Suncor shelves expansion amid first loss in 16 years
Falling prices, rising costs prompt cuts
By Dan Healing, Calgary HeraldJanuary 21, 2009
Suncor Energy Inc. is "downing tools" on the $20.6-billion Voyageur expansion underway at its northern Alberta oilsands operations as it reports its first quarterly loss in 16 years, blamed on falling commodity prices, production setbacks and higher costs.
The first major oil and gas company to report its 2008 results set a sombre tone Tuesday as president and chief executive Rick George also conceded for the first time the company would be willing to take on a partner in its oilsands upgrading business.
Suncor slashed its 2009 capital spending plans in half, to $3 billion from the $6 billion set in October, when it extended its Voyageur timeline by at least a year. The $6 billion, itself chopped from earlier estimates of $9 billion to $10 billion, is 21 per cent lower than 2008 spending.
Investors punished Suncor stock, carving $4.16, or 16 per cent, of its value to drop it to $22.10 on the Toronto Stock Exchange.
"The reason we took the step to go to $3 billion is that we just don't know . . . how long this trough lasts, when we'll see the commodity cycle start moving back in and when we'll see oil prices, for example, move back up," George said during a conference call. "We know it will occur, we just don't know when."
The benchmark New York crude price, which peaked at more than $147 US per barrel last summer and averaged just under $100 for the year, closed Tuesday up $2.23 at $38.74 US a barrel.
A third of the revised capital budget is aimed at growth, to be spent mainly in the first half of the year as the company winds down planning work on its third oilsands upgrader and construction on Firebag Stage 3 (a total of six stages of the in-situ thermal recovery project are planned).
The projects are to be placed in "safe mode" pending resumption of expansion work, Suncor said, adding it's not known when they will be restarted.
"What you can expect from us is that we'll no longer talk about Voyageur as a big, $20-billion project," said George. "When we restart these, we'll restart them one project at a time."
Voyageur was intended to increase oil production to 550,000 barrels per day by 2013. As of Dec. 31, Suncor had spent about $7 billion on the series of projects.
During a morning call with analysts, George said the company is "open" to the idea of giving up equity in the upgrader to a partner in return for investment and is talking to other companies about processing their bitumen for a fee, but would not consider taking a partner in its oilsands reserves.
Oilsands projects in Alberta that have been put on hold recently include Connacher Oil and Gas Ltd.'s $345-million Alger project, StatoilHydro's multibillion-dollar oilsands upgrader, Royal Dutch Shell's Carmon Creek thermal oilsands project and its proposed second oilsands mining expansion, and Petro-Canada's $21-billion integrated Fort Hills oilsands project.
George said the development slowdown has benefits for Suncor, including possibly reducing costs.
"As we restart, we feel we will have
much better control of our costs on a go-forward basis," he said. "And so, downing tools right now will send a message to all of our contractors and staff that we are serious about a much lower price environment."
Melissa Blake, mayor of the Regional Municipality of Wood Buffalo, which includes Fort McMurray, was disappointed at the Suncor news but said the overheated region still hasn't seen an economic slowdown.
"Every one of these projects, if they have longer-term impacts, will ultimately have an effect on the community as far as its growth goes, but I still very much regard this as the time we need to be investing in the infrastructure, housing and businesses to try to catch up to the service levels required for the population," she said.
"If you gauge it by how long you're waiting in line or how long are traffic de-lays, we're still seeing those to be common problems."
Earlier this month, Suncor delayed a $120-million expansion of its St. Clair ethanol plant at Sarnia, Ont., scheduling completion for 2011 instead of late 2009.
In spite of a net fourth-quarter loss of $215 million, Sun-cor posted net earnings for the year of 2.137 billion or $2.29 per share, down 28 per cent from$2.983 billion or $3.23 per share in 2007.
In fourth quarter 2007, Suncor earned $1.042 billion.
Excluding foreign exchange losses and other items, Suncor earned $434 million, or 46 cents a share, in the quarter, compared with $677 million, or 73 cents a share, in the year-prior period.
The operating profit beat average analyst estimates, wire news services reported.
Lanny Pendill, senior energy analyst for Edward Jones in St. Louis, Mo., said Suncor's 2008 results were"disappointing" and 2009 looks like a challenging year but its longer-term prospects are good.
"Oil prices are low now and could certainly move lower . . . there's not a lot of wiggle room between where oil prices are today and where their break-even costs might come out," he said.
"Longer term, this stuff will pass. Oil prices will rebound...and I think Suncor's very well positioned to benefit from that rebound."
He said Suncor will find plenty of takers if it offers to upgrade other companies' bitumen either for a fee or as an equity partner, suggesting Husky Energy and Petro-Canada are possibilities.
Andrew Potter, an analyst for UBS Securities Canada, maintained his buy rating for Suncor but trimmed his 12-month target price from$42 to $39.
In a note, he said earnings were better than he expected but production was lower and cash costs per barrel were higher, leading to a cut in predicted earnings per share this year and next.
Suncor's cash flow from operations for the fourth quarter of 2008 was$551 million, compared with $1.2 billion in the fourth quarter of 2007.
Oilsands production in the fourth quarter of 2008 averaged 243,800 barrels per day, compared with fourth quarter 2007 production of 252,500 bpd due to planned and unplanned maintenance.
Suncor hopes to average 300,000 bpd in 2009, when no major maintenance turnarounds are scheduled.The company had planned to reach that milestone by the end of 2008.
The commissioning of Suncor's second oilsands upgrader in the third quarter of 2008 gives it upgrading design capacity of 350,000 bpd but it said it won't meet that, primarily due to expected constraints in bitumen supply.
Oilsands cash operating costs in 2008 averaged$38.50 Cdn per barrel, compared with $27.80 per barrel in 2007. Suncor's 2009 cost of recovery goal is $33 to $38 per barrel. Suncor has hedging agreements for 55,000 bpd in 2009 and 2010 at a floor price of $60 US per barrel.
Natural gas production averaged 213 million cubic feet equivalent per day in the fourth quarter of 2008, Suncor reported, compared with 229 mmcfe per day recorded in the fourth quarter of 2007, primarily due to third-party processing outages during the more recent period.
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