Suncor Energy Inc. (SU) Q1 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Suncor's first quarter 2017 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.

Thanks, Chris, and good morning, everyone. Welcome to the Suncor Energy's first quarter earnings call. I have with me here in Calgary Steve Williams, our President and Chief Executive Officer; along with Alister Cowan, Executive Vice President and Chief Financial Officer. I'd ask you to note that today's comments contain forward-looking information and actual results may differ materially from the expected results because of various risk factors and assumptions and those are described in our Q1 earnings release as well as our current AIF. And these are both available on SEDAR, EDGAR and our website, suncor.com. There are certain financial measures, we referred to in these comments are not prescribed by Canadian GAAP and for a description of these, please see our first quarter 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. What a difference a year makes. In the first quarter of 2016, crude prices averaged less than US$35 a barrel, and I think the term we've used lower for longer wasn't common just then. And many in the industry were fighting to survive, but since that time crude prices have risen by well over 50% and they're ranked US$50 per barrel. Investment has begun to ramp backup and there is considerably more optimism across the industry. However, ones that hasn't changed in the past year is Suncor's focus on operational excellence and capital discipline. With again our efforts to improve reliability, drive down operating costs and lifted on means long before oil prices failed, and we intend to continue those efforts regardless of the business entirely going forward. In the first quarter of this year, we continued to make significant progress, our oil sands operations had one of the best quarters ever, mining in situ and upgrading all ran well over 90% utilization rates and costs continue to decline. Our oil sands costs were just C$22 to C$55 per barrel and remember that's Canadian dollar. So, in U.S. dollars terms less than $17 per barrel. So, our cash costs were 7% lower than the second quarter of last year and this was achieved while absorbing a 46% increase in natural gas costs over the year. In Syncrude, we were disappointed to have operations interrupted by an unplanned ice age in mid-March. In the last quarterly call, I cautioned that it would be premature to expect the elevated level of performance, we'd experienced at Syncrude to continue over the coming quarters. We know that the journey to operational excellence is never a simple straight line and that's why we set 2020 as the target year to achieve sustainable utilization rates of 90% and cash costs of $30 per barrel oil left. And I'm still convinced that these goals were achievable and that Syncrude is on the path to operational excellence. In fact, we're moving forward at pace on the Syncrude performance improvement initiatives and we're actually seeing more synergy opportunities today than when we increased our working interest about a year ago. Now turning to E&P, I'm particularly pleased with the performance of our offshore projects, reliable operations, reservoir optimization initiatives, and new wells coming on line resulted in production significantly above forecast for the first quarter and lifting costs were less than $5 per barrel in the North Sea and less than $10 per barrel on the East Coast of Canada. Because of these strong performances because of this such strong performance we've been able to raise our E&P production guidance, which offsets the reduced production at Syncrude. The net result is no change to our overall production guidance for the year. In the downstream, refining and marketing business turned in another excellent quarter, despite slightly weaker gasoline demand, our refineries ran at 93% and took advantage of improved distiller demand and stronger wholesale and retail [ph] margins. Our integrated model ensures the consistent cash flow generation, regardless of crude price differentials. Approximately 85% of our Bitumen production is either upgraded our base plan or Syncrude or it is processed through our refineries. And this makes us very resilient to light-heavy differentials. Widening or narrowing of the price differential has almost no impact on our cash flow, as we capture the benefits of the full value change. And of course, that cash flow has led the industry on a per barrel basis for the past several years. With the first quarter continuing the trend of reliable low cost and highly cash generative operations. Looking forward, the Syncrude outage combined with planned maintenance, firebag and the number two upgrader will reduce production in the second quarter. We're sufficiently competent in the performance of our upstream assets that would maintain our overall production guidance for the year. And we fully expect to be within the original forecasted range of 680,000 to 720,000 barrels per day for 2017. We achieved the midpoint of guidance this year that will represent the year-over-year increase in production for more than 12%. The Fort Hills and Hebron expected to achieve first oil by year-end and ramp up through 2018, we anticipate production growth of over 10% again next year. Speaking of Fort Hills and Hebron, both projects are tracking according to plan. At Fort Hills, construction reached 83% complete as of the end of the first quarter, and 26% of the plant already in the hands of operations, including the mine oil preparation, hydro transport and primary extraction. With peak construction activity now safely behind us, we are on track to meet the budget and schedule that we laid out on our past call. At Hebron, the platform is now complete and are waiting for an appropriate weather window to be turned out to the field location and begin splitting [ph] activities. The project remains on track to produce first oil by the year end. So, our major growth projects are rapidly moving towards completion and we will soon start to see the benefits of continuing - up through the downturn in oil prices. With oil prices gradually recovering, we're recently seeing a couple of large transactions with continued consolidation of oil sand that of course Suncor began over a year ago. This is a development that we foresaw several years ago, when we first - and I'm talking about the concept of natural oil sands developer. We've recognized that resource could be more efficiently and effectively developed by companies whose core business was oil sands. We still have the potential to better leverage infrastructure, reduced costs and improve productivity. So, we view this as a very positive for the industry, the province and the country. The oil sands business needs focused operators with strong balance sheets and deep expertise. And we expect the transition to more concentrated oil sands leaders to enable regional images [ph] and technology development that will drive the sector forward and its global competitiveness in decades to come. We continue to evaluate opportunities for further consolidation in the oil sands, but we set a very high bar in terms of our returns. And given our portfolio, development opportunities and the fact that we now hold a majority working interest in both Fort Hills and Syncrude, we don't feel any pressure to pull the trigger on another oil sands acquisition. Our next key development opportunity in the oil sands is in situ replication. We are very pleased to learn in March, that the Meadow Creek East project representing the first two phases in Suncor's in situ replication program have received regulatory approval. This is the first large scale approval piloted and issued under the Alberta Energy Regulators Emerging Integrated Decision Approach. And it is Suncor's first screen in situ project approved since firebag in 2001. So, this full lifecycle approval of Meadow Creek in composites what previously would have been hundreds of individual approvals and over a decade long process. So, this is important foundation for Suncor's organic growth program that could see us at approximately 400,000 barrels a day of in situ production through 2020. Finally, I wanted to take a minute to acknowledge another recent Suncor announcement. This week, we initiated a $2 billion share buyback program. As I mentioned on the last call, with our capital spending expected to decline approximately a $1 billion last year, and average oil prices trending higher at year-over-year, we are well-positioned to significantly grow our earnings and generate strong free cash flow for our shareholders. We believe that share buybacks are an efficient means of returning a portion of that free cash back to the shareholders, particularly at current share price levels. So, when combined with our recent 10% dividend increase, I hope this demonstrates our commitment to increasing shareholder returns as production and free cash flow grow over the next few years. So, go into a little more detail on that free cash flow and the rest of our financial performance, I'll hand over to our Chief Financial Officer, Alister Cowan.

