I don't know if you have noticed, but oil prices have been on the rise lately, which has done miraculous things for the bottom lines at oil and gas companies. The same can be said for Suncor Energy (NYSE:SU), which was able to post a rather healthy earnings per share number considering one of its major oil sands facilities was shut down in the most recent quarter.
Here's a brief rundown of the company's results for the past quarter and why this temporary shut down isn't anything investors should be worried about long term.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||CA$8.75 billion||CA$9.04 billion||CA$7.81 billion|
|Net earnings||CA$789 million||CA$1.38 billion||CA$1.35 billion|
|Operating cash flow||CA$724 million||CA$2.76 billion||CA$1.63 billion|
One of the interesting things about Suncor's business is that a large portion of its oil and gas production comes from oil sands mining, which requires special upgrading facilities to make it into crude oil. These upgrading facilities are similar to conventional refineries in that they occasionally get shut down for maintenance and upgrade work, or if they experience an unplanned outage. This past quarter, the company's oil sand businesses got dinged by one of those unplanned outages from extreme cold weather, which lowered overall production rates and increased cash costs per barrel produced. Suncor also had higher than usual operating costs associated with the ramp-up activities at both its Fort Hills oil sands facility and the Hebron offshore platform in Eastern Canada.
Fortunately, though, some of those operational hiccups were covered up by much higher oil prices and another strong showing from its refining and marketing business.
- Total production for the quarter came in at 689,400 barrels of oil equivalent per day (Boe/d), which was down 5% from the 725,000 Boe/d this time last year. Pretty much all of that decline is attributed to that weather-related outage at one of its oil sands upgrading facilities. Production was also down in its exploration and production segment as declines from its older offshore assets more than offset the ramp-up at Hebron.
- Suncor's portion of production at Fort Hills averaged 29,800 Boe/d for the quarter and Hebron totaled 8,200 Boe/d. Both assets should post much higher production rates in the second quarter.
- Management noted that there will be a high amount of maintenance and turnaround work for its oil sands facilities. This will likely have an impact on production for the rest of the year.
- Suncor continued to consolidate its interest in the Syncrude project by buying out Mocal Energy's 5% interest for CA$920 million. The deal closed after the end of the first quarter. Adding Mocal's stake gives Suncor a 58.7% interest in Syncrude and adds 17,500 Boe/d to its production portfolio.
- Management bought back CA$389 million in shares in the quarter as part of the board's CA$2 billion share repurchase authorization.
What management had to say
Fort Hills and Hebron will significantly add to the company's production as they ramp-up activity throughout 2018. Beyond that, though, there aren't a whole lot of projects in the pipeline to grow the business until two new oil sands facilities (Lewis and Meadow Creek) come online, but that isn't expected to happen until the mid-2020s. According to CEO Steven Williams, Suncor is going to be able to bridge the gap between these projects with several quick-hit investments.
[W]e laid out a series of low capital intensity projects that we believe will grow our free cash flow by more than [CA]$500 million annually beginning in 2020. And of course, that's irrespective of oil prices.
Many of those projects involve the application of technology to reduce costs and improve environmental performance. And examples range from replacing our coke fired boiler system with co-gen units through the use of advanced analytics to reduce maintenance costs and optimize facility throughput. And to more simple measures like employing remote sensing technology such as drones to generate real-time flare stack diagnostics and calculate overburden removal. So we have a great deal of confidence in that suite of projects and we believe that they will increase our annual cash flow by more than [CA]$2 billion by 2023.
A bump in a rather profitable road
Investing in Suncor means that there are going to be occasional periods of much lower production because of planned or unplanned outages at its oil sands facilities. It looks like 2018 will be a year with a lot of these outages, and the costs of getting Fort Hills up to speed will likely mean higher than normal operating costs for the year. Fortunately, high oil prices and a strong performance from its refining & marketing business should ease some of that pain and allow Suncor to maintain its ambitious shareholder return program.
The next few years should be an excellent time for Suncor shareholders. Costs for its production have fallen precipitously in recent years, it has the ability to throw off lots of cash to shareholders, and it still has room to grow with some quick hit investments until the next wave of major capital projects come online. All in all, shares of Suncor look like a pretty attractive investment right now.