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Suncor Energy Third Quarter 2021 Financial Results Call

Thursday, 28 October 2021

Operator: Good day and thank you for standing by. Welcome to the Suncor Energy Third Quarter 2021 Financial Results Conference Call. At this time all participants are in a listen- only mode. After the speakers' presentation, there will be a question and answer session. (Operator Instructions). I would now like to hand the conference over to your speaker today, Trevor Bell, Vice President of Investor Relations. Please go ahead.

Introduction

Trevor Bell

Vice President of Investor Relations, Suncor Energy Inc.

Thank you, operator, and good morning. Welcome to Suncor's third quarter earnings call. With me this morning are Mark Little, President and Chief Executive Officer; and Alister Cowan, Chief Financial Officer. Please note that today's comments contain forward-looking information. The actual results may differ materially from the expected results because of various risk factors and assumptions that are described in our third quarter earnings release as well as our Annual Information Form. Both are available on SEDAR, EDGAR and our website, suncor.com.

Certain financial measures referred to in these comments are not prescribed by Canadian GAAP. For a description of these financial measures, please see our third quarter earnings release. Following formal remarks, we'll open up the call to questions.

Now, I'll hand it over to Mark for his comments.

Opening Remarks

Mark Little

President & Chief Executive Officer, Suncor Energy Inc.

Great. Thanks, Trevor and good morning everyone, and thank you for joining us.

Suncor's third quarter results delivered in three key areas - operational excellence, increased shareholder returns and significant debt reduction.

Suncor delivered $2.6 billion of funds from operations for the third quarter while also completing the most significant maintenance year in our history, on budget. The Downstream produced nearly $1 billion of funds from operations which included approximately $80 million of FIFO gains. This performance marked the third-best set of Q3 results for the Downstream in its history.

Year to date we have reduced the company's net debt balance by more than $3 billion and returned over $2.6 billion to shareholders in the forms of dividends and buybacks by allocating over 70% of our funds from operations including the tax refund received earlier this quarter.

Reviewing the progress, we made on our commitments from earlier this year:

• Our nine-month annualized cash return is 9%,
• We've bought back over 4% of the company's shares since the program's initiation in February,
• The company's net debt level has been returned to year-end 2019 levels, and
• We remain on target to deliver our capital in line with expectations.

In short, we are meeting or exceeding our commitments. Our confidence in our operations and the pace in which we're executing our plan allows us to increase shareholder returns by:

• Doubling the current dividend to annually $1.68 per share or back to the 2019 levels,
• Increasing the buyback by a further 2%, to 7% by February of 2022, all
• While expecting our net debt to be near the top end of our 2025 target range by this year-end given the favorable macro backdrop.

Turning to operating performance.

Upstream delivered 700,000 barrels per day of production in the third quarter.

Oil Sands Operations production of 370,000 barrels per day reflects the planned five-year U2 turnaround. This was partially mitigated by 90% utilization for In Situ in spite of completing the planned maintenance at Firebag.

Looking at year-to-date cash operating costs of $25 per barrel Canadian, we are progressing extremely well towards the bottom end of our full year cash operating cost per barrel guidance.

Syncrude achieved 185,000 barrels a day of production with 91% utilization for the quarter and cash operating cost of $31 per barrel. At the end of the quarter, on September 30, we assumed operatorship of Syncrude - a critical milestone towards achieving the previously communicated $100 million in annual synergies in the first six months of operatorship, and $300 million in total annual synergies by the end of 2023. These synergies will contribute to achieve the cash operating cost target of $30 per barrel at Syncrude.

Fort Hills production of 51,000 barrels per day reflects a one-train operation. We have made significant progress on overburden removal and slope stability, and as a result, anticipate achieving full rates by year-end. We're right on plan with what we stated before and will have both trains at full rates intermittently in November and December, to ensure a seamless transition to full operating mode. Our expectation for 2022 cash operating costs per barrel is in the mid $20s with an incremental 45,000 barrels per day of production.

In our E&P operations, Q3 production of 94,000 barrels per day was an increase from Q2. However, our funds from operations of $360 million reflects an inventory build associated with the timing of cargo sales. The sale of Golden Eagle was completed on October 22 with cash receipt of approximately US $250 million.

In the Downstream, you will recall that we completed significant maintenance at all of our refineries in the second quarter. And as a result, we're very well positioned to take advantage of the demand recovery in the third quarter and the refineries operated at 99% utilization with nearly $1 billion of funds from operations.

