Suncor Prepares for Production Boost on Majority Syncrude Stake

  • Additionanal Syncrude stake will provide 17,500 barrels
  • Company plans to boost its total output 40 percent by 2019

Suncor Energy Inc. is doubling down on a bet that the oil sands will be a competitive source of crude as it increases its ownership of the Syncrude Canada mine and presses ahead with its Fort Hills bitumen project.

The company’s production will grow 40 percent from 2015 levels to more than 800,000 barrels a day by 2019, President and Chief Executive Officer Steve Williams said during a conference call Thursday with analysts to discuss first-quarter results.

“That’s a growth trajectory that very few companies of our scale can hope to equal,” Williams said. “More importantly, it’s growth that gives us even more leverage to rising oil prices.”

The company paid C$937 million ($747 million) for Murphy Oil Corp.’s 5-percent of Syncrude, boosting its ownership to 53.74 percent, it said Wednesday.

Suncor, Canada’s largest oil company by market value, is also pressing ahead with its C$15.1 billion Fort Hills project, with plans to spend C$4.5 billion with its partners this year to begin production at the end of 2017.

Cost Competitive

Suncor aims to make bitumen extraction an important -- and cost competitive -- source of crude for global markets. The company reduced cash operating costs at the oil sands division in the first quarter by 15 percent to C$24.25 a barrel, and Williams said the company can sustain a dividend and free cash flow at crude prices of $40 a barrel.

Williams said he expects a period of oil prices being “lower for longer.” The price of West Texas Intermediate crude, the U.S. benchmark, has gained 25 percent this year and traded Thursday above $46 a barrel, a five-month high. Prices averaged $33.63 during the first quarter.

“Oil sands operating costs not surprisingly continue to trend lower across all segments due to a combination of higher volumes, cost savings and lower natural gas prices,” said Menno Hulshof, an analyst at TD Securities, in a note. “In fact, we would have to go all the way back to 2007 to see costs this low.”

Suncor rose 3 percent to C$37.33 at 1:16 p.m. Thursday in Toronto. The stock has gained 4.5 percent this year, compared with a 15 percent gain for the S&P/TSX Composite Index Energy Sector Index.

Expansion Plans

The 5 percent stake in Syncrude acquired from Murphy Oil will provide Suncor with an additional 17,500 barrels a day of production. The sale will allow Murphy Oil to focus on its drilling operations in North America, the U.S. producer said in a separate statement. The process of improving Syncrude’s operations will be a “multi-year” process and Suncor will continue to work with Syncrude’s operator Imperial Oil Ltd. to improve operations.

The company last year began its efforts to boost control over Syncrude, which produces light synthetic crude oil. It succeeded in winning over resistant Canadian Oil Sands management and shareholders after sweetening its offer earlier this year. Suncor made two offers before a hostile bid in October and finally secured Canadian Oil Sands management’s green light for the takeover in January.

Suncor has taken advantage of the oil industry downturn to expand through deals including the C$4.2 billion takeover of Canadian Oil Sands and the purchase of a bigger stake in a venture with France’s Total SA. The company will “take a breath” on large projects and focus on increasing efficiency and lowering costs, Williams said on the call.

Suncor has also targeted as much as C$1.5 billion in asset sales, Alister Cowan, Suncor Chief Financial Officer, said on the call. The company isn’t currently selling its chain of gas stations. It has already sold C$4.5 billion worth of assets since its merger with Petro-Canada in 2009.

At the same time, Suncor has cut spending by 10 percent this year after posting a surprise fourth-quarter loss. The 2016 spending reductions come after the company eliminated about 1,700 jobs and slashed its budget last year.

First-quarter net earnings were C$257 million, or 17 cents a share, compared with a loss of C$341 million, or 24 cents a share, in the year-earlier period, the company said in a separate statement. The oil sands division lost C$524 million in the quarter, compared with a loss of C$146 million a year earlier, the company said.

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