Suncor Energy Inc. (SU) Q4 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Suncor’s Fourth 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.

Thank you, operator, and good morning, everyone. Welcome to the Suncor Energy Q4 earnings call. With me here in Calgary this morning are Steve Williams, our President and Chief Executive Officer; along with Alister Cowan, EVP and Chief Financial Officer. Please note that today’s comments contain forward-looking information. Our actual results may differ materially from the expected results because of various risk factors and assumptions described in our Q4 earnings release as well as our current AIF. And both of these are available on SEDAR, EDGAR and our website, suncor.com. Certain financial measures we referred to in these comments are not prescribed by Canadian Generally Accepted Accounting Principles, and for a description of these financial measures please see our Q4 earnings release. After our formal remarks, we’ll 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 turn it over to Steve Williams for his comments.

Good morning and thank you for joining us. We certainly have a lot to talk about this morning. Including I think what you’ve seen the strong operational and financial results in the fourth quarter and of course, the updates that we promised on Syncrude and Fort Hills. You see in both cases we’ve made significant progress. Cash generation was an impressive $2.4 billion in a quarter where both Brent and WTI prices averaged less than $50 per barrel. And Alister is going to go into the financial details a little bit later. But what I’d like to do is start with a quick summary of our fourth quarter operations. Then I’ll talk about how our growth strategy is playing out. And then finally, I’ll give you a sense of what to expect from Suncor through the rest of the year. So in the fourth quarter our production averaged just under 740,000 barrels a day, that’s a 27% increase versus the same quarter in 2015. And that through our annual production to 623,000 barrels a day, that’s an 8% annual production increase. And of course, that’s despite the fact is the second quarter Alberta forest fires reduced our 2016 total oil sands production by over 20 million barrels. At oil sands, we achieved record In Situ production in Q4, as a Firebag and MacKay River plants produced more than 238,000 barrels a day and our average In Situ cash costs came in at $10.75 per barrel. So that’s 8% lower than the same period in 2015. And we achieved those low operating cost even though, one of our biggest cost drivers natural gas prices increased by 27% quarter-over-quarter. Meanwhile our base plant operations continued to achieve strong reliability from both mining and upgrading as its following plant maintenance completed in October. Our upgraded production was up by 11% versus the similar quarter in 2015, as we achieved almost 93% utilization for the quarter. And we continue to take cost out of the business is our quarterly mining and upgrading cash cost both significantly defined versus Q4 2015. Our blended oil sands operations cash cost for the quarter were just under $25 per barrel bringing our average cost for the year down to $26.50 per barrel. That’s a reduction of 11% for the quarter and 5% for the full year. And again that was accomplished like the significant impact of the forest fires on the second quarter production and it did sharply increase our per unit cash costs. And of course those cash cost and I often that remind us, so this – those numbers are all measured in Canadian dollars, so in U.S. dollars we’re comfortably below $20 per barrel at current exchange rate. Moving to E&P production for both the fourth quarter and the full year came in at 118,000 barrels per day, so substantially above our original guidance of 95,000 to 105,000 barrels a day. We saw continued strong production in Q4 from Buzzard and Golden Eagle at an average operation cost interestingly of just $7 per barrel. And an E&P Canada new wells at Hibernia, we saw production to over 60,000 barrels a day and lower operating costs there to under $10 per barrel. Turning to the downstream, our refineries continued to operate reliably with utilization rates for both the fourth quarter and the year as a whole hitting 93% and with that reliability comes efficiency. So the Q4 operating costs came in at $5.45 per barrel bringing the average operating costs up to just over $5, at $5.10 per barrel. And that’s matches a multi-year level for us. So I’m going to summarize that. I would say another strong quarter marked by safe reliable low cost operations across our assets in both the upstream and downstream and with very limited major turnaround activity plans for 2017, then confident that the strong performance will continue. But of course, we also recorded a very important addition more operations early in 2016 with the takeover of Canadian oil sands and the acquisition subsequently of the Murphy stake. So we reduced our overall ownership in Syncrude from 12% to 54%. And if I just go back year ago, you’ll remember may the number of observations about the Syncrude operations. I promised we would devote experienced personnel to work closely with the operating team there. That’s from Imperial, Exxon and from Syncrude to drive major performance improvements and realize a significant long-term added value for our shareholders. I also noted that the transaction was an excellent fit with our oil sands growth strategy and a prime example of our ability to create value to bring the oil price downturn in order to build an even stronger company. Now as it turned out the performance improvements materialized more quickly than we had planned for. In the fourth quarter, Suncor share of Syncrude production increased to just under 190,000 barrels per day, with cash costs of 30 to 55 per barrels, so that’s down 19% from the similar quarter in 2015. Bitumen conversion rates exceeded 100% of the nameplate capacity of 350,000 barrels per day during the quarter as the operations ran very reliably with minimal maintenance downtime. And I would note that we are now reporting utilization rates based on the amount of Bitumen process through the cokers rather than utilization rates on sales this was previously done. And we’ve done that just to give a clear indication of how the cokers themselves are operating, because we believe that’s important to focus on the coker to get the improved reliability we’re looking forward. We don’t want to just move out through tankage when we report our numbers. So for the year if we exclude quarter to when production was curtailed due to maintenance in the forest fires, Syncrude achieved average utilization rates of 97% and cash costs of just over $30 per barrel. In fact the third and fourth quarter represented the best six months of production, the Syncrude facility has ever achieved. At this point last year, we forecast immediate savings of about $25 million annually in reduced overhead. And as it turns out we actually captured more than twice that savings. And we generated $360 million of free cash flow from our increased stake at an average