Suncor Energy - Q1 2023

Transcript

Operator (participant)

Good day, and welcome to the Suncor Energy first quarter 2023 results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Troy Little, Vice President of Investor Relations. Please go ahead.

Troy Little (VP of Investor Relations)

Thank you, operator. Good morning. Welcome to Suncor Energy's first quarter earnings call. Please note that today's comments contain forward-looking information. Actual results may differ materially from the expected results because of various risk factors and assumptions that are described in our first quarter earnings release, as well as in our current annual information form, both of which are available on SEDAR, EDGAR, and our website, Suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian generally accepted accounting principles. For a description of these financial measures, please see our first quarter earnings release. We will start with comments from Rich Kruger, President and Chief Executive Officer, followed by Kris Smith, Suncor's incoming Chief Financial Officer, and Alister Cowan, Suncor's current Chief Financial Officer.

Also on the call are three of our senior operating leaders, Peter Zebedee, Executive Vice President, Mining and Upgrading; Shelley Powell, Senior Vice President, In Situ and E&P; and Arnel Santos, Senior Vice President, Refining and Logistics. Following the formal remarks, we'll open up the call to questions. Now, I'll hand it over to Rich to share his comments.

Rich Kruger (President and CEO)

Thanks, Troy. Good morning. Thanks for joining us. I know many of you on the line, and I look forward to reconnecting. For those of you that I don't know, maybe a very brief background. I come to Suncor with nearly 40 years in energy. 31 of those were with ExxonMobil around the world, and then the last seven of those nearly 40 were with Imperial Oil here in Canada as their chairman and CEO. Background includes everything from operations, capital projects, commercial, corporate strategy, et cetera, upstream, downstream, oil and gas, onshore, offshore, conventional, LNG, oil sands. The geography started out in North America, Southeast Asia, Middle East, West Africa, former Soviet Union, and now back to right where I am supposed to be, North America and Canada.

You know, I would, I would never say that I've seen and done it all, but I think it's pretty fair to say I've, you know, I've seen and done a lot. Personality, what can you expect from me? I strive to be quite clear. I hope you find me candid, transparent. I live in a fact-based world, and I tend to be, you know, quite focused. Last but not least, I consider myself to be reasonably decisive and very competitive. I play to win. My assessment, this is week six on the job. It's been quite a time. I see a very proud company here at Suncor, excellent people, quality assets, some very unique competitive advantages, but I also see a company with untapped potential.

I see a gap between our current performance and what I would consider best in class in many areas. You know, so what is my objective? It's really quite simple, lead the company to be the best of the best, the undisputed industry leader, number one. I think in our business that there's four kind of foundations or pillars that are key to that: safety, operational integrity, reliability, and profitability. If you read the press release this morning, you probably noticed I said that three, two if not three times. That's because I believe in it, and that's what I've learned over the course of my career. I strive for us to be a company that delivers on its commitments and delivers long-term or superior long-term shareholder value. The I never forget the shareholder. I can promise you that.

You know, will this be easy? No, quite frankly, I wouldn't have come out of retirement to be here, had it been easy. What can you expect from Suncor going forward? This focus on the fundamentals, starting with safety, operational integrity. You can expect an intense focus on costs, organizational efficiency, and then operational support from our center. We will become a simpler and a more focused organization. I think it's important to note that we basically produce a series of commodities subject to price cycles, and those who have the lowest cost structure have the greatest resiliency to compete in whatever business cycle we happen to be in. We will look hard at reducing spending where value isn't added, whether that's operating costs, OpEx or CapEx.

In terms of capital allocation philosophy, for those of you that know me, you've heard this before. We have a strong balance sheet, very much believe in a reliable and growing dividend, selective high quality, well-timed investments, and returning surplus cash to shareholders. I believe in rewarding our shareholders for their faith and ongoing commitment to the company. Said succinctly, you can expect a lot of words around clarifying, simplifying, and focusing what we do, why we do it, and how we do it. I would end with last but not least, you can expect a sense of urgency, an urgency to improve, strengthen our competitiveness, produce results. My first five weeks on the job have been quite busy. I visited about 50% of our major facilities.

I met with men and women who wear hard hats and boots for All Living, our workplace leaders. I've observed, I've listened, I've learned, I've started coaching. My general sense is this organization is ready. It is ready to respond. It is ready to step up and perform. I'm quite honored and excited to lead it, and I can assure you we won't leave anything on the table. With that, I'll turn it over to Kris.

Kris Smith (Incoming CFO)

All right. Thanks, Rich. Good morning, everyone. Well, first of all, I'd like to acknowledge all the achievements that our company and employees have made over the last nine months as I've handed the reins over to Rich as our permanent CEO. We took decisive action to address our safety performance and drive increased focus on operational excellence. We refocused our portfolio through the sale of our renewable power and international E&P assets in Norway and the U.K.. Meanwhile, we acquired an additional stake in Fort Hills at an attractive price and recently announced our transaction with TotalEnergies to acquire its Canadian upstream assets, including its stake in Fort Hills. We also presented a Fort Hills mine improvement plan in November that enables us to improve long-term asset performance and drive down unit costs. We continue to work across our entire portfolio to drive improved performance.

