Cenovus Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 18 speakers on the call.

Operator

Ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's Second Quarter Results. Recorded. Please be advised that this conference call may not be recorded or rebroadcast without the expressed consent of Cenovus Energy. I would now like to turn the conference over to Mr.

Operator

Jason Ricarte, Senior Vice President, Investor Relations. Please go ahead, Mr. Abate.

Speaker 1

Thank you, operator, and welcome everyone to Synopsys 2023 Second Quarter Results Conference Call. Please refer to the advisories located at the end of today's news release. These describe the forward looking information, recorded. They also outline the risk factors, assumptions relevant to these discussions. Recorded.

Speaker 1

Additional information is available in Sunosa's annual MD and A in our most recent AIF and Form 40 F. All figures represented in Canadian dollars and before royalties unless otherwise stated. John Mackenzie, our President and Chief Executive Officer, will provide brief comments and then we'll take your questions. Recorded. We ask that you hold off on any detailed modeling questions.

Speaker 1

You can follow-up on those directly with our Investor Relations team after the call. Recorded. You are welcome to rejoin the queue for any other follow-up questions you may have. Recorded.

Speaker 2

Great. And thank you, Jason, and good morning, everyone. Before we start, you will have seen a few changes to our executive team that we announced recorded. When I succeeded Alex in April, it did create an opportunity for us to move some of the executive group around to really take advantage of their capabilities and versatility. You can read the full details in our news release.

Speaker 2

However, I'd just like to step you through a few of the changes. Recorded. Keith Chaisson will become our new Chief Operating Officer and replacing Keith in the Downstream will be Doreen Cole, who's been promoted to the position recorded. Drew Ziegel Gansberger will become our new Chief Commercial Officer and Andrew Dhillon will replace Drew as the Executive Vice President of Natural Gas and Technical Services. Recorded.

Speaker 2

Jeff Hart, who is currently our Chief Financial Officer will succeed Andrew as the Executive Vice President of Corporate and Operations Services. Recorded. And finally, Cam Sandar will replace Jeff as our new Chief Financial Officer. I really do feel incredibly fortunate to be surrounded by such recorded. And we have absolute confidence in their ability to continue stewarding this company.

Speaker 2

Recorded. At this time, I'd also like to recognize Canning Faulk, who's announced his retirement from our Board. I've known Canning for over 10 years and have really benefited from his knowledge and experience. I think further Canning has played a significant role in the repositioning and success of Cenovus over the past 2 years. We all wish him the very best and really look forward to his continued presence as one of our major shareholders.

Speaker 2

Recorded. Now let's move to our results. So as always, I'll start with our top priority, which is health and safety. Recorded. This quarter posed some unique and significant health and safety challenges, and I couldn't be more proud of the way our people have stood up to the challenge.

Speaker 2

Recorded. In this quarter, we focused on the safe and disciplined ramp up of the Superior and Toledo refineries as well as completing the major turnaround at our Foster Creek asset. I'd like to thank all our people for their continued commitment to safety and our core values as we completed these tasks. The results were truly exemplary. Recorded.

Speaker 2

Similarly in our conventional business, we dealt with a number of wildfires through the quarter. We temporarily shot in 85,000 BOE per day of our natural gas and NGL recorded through most of May and part of June and supported our staff and their communities. The company worked tirelessly to keep our people and our assets safe. Recorded. In addition, we greatly appreciate the actions taken by local authorities and the provincial emergency management teams.

Speaker 2

Recorded. Our staff truly demonstrated our core value in protecting what matters. Going above and beyond for each other and our communities is truly something we're all proud of. And with that, I'll take you through our operational results. So starting with our U.

Speaker 2

S. Manufacturing assets, as we mentioned in the Q1 call, Our focus has been on bringing the Superior and Toledo assets online. Toledo was fully operational by mid June, recorded. While Superior continues to ramp up with a focus on safely restarting the cat cracker, which is the last of the major units to restart. Recorded.

Speaker 2

These assets are incredibly important and meaningful contributors to our integrated heavy oil strategy. Our focus in the recorded. Our Lima Refinery continued to operate at high rates utilization through the quarter, while the Wood River refinery ran well through the quarter following the completion of some planned maintenance. Recorded. The Borger Refinery is back up to full rates after some planned and unplanned outages over the course of the second quarter.

