Suncor Energy Inc. , Canada’s largest oil sands company, expects its own operations to cover its spending next year, a decision that means its $7.5-billion budget is smaller than what some outsiders forecasted.
The 2012 budget will be “broadly balanced” between growth projects and maintenance spending, Bart Demosky, Suncor’s chief financial officer, said in the company’s third-quarter conference call. At the same time, the company’s cash operating costs tied to oil sands production will climb, with its expansion efforts accounting for some of the rising costs.
Suncor acknowledged that its budget may be smaller than expected, but that is because the company wants spending to match cash flow. Energy companies across the board have pared their budgets as the price of oil and gas remain volatile and the threat of rising costs linger. Investors have welcomed this conservatism, particularly as the market’s collapse in 2009 pinched slews of companies which were spending heavily during Fort McMurray’s boom between 2005 and 2009.
“One of the things we are we are working very hard on is to both spend capital efficiently and to spend only within our means,” Mr. Demosky said, explaining why the budget wasn’t larger.
Suncor’s cash flow, which reached a new high in the third quarter, has so far covered its 2011 budget of $6.7-billion, he said. “At current oil prices, and in fact quite a bit below current oil prices, we are able to meet capital requirements from internally generated cash flow.”
It is more expensive to mine bitumen than extract it through drilling techniques. Suncor, however, kept its costs low this quarter, noted Laura Lau, an energy fund manager at Sentry Investments. Suncor’s cash operating costs in the oil sands rang in at $36.60 per barrel (excluding Syncrude results) in the third quarter.
“All the surprise [in the quarter]has been positive,” Ms. Lau said.
Suncor warned that its cash operating costs to produce oil sands crude will rise next year because the company has hit a “lean” zone in its Millennium mine, Steve Williams, Suncor’s chief operating officer, said. It will take about 12 months for the company to dig through this patch.
The lean stretch will affect costs more than production volume because Suncor will have to remove more material such as sand to get at each barrel of bitumen, a company spokesperson explained. Suncor will detail its production and spending forecasts when it releases its 2012 guidance next week.
Costs will also rise as the company’s Firebag 3 expansion continues to jack up production, and as its Firebag 4 expansion starts, Suncor’s Mr. Williams said.
Suncor made $1.287-billion or 82 cents per share in the quarter, up from $1.224-billion or 78 cents per share in the same quarter in 2010. Operating earnings, which adjust for unusual items, rang in at $1.789-billion or $1.14 a share, compared with $617-million or 39 cents per share last year. Cash flow climbed to $2.721-billion or $1.73 per share, compared with $1.63-billion or $1.04 per share.
The company credited higher oil prices, increased oil sands production and fatter refining margins for its stronger third-quarter results.
Rick George, Suncor’s chief executive, said that while costs are rising in the oil sands region as companies rev up expansion plans, the pain is not comparable to the frothy years between 2005 and 2008. Instead, prices are rising between 3 and 5 per cent, he said. He does not expect costs to make a major jump in 2012.
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