Thursday, February 10, 2022

Canadian Oil Sands Earnings (Suncor and Cenovus) - Q4 2021

[Previously regarding Canadian oil sands majors: Long Reserve Life Oil: Cenovus Energy Inc., Suncor Energy Inc., Cenovus Reports Q3 2021 Earnings, Canadian Natural Resources Limited.]

Suncor (SU) reported results last week. Highlights from the results:

  • Suncor's total upstream production was 743,300 barrels of oil equivalent per day (boe/d) in the fourth quarter of 2021, compared to 769,200 boe/d in the prior year quarter, with the decrease primarily due to decreased production from the company's Exploration and Production (E&P) assets, including the absence of production from the Golden Eagle Area Development, as the sale of the asset was completed early in the fourth quarter of 2021. The company's synthetic crude oil (SCO) production was 515,000 barrels per day (bbls/d) in the fourth quarter of 2021, comparable to 514,300 bbls/d in the fourth quarter of 2020, driven by combined upgrader utilization of 96%.
  • Refining and Marketing (R&M) delivered $765 million in adjusted funds from operations in the fourth quarter of 2021, compared to $415 million in the prior year quarter, including a first-in, first-out (FIFO) inventory valuation gain of $106 million after-tax in the current period compared to a gain of $44 million after-tax in the prior year quarter. 
  • In 2021, Suncor executed on its net debt reduction targets, reducing debt at the highest ever annual pace, resulting in a reduction of net debt by $3.7 billion to $16.1 billion, returning to 2019 net debt levels. 
  • Suncor returned $3.9 billion to shareholders in 2021 through $2.3 billion in share repurchases and $1.6 billion in dividends paid, including an increased dividend in the fourth quarter of 2021, returning it to 2019 levels. Since the start of its current normal course issuer bid program (NCIB) in February 2021, the company has repurchased approximately 84 million of its common shares at an average price of $27.45 per common share, or the equivalent of 5.5% of Suncor's public float as at January 31, 2021.
  • The company’s 2021 capital expenditures were heavily focused on the safety, long-term reliability and efficiency of the company’s operating assets. Looking ahead, enabled by efficiencies achieved across the business and the company’s commitment to capital discipline, in 2022 the company expects to achieve capital expenditures of $4.7 billion, or $300 million (6%) lower than the previously announced ceiling of $5.0 billion, with a program largely focused on sustaining capital including planned maintenance and tailings optimizations.

Net debt fell from $19.8 (CAD) billion to $16.1 billion during the year. As @HFI_Research tweeted, "Incredible to think $SU given how much FCF it will generate is actually prioritizing debt pay down over dividend or share buyback increase. I understand the debt reduction thing because we are doing it at Gear. But they are one of the few 'haves' that can actually borrow." SU can borrow for 30 years at 3.7%; their latest maturity right now is March 2051. I guess at some point if this keeps going they will run out of debt to repay.

Some highlights from the Q4 conference call:

  • We returned nearly $4 billion of cash through the doubling of our dividend and share buybacks, and that's 40% of our adjusted funds from operations within the year. Based on our average 2021 average market cap, that's a 10% [shareholder yield]. Looking at our 2021 full year performance, Suncor generated adjusted funds from operations of $10.3 billion. Our regional oil sands assets contributed record annual funds from operations of $6.9 billion, despite completing the largest maintenance program in our history.
  • Our 2021 full year capital spend of $4.4 billion was within the provided guidance range, but higher than our previously communicated midpoint of $4.2 billion. This was due to increased spend at Syncrude and Firebag late into the year as a result of the operational issues, the earlier receipt of materials for 2022 turnarounds as we manage supply chain and accelerated progress payments on the co-gen as milestones were achieved slightly faster than expected. 
  • In terms of shareholder returns, during the quarter, we returned $1.2 billion to shareholders in the form of dividends and buybacks, and at the same time, reduce our net debt by roughly $500 million. On a full year basis, we returned nearly $4 billion to shareholders and repaid nearly $4 billion of debt. As a result, we reduced the number of outstanding shares back to 2015 levels and returned our dividend and net debt balance back to 2019 levels. As it relates to our guidance, our only change is to the business environment for higher commodity prices, which of course, increases our cash tax and royalty ranges slightly.
  • On the capital allocation, after dividends and the capex, we're allocating our free cash flow 50-50 between buybacks and debt reduction. So we would expect to see a similar, if not higher, cash return to shareholders than you saw in 2021 based on current strip prices.