Thanks, Steve. In the first quarter, our benchmark recruited prices was more than US$50 per barrel for the first time since mid-2015. We have realized improved pricing across those systems and we are able to pull strong financials once again. In the first quarter, we generated just over $2 billion in funds from operations and $812 million in operating earnings. The funds for the numbers is particularly notable given the Tier I cash flow is reduced by approximately $400 million due to the annual share-based compensation premiums and the seasonality of statutory benefit premiums. Our funds from operations for the quarter more than covered our total capital spending of $1.4 billion and our dividends of $534 million. Now even with the price is recovering slightly, we maintained a rigorous focus and cost management across the company. Our total operating selling and general expenses declined by 2% versus the first quarter of 2016, at the same time with our total production increased by almost 5%, this reflects our continued work to sustainably take out of the entire business. As Steve mentioned earlier, our blended oil sands cash costs for $22.55 per barrel and this continues the trend that has seen us reduced oil sands cash costs by over 40% in the past five years. In the offshore business, total expenses were down over 30% quarter-over-quarter. Thanks to lower logistics trough, improved workforce productivity and the general focus in cost management. When combining those production, we achieved operating costs $9.75 per barrel on the East Coast and just $3.75 per barrel in the North Sea. On the capital front, we invested $1.2 billion in Q1, putting us right on track to meet our guidance for the year of $4.8 million to $5.2 million. And of course, as Steve said, that represents a reduction of approximately $1 billion from last year's capital spend. Our strong balance sheet was the strategic asset during the downturn and it remains equally important as the prices recover. We finished the first quarter with approximately $3.6 billion in cash and net debt to cash flow of 1.8 times and debt to capitalization of 27%. With approximately $7 billion of unutilized lines of credit, we have ample liquidity, particularly given the improving crude price environment. This past week, we expect to further strengthen the balance sheet through the early redemption of US$1.25 billion in long term debt, and this will reduce our total debt to capitalization to the middle of our target range. With even stronger balance sheet and free cash flow being generated, I am very comfortable launching into share buybacks again in addition to the February dividend increase of 10% per share. As subject to market conditions, we expect to execute aggressively on the buyback program in the months ahead, and keeping with our commitment to return cash to shareholders. Looking forward, we should expect no surprises in Suncor. We will continue to invest prudently to grow our crude business. We will continue to reduce costs throughout the entire enterprise to show that our business is sustainable and recover our dividend at a US$40 per barrel oil price. We will continue to treat the balance sheet as a strategic asset that enables us to take advantage of opportunities, as they arise, and we will continue to focus on returning and increasing amount of cash to our shareholders as our production and cash flow grow. With that, I'll pass it back to Steve Douglas.

