Suncor Energy Inc. press release
Suncor Energy Reports Third Quarter 2022 Results
TSX - Toronto Stock Exchange · Canada
Unless otherwise noted, all financial figures are unaudited, presented in Canadian dollars (Cdn$), and have been prepared in accordance with International Financial Reporting Standards (IFRS), specifically International Accounting Standard (IAS) 34 Interim Financial Reporting as issued by the International Accounting Standards Board. Production volumes are presented on a working-interest basis, before royalties, except for production values from the company's Libya operations, which are presented on an economic basis. Certain financial measures referred to in this news release (adjusted funds from operations, adjusted operating earnings, net debt, last-in, first-out (LIFO) inventory valuation methodology and free funds flow) are not prescribed by Canadian generally accepted accounting principles (GAAP). See the Non-GAAP Financial Measures section of this news release. References to Oil Sands operations exclude Suncor Energy Inc.'s interest in Fort Hills and Syncrude.
Calgary, Alberta--(Newsfile Corp. - November 2, 2022) - Suncor Energy Inc. (TSX: SU) (NYSE: SU)
"As we drive the focus of the company on operational execution, we delivered $4.5 billion in adjusted funds from operations in the third quarter, the second highest in the company's history, driven by strong refinery throughput in the downstream, delivery of solid upstream production as we executed planned maintenance, consistent with what we have previously communicated, and a solid business environment," said Kris Smith, Interim President and Chief Executive Officer. "Those strong operating cash flows, as well as proceeds from asset dispositions in the quarter, supported the execution of our capital allocation strategy. We returned approximately $1.7 billion of value to shareholders during the third quarter, and the recently completed debt tender of approximately $3.6 billion represents structural long-term debt reduction."
Adjusted funds from operations increased to $4.473 billion ($3.28 per common share) in the third quarter of 2022, compared to $2.641 billion ($1.79 per common share) in the prior year quarter. Cash flow provided by operating activities, which includes changes in non-cash working capital, was $4.449 billion ($3.26 per common share) in the third quarter of 2022, compared to $4.718 billion ($3.19 per common share) in the prior year quarter. Adjusted operating earnings increased to $2.565 billion ($1.88 per common share) in the third quarter of 2022, compared to $1.043 billion ($0.71 per common share) in the prior year quarter. The company had a net loss of $609 million ($0.45 per common share) in the third quarter of 2022, compared to net earnings of $877 million ($0.59 per common share) in the prior year quarter. The net loss in the third quarter of 2022 included a non-cash impairment charge of $3.397 billion against the company's share of the Fort Hills assets, a $723 million unrealized foreign exchange loss on the revaluation of U.S. dollar denominated debt recorded in financing expenses and a $866 million income tax recovery related to the items noted. Oil Sands generated $3.257 billion in adjusted funds from operations(1)in the third quarter of 2022, compared to $1.745 billion in the prior year quarter. Production from the company's Oil Sands assets was 646,000 barrels per day (bbls/d) in the third quarter of 2022, compared to 605,100 bbls/d in the prior year quarter. Production in the current period reflects increased production at Oil Sands Base due to decreased planned maintenance activities in the current quarter, increased production at Fort Hills and the impact of planned turnaround activities at Syncrude. In the third quarter of 2022, reliable operations resulted in refinery crude throughput of 466,600 bbls/d and utilization of 100%, compared to 460,300 bbls/d and 99%, respectively, in the prior year quarter. The company leveraged its extensive domestic sales network and export channels to achieve refined product sales of 577,300 bbls/d, compared to 551,500 bbls/d in the prior year quarter. As a result, Refining and Marketing (R&M) generated approximately $1.8 billion in adjusted funds from operations(1), excluding the impacts of a first-in, first-out (FIFO) inventory valuation loss(2)of $585 million, compared to approximately $1.0 billion of adjusted funds from operations in the prior year quarter, excluding the impacts of a $91 million FIFO gain. In the third quarter of 2022, Suncor continued to deliver on its strategy of growing shareholder returns, returning approximately $1.7 billion of value to its shareholders through approximately $1.0 billion in share repurchases and $638 million of dividends, compared to approximately $1.0 billion in the prior year quarter through $704 million in share repurchases and $309 million of dividends. As