For the fourth quarter, Suncor's cash from operations (excluding changes in working capital) was $3.1 billion and its capital expenditures were $1.4 billion, for free cash flow of $1.8 billion. (Which was up 50% from Q3 2021.) That's just for the quarter: annualized that would be $7.2 billion. (Figures up to this point have been CAD$.) The current FCF yield on the enterprise value is around 11% given last quarter's average $87/bbl price of crude oil. Note that they are planning to invest less than 40% of operating cash flow this year and return the rest to shareholders and repay debt - this is the same fraction as Peabody Energy.

Cenovus (CVE) also reported results last week. Highlights:

  • [R]ecord oil sands production in the fourth quarter of 2021, contributing to total upstream output of more than 825,000 barrels of oil equivalent per day (BOE/d) and almost 792,000 BOE/d1 for the full year.
  • The company generated fourth-quarter cash from operating activities of $2.2 billion and adjusted funds flow of $1.9 billion. With free funds flow of $1.1 billion in the quarter, and proceeds from recent divestitures, net debt was below $9.6 billion at year end, a reduction of more than $1.4 billion from the end of the third quarter and $3.5 billion in 2021 following the acquisition of Husky Energy. Total long-term debt was $12.4 billion as at December 31, 2021, down nearly $1.7 billion from January 1, 2021...
  • Cash from operating activities was $2.2 billion and adjusted funds flow was $1.9 billion in the quarter. Free funds flow of $1.1 billion included capital investment of $835 million primarily for planned winter drilling programs in the Oil Sands and Conventional segments as well as the Superior Refinery rebuild project. Cash flows were impacted in the fourth quarter by a realized risk management loss of $268 million related to Cenovus’s inventory risk management program compared with a realized risk management loss of $184 million in the third quarter. 
  • Cash from operating activities was nearly $6 billion for the year, compared with $273 million in 2020. Adjusted funds flow was $7.2 billion and free funds flow was $4.7 billion. Total capital expenditures for the year were approximately $2.6 billion, primarily concentrated on sustaining production at the company’s upstream assets and maintenance capital for the downstream assets, as well as investment in the Superior Refinery rebuild. 
  • Cenovus’s proved and probable reserves are evaluated each year by independent qualified reserves evaluators. At the end of 2021, Cenovus’s total proved reserves rose 21% to approximately 6.1 billion BOE, while total proved plus probable reserves increased 24% to approximately 8.3 billion BOE largely due to the Husky transaction. Total proved bitumen reserves were approximately 5.6 billion barrels, an increase of 16% from 2020, while total proved plus probable bitumen reserves rose 17% to approximately 7.4 billion barrels. At year-end 2021, Cenovus had a proved reserves life index of approximately 21 years, and a proved plus probable reserves life index of approximately 29 years.

Highlights from the Q4 conference call:

  • We’ve delivered on everything we’ve set out to do, including successful integration of the Husky business delivering over and above our targets for upstream operations, Canadian downstream, transaction synergies, asset sales, net debt reduction, and increasing shareholder returns. Now, assuming commodity prices continue to hold, we will rapidly hit our net debt target of 8 billion, implying we could be looking at even more free funds flow to allocate in 2022. I assure you, we will continue the capital discipline you’ve come to expect from us.
  • One of the things that we did see in December in particular was some pretty weak pricing, both WTI as well as the WTI, WCS spread and so we did take an opportunity to build some inventory and not sell in December, and some of those sales will be reflected in January and February of this year.
  • I think first off my observation is that our NCIB program, I think, has been a reasonably effective offset to Conoco’s action selling down their block. I mean, at this point, you guys have heard me say this so many times that it sounds pretty rote but we’re always happy to work with them, we haven’t really found any opportunities to a coordinate and it’s made a little bit difficult by the rules, but as long as the pricing works for us with our NCIB program, we think that that remains a pretty effective offset to their sell down.
  • I’m kind of old enough and bear enough scars that I guess when it comes to pricing, I’m always very cautious. We anchor all of this company’s development plans at the bottom of the cycle for oil and gas. We won’t invest in a project that doesn’t deliver an acceptable return at the bottom of the cycle, which for oil, we would describe as kind of 45 WTI, so although we’re pleased to see these higher prices, it’s just not something we can count on now. 

For the fourth quarter, Cenovus' cash from operations was $2.2 billion and its capital expenditures were $0.8 billion, for free cash flow of $1.3 billion. That's just for the quarter: annualized that would be $5.2 billion. The current FCF yield on the enterprise value is around 10% given last quarter's average price of crude oil.

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