Well, thank you Alister and Steve. Just a couple of notes before we open the mic. Crude rose modestly in the first quarter versus the fourth quarter of 2016, so we did have a fateful gain after tax of $43 million. Stock-based compensation was a net after tax expense of $72 million and with a modestly rising Canadian dollar in the first quarter, we have an after tax gain of $103 million from the impact of exchange rates with the U.S. - due to strong performance and our continued strong outlook, our E&P production range has been - offset the decrease of 15,000 barrels per day in the Syncrude production range as a results of the incident at Syncrude in the second quarter - or in the first quarter rather. Syncrude cash cost, as a result of that have also been adjusted, the new range is $36 to $39 per barrel. And the royalty rates have been increased to 3% to 6% reflecting a move from growth to net royalty calculation. With that, I'll turn it back to the operator for questions.

[Operator Instructions] And our first question is from Benny Wong from Morgan Stanley. Your line is now open.

Good morning. Thanks, guys. Just looking at your overall op cost at Syncrude, it seems to - expect to be at a relatively flat level on absolute basis despite the outage. Is this because repairs are not expected to cost very much or is there something that has been done there to kind of mitigate any additional repair cost?

Thanks, Benny, I mean few things there. I mean overall, we have a program at Syncrude similar to Suncor in terms of the constantly working on improving reliability reducing cost. So, we're very comfortable that that continues. In terms of the repair cost at Syncrude, there will be relatively minimum net to Suncor because of the cut by insurance. So, it's a very small number as you've noted.

Understood. And are there any lessons learned from this Syncrude outage, you'd be able to share and going forward, what options or tools might be available to you guys in another situation like this that you might start realizing as you're looking to synergies, you're talking about?

Yes, two to three things, I would say. First in terms of the event itself, I think I've certainly had a number of questions about, hey Steve was this because you guys were running this plat card. And I can say, completely unambiguously absolutely no connection. This incident was not on one of the upgraders, it was one that's on the net-net for hydrotreater. And it was what we call a freeze full split in a six-inch pipeline there where during the winter where the peace dissolve. This particular line was a recycle line that is not used very often. Frozen and so it stays okay then during the code of the winter. As the warning season comes then the ice plug that's been in there which has caused some damage, relaxed thaws and then you get the leak occur. So, this is disconnected from the way we've been operating the plant, which is a small piece of good news in there. So, this is one-off event if we don't expect to see translate into future on reliability. I think your question that was more around how can we order things we can do in terms of connectivity, how we can operate it. Probably just worth make sense a few things that I think it's not being very clear. The first one is, we never shut Syncrude down. Actually, kept one of the upgraders operating and it still operating now. We've been operating at minimum, it makes the startup of that train much easier as we put the hydrotreaters on to the back of it. So, we're in a good position for the startup, I expect the first train to be up within the next week, and - happening to do is start the hydrotreaters up and then link them up to the upgrader. So, you can expect just to see through the coming week throughout the first unit up. And then the second one, which we took the opportunity to go into turnaround on, we'll see the other upgraders come up and steadily ramp up through June as we come back from turnaround. So, the situation is a little bit different than I think has been widely perceived. And one of the reasons for that was because for the first time, we actually took intermediate products and put them into other refineries and other upgraders. So, what that meant was, we were able to keep that. We would have fit tank tops on Syncrude had we not done that. But I think in differently for the first time in its 40 years, we were able to export those intermediate materials. That's exactly the synergy we've been talking about in the past. In this case, we've been able to do it with two intermediate products and that's the stream and the gas hole stream. Now, if I go to the other question, I've been getting is, so how does this relate to the whole improvement program for Syncrude. It's been moving at pace. So, we have complete alignment between the owners now. Suncor Imperial and the minority owners to move ahead with an accelerated program to look at all of the synergy opportunities. That project is going very well. We will come out with more detail on each of them, but we have 70 pieces of work projects, which are part of that overall initiative. We're excited by it, I mean what it's telling us is the synergies are bigger than we expected and we'll be moving ahead little bit faster than we planned. So, things are looking good in terms of the overall connectivity and synergies.