We have more work to do, but I'm confident that we will build on that momentum under Rich's leadership and deliver strong performance and results for our shareholders. I'm very excited about what the future holds for Suncor, and I look forward to working with all of you in my new role as CFO following our AGM. Before handing it over to Alister, I would like to update you on three transactions we recently announced, as well as provide a brief operational update. As mentioned, two weeks ago, we announced the acquisition of TotalEnergies Canada for CAD 5.5 billion. The transaction, which remains subject to the exercise of a right of first refusal, includes a 50% non-operated working interest in Surmont and a 31.23% working interest in Fort Hills.

This transaction adds 135,000 barrels per day of high-quality bitumen production capacity to our portfolio and strengthens our long-term free cash flow potential. The transaction is accretive to adjusted funds from operations per share and delivers attractive returns at mid-cycle pricing. As for Surmont, it is a high-quality in situ asset with top-quartile steam-to-oil ratios, a 50-year reserve life, and low cash operating costs per barrel, which will improve Suncor's cash margins and provide a reliable source of funds through the commodity cycle.

With the two recent acquisitions of additional Fort Hills interests between the Teck and TotalEnergies transactions totaling 46%, as well as bitumen production at our Firebag and Mackay River operations, Suncor will have sufficient owned bitumen volume with an oil sands reserve life of 29 years to keep the base mine upgraders full post the projected end of base mine life in the mid-2030s. In addition, Suncor has now eliminated the need to replace the base mine's production with new developments, which also provide optionality for future growth if that is the best use of investors' capital. The transaction will be fully funded via debt and is expected to close sometime in Q3.

With a more resilient pro forma business supported by incremental production and cash flow potential, Suncor's board of directors intends to approve an increase in the quarterly dividend of approximately 10% after the close of the transaction as contemplated. Consistent with Suncor's strategy of refocusing on our core business, we announced the sale of our U.K. E&P assets at CAD 1.2 billion, including CAD 338 million in contingent payments and excluding working capital adjustments. The transaction is expected to close soon, and we look forward to it. Lastly, we announced last week that Suncor will become the primary long-term fuel supplier for Canadian Tire's retail fuel sites.

Consistent with the retail optimization plan presented in November, by bringing two iconic Canadian brands and loyalty programs together in Petro-Canada and Canadian Tire, this strategic partnership provides long-term value to Suncor by expanding our non-controlled retail fuel network and securing long-term supply to protect refinery utilization and maximize sales volumes. Now, switching to current operations, we're pleased to report that our Commerce City Refinery returned to service as scheduled at the end of Q1 after a progressive restart that commenced in February. For Terra Nova, the FPSO is undergoing additional work inside in Bull Arm, Newfoundland, to ensure that it is ready for safe and reliable operation in the field. Based on this, and looking forward to the remainder of the year, we're removing any expected production from Terra Nova from our 2023 E&P production guidance.

An updated plan for reaching first oil will be available after mid-year once we are further through the additional work. With the removal of production volumes from Terra Nova, as well as the impact of acquiring a lower-than-expected stake in Fort Hills with respect to the acquisition from Teck, and the potential early closing of the sale of our U.K. North Sea assets as expected, we expect to be near the bottom of our 2023 upstream production guidance range. Once we have further progressed the acquisition of TotalEnergies' Canadian upstream assets, we will update shareholders further on production guidance for the year. Just before I close, I would like to thank Alister for his tremendous leadership. As Suncor's CFO over these last nine years, and in particular, to thank him for his support of me over these last nine months. Congratulations, Alister.

I hope you enjoy a well-deserved retirement, but you still have a little bit more to do. back over to you.

Alister Cowan (CFO)

Thanks for the kind words, Kris. Yeah, a little bit more to do. I've certainly appreciated all of the relationships I've formed with members of the investment community over these last nine years while I've been at Suncor, as well as before that time. I'm very thankful for the support of my colleagues and the finance team during my time here. Enough of that and let's get on to the quarter highlights. Overall, we generated CAD 3 billion of adjusted funds from operations. The Oil Sands segment delivered CAD 2.6 billion of adjusted funds from operations, with production of 675,000 barrels per day. This performance reflects a new quarterly in-situ production record of 261,000 barrels per day and average base plant and Syncrude upgraded utilization of 93%.

At Fort Hills, we completed the acquisition of the additional working interest of Teck Resources in early February, and production remains on track to ramp up in Q2 prior to starting a five-year turnaround in July, consistent with the restart plan. Oil sands realization averaged CAD 91 per barrel, or 89% of WTI. This reflects the $7 per barrel decrease in the benchmark WTI, offset by $1 per barrel, narrowly in the WCS heavy differential versus Q4 of last year. Our E&P segment generated adjusted funds from operations of CAD 500 million with production of 67,000 barrels per day at an average price realization of CAD 108 per barrel, or 98% of Brent. Downstream generated adjusted funds from operations of CAD 1.2 billion on a FIFO basis.

Excluding the CAD 130 million of FIFO loss, this would be about CAD 1.3 billion on a LIFO basis. Refinery utilization averaged 79%, margin capture was strong at 102%. Overall segment performance was in line with our expectations and obviously impacted by the downtime at the Commerce City Refinery that started at the end of Q4. Utilization at our Canadian refineries was a solid 94% during the quarter. During the quarter, we returned CAD 1.6 billion to shareholders, including CAD 700 million in dividends and CAD 900 million in share buybacks.

