EX-99.1 2 a2240610zex-99_1.htm EX-99.1


EXHIBIT 99.1

Report to Shareholders for the fourth quarter ended December 31, 2019


GRAPHICS

All financial figures are unaudited and presented in Canadian dollars unless noted otherwise. Production volumes are presented on a working-interest basis, before royalties, except for Libya, which are presented on an economic basis. Certain financial measures in this Report to Shareholders (this document) are not prescribed by Canadian generally accepted accounting principles (GAAP). For a description of these non-GAAP financial measures, see the Non-GAAP Financial Measures Advisory section of this document. See also the Advisories section of this document. References to Oil Sands operations exclude Suncor's interests in Fort Hills and Syncrude.

"In the fourth quarter of 2019, Suncor generated funds from operations of $2.6 billion, bringing annual funds from operations to a new record of $10.8 billion," said Mark Little, president and chief executive officer. "In 2019, we returned $4.9 billion in dividends and share repurchases to shareholders, representing 45% of our total funds from operations. Since the start of 2017, we have paid $7.1 billion in dividends and repurchased $6.7 billion of shares, representing over 9% of our outstanding common shares, demonstrating our commitment to shareholder returns."

Funds from operations(1) were $2.553 billion ($1.66 per common share) in the fourth quarter of 2019, compared to $2.007 billion ($1.26 per common share) in the prior year quarter, marking the tenth consecutive quarter above $2 billion. Cash flow provided by operating activities was $2.304 billion in the fourth quarter of 2019, compared to $3.040 billion in the prior year quarter, as the prior year quarter included a source of cash in working capital associated with a declining price environment.

Operating earnings(1) were $782 million ($0.51 per common share) in the fourth quarter of 2019, compared to $580 million ($0.36 per common share) in the prior year quarter. The company had a net loss of $2.335 billion ($1.52 per common share) in the fourth quarter of 2019 due to non-cash asset impairment charges of $3.352 billion after-tax primarily due to lower forecasted heavy oil prices for Fort Hills and higher capital cost estimates for the West White Rose Project, compared to a net loss of $280 million ($0.18 per common share) in the prior year quarter.

In the fourth quarter of 2019, Suncor demonstrated its continued focus on value over volume as Oil Sands operations achieved synthetic crude oil (SCO) production of 300,000 barrels per day (bbls/d) and upgrader utilization of 86%, compared to SCO production of 273,400 bbls/d and upgrader utilization of 79% in the prior year period, with both periods impacted by maintenance.

Total Exploration and Production (E&P) production during the fourth quarter of 2019 increased to 115,900 barrels of oil equivalent per day (boe/d) from 90,200 boe/d in the prior year quarter. The increase was primarily due to higher production in East Coast Canada, which increased to 69,600 bbls/d, from 47,900 bbls/d in the prior year quarter.

Reliable operations in Refining and Marketing drove refinery utilization of 97% and crude throughput of 447,500 bbls/d.

Suncor sanctioned the Forty Mile Wind Power Project, which is expected to drive value through sustainable low-carbon power generation and the retention of generated carbon credits for utilization in Suncor's upstream business.

Subsequent to the end of the quarter, Suncor's Board of Directors (the Board) approved a quarterly dividend of $0.465 per share, an increase of 11%. The Board also approved an increase to the company's existing share repurchase program from $2.0 billion to $2.5 billion through to the end of February 2020 and a further annual extension of the share repurchase program up to $2.0 billion, beginning March 1, 2020, demonstrating confidence in the company's ability to generate cash flow and its commitment to return cash to shareholders.


GRAPHIC
(1)
Funds from operations, operating earnings and ROCE are non-GAAP financial measures. See page 5 for a reconciliation of net loss to operating earnings. See the Non-GAAP Financial Measures Advisory section of this document.

(2)
Includes the impact of the Government of Alberta's mandatory production curtailments.

(3)
Includes asset impairment charges of $3.352 billion after-tax.

(4)
ROCE excluding major projects in progress and impairments would have been 8.7%, 8.0%, and 8.6% for the second quarter of 2019, third quarter of 2019, and fourth quarter of 2019, respectively, excluding the impacts of the $1.116 billion deferred tax recovery for the Alberta corporate income tax rate change in the second quarter of 2019.

Financial Results

Operating Earnings

Suncor's fourth quarter 2019 operating earnings were $782 million ($0.51 per common share), compared to $580 million ($0.36 per common share) in the prior year quarter. The increase was primarily a result of improved western Canadian crude oil differentials, including a substantial narrowing of heavy crude and SCO differentials, which more than offset lower benchmark pricing, from the prior year quarter. This resulted in an increase in Oil Sands price realizations and a net favourable inventory valuation change, partially offset by lower refining margins. Fourth quarter 2019 operating earnings were also positively impacted by increased production at East Coast Canada and Oda.

Operating earnings were unfavourably impacted by lower Oil Sands production compared to the prior year quarter, primarily due to planned maintenance and the Alberta government's mandatory production curtailments, higher depreciation, depletion, and amortization (DD&A) and royalties, and lower refinery crude throughput.

Bridge Analysis of Operating Earnings ($ millions)(1)

GRAPHIC

(1)
For an explanation of this bridge analysis, see the Non-GAAP Financial Measures Advisory section of this document.

Net Loss

Suncor's net loss was $2.335 billion ($1.52 per common share) in the fourth quarter of 2019, compared to a net loss of $280 million ($0.18 per common share) in the prior year quarter. In addition to the factors impacting operating earnings discussed above, the net loss for the fourth quarter of 2019 included $3.352 billion of non-cash after-tax asset impairment charges partially offset by a $235 million unrealized after-tax foreign exchange gain on the revaluation of U.S. dollar denominated debt. The net loss in the prior year quarter included an unrealized after-tax foreign exchange loss of $637 million on the revaluation of U.S. dollar denominated debt and a non-cash impairment loss of $223 million after-tax on one of the company's equity investments.

Funds from Operations and Cash Flow Provided By Operating Activities

Funds from operations were $2.553 billion ($1.66 per common share) in the fourth quarter of 2019, compared to $2.007 billion ($1.26 per common share) in the fourth quarter of 2018, and were influenced primarily by the same factors impacting operating earnings noted above.

Cash flow provided by operating activities was $2.304 billion ($1.50 per common share) for the fourth quarter of 2019, compared to $3.040 billion ($1.90 per common share) for the fourth quarter of 2018. In addition to the items impacting operating earnings noted above, cash flow provided by operating activities was further impacted by a use of cash from working capital in the current quarter as compared to a source of cash in the prior year quarter. The use of cash in the company's non-cash working capital balances was primarily due to an increase in accounts receivable related to increasing refinery margins at the end of the quarter and higher upstream sales volumes.

2  2019 FOURTH QUARTER   Suncor Energy Inc.


Operating Results

Suncor's total upstream production was 778,200 boe/d during the fourth quarter of 2019, compared to 831,000 boe/d in the prior year quarter. The decrease was primarily due to lower Oil Sands production as a result of planned maintenance and mandatory production curtailments in the province of Alberta. E&P production volumes increased from the prior year quarter, primarily due to higher production from East Coast Canada and Oda.

During the fourth quarter of 2019, the company continued to leverage its regional footprint and asset flexibility to maximize the value of its allotted barrels under the mandatory production curtailment program. The company was able to optimize the transfer of our allotted curtailment credits among the company's assets during planned maintenance at Oil Sands operations and Syncrude, while continuing to focus on higher value SCO production. Upon completion of maintenance in the quarter, the company was able to purchase additional curtailment credits from third parties, as well as capitalize on the Special Production Allowances announced by the Government of Alberta on October 31, 2019 and effective December 1, 2019. This program provides producers with temporary relief equivalent to incremental increases in rail shipments, which is anticipated to continue into 2020.

Oil Sands operations production was 418,100 bbls/d in the fourth quarter of 2019, compared to 432,700 bbls/d in the prior year quarter. The decrease in production was primarily due to maintenance, including planned annual coker maintenance at Oil Sands Base, increased yield loss associated with higher SCO production, mandatory production curtailments and an outage at MacKay River. MacKay River is expected to return to operation early in the second quarter of 2020, after completion of planned maintenance which has been accelerated to the first quarter of 2020 to coincide with the outage in an effort to minimize the impacts to annual production. As a result of strong upgrader reliability, SCO production increased to 300,000 bbls/d in the fourth quarter of 2019, despite maintenance, compared to 273,400 bbls/d in the fourth quarter of 2018, representing utilization rates of 86% and 79%, respectively. Production of non-upgraded bitumen from the company's In Situ assets was 118,100 bbls/d in the fourth quarter of 2019, compared to 159,300 bbls/d in the prior year quarter, primarily impacted by the outage at MacKay River and management of mandatory production curtailments, which increased volumes diverted to upgrading as we continue to focus on value over volume through the production of higher value SCO.

Oil Sands operations cash operating costs(1) per barrel increased to $28.55 in the fourth quarter of 2019, from $24.50 in the prior year quarter, reflecting the impact of lower production volumes discussed above, higher costs associated with increased production of higher value SCO barrels, as well as an increase in contractor mining, shovel maintenance and commodity costs.

Suncor's share of production from Fort Hills averaged 87,900 bbls/d in the fourth quarter of 2019, compared to 98,500 bbls/d in the prior year quarter. The decrease in production was due to planned maintenance, which was completed during the quarter, and mandatory production curtailments. Fort Hills remains adversely impacted by mandatory production curtailment due to the continued, disproportionate effect of curtailment as it is applied on a 2018 production basis when the asset was ramping up to full production rates. However, the company was able to partially mitigate production impacts by internally transferring credits from Oil Sands operations and purchasing third-party credits.

Fort Hills cash operating costs(1) per barrel averaged $28.65 in the fourth quarter of 2019, compared to $24.85 in the prior year quarter, reflecting the impact of lower production volumes and slightly higher cash operating costs due to the increase in planned maintenance.

Suncor's share of Syncrude production was 156,300 bbls/d in the fourth quarter of 2019, compared to 209,600 bbls/d in the prior year quarter. The decrease in production was primarily due to planned maintenance that commenced in the third quarter of 2019 and was completed within the fourth quarter, compared to no planned maintenance in the fourth quarter of 2018, and mandatory production curtailments. Upon completion of maintenance, the company was able to partially mitigate impacts of curtailment on production by internally transferring and purchasing third-party curtailment credits. Strong reliability following the maintenance was reflective of the asset's performance in the year, with 2019 marking the second best year of production in the asset's history, even when curtailed.

Syncrude cash operating costs(1) per barrel were $39.85 in the fourth quarter of 2019, an increase from $31.75 in the prior year quarter, due primarily to the decrease in production, partially offset by lower cash operating costs.

Production volumes at E&P were 115,900 boe/d in the fourth quarter of 2019, compared to 90,200 boe/d in the prior year quarter. The increase was primarily due to higher production at East Coast Canada and Oda, which began production in the first quarter of 2019, partially offset by natural declines in the United Kingdom.