That's great color, Steve. And just as my final question, as we're looking at Fort Hills as a project completion later this year. How do you guys think about marketing the product? Do you already have customers in place that are willing to take those barrels and any risk that it will take some time for those barrels to be accepted. So, just wondering if the [indiscernible] treatment makes any difference in terms of how the refiners precede the product.

Well, I mean a few comments. First of all, just generally in terms of Suncor's growth, the industry growth, I mean clearly, our strategy was to work on the climate change with levels of government to get market access, clearly planned and supported. And that program has been very successfully by working in a different way with our regulators, with our levels of government and with the NGOs. We now have three pipelines, we have Keystone, we have Line 3 and the Transmountain pipeline. So, market access much better position, and you know Fort Hills per se wasn't depending on it, but the general industry health and growth was - so, I'm pleased with that progress which is a big step forward. In terms of the product itself. It is a product, which in ourselves a premium. So, it's a high-quality product, we have been working with the market and we're comfortable that we have an issue with market to get.

Great. Thanks, guys.

And our next question Guy Baber from Simmons and Company. Your line is now open.

Thanks. Good morning, everybody. Sticking with the Syncrude theme here a little bit. Have you been able to go back and quantify what you think the opportunity cost with respect to loss cash flow associated with the downtime from Syncrude relative to plan entering the year?

Well, I mean of course, I mean we are in the process, it's a little bit premature to come out with a number, but we'll be clear as we start to weigh in the event up. But of course, for Suncor, we haven't changed our guidance. So, the actual impact has been fairly well mitigated, clearly, we prefer not to happen, but if you look at the fact, we've been able to keep one of the upgraders going to a lot of that product is in tankage and we'll eventually be hydrotreating and come to market. If you look at the fact, we were able to take the turnaround, which was planned turnaround anyway, though we were able to mitigate it with that. And we've got a E&P business, which has done extremely well. So, from a Suncor cash flow point of view, some more product from E&P less from Syncrude, slightly high across at the Syncrude plant. But overall, we've been able to largely mitigate that impact through the steps we've taken. Now, we use the opportunity cost of course is the driving force to make sure that the reliability of that plant has improved. And so, we'll be quantifying that and using it to focus our priorities on making sure that it can't happen again.

Great. That's helpful. And then can you talk about - I wanted to talk about the buyback a little bit. Can you talk about the thought process behind the decision to size the buyback at $2 billion over the next 12 months? How did you come to that decision? And then I would think, it appears pretty obvious that the free cash generation is only going to improve as we move through this year and into 2018 as production grows, as CapEx continues to decline or declines post completion of these projects. At what point, do you all have to consider extending or even upsizing that program so just some clarity some color with respect to how you're thinking about that would be helpful.

Okay, I mean and I'll do it sort of helicopter level and then if Alister wants to jump in, he will. I mean first of all, what you've seen over the last five, eight years now is a rigorous capital discipline. So, we look dispassionately at the uses of our shareholder's capital and we look at the organic opportunities, we look at the inorganic opportunities and we look at referring it through dividend and share buyback. You've seen us continue to move dividends as we've grown the production of the company and you will see that continue into the future. You've seen us we're finishing two of the biggest projects in Canadian industry, are coming to fruition in this next year. So, you've seen us where appropriate start and then finish major organic capital investments. And you've seen us, we started this consolidation of the industry a year ago with Canadian oil sands in Murphy, you've seen us prepare to the - deals to be of very high value, you'll see us do deals there. So, you've seen that we're open to all of the potential uses of capital. Our view at the moment is given the way we have restructured the company, given the assets we now have in the company, and when we look at those three opportunities available to us. Organic investment, we've got a long list of excellent projects, and we will look to trigger those. I don't see those being triggered in the next year or two, I think we're further back in terms of triggering the next generation of in situ replication in the early - for the early 2020, but you know there is considerable investment for 400,000 barrels a day plus with capacity there. We've got some minor, I'll call it minor returns of investment, but significant in terms of our potential production opportunities to debottleneck with the new assets that come on. So, with Fort Hills and with Syncrude in our portfolio, we've got some good low cost high return projects there, so that's great. We've looked at the M&A opportunity, we've got the first mover advantage we believe with the Syncrude deal. I said I believe the window was shutting and for Suncor, because of our rigorous focus on value, that window was and is starting to close and we're seeing that, the success it builds, our good deals but they are, they are more expensive up in the Canadian oil sands deal. So, given that world in our view of the future, we view that having those dividend, our next opportunity is share buybacks and these share prices, we are very happy with that investment. So, Alister used a word and it was carefully picked, it's a relatively aggressive share buyback. We intend to - everything else being equal, we intend to go ahead and execute the share buyback in the 12 months.