WTI price for the year of just $43.36 a barrel. So these strong results were achieved in a partial here as we didn’t close the Canadian oil sands and Murphy transactions till March and June respectively. And of course production was sharply curtailed in the second quarter due to planned maintenance in the forest fires. So I would just say it a little bit premature to expect this level of performance to continue on every quarter, but we do have an increase confidence that sustained utilization rates in excess of 90% and cash cost of $30 per barrel in that are very reasonable goals in the mid-term. Now as I talked about in November, same time as we’ve been working on improving the reliability and cost structure of the business. We’ve also been working with Syncrude and the other owners to drive near-term other operational improvements. We’ve also begun to plan for significant future value creation through changes in governance and support services as well as increased collaboration on operational front. In fact between the performance improvements, cost reductions and lease and asset development initiatives, we’ve identified potential opportunities with a net present value to Suncor of over $2 billion and that potential value is incremental to the original business case. So it’s fair to say that we’re extremely pleased with our increased working interest in Syncrude, the transactions we executed in 2016 are already generating very strong returns for our shareholders and proving to be a key part of our growth strategy. Now another part of our growth program is the Fort Hills project and once again we’ve made significant progress. 2016 drew to a close construction surpassed 76% complete in fact we’re nearer to 80% complete as we speak today. And we remain on track to achieve first oil by the end of this year. With all of the major equipment and materials now on site and field construction is moving ahead at pace. About 58% of the operations personnel have been hired and two of the six major projects there are already in the hands of the operators and being started up. So as we indicated on the Q3 call the project has encountered some cost pressures, which would push the gross Fort Hills project cost about 10% above the sanctioned single point estimate of $15.1 billion. We’ve also increased capacity of the plant by 8% as part of the detail design, which has helped us to maintain Suncor’s originally targeted capital intensity of approximately $84,000 per flowing barrel. And I do want to say quite clearly and of course, we expect to fully manage any increase in the project in the capital guidance that we gave that – at the back end of last year. The bulk of the cost challenge lies in the secondary extraction area, which employees Paraphinic Froth Treatment or as we call it PFT, and that partially upgrades the Fort Hills bitumen. And there have been a few contributing factors I would highlight here, there is a lot more details behind that, that we can talk to you about later, it’s an appetite for it. But what I would say first of all the final PFT design was completed after the project was sanctioned and we elected to incorporate additional investments to support our strong focus on reliability and process safety, and I have no doubt at those who payout as we ramp the project up and aim for relatively high utilization early on in the project. And secondly I would say well, the project overall was achieved higher than typical levels of construction productivity in the region. The inherent scale and complexity of secondary extraction combined with the impact of the forest fires and we’ve had a particularly harsh winter up there this year so far, resulted in slow level productivity than planned. We now moved into the detail start up planning and we’ve identified a number of very encouraging upside opportunities. As I mentioned we’ve been able to increase the nameplate capacity by 8% bringing Suncor share of capacity to just under 100,000 barrels per day and maintaining Suncor’s capital intensity, it actually slightly less than the $84,000 per flowing barrel that we forecast it sanctioned in 2013. And importantly as I said we will maintain our capital spending within the 2017 guidance range of $4.8 billion to $5.2 billion, so we will absorb that over spend. Additionally we are also working on a range of value adding initiatives that have the potential to advance initial operations of primary extraction and accelerate production ramp up improving reliability and further reducing costs. Now when I take detailed review, I often look at our experience and we benchmark versus other oil sands mining projects. And we have – in our view brought forward what would normally be considered some post up – post startup discretionary capital and we’ve done that in support of a safe reliable long-term low cost operation. And as we move into the final months of construction, I am encouraged by our progress and I’m getting increasingly confident that we’ll meet or exceed our original commitments in regards to capital intensity production and added value. Our third level of growth at Suncor is the Hebron project of Canada East Coast. And once again we are pleased with the progress being made. In the fourth quarter, significant milestone was reached as the integrated top side modules were towed out to the deepwater construction site and mated with the gravity-based structure. The project continues to track plan with first oil anticipated by year end followed by a three-year ramp up to full production rates, which for Suncor will be approximately 30,000 barrels per day. So if I were to summarize our existing operations are performing well and our growth projects are on track with Syncrude outperforming expectations and Fort Hills and Hebron on target to produce first oil by the end of this year. With lower levels of plant maintenance across Suncor’s operation and a full year of increased working interest in Syncrude, we expect production to increase by approximately 10% to 15% in 2017. At the same time, our capital spending is expected to decline by approximately $1 billion and we will continue to manage operating costs out of the system. With year-over-year average oil prices expected to rise where therefore well-positioned to significantly grow our earnings and generate strong free cash flow for our shareholders. And as a result of that I’m pleased to confirm that Suncor’s Board of Directors has approved a 10% increase in our quarterly dividend payment. And this means that 2017 will be the 15 consecutive year that Suncor’s dividend was increased. So that reinforces our commitment a competitive – very important to us a sustainable and growing dividend. It’s also I hope you can see indication of our confidence in our ability to continue to grow production and cash flow going forward and deliver that superior results for our shareholders. I’m sure in questions, we’ll also get to share buybacks and we are starting to plan for share buybacks later in the year as well. So to go into a little more depth on our financial performance, I’ll now pass over to Alister, our Chief Financial Officer.