at October 31, 2022, since the start of the year, the company has repurchased approximately $4.6 billion of its common shares, representing approximately 104.7 million common shares at an average share price of $44.01 per common share, or the equivalent of 7.3% of its common shares as at December 31, 2021. In support of its debt reduction and annual capital allocation targets, the company reduced net debt by approximately $1.8 billion in the third quarter of 2022, excluding the impact of a $723 million unrealized foreign exchange loss on the revaluation of U.S. dollar denominated debt. Subsequent to the quarter, Suncor executed a debt tender offer and, as a result, repaid approximately $3.6 billion of its various notes below par. This structural reduction of long-term debt was executed during opportunistic market conditions and demonstrates the company's confidence in its business and commitment to reducing net debt. In alignment with Suncor's strategy to maximize value through its core business, the company continues to optimize and streamline its portfolio. In the third quarter of 2022, the company completed the sale of its Exploration and Production (E&P) assets in Norway. Subsequent to the third quarter of 2022, the company reached an agreement for the sale of its wind and solar assets for gross proceeds of approximately $730 million, before closing adjustments and other closing costs, which is expected to be completed in the first quarter of 2023. The sale process for the company's U.K. E&P portfolio is progressing, with a sale anticipated to close within the next twelve months. Subsequent to the third quarter of 2022, Suncor entered into an agreement, subject to regulatory approval and other closing conditions, to acquire Teck Resources Limited (Teck) 21.3% working interest in Fort Hills Energy L.P. (Fort Hills) and its associated sales and logistics agreements for $1.0 billion, before closing adjustments and other closing costs, bringing the total aggregate working interest of Suncor and its affiliate to 75.4%. The transaction meets Suncor's return objectives and builds upon the company's strategy to optimize its portfolio around its core assets. The transaction is expected to close in the first quarter of 2023.
Financial Results
Adjusted Operating Earnings
Suncor's adjusted operating earnings increased to $2.565 billion ($1.88 per common share) in the third quarter of 2022, compared to $1.043 billion ($0.71 per common share) in the prior year quarter, primarily due to significantly higher crude oil and refined product realizations, reflecting the improved business environment in the current quarter, and higher upstream production. The increase in adjusted operating earnings was partially offset by increased income taxes, royalties and operating expenses in the current quarter. The increase in operating expenses was primarily related to a significant increase in commodity input costs, increased maintenance and higher costs associated with increased Oil Sands production. Adjusted operating earnings were also impacted by a weakening in benchmark pricing during the current quarter, compared to a strengthening in benchmark pricing in the prior year quarter, resulting in a FIFO inventory valuation loss partially offset by a realization of intersegment profit in the third quarter of 2022, compared to a FIFO inventory valuation gain partially offset by a deferral of intersegment profit in the third quarter of 2021.
Net Earnings
The company had a net loss of $609 million ($0.45 per common share) in the third quarter of 2022, compared to net earnings of $877 million ($0.59 per common share) in the prior year quarter. In addition to the factors impacting adjusted operating earnings discussed above, the net loss for the third quarter of 2022 included a non-cash impairment of $3.397 billion against the company's share of the Fort Hills assets, a $723 million unrealized foreign exchange loss on the revaluation of U.S. dollar denominated debt recorded in financing expenses, the recognition of $147 million of insurance proceeds related to the company's assets in Libya recorded in other income (loss), a $65 million foreign exchange loss related to the sale of the company's share of its E&P assets in Norway, a $7 million unrealized gain on risk management activities recorded in other income (loss) and an $857 million income tax recovery related to the items noted. Net earnings in the prior year quarter included a $282 million unrealized foreign exchange loss on the revaluation of U.S. dollar denominated debt recorded in financing expenses, a non-cash impairment reversal of $221 million against the company's share of the Terra Nova assets, an $80 million loss for the early repayment of long-term debt, a $22 million unrealized loss on risk management activities recorded in other income (loss) and a $3 million income tax expense related to the items noted.