Yes, I would just be going to emphasize to everybody on the call, count me as a second, we will be in the market buying our stock back, and this is not just an announcement, it's an actual intent to buy those back.

Very helpful. Thank you, guys very much and congrats on the quarter.

Thank you.

And our next question comes from Neil Mehta from Goldman Sachs. Your line is now open.

Hey, guys. Good morning. Quick question for you on the E&P segment, clearly outperforming our expectations and the guidance that just set out couple months ago, can you talk about where the source of surprise has been at the E&P business?

Yeah, thanks Neil. I mean it's a fairly simple answer, there is something, if you think of the new wells we have been drilling at Hibernia, budget has come a bit turnaround operating very well. So, it's real fundamentals in the business. So, it's good, because it's not - it's a very good indicator for the future as well, not necessarily and exactly these levels, but very encouraging. The selective investments we made on the new wells has gone well at Hibernia, turnaround has gone extremely well at Buzzard and so it's very encouraging trend.

That's great. And as a follow-up on the buyback question. Often energy companies announced large share buyback authorizations but in terms of execution as you will suggest the sector test of offshore the factorizations going to be clear, the $2 billion numbers not just an authorization unit in your view, but at - let's call it a $50 oil price club flat to occur where we are, that's your expectation that you execute this program, so as an integrity of the authorization over that time?

I mean not only would I say, yes, you've got it right there. But just judges by our track record, we built $5 billion of our stock back, through our last sequence of programs. So, when we commit to them, I have to say something notwithstanding something else that we're not foreseeing at the moment, but our plan is to execute on that program. And frankly, I saw a trade in way the Canadian oil sands acquisition is, we'd effectively pre-bought it by buying our stock back through the previous three years.

And last question for me is on refining. Just Steve, where do you think we are in terms of the Canadian refining cycle, so it's tricky for us to get good pricing views in Canada but your business held in better than number of the merchant refiners recover here in the U.S. last year, you just talk about that outlook in 2017.

Again, I would say, you are right. I mean the first of all let me come back to the general mix of upstream and downstream. We are in a pretty good position, the net effect of the Syncrude increase only shipped was if you look at some the combination of the balance of upgrading and refining to our upstream we are in exactly the stopped we like to be, which makes us almost in different to the differentials the others are subject to. So, we like the position we're in, we think those refineries are kudos to the downstream team, they are run extremely well, we are able to capture those margins. And I think what we saw have made the point a few years ago, that we believe not that we are improve this to market we will have to be subject to the market effects. But we are able to mitigate the much more most, so that we can to operate very well financially the downstream through the cycle relative to within, and you know we are if you say, with another one downstream operational miss continent that and have been for a number of years. So, we tend to be relatively robust, even though we saw some the first quarter was view to be in some ways a difficult quarter, when we look today, three, six months ago, but we have been able to operate very effectively through it. So, I am very encouraged and I think is a sign of what you can expect in the future.

Got it. Thanks for the time.

And our next question comes from Paul [ph] from Sun Corp. Your line is now open.

Hi, Steve. This question is I think about as good as you're going to make it. I was wondering what does the Canadian dollar, U.S. dollar exchange rate mean to you, in terms of actual impacts but also in terms of how you are looking at future planning? Thanks.

Again, Alister will pick the question. But just to say, I mean another factor of the construct of the way the balanced of products we have, the way we move and the fact that crude is a U.S. dollar based price, means that we are relatively robust through exchange rate changes.

Yeah, just from numbers the sensitivity is we have aligned a better dollar move in the reduction and the Canadian dollar - and the Canadian dollars about a $130 million extra cash flow for us on an earnings basis that given the translation impact on the debt. But cash flow would increase by about 135.

Great. And Steve totally separate in terms of you guys have differentiated by being the ones that did the deal at the bottom. As you from your point of you is at the bottom of the cycle behind this and the M&A market now less attractive. Thanks.

