Suncor Energy Inc

NYSE:SU

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Suncor Fourth Quarter 2017 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded.It is now my pleasure to hand the conference over to Mr. Steve Douglas, Vice President, Investor Relations. Sir, you may begin.

[Steve Douglas, Vice President of Investor Relations]

Well, thank you, operator, and good morning, everyone. Welcome to the Suncor Energy Q4 Earnings Call. With me here in Calgary this morning are Steve Williams, our President and Chief Executive Officer; Mark Little, our Chief Operating Officer; and Alister Cowan, EVP and Chief Financial Officer.I'd ask you to note that today's comments contain forward-looking information. Actual results may differ materially from expected results because of various risk factors and assumptions, and these are described in our fourth quarter earnings release as well as our current AIF. And they're both available on SEDAR, EDGAR and our website, suncor.com.Certain financial measures that we refer to are not prescribed by Canadian GAAP, but for a description of these measures, please see again our Q4 earnings release.Following our formal remarks, we'll open the call to questions, first for members of the investment community, and then if time permits, members of the media.With that, I'll turn it over to Steve Williams.

[Steven W. Williams, CEO, President & Director]

Thanks, Steve. Good morning, and let me add to Steve's thanks to you for joining us. The first call of the year is always a little bit different. We certainly want to provide color on the very strong operational and financial results we delivered in 2017, but this call also marks the beginning of the new year. And I know that both investors and analysts are looking forward with great interest, particularly in light of the improving global supply-demand balance.So we have a great deal of positive news to report on, both from the year gone by and the year to come. So let me get started.I'm going to kick off with the financial and operational highlights, followed by a strategy update. I'll then pass over to Mark Little and Alister Cowan to provide some additional detail on our operational and financials, respectively.The fourth quarter marked the first time in Suncor's history that we have exceeded $3 billion in quarterly funds flow. This broke the previous record of $2.9 billion, which was set in the first quarter of 2014, interestingly, when WTI oil price averaged just under $100 a barrel, almost 80% higher than this past quarter's average of USD 55.40 per barrel. So clearly, we've taken some significant steps to increase the profitability of our business in the past 3 years.Our assets operated reliably during the quarter, with upgrading at our base plant and Syncrude, hitting utilization rates of 93% and 94%, respectively. Our refineries also averaged 94% utilization for the quarter, resulting in record throughput for the year as a whole. Total upstream production in the quarter was Suncor's second highest ever, falling just shy of our record third quarter. And notably, we recorded a total of almost 8,000 barrels per day of production from startup operations at Hebron and Fort Hills.We were very pleased to see Hebron's first production come online in November, about a month ahead of schedule. Development drilling will continue and we expect the project to contribute close to 10,000 barrels per day to Suncor's production this year.At Fort Hills, we completed multiple test runs of the front end of the plant and produced over 1.4 million barrels of froth, most of which was shipped to our base plant for further processing.In late January, we successfully started up the first of 3 secondary extraction trains, and began producing high-quality PFT bitumen, which has a lower life cycle carbon footprint than the average barrel of oil refined in the United States today. Now let me just repeat that. The life cycle carbon footprint of Fort Hills bitumen is actually lower than the average barrel of oil currently refined in the U.S. So that lower carbon production is shipped by pipeline to the East Tank Farm, where it's blended and sent to market. The East Tank Farm, of course, is a significant project in its own right. Suncor built and operates the $1 billion state-of-the-art facility for blending, storing and shipping Fort Hills bitumen. And in a landmark deal, which closed in the fourth quarter, Suncor created a partnership with the Fort McKay and Mikisew Cree First Nations, which saw them acquire a combined 49% interest in these assets. And this represents the largest First Nations business investment ever made in Canada. And it sets a new standard in terms of how natural resource companies and First Nations can work together for mutual long-term benefits.During the quarter, we were able to reach agreements with our partners in the Fort Hills project to resolve the previously announced commercial dispute. Under the terms of the agreement, Suncor acquired a further 2.26% working interest in the project for a payment of about approximately $300 million. And that equates to a capital intensity of about $69,000 per flowing barrel. So our working interest in Fort Hills is now just over at 53%.As everyone knows, Suncor has a capable and experienced development group. We were one of the few companies to be able to take advantage of low oil prices back in 2015 and '16, to make some significant acquisitions at very attractive valuations while still maintaining our strong balance sheet.We continue to evaluate market opportunities, as we have through the crude price cycle. We do have news today on the natural gas front. As everyone who follows Suncor will remember several years ago, we made a call on natural gas and divested substantially all of our gas-producing assets prior to the sharp fall in gas prices. At that time, we retained a significant set of leases in the Montney, with a view to potential development at some point in the future.Today, I'm pleased to announce that subsequent to the end of the quarter, Suncor reached an agreement with Canbriam Energy Inc. to exchange all of Suncor's Northeast British Columbia landholdings, and consideration of $52 million for a 37% equity interest in Canbriam. This transaction is fully consistent with our philosophy of natural developer, so placing the assets in the hands of those with the best technical expertise and focus to develop them, both safely and efficiently. And it allows us to share in the new value that's created while maintaining our focus on our core areas. So we expect the deal to close later in the first quarter.So we're clearly being very active, steadily growing the company, both organically and inorganically, but this has not been, as you've heard me say before, growth for growth's sake. We're focused on strengthening our core business, taking advantage of integration opportunities across our asset base, as we start to assert what we're calling the Suncor advantage. And the Suncor advantage lies primarily in 4 areas: A long-life, low-decline resource base that is competitive and increasingly carbon-competitive, not just cost-competitive; a highly efficient, tightly integrated downstream that maximizes the value of every oil sands barrel of production and helps to cushion us from the effects of Western Canadian crude price differentials and largely mitigates the impact of crude price differentials; a highly profitable and focused offshore business that provides geographic and funds flow diversification; and fourth, a strong financial position and balance sheet, with management focus on capital discipline and adding value.So we closed 2017 with a record fourth quarter. With rising production and declining capital spending and our strong integrated business model, we're set up for continued success in 2018.So I'm going to ask our Chief Operating Officer, Mark Little, now to go into a little more detail on our operational performance in the fourth quarter. Mark?

