Can Steve Williams lead Suncor Energy to new heights?
'You shouldn’t expect to see Suncor take a sudden left hand turn,' new CEO says
Steve Williams got a taste of what life will be like running one of the Canada’s biggest and most profitable publicly traded companies during a July teleconference discussing Suncor Energy Inc.’s 2012 second-quarter results.
In many ways it was a solid quarter for Suncor. Its revenues, cash flow from operations, return on capital and production were all up compared to the second quarter of 2011. But the analysts and reporters who listened in on the call were more interested in what Suncor was going to accomplish rather than what it had just accomplished.
They seemed particularly interested in the health of three of Suncor’s biggest growth prospects – the proposed Fort Hills and Joslyn North oil sands projects and the Voyageur upgrader – that the company is developing jointly with France’s Total E&P Canada.
In a press release announcing its second quarter results, Suncor said it intended to present development plans for each of the projects to its board of directors for approval by the middle of 2013. (Total would also have to approve the projects for them to go ahead). But as analysts quizzed Williams about the future of Fort Hills, Joslyn North and Voyageur, the man who replaced retired CEO Rick George as the company’s chief executive officer in May indicated that timeframe was a moving target and that Suncor wouldn’t be sanctioning them if they weren’t the best projects out there. “Growth for the sake of growth doesn’t interest me too much,” Williams said in July. “What interests me is profitable growth.”
The comment was telling. It signaled that Suncor was distancing itself from the wild days of 2006-2008, when the company advanced expansion projects on its own at great costs. But then the global recession hit, oil prices collapsed and Suncor was forced to shelve projects like Voyageur. It also found itself with over $13 billion in debt.
George helped turn the company from a money-losing operation into one of the country’s most successful companies during his 20-year reign as Suncor CEO. That transformation required some bold moves on George’s part – such as the 2009, $22.9-billion deal to acquire Petro-Canada. But as Williams takes over as the public face of Suncor, bold may be replaced by bland at Suncor. Yet shareholders won’t mind if Williams can avoid the pitfalls and still lead the company to greater heights.
While the 56-year old Williams has a new role with Suncor, he is not new to the company. When he took over for George as Suncor CEO on May 1, 2012, the date marked his 10th anniversary with the Calgary-based company. During that time, Williams filled some key roles with the firm – vice-president, corporate development and chief financial officer, executive vice-president, oil sands and chief operating officer.
A leadership change at a company Suncor’s size is big news in the oil and gas business. But Suncor is not keen on giving herd-driven markets any reason to doubt where the company is headed under its new CEO. Williams and Suncor have been trying to fly under the radar so far, positioning the succession as a well-planned, well-executed leadership change. The company declined requests to interview Williams for this story.
While Suncor board chair John Ferguson also turned down an interview request to talk about why the board had chosen Williams to succeed George as CEO, he did provide some insight into the decision through an e-mailed response. “I’ve known and worked closely with Steve for a number of years. I can’t think of a leader who is better equipped to face both the challenges and the opportunities for the future of the company,” Ferguson said. “He knows the company, the operations, and the people. He has the support of the entire board of directors and Suncor employees. Steve was the perfect choice – without question.”
Suncor has 27 billion barrels of resources on the books, 23 billion of it oil sands. Williams, in his comments during the company’s July teleconference, made it clear the future is bright for Suncor and that he wouldn’t be charting a drastically different course for the firm. “You shouldn’t expect to see Suncor take a sudden left hand turn,” he said.
However, that doesn’t mean it will be business as usual with Williams at the helm. As the man responsible for leading Suncor’s oil sands operation before becoming company COO, Williams gained an appreciation for the challenges an oil sands-weighted firm like Suncor faces. The resource is huge, but it’s also expensive to extract and produce. Williams has stressed that the company won’t wantonly spend capital in pursuit of the company’s goal of producing one million barrels of oil per day. “I’m not focused on getting to a million barrels per day of production by 2020,” Williams said. “We plan to spend within our means and spend efficiently and effectively and achieve desired returns for our shareholders.”
Whether Suncor can accomplish that under Williams is a matter of debate among the oil and gas cognoscenti. He has 35 years experience in the energy industry, but the high cost of producing oil from mining and in situ operations in the oil sands, and the fact that Suncor’s reserves are located in the remote Fort McMurray region has analysts skeptical the company can grow production while keeping a lid on capital and operating costs.
Suncor’s share price has reflected that skepticism. It’s been as high as $37 in the past 12 months, and was trading at $31 per share as this magazine went to press. That’s not a poor showing, but it’s a far cry from the $70 stratosphere its shares were trading at just before the global economy tanked.