Adjusted Operating Earnings Reconciliation(1)
| | | Three months ended September 30 | | | Nine months ended September 30 | | | | | | | | | ($ millions) | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | Net (loss) earnings | | (609 | ) | | 877 | | | 6 336 | | | 2 566 | | | Unrealized foreign exchange loss (gain) on U.S. dollar denominated debt | | 723 | | | 282 | | | 929 | | | (88 | ) | | Unrealized (gain) loss on risk management activities | | (7 | ) | | 22 | | | (101 | ) | | 8 | | | Asset impairment (reversal) | | 3 397 | | | (221 | ) | | 2 752 | | | (221 | ) | | Recognition of insurance proceeds | | (147 | ) | | - | | | (147 | ) | | - | | | Loss on significant disposal | | 65 | | | - | | | 65 | | | - | | | Restructuring charge | | - | | | - | | | - | | | 168 | | | Loss on early repayment of long-term debt | | - | | | 80 | | | - | | | 80 | | | Income tax (recovery) expense on adjusted operating earnings adjustments | | (857 | ) | | 3 | | | (700 | ) | | (2 | ) | | Adjusted operating earnings(1) | | 2 565 | | | 1 043 | | | 9 134 | | | 2 511 | |
(1) Adjusted operating earnings is a non-GAAP financial measure. All reconciling items are presented on a before-tax basis and adjusted for income taxes in the income tax (recovery) expense on adjusted operating earnings adjustments line. See the Non-GAAP Financial Measures section of this news release.
Adjusted Funds from Operations and Cash Flow Provided by Operating Activities
Adjusted funds from operations increased to $4.473 billion ($3.28 per common share) in the third quarter of 2022, compared to $2.641 billion ($1.79 per common share) in the prior year quarter. Adjusted funds from operations were influenced by the same factors impacting adjusted operating earnings noted above.
Cash flow provided by operating activities, which includes changes in non-cash working capital, was $4.449 billion ($3.26 per common share) for the third quarter of 2022, compared to $4.718 billion ($3.19 per common share) in the prior year quarter. In addition to the factors impacting adjusted funds from operations, cash flow provided by operating activities was impacted by a use of cash associated with the company's working capital balances in the third quarter of 2022, compared to a significant source of cash in the prior year quarter. The source of cash in the prior year quarter was primarily due to an increase in accounts payable and accrued liabilities and the receipt of the company's 2020 federal income tax refund.
Operating Results
Suncor's total upstream production increased to 724,100 barrels of oil equivalent per day (boe/d) in the third quarter of 2022, compared to 698,600 boe/d in the prior year quarter, reflecting increased production from the company's Oil Sands assets, which was partially offset by decreased production from the company's E&P assets.
The company's non-upgraded bitumen production increased to 240,900 bbls/d in the third quarter of 2022, compared to 199,600 bbls/d in the third quarter of 2021, primarily due to increased production from Fort Hills. Production from the company's In Situ assets in the third quarter of 2022 was comparable to the prior year quarter. At Fort Hills, as the company begins the execution of its mine improvement plan, reduced volumes are expected in the fourth quarter of 2022, as well as into the first quarter of 2023.
The company's net synthetic crude oil production was 405,100 bbls/d in the third quarter of 2022, comparable to 405,500 bbls/d in the third quarter of 2021. Production at Syncrude in the third quarter of 2022 was impacted by planned turnaround activities, resulting in upgrader utilization of 67%, compared to 91% in the prior year quarter. At Oil Sands Base, upgrader utilization increased to 80%, compared to 66% in the prior year quarter, reflecting lower planned maintenance activities in the current quarter, as the prior year quarter was impacted by a significant planned turnaround at Upgrader 2. Subsequent to the quarter, the company successfully completed its turnaround activities.
E&P production during the third quarter of 2022 was 78,100 boe/d, compared to 93,500 boe/d in the prior year quarter. The decrease in production was primarily due to the sale of the company's working interest in the Golden Eagle Area Development in the fourth quarter of 2021, the impact of planned turnaround activities at Hibernia in the third quarter of 2022, and natural declines, partially offset by increased production from Norway.
Refinery crude throughput was 466,600 bbls/d and refinery utilization was 100% in the third quarter of 2022, compared to 460,300 bbls/d and 99% in the prior year quarter, reflecting strong utilizations across all refineries in both periods. Refined product sales in the third quarter of 2022 increased to 577,300 bbls/d, compared to 551,500 bbls/d in the prior year quarter. The increase in refined product sales reflected increased demand in the current period, combined with the company's ability to leverage its extensive domestic sales network and export channels.
