Suncor Energy Inc

TSX:SU

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and welcome to the Suncor Energy Second Quarter 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your host, Mr. Troy Little, Vice President of Investor Relations. Please go ahead.

[Troy Little, executive]

Thank you, operator, and good morning. Welcome to Suncor Energy's Second Quarter Earnings Call. Please note that today's comments contain forward-looking information. Actual results may differ materially from the expected results because of risk factors and assumptions that are described in our second quarter earnings release as well as in our current Annual Information Form, both of which are available on SEDAR+, EDGAR and our website, suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian generally accepted accounting principles. For a description of these financial measures, please see our second quarter earnings release.

We will start with comments from Rich Kruger, President and Chief Executive Officer; followed by Kris Smith, Suncor's Chief Financial Officer. Also on the call are three of our senior operating leaders: Peter Zebedee, Executive Vice President, Oil Sands; Dave Oldreive, Executive Vice President, Downstream; and Shelley Powell, Senior Vice President, Operational Improvement and Support Services. Following the formal remarks, we'll open up the call to questions.

Now I'll hand it over to Rich to share his comments.

[Richard Kruger, executive]

Good morning. The second quarter was a very active time for the company. We made material progress in a number of areas we'll share with you today. First, creating an organization-wide what I would refer to as focus on the fundamentals of safety, operational integrity, reliability and profitability. Second, we took a number of tangible actions to construct a simpler, more focused, lower-cost organization that we'll describe today. And last but not least, we found time in the second quarter to deal with a cybersecurity incident. I'll have more on each of these topics shortly.

I want to give you a few general comments though. During our first quarter call, I referenced having visited 50% of our major operating facilities. Since that time, I've continued to go to the field. I've now set foot on essentially all our major sites. Meeting operational leaders, engaging frontline employees, touring the facilities, been at our mines or upgraders or in situ operations or drilling rigs, refineries and the Terra Nova FPSO. In all locations, our conversations were on the fundamentals and what those of us above the field or above the operating site can do to help improve overall performance. I want to comment on fundamental number one, safety for a moment. In particular, what did I see when I went to locations. First of all, safety. Why is this so important? We care about people, management has a moral obligation to provide a safe workplace and quite frankly, it's good for business, a very strong correlation between safety performance and business performance. So what did I see on site? I saw strong site leadership, I saw worker engagement, I saw a very active near miss reporting, I saw a comprehensive root cause investigations. I saw technology highlighting the mines, collision awareness, fatigue management.

By the end of this year, we'll have 1,000 pieces of mobile equipment with these technologies installed. The -- that should make us the first to implement these technologies on a full scale in oil sands, and they have been proven around the world to reduce safety risk. Our approach is not hope or faith-based but relies on tangible actions, starting with leadership, engagement, technology and trading.

Other observations from the sites. It's evident our company's level of the physical integration is a unique opportunity, an unparalleled advantage. But what I like the best is I saw opportunities to improve our financial and operating performance in most all aspects of our business. Also made time in the second quarter to meet face-to-face with several of our major shareholders, had trips to Toronto, New York, Boston, a series of other virtual meetings. Shared my approach, areas of focus, initial assessments of the company, highest priority plans, but equally spent time listening to concerns, expectations and our shareholders' assessment of the company. So bottom line, what I'd say is 120 days in Suncor is pedal to the metal. Our opportunities are abundant and they're clear.

So let me hit on -- let's get to some meat, and I'll talk about some specific actions in the second quarter, and I'll highlight four areas starting with the leadership team. We announced yesterday a series of changes to the composition and responsibilities of our senior executive team, i.e., those reporting directly to me. The changes are consistent with developing a simpler, more focused, high-performing organization. You'll recall, I used those words in our first quarter call.

The changes are designed to improve clarity and alignment on strategies, priorities, fundamentals and execution excellence. We will have clear accountabilities, fewer internal interfaces. We're delayering the organization, and we are concentrating centers of expertise. The senior executive team will be 8, including me, 4 newly externally sourced this year, 3 of the 4 on board now.

A quick summary of the changes, Kris Smith, CFO. Kris will take on additional responsibilities for IT and supply chain. Peter Zebedee, our EVP, Oil Sands, will be adding in situ and drilling to his remit, giving him all oil sands operations. Dave Oldreive, EVP Downstream joined us in June, eliminated a layer of senior management, so all of our refineries now report directly to Dave. Shelley Powell, Senior VP of Operational Improvement and Support Services. Shelley retains our E&P portfolio that takes on the important role of revamping our operational improvement and associated support functions. Karen Keegans is our new Chief Human Resources Officer; and Jacquie Moore remains General Counsel and Corporate Secretary, both individuals with expanded portfolios. We will add a new senior executive role to lead strategy, sustainability, commercial and development. These changes were enabled by 3 senior executive retirements to this month, one later in the year. And I'll step it back a little bit. I once had a mentor who used to say simplicity creates clarity, clarity creates consistency and consistency creates success. This senior executive team is ready to create success.

The next area I'd like to talk about is above field costs. On June 1, we announced internally plans to reduce above field costs by $400 million a year. If you think of it on an overall corporate breakeven basis, that would equate to about $1.50 a barrel. Staffing will be reduced by 1,500 or 20% by the end of this year based on performance and business need.

