9 billion of equity to fund the acquisition of Murphy pipes and interest in Syncrude and to reposition the balance sheet for further potential acquisitions. And we emphasized as Steve mentioned earlier we don’t feel pressure to make further acquisition so we’ll continue to evaluate opportunities that fit well with our existing business and we won’t hesitate to take some action that can generate value for the shareholders. The equity offering was very well received by the market but heavily oversubscribed with existing shareholder taking almost 80% of the issue. We also repaid $600 million of bank debt and $864 million of bonds acquired on the Canadian Oil Sands transaction and these bonds were replaced with commercial paper resulting in annual pretax savings of over $40 million at current funding levels. The net present valued associated with interest savings over the life of redeemed bonds is estimated at approximately $125 million. The net result of these actions as of June 30 is a balance sheet that continues to be in excellent condition with the metrics appropriately positioned for point in the price cycle. We’ve almost $9 billion of liquidity including $3 billion of cash. Our net-debt-to-cash flow was three times despites the impact forest fires on our cash flows. Our total debt-to-capitalization is just over 28% and of course we continue to attract a strong investment grade credit rating. Crude prices rose quite sharply in the second quarter but seemed to be somewhat ranged currently. We remain believers in higher oil prices long term but we don’t expect to see those higher prices until global demand shifts supply and inventories returns to historical levels. Even then we would expect that crude prices will continue to be volatile. Now the good news for Suncor is that we can achieve cash flow neutrality at relatively low crude prices. We believe our current operations can generate sufficient cash flow to cover sustaining capital and dividend obligations at Brent crude price of less than $40 per barrel. As our growth capital starts to decline starting in 2017 it is easy to see that we’ll quickly return to generating free cash flow even as at a relatively low forward strip prices and crack spreads. So we have good reason for optimism. Our major Oil Sands maintenance for this year is complete, production is back up at maximum rates, we’re continuing to increase efficiency and take cost out of the business and a balance of organic growth projects. We’re also continuing to evaluate opportunities for further profitable inorganic growth. Our market conditions have improved to a level that should allow us to generate free cash flow going forward. We’re certainly looking forward to a strong second half in 2016. Now I’ll pass it back to Steve Douglas.

Well thanks Alister, and thank you Steve. Just before we open the floor for questions a couple of comments additional to that. There was significant LIFO FIFO impact in the downstream it was an after-tax gain of $275 million in the quarter. That offset was more than offset Q1. It leaves us year-to-date at an after-tax $83 million positive impact from FIFO. Stock based comp was an after-tax expense of $29 million bringing the year-to-date to an expense after tax of $131 million and the Canadian dollar strengthened modestly in the second quarter reusing in an after-tax gait of $27 million in the quarter but there is still an after tax net expense year-to-date of $858 million. We did make an update to our guidance on June 6. We have updated it further with the incorporation of the 5% working interest of Syncrude associated with the closing of the Murphy deal on June 23, but other than that no changes to guidance. With that I will turn it back to the operator. You could go to questions from the phone.

[Operator Instructions] Our first question is from Guy Baber from Simmons. Please go ahead.

Good morning everybody. It was mentioned a few times during your prepared remarks that you all see yourselves as free cash flow leaders even at the forward strip in generating free cash flow going forward into next year. We obviously have production and oil price sensitivities as a check on our cash flow numbers. The other part of the equation is obviously CapEx. Can you just help frame for us perhaps understanding you can’t give specific guidance but if you could frame for us a general roadmap for capital spending over the next couple of years I think that will be helpful.

Okay, thanks Guy. We do and of course and I will answer your question on CapEx but of course the fact that we believe we’re sort of cash flow neutral after sustaining capital and dividends at less than $40 a barrel so it sums it all up. Let me give you some comments on CapEx. If we look at our CapEx and you look over the last three or four years you've seen a great deal of discipline around that and we’ve been in the sort of $6 billion range plus or minus for a number of years. Now that is of course included a significant amount of growth capital. So if we look at our sustaining capital it was through that period in the $3 billion range. If you look and clearly that’s, - we’re not in a position to guide in detail yet. We need to work through the acquisitions that we have gone through. But we would expect that number to modestly increase associated with Syncrude. So you could see it coming up 3 to 3.5 and maybe up slightly higher. And then you look and then you move on to the next piece which is organic capital spend. Both Hebron and Fort Hills have peaked this year so they are coming down and both will be largely complete next year. So we have no plans to approve major growth projects, organic growth projects in that time. And if you look at the last time between approval and spend, we’re already going to see a big dip and I don’t think us approving big organic projects for at least the next couple of years. So you're going to see a significant decrease in overall capital and I’m guessing it's too early as you say to guide but I will be challenged in the organization with getting down into that fire range.