Thanks, Steve. As we know the fourth quarter of 2016, I had fairly substantial volatility in crude spacing. We did see an average price of WTI that increased by $4.40 per barrel versus the third quarter. And as Steve talked about our operations continued to produce reliable – reliably. So therefore, we did post a very strong financials once again. Before I get into some of the details, I want to note that some of you may assume it seems as a naming convention. And that’s as a result of a recent Alberta Securities Commission recommendation and respect of non-GAAP financial metrics and specifically everyone known as cash flow from operations. We have renamed it funds from operations. And I just want to clarify for Suncor, unlike some other companies. There is no change in the calculation. It’s clearly a name change. So in the fourth quarter we generated $2.4 billion in funds from operations and $636 million in operating earnings. That brought our total funds from operations for the year to $6 billion and our operating earnings fell just $83 million shy of breakeven for the year and remind you, it was a year, which WTI averaged just $43.35, and the forest fires in Northern Alberta reduced their productions for the year by over 20 million barrels between Suncor and Syncrude operations. So that $6 billion of funds from operations for the year more than covered at the same in capital of $2.3 billion under dividends of $1.9 billion leaving over $1.8 billion of discretionary free cash flow, which we invested in growth projects. As Steve mentioned Syncrude delivered very strong funds from operations trying to record production and improved pricing, but I would certainly be remiss if I failed to underline the equally strong contribution from advancing business. Coming into 2016, we anticipated the downstream earnings and funds from operations declined by approximately 20%, 25% from the previous year. This was largely reduced our expectations of pure distillate demand as a results of a mild winter combined with sharply reduced drilling activity in the oil and gas sector. There was a turned out a benchmark cracks for 2016 fell by 70%. But Suncor’s downstream funds from operations were only reduced by 10%. They came in at $2.6 billion for the year including $722 million in the fourth quarter. And I think this demonstrates yet again the value of our integrated model and our structurally advantage refining and marketing network. During the fourth quarter, we maintained our focus on cost size and right across the company, as we continue to identify and an implement opportunities reduce both capital and operating expenses. On the capital front, we invested $1.4 billion in Q4 and that brought our total CapEx for year to $6 billion. That it represented a savings of more than $1 billion versus the midpoint of our original guidance. And it speaks to our commitment to exercise rigorous capital discipline and continue to live within our means. We’ve also been equally disciplined in managing operating costs. A year ago we set a goal reducing our operating expenses by $500 million versus the previous year. And I remind you that we had already taken $1 billion of costs in 2015. We exceed that aggressive goal by over 50% as of 2016 operating expenses came in approximately $850 million below 2015. These results are normalized came for the additional $1.4 billion in operating expense that we assumed in 2016 with the acquisition of the increase working interest in Syncrude. As we said before we estimate that approximately two-thirds of the savings are achieved a structural cost that are not expected to come back into the system a crude prices rise and the remaining costs we expect may or could come back over the next several years. Let’s turn to the balance sheet and it remains in a solid condition, we finish 2016 with approximately $3 billion in cash, net debt to cash flow of 2.4 times and the debt to capitalization of 28% with approximately $6.5 billion of unutilized lines of credit, we’ve ample liquidity particularly given the improving crude price environment. And of course it’s important to point out again the forest fires last May register operating cash flow by approximately $600 million, which had a negative impact in many of our financial metrics. As that impact rolled off in the second quarter of this year, we expect to see a significant improvement in those financial metrics calculated on a trailing 12 month basis. Our balance sheet will be bolster this year by approximately $2 billion of proceeds from the divestment of non-core assets, which is no larger complete with cash already received of approximately $1.5 billion. These divestments include the Petro-Canada lubricants business, Syncrude working interests in the Cedar Point wind facility, the expected sale of approximately 49% of the East Tank Farm and several smaller non-material transactions. When we announce the divestment program a year ago, we targeted $1 billion to $1.5 billion in proceeds. And I think the active results reflect very strong valuations for these non-core assets. So just to sum up our discipline financial strategy has served us well to the extended down turn in crude pricing and allowed us to take advantage on an attractive M&A environment to significantly strengthen and grow the company. With increasing production, decreasing capital spending, lower operating cost and oil prices moving higher than last year, Suncor stands poised to make a step change in cash flow on free cash flow generation. We feel confident that we’ve put the pieces in place, to deliver another year of outperformance in 2017 and the Suncor team is focused on continuing to generate a strong return for our shareholders. So with that back to Steve Douglas.

