NATHAN VANDERKLIPPE

Globe and Mail Update

January 20, 2009 at 11:27 AM EST

CALGARY — A $215-million quarterly net loss at Suncor Energy Inc. marks the latest low point in the dramatic reversal of fortunes for an industry that just six months ago was struggling to find a home for a tidal wave of cash.

Suncor announced Tuesday that it will further slash its 2009 capital spending plan, which had already been lowered to $6-billion and will now be further cut to $3-billion. The company is suspending construction on its Firebag 3 oil sands project and Voyageur upgrader, placing both in a “safe mode” as the reality of low oil prices sinks in.

“We are preparing ourselves to deal with a commodity price that's in the $40 range and potentially downside from that,” Ken Alley, the company's chief financial officer, told a conference call Tuesday morning.

Just six months ago, the oil patch was so flush with cash that the most pressing question was what to do with all that money. Now the possibility of losses is extending across the industry, especially as production costs rise above current crude prices, which dropped to $36 (U.S.) Tuesday morning.

Suncor Energy

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“They're talking mid-$30s operating costs for Suncor, and then if you layer on top of that sustaining capital of, let's call it $6 a barrel, you're talking a round number of $40” to produce a barrel of oil, said Will Lacey, managing director of institutional research at FirstEnergy Capital. “Compare that to where the crude contract is right now – it's a tough business.”

Suncor's fourth-quarter loss stemmed primarily from currency losses on U.S.-dollar denominated long-term debt.

The company reported earnings of $434-million, or 46 cents per common share, after excluding a series of one-time items. Those numbers beat consensus analyst expectations of 44 cents, but shares fell $1.87, or 7 per cent, in early trading as markets faced the possibility of worse losses in the first quarter, which has seen even worse oil prices than the end of last year.

“We're in uncharted territory. Let's be totally honest on that one,” said Mr. Lacey, managing director of institutional research at FirstEnergy Capital. “These are truly extraordinary economic times.”

Suncor President and CEO Rick George vowed to continue construction on Firebag 3 and Voyageur when it feels it can better control costs.

“These projects will be built. It's just a matter of when,” he said.

Still, in a measure of how seriously the company, is responding to the current economic climate, Mr. George said he is attempting to bring on other companies to help build some of its projects.

“We're open for business,” he said. “We are talking to other people in terms of either a long-term processing deal or ownership of upgrading-type assets.”

The company is not, however, “in the mood for giving up our reserves. I would not do a Husky-BP or Encana-Conoco-type deal because I think there is so much more value in owning reserves as opposed to any kind of downstream assets.”

Suncor will not lay off any of its employees, although Mr. George acknowledged the company's dramatic lowering of its capital spending plans will have a “major impact” on its contractors.

Oil layoffs have become a growing concern after ConocoPhillips said last week it was eliminating 4 per cent of its work force, or 1,300 jobs.

On Tuesday, another small player, Calgary-based True Energy Trust, announced it has cut a third of its head-office staff after knocking down its monthly distribution to 2 cents per unit last December, a 50-per-cent drop.