That's very helpful. So that was challenging to get into the fire range next year you think?

Well, next year, yes, I think next year if we start to take her off on Hebron, Fort Hills and then we have got some potential scope to go further after that.

Great, thank you. And then you mentioned M&A a few times in the prepared comments that you won’t chase the market, that you are focused on value. Can you just be very clear for us what your priorities would be when it comes to potential acquisitions, what your primary criteria is when it comes to how you determine whether or not opportunities create value and if you can just give maybe a quick comment on the level of relative attractiveness when it comes to adding Oil Sands opportunities versus something off-shore versus downstream, I think that will be very helpful?

Okay. And I will do the first piece around strategy and I will actually look at both sides of it, both acquisition and divestments and then Alister will give us a few comments on the actual metrics we look for creation of value. So let's first look at, and you heard me use these phrases in the past. You see us investing in the core of our business and divesting in the non-core parts of our business and our definitions are really very clear. So the core of our business is the very central part of it is Oil Sands, but Oil Sands to get the full margin for the product. So its Oil Sands integrated to the market, so you will see us looking at Oil Sands possibilities and you will see us looking at potentially refining opportunities. If I look now at the next level of detail, the market is offering lots of opportunities potentially around Oil Sands. What we have looked at in the refining marketing sector, we haven’t particularly liked. So I am not optimistic to see any moves in that area. So core area is Oil Sands. The next to the core area is areas in the world where we add value, where we believe we have a competitive advantage and that's in the North Sea and off the East Coast of Canada. So you've seen us invest with first grade partners in potential opportunities with Shell around Shelburne and in the other venture out there with Exxon. And we are very comfortable with those areas, but you’re not going to see some - I think there has been a lot of speculation in the market about transformational and step-out changes that’s not what you are likely to see. Now I want to qualify it with - we really have no need for any more acquisitions. So we start in a very strong position, you heard us say we got 40% growth between 2015 and 2019 which is probably the pace setter in our industry for our size of corporation. So you can expect us to be rigorously adhering to our capital discipline and unless there are opportunities in those core areas which really stand out, we will not be pursuing them. So it’s a really powerful, countercyclical position that we find ourselves in. Just a quick comment on divestment, divestment will be in non-core areas that don’t fall in those categories and the example we have been talking about in the market is potentially our lubes business. No final decision has been made on the lubes business although as we went into the front end of the process, the interest we have got has exceeded our expectations. So, I am very pleased with the way the divestment program is going as well. So I will just let Alister to make a few comments on the sort of metrics we look at to evaluate whether we think these bills are adding real long term value for our shareholders.

Okay, thanks, Steve. Guy, so just I will take this back to the fundamental underpinning of what we looked at as capital allocation and the discipline around that. When we got free cash flow this three areas as that really can, are we going to take that free cash flow and invest it in profitable growth, are we going to invest it in increasing the dividend sustainably for our shareholders. So we’re going to invest it in buying stock back. So we’ve talked about a lot of it and we are very disciplined during the – what do we look out when we’re trying to make an evaluation in those three areas. We’re very focused on return on capital and internal rates of return as you would expect for us now the only part of the story. How much cash flow we’re going to generate what’s the free cash flow out of an asset, what kind of accretion are we going to be looking at to generate value cash flow on the earnings basis. And then when we stand back and look at it what is the cost per bottle of the assets that we’re potentially buying. Those are so probably the key things that we look at when we’re assessing value. But I come back to we’re very disciplined about and we’re going to invest it in growth looking at dividend increases and we’re going to buy the stock back.

Thanks very much for the comprehensive answer.

Thank you. The following question is from Neil Mehta from Goldman Sachs. Please go ahead.

Hi, good morning, Steve. How are you?

Great. Thank you. Neil, thank you.

That’s great. So I want to kick it off on downstream something that's gotten a lot of attention on the integrated call so far in earning season. We see product margin soften up a little bit just from your perspective how do you see it playing out from here and given that you have a large refining business does that impact the way you see the go forward cash flow for the company or do your assets have a built-in premium just given the markets that they serve that you can weather any potential storm a little bit better than others?