[Mark S. Little, Chief Operating Officer]

Thanks, Steve, and good morning, everyone. As Steve noted, our assets operated reliably throughout the fourth quarter, resulting in near-record production from the upstream and record annual crude throughput in the downstream. The strong quarterly performance put a cap on a very solid operational year for us, and I just wanted to highlight a few of these details.Total oil sands production was up almost 12% year-over-year, averaging almost 564,000 barrels per day. With continued reliability improvements anticipated at Syncrude and the ramp-up of Fort Hills production, we expect a further increase in 2018 of about 15%.Our E&P production was slightly down in the fourth quarter, primarily due to the unplanned outage at the Forties Pipeline, which shut in Buzzard production for a good part of December. For the full year, however, E&P production came in 3% higher than 2016. Looking forward, we expect the ramp-up of Hebron production to help offset the natural declines in 2018 and enable us to reach our guidance range of 105,000 to 115,000 barrels per day.In the downstream, we continue to run our refineries at full rates to take advantage of strong market conditions, as we set a record for annual crude throughput, and utilization for the year of 96%. Strong reliability generally leads to low unit costs, and that was certainly the case for Suncor in 2017.Our Oil Sands operations cash cost per barrel were down 3% in the fourth quarter to $24.20, and 10% for the full year to $23.80, representing 10-year lows for both periods. For the year, we achieved cost reductions in every area of our Oil Sands operations. In Situ cash costs were down 4% to $10.50 per barrel, mining costs were down 14% to $22 per barrel and upgrading costs were down 33% to just $3.59 per barrel. And remember, these numbers are for the full year, so they include maintenance, downtime and associated costs. In E&P, we also saw year-over-year declines in operating expenses, with costs down 11% on the East Coast to $11.24 per barrel. And costs in the U.K. North Sea dropping by 18% to just $4.62 per barrel. And finally, with record throughput for the year at our refineries, we were able to reduce operating expenses by 1% to $5.05 per barrel. So all in all, a very strong year for operations in 2017, and we're looking to build on that success, obviously, in 2018.As you know, we did encounter some challenges to begin the new year in early January during a time of extreme winter weather conditions. The Oil Sands base plant incurred a power interruption, which resulted in a controlled shutdown of extraction and upgrading. We executed on a very disciplined recovery process and returned the assets to service, with no lasting impacts to overall operations. We are now back at full production rates, and we remain on track to meet our guidance commitments for the year.Looking forward, there are 3 areas of our operations where we're putting particular focus. First, continuing our operational excellence journey, including steadily improving our maintenance and reliability practices and reducing operating costs. Technology, such as the recently approved automated haul systems in our mines, will be critical to our continued progress in this area. Secondly, successfully ramping up and stabilizing operations at Fort Hills at a minimum of 90% of capacity by year-end. And finally, driving forward on Syncrude improvements and integration program to maximize the value of the operation.So we have a lot on our plate from an operations' perspective, and I know we're up for the challenge. So with that, I will pass it along to Alister Cowan to provide some color on our financial results.

[Alister Cowan]