   

(1)
Oil Sands operations cash operating costs, Fort Hills cash operating costs and Syncrude cash operating costs are non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document.
2019 FOURTH QUARTER   Suncor Energy Inc.  3

Refinery crude throughput was 447,500 bbls/d and refinery utilization remained strong at 97% in the fourth quarter of 2019, compared to crude throughput of 467,900 bbls/d and refinery utilization of 101% in the prior year quarter. Refined product sales increased in the fourth quarter of 2019 to 534,600 bbls/d, compared to 530,600 bbls/d in the prior year quarter, reflecting strong retail volumes.

"We demonstrated solid reliability across our refineries and upgraders during the quarter and, while we had some operational challenges, we completed significant maintenance across our upstream operations," said Little. "Our strong upgrader reliability enabled the company to opportunistically focus on value over volume, generating higher margin production during mandatory production curtailments."

Strategy Update

In the fourth quarter of 2019, Suncor remained focused on maximizing the return to its shareholders through payment of $644 million of dividends and the repurchase of 11.1 million common shares for $452 million under the company's share repurchase program. In 2019, the company returned $4.9 billion in dividends and share repurchases to shareholders, representing 45% of total funds from operations, in addition to a reduction of debt of $425 million, reflecting continued flexibility in the company's capital allocation strategy.

In the fourth quarter of 2019, the Board approved an increase to the company's share repurchase program from $2.0 billion to $2.5 billion. Following this approval, the Toronto Stock Exchange accepted a notice to increase the maximum number of shares the company may purchase pursuant to its normal course issuer bid. The increase to the program demonstrates confidence in the company's ability to generate cash flow and its commitment to return cash to shareholders.

Subsequent to the end of the quarter, the Board approved a quarterly dividend of $0.465 per share, an increase of 11%, and also approved authority to repurchase shares of up to $2.0 billion beginning March 1, 2020.

Suncor continues to advance projects and investments intended to incrementally and sustainably grow annual free funds flow by reducing operating and sustainment costs, and investing in projects that enhance value within our existing integrated asset base, while moving forward in the areas of safety, reliability and sustainability.

Suncor is focused on low capital intensity, value-creating projects including the cogeneration facility announced in the third quarter of 2019, the continued implementation of autonomous haul trucks, tailings technology advancements, the Syncrude bi-directional pipelines, and digital technology adoption, which underscores our commitment to deliver growth that is economically robust, technologically progressive and delivers leading sustainable outcomes.

The company is committed to its goal to reduce total greenhouse gas (GHG) emissions intensity by 30% by 2030 and continues to invest in low-carbon innovation aimed at reducing the carbon footprint of our operations and the products we sell. In the fourth quarter of 2019, the company sanctioned the Forty Mile Wind Power Project in southern Alberta. This renewable power project has an estimated total capital spend of $300 million, with 25% of the capital spent in 2019 and the remainder to be spent over the next two years. This investment approach in renewable energy is expected to generate significant value through sustainable low-carbon power generation and the retention of generated carbon credits for utilization in Suncor's upstream business. Together with the cogeneration facility, Suncor has sanctioned projects in 2019 that are expected to achieve one-third of our GHG emissions intensity reduction goal.

In the fourth quarter of 2019, the company also finalized an additional $50 million equity investment in Enerkem Inc., a waste-to-biofuels and chemicals producer, bringing the company's total equity investment to $73 million.

"Suncor continues to invest in high-return projects and, in the fourth quarter of 2019, sanctioned the Forty Mile Wind Power Project, which is designed to provide reliable, low-carbon power to the Alberta power grid," said Little. "In addition, through our Petro-Canada brand, we are contributing to the transformation of Canada's energy system through the completion of our cross Canada network of fast-charging electric vehicle stations. These projects are expected to generate value for Suncor shareholders and contribute to the company's strategic sustainability goals."

Within our offshore business in the E&P segment, the company continued to focus on strategic production growth of existing assets including developing step-out opportunities and asset extensions. Drilling activity at Hebron is ongoing and production continues to ramp up with the completion of the tenth production well during the fourth quarter of 2019. Other E&P activity in the fourth quarter of 2019 included development drilling at Hibernia, Hebron and Buzzard, and development work on Terra Nova, Fenja and the West White Rose Projects.

4  2019 FOURTH QUARTER   Suncor Energy Inc.


Operating Earnings Reconciliation(1)

  Three months ended
December 31
  Twelve months ended
December 31
   

($ millions)

  2019   2018   2019   2018    

Net (loss) earnings

  (2 335 ) (280 ) 2 899   3 293    

Asset impairments(2)

  3 352     3 352      

Unrealized foreign exchange (gain) loss on U.S. dollar denominated debt

  (235 ) 637   (590 ) 989    

Impact of income tax rate adjustment on deferred taxes(3)

      (1 116 )    

Loss on equity investment and (gain) on significant disposals(4)

    223   (187 ) 30    

Operating earnings(1)

  782   580   4 358   4 312    
(1)
Operating earnings is a non-GAAP financial measure. All reconciling items are presented on an after-tax basis. See the Non-GAAP Financial Measures Advisory section of this document.

(2)
During the fourth quarter of 2019, the company recorded after-tax impairment charges of $2.803 billion on its share of the Fort Hills assets, in the Oil Sands segment, due to a decline in forecasted long-term heavy crude oil prices, and $393 million against White Rose, in the E&P segment, due to increased capital cost estimates at the West White Rose Project. Refer to note 13 in the company's unaudited interim Consolidated Financial Statements for the three and twelve months ended December 31, 2019 for further details on this item.

(3)
In the second quarter of 2019, the company recorded a $1.116 billion deferred income tax recovery associated with the Government of Alberta's substantive enactment of legislation for the staged reduction of the corporate income tax rate from 12% to 8% over the next four years.

(4)
The third quarter of 2019 included an after-tax gain of $48 million in the E&P segment related to the sale of certain non-core assets. The third quarter of 2018 included an after-tax gain of $60 million on the sale of the company's interest in the Joslyn Oil Sands mining project. In the second quarter of 2019, Suncor sold its 37% interest in Canbriam Energy Inc. for total proceeds and an equivalent gain of $151 million ($139 million after-tax), which had previously been written down to nil in the fourth quarter of 2018 following the company's assessment of forward natural gas prices and the impact on estimated future cash flows.

Corporate Guidance

No changes have been made to Suncor's previously announced 2020 guidance. For further details and advisories regarding Suncor's 2020 annual guidance, see www.suncor.com/guidance.

Measurement Conversions

Certain natural gas volumes in this report to shareholders have been converted to boe on the basis of one bbl to six mcf. See the Advisories section of this document.

2019 FOURTH QUARTER   Suncor Energy Inc.  5

FOURTH QUARTER DISCUSSION
February 5, 2020

Suncor is an integrated energy company headquartered in Calgary, Alberta, Canada. We are strategically focused on developing one of the world's largest petroleum resource basins – Canada's Athabasca oil sands. In addition, we explore for, acquire, develop, produce and market crude oil in Canada and internationally; we transport and refine crude oil, and we market petroleum and petrochemical products primarily in Canada. We also operate a renewable energy business and conduct energy trading activities focused principally on the marketing and trading of crude oil, natural gas, byproducts, refined products, and power.

Additional information about Suncor filed with Canadian securities regulatory authorities and the United States Securities and Exchange Commission (SEC), including quarterly and annual reports and Suncor's Annual Information Form dated February 28, 2019 (the 2018 AIF), which is also filed with the SEC under cover of Form 40-F, is available online at www.sedar.com, www.sec.gov and our website www.suncor.com. Information contained in or otherwise accessible through our website does not form part of this document, and is not incorporated into this document by reference.

References to "we", "our", "Suncor", or "the company" mean Suncor Energy Inc., and the company's subsidiaries and interests in associates and jointly controlled entities, unless the context otherwise requires.

Table of Contents

1. ADVISORIES

Basis of Presentation

Unless otherwise noted, all financial information has been prepared in accordance with Canadian generally accepted accounting principles (GAAP), specifically International Accounting Standard (IAS) 34 Interim Financial Reporting as issued by the International Accounting Standards Board (IASB), which is within the framework of International Financial Reporting Standards (IFRS) as issued by the IASB.

Effective January 1, 2019, the company adopted IFRS 16 Leases (IFRS 16), which replaced the previous leasing standard IAS 17 Leases (IAS 17), and requires the recognition of all leases on the balance sheet, with optional exemptions for short-term leases where the term is twelve months or less and for leases of low value. IFRS 16 effectively removes the classification of leases as either finance or operating leases and treats all leases as finance leases for lessees. The accounting treatment for lessors remains essentially unchanged, with the requirement to classify leases as either finance or operating. Please refer to note 3 in the company's unaudited interim Consolidated Financial Statements for the three and twelve months ended December 31, 2019 for further information. The company has selected the modified retrospective transition approach, electing to adjust opening retained earnings with no restatement of comparative figures. As such, comparative information continues to be reported under IAS 17 and International Financial Reporting Interpretations Committee 4.

All financial information is reported in Canadian dollars, unless otherwise noted. Production volumes are presented on a working-interest basis, before royalties, except for Libya, which is on an economic basis.

Beginning in the first quarter of 2019, results from the company's Energy Trading business have been included within each of the respective operating business segments to which the respective trading activity relates. The Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment. Prior periods have been restated to reflect this change.

Also beginning in the first quarter of 2019, the company revised the classification of its capital expenditures into "asset sustainment and maintenance" and "economic investment" to better reflect the types of capital investments being made by

6  2019 FOURTH QUARTER   Suncor Energy Inc.

the company. There is no impact to overall capital expenditures, and comparative periods have been restated to reflect this change. Refer to the Capital Investment Update section of this document for further details.

References to Oil Sands operations exclude Suncor's interests in Fort Hills and Syncrude.

Non-GAAP Financial Measures

Certain financial measures in this document – namely operating earnings (loss), funds from (used in) operations, return on capital employed (ROCE), Oil Sands operations cash operating costs, Fort Hills cash operating costs, Syncrude cash operating costs, refining margin, refining operating expense, free funds flow, discretionary free funds flow, and last-in, first-out (LIFO) inventory valuation methodology and related per share amounts – are not prescribed by GAAP. Operating earnings (loss) is defined in the Non-GAAP Financial Measures Advisory section of this document and reconciled to the most directly comparable GAAP measures in the Consolidated Financial Information and Segment Results and Analysis sections of this document. Oil Sands operations cash operating costs, Fort Hills cash operating costs, Syncrude cash operating costs and LIFO are defined in the Non-GAAP Financial Measures Advisory section of this document and reconciled to the most directly comparable GAAP measures in the Segment Results and Analysis section of this document. Funds from (used in) operations, ROCE, free funds flow, discretionary free funds flow, refining margin and refining operating expense are defined and reconciled, where applicable, to the most directly comparable GAAP measures in the Non-GAAP Financial Measures Advisory section of this document.

Risk Factors and Forward-Looking Information

The company's financial and operational performance is potentially affected by a number of factors, including, but not limited to, the factors described within the Forward-Looking Information section of this document. This document contains forward-looking information based on Suncor's current expectations, estimates, projections and assumptions. This information is provided to assist readers in understanding the company's future plans and expectations and may not be appropriate for other purposes. Refer to the Forward-Looking Information section of this document for information on the material risk factors and assumptions underlying our forward-looking information contained in this document.