Thank you, Alister. And thank you, Steve. Just a few more notes before we go to the phones. LIFO-FIFO impact as we mentioned with an after-tax gain of $114 million in Q4 with crude prices rising. And on the year it was a $111 million gain as crude prices rose throughout the year. Stock-based compensation was $153 million charge in the fourth quarter and $335 million for the year. The impact of the change in the Canadian U.S. dollar, Canadian dollar strengthened in the fourth quarter as a result it was a $222 million after-tax gain. But on the year a $524 million charge. I’d reference easily our 2017 guidance. There are no changes to it; it is available on the website. But you will note on Page 23 of our updated Investor Relations deck, we have added sensitivity for the year to our 2017 guidance. And I’d note that $1 change in the price of Brent results in an annualized $205 million impact on our cash flow. And very notably the power of our integrated model is very evident and that our sensitivity to the light heavy differential is essentially neutral. And that is if the light heavy widens or narrows by $1 the impact on us on an annualized basis is just $2 million to cash flow. I would request as we go to the phones that we keep questions on a strategic level certainly the Investor Relations team and controllers will be available throughout the day to answer more detailed modelling. With that I’ll turn it back to Wayne to go to questions.

Thank you. We will now pick questions from the telephone lines. [Operator Instructions] Our first question is from Neil Mehta from Goldman Sachs. Please go ahead.

Good morning guys. Steve you keep this question up for us here, but following the dividend increase congrats on that. But, I want your thoughts on share repurchases and how you think about that as part of the capital allocation priority set in 2017?

Okay. Thanks Neil. And I did that slightly say – I mean – we’ll take the opportunity to do is just be a little bit repetitive from what I said in November. So capital discipline, I know everybody talks the capital discipline. I hope what you seeing is now we have demonstrated right the way across the potential ways we can allocate capital a rigor and discipline and willingness to look at what is in the shareholders best long-term interest. If I go through just quickly what the opportunities are organic growth is one of those and we are coming to the end of a size of substantial organic growth with Fort Hills and Hebron. And I don’t think I can be clearer than what I said in November. Mining investments are coming to an end not just for Suncor but for the industry I believe for a considerable period probably in excess of 10 years. So we look at the go forward economics of Fort Hills, when we look at the absolute economics of Fort Hills. Those are not projects we will be repeating in the foreseeable future some substantial things in the cycle would need to change. I didn’t look at the other opportunities, we have great reserves in Oil Sands and I look at in situ opportunities. Actually we’ve been looking at replication and new technology. And those are quite exciting in how those technological developments and the in situ cost from replication construct to come down. However, I want to be equally clear, we have no plans to be going ahead with major capital investment in either mining or in situ in the foreseeable future. We’ll come back next year and the year after and talk about how that technology is developing and how the cost of reduction opportunity around replication is progressing. But you should – as we’ve sick note with the 2017 CapEx. 2018 will be very similar, you’re going to see us substantially reduced the organic growth spending because we think that is coming – that this part of the cycle is coming to an end. Then I move on to the second where we can allocate capital and that’s merger and acquisitions. And I’ll just look at the other side of that quickly, which, of course, is divestments. We’re well ahead of where we expected to be inside of that quickly which of course is divestment. We’re well ahead of where we expected to be on disinvestments, but we’ve got $1.5 billion of the programming. We were targeting initially $1 billion to $1.5 billion and we’ve already got the next $500 million pencilled in as well. So we’re going to get to that $2 billion, $2 billion plus level on debt investments, so that is strong. On the mergers front, I hope you can see why we were so attracted to the opportunity around made in Oil Sands and Murphy. And you’ve seen us a supply discipline to very good projects there. But then I think I was relative unambiguous in our view the window is staring to close – it’s not completely closed yet, the spread is starting to move away from disciplined buyers not in their favour. So we have nothing of any materiality in the pipeline around mergers and acquisitions. We should then gets to your question really which is so what you do with it? If you – I’ve seen some of the models out there and we don’t disagree with them in terms of the potential free cash flow that’s generated. So the first part of that is you will see us increasing and this word is really important to us. You’ll see us sustainably increasing our divined. And so you’ve seen us go with this 10%, nearly 11% this time. And you’ll us continue to look at dividend broadly in line with the growth of the production of the company going forward. And I teed it up deliberately because we are already starting to look then. It’s depending on how the year unfolds some share buybacks later in the year. And so, you’ll see us sustainably increasing the dividend as we grow and you’ll see us opportunistically buying share buybacks and those two will be our priority through the next few years.