Thanks, Mark. The fourth quarter featured the highest benchmark crude prices since the second quarter of 2015, and the strongest benchmark refining crack for a fourth quarter since 2012. And we were able to take full advantage of the positive business environment that we were in.Oil Sands operations realized prices increased in Q4 by approximately 15% compared to Q4 in 2016, when they averaged -- and they averaged CAD 62.27 per barrel. And our integrated model protected us from the widening differential towards the end of the year. Syncrude realized prices were also up 15% and averaged $73.64 per barrel. The realized prices in the offshore were up roughly 20% quarter-over-quarter, averaging $81.49 per barrel off the East Coast of Canada, and $76.46 in the U.K. North Sea. Downstream refining margins increased by 38% quarter-over-quarter, led by record wholesale volumes in Canada, and a 10% increase in distillate sales.Mark talked generally about our strong cost performance across the business, and then they have resulted in a very strong set of financials for both the fourth quarter and the year as a whole. We generated over $3 billion in funds from operations, and $1.3 billion in operating earnings in the quarter. That brought our annual totals to $9.1 billion in funds from operations and $3.2 billion in operating earnings. And our return on capital deployed improved to 8.6% pre major projects and programs.Our funds from operations, both for the fourth quarter and the year as a whole, easily covered our sustaining capital plus our dividend, leaving a very significant tranche of discretionary free funds flow to invest in growth and increasing returns to shareholders. For the full year, we produced almost $4.1 billion in discretionary free funds flow, which equates to a discretionary free funds flow yield of 5.4%, which rises to 8.2% if you exclude the dividend payment.Our continued focus on reliability and cost management has been a big factor in this strong free funds flow generation. As Mark pointed out, we've reduced our unit operating cost across both the upstream and downstream businesses. We've also been able to steadily drive efficiencies across our corporate functions. As a result, our total operating, selling and general expense for the entire company for 2017 came in at just $9.2 billion. That's more than a 5% reduction since 2014, at the same time as we've grown our production by almost 30%.With increasing production, reduced capital spending and disciplined cost management driving structural increases in our free funds flow, we were very comfortable raising the dividend by 12.5%, as we announced yesterday. This will be the 16th consecutive year of dividend increases for Suncor, and it maintains our commitment to be a competitive, growing and sustainable dividend. In our view, to be truly sustainable, the dividend must not be dependent on high oil prices. We are able to fund both our sustaining capital and our dividend at USD 40 to USD 45 per barrel oil price. Going forward, we expect to be in a position to continue to increase the dividend, but increases will be driven by structural improvements to our free funds flow, driven by production growth, sustaining capital and operating cost reductions and margin-enhancement initiatives, not by rising oil prices.To the extent that we generate excess free funds flow over and above our dividend commitments, in the near term, we will look to return that cash to shareholders through our stock buyback program. You'll recall that on the third quarter call, I indicated that we were aggressively buying, and in the fourth quarter, Suncor repurchased and canceled 18.7 million common shares for a total of $835 million. Since launching the $2 billion stock buyback program on May 2 last year, we have repurchased approximately 35 million shares for a total of approximately $1.5 billion. The current buyback expires at the beginning of May, and we expect to complete the $2 billion by then. I'm also very pleased to say that the board has approved a further $2 billion buyback, in addition to the current $2 billion program. So just to be clear, that will be $4 billion of stock buybacks in total over 2 years.During 2017, we were able to further strengthen our balance sheet through the early repayment of approximately $3.2 billion in debt scheduled to mature in 2018. Year-over-year, we reduced our total debt by $1.9 billion, and we now have no significant debt payments or repayments due until 2021. We finished 2017 with approximately $2.7 billion in cash and over $7 billion of liquidity. Our net debt to funds from operations fell to 1.4x, and our debt -- our total debt to capitalization dropped below 26%. Both these metrics are well within our target ranges we've outlined to you.So as Steve noted earlier, with our balance sheet in great shape, our production increasing, capital spending decreasing and our strong integrated business model mitigating differential increases, we are well-positioned for success in 2018, leading to further value creation and further increased shareholder returns. That said, I should remind everyone that the first half of the year does tend to be a little noisy, as we bear -- that we'll be bearing the full operating cost at Fort Hills and Hebron, with limited production in the early days of operations as we ramp up. Also, we have the major maintenance turnarounds in the second quarter of the Oil Sands base plant #1 upgrader and at the Edmonton refinery. But of course, all these are factored into our 2018 guidance. And we remain confident we will meet our commitments.With that, let me pass it back to Steve Douglas.

[Steve Douglas, Vice President of Investor Relations]

Well, thanks, Alister, Mark and Steve. And just before we go to the -- back to the operator for calls, a few notes from the quarter and looking forward.So on LIFO/FIFO, in Q4, we had $180 million net positive to earnings and cash flow. And for the year, it was $157 million, of course, with crude price rising throughout the year.On stock-based compensation, Suncor's share price rose both in the fourth quarter and throughout the year. So in the fourth quarter, it was an after-tax expense of $85 million, and for the year, $279 million expense.FX. The Canadian dollar weakened slightly in the fourth quarter, and so it was a $91 million expense. But for the year, the dollar strengthened, and it was a net gain of $702 million after tax.We have posted, looking forward, our guidance for the year. There was just one change this quarter, one update, and it was to reflect the U.S. tax legislation that went through recently. Our U.S.-based tax has been adjusted down from 35% to 21%.A couple of other things to think about going forward. Our first quarter, of course, is always impacted, the cash flow, by our stock-based compensation payout. Typically, that would be in the $300 million range. And also, we are, as we've been saying, building inventory through the first quarter in order to manage through the Edmonton refinery turnaround. And so that will mean increases in eliminations, and earnings and cash flow effectively deferred from the first quarter into the second quarter as that inventory is sold in the second quarter. But again, these things are factored into guidance.With that, I will turn it back to the operator to take calls from analysts.

[Operator]

[Operator Instructions] And our first question will come from the line of Neil Mehta with Goldman Sachs.

