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Integrated strategy shields Suncor from record-high WCS crude discounts

Highlights

Suncor had a record high production in Q3 of 744,000 b/d.

Company had a realized price of $49/b for its bitumen.

Suncor considers it viable to install coker at Montreal refinery

Mexico City — Suncor, Canada's largest oil sands producer, said its integrated strategy has shielded it from Western Canadian Select's steep discount to West Texas Intermediate crude futures, a senior company official said Thursday.

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The WCS price discount to WTI futures averaged $27.78/b during Q3, widening from a $10.38/b discount in Q3 2017 as production has exceeded takeaway capacity, S&P Global Platts data showed. The WCS discount has since widened to average $45.94/b so far in the fourth quarter.

Some are questioning the strength of the Western Canadian oil sector because of the crude differentials, Suncor CEO Steve Williams said during the company's third-quarter earnings call.

"However, we are largely immune to these differentials because of that flexibility we have," William said. Suncor in Q3 obtained a realized price for its bitumen of C$64.33/b ($49/b).

Williams said Suncor's flexibility comes from the company's 1 million b/d of refining capacity and enough pipeline capacity contracted to move its crude to the US Gulf Coast.

Despite the weakening value of Canadian oil production, Suncor obtained a record operating income of C$3.1 billion in Q3, Williams said. If prices stay at $68/b for WTI and $29/b for WCS in the coming quarter, the company will maintain operational income at record levels, he added.

NO CURTAILS EXPECTED

Suncor will not curtail production in the fourth quarter, Williams said.

"The higher-cost producers are having to pull back because they're not making any margin on their last barrel. We're not in that circumstance," he said. "If we were to get into that circumstance, we wouldn't hesitate to pull through, pull back, but our marginal barrel is making a profit."

S&P Global Platts Analytics expects total Canadian production losses to be limited to roughly 100,000-200,000 b/d by the middle of 2019. Netbacks are positive on average, with operating costs at $15/b for heavy crude, according to Platts Analytics. However, lower prices are taking a toll on more expensive barrels and could reduce rig activity.

The company had a record high oil sands production in Q3 with 476,000 b/d, Williams said. This pushed the company's overall quarterly production to a new record high of 744,000 b/d, marking an output increase of 69,000 b/d compared with the previous quarter, and 45,000 b/d higher than Q3 2017. Meanwhile, the company's downstream utilization rate achieved a 99% level.

With Suncor's high operational income, Williams said the company will direct future cash flow primarily to reduce production costs, enhance operations and decrease its debt. However, the company is open to investing its cash flow to acquire new assets.

Currently, Suncor does not see any merger and acquisition opportunities in Canada that could add value to its shareholders and operations, Williams said.

"As we go longer bitumen in the long run, we are looking for some potential downstream capacity. However, we haven't been attracted by the high prices refineries have been at," he said.

However, Suncor is evaluating to expand its 137,000-b/d Montreal refinery. "As we see the environment going forward, the Montreal coker is looking very attractive again," Williams added.

-- Daniel Rodriguez, daniel.rodriguez@spglobal.com

-- Edited by Jennifer Pedrick, newsdesk@spglobal.com