Speaker 2

Recorded. So turning to our Canadian manufacturing, our Lloydminster upgrader and refinery ran at a combined utilization rate of 86% in the quarter recorded and they're fully operational as we enter the Q3. We expect both of these assets to run at high levels of utilization through the remainder of the year. Overall, I'd say we achieved everything we set out to do in the downstream during the Q2 and we're very confident in our ability to produce reliably and profitably through the remainder of 2023. In the upstream, we revised guidance as a result of the wildfire impacts, recorded, which had an annualized impact of approximately 10,000 BOE a day in our conventional business.

Speaker 2

And we've also built in a modest decrease of 5,000 barrels a day for our Lloyd Thermos adjusting for the slower than anticipated ramp up in the year. Recorded. These changes have resulted in overall lowering of our guidance to between 775,000 Boe per day. Recorded. At our Oil Sands assets, we safely completed a large turnaround at Foster Creek early in the quarter.

Speaker 2

The turnaround was on schedule and on budget and the recorded. Our focus through the quarter has been on continued execution of projects that support our short and long term recorded. You can see the benefits of our continual effort to optimize these assets

Speaker 3

recorded. With the increased production at

Speaker 2

Sunrise and in addition at the Lloyd Thermals, we saw record daily production and quarterly production volumes of approximately 100 and recorded. We expect strong production recorded from Oil Sands in the second half of twenty twenty three with all major maintenance behind us. In Asia Pacific, our volumes over recorded. On April 7, an unauthorized vessel traveling in our dedicated pipeline quarter recorded and struck an umbilical line at the Liwa 2901 field in China. The line attached is designed, recorded, which resulted in immediate and secure shutdown of our subsea wells.

Speaker 2

Our operating group restored production by the 1st week of June with no environmental impacts from the surrounding area. And as I mentioned, with the vast majority of our major maintenance behind us and the forecast recorded. With the continued ramp up of wells across the upstream portfolio, we expect to see elevated and steady production numbers over the remainder of the year. Recorded. I'd now like to highlight our corporate performance and shareholder returns.

Speaker 2

We delivered almost $2,000,000,000 of adjusted funds flow in the quarter, supported by tighter differentials and increasing oil sands operating margins, particularly partially offset by no recorded Sales in our Atlantic region during the due to timing of liftings and a negative FIFO adjustment of about $170,000,000 which really impacted our U. S. Manufacturing segment. With the dividend increase announced in April recorded. And through our base dividend in NCIB, we distribute about $575,000,000 directly to our shareholders in the quarter.

Speaker 2

As per our June 14 announcement, the warrant repurchase transaction presented us with a unique opportunity to repurchase about 2.4% recorded. We are now ready to take our next question from

Speaker 4

the line of David.

Speaker 5

Please go ahead.

Speaker 2

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 2

Thank you, Steve. Thank you, Steve. Good morning, everyone. Recorded. I believe we attained favorable payment terms that provide us with the flexibility to remain within our shareholder returns framework.

Speaker 2

And we'll continue to dedicate 50% of our excess free funds flow to shareholder returns until we reach our $4,000,000,000 net debt target, at which time we'll dedicate 100% of our excess free funds flow to shareholder returns. Recorded. We continue to focus on running our assets safely and reliably. As we line out our integrated business model, we expect to have strong production recorded and throughput in the second half of twenty twenty three, which will continue to move us forward to achieving that $4,000,000,000 net debt target. So before we take your questions, I'd also like to update you on our sustainability work.

Speaker 2

Our 2022 ESG report was released in recorded. And we announced a new milestone to reduce our methane emissions in upstream operations by 80% by year end 2028. Recorded. We see reducing methane as a key near term action that contributes to our 2,035 emissions target. We also continue to advance technologies that will help us address our 2,050 net zero ambition.

Speaker 2

You can read more about those achievements and the progress we've made towards other ESG targets in the ESG report on our website. Recorded. So in closing, we've succeeded in accomplishing the operating goals we set out for ourselves in the Q1 and are well positioned for significant improvement in our financial performance in the back half of twenty twenty three. And with that, we're happy to take your questions.

Speaker 6

Recorded. Thank you.

Operator

We will now begin the question and answer session and go to the first caller. First question comes from Dennis Fong at CIBC World Markets. Please go ahead.

Speaker 7

Hi, good morning and thanks for taking my questions. My first question here is just on capital structure. Just with respect to term debt, you guys are showing about a recorded. How are you thinking about continuing to take either advantage of the free cash flow that you're generating to

Speaker 2

recorded. Good morning, Dennis. It's not necessarily the first question that I was anticipating, but recorded. Maybe I'll have Jeff answer that for you.

