Canada’s oil sands goliath, in a major rethink of development plans, is taking a hard look at tens of billions of dollars of planned spending and threatening to pull back from big projects unless it can wrangle back costs and boost profits.
Suncor Energy Inc. is abandoning its bold growth target of pumping a million barrels a day by 2020, after its new chief executive officer announced “rigorous scrutiny” on the cost of three projects, the Joslyn and Fort Hills oil sands mines and the Voyageur upgrader.
“Growth for the sake of growth doesn’t interest me too much,” Steve Williams told investors on Wednesday, as Suncor announced $333-million in second-quarter profit, down 75 per cent from the previous quarter, largely because of a $694-million writedown of its Syrian assets.
“What interests me is profitable growth,” Mr. Williams said. Suncor, he added, could even contemplate withdrawing from those projects in favour of other measures that would boost Suncor production through, for example, increasing the output of current facilities or building more profitable non-mining oil sands. “In principle, there is the opportunity to not progress those projects.”
It is a startling declaration from a firm whose size and stature in the oil sands make it an industry leader and bellwether. The Suncor cost review is an unmistakable sign of the issues confronting companies seeking to squeeze crude out of an area whose staggering costs make it among the most expensive on earth to develop. A paring-back of Suncor’s development plan would hamper the industry’s ambition to double output over the next decade, and cloud the bright outlook for economic growth and labour demand in the West.
And though Suncor offered little explanation as to why it is contemplating the changes, the cost review comes as investor skepticism weighs on the share performance of Canada’s major energy companies. Worries about volatile oil prices and soaring costs have made investors nervous about an erosion of profits in the sector. The TSX energy index is down 25 per cent from its 52-week high, and shares of many energy heavyweights have flatlined in recent years.
Norm MacDonald, who manages Trimark resource and energy funds, can recall a late 1990s presentation where Suncor trumpeted its ability to generate 20-per-cent returns at $30 oil. “And now to get 20 per cent, you need $110 oil. It’s shocking,” he said.
“So I think management teams are understanding now that the way to drive a stock price higher is not grow at all costs, but only grow if it’s going to return something to shareholders.”
It’s an issue facing the entire oil sands. Take Cenovus Energy Inc., which has gone so far as to run its own assembly yard to keep costs down. Its older Christina Lake project requires prices of $35 (U.S.) a barrel to produce a reasonable return. But new developments in coming years, chief executive officer Brian Ferguson said in an interview Wednesday, should “clear that hurdle at $65 or less.”
Keeping those costs low is a primary goal: “In a resource business and a commodity-driven business, it’s the low-cost producer that always is able to generate strong returns,” he said.
Indeed, the Suncor cost review comes amid a broader resource focus on costs, as years of booming commodity prices give way to concern about a faltering global economy. Kinross Gold Corp., BHP Billiton and Rio Tinto PLC have all recently voiced similar concerns.
“A lot of these large, multibillion-dollar projects are coming under increased scrutiny,” said Ari Levy, a vice-president at TD Asset Management who oversees several energy and resource funds. “It’s a constant struggle for all these companies to try to retain as much as possible of that economic rent, or that profitability.”
At Suncor, the review is set against a management change that is also now shifting the direction of the company.
Since taking the lead at Suncor, Mr. Williams has sought to assure investors that he intends to stay the course set by his predecessor, Rick George. But the capital review marks a clear break with Mr. George, who set the million-barrel goal and led the company as it invested in a series of increasingly expensive projects.
Mr. George even poked fun at rivals, notably saying earlier this year that the costs for Imperial Oil Ltd.’s Kearl project were “way out of range” – even as those examining Suncor numbers concluded that its Firebag project was touching new highs for non-mining projects. A cost analysis conducted by BMO Nesbitt Burns concluded that Fort Hills and Joslyn were the third- and sixth-most expensive projects under way in the oil sands, requiring $90 and nearly $80 oil prices, respectively, to turn a reasonable profit.
Now Mr. Williams has essentially acknowledged that without a major re-think, Suncor faces potentially narrowing profitability.
He said the review had nothing to do with cost inflation or dipping oil prices: Suncor’s recent projects have come in slightly under budget, and its refineries substantially shield it from downward Alberta crude movements. He also said Suncor’s relations with Total SA, its partner on all three projects under review, remains healthy. Total has pledged $20-billion in oil sands investments over the next decade. Total spokeswoman Elizabeth Cordeau-Chatelain said that goal remains in place.Report Typo/Error