Suncor's net debt position as of quarter end was CAD 15.7 billion, which primarily reflects working capital use of CAD 2 billion and the earlier than expected closing of the acquisition of the stake in Fort Hills from Teck, which all in, including leases, was CAD 1 billion. Our final 2022 cash top-up payment was CAD 500 million, as we paid the majority of our cash taxes of CAD 4.2 billion throughout 2022. As Kris mentioned, we expect to receive the CAD 1.2 billion of gross proceeds from the sale of the UK E&P in the near term.

As stated previously, with the acquisition of Total's Canadian upstream assets, we're now expecting to remain at a 50/50 capital allocation between share buybacks and debt reduction until we return to CAD 12 billion of net debt, at which point we will switch to 75/25 allocation. With that, thank you all, and I'll turn you back to Rich.

Rich Kruger (President and CEO)

Before we get to your questions, I'd just like to commend Kris for his leadership over the last nine months, of the focus he's brought to this business, particularly safety. I've seen that in each of my site visits. And also, I can assure you, Kris and I are gonna work very well together. We have been engaged since before I showed up, or weeks before that, and I think we're gonna make a very strong team. Lastly, thank Alister for his dedication and leadership for nearly a year. As is said, he'll be missed but not forgotten. Look forward to working with each of you and the investment community at large. With that, I'll turn it back to Troy to kick off our question period.

Troy Little (VP of Investor Relations)

Thank you, Rich. I'll turn the call back to the operator to take some questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment while we compile the Q&A roster. Our first question will come from the line of Greg Pardy with RBC Capital Markets. Your line is open.

Greg Pardy (Research Analyst)

Yeah. Thanks very much. Good morning, everybody, and thanks for the rundown, and indeed, all the very best to you, Alister. Rich, and welcome. You can't imagine how happy I am to have you back in the chair. A couple of quick ones. Rich, particularly as you've looked at the business, I'm wondering if there are areas upstream or downstream where you see low-hanging fruit from an operating performance perspective, so either higher throughputs or lower operating costs. If so, what those might be and how long you think some of that might be to achieve better performance.

Rich Kruger (President and CEO)

Greg, I missed you, too, so it's good to be back. Thank you. You know, I do, I've seen opportunities across the organization. You know, I think let me start on the downstream a little bit. We, you know, there's a baseball analogy that I, that I wanna share quick is, you know, the downstream here to here and in Canada has done very, very well. I'm a baseball fan, and somebody told me it's, you know, we didn't hit a triple. We were born on third base. We have a lot of structural advantages right now. What is important, are we operating to the best of our ability? I think as I look at the downstream, I see, reliability is still an opportunity.

I think our cost structure, turnaround performance. Turnarounds, we spend a lot of money. The, you know, of course, the time offline. I think there it's just getting incrementally better at the fundamentals, the basics. In the upstream, I mean, you know, the mining's tough business. We know that. We've got aging mines. We've got more challenges on haul distances and things. I spent a lot of time with Peter in looking at his kind of improvement plans, all the way from reducing contractors to enhance efficiency and, you know, reduce cost, improving the performance of our fleet. You know, Greg, in those areas, I would say it's lots of little things.

I don't know if I'd maybe describe them as low-hanging fruit, but I think they're very tangible and things that we have and will continue to have a very intense focus on. I hit at it in my comments, is fundamentally our cost structure, is looking at ensuring that all our people, everybody above the operating units are focused on what they do to support the operating units. I think there's some low-hanging fruit there and really looking at what we do, how we do it. We, you know, we're making you know, small improvements. I'll have more to say about that in the, you know, the next couple of months ahead. I, you know, I wrapped up my comments with this sense of urgency.

We need to get on with it, and I don't see anything in my first five, six weeks that will prevent us from bringing about material improvement, from inside, from focusing on those things that we control.

Greg Pardy (Research Analyst)

Okay. Understood. The second quick one. Well, maybe it's not a quick one. The pace at which you run the base mine is coming up a lot. There is a fairly defined view, it would seem, out there that it's really all about managing ARO, that you're gonna have to slow down the mine to manage ARO. How are you guys kind of thinking about that decision? Like, how should we think about how fast that base mine is gonna run over the next, you know, few years?

Rich Kruger (President and CEO)

Well, you know, I'm gonna turn it over to Peter here in a second to, you know, maybe give you a little bit more specific on it. I think if you know, you look at Kris described the recent deal we've done looking at longer term bitumen supply, 'cause, you know, the most valuable barrel through an upgrader is the incremental barrel, the last barrel. It's much like a refinery. Ensuring that we utilize those facilities to the fullest. It becomes what's the most economic way to do that? Whether it's continuing to mine and extend the life of the base mine, whether it's bringing a bitumen supply from outside the lease. I would say those are all kind of works in progress, but it's all about value.

It's all about determining what is the most valuable barrel to fill up those upgraders with. Peter, maybe if you wanna add any further color to my comments.

Peter Zebedee (Executive VP)

Maybe a little bit more information, Greg. I think in the short term, I mean, you know, between now and 2026 and 2027, the rate of mining at base mine will continue as is. We'll be running to maximize volumes out of the base mine. This is a tailings driven facility, until we're able to open up our tailings plan, and we look to secure an additional piece of variability around potential for water management and recycle, we don't have a lot of ability in the short term to throttle the rate of mining. Post that, in our long-term plans, we are looking to see what the rate of mining is that'll maximize the value coming from the asset, taking into consideration your body, operating costs, et cetera.

