Despite operating in the midst of one of the worst oil market downturns in decades, Canadian oil giant Suncor Energy (NYSE:SU) is thriving. That was evidenced by the company's strong third-quarter report, as well as comments made by CEO Steve Williams on its third-quarter conference call. Here are five things he wanted investors to know about the company's recent success.
1. Rock-solid operating results
Our operating results in the quarter were very strong ... It was the third consecutive quarter in which we've reached 90% throughput on our upgraders and we also continued our trend of steadily reducing costs. Oil sands operating costs declined to C$27 per barrel ... that's the lowest level since 2007. Record in-situ production at an average cash cost of just above $12 ... contributed positively to our results, and we achieved these production and cost thresholds despite several weeks of planned maintenance in September.
-- CEO Steve Williams
There were three achievements that really contributed to Suncor's strong quarter:
- It reached 90% throughput at its upgraders.
- Its costs fell to the lowest level in years.
- It delivered record low-cost in-situ production.
It was the combination of these factors that really drove strong cash flow for the company during the quarter.
2. The company has hit all of its goals
Not only did Suncor Energy have several noteworthy achievements during the quarter, but it has already hit all of its goals for 2015.
It was about this time last year that we were finalizing our goals for 2015. Oil prices were in free fall but we were looking to maintain our track record of improving reliability and growing production while accelerating cost reductions. With three quarters now on the books we're delivering on each of these goals. We've been working to steadily improve the reliability of our oil sands upgraders with a goal of averaging 90% throughput by 2017.
What's most impressive is that not only did the company meet its goals for 2015, but it has already achieved its 2017 goal of 90% throughput, showing just how far the company has come in a short amount of time.
3. Suncor's refineries really benefit from weak oil prices
One of the things that sets Suncor apart from a lot of other energy companies is its vertical integration whereby it owns refining assets. This integration really paid off last quarter.
In the downstream we enjoyed one of our best quarters ever. We recorded average utilization rates of 96% at our refineries and took advantage of strong crack spreads and location differentials to generate near record earnings and cash flow.
Suncor's refineries benefited from weak crude prices and delivered robust cash flow. In fact, CFO Alister Cowen pointed out on the call that its refining and marketing segment accounted for 42% of its cash flow last quarter, which is up from 22% in the year-ago period.
3. Capital discipline is paying off
Weak oil prices makes it imperative for oil producers to watch every penny they spend. That has been a real strength of Suncor.
During the third quarter we maintained our unwavering focus on capital discipline. We executed extensive planned maintenance in both the upstream and downstream, we continued to drive our major growth projects forward according to plan, and we managed the associated capital spending well within our budget. This helped us generate free cash flow once again in the third quarter, even after investing more than $900 million of growth capital and despite a Brent oil price that averaged just over $51 per barrel for the quarter.
While most of its peers are just struggling to break even, Suncor Energy is actually generating free cash flow. That accomplishment can be attributed to the company's focus on its costs, and especially its disciplined approach to cap ex spending.
5. Taking advantage of the downturn
Suncor Energy has been aggressive in 2015 to take advantage of unique opportunities to increase its ownership in key oil sands assets. One opportunity it recently closed was a deal to buy another 10% stake in its Fort Hills oil sands development from French oil giant Total.
We originally established the joint venture structure for Fort Hills in order to effectively manage the financial risks associated with a $15 billion project...We believe that the project execution risk has been significantly mitigated and so we seized a strategic opportunity to increase our working interest. The cost to Suncor for the additional 10% working interest will be approximately $1 billion. That equates to about $56,000 per flowing barrel, a significant discount to the expected overall project cost of $84,000 per flowing barrel that we announced at project sanction...And of course moving to a 51% working interest gives Suncor a majority interest in Fort Hills and strengthens our governance role on the project.
In seizing this opportunity, Suncor is accomplishing two major goals. First, it now has majority control of the project, meaning it will set the tone for development and operations. Second, it is acquiring this additional stake at a significant discount to the project's replacement cost, which will improve overall returns.
Suncor Energy has really been impressive this year with it being one of the few oil companies generating free cash flow. There are two things that have enabled it to accomplish that rare achievement: Financial discipline and vertical integration. Furthermore, because it is so strong financially, the company has been able to take advantage of an opportunity that arose during the downturn to increase its stake in a key project at a significantly discounted price. Clearly, Suncor Energy is thriving at a time when most energy companies are just focused on surviving.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Total (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.