Measurement Conversions

Certain crude oil and natural gas liquids volumes have been converted to mcfe on the basis of one bbl to six mcf. Also, certain natural gas volumes have been converted to boe or mboe on the same basis. Any figure presented in mcfe, boe or mboe may be misleading, particularly if used in isolation. A conversion ratio of one bbl of crude oil or natural gas liquids to six mcf of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, conversion on a 6:1 basis may be misleading as an indication of value.

Common Abbreviations

For a list of abbreviations that may be used in this document, refer to the Common Abbreviations section of this document.

2019 FOURTH QUARTER   Suncor Energy Inc.  7

2. FOURTH QUARTER HIGHLIGHTS

Fourth quarter financial results  

Suncor's fourth quarter 2019 operating earnings(1) were $782 million ($0.51 per common share), compared to $580 million ($0.36 per common share) in the prior year quarter. The increase was primarily a result of improved western Canadian crude oil differentials, including a substantial narrowing of heavy crude and SCO differentials, which more than offset lower benchmark pricing from the prior year quarter. This resulted in an increase in Oil Sands price realizations and a net favourable inventory valuation change, partially offset by lower refining margins. Fourth quarter 2019 operating earnings were also positively impacted by increased production at East Coast Canada and Oda. Operating earnings were unfavourably impacted by lower Oil Sands production compared to the prior year quarter, primarily due to planned maintenance and the Alberta government's mandatory production curtailments, higher DD&A and royalties, and lower refinery crude throughput.

Suncor's net loss was $2.335 billion ($1.52 per common share) in the fourth quarter of 2019, compared to a net loss of $280 million ($0.18 per common share) in the prior year quarter. In addition to the factors impacting operating earnings discussed above, the net loss for the fourth quarter of 2019 included non-cash after-tax impairment charges of $3.352 billion primarily due to lower forecasted heavy oil prices at Fort Hills and higher capital cost estimates for the West White Rose Project, partially offset by a $235 million unrealized after-tax foreign exchange gain on the revaluation of U.S. dollar denominated debt. The net loss in the prior year quarter included an unrealized after-tax foreign exchange loss of $637 million on the revaluation of U.S. dollar denominated debt and a non-cash impairment loss of $223 million after-tax on one of the company's equity investments.

Funds from operations(1) were $2.553 billion ($1.66 per common share) in the fourth quarter of 2019, compared to $2.007 billion ($1.26 per common share) in the fourth quarter of 2018, and were influenced primarily by the same factors impacting operating earnings noted above. Cash flow provided by operating activities, which includes changes in non-cash working capital, was $2.304 billion ($1.50 per common share) for the fourth quarter of 2019, compared to $3.040 billion ($1.90 per common share) for the fourth quarter of 2018, reflecting a use of cash from working capital as compared to a source of cash in the prior year quarter due to an increase in accounts receivable related to increasing refinery margins at the end of the quarter and higher upstream sales volumes.

Sustained focus on value over volume. In the fourth quarter of 2019, Oil Sands operations achieved SCO production of 300,000 bbls/d and upgrader utilization of 86%, compared to SCO production of 273,400 bbls/d and upgrader utilization of 79% in the prior year period, reflecting planned maintenance in both periods.

Exploration and Production (E&P) production during the fourth quarter of 2019 increased to 115,900 boe/d from 90,200 boe/d in the prior year quarter. The increase was primarily due to higher production in East Coast Canada, which increased to 69,600 bbls/d, from 47,900 bbls/d in the prior year quarter.

Refining and Marketing (R&M) refinery utilization averaged 97% for the quarter. R&M delivered quarterly crude throughput of 447,500 bbls/d and refined product sales of 534,600 bbls/d in the fourth quarter of 2019, compared to 467,900 bbls/d and 530,600 bbls/d, respectively, in the prior year quarter.

Continued investment in clean energy. In the fourth quarter of 2019, Suncor sanctioned the Forty Mile Wind Power Project, which is expected to drive value through sustainable power generation and retention of the generated carbon credits. The company also finalized an additional $50 million equity investment in Enerkem Inc., a waste-to-biofuels and chemicals producer, bringing the company's total equity investment to $73 million.

Completion of network of electric vehicle (EV) stations across Canada. Suncor advanced its sustainability and technology initiatives by completing its coast-to-coast network of fast-charging EV stations across Canada during the fourth quarter of 2019.

Returning value to shareholders. The company returned $644 million to shareholders through dividends and repurchased $452 million of its shares during the fourth quarter of 2019 under its normal course issuer bid (NCIB).

Increase to share repurchase program. In the fourth quarter of 2019, Suncor's Board of Directors approved an increase to the share repurchase program from $2.0 billion to $2.5 billion through to the end of February 2020, demonstrating confidence in the company's ability to generate cash flow and its commitment to return cash to shareholders.

Subsequent to the end of the quarter, Suncor's Board of Directors approved an 11% increase in the quarterly dividend and a renewal of the share repurchase program. This increases the quarterly dividend from $0.42 to $0.465 per share and provides approval for $2.0 billion in share repurchases beginning March 1, 2020.

   

(1)
Non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document.
8  2019 FOURTH QUARTER   Suncor Energy Inc.

3. CONSOLIDATED FINANCIAL INFORMATION(1)

Financial Highlights

  Three months ended December 31   Twelve months ended December 31    

($ millions)

  2019   2018   2019   2018    

Net (loss) earnings

                   

Oil Sands

  (2 682 ) (377 ) (427 ) 945    

Exploration and Production

  (162 ) (115 ) 1 005   807    

Refining and Marketing

  558   762   3 000   3 154    

Corporate and Eliminations

  (49 ) (550 ) (679 ) (1 613 )  

Total

  (2 335 ) (280 ) 2 899   3 293    

Operating earnings (loss)(2)

                   

Oil Sands

  277   (377 ) 1 622   885    

Exploration and Production

  231   108   1 141   897    

Refining and Marketing

  558   762   2 912   3 154    

Corporate and Eliminations

  (284 ) 87   (1 317 ) (624 )  

Total

  782   580   4 358   4 312    

Funds from (used in) operations(2)

                   

Oil Sands

  1 405   607   6 061   4 964    

Exploration and Production

  555   331   2 143   1 779    

Refining and Marketing

  793   873   3 863   3 798    

Corporate and Eliminations

  (200 ) 196   (1 249 ) (369 )  

Total

  2 553   2 007   10 818   10 172    

(Increase) Decrease in non-cash working capital

  (249 ) 1 033   (397 ) 408    

Cash flow provided by operating activities

  2 304   3 040   10 421   10 580    

Capital and exploration expenditures(3)

                   

Asset sustainment and maintenance

  1 026   654   3 227   3 347    

Economic investment

  712   465   2 209   1 903    

Total

  1 738   1 119   5 436   5 250    


  Three months ended December 31   Twelve months ended December 31    

($ millions)

  2019   2018   2019   2018    

Discretionary free funds flow(2)

  864   764   4 914   4 432    
(1)
The three and twelve months ended December 31, 2018 have been restated to reflect the change to the company's segmented presentation of its Energy Trading business, with no impact to overall consolidated results. The Energy Trading business is now included within each of the respective operating business segments to which the respective trading activity relates. Suncor's Energy Trading business was previously reporting within the Corporate, Energy Trading and Eliminations segment.

(2)
Non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document. Discretionary free funds flow for the three and twelve months ended December 31, 2018 have been restated for the impact of the change to the company's classification of asset sustainment and maintenance capital expenditures. Refer to the Capital and Investment Update section of this document for further details.

(3)
Excludes capitalized interest of $37 million in the fourth quarter of 2019 and $28 million in the fourth quarter of 2018 and reflects the company's revised capital expenditure classification. Refer to the Capital and Investment Update section of this document for further details.
2019 FOURTH QUARTER   Suncor Energy Inc.  9

Operating Highlights

  Three months ended
December 31
  Twelve months ended
December 31
   

  2019   2018   2019   2018    

Production volumes by segment

                   

Oil Sands (mbbls/d)

  662.3   740.8   670.4   628.6    

Exploration and Production (mboe/d)

  115.9   90.2   106.8   103.4    

Total (mboe/d)

  778.2   831.0   777.2   732.0    

Refinery utilization (%)

  97   101   95   93    

Refinery crude oil processed (mbbls/d)

  447.5   467.9   438.9   430.8    

Net Loss

Suncor's consolidated net loss for the fourth quarter of 2019 was $2.335 billion, compared to a net loss of $280 million for the prior year quarter. The net losses were primarily affected by the same factors that influenced operating earnings described subsequently in this section of this document.

Other items affecting net losses over these periods included:

During the fourth quarter of 2019, the company recorded after-tax impairment charges of $2.803 billion on its share of the Fort Hills assets, in the Oil Sands segment, due to a decline in forecasted long-term heavy crude oil prices, and $393 million against White Rose, in the E&P segment, due to increased capital cost estimates at the West White Rose Project.

The after-tax unrealized foreign exchange gain on the revaluation of U.S. dollar denominated debt was $235 million for the fourth quarter of 2019, compared to a loss of $637 million for the fourth quarter of 2018.

The fourth quarter of 2018 included a $223 million after-tax impairment charge in the E&P segment associated with the company's equity investment in Canbriam Energy Inc. (Canbriam). This included the reversal of a $133 million after-tax gain recorded in the first quarter of 2018, when the equity investment was acquired through an asset exchange, for a net after-tax impairment of $90 million in 2018.

Operating Earnings Reconciliation(1)

  Three months ended
December 31
  Twelve months ended
December 31
   

($ millions)

  2019   2018   2019   2018    

Net (loss) earnings

  (2 335 ) (280 ) 2 899   3 293    

Asset impairments(2)

  3 352     3 352      

Unrealized foreign exchange (gain) loss on U.S. dollar denominated debt

  (235 ) 637   (590 ) 989    

Impact of income tax rate adjustment on deferred taxes(3)

      (1 116 )    

Loss on equity investment and (gain) on significant disposals(4)

    223   (187 ) 30    

Operating earnings(1)

  782   580   4 358   4 312    
(1)
Operating earnings is a non-GAAP financial measure. All reconciling items are presented on an after-tax basis. See the Non-GAAP Financial Measures Advisory section of this document.

(2)
During the fourth quarter of 2019, the company recorded after-tax impairment charges of $2.803 billion on its share of the Fort Hills assets, in the Oil Sands segment, due to a decline in forecasted long-term heavy crude oil prices, and $393 million against White Rose, in the E&P segment, due to increased capital cost estimates at the West White Rose Project. Refer to note 13 in the company's unaudited interim Consolidated Financial Statements for the three and twelve months ended December 31, 2019 for further details on this item.

(3)
In the second quarter of 2019, the company recorded a $1.116 billion deferred income tax recovery associated with the Government of Alberta's substantive enactment of legislation for the staged reduction of the corporate income tax rate from 12% to 8% over the next four years.

