Suncor cancels Voyageur upgrader

It’s not just mining companies that are tightening their belts and focusing on capital allocation discipline.

It’s not just mining companies that are tightening their belts and focusing on capital allocation discipline.

Suncor Energy (SU-T)—Canada’s largest crude producer and the first company to develop the oil sands—has decided not to proceed with building the costly Voyageur upgrader near Fort McMurray, AB.

“Since 2010, market conditions have changed significantly, challenging the economics of the Voyageur upgrading project,” said president and chief executive Steve Williams. “This decision is in line with our commitment to capital discipline and our stated plan to allocate capital with priority given to developing higher return growth projects and accelerating the return of cash to shareholders through dividends and share buybacks.”

Suncor said it reached the decision not to proceed with the $11.6 billion upgrader project after conducting a joint strategic and economic review with its joint-venture partner Total E&P Canada late last year. Upgraders process heavy bitumen from the oil sands into light crude.

The company also said the decision will likely incur a charge to first quarter 2013 net income of about $140 million and a charge to cash flow from operations of about $180 million. The company releases its first quarter results tomorrow.

Earlier this year in February, Suncor reported a net loss in the fourth quarter of $562 million or $0.37 per share, which included an after tax impairment charge of $1.49 billion for the Voyageur upgrader project. (Operating earnings in the final quarter of 2012 totaled $1.0 billion or $0.65 per share.)

Andrew Potter of CIBC World Markets said in a note on March 27 that it was time to abandon ship and that Suncor shareholders should be pleased by the news.

“With the project’s economics widely known to be challenged, the cancellation does not come as a surprise and we believe that investors will ultimately view the cancellation as being positive since it will free up immense capital in the long term, which will now be available for share buybacks, dividend increases, and other high return projects.”

Upgraders have become more expensive to build over the last decade, according to New York-based Energy Intelligence Group. The cost of building an upgrader rose by 70% between 2000 and 2008, EIG reported recently. “That cost inflation, when coupled with flat demand south of the border for Alberta light oil given the US’ own surge in light oil production, knocked the stuffing out of Voyageur’s economic viability, leaving Suncor and Total to opt to sell diluted bitumen from their upstream mining projects instead,” EIG’s oil sands correspondent, James Irwin, noted in a recent report on the project. He also pointed out that only three of 11 upgraders that were in the works in 2008 have been built.

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