Yes, I mean, let me make a few comments and I’ll just take a step back as well and look at the downstream of the time. I mean some core clearly has the best quality downstream in North America in terms of dollars per barrel margin we are making. You can go back as far as 2010 and you’d see that through a quite extreme cycle in terms of commodity prices that business is being resilient. I think we still continue to surprise the market and the ability to be able to model that business through the cycle. And in terms of how we continue to be whether it’s low crude prices whether it’s high crude prices, part of that is to do with the location of the refiner. And part of it is to do with the indication with the integration of that business back into all the sense. But throughout the cycle we tend to be the number one margin producer on our downstream assets. So are there going to be some changes in profitability in that sector yes certainly we would expect – we didn’t expect the levels to stay the sorts of levels we've seen in particularly '13, '14 and '15. But we do expect us always to be at the very top of those profitability and cash margin for those refiners. Sometimes that becomes a little bit opaque because of the FIFO accounting mechanism where you will see -- some quarters you'll see high some quarters you’ll see at land. But interestingly approximately this year those effects of almost netted each other act. So if you start to look over more extended period– I’m optimistic – so I like the business, I like the positioning of it and I think you’re going to see it to continue to make a significant contribution going forward.

I appreciate that. And then on Syncrude and you’ve spend -- been able to spend even more time with the asset here and so any update that you can provide the market on just that the opportunity set you’re seeing in front of it to improve the utilization and drive down costs?

I would just say we are quietly confident. We are working the very detailed now of the change plan with the operator Imperial. We are still optimistic we will get that reliability into the 90% range and we’ll get the cash cost of that business dining to the -- into the $30 range. So very pleased with the acquisition, very pleased with the prices we got that business for, encouraged by how the plan is panning out. And I hope that as we finalize that plan we’ll come and share with the -- with you guys. So I would expect to be in the market share and the details of how we get from here to those numbers before we get to the end of the year.

We’ll look forward to it. Thanks Steve.

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

Yes, thanks good morning. Steve most of my questions have been answered but when we come back to the organic opportunities that you have let’s just say some additional dollars become available and what becomes attractive to you is it things like the -- like an expansion of Mackay or do you look at further the growth of Firebag or is it that replication strategy that you described a couple of years ago just trying to get a feel for that as well?

Thanks Greg. I mean let’s say it clearly is you can fix these things 1, 2 and 3 years ahead. If I look at those three potential allocations of cash organic growth the question you're asking, shareholders either through dividends or buybacks or acquisitions and mergers. Clearly our view at the movement is that there is more value to have to be had in the acquisitions and mergers pieces better than the organic pieces. And that's where you’ve seen us concentrating and spending our time. I think that cycle will come to an end it’s not going to stay like that. As we’re starting to see upward movement and volatility in crude prices as that trend continues then some interesting things will happen in our willingness to deploy other assets. We like to be countercyclical, we like to buy at the bottom of the market. So then we get back to that says we're looking at as we grow the company dividends and share buybacks. You then go to your particular question on organic growth; we have the best opportunities in the industry available to us going forward. We have a long list of opportunities with mines I don't see us investing in a major mine new mine similar to at Fort Hills for a long time it could be 10 years. So you can take that out of the equation. That leaves you then the in situ assets we have in Oil Sands and at least you with some of the potential opportunities of these close to Canada and in the North Sea. If I look in Oil Sands which is where I think your question was particularly focused, you are right, we have a long list of in situ opportunities. We will take the opportunity all not approving those in the next year or two to really work the auctions there. We can already see what's going to come out is the leader. It is going to be the replication strategy. We've identified a program which would take us eight to ten years of replication probably one project every year to 18 months. The more we’re working and the lower we're able to get the prices and the more we're able to include the new breakthrough technologies that we’re starting to see about solvent extraction and use of these electromagnetic wave technologies. So you’re not going to see it quickly and given we’ve stopped talking about approvals for at least a couple of years you were then into early to mid-20s before those projects come on. But I think the next generation of organic growth if the market if we come to a conclusion the market will support those is going to be in that replication In Situ business.

Okay, that's great. Just one more for me, I mean it’s more of a natty question but the sales your base of sense sales force obviously is supported by pretty significant draw downs on the inventory side, should that more or less rework itself by the end of the year? In other words you’d expect to see sales lower than production here just through the balance of the year as you rebuilt?