(4)
The third quarter of 2019 included an after-tax gain of $48 million in the E&P segment related to the sale of certain non-core assets. In the second quarter of 2019, Suncor sold its 37% interest in Canbriam for total proceeds and an equivalent gain of $151 million ($139 million after-tax), which had previously been written down to nil in the fourth quarter of 2018 following the company's assessment of forward natural gas prices and the impact on estimated future cash flows. The equity interest in Canbriam was acquired during the first quarter of 2018 in exchange for the company's mineral landholdings in northeast British Columbia, at which time a gain of $133 million after-tax was recorded on the transaction. The third quarter of 2018 included an after-tax gain of $60 million on the sale of the company's interest in the Joslyn Oil Sands mining project.
10  2019 FOURTH QUARTER   Suncor Energy Inc.

Bridge Analysis of Operating Earnings ($ millions)(1)

GRAPHIC

(1)
For an explanation of this bridge analysis, see the Non-GAAP Financial Measures Advisory section of this document.

Suncor's fourth quarter 2019 operating earnings were $782 million ($0.51 per common share), compared to $580 million ($0.36 per common share) in the prior year quarter. The increase was primarily a result of improved western Canadian crude oil differentials, including a substantial narrowing of heavy crude and SCO differentials, which more than offset lower benchmark pricing from the prior year quarter. This resulted in an increase in Oil Sands price realizations and a net favourable inventory valuation change, partially offset by lower refining margins. Fourth quarter 2019 operating earnings were also positively impacted by increased production at East Coast Canada and Oda.

Operating earnings were unfavourably impacted by lower Oil Sands production compared to the prior year quarter, primarily due to planned maintenance and the Alberta government's mandatory production curtailments, higher DD&A and royalties, and lower refinery crude throughput.

After-Tax Share-Based Compensation Expense by Segment

  Three months ended
December 31
  Twelve months ended
December 31
   

($ millions)

  2019   2018   2019   2018    

Oil Sands

  17   (15 ) 70   48    

Exploration and Production

  2   (2 ) 8   4    

Refining and Marketing

  9   (7 ) 39   25    

Corporate and Eliminations

  27   (40 ) 134   90    

Total share-based compensation expense (recovery)

  55   (64 ) 251   167    

The after-tax share-based compensation impact on results was an expense of $55 million during the fourth quarter of 2019, compared to a recovery of $64 million during the prior year quarter, as a result of an increase in the company's share price through the period, compared to a decrease in the prior year quarter.

2019 FOURTH QUARTER   Suncor Energy Inc.  11


Business Environment

Commodity prices, refining crack spreads and foreign exchange rates are important factors that affect the results of Suncor's operations.

  Average for the three
months ended December 31
  Average for the twelve
months ended December 31
   

      2019   2018   2019   2018    

WTI crude oil at Cushing

  US$/bbl   56.95   58.85   57.05   64.80    

Dated Brent crude

  US$/bbl   63.30   67.80   64.30   71.05    

Dated Brent/Maya crude oil FOB price differential

  US$/bbl   9.30   4.35   6.45   9.10    

MSW at Edmonton

  Cdn$/bbl   68.10   42.70   69.20   69.30    

WCS at Hardisty

  US$/bbl   41.10   19.50   44.25   38.50    

Light/heavy differential for WTI at Cushing less WCS at Hardisty

  US$/bbl   (15.85 ) (39.35 ) (12.80 ) (26.30 )  

SYN-WTI differential

  US$/bbl   (0.70 ) (21.60 ) (0.60 ) (6.15 )  

Condensate at Edmonton

  US$/bbl   53.00   45.30   52.85   61.05    

Natural gas (Alberta spot) at AECO

  Cdn$/mcf   2.50   1.60   1.75   1.50    

Alberta Power Pool Price

  Cdn$/MWh   46.95   55.55   54.95   50.20    

New York Harbor 2-1-1 crack(1)

  US$/bbl   18.50   18.75   19.90   19.40    

Chicago 2-1-1 crack(1)

  US$/bbl   14.45   16.25   17.05   17.40    

Portland 2-1-1 crack(1)

  US$/bbl   25.75   24.25   24.55   24.00    

Gulf Coast 2-1-1 crack(1)

  US$/bbl   17.10   17.45   19.15   18.40    

Exchange rate

  US$/Cdn$   0.76   0.76   0.75   0.77    

Exchange rate (end of period)

  US$/Cdn$   0.77   0.73   0.77   0.73    
(1)
2-1-1 crack spreads are indicators of the refining margin generated by converting two barrels of WTI into one barrel of gasoline and one barrel of diesel. The company previously quoted 3-2-1 crack margin benchmarks based on wider use and familiarity with these benchmarks and, although the 3-2-1 crack spread is more commonly quoted, the company's refinery production is better aligned with a 2-1-1 crack spread, which better reflects the approximate composition of Suncor's overall refined product mix. The crack spreads presented here generally approximate the regions into which the company sells refined products through retail and wholesale channels.

Suncor's sweet SCO price realizations are influenced primarily by the price of WTI at Cushing and by the supply and demand for sweet SCO from Western Canada, which influences SCO differentials. Price realizations in the fourth quarter of 2019 for sweet SCO were favourably impacted by a significant narrowing of SCO differentials, partially offset by a decrease in WTI at Cushing to US$56.95/bbl, compared to US$58.85/bbl in the prior year quarter. Suncor also produces sour SCO, the price of which is influenced by various crude benchmarks, including, but not limited to, MSW at Edmonton and WCS at Hardisty, and which can also be affected by prices negotiated for spot sales. Prices for MSW at Edmonton increased to $68.10/bbl compared to $42.70/bbl in the prior year quarter, and prices for WCS at Hardisty increased to US$41.10/bbl in the fourth quarter of 2019, from US$19.50/bbl in the prior year quarter, as a result of narrower western Canadian heavy crude differentials, in part due to mandatory production curtailments in Alberta.

Bitumen production that Suncor does not upgrade is blended with diluent or SCO to facilitate delivery on pipeline systems. Net bitumen price realizations are, therefore, influenced by both prices for Canadian heavy crude oil (WCS at Hardisty is a common reference), prices for diluent (Condensate at Edmonton) and SCO. Bitumen price realizations can also be affected by bitumen quality and spot sales. Bitumen prices were favourably impacted by narrower heavy crude oil differentials in the fourth quarter of 2019.

Suncor's price realizations for production from East Coast Canada and International assets are influenced primarily by the price for Brent crude, which decreased to US$63.30/bbl in the fourth quarter of 2019, compared to US$67.80/bbl in the prior year quarter.

Suncor's refining margins are primarily influenced by industry benchmark crack spreads and, although the 3-2-1 crack spread is more commonly quoted, the company's refinery production is better aligned with a 2-1-1 crack spread, which more appropriately reflects the company's refined product mix of gasoline and distillates. Benchmark crack spreads are industry

12  2019 FOURTH QUARTER   Suncor Energy Inc.

indicators approximating the gross margin on a barrel of crude oil that is refined to produce gasoline and distillates. More complex refineries can earn greater refining margin by processing less expensive, heavier crudes. Crack spreads do not necessarily reflect the margins at a specific refinery. Crack spreads are based on current crude feedstock prices, whereas actual earnings are based on first-in, first-out (FIFO) inventory accounting where a delay exists between the time that feedstock is purchased and when it is processed and sold to a third-party. A FIFO loss normally reflects a declining price environment for crude oil and finished products, whereas FIFO gains reflect an increasing price environment for crude oil and finished products. Specific refinery margins are determined by actual crude purchase costs, refinery configuration, production mix and realized prices for refined product sales in markets unique to each refinery.

The cost of natural gas used in Suncor's Oil Sands and Refining operations is primarily referenced to Alberta spot prices at AECO. The average AECO benchmark increased to $2.50/mcf in the fourth quarter of 2019, from $1.60/mcf in the prior year quarter.

Excess electricity produced in Suncor's Oil Sands operations and at Fort Hills is sold to the Alberta Electric System Operator, with the proceeds netted against the cash operating cost per barrel metric. The Alberta power pool price decreased to an average of $46.95/MWh in the fourth quarter of 2019, compared to $55.55/MWh in the prior year quarter.

The majority of Suncor's revenues from the sale of oil and natural gas commodities are based on prices that are determined by or referenced to U.S. dollar benchmark prices, while the majority of Suncor's expenditures are realized in Canadian dollars. In the fourth quarter of 2019, the Canadian dollar remained unchanged in relation to the U.S. dollar as the average exchange rate for both the fourth quarters of 2019 and 2018 was US$0.76 per one Canadian dollar.

Suncor also has assets and liabilities, including approximately 65% of the company's debt, which are denominated in U.S. dollars and translated to Suncor's reporting currency (Canadian dollars) at each balance sheet date. A decrease in the value of the Canadian dollar, relative to the U.S. dollar, from the previous balance sheet date increases the amount of Canadian dollars required to settle U.S. dollar denominated obligations, while an increase in the value of the Canadian dollar, relative to the U.S. dollar, decreases the amount of Canadian dollars required to settle U.S. dollar denominated obligations.

2019 FOURTH QUARTER   Suncor Energy Inc.  13

4. SEGMENT RESULTS AND ANALYSIS

OIL SANDS(1)

Financial Highlights

  Three months ended December 31   Twelve months ended December 31    

($ millions)

  2019   2018   2019   2018    

Gross revenues

  4 425   3 149   18 347   15 743    

Less: Royalties

  (143 ) (67 ) (917 ) (398 )  

Operating revenues, net of royalties

  4 282   3 082   17 430   15 345    

Net (loss) earnings

  (2 682 ) (377 ) (427 ) 945    

Adjusted for:

                   

Impact of income tax rate adjustment on deferred taxes(2)

      (910 )    

Asset impairment(3)

  2 959     2 959      

Gain on significant disposal(4)

        (60 )  

Operating earnings (loss)(5)

  277   (377 ) 1 622   885    

Funds from operations(5)

  1 405   607   6 061   4 964    
(1)
The three and twelve months ended December 31, 2018 have been restated to reflect the change to the company's segmented presentation of its Energy Trading business, with no impact to overall consolidated results. The Energy Trading business is now included within each of the respective operating business segments to which the respective trading activity relates. Suncor's Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment.

(2)
In the second quarter of 2019, the company recorded a $910 million deferred income tax recovery in the Oil Sands segment associated with the Government of Alberta's substantive enactment of legislation for the staged reduction of the corporate income tax rate from 12% to 8% over the next four years.

(3)
During the fourth quarter of 2019, the company recorded after-tax impairment charges of $2.803 billion on its share of the Fort Hills assets due to continued volatility in the crude oil price environment, resulting in a decline in forecasted long-term heavy crude oil prices. Refer to note 13 in the company's unaudited interim Consolidated Financial Statements for the three and twelve months ended December 31, 2019 for further details on this item.

(4)
The third quarter of 2018 included an after-tax gain of $60 million on the sale of the company's interest in the Joslyn Oil Sands mining project.

(5)
Non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document.

Bridge Analysis of Operating Earnings ($ millions)(1)

GRAPHIC

(1)
For an explanation of this bridge analysis, see the Non-GAAP Financial Measures Advisory section of this document.
14  2019 FOURTH QUARTER   Suncor Energy Inc.

The Oil Sands segment had operating earnings of $277 million in the fourth quarter of 2019, compared to an operating loss of $377 million in the prior year quarter. The increase was primarily due to higher realized crude prices due to improved western Canadian crude oil differentials, including a substantial narrowing of heavy crude and SCO differentials, more than offsetting benchmark pricing declines. This was partially offset by lower overall production volumes due to planned maintenance and mandatory production curtailments and higher DD&A.