In the quarter, we took a onetime pretax charge of $275 million, about $210 million after tax. This would represent a 9-month payout. This is an internally led effort, eliminating work we consider to be unaffordable or low relative value. We are looking at what we do, why we do it, how we do it and the value it adds nothing is off limits.

Reductions are occurring at all levels, top to bottom, including the senior most executives. We are on plan, 1/3 complete. As of August 1, 535 individuals have left the company at a cost reduction of about $125 million so far. Now I would note these actions, they aren't easy, and they certainly aren't taken lightly, but they are necessary for our competitiveness.

Another area we spent time in during the quarter was a strategy reexamination. In particular, we've taken a -- we've started a comprehensive relook at our strategies and our articulated objectives. Where we stand is we judge that our current strategic framework is not or is insufficient in terms of what it takes to win. The lack of emphasis on today's business drivers, and while important, we have a bit of a disproportionate emphasis on the longer-term energy transition. Today, we win by creating value through our large integrated asset base underpinned by oil sands. Discussions have occurred with our Board of Directors, who are supportive of our revised direction in tone, and I would just leave this with more to come but you can expect a sharper, clear, more tangible articulation of how Suncor plans to win.

In addition to the above, we encountered a cybersecurity incident in the quarter. On June 25, we confirmed a cyber incident stemming from unauthorized third-party access to our IT network. We immediately isolated our operational IT systems as well as backup databases. In the days thereafter, we established a safe, secure IT environment free of incursion and corruption. The incidence certainly caused disruption. However, it did not have a material impact on our financial and operating results. Our organization responded extremely well at all levels. Our IT professionals, our operations staff in terms of business continuity and third-party support teams brought in to assist. To date, we're largely back to normal with a few exceptions and the benefits of significant lessons learned.

As I look to the rest of the year, I'll comment on a few areas. These are examples only, not all inclusive, that you can expect focus from our company. First and foremost, base business, continued focus on the fundamentals and continuing to determine ways to improve our financial performance, which I would measure in free cash flow per share.

Looking at the operational areas, mining fleet management. We have in the order of about 900 trucks operating in 5 mines with 3 operational trucks. We're examining the makeup of our truck fleet sizes, ownership, lease to contracted. We're -- we believe there's a material opportunity to lower our overall cost per ton on all earth movements. Peter Zebedee is the senior executive with the ball on this initiative.

A second area I'd like to highlight is turnaround planning and execution. And for context, we conduct large annual turnarounds at essentially all of our upstream and downstream facilities. We spend about $1.3 billion per year, roughly 20% of our capital budget. When we look at benchmarks, Solomon and others, we are well below average in turnaround planning and execution. So we see a major opportunity to improve cost schedule volumes. Dave Oldreive and Shelley Powell are our senior executive co-leads on this important initiative.

Beyond the operation and when I look a little bit further on the radar screen, I'll flag two areas that are top of list. Fort Hills long-term plan. The near-term recovery plan was set last year with clear and definitive actions for the next several years. Given our confidence in the value in this long-life resource, our focus is now on years 4 through 40. The key strategic question is what is the best, most valuable way to move into the North mining areas. More to come on Fort Hills.

The last area I'll comment on is Pathways Alliance. We continue to work to achieve net zero greenhouse gas emissions from our operations by 2050. There is alignment within the Pathways Alliance and increasingly the federal and provincial governments. This fall is key to agree on a competitive fiscal framework for infrastructure investment. Kris Smith and Arlene Strom are the senior executives on this important file.

Before I turn it over to Kris, I want to offer a couple of comments on guidance. On upstream production, we're tracking to the low end of our range, our range is 740 to 770, midpoint of 755. Our Terra Nova start-up delay and our lower stake in Fort Hills has been planned due to the tech acquisition in total, add up to about 20,000 barrels a day, which together would take us below the low end of the range. Downstream, our Commerce City refinery recovery from the incident in December 2022, makes achieving guidance a challenge although I'll note that Commerce City volumes don't have a proportional impact on downstream profitability simply given relative value contribution. That said, make no mistake about it, we are focused on meeting our targets, delivering on commitments. There are no revisions to guidance to date.

Looking ahead, I envision updating when we have information and clarity on which to base any changes if there were to be changes, and given that turnarounds have such a material impact, both upstream and downstream for us, it makes sense to tend to upgrade after majority are completed each year or at least well underway. For us, for this year, that would essentially mean at the end of the third quarter.

So with that, I'll turn it over to Kris.

[Kris Smith, executive]

Great. Thanks, Rich, and good morning, everyone. Well, I'll just provide some high-level overview of the numbers and some color. Suncor generated $2.7 billion of adjusted funds from operations in the second quarter. This includes a onetime restructuring charge of $210 million after tax related to workforce reductions. Based on our expected annual savings, as outlined by Rich in his comments, this will have about a 9-month payback. Now when severance costs are excluded, AFFO was $2.9 billion or $2.19 per share. While not as strong as the previous year, the quarter still saw a very constructive business environment, we saw WTI averaging $74 a barrel in the quarter and light-heavy differentials strengthened versus Q1 and averaging $15 a barrel. As well, we continue to see synthetic crude oil trade at a premium to WTI. And while refining cracks were down from Q1, 211 cracking margins remained robust at around $30 a barrel.

