CALGARY – Suncor Energy Inc. booked higher second-quarter earnings on Thursday, though maintenance work at many of its operations took a bite out of production and it opted to take a $514-million writedown on its assets in war-torn Libya.
On a conference call with analysts, chief executive Rick George said the improved results were “especially solid, since this was our quarter around extended maintenance, both in oilsands and in our downstream – and despite that, we’ve managed to take advantage of posting very strong financial results.”
Net income rose to $562 million from a year-earlier $540 million, or from 35 to 36 cents on a per-share basis.
Operating earnings, which strip out the effects of one-time items, increased to $980 million from $839 million in the second quarter of 2010.
The operating earnings of 62 cents per share missed analyst expectations of 68 cents per share, but marked an improvement over the 54 cents per share Suncor booked a year earlier.
During the quarter, production averaged 460,000 barrels of oil equivalent per day – a significant drop from 633,900 barrels during the second quarter of 2010, but in line with Suncor’s expectations after it sold some non-core assets, shut down oilsands operations for planned maintenance and shut in production in war-torn Libya.
CIBC World Markets analyst Andrew Potter said Suncor’s production came in slightly ahead of his expectations.
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Much of the production drop can be attributed to a maintenance turnaround at its U2 oilsands upgrader – the largest such outage in the company’s history. The work was completed on time, and production has since returned to normal levels. Suncor also completed maintenance work at three of its four refineries.
While the maintenance work dragged on Suncor’s second-quarter results, Potter said it should be “smooth sailing” ahead.
“With Suncor completing substantial planned maintenance in Q2, we believe the company is now poised for (about) 18 months of relatively clean operations,” he wrote in a research note.
Suncor became Canada’s largest energy company when it merged with Petro-Canada in 2009. Through the transaction, it inherited oil assets in Libya. As conflict broke out in Libya in February, Suncor pulled its employees out of the North African country.
George has said Suncor would not resume operations in Libya so long as Moammar Gadhafi remains in power, and had already warned it may have to take a writedown on those assets.
“We have elected to take a write down on our Libyan assets of some $514 million,” said chief financial officer Bart Demosky on the conference call. “And that leaves us with a remaining net book value of about $400 million.”
Demosky said Suncor has risk-mitigation instruments in place for just over $400 million, “and our insurers have been notified of our intention to make a claim.”
“Another important reminder, I think, is that even with the loss of Libyan production, from an earnings point of view it’s not significant to Suncor. Those operations accounted for only about one per cent of Suncor’s earnings in 2010,” Demosky said.
Suncor is the largest operator in the oilsands, with huge mining operations north of Fort McMurray, a 12 per cent interest in the Syncrude Canada Ltd. mine, a 41 per cent stake in the yet-to-be-developed Fort Hills mine and steam-driven operations at Firebag and Mackay river.
Stage 3 of Firebag started producing oil this month, and is expected to ramp up to 60,000 barrels per day over the next few years. Its cost came in about 10 per cent above the original estimate, but George said it was mainly because the company decided to add another well pad, and other increases in the project’s scope.
“I do not think that this increase was driven in any significant way by inflation,” George said, with the caveat that it’s impossible to avoid rising input costs entirely.
“The project was very far along. The materials were bought. We had a lot of hard-money bids in Firebag 3. Not all of them, obviously, but quite a few.”
With significant infrastructure in place from the first three Firebag phases, George said he expects the costs of the next three to come in lower, though he cautioned it’s too early to say that definitively.
In December, Suncor inked a $1.75-billion deal with the Canadian division of France’s Total SA to work together in the oilsands, sharing interests in the yet-to-be developed Fort Hills and Joslyn mines, as well as the Voyageur upgrader.
Shares in the company were down 65 cents or 1.7 at $37.49 in mid-day trading on the Toronto Stock Exchange.
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