[Neil Singhvi Mehta]

I wanted to ask a couple questions here on the slide deck that you posted along with your comments today. In Slide 8, you show what the cash flow expectations would be at $60 WTI in 2018, which was ahead of -- slightly ahead of consensus here. But there were -- there's some one-timers in here, heavy maintenance. You had the ramp-up at Fort Hills. Can you give us a sense of what the cash flow power of the company would look like ex some of these one-timers? Recognizing that third quarter, you did something like $3 billion quarterly, which would imply $12 billion annualized. We're just trying to frame what a more normal year looks like, because '18's pretty noisy.

[Steven W. Williams, CEO, President & Director]

No, absolutely, Neil. I mean, I say it sort of jokingly. I mean, we -- you know we don't formally guide on cash flows. And I also know that your math is much better than mine. But I think the underlying tone of your question is right. We've probably been conservative in what we've estimated as cash flows, even allowing for the noisy year. I mean, I'd just pick out a couple of numbers for those less familiar to put into their calculations. We generated just over $9 billion of cash flows '17, at a WTI price average of $51. So it's not too difficult to adjust from there. We've talked in the past about an increase of $10 per barrel is worth just a little bit more than $2 billion in cash flow for us. So it doesn't take much math to get to $11 billion, $12 billion. I would say 2 of the bigger questions that we've been asked regularly have been around pipeline and light-heavy differentials. And I'd like -- it's probably worth me making those points right upfront. Suncor is not exposed to the current pipeline issue. We have market access, including all of the production from Fort Hills, and we built that into our forward commitment. So we are active advocates of the pipeline, we definitely are supporting them, we want them for future growth beyond, but we are in a very good position. So it would need something significant to change for us to be moving any substantial volume onto rail. So we're not exposed to this current pipeline debate that's going on. The other one is the big question, Mark, is about the light-heavy differential, which has blown out on some days to $30-plus. We are largely not exposed to that differential. When Fort Hills is fully up, and then it's possible on a day we could have some minimal exposure. But relative to the industry, you can see through the fourth quarter, we have little to no exposure. We've put some numbers in that slide deck, but they, again, they are relatively conservative.

[Neil Singhvi Mehta]

I appreciate the color there. And then the follow-up is on the buyback. You re-upped the number by $2 billion. Just trying to -- can you help us frame, Steve, how aggressive you want to be around prosecuting that number? I think you -- the last $2 billion number came out last May, and the goal was to get it done within a year. So should we think 1 year out would be the goal, all else equal, recognizing the volatile -- volatility of the commodity tape?

[Steven W. Williams, CEO, President & Director]

Absolutely, you've nailed it, Neil. I mean, our strategy is, as Alister said, we won't -- when we make that dividend commitment, we're confident we can cover it with cash flows at the low end of the cycle. We've used buybacks, particularly through these periods of high-capital spend and such price volatility on crude, we've used it as a way of flexing the return to shareholders. You've seen that the first $2 billion, we are well on target to buy back in this first year. We fully expect to buy all of that $2 billion back in the second year period.

[Operator]

And our next question will come from the line of Benny Wong with Morgan Stanley.

[Chui Kit Wong, Vice President]

Just wondering if there is an update on how you're thinking about the Montreal Refinery and option to add coking capacity there, given where WCS differentials are and the approaching IMO fuel regulation? Does that become a more attractive project to you? Or what's preventing you from moving forward?

[Steven W. Williams, CEO, President & Director]

It's there on our list. It's not at the top of our list in terms of investments. We've recognized it as an option. So if our view of spreads and coking margins were to significantly change in the future, we still have the main vessels there ready to install. We've done some work on the design. We could execute that project. We think it below normal upgrading costs, but we currently have no plans to do that. It's on our list.

[Chui Kit Wong, Vice President]

Great. And maybe can you speak a little bit about the autonomous trucks you guys are moving towards and the benefit it brings? I think in your slides, you indicated you think you'll get about $1 per barrel in op cost savings. When should we expect that to be fully achieved? And on the sustaining CapEx side, how do we think about that? Is there any change in that directionally?

[Steven W. Williams, CEO, President & Director]

Yes, I mean, I'll just give you a few headline comments. I know that Mark took -- put a press release out last week, and gave quite a few of the details. And you've sort of laid them back very well. It is a multi -- first of all, the test runs have gone extremely well, which is why we are so confident. So kudos to Mark and his team for doing the work, getting those test runs done and being the first in the industry to commercially execute on the rollout of these trucks. We've worked very closely with the union through that. And you may have noticed over the years, we've been talking about steps we've taken to minimize the impact to our employees. So Fort Hills, we never recruited all of the drivers to run the trucks in anticipation of this opportunity. So we've got people on short-term contracts out there, so relatively easy. So we're working very closely with the union to minimize the impact on our employees. And I'm hopeful that with the combination of demographics and other growth in the company, that we will largely be able to retrain employees and look after them. So that's very important to us. It is a multiyear program. It will roll out over 6 years. It will start with the Steepbank Mine. Then it will go through various stages through Fort Hills, and probably, finally, the Millennium Mine. And then we'll start to look further in terms of opportunities where we venture with others to share some of that experience. The big -- the headlines, and I wouldn't be too much more specific than this, it's markedly safer, it's 10% more productive. And we think when you run the numbers through on an SCO basis, you get to a $1 a barrel savings. So it's a substantial impact on our operating cost. So I would sort of ramp it in a linear way through that period.