I appreciate that, Steve. My follow up question topic that’s been dominating a lot of the macro discussion that’s been around broader taxes and not only what it means for downstream, but also what it could potentially mean for Canada. Can you talk about the early scenario analysis that Suncor has run on this and how you see it could theoretically impact your business in its different form?

I mean it’s a tough question to answer, Neil. I will make few comments. Let me just firstly comment on back downs. I mean if you recall actually about this time last year, we were looking at the downstream and there were serious concerns about the demand profile going forward for refined products, serious concerns about the margins. And I think what we’ve been able to demonstrate this – and we’ve had multi-years of excellent downstream performance. And what we’ve been trying to highlight is that we have a very powerful integrated strategy, which means we are able to disproportionately take advantage of the market even when it – in the downturn, we still able to have a very good year like we did in 2016. So I think supply and demand works and we have had a long-term view that the demand for refined products had probably peaked on the continent and our plans were in the context. I would play with the current regime in the U.S. that may potentially reverse depending on what happens to general economic activity and the well being in number of citizens who are participating in the upside and therefore want to start travelling and consuming our products. So, I’m expecting a broadly similar year this year as we had last just generally and overall in terms of refining. On the boarder tax, gosh, that is such a difficult question to answer. What I would say and I will start in close to Suncor. Overall, I’m positive not negative. Now of course there is a risk and it’s a probability adjustment in that comment. First indications are very strong. There’s a lot of support for the oil and gas industry. There’s a lot of expertise in the government with Rex Tillerson as the Secretary of State, he is clearly saying that he believes oil and gas is an important part of the U.S. future. The secretary has great experience not just in the industry but with the Canadian Oil Sands. On his watch, significant investment came into the Oil Sands and he understood that – when you look at the long-term continental balance, Canadian Oil Sands are a vital part. And also go back to a few years ago when we shutdown the Voyageur project and one of our long-term reasons for doing that was we believed there was generally in the world of like sweet crude and particularly on the continent. But there was more of a shortage of heavy crude and that’s why we’re very comfortable to be producing a heavier barrel as we go forward and that demand is still there and the potential sources for that to make best use of the refinery stock in the U.S. or Canada, Mexico, Venezuela and some of the other heavy supply – heavy crude oil supplies around the world. So I see we’re still a critical part of that mix. I then look at the general signals and say the regime down there are going to probably reduce corporation taxes. They are probably going to be encouraging businesses in ways that we haven’t seen for a while. And the good recognition in Canada has been even by our NDP government here in Alberta and the Federal government have been an open realization that we have to stay competitive. And that we have to have a level playing field. And that was a vital component of the climate taxes or levies that we’ve been talking about, it’s a vital part of Alberta strategy and Canada strategy. So we got our own levels of government. Now advocate approving pipeline, advocating for the industry. So whilst it’s difficult to talk about a border tax because it could come or it may not come in all sorts of different ways. My view is that overall Canada is not at the top of the list for the U.S. in terms of the trade concerns. The trade, I think it’s a very healthy balance and a very healthy symbiotic relationship between Canada and the U.S. So I think the probability of a border taxes we’re currently thinking about it is very low. But even if it’s there, we are a – we do play on both sides of this. So we are unusually advantage. We have businesses in the U.S. and in Canada, so difficult to be very specific about it. We’re feeling that the probability is relatively low and we’re responding in a bit more details, if any details come out.

I appreciate it.

Thank you. The following question is from Roger Read from Wells Fargo. Please go ahead.

Yes, thank you and good morning.

Good morning, Roger.

I guess kind of along the lines of the cash flow and the share repurchase discussion, I was wondering how you think about the balance sheet competing with that as well. You’re not what I would describe is an over levered company, but you do have some debt maturities. Should we think about repay or refinances and other use of cash flow? Or should we really think about share repos and then higher dividends as the more likely paths?