I mean like we’re already starting to build I think you’ll see the majority of that correction in the third quarter because I will be putting some pressure into the business because we took part of our cost reduction as to get our working capital down. And I'm putting a fair amount of pressure in the business to make sure we only go to levels we actually need to service that business.

Okay, that's great. Thanks very much.

Thank you. Our following question is from Jason Frew from Credit Suisse. Please go ahead.

Yes, thanks Steve this might have overlapped a bit with your comments on the replication strategy but I wonder if you could comment a little more on the recent sustainability report and the target you have for reducing emissions intensity. Just what’s the strategy there and how well do you think that strategy has developed in your view?

We are engaged in all of the conversations in Canada around climate change and around sustainability going goals and how we make progress to get there. We’ve done a comprehensive piece of work in putting together our targets. We believe that the best place for Suncor, the best place for Alberta, the best place for Canada to be is at the leading edge of those conversations then we can start to form the word’s policy around how you manage that climate change. Of course, what we like about that is that then starts to give us certainty in terms of the investments we’re making, what the cost structure looks like, what our ability to grow the industry looks like and I have to say overall I’ve never been more optimistic. So the conversations have moved Canada into a leadership position. President Obama came into the parliament in October and said he recognized Alberta and he recognized Canada now as one of the leaders in policy. What that starts to do is give us a certainty and hopefully start to create a way for the next pipeline to be approved and installed. So overall I am very comfortable with that big picture. I then look at the clearly our sustainability targets are ambitious. We have the idea, we still need some technology development to be able get there but the major steps in that we’re already starting to see. So we’ve already scoped what some of those projects would look like in terms of technology step and of course of examples would be the first one be the In Situ technology you heard me speak about. Once you start to put solvency and you need much less heat so you take a step improvement in the carbon footprint or that type of project and we plan to be implementing some of those in this period. Another one would be and it’s an interesting one because it’s immediately intuitive until you sit back and think about it. We are advocating in a modest way to work with government so that we can strand some of the oil in the Oil Sands and what I mean by that is when you have vast reserves like we have what our preference would be the last barrel we currently take out because the reserve belongs to the province and the population here. Our regulation is written so that we take to a very high percentage the last piece of oil. That tends to be the most expensive both economically and environmentally. What we would like to do is be able to leave that last piece in and effectively high grade particularly the mines and In Situ as well. I am very optimistic that we’re making some breakthrough with government now that will now enable us to do that. So you could be talking about 10% or 20% improvements in the economics of some of those extraction operations. So it looks as though both through a bit of interpretation, a bit of regulation we will be able to do that, so great opportunities. That is another significant potential contributor to reducing our carbon footprint. So I am really encouraged by where we are. Our plans are ambitious and that’s deliberate because we want to push ourselves to be best.

Okay. Thanks for that.

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

Good morning. I have to apologize first I came in the call late so if the questions has already been addressed please let me know I would take it off line. Several quick ones. Steve if we’re looking at your production mix right now it’s probably about 85% Oil Sand and then split evenly on the Eastern Canada and North Sea. From that standpoint is that the desirable mix for you or was that do you think one is more heavy or that too light that you want to change it?

Thanks Paul. I would look at it slightly differently. So we’ve really looking – we have a clearly Suncor is a company which is very heavily concentrated on Oil Sands. We’re very comfortable with the mix we have. We’re very comfortable with the EMP business because we believe we have the value we add in those two regions, North Sea, north of the East Coast and we have some potential opportunities there in the medium to long term. If you look the business has critical mass and is a good generator of cash through, right away through to the mid 20s. We have leases in our ownership which will work it offsetting any depletion in production there and if we're going to sell that business you probably look at and you could look at it – we certainly wouldn’t look at it at this stage in the cycle and you probably would look at it in towards the mid 20s. So I really like the position we’re in. We have no imperative to do anything in those businesses. We like those with Exxon and Shell the opportunity that we bought into there. We look around the North Sea, there hasn’t been a great deal that’s excited us but there are opportunities around some smaller more mature off the developed opportunities there. You can look at some tax benefits and opportunities but I don’t see any significant moves in those area. Most of it is likely to be concentrated in Oil Sands which means you end up with about the balance we’ve got or you could see it slightly changing but nothing significant.

