Suncor Energy Inc.'s pullback is paying off.
Two years after abandoning plans to pump one million barrels of crude a day from the oil sands by 2020, Canada's biggest energy company has undergone a dramatic shift. Suncor has dialled back a multibillion-dollar spending spree aimed at rapidly boosting production and instead is redirecting more of its growing stream of cash to shareholders.
The strategy reflects a new wariness in the oil sands after years of big spending and cost blowouts on major projects, as Canadian producers face new competition from the surge of U.S. shale oil. Stalled multibillion-dollar export pipeline plans have stoked uncertainty about future growth in the sector, prompting project delays such as Statoil ASA's move last month to shelve a steam-driven project called Corner.
"The greater concern from a lot of institutional investors is whether you're going to be able to market your crude, not whether you're going to be able to grow your production," said Robert Mark, a director at MacDougall MacDougall & MacTier Inc., which has $5.1-billion (Canadian) under management including Suncor shares.
Under chief executive Steve Williams, Suncor posted free cash flow (a measure of discretionary cash generation) of $3.6-billion for the 12 months ended June 30, a 66-per-cent increase from the year-prior period and profits climbed sharply. Instead of plowing the money into growth projects, the company has raised its quarterly payout, aggressively bought back shares and throttled back spending plans this year by $1-billion. The moves followed decisions last year to jettison a chunk of its natural gas business and abandon its $11.6-billion Voyageur upgrader with Total SA.
Investors have responded by pushing the stock up about 7 per cent so far this year, topping the iShares energy index exchange-traded fund's return of about 4 per cent. Energy shares, however, have fallen recently as oil prices have retreated, which could crimp earnings for the sector, including Suncor.
The company is still spending cash on new projects – including $5.5-billion on Fort Hills, a $13.5-billion joint venture under construction with Teck Resources Ltd. and Total's Canadian arm.
But Suncor will also add roughly 100,000 barrels-per-day (bpd) of production through a series of tweaks to equipment and incremental expansions at existing operations. The total represents roughly 50 per cent of the energy giant's planned oil-sands growth out to 2020.
By comparison, the company's production share of Fort Hills is 73,000 bpd. According to company estimates, the partly built mine, due to start up in 2017, will churn out bitumen for between $78,000 and $92,000 per flowing barrel, an industry calculation that measures overall cost of production.
But at existing operations, Suncor says it can wring crude for between $10,000 and $30,000 per flowing barrel.
"And that's substantially below what it would be if you ended up doing it any other way," Mark Little, Suncor's executive vice-president of upstream operations, said in a recent interview. "It can get up to $100,000, just depending on whose projects you're talking about and what the portfolio is."
A glimpse of the slimmed-down strategy is on display deep in the mechanical bowels of the company's MacKay River project about 60 kilometres northwest of Fort McMurray. Suncor began pumping crude from underneath the surrounding boreal forest here more than a decade ago, using super-hot bursts of steam to melt shallow seams of bitumen it couldn't mine. Today, plans to increase production hinge on feeding more water into giant boilers, which generate steam.
"That's one piece of the puzzle," plant manager Mike Douglas said on a recent afternoon, gesturing at a new high-pressure water pump. The equipment will help squeeze an extra 8,000 bpd from the site, boosting output to 38,000 bpd by year-end. The company is also laying the groundwork to pump another 20,000 bpd from the steam-driven project.
Elsewhere, new equipment at the company's base plant – which includes the North Steepbank and Millennium mines – will yield 6,000 bpd, Suncor says, while upgrades at its steam-driven Firebag project will add another 20,000 to 40,000 bpd over the next three to four years.
In Calgary, Mr. Little said the investments are not motivated by the recent drop in crude prices, which have plunged on bulging global inventories and weak demand in Europe and China.
"But clearly oil sands costs have been going up for over a decade," he said, prompting companies to search for hidden savings. "And we think we're making some good progress there," he said.
Still, gains from incremental cost savings at its oil sands operations may be limited over time, analysts say.
The ability to scour old assets for overlooked efficiencies "only really exists for producers that have a meaningful amount of investment already in place," said Chris Cox, analyst at Raymond James in Calgary, noting Cenovus Energy Inc. and Imperial Oil Ltd. are planning similar moves.
Suncor's operations date to 1967, giving it a distinct advantage over rivals, Mr. Cox said, "but I'm not sure how much more of that opportunity exists versus what's already been outlined."