Why Suncor’s Steve Williams is grateful for the rout in oil prices.
Steve Williams seizes on the patch’s price pangs to prepare Suncor for oilsands dominance
When Steve Williams first laid eyes on Alberta’s oilsands 14 years ago, he said it struck him as “one of the wonders of the world.”
A chemical engineer from Bristol, England, he’d been at Exxon Mobil Corp. for 18 years and ran its largest U.K. refinery. He had come to Alberta to talk to Suncor about joining the company and what was then just the beginning of what would become the oilsands’ phenomenal boom. Over the next decade-and-ahalf, the production of synthetic and crude bitumen from Alberta’s Athabasca region would mushroom by nearly 60 per cent, from 1.5 million barrels per day to 2.37 million barrels today.
The oilsands future still looked brilliant when, three years ago, Williams was elevated from roles as executive vice president, CFO and CO, to Suncor’s president and CEO. Still, from the beginning, Williams was focused on driving down production costs, repositioning the oilsands pioneer as a low-cost producer.
That was far from a widespread obsession at the time — though it has, since last year, become every producer’s preoccupation. Then, oil prices were above US $100 a barrel, oilsands investment was booming, and many new competitors were driving hard to build out as much production growth as possible.
Williams was different; he was fixated on the long haul.
“The oilsands business is the ultimate marathon,” Williams said at the company’s annual meeting in May 2012, when he took over the company’s controls from the retiring Rick George. “It requires fitness, endurance, strategic pacing and discipline.”
It turned out to be astute, preparing Suncor exceptionally well for the oil shock that would strike in summer 2014, and see oil prices stumble to below US$40 a barrel a year later, before reviving slightly last month to just under US$50.
And, with other producers caught far less prepared, it also offered Williams a chance to consolidate his company’s dominance over the Alberta oilsands wonder — with Williams not only putting his own stamp on Suncor, but branding a commanding portion of the oilsands with Suncor’s way of running things.
As he launched a hostile takeover bid Monday for Canadian Oil Sands Ltd. (COS), the largest shareholder of Syncrude Canada Ltd. — a project neighbour in northern Alberta, and a longtime rival (although Suncor also has a minor equity stake) — Williams pointed out that Suncor is sitting on a cash pile and available credit of $12 billion, and a “fortress balance sheet.”
The all-share transaction is valued at $6.6 billion including debt and would increase Suncor’s stake in Syncrude to 49 per cent, from 12 per cent.
It was Williams’ second move in a month to expand Suncor’s core oilsands operation. Suncor purchased an additional 10 per cent of the Fort Hills project last month from French major Total S.A. at a distressed price of $310 million, increasing its stake to 50.8 per cent. While others have slowed down or cancelled projects, the $15 billion mining operation is the only one still in construction in the Fort McMurray region and is on track to start producing in late 2017.
With the moves, Williams, 59, is out to make Suncor’s low-cost know-how the oilsands’ new strategic advantage amid low oil prices that he believes are not going anywhere anytime soon.
Indeed, Suncor has compressed its operating costs to $28 a barrel, and they’re heading lower, while the comparable costs at Syncrude are $52.63 a barrel.
“If you look at the way reliability and operating costs are going (at Suncor), it’s a very successful business, even at these low oil prices,” Williams said in an interview this week.
And Williams believes that, by taking a majority stake in Syncrude, Suncor can push it to do better.
“My plan would be to commit significant resource in an area where we have great expertise,” he said. “Suncor is actively working on … programs of how to improve reliability and how to reduce operating costs in this lower (price) crude world that we are likely to be in for longer.”
Until Williams took over, his predecessor had cast a long shadow at Suncor. George, a lawyer and engineer originally from Colorado, enjoyed legendary status after taking an unprofitable oilsands plant in Fort McMurray and growing it into a Canadian giant in 20 years. His style included placing a high value on organic growth and enterprising employees. But when the recession hit, Suncor ran into financial difficulties and merged with Petro-Canada to re-enforce its finances.
Williams introduced his own style: Bringing order to the giant mines, steam-assisted gravity drainage (SAGD) facili- ties, pipelines, upgraders, refineries and gasoline stations that make up Suncor’s integrated oilsands business. He saw opportunity less in growth, and more in making systems work more profitably.
