Suncor Energy Inc., the second- largest oil-sands miner in the world, said first-quarter net income fell 38 percent after the company paid more royalties to the Alberta government. The company also said it will stop hedging oil-production.
First-quarter net income dropped to C$227 million ($165 million), or 46 Canadian cents a share, from C$366 million, 77 cents, in the year earlier period, Suncor said in a statement. The per-share earnings reflect payment of dividends on preferred stock.
The company began hedging several years ago when an expansion to almost double oil-sands output ran 70 percent above budget to C$3.4 billion, increasing debt. Suncor is letting its hedges, which covered about 39 percent of production in the first quarter, expire to capture the full benefits of high oil prices, Chief Executive Rick George said during a conference call with analysts.
“I’m pleased to see them end their hedging program,” said M. Garrett Smith, managing partner of the $260 million BP Capital Equity Fund, which owns about 500,000 Suncor shares. “Suncor had to pay the cost over-runs and hedging was a rationale response for management at the time. Oil prices are much higher now and this is a well-timed decision.”
Suncor’s shares gained 70 Canadian cents, or 2.2 percent, to C$33 at 12:57 p.m. in Toronto Stock Exchange trading.
Increased oil-sands output from northern Alberta means the company can take more risk on prices, said George, 53, during the conference call.
“We’re a much a bigger company, and we have a very strong balance sheet. We also have the flexibility to adjust capital expenditures to match cash flow, which we didn’t have in those prior periods,” he said.
The company had a loss of C$63 million on forward sales of 85,000 barrels of oil a day in the first quarter, spokesman John Rogers told analysts.
Suncor has forward sales on 79,000 barrels of oil for the remainder of this year and 36,000 in 2005, Rogers said during a telephone interview.
Suncor’s oil-sands output sold in the quarter for C$38.16 a barrel after hedging compared with C$43.28 without the forward sales. A year-ago, the company’s oil price after hedging was C$44.09 a barrel.
A 15 percent rise in the value of the Canadian dollar reduced the effective sales price of Suncor’s crude oil. Oil futures traded on the New York Mercantile Exchange were 4.3 percent higher than in last year’s first quarter.
The company’s profit was also reduced by C$40 million for higher oil-sands royalties. Suncor said in January it could face higher payments if the provincial government classified the Firebag oil-sands project as separate from existing operations. Alberta confirmed this month that Firebag’s costs could not be used to reduce royalties, the company said.
Royalty payments, depending on oil prices, could rise to as much as C$149.5 million this year from C$19.5 million in 2003, Rogers said in the telephone interview.
Alberta’s royalty program requires oil-sands developers to pay higher rates after capital costs are recovered. Suncor eventually would have to pay more money to the province, BP Capital’s Smith said.
“I view it as a little bit of a negative, but clearly it’s a one-time announcement. It’s just a shifting of the time horizon,” said Smith, who said he intends to buy additional Suncor shares as more money comes into his fund.
Suncor spent more than C$600 million on Firebag. The project is expected to produce 35,000 barrels a day of bitumen, a tar- like oil, in mid-2005. It pumped about 5,900 barrels a day in the quarter.
Oil-sands production rose 4.1 percent to 219,800 barrels a day. The company has forecast producing 225,000 to 230,000 barrels per day in 2004. The company continues to discuss the royalty issue with the government and intends to meet its goal of boosting oil-sands output to 330,000 barrels a day by 2008, George said.
Suncor uses mechanical shovels to scoop up Alberta’s tar sands and processes the bitumen they contain into synthetic crude oil. Refiners purchase the synthetic oil to make gasoline, diesel and other petroleum products.
Sales increased 5.9 percent in the quarter to C$1.8 billion from C$1.7 billion.
Syncrude Canada Ltd. is the world’s largest oil-sands miner.