"Strong operations at our refining assets resulted in the third highest crude throughput in our company's history, and contributed to strong refined product sales during the quarter," said Smith. "Increased utilization of the interconnecting pipelines helped to minimize the impact of significant planned upstream turnaround activities in the third quarter. All major planned maintenance on our assets has been completed early in the fourth quarter, and we remain focused on safe, reliable operations."
The company's total operating, selling and general expenses were $3.075 billion in the third quarter of 2022, compared to $2.768 billion in the prior year quarter. The increase was mainly due to a significant increase in commodity input costs, including higher natural gas prices, increased maintenance and higher costs associated with increased Oil Sands production. The company's exposure to higher natural gas costs is partially mitigated by revenue from power sales that is recorded in operating revenues.
Strategy Update
Suncor's top priority is improving its safety and operational performance. The company's ability to deliver on its operational excellence priorities and drive improved operating performance, by operating safely, reliably and efficiently, is underpinned by Suncor's value of safety above all else. Suncor aims to further grow its profitability by focusing the company's capital investments on high-value cash flow initiatives that support its incremental free funds flow targets, while continuing to adjust and streamline its portfolio to optimize its base business.
The company has made disciplined decisions to adjust and streamline its portfolio to enable greater fit and focus of its portfolio. During the third quarter of 2022, the company completed the sale of its E&P assets in Norway for gross proceeds of approximately $430 million, before closing adjustments and other closing costs. Subsequent to the third quarter of 2022, the company reached an agreement for the sale of its wind and solar assets for gross proceeds of approximately $730 million, before closing adjustments and other closing costs. The sale is pending regulatory approval, and is expected to be completed in the first quarter of 2023. The sale process for the company's U.K. E&P portfolio is progressing, with a sale anticipated to close within the next twelve months. The company is also undertaking a strategic review of its downstream retail business with the goal of unlocking long-term value. The strategic review is expected to be completed in the fourth quarter of 2022, at which time an update will be provided.
Subsequent to the third quarter of 2022, Suncor entered into an agreement, subject to regulatory approval and other closing conditions, to acquire Teck's 21.3% working interest in Fort Hills and its associated sales and logistics agreements for $1.0 billion, before closing adjustments and other closing costs, bringing the total aggregate working interest of Suncor and its affiliate to 75.4%. The transaction meets Suncor's return objectives, providing long-term value for the company by adding approximately 40,000 bbls/d of bitumen production capacity, and builds upon the company's strategy to optimize its portfolio around its core assets. The transaction is expected to close in the first quarter of 2023.
"We continue to optimize and streamline our portfolio to concentrate our efforts on, and drive value from, our core business. We have completed our Norway asset sale, have reached an agreement for the sale of our wind and solar assets and are progressing the sale of our U.K. E&P portfolio," said Smith. "The acquisition of additional interest in Fort Hills is a strategic fit with our focus on core assets, and underscores our confidence in the long-term value of the Fort Hills project."
The company is committed to allocating excess funds in accordance with its capital allocation framework; strengthening its balance sheet through debt reductions and maximizing shareholder returns. In the third quarter of 2022, the company returned approximately $1.7 billion of value to its shareholders through approximately $1.0 billion in share repurchases and the payment of $638 million of dividends. The company also reduced net debt by approximately $1.8 billion in the third quarter of 2022, excluding the impact of a $723 million unrealized foreign exchange loss on the revaluation of U.S. dollar denominated debt. Net debt was $14.584 billion as at the end of the third quarter, reflecting the achievement of the company's 2025 targeted net debt range of $12 billion to $15 billion. As at September 30, 2022, since the beginning of the year, the company has reduced net debt by approximately $2.5 billion, excluding the impact of a $929 million unrealized foreign exchange loss on the revaluation of U.S. dollar denominated debt. The company remains on track with its previously articulated capital allocation framework, and depending on the business environment, expects to increase its share buyback allocation to 75% by the end of the first quarter of 2023.
Subsequent to the third quarter of 2022, the company executed a debt tender offer and, as a result, repaid approximately $3.6 billion of its various notes below par. This significant structural long-term debt reduction, which was executed during opportunistic market conditions, advances the company's debt reduction and annual capital allocation targets, and is expected to reduce long-term financing costs and provide ongoing balance sheet flexibility.