Greg Pardy (Research Analyst)

Terrific. Thanks. Thanks to both.

Rich Kruger (President and CEO)

Thanks, Greg.

Operator (participant)

One moment for our next question. That will come from the line of Dennis Fong with CIBC. Your line is open.

Dennis Fong (Equity Research Analyst)

Thank you. Good morning, everyone. Again, congratulations to Kris and Rich on your new roles, as well as Alister for a well-deserved retirement. The first question I have is, during the quarter, it looks like you had about 5,500 barrels a day of Fort Hills production that was processed at the base plant upgraders and about 1,800 barrels a day of oil sands off the volumes that were processed at Syncrude. Can you talk towards against some of the impacts of feeding those barrels through the various upgraders and processing facilities, and maybe what some of the considerations may be in the future for shifting the destination of barrels across your portfolio?

Rich Kruger (President and CEO)

Dennis, this is Rich. I'll maybe start out with that again, then I'll probably turn it to Peter for more specifics. It's all about value. I think one of the things I said in my opening comments is that I really look forward to working with here is the unique competitive advantages that we have through the physical integration of our upstream through our upgrading, and actually, quite frankly, all the way through refining and logistics. We've got a an asset base that is quite hard. Well, it's unparalleled, and it's hard to replicate. Those kind of decisions are about incremental what, you know, what are bitumen prices in the market? What's the sour crude? What's the synthetic price?

How can we move molecules around to maximize the value of each and every barrel. Maybe I'll turn it to Peter, though, to kind of get into, like, how do we really how do we do it, and how real time are those decisions to make the most money?

Peter Zebedee (Executive VP)

Yeah. Thanks, Rich, and thanks, Dennis. It is indeed a really dynamic process, and frankly, it is all about margin optimization and generating the maximum value for those molecules. Dennis, we really look at it, I would say, on three time horizons, you know, starting from the long range, kind of the business planning process and the budgeting process that really optimizes extraction at all of the bitumen production facilities, the utilities, and takes into consideration major maintenance outages for the year. It's that kind of macro level planning. Then zooming in on much more of a short-term planning process where we look at production planning and consideration of all the risks we have in our facilities on kind of a, you know, one to 12-week time horizon.

That really allows us to optimize on market-based conditions through differentials, logistics, downstream demand, et cetera. Finally, it's really in the here and now it is that shift by shift optimization that's done by our production planning team, and we have an integrated production planning team across the upstream assets in the region and extending down into downstream into the refining. Production coordinators on a 24-hour shift by shift basis. This is very dynamic, very real time, and it's all about making the most from the molecules that we produce.

Dennis Fong (Equity Research Analyst)

Great. Great. Appreciate that color. Maybe shifting focus towards the downstream side and maybe a little bit more specifically Commerce City. I know the facility itself was impacted by, we'll call it a very unique circumstance with respect to winter conditions in the region. I was just curious as to whether or not there were any learnings from the events that occurred there, and if there were any changes to operations or operating procedures that were being implemented to maybe limit the risk of future kind of downtime as well as anything else across the rest of the platform? Thanks.

Rich Kruger (President and CEO)

Yeah. You know, Dennis, Rich here again. You know, there have been a lot of learnings. I think, you know, the best organizations, whenever you have things like this happen, that's how you get better, is through the learning process. In fact, I'll say, just literally real time, we went through a pretty comprehensive discussion with the Suncor board of directors yesterday on the learnings on it. You know, and the learnings, they fall into a variety of buckets, but they, you know, the competency of individual operators. Have we had sufficient training? The, you know, the uniqueness of what happened, the temperature drop over the, you know, very, very short period was extreme.

If you look at the temperature range itself and the low ends of it, that's not necessarily, you know, out of the, you know, the realm of history, but it's how fast the temperature changed and then what that impacted on control systems, steam generation, and our ability to keep things hot, keep things warm with that. As we lost steam capability, there was a little bit of a cascading effect, and the judgment was made. It was before I was here, but I look at it, I think it's exactly the right judgment to take that entire facility down, and that was made out of concern, out of safety and operational integrity. That, you know, to me, was the right decision. Now you've got a facility in extremely cold weather that you're not able to be keeping warm anymore.

It's kind of a damned if you do, damned if you don't. If you'd continued to operate, you'd run risk that in those extreme conditions, you could have some type of loss of primary containment and, you know, further escalating event. Also you knew when shutting it down, now you've taken things to, you know, ambient temperature. I would say there have been a lot of learnings. What we're trying to do right now is take those learnings and incorporate it into the facility, whether it's operator capability and training, whether it's heat tracing, some, you know, things that we would do in preparation for the, you know, apparently every year there's winter in Denver.

For before the next season, so that if we were to experience something as unique as this, we would be far better equipped to handle it. Yes, lots of learnings, and we're plowing it right back into actions to ensure that this consequence doesn't happen again.

Dennis Fong (Equity Research Analyst)

Great. I appreciate the incremental color you provided there, Rich. I'll turn it back. Thanks.

Operator (participant)

One moment for our next question. That will come from the line of Neil Mehta with Goldman Sachs. Your line is open.

Neil Mehta (Managing Director)

Hey. Welcome back, Rich. We missed you, sir.

Rich Kruger (President and CEO)

Thank you, Neil. It's good to be back.