[Operator]

And our next question will come from the line of Paul Cheng with Barclays.

[Yim Chuen Cheng, Managing Director and Senior Analyst]

Maybe the first one is for Alister. Alister, if you -- looking at the -- I mean, we can make an argument that what is the oil price going to look like, but you do generate quite a lot of cash in free cash flow. We looked at your balance sheet. Is there any desire there to bring your balance sheet gearing much below your current level? Or that you think you have reached a optimum level already?

[Alister Cowan]

Yes, that's a good question, Paul. We do generate substantial amounts of free cash flow. I think the balance sheet, where we're at today, is in a good position. I think that's why we have increased the dividend, and we feel comfortable with the $2 billion stock buyback that I talked about and then Steve expanded on. I don't see any need at this point in time to significantly improve the balance sheet. I think over time, as prices potentially go higher, you will see that drift down towards the bottom end of our ranges, that's what we've always said. But clearly, we like to retain the flexibility of the balance sheet as we go forward. That's been a strength of Suncor.

[Yim Chuen Cheng, Managing Director and Senior Analyst]

And when you talked about earlier that on the future dividend increase would be a function on the structural improvement, like on a higher production and all that, do you measure in a nominal base or do you measure those based on a per share matrix?

[Alister Cowan]

Well, I think it's a combination of both. Both in absolute terms and the amount of additional free cash flow that we will generate. And I think we have a slide on that in our investor deck, what we expect over the next several years. And clearly, that will translate then into a per share number combined with the benefits of the stock buyback.

[Yim Chuen Cheng, Managing Director and Senior Analyst]

A final one for me. This probably for both Steve and Mark. You guys have done quite a lot. And so what is the next step? Is there -- in terms of the step-function change in your cost structure, is that a big grand prize, either in the area or the technology? I mean, it's great that the automated trucks that are $1, but that doesn't seems like it's a step-function change. So is there anything out there that we should watch out, that is going to see it smashed by another 30%, 40% on your cost structure?

[Steven W. Williams, CEO, President & Director]

I mean, I think it is a gradual, progressive process. So you will see us continuing to -- it's top of our agenda. We know that a lot of it is to do with reliability, and getting the reliability up helps distribute the costs. And then we have a whole list of -- so if I think about looking forward, I like the way Steve is now portraying in the deck. We talk about the 20% growth over the next couple of years. We know that's the ramp-up of Fort Hills, the ramp-up of Hebron, and the delivery of the synergies which come with Syncrude. Then what we're starting to talk about much more clearly now, we've talked about 100,000 barrels a day or equivalent in margin of projects. Now some of those will be a cash flow equivalent in cost reduction. So you're going to see, as we more closely integrate Syncrude and Suncor, as we put the bidirectional line in, as we start to implement the new tailings system. And then you're going to see some more of that debottleneck stuff we talked about. You can, obviously, we've got the scope now on Fort Hills. You're going to see some of it in E&P. We've talked about some of the steps out in Oda, Rosebank and White Rose and Buzzard, where we have similar opportunities. So it's a whole -- we'll give more color on those as we're getting towards them. But it will be all of those things. So I do see it continuing. I think Mark's given me a good warning here, which is, of course, we went for the low-hanging fruit first, so we did the bigger, easier pieces. So it's harder work now, but still some significant progress, I think.

[Operator]

And our next question will come from the line of Roger Read with Wells Fargo.

[Roger David Read, MD & Senior Equity Research Analyst]

Just a follow-up on the Syncrude. The -- I believe it is Page 19 in the handout. Realizing the near-term synergies, your comments, low-hanging fruit, may already be there, but this is both a throughput as well as a cost-reduction story. The guidance doesn't look like a lot of changing cost for '18 versus '17. And I was just curious how much of that is because throughputs aren't changing a lot, or is there something else going on in Syncrude? And then how do you think about it, say, to 2020, where we should see things going?

[Steven W. Williams, CEO, President & Director]

No, I would just say it's prudence. So I mean, we're seeing steady progress. I mean, you have seen in the fourth quarter, 94% utilization and the costs have come down to $32.80 a barrel. So we're making real substantial progress. All we're doing is being a little bit measured in what we're saying. We are seeing the opportunity for improvements. But it's very difficult to be month-to-month specific. So that's why we said you can plan in your model 90% utilization and a $30 cost in that 2020 time frame. So just draw a straight line. But you will see -- you've seen periods where we've had this reliability up very high. And then we're steadily working on the underlying issues. And I'll give you a real example. The cause of the problem last year with Syncrude was to do with its winterization, and then an ice plug-in process, [ dead lag ] thawing out. We've put the 2 standards together of Suncor and Syncrude, and we're now going in and upgrading some of the facilities there. So you will see that the utilization come with those benefits. But it's a slow, steady process. So the Syncrude work is going very well. Doreen Cole is now in there as the leader, a Suncor executive. We're swapping technical and leaders in both directions. The collaboration is working. Mark and myself are meeting with Rich Kruger on a bimonthly basis. And I continue to be very encouraged. So no, I think we'll make steady progress.