Okay. Second question maybe it is for Alister and Steve also for you. If we look at most of the oil company and I think including you guys looking share buyback if I will but if we [indiscernible] in a I mean we are highly cyclical industry and so if we decide to grow the dividend over time but is that a concern at some point the dividend commitment become so big it’s not sustainable. Now you are not in that case but if we continue to grow at some point we may get there. So from that standpoint should we look at dividend and buyback you need to go hand by hand as you raise the dividend on a per share basis you should also finally?

I mean, what we said in the past Paul as you can expect to see and of course the dividend is at the discretion of the Board not management but you can expect broadly that you see dividends increase in line with our growth as we go forward and there clearly is an opportunity for some variation on that but that’s the expectation we try to create. The second piece you will see opportunistically buying our stock back and as Alister said we’ll just value it on a level playing field and compare it with the other alternative which is organic growth or acquisition and mergers. So I think that position and you know if you look our track record you’ve seen increase dividend for multiple years and you’ve seen we’ve bought – we effectively pre-purchased the acquisitions by that we used our stock for because we bought 10% of our stock back over the previous three plus years. So judge us by our track records you’ll see us continuing broadly with those philosophies going forward.

I know it’s early, do you have any preliminary outlook for 2017 CapEx versus 2016 whether it’s going to be about flat, go up or go down?

You did miss an answer earlier on that Paul. I would expect it to modestly go down from both Fort Hills and Hebron peak this year so you’ll see it go down modestly.

Okay. And final one. Based on module just describe on the replication strategy and looking out over the next couple of years you sense whether all the detail. Steve maybe I got you wrong but there seems like the timeline have been pushed a bit to the right a little bit later if that a – well first of all that what does you think that is the correct statement and if it is correct, if it is different primarily because the technology is not mature enough or that it is - you are focusing a lot of effort into the integration of your recent acquisitions. So that it may take - the management maybe having lesser time on that or that it is a capital availability issue?

Yes, I mean, first of all, you’re right, we’ve pushed it back a couple of years. Now technology is -- we can see our way largely to the new technology. The more time you spend in the design phase the better it gets the lower cost and the more efficient it is. So I'm not concerned about and itself is not the driver. It simply when we look at the allocation of capital between the organic acquisition and mergers, buying our own stock back, we do the economics on that and our view of price is going forward. And the other two are coming at in a very strong position relative to organic growth at the moment. So we don't see ourselves investing organically in major projects in this area and we don’t see ourselves approving those for at least a couple of years. And that’s the combination of economics and the fiscal environment there.

Thank you.

Thank you. The following question is from Fernando Valley from Citigroup. Please go ahead.

Hi, guys. Thanks for taking my question. If we look at how you’ve proceeded with acquisitions so far it seems to be concentrated on the light oil and to the spectrum in Syncrude. Just wanted to understand as you’re growing in Fort Hills and as you look towards acquisitions how market act or play a part in the strategy particularly since you’re saying that there aren't a lot of opportunities under refining and marketing? Also wanted to understand how you're seeing with the eco gas under $1 for the quarter, it seems to be an interesting experience during the utilization of natural gas in your upstream Oil Sands business, I wanted to understand how that plays into your strategy going forward? Thanks.

Sorry, you just broke up on the second piece of the question there on natural gas?

Yes, so currently it produces 99% oil and obviously in fact the Oil Sands has a huge content of cost that are natural gas related, just wondering if you see more interesting opportunities to acquire to balance out and hedge out your natural gas exposure?

Okay, got it. Thank you. So I mean, the first one, just to say you know we have a clear strategy around light oil, heavy oil, upstream, downstream and we are well within our target ranges as we go through the acquisitions that we have done because market access is very easy for things like the Syncrude because it's already there, it's an operating business. And as far as Fort Hills goes, Suncor is in a - we are - at the industry level we support all of the pipelines and we're actually partners in each of the pipelines. But as a corporation we don't actually need them through this period. We would like them there and I think they - we sell most of our product because of our integration at a Brent related price So we’re significantly different than the most of the other players. But we've also secured a preferential position in terms of market access on existing facilities. I mean in fact today we have, that we're often in a situation where we will sub contract our capacity and pipelines to some of our competitors as a profit-making trade transaction. So market access is not really an issue for Suncor through this period, it's more of an industry challenge. We do have a view on gas prices that was why we sold our business in 2013.Our view was that the price of gas was going to go low and stay low for an extended period probably 25 plus years. We didn't anticipate it was going to be quite this low for this long but you know we were thinking more in the sort of $3 to $5 range. So we find ourselves 99% oil and a low percentage of gas by design and decisions we made. As a hedge when we sold our gas business, we kept a very significant reserve in the monthly. And that - we have - we still have that, there is very low cost to keep and retain it. If there is a good opportunity that others would like - daily like to acquire that, because it's very high quality resource right in the sweet spot of that reserve. So, we're very happy with our high - because we think gas prices will stay low and so the opportunities there have not been, have not been great. And we have a - we already have a gas resource in our ownership should we chose to develop that and prices go high.

