Suncor Energy's (NYSE:SU) second-quarter earnings report tells two distinct stories. On the one hand, you have a business that's built to generate loads of free cash flow it can use to reward shareholders. On the other, it continues to be plagued with operational issues at its largest asset, Syncrude. Both of these narratives factored heavily into the oil producer's Q2 results. 

Let's take a look at Suncor's most recent earnings, consider how management intends to address its issues, and get a feel for what investors can expect from this company in the coming years. 

By the numbers

Metric Q2 2018 Q1 2018 Q2 2017
Revenue CA$10.43 billion CA$8.75 billion CA$7.25 billion
Net earnings CA$972 million CA$789 million  CA$435 million
Diluted EPS CA$0.59 CA$0.48 CA$0.26
Operating cash flow CA$2.45 billion CA$724 million CA$1.67 billion

DATA SOURCE: SUNCOR ENERGY EARNINGS RELEASE. EPS = EARNINGS PER SHARE.

It was a good thing for Suncor that oil prices were significantly higher last quarter, because it helped to cover up some operational blemishes. The company experienced a lot of downtime at its production facilities and offshore platforms, which dragged down segment earnings compared to the prior quarter

Keep in mind, too, that this time last year, there was a fire at its Mildred Lake upgrader facility and a significant shutdown at Syncrude for maintenance and an unscheduled outage. So the gains this past quarter compared to the prior year aren't as great as they look on paper. 

SU net earnings by business segment for Q2 2017, Q1 2018, and Q2 2018. Shows modest year-over-year increases for its upstream segments.

Data source: Suncor Energy earnings release. Chart by author.

The highlights

  • Total production in the quarter averaged 662,000 barrels per day. That was up from Q2 2017, but was also the weakest performance since that quarter; production in Q3 2017 was 739,000 barrels per day. Production from its Fort Hills oil sands facility was up to 70,000 barrels per day, and its Hebron offshore platform contributed an additional 13,500 barrels per day. However, continued outages and disruptions at Syncrude, as well as planned maintenance at other offshore facilities, more than offset these gains. This was somewhat to be expected, though, as management had mentioned in the prior quarter that there would be an unusually high amount of maintenance and turnaround work this quarter.
  • With the Fort Hills and Hebron sites operational, the company has no new major projects under construction. 
  • Higher oil prices and strong cash flows this quarter allowed management to increase its rate of share repurchases. Suncor bought back CA$609 million worth of shares in Q2, and the board of directors increased management's repurchase authorization to a total of CA$3 billion.
In-situ oil sands facility.

Image source: Suncor Energy.

What management had to say

Suncor's Syncrude facility has been a bit of a trouble spot for the company. Between the wildfires near Fort McMurray in 2016 and subsequent equipment issues, the facility has been running at discouragingly low utilization rates. CEO Steve Williams acknowledged these concerns in his press release statement, and tried to reassure investors that it was working with its joint-venture partners on resolving the problems there.

We want to reiterate our belief in Syncrude's long-term potential and ability to achieve sustained reliability improvements, despite our disappointment with recent operational performance. From experience, we know that long-term reliability is a journey and we are working with the owners to advance strategic initiatives in order to achieve our reliability and cost goals.

Williams also gave a brief statement on the company's plan and its outlook for the rest of the year. 

Bringing our major growth projects up to their full design capacity on a sustained basis remains a priority of the company.  As these major growth projects transition to continued operations, we remain focused on returning cash to shareholders and prioritizing initiatives at our existing assets that further improve cash flow.

SU Chart

SU data by YCharts

Cash in now, grow later

Suncor Energy is unlike any other oil company out there because so much of its production comes from oil sands. Unlike conventional or shale oil drilling, oil sands production doesn't decline over time, nor does it require constant reinvestment to maintain production levels. This means that Suncor's capital commitments over the next couple of years to maintain production will be minimal, will should allow management to return loads of free cash flow to investors through shares repurchases and dividends. Longer term, management is targeting some new in-situ oil sands installations that will go live in 2023 at the earliest.

The only real cause for concern here is the performance of Syncrude. In the quarters since Suncor gained a majority stake in the joint venture through a pair of deals, Syncrude's output has been stifled by planned and unplanned outages. If Suncor really wants to realize its potential, it has to get operations at this facility under control. But provided the Canadian oil company can do that, its outlook is good. Unless there's a significant decline in oil prices -- which is always a possibility, though current investment trends don't foreshadow one -- then Suncor Energy will likely deliver a lot of value to investors over the next couple of years.  

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