CALGARY -- Chastened by the experience of the last boom, the new Suncor Energy Inc. will take a more subdued approach to building new oil sands projects.
After a dramatic rise in costs swept across the Fort McMurray landscape in recent years, Suncor chief executive officer Rick George said yesterday the company will now build without borrowing, a strategic shift that will dampen its pace of development.
It will use only the cash it generates to finance the long list of multibillion-dollar projects in its construction queue, as Mr. George seeks to avoid what he called a "firestorm of inflation up north."
The new spending regime could, in fact, cut new project spending to less than half its high. In the fall of 2008, combined capital spending 2009 plans for Petro-Canada and Suncor amounted to $14-billion. But for the foreseeable future, the newly merged company is unlikely to exceed $6- to $7-billion per year, Andrew Potter, an analyst with UBS Securities, has calculated.
"Obviously a lot has changed over the last 12 months in terms of oil prices and everything," he said. "But that puts this into perspective."
The new Suncor will be "less growth-y, but in exchange, you get free cash generated," Mr. Potter said. "That is something it hasn't been able to do in the past. It used to be all about growth, no free cash. So it's a much more robust company financially than it was in the past."
The change is already reversing Suncor's position on accruing financial commodity hedges, which it plans to rapidly shed. Hedges guarantee a future price of oil for a certain volume of production, but by spending only what it makes, Suncor will no longer need the stability they provide during periods of heavy construction.
Suncor will shed more light on its 2010 capital plan in a conference call next Friday. Analysts expect it to resume work on expansion of its Firebag project, which is already partially built. But Suncor may also indicate which of a handful of other projects it will fund, including expansion of Petro-Canada's Mackay River project or Fort Hills, whose fate is hugely important to UTS Energy Corp., a 20-per-cent owner of the proposed oil sands mine. Both projects are located north of Fort McMurray.
The speed of its development is, however, likely to be tempered. So strong is the concern about a piling back into the oil sands that even with the return of crude prices to near $80 (U.S.), high enough to make most new projects profitable, Mr. George and others have showed no rush to resume growth. Only Imperial Oil Ltd. has made a significant new announcement this year, as it proceeded with construction of its $8-billion (Canadian) Kearl mine.
Others have been far more cautious. Canadian Natural Resources Ltd. has spoken of the need to co-ordinate building schedules; Mr. George said he wants "to see a really disciplined approach."
For Suncor, part of that includes selling off assets to retire part of its $13-billion in net debt. Over the next year, it plans to sell $2- to $4-billion in assets, including 30 per cent of its natural gas portfolio, some of its holdings in the North Sea and Trinidad and Tobago, a corporate plane and real estate.
It has not yet decided what to do with projects in Syria and Libya, but has ruled out selling any oil sands leases, and does not plan to sell its 12-per-cent stake in Syncrude.
"It gives us a window into some of the technologies and operational improvements Syncrude is trying to make," Mr. George said. "There's probably more advantages to us now of staying in that asset rather than selling it."
In the future, Suncor may even look to grow in the oil sands, as it focuses its bet on a massive resource that remains fraught with environmental and economic problems.
"Down the road, I'd be more of an acquirer - or maybe a better way to put that, a consolidator - than I would be a seller [of oil sands properties]," he said. "It's our heartland and it's the core of this company."
Suncor (SU-T)
Close: $35.40, up 3¢
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Suncor Energy
Q3 / 2009 / 2008
Profit / $929 million / $815 million
EPS / 74 ¢ / 87 ¢
Cash flow / $574 million /$1.15 billion
Source : Company reports