Natural gas, which is a key input cost to our operations remained low, with AECO averaging $2.35 a Gj in the quarter. Looking forward, we continue to see a strong business environment with both crude and refining crack strengthening since Q2 on the back of healthy supply-demand fundamentals and expect to see this continue.

Now turning to operations. Our upstream operations delivered 742,000 barrels of total production in the quarter. With respect to oil sands, we had strong operations, delivering $2.6 billion of adjusted funds from operations with oil sands realizations averaging CAD 94 a barrel, which was about 94% of WTI. Oil Sands delivered 679,000 barrels a day of production in a quarter that had the Syncrude turnaround, which turnaround was executed safely with quality and ahead of schedule. We saw strong upgrading performance in the quarter with 94% upgrading utilization, which included that turnaround and which also included 100% utilization at base plant upgrading, delivering a total of 505,000 barrels a day of synthetic crude oil production. Our In Situ assets also saw continued strong production, including 102% utilization at Firebag. Meanwhile, the Fort Hills asset was on plan with production ramping up quarter-over-quarter to 110,000 barrels a day net, including 14,000 barrels a day of internal transfers to base plant upgrading.

As we look forward into the quarter, Fort Hills started its 5-year full plant turnaround in late July, and we're pleased with the progress and that it's on track to complete on schedule later this week. Also, our base plant Upgrader 2 scheduled major turnaround will be starting in early September, stretching into Q4, and that's been reflected in our guidance. Exploration and production generated adjusted funds from operations of $521 million with production of 63,000 barrels per day and average realizations of CAD 108 per barrel, which was about 102% of Brent.

We also closed the sale of our U.K. North Sea assets on June 30 for gross proceeds of CAD 1.1 billion. The asset life extension work on the Terra Nova FPSO continued in the quarter and is now complete with the vessel setting sail actually just a couple of days ago on Sunday. Once it arrives at station, it will then begin subsea reconnection activities through the remainder of the quarter and into Q4.

Finally, Downstream generated adjusted funds from operations of $781 million on a FIFO basis in the quarter or $897 million on a LIFO basis. Average refinery utilization was 85%, which reflected planned turnaround activity. All refinery assets are back from spring turnaround activities and set up for a strong run for the rest of the year. And in fact, in July, we saw average refining utilizations across the network of over 100%. Meanwhile, in the quarter, margin capture was 89%, which reflected reduced heavy feedstock mix and increased intermediates during the turnarounds and rebuilding of inventories. And we had refined product sales of 547,000 barrels per day.

With respect to overall costs, as Rich said in his comments, cost management, cost reduction is a key focus of this management team, and we're seeing progress on costs and see ourselves trending towards the bottom end of our Oil Sands cash cost per barrel guidance ranges for the rest of the year. Year-to-date capital spend to the end of Q2 was $2.7 billion. As with costs, we remain laser-focused on driving capital discipline. Though with the unplanned spend related to the Commerce City outage earlier this year, and the extended Terra Nova life extension work, along with some inflationary pressure, we are trending toward the upper end of our guidance range.

On shareholder returns, we returned $1.4 billion to shareholders in the quarter which was made up of about $700 million in dividends and about $700 million in share buybacks. Year-to-date, we've bought back almost 3% of our shares. And at the end of Q2, our net debt was $14.4 billion, which was a $1.3 billion reduction from the end of Q1. As our shareholders expect, along with safety, reliability and profitability, we remain focused on prudently managing our balance sheet and reducing debt while continuing to provide very competitive returns to our shareholders, through our dividend and reduce share count via buybacks.

And with that, I'll turn it back over to you, Troy.

[Troy Little, executive]

Thank you, Kris. I'll turn the call back to the operator to take some questions.

[Operator]

[Operator Instructions] And the first question today will come from the line of Greg Pardy with RBC Capital Markets.

[Greg Pardy, analyst]

Thanks for the detailed rundown. Kris, I mean, you delved into just what turnaround activity looks like in the third quarter. Are there any initiatives that you're taking to, I guess, mitigate the impacts of production being offline. I guess is there anything special or any modifications maybe that you're making to maintenance plan for the third quarter that you might not have done in previous years?

[Kris Smith, executive]

Yes. Thanks for the question, Greg. What I'd say is that the team has been super focused on delivering the turnaround as we planned and if anything, if you look at the Syncrude turnaround in the spring and the delivery of that, I think it's a great indication of that type of focus, that turnaround, as I mentioned in my comments, not only good quality, really good safety but came in a bit ahead of schedule. And that's what we like to see.

So I'm looking down at my colleagues at the end of the table, Peter Zebedee and Dave Oldreive, even I know that they're super focused on delivering the turnaround that we've outlined. We've outlined them in the guidance. As I mentioned, the big one in the quarter is the U2 turnaround, which will start in September and go into October.

And Fort Hills, I just mentioned, that was a full plant turnaround, 5-year turnaround, really pleased with what we've been seeing, and it's coming back this week as we expected. So I would say it's been a real double down focus on getting good planning into these turnarounds and focus on execution through them.