Neil Mehta (Managing Director)

All right. Congrats to everyone and Alister on your retirement. The first question is just around the transactions, both Surmont and Fort Hills from Total. Maybe you could dive into what attracted you to this asset, why now, and dig more into the upside case associated with the deal and how are you mitigating some of the risks associated with it as well.

Rich Kruger (President and CEO)

I'll give you a little bit of color commentary, but I'm really gonna turn it over to Kris 'cause Kris and Alister were the ones that, you know, made this happen. I was brought into this thing literally within an hour of my announcement on February 21st. By then, you know, things had been, you know, things had moved along a little. As you know, we look at it's we've talked about the long-term bitumen supply, the value in keeping up the upgraders full and the uplift you get from that. Now we have other internal alternatives. We've looked at those alternatives, whether they're developing, you know, incremental mining capacity or in situ. We looked at this, and we saw that, you know, a significant value in it.

We saw a material dimension of risk management in it in terms of not having to plan and execute large-scale capital projects. The timing of it brings barrels immediately, and it's accretive. To me, it looked at it, and it was pretty clear that this is a win-win. You know, why don't I ask Chris to comment any further on it?

Kris Smith (Incoming CFO)

Well, thanks, Rich. I actually don't have too much more to add because I think you covered the major points. I mean, when we looked at, you know, when we looked at the opportunity of this transaction, I mean, it was checking a lot of boxes for us. First of all, obviously, we know the Fort Hills asset really well. We have a lot of confidence in the long-term value of that asset and the plan we have for it. Surmont is a high-quality bitumen asset, as I mentioned in my remarks. We're also well, you know, we're a very good operator in situ ourselves. We see a real opportunity to actually work with the operator and bring both of our advantages to that asset.

Then, as Rich mentioned, you know, from a strategic, there's just a great strategic fit. There's a lot of industrial logic related to this transaction and long-term bitumen supply into the region. We saw it as a really nice fit for our portfolio. As Rich mentioned, accretive to shareholders. We see very good return, long-term returns from this investment at the price we paid. We just saw it attractive on all sorts of dimensions, when we entered into the deal.

Rich Kruger (President and CEO)

I, you know, I'll make one other comment on it. You know, we're all aware that ConocoPhillips has a ROFR on Surmont. We reached out the morning of the announcement and, you know, one of the overriding messages is we would be a partner, a very willing partner, that would look to invest and grow value in this asset. We have tremendous respect for ConocoPhillips as an operator, and we think there would be synergies that we could bring that would add value to both the Surmont operation as well as our Firebag back and forth, that together we could make this more valuable than either of us individually. You know, we'll see, we'll see what goes on in that, but we would very much look forward to being in that partnership.

Neil Mehta (Managing Director)

That makes sense. That's the follow-up is, as you highlighted in the presentation, there are significant tax pools associated with this. To the extent that Conoco does execute a right of first refusal on Surmont only, do the tax pools exist at the asset level, or they stay at the consolidated level? Does that make sense?

Rich Kruger (President and CEO)

You know, I'll do one comment, then I'll ask Alister if he wants to supplement it a little bit. You know, with the ROFR still out there, kind of anything that might happen in the future is kind of speculative. You know, if this, then that. I would say on, you know, all those remain to be seen. It kind of depends on what happens. If, you know, Alister, would you have anything you'd want to add there or.

Alister Cowan (CFO)

Yeah. No, you.

Rich Kruger (President and CEO)

For a later date.

Alister Cowan (CFO)

You got it right. I mean, it depends on how it gets executed, what happens to the tax losses. They would, on the face of it, be lower by the amount of the ROFR. Beyond that, we have to see how it was executed.

Rich Kruger (President and CEO)

Yeah.

Neil Mehta (Managing Director)

Note. Note.

Operator (participant)

One moment for our next question. That will come from the line of Doug Leggate with Bank of America. Your line is open.

Doug Leggate (Managing Director)

Good morning, everyone. I love the exotic version, but congrats to all you guys. Alister, I'm glad we were able to get our trip squeezed in before you walked away. Thanks for your time again. Guys, I wonder if I could follow up on Neil's question on the ROFR. I wanna be a bit more specific about the tax benefits that you guys are acquiring. Kris, this might be for you, given it's more of a kind of a technical accounting question. I'm trying to understand who owns the tax losses. Is it the TotalEnergies entity that you're buying the shares of, or do the tax losses sit at the asset level?

In other words, if ConocoPhillips did preempt, do you hold on to the majority of those tax losses, or do they get transferred with the asset? Any, you know, technical explanation of how that might work would be really appreciated.

Kris Smith (Incoming CFO)

Yeah. Thanks, Doug. As you pointed out, we're doing a share transaction. We're purchasing the entity, so the tax pools are at the entity level. As Alister mentioned in his answer to the earlier question from Neil, I mean, certainly if the ROFR is triggered, it then is going to move into a different sort of transaction at an asset level. I think the tax pools are gonna be looked at quite differently, and they're gonna be lower. We're transacting at the entity level, as we're looking at the tax pools, they're on that basis.

Doug Leggate (Managing Director)

Okay. we're gonna have to wait and see how it plays out. Are the tax pools split proportionally to the value of the assets included in, you know, in the transaction, sort of two-thirds, one-third?

Kris Smith (Incoming CFO)

Oh, they're at, Doug, they're at the entity level.