[Roger David Read, MD & Senior Equity Research Analyst]

Okay, great. And probably as a follow-up to Paul Cheng's question about the balance sheet, and then, quite obviously, the heavily discounted WCS barrels locally there, does this open up an opportunity for acquisitions? And how do you see acquisitions competing for capital as you look at, obviously, an oil price affecting, to some degree, what you'd spend on CapEx and then the commitment, both to the dividend and the share repos?

[Steven W. Williams, CEO, President & Director]

I mean, the first thing I would say is, it clearly gives Suncor an advantage. We have virtually no exposure to the light-heavy differential. And our competitors are exposed to that because of their different business models of integration and proportion of upgrading or refining to the oil sands barrels they are producing. So I wouldn't want to go on and speculate about acquisitions and such, but to the extent that we are not exposed to it and others are, and therefore, their earning capability in these periods is constrained, there is an impact. And I think it's underappreciated. I really just want to talk about the positive side for Suncor, that hopefully, the third and particularly, the fourth quarter, is making it very clear that when we said it, we meant it. We are virtually not exposed to the light-heavy differential. We've put some numbers in there for when Fort Hills is fully on. So this $25 million, which would put us at the very low end. I would be quite surprised if we actually ever get as high as that number, because we are largely able to mitigate it through the business plan. So what I would say is that has helped us have a healthy balance sheet, which has historically made us able to make these countercyclical, not massive acquisitions, but acquisitions where it fitted very well with our business. So to that extent, it may present us with some of those opportunities in the future. But we are not looking at anything in particular.

[Roger David Read, MD & Senior Equity Research Analyst]

Okay. And do you want to -- I guess it is a big question with investors right now, the exposure of the light-heavy. Kind of give us that quick overview of why you are not exposed to it, just as a quick summary to people who are, let's just say, a little bit skeptical of Canadian heavy oil producers in general?

[Steven W. Williams, CEO, President & Director]

Yes, no, I mean, I would just say -- I mean, Steve will give the details, but it's just evident now. Hopefully, you can see it. You've seen in the fourth quarter the light-heavy differentials blow out, and they've had virtually no impact. We've had a record producing quarter at relatively low crude prices through that period compared to some -- that we've seen since. So hopefully, it's becoming really clear how it works. But there are 2 most important pieces, Steve will take you through them.

[Steve Douglas, Vice President of Investor Relations]

Roger, Steve Douglas here. I mean, the real simple explanation, and it is a fairly complex set of factors that goes into it related to royalties and transportation differentials and so on and so forth. But real simple thumbnail, we produce between 750,000 and 800,000 barrels a day of bitumen, and only about 150,000 barrels of that is actually exposed. By that, I mean, is sold at a price that's influenced by the Hardisty light-heavy differential. The rest is either upgraded or refined in our system or sold into a global market like the U.S. Gulf Coast, where it attracts a Maya differential. Does that make sense?

[Roger David Read, MD & Senior Equity Research Analyst]

It make sense to me. I was just doing it so you could help yourself here.

[Steve Douglas, Vice President of Investor Relations]

Yes, no, absolutely. And we have taken and tried to outline that clearly in the deck this quarter. So we actually have a slide that kind of shows where our production goes and how only 20% maximum is exposed to Hardisty heavy pricing. So thank you for that.

[Operator]

And our next question will come from the line of Greg Pardy with RBC Capital Markets.

[Greg M. Pardy, Managing Director and Co]

We're getting just a lot of questions around your longer-term growth profile. So Steve, I mean, you've characterized, obviously, Fort Hills and Hebron, lock things in for the next year or 2, but in terms of growth, is the right way to think about this that the next major phases are really going to take advantage of next-generation technology, i.e. 2023, with solvents and so forth in the SAGD side? And that you'll infill that with probably brownfields in various parts of the business. And then from a spending standpoint, until we are into next decade, are we sort of in it around $5 billion a year?

[Steven W. Williams, CEO, President & Director]

Okay, yes. Thanks, Greg. Yes, I mean, you sort of approximately nailed it there. So I think we talk about 2021 as lean periods in terms of growth, but let me say some things about that. And we're going to -- as we come around on the road shows over the next few months, we'll paint some more color on this. Think of production growth through the next 2 years, so largely Fort Hills, Hebron and Syncrude, as that 20%. So 10% a year. So we've always looked at the years following as smaller than that. But what I've tried to say is they are actually quite considerable in terms of growth. So if you think about it just in cash flow, as opposed to just production, because some of these will be margin projects which are completely within our control. You can think of 5% to 6% growth annually through 2021 as well, until we kick in with the next phase of bigger projects. And that will be through a combination of autonomous haul trucks, the Syncrude pipeline, the different tailings, the Oil Sands debottlenecks, Fort Hills debottlenecks, the small -- relatively small step-out projects in the conventional E&P, so Oda, Rosebank in the U.K., White Rose in Buzzard, and that fill -- those come in, in those sorts of periods. Then you've got --- we've already got 2 replication phases approved, Meadow Creek East, and 1 phase submitted for Meadow Creek West. There are 4 further phases in Lewis that we anticipate relatively soon. So that's the next bigger wave of investments. And they will start to likely come in, in that back end of '22, '23 period. And you'll start to see, if this program goes ahead on this. I mean, a lot could happen between now and then. You will see one of those come on every 12 to 24 months. So that's then the big structured, organic investment. Back to the last one, many opportunities may present ourselves. If we see the market where some are exposed to these very large differentials, there may be other opportunities. So I think the base case, the one I've just outlined, is very good. There may be some even better options present themselves.