[Greg Pardy, analyst]

Okay. And then maybe just completely shifting gears. There's a reference in the release, obviously, to acquiring the balance of Fort Hills. I'm just interested in what your thoughts are there generally how you think about it strategically? And then whether there's any possibility of getting a deal done this year? And I'm not asking you to negotiate publicly here. I'm just curious as to whether that is something that could be sooner than later or whether it's just going to take some time.

[Richard Kruger, executive]

Yes, Greg, this is Rich. I think a couple of things I'd say is the long-term bitumen supply to the upgraders remains focus area for us. And between a combination of the ability to move Firebag volumes there and/or Fort Hills and/or incremental Fort Hills.

As we look at it, we generally would prefer to operate and have 100% ownership of our assets. That's generally where we think we can add the most value and be the most competitive. And so Fort Hills would fit into that. The -- with ConocoPhillips exercising the ROFR, the deal as originally announced and configured changed, and we acknowledge that. Total acknowledges that. Discussions are still going, and I appreciate you not asking me to speculate where we'll end up, but discussions are going, continuing the strategic value to us. And I would say Total is -- largely remains the same. So we just -- we'll work through that. And when we -- if and when the time is right, we have something to announce, we'll do that. I think that -- but expecting a resolution on all that this year, that's a reasonable expectation.

[Operator]

One moment for our next question. And that will come from the line of Dennis Fong with CIBC.

[Dennis Fong, analyst]

The first one really here is, Rich, you've outlined a number of, we call it, strategic opportunities ahead of you. And also in light of the changes to the management team, can you talk to how some of these decisions can or will be made or at least how you envision them being made? And maybe while comparing or contrasting to how some decisions were made in the past.

[Richard Kruger, executive]

Yes. Dennis, I think the big thing is when we -- we will -- we are disaggregating our business, our cost structure, the efficiencies, the value we add from top to bottom. So for example, I used -- I talked about mining fleet management. When you look at our mining operations, huge scale. And if you -- as Peter breaks down the component parts of his performance, he's got the mining, the extraction and the upgrading.

The greatest concentration of cost is in the mining and it also happens to be -- you heard Kris articulate the upgrader utilization, high performance. So the greatest concentration is cost and the greatest opportunity for improvement. So what we're doing, and it's not rocket science at all, we're very sharply focusing on where we have the biggest prizes and that represents a big prize. And the goal in all this is to make us obviously more profitable.

But I would ask you to think of that in terms of -- because here's how we're thinking about it. In terms of our breakeven, what does it take? What business environment do we need to be in so that we can pay all our bills and when I say breakeven, I'll put pay our dividends, reliable and growing dividend, and pay or fund the sustaining capital required to take care of the assets we have. So our focus is on improving our quality, our efficiency and lowering that cost structure so that we are resilient in the tough times. And then in the good times, we have more free funds flow available for rewarding shareholders. And that's kind of the mental model that we have here.

And I just -- I know I use this word a lot, but it's bringing a very strong, clear focus to where our opportunities lie. You ended your question with kind of to the past. Dennis, I was laying out a beach in St. Lucia, so I don't really know how the past, I just -- I kind of focused on the present and the future. But it -- I said on the very first call that we would be a simpler, more focused organization and I didn't pick those words lightly. And if you look at the actions we have and continue to take, I think they're very, very aligned with that.

[Dennis Fong, analyst]

Great. I appreciate that color. My second question, I guess, moving in a slightly different direction, as we saw a significant amount of volumes being transferred using the Intertek pipelines in the second quarter, really probably managing volumes around the planned turnaround, we also saw a higher throughput of Fort Hills volumes through the upgraders as well.

I think curiosity, how is the strategy of balancing the flow of all these crews determined? And then secondly, are there opportunities to potentially increase that integration or even increase the I guess, the interconnect between your various assets as you look at strategies going forward?

[Richard Kruger, executive]

I may ask Peter here to comment here in a minute. But this is one of the things I commented on at the very beginning that as I went to site to site and looked at how we're -- literally how we're plumbed and the opportunity that, that provides for value, whether it's the Syncrude to the base plant, whether it's getting Firebag bitumen to the base plant increasingly Fort Hills, these are major opportunities for us. And they allow us the flexibility when we're doing planned maintenance or even unplanned events to capture value. And I think the -- what you saw in the quarter were just some very tangible examples of doing exactly that. If I think to the future or further opportunities, Peter, maybe can offer -- or can I ask you to maybe comment on kind of how you see, how things might unfold for us?

[Peter Zebedee, executive]

I think you saw that through the quarter where we're flowing volumes and really keeping our upgraders full and optimizing the production network, the integrator production network within the region. This actually also extends into the downstream refining network that we have. Our -- and this is something that we've got our teams focused on 24 hours a day, 7 days a week, really looking to generate the maximum benefits for the company through placing volumes in the appropriate places.

We've seen a significant benefit in flowing Fort Hills volumes into the base plant upgrader in terms of yield uplift. Are there opportunities to expand that? Yes, we have our development teams focused on looking at what other regional physical integration opportunities and the physical integration opportunities down into the downstream.