Okay, I mean, I’ll give you a top-line answer and then Alister will chip in. So as I say you will see us of course I’m not accountant, so I can be really critical of how healthy a balance sheet these guys like to see. I mean think we have a very healthy balance sheet. We’re tough. We do a lot of our ratios on trailing numbers. And so 2016 is a relatively tough test for us in terms of cash because of the special events that happened there. So but you will see capital discipline around the balance sheet. You’ll see us – I don’t think its repair, I think it’s improved. I think the overall plan when we came into this last cycle and into the major capital was we sort of prepaid for lots of things. We bought back $5 billion of our own stock. We’ve had some very, very low debt ratios. And that was sort of de-risking the potential cycle that was coming, but in particular Fort Hills and Hebron. So you’ll see us continue I mean Alister took the debt down in that high cost Syncrude debt – Canadian Oil Sands debt that we took on. So you’ll see us working on – Alister talk about that. And then those comments I made on, you’ll see dividend increase share buyback. And you know we think if we take a combination of the analyst nabs on our own nabs; we’ve got considerable room to buyback our own stock, so you will see us moving into that.

Yes, the only comment I would make, Roger, emphasize – I actually view our balance sheet as strong today. You will see us through the cycle take some major steps to strength it even further as Steve mentioned. We already refinance some of the debt as June of next year. So when it comes due, you’ll see us pay some of that down as part of that major strengthening going forward.

Okay, thanks. And then back to Syncrude obviously a lot of potential here. Any idea when you might give us some very specific sort of what you’re setting internally for targets. Where you think you can really go with this say over a three year period putting a much more aggressive management plan in place? Or I say aggressive management, but a very focused management team on this asset?

Yes, I mean, I’ll make a few comments. I will stop just short of talking about specific targets and specific numbers. And my reason for that is very simple. We have several owners. We have a major organization up there, which by the way I want the overall message to be one of respect and compliments to. They’ve done a tremendous job. The Syncrude workforce, the leadership under Mark Ward, the Chief Executive up there, they have made substantial and visible progress and we’re proud owners of Syncrude. But if you look you can tell by – our general policy in Suncor is to understate and over deliver and that degree of conservatism we think is appropriate. We’ve tried to highlight the size and scale of these benefits. And I’ll be perfectly frank with you. If that’s all we achieve, I won’t be completely happy. I think there’s considerably more available there. I am tremendously encouraged by the group of owners. We had an owners meeting a few weeks ago. And we have unanimous support of all of the owners to accelerate ahead with the program we’re backed to go into. The simple way I would characterize it. I’ll give you just a few examples. Let me give you one on – so I talked last time about the fact that Syncrude has a very generous slightly overcapacity in terms of hydrotreating. We can find ways of filling that up. So it will make money for all involved in that. We found another one because it’s one of the secrets for Suncor’s reliability has been what I call multiple parallel paths. So we have two mines. We have two in situ plant any one of those doesn’t affect the operations of our upgraded and hydrotreated. We think we can bring some of that flexibility quite quickly to Syncrude. So we are looking at a fast way off. They have some maintenance coming up in the next six months and we’re looking at how we can put on by river in situ bitumen in there to keep the backend of the plant operating whilst work is being done on the front end. So those are exactly the sort of connections I was talking about when I said we’re next door neighbours, we can give some of our redundancy and duplication and share that with Syncrude. I think we will be able to do that for this next period. So that will be one. I’ll give you completely different example. Suncor in the Oil Sands region have been for a number of our major turnarounds are trailing what we call digital turnarounds. So every individual is working their contractor and employee where is a tag. We are able to monitor where they are primarily for safety purposes. But it has a tremendous benefit in terms of productivity. So the next turnaround in Syncrude is going to be digital and we’re going to do the same thing, so some great synergies there. And then what I would I say is and Mark Ward will be leading the activity with some close engagements from Imperial and ourselves. We’ll be looking at where we duplicate services and cost. So we have a great opportunity to integrate some of our services and the governance. And you will see Syncrude move in the direction of an operating business rather than the completely standalone corporate entity, which was wholly appropriate in the past probably is less appropriate as we go forward. And so I think you’ll see us make progress in that direction. And you know Mark Ward is going to be working closely with us leading that. So, overall, I’m very encouraged by the speed, which we have been able to move. Our ambitions are still high and I’m encouraged with the quality and pace that the team are moving at.

Okay, great. Thank you.

Thank you. The following question is from Guy Baber from Simmons. Please go ahead.

Good morning, everybody. I wanted to follow-up on the buyback discussion a little bit more, but Steve you mentioned seeing how a year develops before making a decision. So the questions are one what are the signals you need to see to launch the buyback program and then two how do you think about determining the appropriate size of that program, it would appear that it could be pretty significant as you are already generating free cash flow at current levels, you have $2 billion in assets sales coming in, CapEx should head lower in 2018, so how do you think about the size? And will that be a quarter-to-quarter decision or do you take a longer term view in formulating that program? And then I have a follow-up.

