Suncor’s Fort Hills return estimates prompt skepticism

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Analysts are having a tough time duplicating Suncor Energy Inc.'s rate of return forecast for its newly approved Fort Hills oil sands project.

Suncor, which is developing the $13.5-billion mining project along with France's Total SA and Teck Resources Ltd., said it expects an internal rate of return of 13 per cent, a number some experts are calling aggressive.

Embedded in its outlook are assumptions of $95 (U.S.) per barrel for West Texas intermediate crude, a bitumen price of $60.50 per barrel, development capital of $84,000 per flowing barrel and a Canadian dollar worth 96 U.S. cents.

A couple of items have raised eyebrows, including the WTI price above the current strip of futures prices on the New York Mercantile Exchange, and "sustaining capital," the money required to keep the operation humming following construction, of $3 per barrel. The figure is below that of Imperial Oil Ltd.'s similar Kearl project.

Among analysts, TD Securities' Menno Hulshof has calculated a rate of return of just under 10 per cent, Samir Kayande of ITG Investment Research estimates 11.5 per cent on a pre-tax basis and Phil Skolnick of Canaccord Genuity posits 10 per cent, though Mr. Skolnick points out that Suncor has savings from integrating its refining business that are not part of his equation.

Andrew Leach, economist and University of Alberta School of Business Enbridge professor in energy policy, ran the numbers to arrive at an after-tax figure of 10.2 per cent.

Of course, some of the assumptions differ from Suncor's. Mr. Leach believes that Suncor has actually been conservative in the outlook for heavy oil differentials, pegging them at the wide end of historical range of around $26 a barrel below WTI. Narrower ones – Western Canada Select heavy crude at $16 or $17 (U.S.) per barrel under, for instance – would push the return closer to Suncor's forecast, he said.

The Fort Hills partners announced late on Wednesday they are going ahead with the northern Alberta project, which has been stopped and started a number of times over the past decade. Fort Hills, in which has a 40.8 per cent stake and is the operator, is designed to produce 180,000 barrels a day of bitumen, with first production expected to arrive in late 2017.

Michael Dunn, analyst with FirstEnergy Capital Corp., said Suncor's sustaining capital estimate of $3 per barrel is below the Kearl figure of the mid-single digits per barrel. Teck, which has a 20 per cent interest in Fort Hills, released its own separate estimate of a more forgiving $3-$5 per barrel for the venture.

Suncor said the 13 per cent rate of return keeps Fort Hills comfortably above its cost of capital.

The difference between its outlook and those of the analysts is not huge, reflecting the relatively difficult economics of an oil sands megaproject compared to other energy plays such as the light, tight oil of the North Dakota Bakken formation and other regions.

Unlike those other projects, however, the oil sands cash flow and capital requirements remain constant over 50 years, nor will producers need to keep finding new resources to maintain output.

"We all knew the economics were skinny. It's just the way it is with mining projects," Mr. Skolnick said.

"If you go out five our six years from now and Fort Hills is on production, it's flat, stable production. Anyone in these tight oil plays is still on a treadmill."