[Richard Kruger, executive]

And Peter, that yield uplift is from PFT?

[Peter Zebedee, executive]

From paraffinic froth treatment process. Yes.

[Richard Kruger, executive]

And it's material. I mean it makes a difference.

[Peter Zebedee, executive]

It is material. Yes.

[Operator]

One moment for our next question. And that will come from the line of Neil Mehta with Goldman Sachs.

[Neil Mehta, analyst]

Yes. And Rich, this was very helpful color. I want to build on your comments on the cyberattack, and we were watching it from the outside, but maybe you can share some perspective with the investment community of lessons learned and how your new team was able to take on this challenge and as we evaluate its ability to navigate challenges going forward?

[Richard Kruger, executive]

Well, first of all, I'd rather have a root canal then go through one of these attacks again. They're not pleasant at all. But let me start with the tail end. I was -- look, we -- I had been here a couple of months, Dave Oldreive in the Downstream was four days into his new job, and I've got to tell you, I saw Suncor management at its best.

In terms of the triggering, we call it different things, but I'd call it the business continuity plan, triggering that, putting it in motion, making decisive key decisions early in it. And that goes from the IT, as Peter led our internal business continuity efforts and I say it tongue in cheek, but June was our highest upstream production month of the year. So apparently, when the rest of us in Calgary were playing Whack-a-Mole here, the organization just delivered and so really pleased with that.

Now what I'd also say is we had a comprehensive rundown with our Board 1.5 weeks ago, and John Hill, our Senior VP of IT, I've said John is free to share lessons learned with his colleagues in the IT community. And what I've also said is I'm very comfortable talking to any of my colleagues on lessons learned. But I would say a few simple things, and these -- these aren't rocket scientists, we're not the first and we're not the last to go through a cybersecurity attack. But a quick action. And it's like any emergency response. When in doubt, go the extra distance. It's easy if you over respond and pull back. If you under respond or slow play things, it likely doesn't turn out well. Then the confidence in reestablishing a safe, secure IT environment. And I'll tell you, I'm not the only one around this table, but in the 3 or 4 days that followed, I learned more about IT hardware, software interconnect, than I ever imagined I would in my life because you needed to understand that as we talked with John and his team to make informed decisions as the event unfolded. And so fast response, decisive, the -- building the safe, secure environment. And then as you resume or restore operations doing it very thoughtful, measure twice, cut once. And I'll probably end my comments there. But it -- wouldn't want anyone to go through this. But if I were ever to go through it again, this is the team I would want to go through it with.

[Neil Mehta, analyst]

That's really helpful, Rich. And then the follow-up is just your perspective on Fort Hills as you've spent time now touring all the assets, investors are trying to evaluate whether the issues here are structural or there's a clear line of path to fixing it? And then how does that affect the way we should think about 2024 capital spend as well as you think about the plan to get that up to the capacity?

[Richard Kruger, executive]

Well, I think the overall reset that was developed last year and communicated last year is solid. There's not a lot of margin for error in that we've got to execute. But fundamentally, that's true in all aspects of our business. It's execution that's key, and so I like that. And what it -- Peter uses the analogy with me, is now we're able to put on the high beams and we're looking not just in front of us month by month, quarter by quarter, but we're able to look longer term. And my confidence of the value in this asset is high.

And so as we look at that, I made the comment in my earlier remarks of years 4 through 40, what is the best way to maximize that value in 4 through 40, I'll be very explicit what we're looking at. In the North part of the mine, you've got an area that has a higher fines content and in another area that has a lower fines content. So as we're looking to go to that North mine, we're thinking about are we better opening up two pits and blending bitumen volumes over time, getting to more ratable, stable, predictable production profile versus ups and downs that may occur quarter-to-quarter, year-on-year as you put a variable bitumen supply, higher fines content, lower fines content.

And that's a value based. It's a strategy based and that's where we're digging in right now. And what it may mean on capital as we move activities around, we may move some capital around. Is it fundamentally different? Is it at the end of the day? Is it different plan or a different overall capital profile? No, I don't think so. I think it's just what's the best timing and sequencing to do. And that's -- we'll have more to say on that, I would say, as we complete our work, which will largely be over the rest of the year. But it's not -- I would just finish up there. It's nice to be not hand-to-mouth and figuring out the short term, how we're responding to things. But with the confidence in the short-term plan, and I really mean the next few years, and now we're looking at, okay, how do we maximize long-term value, which is the name of the game.

[Operator]

One moment for our next question. And that will come from the line of Manav Gupta with UBS.

[Manav Gupta, analyst]

I wanted to switch a little to that refining side, you are one of the most profitable North American refiners. In the third quarter, we are seeing a very strong rebound in cracks almost $5 to $6 higher quarter-over-quarter. And then you indicated you're running much harder in 3Q. So when we look at the third quarter in terms of refining, should we think of earnings closer to the first quarter versus second quarter? I think in the first quarter, your cash flow is about $400 million higher. So trying to get a hang of how the refining is looking in the third quarter from you guys?