FirstEnergy Capital vice-president of institutional research Mike Dunn says the market’s valuation of Suncor is due to the company’s poor execution on major projects of late – like the stalled Voyageur upgrader and its Firebag in situ developments. “The concern is that a lot of the cash flow it is generating is going to be invested in projects with not great returns,” Dunn says. “If the market had more confidence in that, the shares might be performing better.”
This isn’t lost on Williams, and one of his talking points has been to stress that Suncor will be focusing on execution and operating its assets efficiently and effectively. Dunn says that message has reverberated well with investors.
And there are reasons to believe Williams can not only keep Suncor on a profitable course during these volatile times, but that he can make it a stronger company than it was under George. For all his contributions to Suncor – and there were many – it was on George’s watch that the company ran into large cost overruns on some of its expansion efforts in the latter part of the last decade. “It turned out they didn’t have enough money to execute them and they had to spend a good bunch of money to stop them, which at the time put them in a precarious position in terms of their balance sheet,” Dunn says.
Williams’ comments during the July teleconference about only proceeding with projects that have strong economics and deliver value for shareholders suggest the mistakes of the past will not be repeated. “I think what people want them to do is focus on execution and cost control,” Dunn says. “Steve Williams’ background as COO, it’s not so much a concern of strategically navigating the company as it is about execution organically. He brings to the table that sort of focus.”
Much of his focus seems to be centered on ensuring he is clear about what Suncor’s business strategy is. That strategy is what Williams likes to call its “integrated model”, where it is pursuing growth in mining, in situ and upgrader projects. It also has four refineries – three in Canada and one in Colorado – ready to process its oil sands crude into high quality products. Williams says he’s spent a lot of time with the company’s employees and that he had met with 20 per cent of Suncor’s shareholders in his first three months as CEO.
That facetime with the CEO is important for Suncor because it is a big company with 13,000 employees and operations – both upstream and downstream – in Canada, the United States, the United Kingdom, Norway and the Middle East. It’s easy for big companies and their senior management to lose their way, says Scott Sharabura, a Calgary-based principal with management consulting firm Booz & Company.
“[CEOs] can add a lot of value by clarifying the strategy of the company, recognizing what a company is going to do and what it is not going to do,” Sharabura says. “We’ve seen a lot of companies fall into trouble when you don’t have clarity at the top. Deeper in the organization people will not have anything to hinge their activities to. They’ll do their best to chase opportunities. But if you add that up across a large organization, you get a mess.”
No such mess appears to be brewing at Suncor. What the company is going to continue to do under Williams is to produce from its oil sands reserves. That’s not to say that the company will ignore its North American and international operations, which averaged 204,600 barrels of oil equivalent per day in production during the second quarter of 2012. (Dunn says the offshore production it got from the Petro-Canada deal, for example, is the kind of low-cost, high netback production that provides cash flow and more insulation from low oil prices to fund Suncor’s oil sands projects).
But it began its life as a pure oil sands producer and its 27 billion barrels of oil sands reserves are impossible to ignore. It’s a huge resource, and Suncor doesn’t have to go looking for it or deal with the kind of above ground risks it’s experienced in Libya and Syria. What it must do, however, is figure out a way to produce the bitumen as cheaply and efficiently as possible.
Can Suncor make that happen? There are signs the “focusing on execution” message Williams has been hammering home is not just talk. Production from the first three stages of its maligned Firebag operations averaged 95,500 barrels per day (bpd) in the second quarter of 2012 compared to 56,400 bpd in the second quarter of 2011. And more growth at Firebag is coming, as Stage 4 is expected to achieve first production early in the first quarter of 2013. Williams says costs of this expansion are currently slightly below expectations.
Dunn also believes the Fort Hills, Joslyn North and Voyageur projects will eventually be built. The partnership with Total means Suncor won’t have to go it alone in advancing the projects and the company does have to develop new mines within the next decade to replace its Millennium and North Steepbank sites near Fort McMurray.
Some investors are also predicting brighter days ahead for the company’s share price. In a May report entitled, “Oil Sands Watch”, CIBC World Markets analyst Andrew Potter ranked Suncor as the top pick among Canadian-based integrated oil and gas companies.
“With Firebag 3 continuing to ramp up, Suncor is delivering organic growth, something that has been lacking from the story in recent years,” Potter wrote. “If the company can continue its recent operational momentum in the oil sands and undergo no meaningful scheduled maintenance until mid-2013, we expect Suncor to re-rate to its historical valuation as it returns to growth.”
The stakes are high for the oil sands sector as it pursues growth plans that could double oil sands production by 2020. They are arguably even higher for the new leader of Canada’s highest profile player in the oil sands. But Williams isn’t backing away from the challenge.
“Suncor is in tremendous health, we have great opportunities and growth ahead of us,” he said in an email response. “We have the people, the plan, the resource base and the balance sheet to deliver the kind of profitable growth that shareholders expect.”
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