Great, thanks a lot.

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

Hi, good morning. First question is just a follow-up on some of the CapEx discussion. Could you just remind us how much of the CapEx budget this year is from Fort Hills and Hebron? And then how that rolls off in 2017 and 2018?

Yes Phil, it's Alister. Fort Hills and Hebron is by $2.8 billion this year and as you move into 2017 you see that coming down probably by close to $800 million to $1 billion and then rolling off to a low level as we finish it up in 2018.

Got it, okay. And if - and I apologize I was late as well, but - I believe the long-term CapEx commentary was around getting the number towards $5 billion which of course is above a maintenance capital level. I am just wondering how you think about the growth that were tied to that level of spend and - I know maybe some of the opportunities on the Oil Sands that needs cost reduction so where the opportunities lie?

I think what it says is, that I mean if you actually look at our sustaining capital even with the acquisitions we do, we're getting into the $3.5 billion, $4 billion type level we think it is the top end of the range. There is range because it is slightly cyclical, it's not a completely flat spend. If you look beyond that it's discretionary. I mean we clearly know that, some of the opportunities in front of us as we've acquired these assets, with very modest amounts of capital can have very, very high impacts in terms of reliability and therefore returns. And I remember coming out a couple of years ago and we talked about 100,000 barrels a day capability by fine tuning, debottlenecking our existing assets. So they are clearly are those opportunities and that's why the number pushes up slightly from a - the $3.5 billion, $4 billion sustaining capital. So, it's those types of projects and we’re not - when we talk about the numbers factor any major, major independent growth projects like, new In Situ or new mines in there.

Great, okay. That makes sense. My last question is, as we think about the balance sheet now, it's around three times level and trailing 12 obviously that's influenced by the impact of the fires, so really, as we move forward it's not that high. But as you move out to 2017 and you've talked about M&A over buybacks, I mean is there a leverage level where you are comfortable maybe being more sort of a buybacks even if you, you see opportunities out there on the M&A front?

I mean I’ll start and I'll let - Alister is keen to get a comment as well. I mean part of the power of the model is disability to do things counter-cyclically. And what it means is that because we’ve - and that’s one of the reasons we went and entered the equity issue is the opportunities we've seen, when we're able to operate almost at the - what the best - when the market is in the best position for the acquirer is because of that strong balance sheet. So you will - I took you through more words back to 2003 and listed 7 or 8 acquisitions and divestments where by having our balance sheet in the right position we've been able to take advantage of those market opportunities and that creates – that's going to create vast demands of a shareholder value. So, you see is doing not just broadly in terms of the ratios and the health of the balance sheet. You will see that capital discipline right away through. So I mean Alister can give us a few more details in numbers. But you know, you'll see as we trade off the three uses of the capital, one of them we’re able to keep our balance sheet in excellent health.

Yes, Phil. I mean, as you look at our numbers the projected cash flow is obviously impacted by the fire. So why does that flee, I can really look at it as I feel less than a realistic basis. We’re on the top end of the ranges that were set both into cap and cash flow. I think that’s entirely appropriate for where are, what we’ve done, investing the $9 billion in acquisition and also bringing Hebron and Fort Hills forward. We’re going to place these both as Steve said and if I look at going forward, even with thinking about that dividends and share buybacks and potential acquisitions, I do see those metrics trailing down at to the bottom end of our ranges over the next few years just as we bring on the project to generate more cash flow.

Do you see divestiture cash coming in this year? I know you have some things on the market.

Yes, I mean, we might see some of that. I think, if I recall what I said at the beginning of the year, 1 billion to 1.5 billion within the next 12 to 18 months, I guess, not only 12 months. So I expect to see some of it in this year, but probably some of it actually in the door Q1, Q2 next year.

Okay, thanks. I'm going to stop there.

Thank you Phil and we have reached our time. So I'm going to stop us there, but obviously, lots of opportunity, the IR team is available and welcome to your calls later today and going forward. Thank you to everybody for joining us. Thank you, Operator.

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