Production Volumes(1)

  Three months ended
December 31
  Twelve months ended
December 31
   

(mbbls/d)

  2019   2018   2019   2018    

Upgraded product (SCO and diesel)

  310.1   284.9   322.4   290.9    

Internally consumed diesel(2)

  (10.1 ) (11.5 ) (9.1 ) (10.6 )  

Total Oil Sands operations upgraded product

  300.0   273.4   313.3   280.3    

In Situ non-upgraded bitumen

  118.1   159.3   99.5   138.0    

Total Oil Sands operations production

  418.1   432.7   412.8   418.3    

Fort Hills bitumen

  87.9   98.5   85.3   67.4    

Internally upgraded bitumen from froth

        (1.3 )  

Total Fort Hills bitumen production

  87.9   98.5   85.3   66.1    

Syncrude (sweet SCO and diesel)

  158.1   212.4   174.6   146.5    

Internally consumed diesel(2)

  (1.8 ) (2.8 ) (2.3 ) (2.3 )  

Total Syncrude production

  156.3   209.6   172.3   144.2    

Total Oil Sands production

  662.3   740.8   670.4   628.6    
(1)
Bitumen production from Oil Sands Base is upgraded, while bitumen production from In Situ operations is either upgraded or sold directly to customers, including Suncor's own refineries, with SCO and diesel yields of approximately 79% of bitumen feedstock input. Fort Hills finished bitumen is sold directly to customers and bitumen froth from Fort Hills can be sent to Oil Sands Base for further processing into SCO. Essentially all of the bitumen produced at Syncrude is upgraded to sweet SCO and a small amount of diesel, at an approximate yield of 85%.

(2)
Both Oil Sands operations and Syncrude produce diesel, which is internally consumed in mining operations, and Fort Hills uses internally produced diesel from Oil Sands Base within its mining operations. Of the 10,100 bbls/d of internally consumed diesel at Oil Sands operations in the fourth quarter of 2019, 8,300 bbls/d was consumed at Oil Sands Base and 1,800 bbls/d, net, was consumed at Fort Hills. Oil Sands operations utilization rates are calculated net of Oil Sands Base internally consumed diesel, but inclusive of diesel consumed internally at Fort Hills. Syncrude utilization rates are calculated using intermediate sour production.

Oil Sands operations production was 418,100 bbls/d in the fourth quarter of 2019, compared to 432,700 bbls/d in the prior year quarter. The decrease in production was primarily due to maintenance, including planned annual coker maintenance at Oil Sands Base, increased yield loss associated with higher SCO production, mandatory production curtailments and an outage at MacKay River. Mackay River is expected to return to operation early in the second quarter of 2020, after completion of planned maintenance which has been accelerated to the first quarter of 2020 to coincide with the outage in an effort to minimize the impacts to annual production. As a result of improved reliability, SCO production increased to 300,000 bbls/d in the fourth quarter of 2019, despite planned maintenance, compared to 273,400 bbls/d in the fourth quarter of 2018, representing utilization rates of 86% and 79%, respectively. Production of non-upgraded bitumen from the company's In Situ assets was 118,100 bbls/d in the fourth quarter of 2019, compared to 159,300 bbls/d in the prior year quarter, primarily impacted by increased volumes diverted to upgrading as we continue to focus on value over volume through the production of higher value SCO, and the outage at MacKay River.

Suncor's share of production from Fort Hills averaged 87,900 bbls/d in the fourth quarter of 2019, compared to 98,500 bbls/d in the prior year quarter. The decrease in production was due to planned maintenance, which was completed during the quarter, and mandatory production curtailments. Fort Hills remains adversely impacted by mandatory production curtailment due to the continued, disproportionate effect of curtailment as it is applied on a 2018 production basis when the asset was ramping up to full production rates. However, the company was able to partially mitigate production impacts by internally transferring credits from Oil Sands operations and purchasing third-party credits.

2019 FOURTH QUARTER   Suncor Energy Inc.  15

Suncor's share of Syncrude production was 156,300 bbls/d in the fourth quarter of 2019, compared to 209,600 bbls/d in the prior year quarter. The decrease in production was primarily due to planned maintenance that commenced in the third quarter of 2019 and completed in the fourth quarter, compared to no planned maintenance in the prior year quarter, and mandatory production curtailments. Upon completion of maintenance, the company was able to partially mitigate impacts of curtailment on production by internally transferring and purchasing third-party curtailment credits.

Sales

  Three months ended
December 31
  Twelve months ended
December 31
   

(mbbls/d)

  2019   2018   2019   2018    

Oil Sands operations sales volumes

                   

Sweet SCO

  106.2   110.2   113.5   96.1    

Diesel

  29.7   27.6   26.0   28.8    

Sour SCO

  155.4   150.7   171.8   162.6    

Upgraded product

  291.3   288.5   311.3   287.5    

In Situ non-upgraded bitumen

  126.3   172.0   101.4   134.0    

Oil Sands operations

  417.6   460.5   412.7   421.5    

Fort Hills bitumen

  91.8   94.6   86.1   57.3    

Syncrude

  156.3   209.6   172.3   144.2    

Total

  665.7   764.7   671.1   623.0    

Sales volumes for Oil Sands operations were 417,600 bbls/d in the fourth quarter of 2019, compared to 460,500 bbls/d in the prior year quarter, and were influenced by the same factors influencing production, combined with a draw in inventory in the prior year quarter.

Bitumen sales at Fort Hills decreased to 91,800 bbls/d, net to Suncor, in the fourth quarter of 2019, from 94,600 bbls/d in the prior year quarter, consistent with the decrease in production, partially offset by a small draw in inventory.

16  2019 FOURTH QUARTER   Suncor Energy Inc.


Bitumen Production

  Three months ended
December 31
  Twelve months ended
December 31
   

  2019   2018   2019   2018    

Oil Sands Base

                   

Bitumen production (mbbls/d)

  289.9   278.3   289.9   258.8    

Bitumen ore mined (thousands of tonnes per day)

  445.8   412.1   434.8   378.0    

Bitumen ore grade quality (bbls/tonne)

  0.65   0.68   0.67   0.68    

In Situ

                   

Bitumen production – Firebag (mbbls/d)

  195.6   197.2   187.0   204.0    

Steam-to-oil ratio – Firebag

  2.6   2.7   2.7   2.7    

Bitumen production – MacKay River (mbbls/d)

  22.3   37.0   29.2   36.0    

Steam-to-oil ratio – MacKay River

  3.2   2.8   3.0   2.9    

Total In Situ bitumen production (mbbls/d)

  217.9   234.2   216.2   240.0    

Total Oil Sands operations bitumen production (mbbls/d)

  507.8   512.5   506.1   498.8    

Fort Hills

                   

Bitumen production (mbbls/d)

  87.9   98.5   85.3   67.4    

Bitumen ore mined (thousands of tonnes per day)

  149.1   154.1   140.5   106.2    

Bitumen ore grade quality (bbls/tonne)

  0.59   0.64   0.61   0.63    

Syncrude

                   

Bitumen production (mbbls/d)

  188.5   240.7   205.4   172.0    

Bitumen ore mined (thousands of tonnes per day)

  296.8   384.4   330.5   277.5    

Bitumen ore grade quality (bbls/tonne)

  0.64   0.63   0.62   0.62    

Total Oil Sands bitumen production

  784.2   851.7   796.8   738.2    

Bitumen production at Oil Sands operations decreased in the fourth quarter of 2019 to 507,800 bbls/d, compared to 512,500 bbls/d in the prior year quarter. The decrease was primarily due to an outage at MacKay River, which is expected to return to operation early in the second quarter of 2020, and mandatory production curtailments, which was partially offset by increased production at Oil Sands Base.

Bitumen production at Syncrude in the fourth quarter of 2019 decreased to 188,500 bbls/d, net to Suncor, from 240,700 bbls/d in the prior year quarter. The decrease was primarily due to planned maintenance that was completed in the fourth quarter and mandatory production curtailments. Upon completion of maintenance in the quarter, the company was able to partially mitigate further production impacts from mandatory production curtailments by internally transferring and purchasing third-party curtailment credits.

Price Realizations

Net of transportation costs, but before royalties

  Three months ended
December 31
  Twelve months ended
December 31
   

($/bbl)

  2019   2018   2019   2018    

Oil Sands operations

                   

SCO and diesel

  70.93   42.44   69.65   68.97    

Bitumen

  36.73   2.43   42.08   24.70    

Crude sales basket (all products)

  60.58   27.50   62.87   54.91    

Crude sales basket, relative to WTI

  (14.35 ) (49.94 ) (13.20 ) (29.24 )  

Fort Hills bitumen

  41.41   20.26   48.96   38.47    

Syncrude – sweet SCO

  72.14   47.71   73.45   70.19    

Syncrude, relative to WTI

  (2.79 ) (29.73 ) (2.62 ) (13.97 )  
2019 FOURTH QUARTER   Suncor Energy Inc.  17

Average price realizations at Oil Sands operations increased to $60.58/bbl in the fourth quarter of 2019 from $27.50/bbl in the prior year quarter, primarily due to the narrowing of heavy crude oil differentials resulting from mandatory production curtailments in the province of Alberta and narrower SCO differentials, partially offset by a decrease in the WTI benchmark price.

Average price realizations for Fort Hills bitumen were $41.41/bbl in the fourth quarter of 2019 and were higher than In Situ bitumen realizations due to a higher proportion of sales being made in the U.S. mid-continent and the U.S. Gulf Coast, where Suncor is able to utilize its logistics network to access favourable pricing in the U.S. market, combined with the higher quality associated with paraffinic froth-treated bitumen produced at Fort Hills. Average price realizations were higher than the prior year quarter due to improved heavy crude oil differentials in the fourth quarter of 2019.

Average price realizations at Syncrude increased to $72.14/bbl in the fourth quarter of 2019 from $47.71/bbl in the prior year quarter due to narrower SCO differentials, partially offset by a decrease in the WTI benchmark price.

Royalties

Royalties for the Oil Sands segment were higher in the fourth quarter of 2019 compared to the prior year quarter, primarily due to the increase in crude price realizations.

Expenses and Other Factors

Total Oil Sands operating and transportation expenses for the fourth quarter of 2019 were comparable to the prior year quarter, as described in detail below. See the reconciliation in the Cash Operating Costs section below for further details regarding cash operating costs and a breakdown of non-production costs by asset.

At Oil Sands operations, operating costs increased compared to the prior year quarter primarily as a result of an increase in maintenance, commodity costs, and contractor mining costs for increased ore volumes processed.

At Fort Hills, operating costs in the fourth quarter of 2019 decreased when compared to the prior year quarter due to a decline in sales volumes in the current quarter, partially offset by the increase in planned maintenance.

Suncor's share of Syncrude operating costs were lower than the prior year quarter, primarily due to lower unplanned maintenance costs on improved reliability.

Oil Sands transportation costs in the fourth quarter of 2019 were comparable to the prior year quarter.