Mike Tims, vice-chairman of private investment firm Matco Investments Ltd., notes that companies tend to recruit CEOs that are suited for the prevailing business and economic conditions.
“Rick George was the right CEO for the period he was there, which was a period of exceptional growth,” he said. “Clearly the environment has changed a lot, and Steve has sharpened the cost focus.”
As Williams put it in 2012, “Growth for the sake of growth doesn’t interest me too much. I’m not focused on getting to a million barrels a day in production by 2020. What I am focused on is achieving strong returns for our shareholders.”
But not many outsiders would have anticipated the well-timed cost proficiency that Williams had to offer. Before taking over as CEO, Williams stayed largely out of the spotlight, although, by 2007, he was already being looked at as a potential successor for George. (Mike Ashar, another contender, would wind up being put in charge of Suncor’s strategic growth and energy trading; he then left Suncor to become president of New Brunswick’s Irving Oil Ltd. — which ended with him suing the privately run Irving for wrongful dismissal earlier this year).
Williams began making unflinching cuts to reduce costs. In 2013, he pulled the plug on the half-finished Voyageur upgrader project in the face of rising capital costs and the sudden glut of U.S. light oil that was eating into the economics of refining bitumen. At the time, Suncor had already sunk $3.5 billion into Voyageur.
He sold Suncor’s natural gas business, among a number of other assets, concentrating the company’s focus on the oilsands. Today, 80 per cent of the company’s 580,000 barrel-a-day production comes from the oilsands. Growth projects were cut into smaller pieces to temper cost inflation. Employees were squeezed into smaller spaces to save on rent. Suncor was among the first companies to announce mass layoffs last January, in the early days of the oil price collapse, explaining it was accelerating its cost-control push to make itself more resilient in the downturn.
Williams’ discipline was enough to get the attention of Warren Buffett’s Berkshire Hathaway, which sold off a US$3.7 billion stake in Exxon and upped its share of Suncor, making the Alberta company its largest oil holding. Berkshire now holds 22.4 million Suncor shares, or 1.5% of the stock, and is its 11th-largest shareholder.
Syncrude, held back by its awkward consortium model (its ownership is shared between Canadian Oil Sands, Imperial Oil, Suncor, Murphy Oil, Japan’s Nippon Oil, and China’s Sinopec and Nexen/ CNOOC) began to look like an obvious target for Suncor to impose its discipline on.
And Syncrude had been experiencing serious operational challenges in recent years. With capacity to produce 350,000 barrels per day, its average production has been closer to 250,000 due to continuing setbacks, including a recent fire.
Williams had already been hinting in recent months that he was on the hunt for a purchase. “There are serious amounts of fire sale or distressed assets on the market, some because other companies’ balance sheets aren’t in good shape, some because they have other reasons for wanting to sell assets,” Williams said last month in a conference call with analysts. “So we’re looking very closely.”
By then, Suncor had already approached COS twice, in the spring, to discuss a deal on friendlier terms, and at a higher price, but had been rebuffed by its board.
Today, Suncor’s betting that COS is even more distressed: The $11.84 per share that was put on the table in March is now down to just over $9, based on the deal that will give COS shareholders one Suncor share for every four of theirs, and based on Friday’s closing price.
COS’s directors remain unpersuaded: they adopted a poison pill Wednesday to fend off Suncor’s advance, as Williams spent the week meeting directly with COS shareholders to sell them on a combination he believes is so compelling that, as he put it, “one plus one equals three.”
If the COS bid is successful, Suncor would add about 100,000 barrels a day to its already large oilsands portfolio and spread its wings across some of the best mining leases around Fort McMurray. There’s always the risk of a competing bid, most likely from Syncrude’s major partner, Imperial Oil, that would force Suncor to consider raising its offer. And even if William convinces COS shareholders and gets control of Syncrude, there will be yet more uncertainties and surprises as he seeks those economies of scale he has his eye on. But whatever the outcome, Williams has made it unequivocally clear that he still sees plenty of value in the oilsands at today’s prices — and that he knows just how to squeeze the most of it out.
My plan would be to commit significant resource in an area where we have great expertise. Suncor is actively working on … programs of how to improve reliability and how to reduce operating costs in this lower (price) crude world.
— Steve Williams, Suncor CEO If you look at the way reliability and operating costs are going (at Suncor), it’s a very successful business, even at these low oil prices
—Steve Williams , Suncor CEO