Compared to $3.8 to $3.9 billion for full-year funds from operations in 2018 and 2019 from the downstream, the third quarter is in-line with that run rate with slightly better cracking margins, but also with some significant headwinds:

• Average sweet and heavy differentials were $4/bbl US narrower,
• Canadian dollar was 5% stronger, and
• Natural gas prices were 125% higher.

In short, while the headline funds from operations this quarter is comparable to our 2018- 2019 run-rate, there were considerable headwinds that we were able to offset through strategic improvements and investments in our supply, trading and logistic assets to further our competitive advantage.

As discussed during Investor Day, the investments we've made - and continue to make to achieve our $2 billion of incremental free funds flow initiatives are building a business that's more resilient and stronger than ever before. As incremental demand continues to recover, we expect to capture higher margins.

Reflecting back on the second and third quarter of this year, we delivered $5 billion of funds from operations or nearly $3.50 per share, despite completing the highest maintenance activity across Base Plant, Syncrude, and all of the refineries in our history , and with Fort Hills operating at one-train.

Our assets continue to operate at strong rates which positions us for significant improvement to our free funds flow generation in the fourth quarter and into 2022 and beyond.

I'll now hand it over to Alister to go through our financial highlights.

Financial Highlights

Alister Cowan

Chief Financial Officer, Suncor Energy Inc.

Thanks, Mark, and good morning, everyone.

For the third quarter, we continued to exceed our plan to increase shareholder returns and reduce debt. We returned over $1 billion to shareholders in the form of $310 million in dividends and $700 million in share repurchases. During the quarter, our buyback amounted to 28 million shares - that's 20% more than in Q2, at an average of $25 per share. In addition to the nine-month annualized cash return of 9%, we have also reduced our net debt balance by over $3 billion - and $2 billion of that came in Q3.

Oil Sands delivered approximately $1.6 billion of funds from operations during the quarter. Although price realizations were higher during the quarter, these were partly offset by

higher royalties especially at Firebag, which turned to post payout during the quarter. We had anticipated this royalty change to be the middle of 2022, however at current prices post payout has been achieved much sooner. To just to clarify, all our assets except Fort Hills are now in post-payout thus the cashflow from these assets now fully reflects the royalty charges.

As Mark mentioned, our Oil Sands Operations cash operating costs continue to trend very well, with year-to-date Q3 sitting at $25 per barrel despite increasing natural gas costs. You can see from the disclosures, that higher natural gas costs added just over $1 to our Oil Sands Operations cash operating costs in the third quarter, but nearly half of this has been offset elsewhere in our business - including through higher power revenue. We have updated our natural gas sensitivity to reflect a $160 million funds from operations impact for every $1 Canadian per GJ change in AECO. This sensitivity update reflects our integrated model view and includes power revenue, which is correlated to, and does mitigate a portion of the natural gas cost.

The E&P segment generated $360 million of funds from operations with price realizations of approximately $90 Canadian per barrel, delivering $300 million of free funds flow net of capital expenditures. These results include an inventory build, due to lifting schedules which we expect to come through as additional funds flow in the fourth quarter.

As Mark noted, we recorded our third best Q3 results in Downstream's history, despite a less than normal business environment. I would like to put these results in the context of the demand - if I look at Q3 2021 versus Q3 2019, average product demand across Canada was down nearly 7%, but Suncor's sales channels remained relatively similar to the same period Q3 2019. This strong performance is a considerable driver towards capturing higher margins and is a direct result of strategic investments in our supply, trading, and logistics asset. We expect this trend to continue into 2022 with Suncor's Downstream capturing higher demand and higher margins and continuing to outperform the industry.

Ending the third quarter, our net debt is $16.7 billion which includes capital leases. With the Golden Eagle sale proceeds of approximately US $250 million received in October, the net debt balance stands at $16.4 billion CAD - similar to year-end 2019 levels.

As it relates to our guidance, our only change is to the business environment for increasing commodity prices which of course does increases our cash taxes and royalty ranges slightly.

Lastly, as I look at our performance for the remainder of the year, we are on track or ahead on both the net debt and buybacks. On our investor day, we outlined the 5-year target to buyback approximately 12% of the outstanding shares. By the completion of the current program in February 2022, we expect to purchase 7% of the float or said another way, achieving 60% of our planned buybacks over five years.

With that, I'll pass you back to Mark.