DD&A and impairment expenses for the fourth quarter of 2019 were higher compared to the prior year due to an increase in depreciation on the company's asset retirement obligation asset and additional depreciation associated with the transition to IFRS 16.

18  2019 FOURTH QUARTER   Suncor Energy Inc.


Cash Operating Costs

  Three months ended
December 31
  Twelve months ended
December 31
   

($ millions, except as noted)

  2019   2018   2019   2018    

Oil Sands Operating, selling and general expense (OS&G)

  1 985   1 998   8 027   7 577    

Oil Sands operations cash operating costs(1) reconciliation

                   

Oil Sands operations OS&G

  1 143   1 088   4 639   4 222    

Non-production costs(2)

  (11 ) (4 ) (179 ) (100 )  

Excess power capacity and other(3)

  (60 ) (80 ) (241 ) (237 )  

Inventory changes

  32   (25 ) 48   (14 )  

Oil Sands operations cash operating costs(1)

  1 104   979   4 267   3 871    

Oil Sands operations cash operating costs ($/bbl)(1)

  28.55   24.50   28.20   25.25    

Fort Hills cash operating costs(1) reconciliation

                   

Fort Hills OS&G

  248   291   921   832    

Non-production costs(2)

  (20 ) (24 ) (115 ) (120 )  

Inventory changes

  4   (43 ) 9   55    

Fort Hills cash operating costs(1)

  232   224   815   767    

Fort Hills cash operating costs ($/bbl)(1)

  28.65   24.85   26.15   31.20    

Syncrude cash operating costs(1) reconciliation

                   

Syncrude OS&G

  594   619   2 467   2 523    

Non-production costs(2)

  (20 ) (7 ) (82 ) (33 )  

Syncrude cash operating costs(1)

  574   612   2 385   2 490    

Syncrude cash operating costs ($/bbl)(1)

  39.85   31.75   37.95   47.25    
(1)
Non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document.

(2)
Significant non-production costs include, but are not limited to, share-based compensation expense and research expenses. Non-production costs at Fort Hills also include, but are not limited to, project startup costs, excess power revenue from cogeneration units and an adjustment to reflect internally produced diesel from Oil Sands operations at the cost of production.

(3)
Oil Sands operations excess power capacity and other includes, but is not limited to, the operational revenue impacts of excess power from a cogeneration unit and the natural gas expense recorded as part of a non-monetary arrangement involving a third-party processor.

Oil Sands operations cash operating costs(1) per barrel were $28.55 in the fourth quarter of 2019, compared to $24.50 in the prior year quarter, reflecting the impact of lower production volumes discussed above, higher costs associated with increased production of higher value SCO barrels, as well as an increase in contractor mining, shovel maintenance and commodity costs. Total Oil Sands operations cash operating costs were $1.104 billion, compared to $979 million in the prior year quarter due to the same factors discussed above.

Excess power capacity and other decreased compared to the prior year quarter due mainly to a decrease in excess power revenue as a result of lower volumes and power prices.

Oil Sands operations inventory changes in the fourth quarter of 2019 reflect a build of higher cost SCO inventory, partially offset by a draw of lower cost bitumen inventory.

Fort Hills cash operating costs(1) per barrel averaged $28.65 in the fourth quarter of 2019, compared to $24.85 in the prior year quarter, reflecting the impact of lower production volumes in the current period and slightly higher cash operating costs due to higher planned maintenance. In the fourth quarter of 2019, inventory changes reflected an increase in crude production costs, partially offset by a draw of inventory.

Syncrude cash operating costs(1) per barrel were $39.85 in the fourth quarter of 2019, compared to $31.75 in the prior year quarter, with the increase attributable to the decrease in production, partially offset by lower cash operating costs. Higher non-production costs compared to the prior year quarter is due to increased share-based compensation expense.

Planned Maintenance Update

The company completed planned maintenance at Oil Sands operations, Fort Hills, and Syncrude in the fourth quarter of 2019. Planned cogeneration maintenance at MacKay River originally scheduled for the third quarter of 2020 has been accelerated to the first quarter of 2020 to coincide with the outage that occurred in the fourth quarter 2019, in an effort to minimize impacts to annual production.

   

(1)
Non-GAAP financial measure. See the Non-GAAP Financial Measures Advisory section of this document.
2019 FOURTH QUARTER   Suncor Energy Inc.  19

EXPLORATION AND PRODUCTION(1)

Financial Highlights

  Three months ended
December 31
  Twelve months ended
December 31
   

($ millions)

  2019   2018   2019   2018    

Gross revenues(2)

  911   651   3 372   3 474    

Less: Royalties(2)

  (83 ) (19 ) (302 ) (257 )  

Operating revenues, net of royalties

  828   632   3 070   3 217    

Net (loss) earnings

  (162 ) (115 ) 1 005   807    

Adjusted for:

                   

Impact of income tax rate adjustment on deferred taxes(3)

      (70 )    

Asset impairment(4)

  393     393      

Loss on equity investment and (gain) on significant disposals(5)

    223   (187 ) 90    

Operating earnings(6)

  231   108   1 141   897    

Funds from operations(6)

  555   331   2 143   1 779    
(1)
The three and twelve months ended December 31, 2018 have been restated to reflect the change to the company's segmented presentation of its Energy Trading business, with no impact to overall consolidated results. The Energy Trading business is now included within each of the respective operating business segments to which the respective trading activity relates. Suncor's Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment.

(2)
Production, revenues and royalties from the company's Libya operations have been presented in the E&P section of this document on an economic basis and exclude an equal and offsetting gross up of revenues and royalties of $87 million in the fourth quarter of 2019 and $120 million in the fourth quarter of 2018, which is required for presentation purposes in the company's financial statements under the working-interest basis.

(3)
In the second quarter of 2019, the company recorded a $70 million deferred income tax recovery in the E&P segment associated with the Government of Alberta's substantive enactment of legislation for the staged reduction of the corporate income tax rate from 12% to 8% over the next four years.

(4)
During the fourth quarter of 2019, the company recorded an after-tax impairment charge of $393 million against White Rose due to increased capital cost estimates at the West White Rose Project. Refer to note 13 in the company's unaudited interim Consolidated Financial Statements for the three and twelve months ended December 31, 2019 for further details on this item.

(5)
The third quarter of 2019 included an after-tax gain of $48 million in the E&P segment related to the sale of certain non-core assets. In the second quarter of 2019, Suncor sold its 37% interest in Canbriam for total proceeds and an equivalent gain of $151 million ($139 million after-tax), which had previously been written down to nil in the fourth quarter of 2018 following the company's assessment of forward natural gas prices and the impact on estimated future cash flows.

(6)
Non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document.

Bridge Analysis of Operating Earnings ($ millions)(1)

GRAPHIC

(1)
For an explanation of this bridge analysis, see the Non-GAAP Financial Measures Advisory section of this document.
20  2019 FOURTH QUARTER   Suncor Energy Inc.

Operating earnings for the E&P segment in the fourth quarter of 2019 increased to $231 million, from $108 million in the prior year quarter, primarily as a result of higher East Coast Canada production volumes and crude price realizations, partially offset by higher royalties and DD&A related to the increased production. Financing and other expenses in the fourth quarter of 2019 were lower when compared to the fourth quarter of 2018, primarily due to losses related to our equity investment in Canbriam that were recorded in the prior year quarter.

Production Volumes

  Three months ended
December 31
  Twelve months ended
December 31
   

  2019   2018   2019   2018    

E&P Canada

                   

Terra Nova (mbbls/d)

  8.2   9.5   11.6   11.7    

Hibernia (mbbls/d)

  25.1   19.0   20.1   22.1    

White Rose (mbbls/d)

  8.1   3.7   4.7   6.6    

Hebron (mbbls/d)

  28.2   15.7   23.5   13.0    

North America Onshore (mboe/d)

        0.5    

  69.6   47.9   59.9   53.9    

E&P International

                   

Buzzard (mboe/d)

  26.7   27.7   31.9   34.2    

Golden Eagle (mboe/d)

  9.1   10.7   9.0   12.4    

United Kingdom (mboe/d)

  35.8   38.4   40.9   46.6    

Norway – Oda (mboe/d)

  7.8     3.7      

Libya (mbbls/d)

  2.7   3.9   2.3   2.9    

  46.3   42.3   46.9   49.5    

Total Production (mboe/d)

  115.9   90.2   106.8   103.4    

Total Sales Volumes (mboe/d)

  113.5   83.1   106.0   102.8    

Production volumes for E&P Canada were 69,600 boe/d in the fourth quarter of 2019, compared to 47,900 boe/d in the prior year quarter. The increase in production was primarily due to the ramp up of Hebron production throughout 2019 and the impact of a temporary production interruption due to a major storm system that impacted all E&P East Coast Canada assets in the prior year quarter.

E&P International production increased to 46,300 boe/d, from 42,300 boe/d in the prior year quarter, primarily due to increased production from Oda, which began production near the end of the first quarter of 2019, partially offset by natural declines in the U.K.

E&P sales volumes increased to 113,500 boe/d in the fourth quarter of 2019, compared to 83,100 boe/d in the prior year quarter, due to the increase in production.

Price Realizations

  Three months ended
December 31
  Twelve months ended
December 31
   

Net of transportation costs, but before royalties

  2019   2018   2019   2018    

Exploration and Production

                   

E&P Canada – Crude oil and natural gas liquids ($/bbl)

  84.36   73.48   84.86   87.82    

E&P Canada – Natural gas ($/mcfe)

        1.94    

E&P International ($/boe)

  78.82   82.30   81.09   86.77    

Price realizations at E&P Canada were higher in the fourth quarter of 2019 than the prior year quarter, despite a decrease in Brent crude benchmark pricing, as the prior year quarter was impacted by unfavourable pricing windows realized on the timing of cargo sales relative to the Brent crude benchmark average in the period.

2019 FOURTH QUARTER   Suncor Energy Inc.  21

Price realizations at E&P International were lower in the fourth quarter of 2019 than the prior year quarter, due to lower benchmark crude pricing for Brent.

Royalties

E&P royalties in the fourth quarter of 2019 were higher due to an increase in East Coast Canada sales volumes and crude price realizations.

Expenses and Other Factors

Operating and transportation expenses for the fourth quarter of 2019 were lower than the prior year quarter, as the prior year quarter was impacted by increased costs at Terra Nova related to planned maintenance activities.

DD&A and impairment expenses in the fourth quarter of 2019 was higher when compared to the fourth quarter of 2018, primarily due to higher East Coast Canada production, partially offset by lower U.K. production.

Planned Maintenance Update for Operated Assets

There are no significant maintenance events scheduled for the first quarter of 2020.

22  2019 FOURTH QUARTER   Suncor Energy Inc.

REFINING AND MARKETING(1)

Financial Highlights

  Three months ended
December 31
  Twelve months ended
December 31
   

($ millions)

  2019   2018   2019   2018    

Operating revenues

  5 545   5 667   22 304   23 778    

Net earnings

  558   762   3 000   3 154    

Adjusted for:

                   

Impact of income tax rate adjustment on deferred taxes(2)

      (88 )    

Operating earnings(3)

  558   762   2 912   3 154    

Funds from operations(3)

  793   873   3 863   3 798    
(1)
The three and twelve months ended December 31, 2018 have been restated to reflect the change to the company's segmented presentation of its Energy Trading business, with no impact to overall consolidated results. The Energy Trading business is now included within each of the respective operating business segments to which the respective trading activity relates. Suncor's Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment.