[Richard Kruger, executive]

Yes. I'm going to turn it over to Dave here in a second. But Dave has been with us here a couple of months, which is play enough time to get up to speed. And his focus is on those same things we've talked about, safety, operational integrity and reliability. Kris commented how as we -- with a lot of the major work behind us, we're positioned for a good strong run. So Dave, why don't you comment on kind of how you see -- we're halfway through the third quarter and how you see the months ahead playing out?

[Dave Oldreive, executive]

Yes. Thanks, Manav for the question. We do have a very strong refining network here in Suncor with refineries in just great locations to make money in this business. If you look at the third and the fourth quarter, I mean, it was as Kris mentioned, July, even with the impact of the cyberattack, our refining business ran over 100% of capacity. And we expect largely to run close to capacity through the balance of the year. We have two small turnarounds planned, small hydrocracker turnaround in our Edmonton facility and a reformer turnaround in Montreal. Both of those have solid plans in place, we expect to deliver those on time and on schedule and on budget. And with that, I would see strong performance for the refining business for the balance of the year.

[Richard Kruger, executive]

Dave, can you comment a little bit to as you looked at things -- as you look at, okay, so what can we do better? And we've talked about turnarounds, if you want to comment on that. But I think you've said we've got a good network, good locations. A big part of it is where we are. So now what are we going to do to make it even better?

[Dave Oldreive, executive]

Yes. Thanks, Rich. Look, we have a strong refining business. We do have opportunities to be more focused in that business to leverage stronger work processes, stronger adherence to standards and to really drive operational excellence across that business.

If you look at our Commerce City refinery, we had our event back in December, which we took most of the first quarter to recover from, but we did deliver and back up online. We had turnarounds that went longer than we'd like in Commerce City. But we know how to fix that. We've got new leadership in place. I'm committed to help fix that refinery to get that business really focused on excellence. So that's an opportunity for us.

But what I really like about our refining business is the ability to take our molecules and fully integrate them from our upstream assets through our refineries, particularly Edmonton refinery, where we have some really unique optimization, integration opportunities, but all the way through to our company-owned retail sites at the pump. That molecule is integrated. All the value is kept within Suncor and not lost to others in that value chain. That's a real competitive advantage for us.

[Richard Kruger, executive]

And I think just to add on to that, we talked about, in particularly, we focused on refining, but I want to just reiterate that retail when we talked last quarter, announced just before the quarter, the Canadian Tire deal, for example. I think things like that where we can further benefit from our ability to confidently provide volumes, strengthen the brand, try to ratchet up on the value per leader, value per barrel, whatever, it's those synergies that I think also, as I've talked to Dave and he's new in it. I can see him right now, you guys can't see him, but he's kind of salivating down there at the end of the table on what we see as continued opportunities.

[Dave Oldreive, executive]

Absolutely. Our retail business is solid and where we invest, we get really good results, really good business, great to see it integrated, company-owned and ability to continue to capture that short for the long term for our business. So really excited to continue to optimize that part of our business.

[Manav Gupta, analyst]

We completely agree, you have one of the best integrated downstream models out there. My quick follow-up question here is you have taken ownership of the Syncrude, you have announced some good measures over there. The cash cost at Fort Hills came down meaningfully quarter-over-quarter. Syncrude was still a little on the higher side. Is there a plan to make the Syncrude cash cost even more competitive from where we are right now? And I'll turn it over after that.

[Richard Kruger, executive]

Peter, do you want to comment on the Syncrude's cash costs in the -- or in particular, per barrel basis in the Syncrude.

[Peter Zebedee, executive]

No, I'm happy to do that, Rich. And I think I'll link back to your earlier comments, Rich, and the biggest component in cash cost per barrel is our mining costs at Syncrude, and this is true for all our operations. We are working to drive improved efficiency in our mining business.

The scale of our mining business across the Suncor portfolio, we're moving 1.3 billion tons per year. And so a little improvements add up to a lot here. And we will look at driving improvements within our own mining operations, especially at Syncrude, but also looking at the balance of how those tons are moved. How much we move with our own fleet versus how much we move with third-party contractors, and leveraging what we see as an arbitrage opportunity to move more ourselves.

So Syncrude is focused and an improvement on cash cost per barrel will be driven through improvements in further in-sourcing of mining operations and in the future, looking to implement autonomous haul truck technology to improve fleet productivity and drive a more competitive mining cost per barrel.

[Richard Kruger, executive]

And 2Q was distorted a little bit by the turnaround impact. I think when you take it on a unit cost basis?

[Peter Zebedee, executive]

It was distorted. We did have a coker out for 63 days, 2-day -- beat the turnaround schedule by 2 days. And that, of course, is another opportunity for us is to look to reduce the duration of those turnarounds, improved our risk-based work selection, and we'll be doing that coincident with our Downstream colleagues and corporately on improving the efficiency of our turnarounds. So that did impact our cost in the second quarter.

[Operator]

One moment for our next question. And that will come from the line of Menno Hulshof with TD Securities.

[Menno Hulshof, analyst]

I'll start with a question on shareholder capital returns. You were quite active on share buybacks in the first half. So is it reasonable to assume that the second half will be more skewed towards debt reduction given your 50-50 target? And when do you expect to hit your secondary $12 billion net debt target on the strip?

