Suncor Energy Inc.'s chief executive is disappointed with the performance at his company's marquee operation – its oil sands plant.
Operational headaches at and around the sprawling facility north of Fort McMurray, Alta., marred an otherwise strong second-quarter showing from Canada's largest oil company.
Suncor rewarded investors with a hefty 22-per-cent dividend hike and renewed stock buyback plans as a combination of a sharp cut in capital spending and strong commodity prices led to cash piling up on its balance sheet.
Still, production lagged expectations, a factor that contributed to a 3-per-cent drop in Suncor shares, along with a broader market slide following Argentina's second debt default in 12 years.
"I'm not satisfied with the overall level of reliability we've achieved in our oil sands operation," CEO Steve Williams said in a conference call to discuss the results.
"During the quarter, we dealt with a number of internal and third-party operational outages, and those ranged from processing challenges in extraction and upgrading to third-party power and pipeline outages. As a result, our average production for the first half of the year has lagged slightly below our guidance range."
The company's integrated mining and synthetic crude processing businesses, a category of oil sands operation that also includes the Syncrude Canada Ltd. joint venture, have struggled with outages and production drops as equipment has aged in a region known for its harsh climate. Suncor is also a Syncrude partner.
"Although the second-quarter results were somewhat disappointing, we believe management's continued focus on capital discipline and returning cash to shareholders demonstrated by the dividend increase and budget reduction outweigh the hiccups encountered in the downstream business," BMO Nesbitt Burns analyst Randy Ollenberger wrote in a note to clients.
Suncor's company-wide production averaged 518,4000 barrels a day in the second quarter, up 3.7 per cent from the same period a year earlier. However, oil sands mining volumes fell about 10,000 barrels a day from the first quarter due to various shutdowns for repairs.
Unplanned maintenance at Syncrude's upgrading plant also reduced Suncor's oil sands output.
Struggles in oil sands mining were offset by gains in its steam-driven bitumen production operations, including the newly expanded Firebag project, the company said.
Mr. Williams said he expects some of the business's bugs will be ironed out in the second half, pointing to already improved performance over the past two months. "So with limited maintenance scheduled for the remainder of the year, we are still expecting to meet our 2014 oil sands guidance forecast for both production and costs," he said.
The company has chopped $1-billion from its capital spending budget for 2014, a move that Mr. Williams said will not affect its major growth plans but helps put cash back in investors' pockets. The budget is now pegged at $6.8-billion.
It cancelled a shale gas project in British Columbia and, along with partner Total SA, shelved the Joslyn oil sands development in northern Alberta.
Suncor increased its quarterly dividend to 28 cents a share.
In the quarter, it earned $211-million, or 14 cents a share, down 69 per cent from year-earlier $680-million, or 45 cents a share.
Net income was reduced by after-tax writedowns of $718-million for shelving the Joslyn project, a $297-million on its Libyan assets and $223-million on oil sands assets that no longer fit into operations but cannot be deployed elsewhere.