(2)
In the second quarter of 2019, the company recorded an $88 million deferred income tax recovery in the R&M segment associated with the Government of Alberta's substantive enactment of legislation for the staged reduction of the corporate income tax rate from 12% to 8% over the next four years.

(3)
Non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document.

Bridge Analysis of Operating Earnings ($ millions)(1)

GRAPHIC

(1)
For an explanation of this bridge analysis, see the Non-GAAP Financial Measures Advisory section of this document.

R&M operating earnings in the fourth quarter of 2019 were $558 million, compared to $762 million in the prior year quarter. The decrease in operating earnings was primarily due to lower refining margins, attributed to significantly narrower crude differentials, lower refinery crude throughput, lower marketing margins, partially offset by a lower FIFO loss, as the prior year quarter included a significant FIFO loss associated with the significant decline in crude and refined product benchmarks.

2019 FOURTH QUARTER   Suncor Energy Inc.  23


Volumes

  Three months ended
December 31
  Twelve months ended
December 31
   

  2019   2018   2019   2018    

Crude oil processed (mbbls/d)

                   

Eastern North America

  217.3   221.0   203.3   208.1    

Western North America

  230.2   246.9   235.6   222.7    

Total

  447.5   467.9   438.9   430.8    

Refinery utilization(1) (%)

                   

Eastern North America

  98   100   92   94    

Western North America

  96   103   98   93    

Total

  97   101   95   93    

Refined product sales (mbbls/d)

                   

Gasoline

  247.4   245.6   246.6   245.6    

Distillate

  213.7   209.7   218.1   203.4    

Other

  73.5   75.3   74.7   78.4    

Total

  534.6   530.6   539.4   527.4    

Refining margin(2) ($/bbl)

  34.80   41.50   33.15   34.50    

Refining operating expense(2) ($/bbl)

  5.05   5.45   5.35   5.35    
(1)
Refinery utilization is the amount of crude oil and natural gas plant liquids run through crude distillation units, expressed as a percentage of the capacity of these units.

(2)
Non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document. Refining margins include the impact of the FIFO method of inventory valuation.

Refinery crude throughput was 447,500 bbls/d in the fourth quarter of 2019, compared to 467,900 bbls/d in the prior year quarter. Both periods achieved high utilization rates at 97% and 101%, respectively.

Refined product sales increased in the fourth quarter of 2019 to 534,600 bbls/d, compared to 530,600 bbls/d in the prior year quarter, reflecting strong retail sales volumes.

Prices and Margin

Realized refined product gross margins, including FIFO inventory valuation, were higher in the fourth quarter of 2019, compared to the prior year quarter, and were influenced by the following:

Narrower crude oil differentials in the fourth quarter of 2019 compared to significantly wider differentials in the fourth quarter of 2018.

In the fourth quarter of 2019, the impact of the FIFO method of inventory valuation, relative to an estimated LIFO(1) accounting method, resulted in a negative impact on the company's results of $16 million, after-tax, compared to a negative impact on operating earnings of $649 million, after-tax, in the prior year quarter, for an overall favourable quarter-over-quarter impact of $633 million, after-tax.

Marketing gross margins in the fourth quarter of 2019 were lower than in the prior year quarter, primarily due to finished product market conditions.

Expenses and Other Factors

Operating expenses in the fourth quarter of 2019 increased slightly compared to the prior year quarter, primarily due to share-based compensation expense incurred in the fourth quarter of 2019, compared to a recovery of share-based compensation in the prior year quarter.

DD&A increased in the fourth quarter of 2019 compared to the prior year quarter due to the implementation of IFRS 16.

Planned Maintenance

A two-week planned maintenance event is scheduled at the Commerce City refinery in the first quarter of 2020. The anticipated impact of this maintenance event has been reflected in the company's 2020 guidance.

   

(1)
The estimated impact of the LIFO method is a non-GAAP financial measure. See the Non-GAAP Financial Measures Advisory section of this document.
24  2019 FOURTH QUARTER   Suncor Energy Inc.

CORPORATE AND ELIMINATIONS(1)

Financial Highlights

  Three months ended
December 31
  Twelve months ended
December 31
   

($ millions)

  2019   2018   2019   2018    

Net loss

  (49 ) (550 ) (679 ) (1 613 )  

Adjusted for:

                   

Impact of income tax rate adjustment on deferred taxes(2)

      (48 )    

Unrealized foreign exchange (gain) loss on U.S. dollar denominated debt

  (235 ) 637   (590 ) 989    

Operating (loss) earnings(3)

  (284 ) 87   (1 317 ) (624 )  

Corporate

  (295 ) (178 ) (1,113 ) (876 )  

Eliminations

  11   265   (204 ) 252    

Funds (used in) from operations(3)

  (200 ) 196   (1 249 ) (369 )  
(1)
Beginning in the first quarter of 2019, results from the company's Energy Trading business have been included within each of the respective operating business segments to which the respective trading activity relates. The Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment. Prior periods have been restated to reflect this change. The results from the company's Renewable Energy business are included within Corporate results.

(2)
In the second quarter of 2019, the company recorded a $48 million deferred income tax recovery in the Corporate and Eliminations segment associated with the Government of Alberta's substantive enactment of legislation for the staged reduction of the corporate income tax rate from 12% to 8% over the next four years.

(3)
Non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document.

Corporate

The Corporate operating loss was $295 million for the fourth quarter of 2019, compared to an operating loss of $178 million for the prior year quarter, with the increased loss attributable to a share-based compensation expense incurred in the fourth quarter of 2019, as compared to a share-based compensation recovery in the prior year quarter, and a lower operational foreign exchange gain than in the prior year quarter. Suncor capitalized $37 million of its borrowing costs in the fourth quarter of 2019 as part of the cost of major development assets and construction projects in progress, compared to $28 million in the prior year quarter.

Eliminations

Eliminations reflect the deferral or realization of profit on crude oil sales from Oil Sands to Suncor's refineries. Consolidated profits are only realized when the refined products produced from internal purchases of crude feedstock have been sold to third parties. During the fourth quarter of 2019, the company realized $11 million of after-tax intersegment profit, compared to a realization of $265 million of after-tax intersegment profit in the prior year quarter. The realization of deferred profit in the fourth quarter of 2019 was driven by the decrease in Oil Sands price realizations over the quarter, as higher margin crude refinery feedstock inventory sourced internally from Oil Sands was sold and replaced by lower margin crude feedstock inventory. The realization of deferred profit in the prior year quarter was driven by the decrease in oil sands benchmark prices, as a result of the significant widening of crude differentials.

2019 FOURTH QUARTER   Suncor Energy Inc.  25

5. CAPITAL INVESTMENT UPDATE

Capital and Exploration Expenditures by Segment

  Three months ended
December 31
  Twelve months ended
December 31
   

($ millions)

  2019   2018   2019   2018    

Oil Sands

  1 082   663   3 522   3 546    

Exploration and Production

  281   285   1 070   946    

Refining and Marketing

  314   189   818   856    

Corporate and Eliminations

  98   10   148   58    

Total capital and exploration expenditures

  1 775   1 147   5 558   5 406    

Less: capitalized interest on debt

  (37 ) (28 ) (122 ) (156 )  

  1 738   1 119   5 436   5 250    

Capital and Exploration Expenditures by Type, excluding capitalized interest(1)

  Three months ended
December 31, 2019
  Twelve months ended
December 31, 2019
   

($ millions)

  Asset
Sustainment and
Maintenance(2)
  Economic
Investment(3)
  Total   Asset
Sustainment and
Maintenance(2)
  Economic
Investment(3)
  Total    

Oil Sands

                           

Oil Sands Base

  541   107   648   1 667   164   1 831    

In Situ

  31   129   160   113   575   688    

Fort Hills

  66   10   76   331   72   403    

Syncrude

  156   24   180   493   46   539    

Exploration and Production

  2   263   265   5   1 011   1 016    

Refining and Marketing

  200   112   312   566   245   811    

Corporate and Eliminations

  30   67   97   52   96   148    

  1 026   712   1 738   3 227   2 209   5 436    
(1)
The classification of the company's capital expenditures has been updated to "asset sustainment and maintenance" and "economic investment" to better reflect the types of capital investments being made by the company.

(2)
Asset sustainment and maintenance capital expenditures include capital investments that deliver on existing value by ensuring compliance or maintaining relations with regulators and other stakeholders, maintaining current processing capacity, and delivering existing developed reserves.

(3)
Economic investment capital expenditures include capital investments that result in an increase in value through adding reserves, improving processing capacity, utilization, cost or margin, including associated infrastructure.

The company spent $1.738 billion on capital expenditures in the fourth quarter of 2019, excluding capitalized interest, an increase from $1.119 billion in the prior year quarter, with the increase driven by increased asset sustainment and maintenance capital expenditures related to an increase in planned maintenance activities at Oil Sands Base and Syncrude, as well as increased economic investment capital expenditures at In Situ, Refining and Marketing and Corporate.

Activity in the fourth quarter of 2019 is summarized by business unit below.

Oil Sands

Oil Sands Base capital and exploration expenditures were $648 million in the fourth quarter of 2019, the majority of which was focused on asset sustainment activities related to the company's planned maintenance program, which included the completion of annual coker maintenance at Upgrader 2, the continued development of tailings infrastructure, and other reliability and sustainment projects across the operations. This also included increasing economic investment to progress low-carbon power cogeneration to replace the coke-fired boilers and continued construction of the Syncrude interconnecting pipelines.

26  2019 FOURTH QUARTER   Suncor Energy Inc.

In Situ capital expenditures were $160 million in the fourth quarter of 2019, and were primarily directed towards economic investment activities, including well pad construction that is expected to maintain existing production levels at Firebag and MacKay River.

Capital expenditures at Fort Hills were $76 million in the fourth quarter of 2019, primarily focused on sustaining capital activities on mine and tailings development to preserve production capacity.

Syncrude capital expenditures were $180 million in the fourth quarter of 2019, the majority of which was for asset sustainment expenditures focused on maintaining existing assets, including capital related to the upgrader turnaround.

Exploration and Production

Capital and exploration expenditures at E&P were $265 million in the fourth quarter of 2019 and were primarily focused on economic investment projects, including development drilling at Hibernia, Hebron and Buzzard, and development work on Terra Nova, Fenja and the West White Rose Projects.

Refining and Marketing

R&M capital expenditures were $312 million and were primarily related to the ongoing sustainment and enhancement to refinery and retail operations, and other economic investment projects on logistics and our retail and wholesale network, including an electric vehicle fast-charge network.

Corporate and Eliminations

Corporate capital expenditures were $97 million, primarily directed towards the company's information technology initiatives and the Forty Mile Wind Power Project.