Certainly. I'd like to be very reflective and critical of the actions we take. So, we did go back and take a very close look ourselves, with everything you've got all the information you have now with the benefit of hindsight we have done something different. And you know, we believe we got it right, we believe we've got that deal at the bottom of the market. Of course, as you would expect that the opportunities to look the subsequent deals as well and you can tell what conclusion we came to. The only thing, I would say is, we are the core of Suncor's business is oil sands. There are known sellers out there if you look the exodus from oil sands by a lot of the big international companies, I don't think is quite finished yet. And so, there may be some incredible opportunities, because I don't think there are many companies out there and the balance sheet capable of purchase. So, we have no plans or intentions, that's clear, we committed to our share buyback. But I have a feeling that maybe a bit of double boss in there, you may see some of these come back round again.

Yeah, it does seem the notable exit that you're referred to there from the - mega international measures is more opportunistic than dramatic, will you agree with that?

No, I agree. I mean I think let me have to talk to them about whey they are exiting, but I think that's for reason to strategy to do with their co-operations. What it means is as you say, there are just potentially some great opportunities coming along. But just look at our track record we are opportunistic we are value buy we only buy we absolutely it's a great deal. And we feel no pressure, we've got 12% growth 10% and then we've got 400,000 500,000 barrels a day of organic growth opportunities after that. So, it's the perfect position to be and we feel no pressure to engage in acquisitions going forward.

Thank you very much indeed.

Your next question comes from Roger Read from Wells Fargo. Your line is now open.

Yeah, thank you. Good morning. I guess question at this point, you've talked about earlier debottlenecking. The Fort Hills and Syncrude as you go forward. And I believe in the presentation, the indication was Fort Hills upfront cost was about $83,000 per flowing barrel. Can you give us an idea of the debottlenecking kind of CapEx that may occur or if you don't even want to think about it at that way, just sort of the cost going forward on a per barrel basis for some of that growth as you work through these two big projects.

Okay. I mean it's a little bit early to be actually specific about Fort Hills and the cost. But what I would do is just reference you back to. I remember customers before years ago, now we came at to the market and said, we've got some people from that backing opportunities. And we have had exactly these conversations. And we've talked about then about 100,000 barrels a day of potential opportunities through a mix of debottlenecking improving reliability, these operationally excellent type investment. And the net result of all of that was if you look at 100,000 barrels, then the very low - the low end of those projects came in at less than $10,000 of flowing barrel. There have been some progressively higher ones. I think on average just below $25,000 of flowing barrel, that's the sort of ballpark, we are talking about. These tend to be significantly lower than gradual cost, you just find that build the plant which needs debottlenecking. We know because we specifically designed it for Fort Hills that we designed the front-end mining and primary extraction, we designed it bigger than the backend, because we wanted to bring the plants up quickly and then we wanted to have a high reliability factor on it. So, we spend some funds in doing that. So, we know we've got some opportunity there to debottleneck right now. So, I would think of those and the Syncrude bonds is in that $25,000 of flowing barrel is a good market for now and as we get nearer to the specific project, we'll update on that.

Great, thanks. And then question on the reliability side. Obviously, you had the plant turnaround here accelerated in the unplanned outage. What should we be looking for in the outside in terms of ways will know that reliability is being improved as oppose to two or three years now, we can do a look back and say well yeah you got better. What are some of the markers, we should be watching for?

I mean we will talk to it. I think in a way I mean more detailed presentation on what the individual components, are those - some of those 70 line items that specifically around reliability and improving service factors. You will see it, so I think what you will see is, if you look at the third and fourth quarter, they were the best six months the operation in Syncrude's 40-year history. You will see quarters where that will start to happen. And of course, the secrete then is how do you do that continuously. We know the plant is capable of it, we know that the hydraulic capacity is there, it's a question of how you do, day after day, week after week, month after month. So, you will start to see it come through and you will start to see us guide on improved throughputs or reliability and you will start to see cost is coming down. It won't be just fixed debt to actually see a trend start to occur.

Great. Thank you.

And our next question comes from Paul Cheng, from Barclays. Your line is now open.

Hey, guys. Good morning. Steve, when you earlier talk about the replicator for the new [indiscernible] maybe early 2020. What maybe the factor, if there is any that could push the timeline earlier or later?