[Greg M. Pardy, Managing Director and Co]

Okay. And then just on the CapEx side. I mean, if you're $10 billion, $11 billion a year of cash flow, even at reasonable oil prices, your spending is around $5 billion. I mean, your -- it's a pretty clear path, but is $5 billion a reasonable number to be thinking about until you get into, let's just say, up to 2020?

[Steven W. Williams, CEO, President & Director]

If I were in -- if that were all unfolded, I would say, you are in the zone, it's probably $5.5 billion. We've put a matrix in to say we will factor it according to -- if crude is at certain prices and cash flows are at certain levels, from a strategic point of view, I see this as a period of returning more funds to shareholders. We've talked about in mining, we don't see in this period big investments in mining. Canada is having to -- we're having to look at Canada quite hard. The cumulative impact of regulation, higher taxation than other jurisdictions, is making Canada a more difficult place to allocate capital in. And we're having those conversations with levels of government at the moment, that other jurisdictions are doing much more to attract businesses in. So Canada needs to up its game. And so absent some changes and some improvement in competition, you're going to see us not exercising the very big capital projects that we've just finished.

[Operator]

And our next question will come from the line of Guy Baber with Simmons.

[Guy Allen Baber]

I wanted to go back to the dividend to just make sure that I understand the message. But obviously, you've been increasing the dividend meaningfully. You have this meaningful production growth guidance you referenced through 2020, which has given many confidence, and these above-average dividend raises continuing in the near term. But then beyond 2020, you don't have the volume guidance, but you have identified some pretty meaningful cash flow improvement initiatives. So just wanted to clarify here, should we be still thinking that even though the production growth rate might slow post 2020, you could still continue to see pretty meaningful dividend increases, given some of these cash flow initiatives that you're progressing, that aren't attached to volumes necessarily?

[Steven W. Williams, CEO, President & Director]

It's very well put. The answer is yes. You can expect to see steady, affordable, sustainable dividend increases throughout this period. Now clearly, it's a board authority. Our strategy have to unfold and we have to deliver the results. But if you were looking -- if you look at the growth in cash flow, which -- and sustainable cash flow, which is the driver for the dividend and share buyback program, you're absolutely right. You should expect to see -- in fact, I would say, to be perfectly honest, we've been reasonably conservative this year at 12.5%. What we want to do -- we don't want to be big increases and backing off, so what we've been doing is positioning ourselves to get that very healthy balance sheet and to continue this program going forward.

[Guy Allen Baber]

Yes, that's helpful. And then the follow-up is, you have an interesting slide in your deck, Slide 14, on regional synergies for existing assets between Firebag, your base mine, McKay, at Fort Hills now. Can you talk about to what extent you may have already captured some of those synergies in 2017 and what lies ahead? Just trying to better understand the potential there. It seems meaningful, but if you could help quantify it maybe, that would be helpful.

[Steven W. Williams, CEO, President & Director]

I would say we're dipping our toe in. We have moved some materials around. So we've -- in terms of molecules and the real opportunities, we've been moving materials into Syncrude. We've moved materials from Syncrude to the base plant. And we've moved materials from Fort Hills down to the base plant. All of those initially were by trucks. So they test the logistics, they make sure, molecularly and from a chemical engineering point of view, it works and it has. Now what we've got to do is make the real connection. So we've seen the opportunity and we are able to size it. We haven't taken full advantage of it. So you will see those progressively roll out as Syncrude integrates more into the region and as Fort Hills ramps up and we integrate that more with the business as well. So lots more to come.

[Guy Allen Baber]

Okay, great. Then last one for me. I did want to mention the downstream or ask about the downstream, just given how strong the performance was 4Q relative to some of the indicators that we track, but also relative to a lot of peers. Would you highlight any notable specifics that contributed to such good delivery during 4Q? Any specific assets stand out? And then maybe just talk about how you view the refining macro framework for your assets in this environment and what you feel the outlook is for cash generation capability there?