[Kris Smith, executive]

Yes. Thanks, Menno. It's Kris here. Yes, as you pointed out, we had probably more weighted towards buybacks in the first half versus debt reduction, though obviously, we made progress on debt reduction, as I mentioned in my remarks.

I think as we go through the balance of the year, you probably see a little bit more trending towards the debt reduction side, but we're still going to be focused on both. And we've got that 50-50 capital allocation is our guidepost as we move through the balance of the year. So you're going to see us continue to toggle on both of those. But I think you're right to point out, it will probably be a bit less in the second half on the buyback side, but still I would say, a very good buyback program continuing.

In terms of your question around the $12 billion net debt, I mean, obviously, it's going to be a factor on your view on what you think pricing is going to look like. I think if we see pricing continue at its current level, we're going to start approaching that kind of as we get it earlier into next year.

Now the one piece, Menno that I would add is -- as we talked earlier in Rich's comments on the Q&A is the potential for the Fort Hills transaction. If that does transpire, then obviously, that will change the profile, but the amount would be much less than what we've been talking about a couple months ago in the original transaction. So we would expect to be able to work through that very quickly.

[Menno Hulshof, analyst]

Okay. Kris. And then my second question is more of a point of clarification on Neil's Fort Hills question. I believe the original redevelopment plan was to get to center pit this year and north pit towards the middle of next year, I think that was the time line. Is that still the general plan? Or is all of that getting reevaluated?

[Richard Kruger, executive]

That is still the plan. And so my earlier comments were as we go into North pit and as we think a bit longer term, what is the best way to mine North pit overall. But that the plan you've heard before remains the plan.

[Operator]

One moment for our next question. And that will come from the line of John Royall with JPMorgan.

[John Royall, analyst]

So you mentioned on Terra Nova, the subsea connection will go into 4Q once the platform arrives on site. Is there an expectation you can give us for timing on getting production back up and running full?

[Richard Kruger, executive]

Yes. I'm going to turn it over to Shelley Powell here in a second. And Kris mentioned we dropped ropes on Sunday, and I think we should be on station sometime today, I think, Shelley. And then it starts that process. But Shelley, why don't you describe a little bit of from the time we're on station, what happens to the integration or introduction of hydrocarbons?

[Shelley Powell, executive]

Sure. Thanks so much for that. So there is still a fair amount of work in front of us. So sailing away kind of marked one major milestone for the asset life extension project. The good news is the weather is in our favor right now off the coast of Newfoundland and Labrador. So sea states are good.

As Rich mentioned, if all goes well, we are looking to reconnect over the course of the next couple of days. And then we still do have several weeks of additional work in front of us. So there's barrier testing that needs to be done with the subsea assets. There is a full set of commissioning activities that we need to undertake there as well. And primarily, we are very focused on making sure that we take the time to do the right work to make sure that when we do return to operation, we have a safe and reliable, sustainable operation going forward.

[Richard Kruger, executive]

Is that -- sorry, go ahead, Shelley.

[Shelley Powell, executive]

I was just going to say, so in terms of exact timing, we will take the time that we need to do it safely.

[Richard Kruger, executive]

And the -- as we've got the reconnection and you've got to establish functionality with the well centers and to bring them up on and on that we've been a little innocuous on it. But with where things are, production in the fourth quarter at some time is not unreasonable. But what I'd just say is a little bit further down the line, get a few more of these things kind of checked off. And as we check off each of them our confidence in what that maintenance will get higher. But that's -- if we lay out a plan right now, that's what the plan would include.

[John Royall, analyst]

Great. That's super helpful. And then given the Surmont asset is now not a part of the deal with Total and assuming you do ultimately buy in the rest of Fort Hills, what are your other options for backfilling the lost production from baseline next decade in terms of the production that would have come from Surmont? Just can you talk through some of the other options you have there?

[Richard Kruger, executive]

Yes, absolutely. When I talked earlier on, I mentioned about kind of the reexamination of our strategies and kind of what are those key articulated objectives. Obviously, long-term bitumen supply is in that top 10 list. There's no question about it. And I spent time here again with Shelley recently and now, Peter, looking at our -- some of our in situ opportunities.

And I think the -- we -- because I'll tell you, I'm agnostic to a barrel of bitumen. I don't care if it comes from dirt or the earth it's what's the most profitable, the lowest cost, most reliable supply. And we're looking at some of our own internal, like Lewis, for example, is one we've talked about at points in time. I guess, Firebag south is one area we've looked at. And we're looking at a variety of other kind of alternatives in the mine, just adjacent leases.

So I think the -- John, what I'd say is we're looking at kind of the full swath of opportunities. And whatever we do will be driven by lowest supply cost and whether that's incremental in situ or whether that's incremental mining and whether that's from assets in our portfolio today or assets that we think we can -- are worth more to us than they are to their current owners. So it's that full view screen or radar screen we're looking at in Fort Hills, obviously helps in that regard from the standpoint. Not just the Fort Hills ramp up as well as whatever happens with the Total side of it. That definitely helps in keeping the upgraders full then beyond that, it's all about value, whether that's maintaining a production profile, growing it or not. It's about what value opportunities are there for us. And I'm excited because we're -- we've got a number of things that are there available -- a number of levers that are available for us to consider pulling over time.