Okay again I’ll give a general overlay and then you’ll get a much better quality answer from Alister. I mean first of all remember so – may be I should just up one notch to what I said. We are looking at I think, share buyback program. The execution of that is likely to be later in the year and that simply because of if you look at the detail of the finances of the company, we got some priorities there, we’re looking at some of the higher cost of debt becuase we’ve been working hard to get our weighted average cost of capital down and that’s been very successful. You’ll see us do a little more of that. One thing to say there is a little bit of seasonality in our business so not every quarter will be identical. I can say the first quarter has started just where the fourth quarter finished. So far the quality of the operations is very high. So we’re seeing on the cash generation side the same sort of numbers are being achieved so far. But it’s really just working through that you should expect a share buyback program to start later this year. I think and again this is just a general comment, it will – the execution of it is managed on a quarter or six months period. But that’s not how – we will look at a much bigger program over a period of time and we will just take a capital disciplined approach. So our last program was – it was literally programmed in terms of buying. And what you’ll see us do is a nice program which we will execute over an extended time. So we haven’t telegraphed exactly when we’re going to do it, but you’ll see us do over the next couple of years. I don’t know if you would add to that Alister.

No, I think that was a very quality thus far.

That’s very helpful. And then my follow-up, I wanted to talk a little bit more about the cash flow strength over the last two quarters and you said 2017 is starting up on the right foot. But on Slide 6, of your deck I think you show its $52 a barrel oil about $8 billion of cash flow for 2017. And if we think about the last two quarters, you are running at a rate well above that level despite WTI only averaging $47. Obviously Syncrude has been exceptionally strong. But it still seems to me that that 2017 cash flow forecast has some conservatism built in. Do you disagree with that? Is there anything specific you’re risking as we think about 2017 cash flow? Just trying to make sure that we understand all the drivers of cash flow is progressive this year.

Okay I mean now I’d say two things in particular of being a fall in wind, and may be I’ll add a third one in there. We have been working very hard over an extended period on reducing our costs. And that’s going very well, there’s still more to come. It gets tougher as we go forward. And as we go one or two years ahead and this cycle turns, then we’ve got some programs in place to keep real downward pressure on that cost, so we don’t find ourself retracing a pattern that’s been trodden in the past. So costs have gone extremely well you see that continue. The other thing is we’ve been producing above guidance for the period. And we do have albeit much left then it’s not a big year on maintenance, we do have maintenance this year. So we have some maintenance in the upstream, and some in conventional upstream and some maintenance in buy-back. So you will some effect from planned maintenance. So you can’t just take a clean quarter and multiply it by four. But we work closely with the models – we don’t forecast in detail cash flow but I don’t significantly disagree with the model X, Y you’ve seen 10% plus dividend increase and the stock here quite clearly back share buybacks because there is a significant free cash flow coming and I’ll Alister to give few comments as well.

Yes. I just see those just going to emphasize you pick up in your common run seasonality so I just wanted to make sure everybody understand the Q1 and Q2 are always our seasonal low quarter for cash flow and you saw that last year. Typically we’ll pay our stock compensation and we have some other one-time payments that I was going to meet in the first quarter. And then Steve just talked about our maintenance quarter is always Q2. So you’ll see then as lower compared to the last couple of quarters and then in Q3 and Q4 will pick up again on cash flow. Just want to make sure everybody understand the seasonal nature of our business.

Thank you.

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

Yes. Thanks, Good morning. Steve, I know we’ve kind of beaten Syncrude gas but one thing I did want to ask is was there anything unique that occurred in the fourth quarter i.e. additional or what have you that would have led to the high rate of utilization that you are able to achieve?

Not particularly. Now I mean it was generally and broadly a high-quality operation. So I mean at sometime it’s a little bit counter-intuitive around the mines, Greg that they actually operate as long as it's not when you get down to minus 40 or 50 it can be brutally tough. But generally in the winter they operate well because the roads are hard the equipment is designed for those cultures so often refine the mines operate best in the shoulder seasons. But generally it was quality operation throughout Syncrude the mine operated well. The delayed cokers operated well, hydrotreating operated pretty good. So it was an overall quality operation and as I said that’s the result of a number of years the efforts by the Syncrude team have been working on reliability and costs. And we put our shoulder to the wheel and helped what we could as well.

Okay. That’s helpful. Now you mentioned that you are going to MacKay as a backup for the maintenance period but is that a part of border initiative than to increase the redundancy of feedstocks. In other words is MacKay or even potentially Fort Hills likely to become a backup for Syncrude on a go-forward basis?

