Suncor, Cenovus fight despite low prices

Both companies have upbeat outlooks, with Suncor increasing capital budget 15%; Cenovus’ budget down, but production goals flat

GARY PARK

For Petroleum News

Canada’s high-cost, low-return oil sands players are not altogether crawling into a hole to ride out the storm.

Suncor Energy and Cenovus Energy, the two largest oil sands producers and barometers to the sector’s future, have delivered surprisingly upbeat outlooks for 2016 and beyond.

Suncor set its capital budget for next year at C$6.7 billion-C$7.3 billion, up 15 percent at the midpoint from the C$5.8 billion-C$6.4 billion it expects to spend this year.

Of that spending program, 55 percent has been earmarked for upstream growth projects, with the balance allocated to sustaining operations at a cost of C$27-C$30 a barrel, compared with C$28-C$31 this year and continuing a trend that has seen Suncor reduce its oil sands cash costs by 11 percent since 2011.

The spending is targeted at achieving output of 525,000-565,000 barrels of oil equivalent per day (including 95,000-105,000 barrels per day of conventional oil) in 2016, down 5 percent at the midpoint from this year’s anticipated 550,000-595,000 boe per day partly because of planned maintenance at several facilities.

Suncor Chief Executive Officer Steve Williams told analysts that his company is positioning itself to be the “last guy standing” in a world of weak oil prices and rising demands to reduce carbon emissions.

He conceded to the Globe and Mail that his industry is in a fight for its life against depressed crude prices, new Alberta regulations to cap carbon emissions and mounting global resolve to get off a diet of fossil fuels.

Williams said the answer is to both reduce costs and greenhouse gas emissions and make Canada the “place of choice” in the oil businesses because it is “innovative; it’s got new technology; it’s got the rule of law; it’s got great regulation; and it’s got companies that are willing to invest here.”

He argued Suncor is already “busting the myth” that it remains a high-cost producer by driving operating costs closer to US$20 a barrel, adding that it also primarily receives international prices for its upgraded crude.

Cenovus Chief Executive Officer Brian Ferguson put his own twist on an optimistic outlook, suggesting the company can revive oil sands projects in the coming year without relying on a recovery in oil prices.

He said the deciding factors will be clarity over government policy changes, such as the outcome of Alberta’s royalty review, and assurances that cost savings are sustainable.

Ferguson said Cenovus is in good enough financial shape to invest in projects - even though it has deferred its Narrows Lake oil sands project and future expansions of its core Foster Creek and Christina Lake operations - provided it has certainty over regulatory and cost factors.

“These are 30-year investment decisions,” he said, noting that projects stand to benefit from reductions in the cost of labor and materials that Cenovus and its peers are determined will last beyond the eventual recovery in oil prices.

Cenovus has set its 2016 capital budget at C$1.4 billion-C$1.6 billion, down by C$350 million from this year, but leaving intact the company’s goal of achieving production of more than 600,000 bpd from net existing or approved projects.

Analyst Greg Pardy of RBC Dominion Securities gave the budget a “positive” mark, noting that although spending is 18 percent below his outlook production is off by only 1 percent.

Cenovus, which jointly operates Foster Creek and Christina Lake with ConocoPhillips in return for its partnership in two U.S. refineries operated by ConocoPhillips, said it plans to use about 80 percent of its 2016 budget to sustain capital investments, with the remaining 20percent allocated mainly to growth projects.