Doug Leggate (Managing Director)

We'll have to wait and see what, how that plays out. I guess, Rich, my question for you is that obviously, you're inheriting a lot of legacy reliability issues. Not all of those, or rather a large part of those one imagines are structurally related to the age of the mine. How do you anticipate closing some of those reliability gaps given the obvious, you know, more, structural, just structural challenges of the mine life?

Rich Kruger (President and CEO)

First of all, Doug, I would say that, you know, advanced age is no excuse for poor performance, I'm saying that a bit tongue in cheek. You know, I think it's you take the mines, yes. What you're saying is obviously there's aging equipment. I think the issues are a little bit more things like haul distances and, you know, and ore quality in different areas. If you look at it, I was up with Peter just a couple weeks ago, and I went into the maintenance phase at each of the, you know, the base mine at Syncrude, Fort Hills. You talk about, you know, how we maintain things. We basically, like, rebuild trucks over time.

A truck is not old because over a period of, you know, a relatively short time, it's rebuilt. Now upgraders are different things, but look at refineries. Refineries across around the world have been operating, and they can operate very reliably despite age. It comes down to maintenance. It comes down to best practices, operational discipline. Yes, we have an aging mine set of assets. Yes, we have increased haul distances. I think that just means we just have to get smarter and more creative about how we manage costs and improve reliability. I really don't look at that as a. Certainly, no, Peter doesn't either. I know we don't. We don't look at that as an excuse or as a, well, you know, a limitation on what we can achieve.

I think it just means we need to get, you know, more thoughtful and more creative, and it really means executing the fundamentals extremely well. Our maintenance programs, our reliability programs, looking at risk-based work selection on turnarounds. It's just, you know, the blocking and tackling in our business that we've learned for decades, whether we've learned that in refining or whether you've learned it in mining, but executing extremely well. I hope, and I think you've heard in my comments, you know, that's gonna be our plan, looking at how we do what we do, how we do them, and then ensuring that those folks that are not at the asset, that they're providing the highest level of support, whether that's for rotating equipment, whether that's, you know, near-term, mid-term, or long-term mine planning. It's really...

You know, it's a focus on the basics, but just doing the basics extraordinarily well. I know, you know, it's kind of a long answer to it, but I just... You know, I mean, My premise is the age of our facilities and ultimately is not going to be a material inhibitor.

Peter-

Doug Leggate (Managing Director)

Great perspective, Rich.

Rich Kruger (President and CEO)

Yeah?

Doug Leggate (Managing Director)

Thanks and good luck. Peter, go ahead, please.

Rich Kruger (President and CEO)

Anything you'd add to that, Peter?

Peter Zebedee (Executive VP)

Well, I would just say, especially in the mining operations, really our approach is threefold. You know, across our portfolio, we're moving 1.3 billion tons of material every single year to generate the products that we do. Little things make a big difference, and that means squeezing the efficiency out of our own operations every shift, every single day. It means reducing our exposure to more expensive tonnages executed by a third-party contractor. I would say the last tranche of that really is around the implementation of new mining technologies, like the autonomous trucking technology we have active in our base plant today and will be scaling up across all of our assets in the near future.

Rich Kruger (President and CEO)

Doug, I-- Rich again. You know, you got me going here, so I got to say one more thing. I think, you know, we haven't talked today so much, but our focus on safety and improving safety. Safety is a huge productivity driver. When you-- Not only do we have a moral obligation to people, and we care about people, that's why, but it affects productivity. Activities that Peter has going on safety system, collision avoidance, fatigue management. We've talked about autonomous vehicles over time. All of these things not only ensure a safer workplace, but they provide a more productive workplace. I think those things, you know, they... Safety, operational integrity, reliability, and profitability, they are all very interlinked. I think the other things we're working on add to that same reliability aspect in-- particularly in mining.

Doug Leggate (Managing Director)

Appreciate your answers, guys. Thanks so much.

Rich Kruger (President and CEO)

Yep. Thanks, Doug.

Operator (participant)

One moment for our next question. That will come from the line of Menno Hulshof with TD Securities. Your line is open.

Menno Hulshof (Managing Director)

Thanks, and good morning, everyone. Rich, you talked about driving clarity and simplification throughout the organization. Can you just elaborate on what is meant by that? It felt like those words were carefully selected. What specific steps could we see over the next year to achieve that?

Rich Kruger (President and CEO)

You give me too much credit, Menno. I don't know that they were carefully selected, but what I believe is I believe everybody in the organization needs to have a line of sight to how do they support making money. I very much believe in making money. We are in business to make money and as much of it as possible. Everybody, starting with me, needs to see how they do that. That, well, you know. What I believe here and just, you know, been here a short while, but I'm proof testing a lot of things, is that we can enhance our clarity about what the workforce does to support, whether it's safety, integrity, reliability, or profitability. I think we can eliminate work. I think we can do away with work that doesn't add value.

I think we can look at things like service levels and service level support, but all with a keen eye on how it enhances bottom line business performance. You know, if my words came across as carefully selected, they're not really intended. We're early in this, but I just see a lot of opportunity for organizational efficiency. If that's, you know, focusing on higher value activities, so be it. If that's eliminating low value-added work, awesome. It's combinations of all of that. I do think above the field in an organization, you can create an energy, a motivation through clarity and focus that people can move mountains. I think fundamentally, you look at our business, our business kind of involves moving mountains in many cases. I think this organization is ready for that.