[Steven W. Williams, CEO, President & Director]

Yes, I mean, what I would say, and I'll let Steve pick up on some of the finer points of your question there. But let me just take a step back on the downstream. I mean, first of all, I mean, thank you. I think it's done a tremendous job. I think it's underappreciated in our portfolio. And Suncor has been a clear outperformer for a number of years now. And we've always found, if I think of this time last year, we were talking about, wow, gosh it's been a fantastic business, but how can it sustain that going forward. And in recent history, year after year, it has performed at these levels. From an operating point of view, it's done very well in terms of reliability and cost. But in terms of the integrated business model and its ability to help us take advantage of all of the margins that are available, it's been outstanding. If I think of last year, the questions we were getting on this call was, others are selling their retail businesses, why don't you do it? You could get -- and the discussion was, you could get $4 billion, $5 billion for it. I hope it's starting to become clear in our humble judgment why we kept it. That actually, we believe that not only it was a good business, it is a good business. And if anything, with the import-export balance on this continent, it's looking even better going forward. So when I look in the market as a potential acquirer in the downstream, sellers' expectations are high, and that's because the market has had good margins for a while, I think people are starting to view the future of it slightly differently then may have been anticipated, where demand peaked on the continent, products were being exported. Now with products freely moving in and out of the U.S. in particular, it bodes, I think, reasonably well for refining and marketing. So we're very pleased with how it fits with our business. We are very pleased we kept the integrated chain right the way through to the customer. And we think it's advantageous. I don't know, Steve, whether you'd want to say anything in particular about the detail of downstream.

[Steve Douglas, Vice President of Investor Relations]

Well, thanks, Steve. I just had a couple of comments. As it relates to Suncor specifically, we've seen terrific demand, but not -- including 10% increase year-over-year in distillate demand in Canada. But not just demand, but channel mix, where more of the demand is coming through the higher channel -- higher-value channels like retail. Then secondly, on a macro level, we're seeing a very positive go-forward outlook for refining. And I think there are 2 or 3 things that contribute to it: Low gas prices for the foreseeable future; advantaged feedstock costs because of surplus crude; structural exports to Latin America, which is keeping margins higher and keeping refineries running full; and finally, the marine sulfur regulations coming at us in 2020, which we think will lead to strong distillate demand. So to your question of where is it going, we've been generating $2.5 billion to $3 billion of cash flow out of the downstream for the last few years, and we think it's more of the same. We have a very positive outlook going forward. We have -- we'll take one more question, and then we need to close.

[Operator]

Yes, sir. Our last question then will come from the line of Paul Sankey with Wolfe Research.

[Paul Benedict Sankey, MD and Senior Oil & Gas Analyst]

Steve, just on the costs. I was wondering about your autonomous truck program, which I'm always fascinated by, and can you just give a bit more clarity on your assertion that CO2 emissions from your production are lower? I just wondered if you could add a little bit more definition around that comment.

[Steven W. Williams, CEO, President & Director]

Yes, I mean, assuming the capital -- CapEx numbers we talked about for trucks are funded, they are relatively -- relative to the sorts of capital we're talking about, they are not big numbers. The numbers we talk to, when we talk about Fort Hills being a lower-carbon footprint than the average barrel of crude on this continent now, are third-party numbers. They are not our numbers. So Steve, I don't know if you want to talk about the actual source you get the reports, but we can reference you those, Paul. Those are independently verified outside of Suncor. They are not our numbers.

[Paul Benedict Sankey, MD and Senior Oil & Gas Analyst]

Yes, I apologize if I didn't -- if I missed this on the call, but did you talk about autonomous truck numbers and penetration of the trucks into your mix?

[Steven W. Williams, CEO, President & Director]

We did talk a little bit, Paul. But all we said was that, assume that the autonomous truck program will be executed over about a 5- to 6-year period. The first parts will be in our Steepbank Mine. I know when we were last -- when we last met, we chatted about how we'd almost pre-positioned Fort Hills in terms of the mine design and in terms of we bought autonomous trucks there. So they are capable of switching from autonomous to drivers. So we bought them with that capability. And we didn't recruit the drivers. What we did was just recruit short-term contract drivers, so that the flip at the appropriate moment could happen. So towards the front end of the program at Fort Hills, we'll also start to change over to autonomous once we start to get the plant line down. And then we'll finally move through to the mines. We did talk -- I'm not sure if you missed it, we talked about the...

[Paul Benedict Sankey, MD and Senior Oil & Gas Analyst]

Yes, I apologize, sorry.

[Steven W. Williams, CEO, President & Director]

No problem. We did talk about the benefits from it. And it's about -- they are about, clearly a lot safer, about 10% more productive and $1 a barrel savings when you run it through to that SCO number we normally quote.

[Paul Benedict Sankey, MD and Senior Oil & Gas Analyst]

Are there any other savings -- sorry to go on, but are there any other savings of the dollar plus nature that you can see, given that you've got cost so low now? Is there any other big items that you could point us to for you getting perhaps below $20 a barrel of cash cost?

[Steven W. Williams, CEO, President & Director]

I would say, it's a lot of smaller things. But you know, a lot of -- when we come around, we'll take you through the detail of the program. The 5% to 6% cash flow improvement we're talking about in each year, in the 2021 period. A significant proportion of that is going to be a continuation of the cost reduction or margin improvement. So you will see the autonomous trucks. You will see the bidirectional lines for Syncrude will certainly help, because it keeps the plants full and then you can -- so you're able to distribute the cost, and the new tailing system we're putting in is much more cost effective than the old one.

[Steve Douglas, Vice President of Investor Relations]

And I think we will wrap it up there. Thank you, everyone. Operator?

[Operator]

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.