Speaker 8

Yes. No, and I'll just give you some color, Dennis, on where we see the capital structure. And we talked to the $4,000,000,000 net debt. Recorded. We view that as driving towards $7,000,000,000 on the gross side.

Speaker 8

And you're right, we're right around the 14 year average term mark. Recorded. Look, we'll be balanced through all of this. So I think you have to view as our end goal on this is to have a tower structure that is sustainable and that we like and is balanced through. Recorded.

Speaker 8

We'll target throughout the different towers and be balanced in it. So and it will really be dependent on the market and where we see the curve and different factors in there as well. So roundabout answer is that we'll be balanced and end up with the structure that we like as we get through this deleveraging and

Speaker 7

recorded. Great, great. Thanks. My follow-up and my second question probably aligns more With maybe what you're expecting. In terms of Superior and the kind of ramp up of the FCC unit there, recorded.

Speaker 7

I was just hoping to get a little bit more context in there. Are you able to sell some version of, we'll call it, slightly off spec product? And how should we be thinking about the timing of, we'll call it, the full ramp up of all units at Superior?

Speaker 2

Yes. I'll let Keith answer that question. But the FCC is really with a gasoline producing unit, and it's more incremental to where we are versus what we're producing today. But Keith, maybe you can provide some color on Superior.

Speaker 5

Recorded. Yes. Thanks for the question, Dennis. Maybe I'll just step up a little bit. When I think about the whole downstream throughput, recorded.

Speaker 5

We're kind of right at the 690, almost 700,000 barrels a day of throughput. So most of our assets recorded. Morgan Gasior:] At Superior, I would say it's been A little bit of a challenge for us, but nothing systemic there. It's just working through kind of normal startup issues. Recorded.

Speaker 5

We're days away from introducing FEED into that unit. And as John alluded to, when we go through the crude unit, we do make on spec products that we can sell, recorded. And then we make some intermediate products that would require the FCC to continue to process. So So we have a fair amount of inventory there that we'll be able to run through the FCC once it's up and running and generate cash. And like I said, It's imminent.

Speaker 5

We're just knocking through the last couple of challenges that the team has seen as they safely restarted that refinery after being down for 5 years.

Speaker 7

Recorded. Great, great. Thanks for answering my questions. I'll turn it back.

Speaker 2

Great. Thanks, Dennis.

Operator

Thank you. The next question comes from Greg Pardy at RBC Capital Markets. Please go ahead.

Speaker 9

Yes. Thanks. Good morning. Thanks for the rundown. Yes, maybe just to stick with the U.

Speaker 9

S. Manufacturing for a bit, like your utilization rates actually looked okay from recorded. But it's cost obviously. And I guess the question there is, is the cost effectively, are they inflecting now into margin? Recorded.

Speaker 9

And then I guess a question for Keith, but as you ramp up fully at Superior and now with Toledo, then could we look forward to

Speaker 5

recorded. Hey, Greg, thanks for the question. What I would offer up on just the cost basis, as you can imagine, through startup, you're incurring some additional recorded. Maintenance costs and repair costs. So we do expect those to normalize at the back end of the Q3 and into the Q4.

Speaker 5

And so we should see some of our cost structure come down as we get to normal operations through this quarter. Recorded. With regards to revenues and profitability, I would say things are looking good. We're producing products. Recorded.

Speaker 5

We're going to be able to we're marketing those products and sales. So we're going to see the normal cash cycle associated with the refineries. Recorded. But all is looking good kind of coming out of the Q2 into the Q3 across those assets. And like you said, utilization, I alluded to this in the previous question.

Speaker 5

Utilization is into the low 90% now across all of our assets and the FCC recorded. Greg,

Speaker 2

just on the working capital question as well. I think one of the things that you will see is and Keith kind of mentioned this is we do have a reasonably significant inventory of intermediates recorded. We'll work through the refineries through time as they continue to produce on spec recorded. When we kind of guide you to where you should be thinking about inventory levels in particular, you should be kind of in that 45,000,000 to 50,000,000 barrel range. So with these refineries coming up, there is additional inventory that we will carry both on the front end and the back end of those So while you may see some short term working capital releases as we chew through the inventory that we built up, I think that's a reasonable number

Speaker 9

recorded. Okay. Thanks for that. And then sort of all of this then rolls up into the Question everybody is asking, right, which is should we sort of be thinking around $4,000,000,000 is around year end? Is that Remember, is that December?