I think they're asking for it, and, that's exactly what I intend to provide.

Menno Hulshof (Managing Director)

Okay. Thanks for that, Rich. Having seen all of the inner workings at ExxonMobil and Imperial for decades, are there any best practices that have been shortlisted for rollout at Suncor over the near to midterm? I guess as a follow-up to that, do you think there are ways that Suncor and Imperial could work together even more effectively?

Rich Kruger (President and CEO)

I think I'm a big believer in benchmarking and best practices. You know, how do you know if you're the best unless you know, unless you've got some kind of a scorecard to it? When I, when I think of best practices, you know, whether you know, whether it's safety systems, integrity systems, there's kind of three categories I think about. First, the system design itself. Is it a quality system? In my short time here, I think we have quality systems. Our safety systems, our operational excellence systems, I think are quality. Now, can they be improved? Can they be made better to implement? Absolutely. Are they, you know, as simple as they can be to apply in the field? Those are questions. We have sound systems.

You get into the application of the system. That's where in a, in a short time, but I've seen variability in how well we've applied systems at different sites. My vision there would be we reduce variability to the highest standard of performance. Once you have a quality system, once you've applied that system, then it comes into the effectiveness. Are your systems delivering the intended result? That's where you put that, you know, that return feedback loop in place to enhance the system, strengthen the leadership that goes with the applicability to produce better results. On the application of what I think are our quality systems, we have work to do to reduce variability. Along with that is measuring the execution quality, the effectiveness of our application.

Those are the two areas where I plan to focus on, you know, early on. Other best practices, I think in, I'm a big one for learning. You look over the lease line to learn. For collaboration, whether that's in, you know, whether that's in operation refineries, whether that's in operation of mines, I believe that for Suncor to be a winner in the oil sands, the oil sands also has to win and compete on the world stage. You know, the consumer, when they put a nozzle in a car, a truck or the side of an airplane, quite frankly, they don't really think about where that low gas diesel or jet comes from. Does it come from an oil sand? West Texas Intermediate oil?

We have to be globally competitive in the oil sands, and our goal is to be the best of the best in the oil sands. To be globally competitive, that comes with collaboration. I think Pathways is a great example of that. I think there's other more fundamental examples of how do we run and operate mines? How do we, you know, how do we maintain, you know, dikes and dams and tailings? How do we collaborate with the federal and provincial governments on sound public policies that achieve the objectives, but also ensure or maintain the competitiveness of what is a critical industry for not only Alberta, but Canada overall.

That's a long You got me going there, Menno, on a topic I'm passionate about, but I think collaboration and application of standards and best practices is very much a part of a winning formula.

Menno Hulshof (Managing Director)

Appreciate the thoughts, Rich. I'll turn it back.

Rich Kruger (President and CEO)

One moment for our next question. That will come from the line of Harry Mateer with Barclays. Your line is open.

Harry Mateer (Research Analyst)

Thank you. Good morning. First of all, I see slide 4 about the capital allocation, and it looks mostly similar to what the company had up previously. You know, at the same time, Suncor's coming out of the gates with a, you know, a debt-funded acquisition and going above the $12 billion-$15 billion net debt range, at least for a period of time. You know, Rich, for the credit investor community, would like to get your perspective on the balance sheet, how you think about optimal leverage for Suncor, and perhaps where in the investment grade category you think the right place is for Suncor's ratings to be.

Rich Kruger (President and CEO)

I think, you know, I think some of the specificity of what you've asked for maybe is beyond what I can comment on today. You know, fundamentally, I think, I believe in a strong balance sheet. We produce a basket of commodities. Prices go up and down, and how you have the resiliency to get through the inevitable cycles is by having a, you know, a strong balance sheet. And when I look at, you know, covering what my priorities are, the care and feeding of the existing asset base, the sustaining expenditures are, you know, you need to do those in the short-term and the long-term. As I commented, a reliable and growing dividend. High dividend is very important to me.

I want to ensure that we have a cost structure which includes, you know, level of debt and financing costs on debt, so that we can withstand those ups and downs and financially, you know, deliver. Maybe you dial back on high-quality investments in periods of low prices. Maybe you use, you know, the flywheel of returning surplus cash to shareholders as modified, but that you don't put at risk taking care of what you already have, and you can still continue with a reliable and growing dividend, you know, in periods of up and down. Maintaining a strong credit rating is key, obviously, for, you know, the cost. I think coming out of Daisy is a bit of a reflection on confidence that I have in the corporation. I think that's all important.

Maintaining our ability to borrow when we can and should leverage for opportunities, keeping a strong credit rating, our credibility in the marketplace, and then getting our cost structure where we can, you know, we can withstand the inevitable ups and downs you see in our business. It's the business we've chosen. You know, I'm not... You know, Harry, I'm not sure if I was specific enough for you. Alister, if you have anything else to add or bolster that or refute it.

Alister Cowan (CFO)

I feel like you summarized it very well. I would just, you know, emphasize the work the rating agencies went through our Total acquisition and no changes to our ratings. I think that demonstrates their commitment to a strong balance sheet and getting the debt back down in a relatively short order.

Rich Kruger (President and CEO)

Yep. Exactly.