[Operator]

One moment for our next question. And that will come from the line of Doug Leggate with Bank of America.

[Kaleinoheaokealaula Akamine, analyst]

This is Kalei on for Doug. My first question is also on Syncrude maybe it's best for Rich. So the trend as we see it in recent years has seen the Canadians consolidate the oil sands and the result has been just a lot of synergies. When I think about your interest in Fort Hills, it's perhaps another play on this. And when I think about Syncrude, it's just another asset that you're highly familiar with.

So I'm wondering if the ownership structure as it stands today, does maximize the value of that asset? Or do you think there could be synergies? And I guess I'm asking that in the context that you guys were just able to identify material cost savings across the business that you do wholly own.

[Richard Kruger, executive]

Yes. I think it gets back to my earlier broad comments that ownership and partnerships get there for a variety of reasons over time. In a clean sheet of paper world, we would prefer to operate, have a 100% interest and then -- and I think it's -- our asset base is a real vivid illustration of that.

The synergies, and Dave commented earlier, Peter did too, of kind of molecule management from the mine all the way through to someone's gas tank, that gives us opportunities, so the flexibility that goes with that is also important. And I think Peter's business is probably the best example of it.

I commented in round numbers, we have 900 trucks in 5 different mines, in 3 different kind of asset bases that have 3 different sets of ownership. Well, if Peter wants to move, Komatsu 980 or Cat 797 and he wants to move them from one to another, he's got to ask people. Well, Peter doesn't like to ask people. Peter just likes to do it and get on with it and save money. So there's opportunities there but I'm being a little tongue in cheek, but they all come down to value.

Aligned partnerships can be highly, highly successful. I think the Interconnect pipeline at Syncrude is a real good example of that. It was a long time in coming. There was some bad*** that used to be at Imperial that made that problematic. Well, he retired and they got it done. And so the opportunity when both sides can benefit, which is what we're about, creating partnerships that value and again, 100% ownership, operatorship is ideal, but we're not always there. And if we get there a move there, it's because both parties will see value in such a deal.

[Kaleinoheaokealaula Akamine, analyst]

That's very helpful, Rich. I appreciate that. My second question is on the breakeven that you touched on earlier. Just wondering if you can quantify where that is today, following those cost reductions and where you think it could go organically. And do you think that level would be low enough? Or would you consider supporting it with additional downstream? And I'm thinking back to last November when you guys decided to keep the retail segment because it helped bolster your cash margins.

[Richard Kruger, executive]

Yes. I'm a bit of a numbers guy. So I was playing around with numbers last night, and texted an e-mail and back and forth. And I got to tell you, on a calculation of breakeven I was $0.50 off from what Troy's experts in IR came up with. And I would say we're kind of -- and you guys put out a lot of stuff depending on what you put in and what period you look at whether it's dividends or sustaining level, we're kind of in that $50 a barrel range, plus or minus a little bit.

And is it -- what you said is that -- I always like it to be lower because I like the resiliency that provides and I like the incremental or supplemental free cash flow and the options that go with that. So that will continue to be a big focus area for us as we get to be a simpler, more focused organization, as we prioritize operational improvements, whether they're turnarounds, mine fleet, whatever they happen to be to strengthen the company and give us more and more optionality on it.

Repeat the second -- the tail end of your question a little bit. So you got me going on breakeven because it's very much the way I look at things. And the -- the second part of your question, Troy is scratching a little note for me making sure I get it. Downstream. Yes, Downstream. The benefit of being an integrated company like ours is the natural hedge that goes with it. So if the downstream growth, whether that's in retail, whether that's in partnerships in retail, whether that's looking at the pots and pans we have at our four facilities, could be midstream assets. To me, all of those are on the table to look at how we further strengthen, increase our resiliency, increase our cash flow. I don't have a corresponding list right now to say, here's what those things would be. But I'm looking to my left at a fellow named Dave and it won't be too long before I say, Dave, let's talk about your list. Because I think that's really part of the benefit of kind of our identity, who we are with the level of physical integration and the synergies that go with that.

[Kaleinoheaokealaula Akamine, analyst]

I appreciate that. And just to be clear, the $50 that you mentioned, that's a WTI number. And what's the WTI...

[Richard Kruger, executive]

Hear the number and then forget it because it's not precise. But yes, we talk about it here and what kind of a business environment in a WTI kind of world do we need to be in to be able to pay our priority bills. Our ongoing operating costs and I put dividend and sustaining capital, taking care of the assets we have. I put those in that priority builds.

Dividend is sacrosanct to me. And I've learned in other areas, you got to take care of what you have. You got to feed the kids you have before you have any more kids. And sustaining capital is very much that take care of the asset base you have. And you want to be able to do that in good business environments, in weaker business environment.

So when I talk about breakeven, I include dividends and sustaining capital. What kind of business environment do we need to be in, so we have resiliency and we can withstand or ride through when times are -- they're not as strong as we'd like them to be.

[Operator]

I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Troy Little for any closing remarks.

[Troy Little, executive]

Thank you for joining us today. Please don't hesitate to reach out to us should you have any follow-up questions. Operator, you can close the call.

[Operator]

Thank you all for participating. This concludes today's program. You may now disconnect.