Several things, Paul. First of all, we won't rush it from a technical point of view. So, what I mean, two important components of the projects at the moment are we have - the technology developments are coming along very nicely and we are putting test in kind of the large-scale test on the technology itself, very encouraging and very well. So., we are looking at how we will install that technology as we bring the project on and that's the combination of the solvent type technology and the electromagnetic wave technology. So, we are just looking at the final designs of those applications, that's one piece. The other piece is, we are working with contractors of how do we design this one and build it many times. So that we get back the benefit of that replication and the benefit of almost like a manufacturing plant, we'll bring one of these 30,000, 40,000 barrel a day units on every 12 or 18 months. So, we are growing that, well that execution strategy will look like in detail and having the discussions with some of those contractors. So, both of those are progressing nicely. You could easily be talking plus or minus 12, 18 months on those opportunities. But very encouraging, but we don't - we won't rush for the sake of it.

And maybe this is for both Steve and Alister. I assume that if oil price going to move much higher than the current industry and given that you are not spending any more money in organic CapEx than where you are currently budgeting and you don't see a lot interesting opportunity on them and should we assume that you won't put the money, additional money in the balance sheet and instead that will go for additional buyback, or that increase the pace of the buyback as a result?

I mean all that cycle as you know again judges via track record just seeing mix. I mean Alister is eager to eager to come in, so I'll let him speak. But you are going to see putting the - if you're seeing $1.75 billion of debt, be addressed you've seen us going to buyback, so it's exactly the sort of mix you will see going forward.

Yes, good to reemphasize with Steve, Paul I mean. We clearly stated in our intent to increase return holders, so I would say that as oil prices move up, we'll be looking at the dividend again and sell buybacks and we said we wanted to gradually strength of the balance sheet overtime, so a bit of mix Steve just said, yes.

And final one from me, Steve you mentioned about the 70 projects your initiative that you guys are looking at the integration between you guys and Syncrude any kind of financial metric or upgrading metric what is the medium term let's say two to three-year time what you expect this initiative will achieve in terms of whether that is reliability improvement or you're improving the price realization or reducing is there anything you may be able to share at this part?

We tried to give two bases on it, so we talked about 90% reliability in 2020 and we gave cash cost guidance about 30 in the same timeframe. I mean the first - we will give you more detail I think now it's probably not the time to do that but I'll see - analyst who'll be working on how we get some more of that detail out to you guys. The first of the projects are executed already. So, we now have technical experts in working alongside Syncrude engineers, the Chairman of Syncrude is Mark Little, our Upstream President and he is actively working on personal exchange and the shorter cycle projects that we can get to so it's a bit of continuum. First ones are actually happening right now in the first movement of material physically I mean they are moving 12,000 to 14,000 barrels a day of gas oil to key upgrader there running and we've just recently started moving that flow. So, literally, the first project you would see us come out with a comprehensive lift of 70 projects and 70 timelines and expectations, what we'll give you is general guidance somewhat to expect in terms of reliability cash cost and I will give you some of the color on the detail of the project so you can see what we're doing and see the progress we're making.

Very good. Thank you.

Probably, we're saying Paul just that there couldn't be a better alignment between our sales imperial Exxon and the minority shareholders, now we're absolutely aligned on accelerating the program and getting to these benefits as quickly as we can.

Thank you.

And our next question comes from Phil Gresh from JP Morgan. Your line is now open.

Hey, good morning. A couple of follow-ups I guess here from me. One is just on the asset sale proceeds and the process here, you've got a lot of cash in the door in the first quarter, it was a little lower though I had in my model I think I didn't have quite the amount of tax implication, but is it fair to say that your kind of done with your asset sale process or do you still see more pruning to do?

Sorry, Steve. We're going to see the sale of the 49% interest in East Farm has now being completed, so that's probably the difference that you've got in your model. We don't expect to see that happening until probably Q3, but it's on track for us, so that's probably going to be close to $500 million.

So, no major other asset sales planned although, you know the discipline you're seeing is exercised around looking at what is the color of our business and investing in that and then divesting of things, which we are not, not core to our business, that process is ongoing.

Sure, okay. Second question is just a follow-up on the balance sheet with the paydown here in the second quarter, as you think about your target levels, the leverage and the comfort with the buyback, would you say that maybe to frame it as the absolute level of debt you have here your comfort level there is high even the 12 prices for some reason go down were to pull back in the agreement etcetera that you're generally comfortable with that level or do you still see some room to bring that down?

I'll make the first comment and Alister I'm sure is going to want to jump in. We're setting the company up with the focus on cost reduction, general shape of the balance sheet to be able to operate healthily at $40 a barrel.