Harry Mateer (Research Analyst)

Okay, thanks for that. I'm not sure for Alister or Kris, but, you know, given the planned debt financing, you've noted in the slides, I mean, Suncor has a pretty clean maturity slate in the next couple of years. How are you thinking about staggering that financing? Are you comfortable issuing some longer-term debt? Are you thinking, you know, more like issuing shorter-dated notes or bank debt to provide a bit of a glide path to gross debt reduction in the next couple of years?

Alister Cowan (CFO)

Yeah, as you noted, Harry, you know, our maturities have been in the short term, we've essentially taken most of those out with the debt buyback last year. We'll focus more on the shorter end. Obviously, we think we can accelerate the debt repayments, so we'll be focusing on our ability to be able to repay debt as quickly as we can. We will issue some longer term stuff as part of the package, but the focus will be on the shorter end.

Harry Mateer (Research Analyst)

Okay. Thanks very much.

Rich Kruger (President and CEO)

Thanks, Harry.

Operator (participant)

We do have time for one final question, and that will come from the line of Roger Read with Wells Fargo Securities. Your line is open.

Roger Read (Senior Energy Analyst)

Thanks for working me in here. I guess what I'd like to really kind of understand, Rich and Kris, is, you know, so much of the forward focus is gonna be on reliability, safety, and the general systems are in. How much visibility do you have today or certainty do you have of what needs to be done in terms of, you know, making things work the way you want them to work and improving the overall performance? What I'm really just getting at is, you know, you had the Investor Day at the end of last year, and then we've had obviously some pretty significant changes here at the top. I just wanna kind of understand, you know, are we looking at something that, you know, should really be a very quick impact?

Are we looking at things that, well, let's think about it more as a 2024, 2025 kind of event? Anything you can do to help us with the timeline, I'd appreciate.

Rich Kruger (President and CEO)

You know, I think in terms of what needs to be done, a lot of it is not, you know, and I don't mean to oversimplify it, but it's not rocket science either. It gets back to, and I end up looking down the table at the, you know, the Executive VPs and the Senior VPs responsible for our operations. It's the kind of things we talked about. It's applying, you know, Well, it's executing our work exceedingly well. That is not necessarily complicated. It's ensuring that people have the skills, abilities, the time, the support to do what we know it takes to operate and maintain facilities.

Yes, it is also getting smarter and looking for creative financial solutions on whether that's our, you know, our truck fleet at Fort Hills, for example, or getting better at, you know, the turnaround expenditures. We spend, for example, nearly CAD 1 billion a year on plant turnarounds across our massive asset base. It seems like that should be something we become really, really good at because you save money, and if you shorten timelines through risk-based work selection, you get online quicker, and you start making money while you take facilities down. You know, I think I would love to be able to say, you know, how fast and what to expect. I'm just. You know, Roger, I'm not there yet.

I think the, you know, the what we need to do and what we need to focus on, and equally important, what we need to be sure we don't focus on to allow the, you know, to allow the attention to where the biggest bang for the buck is, I think that's getting clearer and clearer. I think the senior leadership team and I are rapidly getting aligned on that. We will be pursuing any and all improvement opportunities with a sense of urgency. I know I didn't give you know, a timeline or numbers, but this is. When you started saying, you know, 2024, 2025, that ain't my timeline. You know, there's no better time than the present. I think, you know, I would hope that we start seeing...

Hope's not a very good strategy, by the way, so, you know, I would expect that we will start to see incremental improvements, you know, with time, and that time's not, you know, just the future. That's sooner rather than later. I just signed you guys up to deliver, folks. I'm looking at my team down there, and I just signed them up. I can tell there's a little tightness being formed down there at the end of the table, but they're all smiling, so that's a good thing.

Roger Read (Senior Energy Analyst)

Yeah, I appreciate that. Yeah, just as a quick follow-up, it's been kinda hammered already, the ROFR that Conoco has, if they exercise that, it obviously alters the transaction. Would we anticipate, you know, then you would, obviously with a lot less debt, would be likely to move back to a 75/25 payout more quickly? I mean, that's just that seems like a natural progression if that happens, I'm just trying to, you know, kind of anticipate what the changes might be if that piece of the Total transaction does not occur.

Rich Kruger (President and CEO)

Well, you know, the, you know, again, it. What Conoco may or may not do, you know, we'll all learn that here in the relatively near future. If I step back from it, more broadly, you know, Go back to what I described on capital allocation. If we have surplus cash, we'll look at what's the best way to return that to the shareholder. That will, you know, that'll be, you know, combinations. We've continued to look at our dividend and/or share buybacks and/or debt reduction. Undoubtedly, if we didn't have this big acquisition, our debt would be back closer to where we've talked about targeting it.

It'd be that combination of events that we would just look at what do we believe is the highest value of the shareholder. I can assure you know, Roger, everything we have done and will continue to do will always have the shareholder, you know, at the front of the windshield, not looking in back, but looking forward. What's in the best interest of the shareholder? That's our mantra.

Roger Read (Senior Energy Analyst)

Appreciate it. Thank you.

Rich Kruger (President and CEO)

You're welcome.

Operator (participant)

Thank you. I would now like to turn the call back over to Mr. Troy Little for any closing remarks.

Troy Little (VP of Investor Relations)

Thank you, operator. Thank you for joining us, everyone. Please don't hesitate to call us with any follow-up questions. Operator, you can now end the call.

Rich Kruger (President and CEO)

Thanks, folks.

Operator (participant)

Thank you all for participating. This concludes today's program. You may now disconnect.