I would say both of those are being studied. This is a once-off opportunity that we’re looking at and we are probably put it in by roads, not even put a pipeline into this one, where they have some of the front-end of their plant shutting down. And they would have to shut some of the backend down. We’re able to help mitigate that by getting bitumen in. But it’s a forerunner. It’s exactly my best view is that from what I’m looking at, you’ll see some bitumen supply increased as you see. So the ability to get bitumen in both directions by the way, because we may well benefit from that on occasions when the back-end of Syncrude is shutdown and they are producing bitumen. So that could be a reciprocal agreement there. I think you will generally see there and I think you’ll see about some of these mid-streams as well. Suncor is generally short of – conscious business decision we have short of hydrotreating because we produced a complete mix of product. Syncrude is long with hydrotreating so there’s an opportunity there. So I think we’ll always be slightly behind where you would like us to be in defining it. Because of the nature of the partnership these are commercial arrangements which have to be before I can speak about here in with specificity and detail, they have to be approved and agreed by the partners. So it's exactly, what you are indicating in your question.

Okay. And then that the 90%, Steve go ahead.

No, we’ll finish up there go ahead.

I was going to say, so the 90% utilization you are talking about in simple terms I’m assuming that would still beyond 350,000 barrels a day of calendar stream capacity on synthetic. That would part of it and the another thing is, it doesn’t sound like there is lot of capital, you need to expend to achieve that. This is more about consistency and best practices is that right?

Absolutely right, remember Greg, how difficult it was first of all to explain, secondly to inspire any confidence when we talked about the 100,000 barrels a day of increased production, we were going get in Suncor’s business because of its lots of little things, that you will the old piece of pipe that has to go in but you characterized it really absolutely right. It will be relative, very low cost, it will be easy to implement and you’ll probably see the results before we’ll talk a lot about it. The other thing I would say I am so encouraged by how well they’ve done. Like Suncor, there is nothing magic about 350. So you might see just like Firebag, we’ve rated it twice. We will look for the next opportunity and if there’s investment we’ll talk about that but it maybe just connectivity.

Okay all right and I just want to switch over quickly to Fort Hills, so did the redesign on the secondary extraction and take into account lessons learned from other projects or I guess project and is that what the main driver of the capacity, is that main driver of the capacity increase?

So, let me just remember when we improved the project, I never wanted to go too much into that. The project was $15.1 billion plus 16%, was what we approved. And the reason it was a plus 16% was because of PFT wasn’t fully designed at that stage, because of the sequencing of the project. So some of it, is just the details designed in our emphasis on reliability and safety. So some of the it was the first part of design, it was an excellent period to execute major projects. So we took the opportunity to put it in, sparing of major pieces at the low point in the market, that would become, so I actually look at half of those projects, is additional return on investment projects. So, and then I will answer your question specifically, we were very aggressive somebody much smarter than us once said, if you’re really smart you learn from your mistakes, if you are really, really smart you learn from other people. And what we did was, we bench marked to all the PST examples that have been executed. We’ve bench marked to the latest mines that have been built. And we looked and we looked at their weak spots and we’ve invested our way through that, from the beginning. So I don’t want to talk about specific competitors; that wouldn’t be fair. But we’ve looked what is limited other mining operations and we’ve built in to our plan not only have we built in to be quite frank, we have got some of the best employees from those organizations working with us as well, to help us with that. We’ve also done the same with the start-up team. And so we’ve brought in experience deliberately from our competitors, because that experience exists in the industry. So that’s why I am very confident about Fort Hills. Fort Hills will come up I believe faster than people anticipate and it will stay up at reliable levels because we have duplicated equipment where we need to. For example, take PST we have built three parallel trains so the any one train doesn’t have a major impact. My honest view on the front end of Fort Hills is it's too early to build in any economics or any advantage for it. The front end of the plant is oversized. And that’s deliberate, because you don’t want to be, you want to keep your PST’s all of the time because that’s where your capital intensity is. So we have some other opportunities around the front-end, so you now we’ve taken advantage of upgrading the main plate capacity of the unit to 194. I will be very surprised if in three or four years time we are not having a debate about first debottleneck for that the plant, because we know there is significantly less than full cost debottleneck on that plant because you can’t build a plant that size and perfectly match all the pieces of it.

Okay and then just on the OpEx you guys I think have been $22 to $23 in terms of these original design with these changes are those still the numbers that you would stick with or are they going to look better as well.

Sorry, it’s Steve Douglas here, Greg, we haven’t moved away from the sanctioned numbers, so for the time being $20 to $24 is the cash cost that we’re still sticking to and you should model.

Okay.

With that we are overtime, I know we started a minute late but we’ve run the full hour and then some. So thank you to everyone. I know there is a considerable line-up still on the line and we are available, so we’ll get to the rest of the callers throughout the day. Thanks so much back to you operator.

Thank you that concludes today’s conference call please disconnect your lines at this time and we thank you for your participation.