I mean if you look at the level of debt, whereas the buyback, we're going to the midpoint of our range on debt to capital and we're trending somewhere down on the net debt to capital. So, I mean I think when we see the metrics are going to continue to go down as we go forward during the next couple of years for the cash flow we are generating even with continuing - sell buyback. So, on the absolute level of down, we have some opportunities during the next couple of years if we wanted to buy some of that down with some and I am not particularly focused on it at this point.

Sure, okay. And last question for Steve. You mentioned kind of looking back being comfortable at the decisions you made and not changing anything and obviously, I thought the Syncrude acquisition solid decision. I am wondering if you look back on the equity issuance at that time which I think was more proactive in nature to look at future potential deals. Is that something that if you look back would you sell at that pace of it or how do you think about that today with now the buyback?

I think that's a really fair question. I mean I think with the - of course what we didn't know, what we were committing to was capital discipline and a healthy balance sheet, and we did that. The one thing that made me feel very comfortable about that deal was that most of it was brought by our existing shareholders when the allocation was done. So, some of the issues that could have been there we're not before. So, when I look back, no, with the benefit of hindsight, we were probably being a very conservative at that time. I know we have always committed to keeping the balance sheet healthy because we think it's a strategic asset. But I think that's a fair question, Phil.

Okay. Thanks for taking the question. I appreciate it.

And our next question comes from Fernando Valle from Citi. Your line is now open.

Hi, guys. Thanks for taking my question. First I would like to dig in a little bit on the earlier question on the refining outlook. You had very strong demand growth on your marketing sales. Trying to understand if there was more on market share gains or if you saw a better demand outlook in Canada than we have seen in the U.S. this year.

Hey Fernando, its Steve Douglas here. I think probably on the distillate side, we saw a strong comeback and certainly in Western Canada a big part of distillate demand is the industry itself, its drilling rigs coming back on and the associated trucking and rail cars. So, we saw a strong return on that demand. Also saw in the U.S. where distillate demand had been in decline last year and we saw that comeback strongly. We did see a bit of weak gasoline at the beginning of the year but subsequently that came back. So, I would say in Canada a little stronger than the U.S. across the comeback.

Great. Thanks for that Steve. And then bigger picture, Steve you just talked a little bit about the delay in the new project as for 2020. Just want to understand when you do see this new SAGD projects coming online, what are your trying to accomplish, just a lower overall breakeven, are you trying to change the payback structure but a shortening payback. Do you think the technological have breakthroughs of just be able to differentiate oil sands paybacks or just overall breakeven?

First of all, I would say what I am talking about are the, the final full AFE approvals. We are actually spending funds on those projects now, both in terms of the technology development the early design of some of those projects and doing real work with contractors about how we get the benefit. So, those things that we not spending anything part of that $5 billion we have talked about includes investment to develop the technologies, pie the technologies and then move seamlessly in to the operations of the plant. But really, I mean if focusing on a number of things, I mean it's generally to improve the economics, so it's getting the best technology which will manifest itself in the number of way. Reduced capital costs so, by designing one some building multiple times, reduce those costs. Better operating costs, because you are seeing the - some of these are moving towards little if no [indiscernible] depending on our finial design. So, you're seeing the operating cost of these units come down. So, overall you are going to see the actual capital cost involved coming down that's one benefit and you will see the returns on these projects coming up.

Okay. Thank you so much for that.

And our next question comes from Neil Williams [ph] from Thomson. Your line is now open.

Hi, guys. Thanks for taking my question. I wanted to ask about what your thoughts on President Trump's comment about energy pretend to be in the target of trade sanctions, what's that if any Suncor would take, if that were to - that situation was to continue?

I mean first of all, I won't comment on the hypothetical situations, but clearly there are discussions going on across the board or all sorts of trade. Of course, the oil trade is a very balanced trade and there are serious potential consequences to customers and the general population voters in the U.S. if [indiscernible] or border tax which is implemented. I think the general view is that the probability of it on energy is relatively low, not to say impossible. But one thing I would say for Suncor, not surprisingly we've done a fair about of analysis on what it could look like and with the impacts for Suncor, not the industry necessarily are fairly mitigated, because of course we have an integrated business both import and export materials across the border. We have operating businesses in the U.S. itself, which would be inside. So, the impact for Suncor itself relative to the industry will be fairly muted.

Okay. Thank you.

And with that, we've reached our time. So, thank you very much for participating. Appreciate the questions and of course, as always, we're available for further detailed questions throughout the day and going forward. Thank you, operator.

Ladies and gentlemen, thank you for your participation in today's conference. And this does conclude the program. You may all disconnect. Everyone, have a great day.