2019 FOURTH QUARTER   Suncor Energy Inc.  27

6. FINANCIAL CONDITION AND LIQUIDITY

Indicators

  Twelve months ended    

  Previous leasing
standard
December 31
2019
  IFRS 16
impact
  IFRS 16
December 31
2019
  December 31
2018
   

Return on Capital Employed(1) (%)

                   

Excluding major projects in progress(2)(3)

  5.2   (0.1 ) 5.1   8.2    

Including major projects in progress(2)

  5.0   (0.1 ) 4.9   8.0    

Net debt to funds from operations(4)(5) (times)

  1.3   0.2   1.5   1.5    

Interest coverage on long-term debt (times)

                   

Earnings basis(6)

  3.6   (0.1 ) 3.5   6.4    

Funds from operations basis(5)(7)

  13.9   (0.5 ) 13.4   14.1    

Total debt to total debt plus shareholders' equity (%)

  27.8   2.2   29.9   28.3    
(1)
Non-GAAP financial measure. See the Non-GAAP Financial Measures Advisory section of this document.

(2)
2019 ROCE includes asset impairment charges of $3.352 billion after-tax.

(3)
ROCE excluding major projects in progress would have been 8.6% for the twelve months ended December 31, 2019, excluding the impacts of impairments of $3.352 billion after-tax in the fourth quarter of 2019 and the impacts of $1.116 billion deferred tax recovery for the Alberta corporate income tax rate change in the second quarter of 2019.

(4)
Net debt is equal to total debt less cash and cash equivalents.

(5)
Funds from operations and metrics that use funds from operations are non-GAAP financial measures. See the Non-GAAP Financial Measures Advisory section of this document.

(6)
Equal to net earnings plus income taxes and interest expense, divided by the sum of interest expense and capitalized interest on debt.

(7)
Equal to funds from operations plus current income taxes and interest expense, divided by the sum of interest expense and capitalized interest on debt.

Capital Resources

Suncor's capital resources consist primarily of cash flow provided by operating activities, cash and cash equivalents, and available lines of credit. Suncor's management believes the company will have the capital resources to fund its planned 2020 capital spending program of $5.4 to $6.0 billion and to meet current and future working capital requirements, through cash and cash equivalents balances, cash flow provided by operating activities, available committed credit facilities, issuing commercial paper and, if needed, accessing capital markets. The company's cash flow provided by operating activities depends on a number of factors, including commodity prices, production and sales volumes, refining and marketing margins, operating expenses, taxes, royalties and foreign exchange rates.

The company has invested cash in short-term financial instruments that are presented as cash and cash equivalents. The objectives of the company's short-term investment portfolio are to ensure the preservation of capital, maintain adequate liquidity to meet Suncor's cash flow requirements and deliver competitive returns derived from the quality and diversification of investments within acceptable risk parameters. The maximum weighted average term to maturity of the short-term investment portfolio is not expected to exceed six months, and all investments will be with counterparties with investment grade debt ratings.

Available Sources of Liquidity

For the three months ended December 31, 2019, cash and cash equivalents decreased to $1.960 billion, from $2.089 billion at September 30, 2019, with cash flow provided by operating activities and an increase in short-term indebtedness being more than offset by the planned use of cash related to the company's capital and exploration expenditures, dividend requirements and the repurchase of Suncor's own shares under its NCIB in the fourth quarter of 2019. The company's cash and cash equivalents balance at December 31, 2019, was also impacted by a use of cash in the current period associated with the company's working capital balances, as the company's accounts receivables balances increased due to increasing refinery margins at the end of the quarter and higher upstream sales volumes.

For the twelve months ended December 31, 2019, cash and cash equivalents decreased to $1.960 billion, from $2.221 billion at December 31, 2018, with uses of cash in respect of the company's capital and exploration expenditures, dividend requirements, the repurchase of $2.274 billion of Suncor's own shares under its NCIB, and a net decrease of short-term and long-term debt of $425 million, exceeding cash flow provided by operating activities.

28  2019 FOURTH QUARTER   Suncor Energy Inc.

As at December 31, 2019, the weighted average days to maturity of the company's short-term investment portfolio was approximately 17 days.

Available credit facilities for liquidity purposes at December 31, 2019 increased to $4.701 billion, compared to $3.608 billion at December 31, 2018, primarily as a result of the repayment of short-term indebtedness.

Financing Activities

Management of debt levels continues to be a priority for Suncor given the company's long-term growth plans and future expected volatility in the pricing environment. Suncor believes a phased and flexible approach to existing and future growth projects should assist the company in maintaining its ability to manage project costs and debt levels.

Total Debt to Total Debt Plus Shareholders' Equity

Suncor is subject to financial and operating covenants related to its bank debt and public market debt. Failure to meet the terms of one or more of these covenants may constitute an "event of default" as defined in the respective debt agreements, potentially resulting in accelerated repayment of one or more of the debt obligations. The company is in compliance with its financial covenant that requires total debt to not exceed 65% of its total debt plus shareholders' equity. At December 31, 2019, total debt to total debt plus shareholders' equity was 29.9% (December 31, 2018 – 28.3%) and increased due to the implementation of IFRS 16 and impairment charges recorded in the fourth quarter of 2019. The company continues to be in compliance with all operating covenants under its debt agreements.

($ millions, except as noted)

  December 31
2019
  December 31
2018(1)
   

Short-term debt

  2 155   3 231    

Current portion of long-term debt

    191    

Current portion of long-term lease liabilities

  310   38    

Long-term debt

  12 884   12 668    

Long-term lease liabilities

  2 621   1 222    

Total debt

  17 970   17 350    

Less: Cash and cash equivalents

  1 960   2 221    

Net debt

  16 010   15 129    

Shareholders' equity

  42 042   44 005    

Total debt plus shareholders' equity

  60 012   61 355    

Total debt to total debt plus shareholders' equity (%)

  29.9   28.3    
(1)
Excludes the impact of IFRS 16, which was prospectively adopted on January 1, 2019 in accordance with the standard.

Change in Debt

($ millions)

  Three months
ended
December 31,
2019
  Twelve months
ended
December 31,
2019
   

Total debt – beginning of period

  17 690   17 350    

Increase in long-term debt

    557    

Increase (decrease) in short-term debt

  545   (982 )  

January 1, 2019 increase in lease liabilities associated with IFRS 16

    1 792    

Increase in lease liability

  63   186    

Lease payments

  (77 ) (307 )  

Foreign exchange on debt, and other

  (251 ) (626 )  

Total debt – December 31, 2019

  17 970   17 970    

Less: Cash and cash equivalents – December 31, 2019

  1 960   1 960    

Net debt – December 31, 2019

  16 010   16 010    
2019 FOURTH QUARTER   Suncor Energy Inc.  29

The company's total debt increased in the fourth quarter of 2019 due to an increase of short-term indebtedness and leases entered into during the period, partially offset by favourable foreign exchange rates on U.S. dollar denominated debt compared to September 30, 2019, and lease principal payments made during the fourth quarter of 2019.

On a year-to-date basis, the company's total debt increased in 2019 due primarily to the impact of the adoption of IFRS 16, which added $1.792 billion in lease liability to the company's balance sheet, a net increase in long-term debt and leases entered into in 2019, partially offset by the repayment of $982 million of short-term debt, favourable foreign exchange rates on U.S. dollar denominated debt, as compared to December 31, 2018, and lease principal payments made in 2019.

Common Shares

(thousands)

  December 31, 2019    

Common shares

  1 531 874    

Common share options – exercisable

  21 535    

Common share options – non-exercisable

  12 347    

As at February 3, 2020, the total number of common shares outstanding was 1,529,583,074 and the total number of exercisable and non-exercisable common share options outstanding was 33,142,876. Once exercisable, each outstanding common share option is convertible into one common share.

Share Repurchases

Under the company's NCIB that commenced in the second quarter of 2019, Suncor is permitted to purchase common shares for cancellation through the facilities of the Toronto Stock Exchange (TSX), the New York Stock Exchange and/or alternative trading platforms between May 6, 2019 and May 5, 2020. Under the company's NCIB, 40,406,781 common shares have been purchased to date, representing 2.6% of the total outstanding common shares.

During the fourth quarter of 2019, Suncor repurchased and cancelled 11,139,941 common shares, representing 0.7% of the total outstanding common shares, at an average price of $40.56 per common share, for a total of $452 million, compared to the prior year quarter when the company repurchased and cancelled 26,725,575 common shares at an average price of $43.61 per common share, for a total of $1.166 billion.

  Three months ended
December 31
  Twelve months ended
December 31
   

($ millions, except as noted)

  2019   2018   2019   2018    

Share repurchase activities (thousands of common shares)

  11 140   26 726   55 298   64 426    

Weighted average repurchase price per share (dollars per share)

  40.56   43.61   41.12   47.38    

Share repurchase cost

  452   1 166   2 274   3 053    

Following the approval by the Board of Directors to increase the NCIB to $2.5 billion in the fourth quarter of 2019, the TSX accepted a notice filed by Suncor of its intention to amend its NCIB effective as of December 30, 2019. The notice provided that Suncor may increase the maximum number of common shares that may be purchased for cancellation between May 6, 2019 and May 5, 2020 from approximately 3% of Suncor's issued and outstanding common shares as at April 30, 2019 to approximately 5% of Suncor's issued and outstanding common shares as at April 30, 2019.

Between May 6, 2019 and February 3, 2020, pursuant to the NCIB, Suncor has already repurchased approximately $1.781 billion of common shares on the open market. Pursuant to the NCIB (as amended), Suncor has agreed that it will not purchase more than 78,549,178 common shares, of which 43,931,561 common shares have already been purchased between May 6, 2019 and February 3, 2020. Suncor security holders may obtain a copy of the notice, without charge, by contacting the company. Subsequent to the end of the fourth quarter of 2019, Suncor's Board of Directors approved a further share repurchase program of up to $2.0 billion.

Contractual Obligations, Commitments, Guarantees, and Off-Balance Sheet Arrangements

In the normal course of business, the company is obligated to make future payments, including contractual obligations and non-cancellable commitments. Suncor has included these items in the Financial Condition and Liquidity section of Suncor's Management's Discussion and Analysis for the year ended December 31, 2018 dated February 28, 2019 (the 2018 annual MD&A) with no significant updates to note in the fourth quarter of 2019. Suncor does not believe that it has any guarantees or off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the company's financial performance or financial condition, results of operations, liquidity or capital expenditures.

30  2019 FOURTH QUARTER   Suncor Energy Inc.

7. QUARTERLY FINANCIAL DATA

Trends in Suncor's quarterly revenue, earnings and funds from operations are driven primarily by production volumes, which can be significantly impacted by major maintenance events, changes in commodity prices, including widening of crude differentials, refining crack spreads, foreign exchange rates and other significant events impacting operations, such as the Government of Alberta's mandatory production curtailments implemented during 2019.

Financial Summary

Three months ended
($ millions, unless otherwise noted)
  Dec 31
2019
  Sept 30
2019
  June 30
2019
  Mar 31
2019
  Dec 31
2018
  Sept 30
2018
  June 30
2018
  Mar 31
2018
   

Total production (mboe/d)

                                   

Oil Sands

  662.3   670.0   692.2   657.2   740.8   651.7   547.6   571.7    

Exploration and Production

  115.9   92.3   111.7   107.1   90.2   92.1   114.1   117.7    

  778.2   762.3   803.9   764.3   831.0   743.8   661.7   689.4