Suncor Energy (NYSE:SU) thinks that its acquisition of a majority stake in Syncrude will be a transformative move, but that hit a snag this past quarter after a fire shut down part of the facility. Despite this not-so-good news, management remained remarkably upbeat in its most recent conference call. Not only does it think it will be able to recover from this setback with few issues, but it doesn't even think it will have an impact on 2017's overall production. 

Here's a look at why management thinks that is the case, how it views the red-hot merger and acquisition market in Canadian oil sands, and why the company is now comfortable giving loads of cash back to shareholders. 

Oil sands mining equipment

Image source: Getty Images.

A setback in oil sands operations

Suncor's acquisition of a greater stake in Syncrude is looking more and more like a stroke of genius. Not only did management buy at the bottom of the cycle, but having a majority stake in the business gave it control of operations. So far, management has used this operator stake to drastically improve efficiency and cut costs. Last quarter, though, the company hit a major speed bump when a fire erupted at the Syncrude upgrading facility and drastically lowered output. 

As part of his prepared remarks, CEO Steven Williams addressed both the impressive performance of Syncrude since Suncor took control as well as this most recent incident. 

At Syncrude, we were disappointed to have operations interrupted by an unplanned outage in mid-March. In the last quarterly call, I cautioned that it would be premature to expect the elevated level of performance we've 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 or less.

Exploration and production making up the difference

Even though this fire and repair work is likely going to impact Suncor's oil sands business segment results, management doesn't think it will affect overall guidance for the year. The reason? Williams mentioned that better-than-expected results from its conventional oil production segment are more than enough to make up the difference.

I'm particularly pleased with the performance of our offshore projects. Reliable operations, reservoir optimization initiatives and new wells coming online 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 the strong performance -- because of this 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.

These next couple of years could lead to significant increases in production. The Fort Hills oil sands facility and its Hebron offshore platform should both come on line by the end of 2017 and will help push production above 800,000 barrels per day by 2019. 

Management's mind-set for acquisitions

Suncor has been one of the more aggressive companies when it comes to mergers and acquisitions over the past year or so. That strategy has worked out well because of the aforementioned reasons, but Williams reiterated management's thinking on why it made the moves it did at the time. He also talked about what this strategy means in today's M&A environment.

With oil prices gradually recovering, we've recently seen a couple of large transactions. We've continued the consolidation of Oil Sands that, of course, Suncor began over a year ago. This is a development that we foresaw several years ago when we first began talking about the concept of natural oil sands developer. We've recognize that [the] resource could be more efficiently and effectively developed by companies whose core business was oil sands. We saw the potential to better leverage infrastructure, reduce costs and improve productivity...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 of development opportunities and the fact that we now hold a majority working interest in both Fort Hills and Syncrude, we do not feel any pressure to pull the trigger on another oil sands acquisition.

We're restarting our repurchase plans...

Once oil prices started to crash, just about every major oil and gas company abruptly ended their share repurchase programs to conserve cash. This past quarter, though, Williams announced that Suncor was restarting its share repurchase program along with a dividend increase. Here's why he thinks the time is right to do this.

This week, we initiated a $2 billion [Canadian dollars] share buyback program. As I mentioned on the last call, with our capital spending expected to decline approximately $1 billion a year and average oil prices trending higher 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 our 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.

... and we've got the financial strength to do it

An ambitious share repurchase program like that might raise a few eyebrows. It wasn't that long ago that the company was pushing up against the high end of its debt targets and needed to do some serious financial house cleaning. CFO Alister Cowen put many of those concerns to bed when he announced what the company has been able to do with its operational cash flow lately. 

We finished the first quarter with approximately $3.6 billion in cash, a net debt to cash flow of 1.8x and debt to capitalization of 27%...This past week we took steps to further strengthen the balance sheet through the early redemption of [CA]$1.25 billion in long-term debt, and this will reduce our total debt to capitalization to the middle of our target range. With an even stronger balance sheet and free cash flow being generated, I'm very comfortable launching into share buybacks again in addition to the February dividend increase of 10% per share.

More opportunities down the road?

Some analysts were a little curious when Williams mentioned that one of the reasons acquisitions were attractive lately was because it consolidated the industry. Recently, we have seen many of the integrated oil companies sell their oil sands assets. Royal Dutch Shell, Marathon Oil, and ConocoPhllips have all shed oil sands assets in the past six months, and there could be more out there. Here's what Williams had to say about the situation.

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 now with a balance sheet capable of purchase. So we have no plans or intentions. That's clear. We've committed to our share buyback. But I have a feeling that there may be a bit of a double bottom there, that you may see some of these come back around again.

That isn't too surprising, really. It's still going to take a year or two to fully optimize Syncrude, and Suncor likes to operate its oil sands facilities rather than just have an equity interest in the business. So there may be some opportunities down the road, but it will have to be just the right assets. After all, this is the same management team that recently said it doesn't anticipate investing in another oil sands mine for at least a decade. Perhaps if we see oil prices struggle again -- they have certainly dropped a bit since this conference call -- that strategy could change.

Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.