Suncor Energy (SU 0.30%) can't seem to catch a break when it comes to its oil-sands operations. Last year, there was the devastating effect of wildfires in Alberta. This year's fire at its Syncrude oil sands project wasn't a natural disaster on that scale, but it's having a significant impact on the company's results.
This past quarter's results showed the effects of this problem, as well as management's efforts to get the facility back into tip-top shape. Here's a look at the impact the Syncrude outage and other operational shutdowns had on Suncor's most recent quarter, and whether these issues could have any lasting impact.
Image source: Getty Images.
By the numbers
| Metric | Q2 2017 | Q1 2017 | Q2 2016 |
|---|---|---|---|
| Revenue | $5,580 million | $5,960 million | $4,509 million |
| Net income | $253 million | $1,028 million | ($649 million) |
| Earnings per share | $0.20 | $0.81 | ($0.35) |
| Operational cash flow | $1,286 million | $1,237 million | $663 million |
Source: Suncor Energy earnings release. ALL RESULTS WERE CONVERTED TO U.S. DOLLARS BASED ON FOREIGN-EXCHANGE RATES FOR THE GIVEN QUARTERS PROVIDED BY SUNCOR IN THE EARNINGS RELEASES.
Suncor's results look good or bad depending on which quarter you compare them to. When stacked up against this time last year, results look great. However, this time last year, a majority of the company's oil-sands assets were shut down because of the wildfires that devastated Fort McMurray, Alberta. Also, oil prices have increased modestly since then, so this quarter had better be an improvement year over year.
Compared to the prior quarter, things don't look quite as good. Much of that decline in earnings had to do with downtime related to a fire at its Syncrude facility, and a high amount of maintenance for its other oil-sands facilities. Its Firebag facility went through a scheduled five-year turnaround and upgrade, and management brought forward several maintenance projects to make the best of downtime at Syncrude. Also, Suncor's refining-and-marketing segment benefited from a $178 million gain in the first quarter from the sale of its Petro-Canada lubricants business.
With so much maintenance going on simultaneously, we can't look at per-barrel costs and say that the company is doing well -- or poorly -- right now. The high-fixed-cost nature of oil sands means that per-barrel costs are heavily influenced by the utilization rate of the facility. With these two facilities down, it skews any reported numbers.
Thankfully, Suncor's exploration-and-production unit stepped up to produce much better results, and the company also benefited from a one-time foreign-currency gain. These helped to keep Suncor's earnings in the black.
Source: Suncor Energy earnings release. Chart by author.
The highlights
- Total production came in at 539,100 barrels of oil equivalent per day (BOE/D), well below the 725,100 BOE/D in the first quarter. All of that decline is from the shut-ins at Syncrude and Firebag, and were offset by a modest increase in offshore production at its Canadian offshore facilities.
- Management lowered guidance for Syncrude for the second quarter in a row. It now expects Syncrude to produce between 130,000 and 145,000 barrels per day. Also, operational cost-per-barrel guidance was increased to $42 Canadian to $45 Canadian per barrel to reflect all the maintenance work going on. If Suncor gets Syncrude back up and running at full capacity in a quarter or two, this operational hiccup can be forgiven.
- Management increased capital-spending guidance for the year from $3.7 billion-$4.0 billion to $4.1 billion-$4.3 billion. The higher rate of expenditures has to do with accelerating the completion of the Fort Hills facility and bringing forward some of that Syncrude upgrade work.
- Speaking of Fort Hills, it's now 90% complete, and some mining activities have begun. Suncor's other major capital project -- the Hebron offshore platform -- is nearing completion, as the production platform was towed and positioned on the sea floor. First oil at both Fort Hills and Hebron should start before the end of the year.
- Management also gave the green light for its next offshore production project, West White Rose. First oil is expected in 2022, and Suncor's estimated production for the facility is 20,000 BOE/D
- Even though cash flows remained rather robust in the quarter, they weren't quite enough to cover the accelerated capital spending in the quarter and its other cash needs. The company bought back $227 million in stock in the quarter as part of its recent $1.5 billion stock-purchase authorization, though. It also paid down some long-term debts, which now stand at $9.6 billion.
What management had to say
CEO Steven Williams didn't seem entirely impressed with the company's most recent results, but he did explain that he sees these as surmountable, temporary issues for the company.
Our integrated model and a continued focus on cost reduction supported our performance in the second quarter. Strong performance from our offshore and downstream businesses helped to offset the facility incident at Syncrude and major maintenance at the majority of our Oil Sands assets, generating cash flow in excess of our sustaining capital and dividend commitments... Although the performance of some of our Oil Sands assets did not meet our expectations in the second quarter, we have full confidence in these assets. We have substantially completed extensive oil sands maintenance and anticipate strong performance going forward.
What a Fool believes
Suncor took a lot of pride in taking a majority stake in Syncrude, and immediately started to improve utilization rates and output. Soon after that, we had this incident that shut down production. Perhaps this is a fluke that Suncor will be able to fix and get these facilities back to running at a high rate. If, by chance, these operational hiccups continue as the company tries to squeeze more out of this asset, that could be a bigger problem.
Suncor looks like it's on the right track to generating significant value for shareholders in the long run. Its capital-spending plans for the next decade will likely be minimal, and its improving balance sheet means it can throw off more cash to shareholders. If it doesn't hit many more speed bumps on this path, it could be a compelling oil-and-gas stock.
