Suncor's Oil Sands 4Q Production Slides, Construction Projects on Hold
Suncor has reported 2008 net earnings of $2.137 billion ($2.29 per common share), compared to $2.983 billion ($3.23 per common share) in 2007. Excluding unrealized foreign exchange impacts on the company's U.S. dollar denominated long-term debt, the impact of income tax rate reductions on opening future income tax liabilities, and project start-up costs, 2008 earnings were $3.013 billion ($3.23 per common share), compared to $2.390 billion ($2.59 per common share) in 2007. Cash flow from operations in 2008 was $4.463 billion, compared to $4.009 billion in 2007.
The increases in earnings and cash flow from operations are due primarily to higher annual average price realizations for oil sands and natural gas products. This was partially offset by unscheduled maintenance -- which led to higher operating expenses, lower production and increased product purchases -- and decreased earnings from our downstream operations due to declining commodity prices in the second half of the year which reduced the value of inventories.
"We've had a challenging 2008 with unscheduled maintenance at our oil sands operations," said Rick George, president and chief executive officer. "We've put considerable effort into maximizing the reliability of our assets with the target of achieving higher, more stable production rates in 2009 and beyond."
Suncor's total upstream production averaged 264,700 barrels of oil equivalent (boe) per day in 2008, compared to 271,400 boe per day in
2007. Oil sands production contributed 228,000 barrels per day (bpd) in 2008 compared to 235,600 bpd in 2007. Oil sands production volumes and sales mix were impacted during the year by planned and unplanned maintenance activities in the company's upgrading and extraction facilities. In Suncor's natural gas business, production was 220 million cubic feet equivalent (mmcfe) per day compared to an
average of 215 mmcfe per day in 2007.
Oil sands cash operating costs in 2008 averaged $38.50 per barrel, compared to $27.80 per barrel during 2007. The increase in cash
operating costs per barrel was due to higher operating expenses including increased unplanned maintenance, as well as increased third-party bitumen purchases and higher natural gas input costs.
Commissioning of Suncor's $2.3 billion expansion to one of two oil sands upgraders was completed in the third quarter of 2008. With the
completion of this expansion, Suncor has upgrading design capacity in place of 350,000 bpd. Actual production in 2009 is expected to be
less than design capacity at 300,000 bpd (+5%/-10%) primarily due to expected constraints in bitumen supply and planned maintenance in the third quarter.
Suncor's Board of Directors approved a $20.6 billion investment that is expected to boost crude oil production capacity at the company's
oil sands operation by 200,000 bpd. At the end of 2008, spending on this project totaled approximately $7.0 billion. Company-wide capital
spending in 2008 totaled $7.6 billion. Net debt at year-end 2008 was $7.2 billion, compared to $3.2 billion at the end of 2007. For further details on Suncor's capital spending plans, see Operational and Financial Outlook on page 3.
At the company's annual and special meeting in April 2008, Suncor shareholders approved a split of the company's common shares on a two-for-one basis, and the shares began trading at the split-adjusted price in May on both the Toronto and New York stock exchanges.
Fourth Quarter 2008
Suncor recorded a net loss in the fourth quarter 2008 of $215 million ($0.24 per common share), compared to net earnings of $1.042 billion ($1.13 per common share) for the fourth quarter of 2007. Excluding unrealized foreign exchange impacts on the company's U.S. dollar denominated long-term debt, the impact of income tax rate reductions on opening future income tax liabilities, and project start-up costs, earnings for the fourth quarter of 2008 were $434 million ($0.46 per common share), compared to $677 million ($0.73 per common
share) in the fourth quarter of 2007. Cash flow from operations for the fourth quarter of 2008 was $551 million, compared to $1.200 billion in the fourth quarter of 2007.
The decrease in earnings was primarily due to significant decreases in benchmark commodity prices over the course of the fourth quarter of 2008. This negatively impacted both our sales revenues and the value of our inventories. In addition, we had higher operating expenses in our oil sands business. These impacts were partially offset by mark-to-market gains on our crude oil hedges. The decrease in cash flow from operations was due primarily to the same factors that impacted earnings during the quarter excluding the impact of the crude oil hedging gains.
Suncor's combined oil sands and natural gas production for the fourth quarter of 2008 was 279,400 boe per day, compared to 290,700 boe per day in the same period of 2007. Oil sands production in the fourth quarter of 2008 averaged 243,800 bpd, compared to fourth quarter 2007 production of 252,500 bpd. Production volumes were reduced in the fourth quarter of 2008 due to planned and unplanned maintenance. Natural gas production averaged 213 mmcfe per day in the fourth quarter of 2008, compared to the 229 mmcfe per day
recorded in the fourth quarter of 2007. The decrease in production was primarily due to third-party processing outages during the fourth quarter of 2008.
Fourth quarter 2008 oil sands cash operating costs were $41.30 per barrel, compared to $27.90 per barrel in the same period of 2007. Cash operating costs per barrel were higher in the fourth quarter primarily due to higher total operating costs, including expenses and production impacts related to a fire at the oil sands facility in late November.
Operational and Financial Outlook
In January, Suncor's Board of Directors approved a revised 2009 capital spending plan of $3 billion, with approximately one third of the budget targeted to growth projects and the remainder for spending on base business operations. The previous plan, approved in October 2008, had targeted spending of $6 billion.
With the revised plan, construction on the Voyageur upgrader and Firebag Stage 3 will be wound down and the projects placed in a "safe mode" pending resumption of expansion work. At this time, construction restart and completion targets for these projects, and start up and completion targets for all other expansion projects, have not been determined. Capital growth plans will be reviewed on a quarterly basis in light of market conditions and updates provided as details are known.
"With market conditions limiting our growth capital spending in 2009, we will be tightly focused on getting full value from our existing assets," said George. "Safe, reliable, cost-effective and environmentally responsible performance will be the keys to weathering the current downturn and ensuring we are well positioned for a market recovery. We have some of the most experienced employees and contractors in the industry and, going forward, I expect everyone to be lined up behind these priorities."
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