Speaker 9

Is that the early part of next year? What's your thinking there? And frankly, does it matter that much?

Speaker 2

Well, the way we think about it, Greg, is we've now got our assets into the condition that we wanted them to be recorded. Getting Superior and Toledo up were really kind of the last assets that we wanted to bring forward that kind of completed our vision recorded. So getting those value chains in order is it was really important to us. Now one thing I would say is, don't expect us to do anything different other than run these assets well recorded over the coming quarters. So we are focused on getting our debt down to $4,000,000,000 Whether that happens in November, December, January, February is really a function of the pricing and the commodity strip that you want to use.

Speaker 2

Over the course of the quarter, we've seen recorded. It could be as high as $80 and as low as $65 and it's today it's back it looks like it's back to $80 Cracks have been volatile. Recorded. We saw actually negative diesel cracks for a couple of days this month. So, I think the important thing is To understand though, this is the trajectory that we're on.

Speaker 2

All the assets are up and running. We're going to dedicate 50% of our Free cash flow to debt reduction 50 percent to shareholder returns and then we get to $4,000,000,000 we'll flip over to 100, but there's nothing that's going to change the operating strategy of this company between now and then.

Speaker 9

Understood. Thanks very much.

Speaker 5

Recorded. Thanks, Greg.

Operator

Thank you. The next question comes from Neil Mehta at Goldman Sachs. Please go ahead.

Speaker 10

Yes. Thank you and congrats to everyone on some of the leadership changes here. My first question was just on the offshore. The recorded. A tactical question is, can you spend a little more time talking about the softer results there?

Speaker 10

It sounds like it's just a timing effect. And recorded. If that was an under lift, do you get it back in the back half? And then the bigger picture question related to offshore is, how do you recorded.

Speaker 2

Okay. Sorry, Neal, you cut out a little bit. I assume you're talking about the underlift on the East Coast?

Speaker 10

Yes. The underlift in the East Coast and then do you get it back in the back half?

Speaker 11

Recorded. Yes. Hi. Nourid Ramzi here from the upstream. We obviously took, as we mentioned, recorded.

Speaker 11

Timely opportunity to take a Tahira earlier in the year that we were going to take in August, so we're going to have flat production going forward. We're fully operational and up. Recorded. And it's purely timing. There's 2 things.

Speaker 11

The FPSO, we actually offloaded and take it to storage tanks. So those continue to take place, but our lifting was just happened to be a few days after the Q2 finished. So we've actually had a lifting in very early July, which you'll see kind of coming through in the 3Q results. But we expect to see recorded. Steady production from our base Ciro's operations in the East area there.

Speaker 11

And as we've mentioned before, Terra Nova recorded and continues to be at the harbor side, just finishing some maintenance that to allow it to go back offshore. And we're collectively supporting the operator and gaining a lot of confidence to be able to see line of sight to that going offshore And then establishing safe production from the Terra Nova asset as well later on the end of this year, beginning of next year.

Speaker 2

Yes. Recorded. I think, Neil, just to expand on that a little bit, as we see West recorded. I'm not calling anything into our forecast and we continue to make really good progress on West White Rose. Recorded through the quarter as well.

Speaker 2

We did achieve a couple of major milestones there. But maybe Drew, you might want to talk a little bit about the other offshore business in Asia and where we are with that.

Speaker 12

Recorded. Yes, sure thing, John. So, as you would have seen in the news release and then to John's comments this morning, we had recorded. And we dealt with that in April May and the teams did an extraordinary job getting that back online. And As you guys may recall, we had a very strong Q1, and the demand for gas and our production was actually over kind of our budget at the time and happy to say that that now continues now that we're back up and fully operational in June.

Speaker 12

So as we see the back half of this year, We expect to have still strong demand for our production in the Asia Pacific business and happy to report that things are running very well and we are Still trending on the high end of our guidance relative to what we thought the demand was going to be.

Speaker 10

Recorded. Thank you. That's great color. And the follow-up is just on the

Speaker 13

Pathways project. John, it's hard for us

Speaker 10

recorded. It gets to FID next year. Just any of your thoughts on timing and what are the gating factors to get this thing to

Speaker 2

recorded. Sure. I'm actually going to turn that question over to Rona Del Ferreira. Rona is not usually here. She's usually on the road, recorded.

Speaker 2

Speaking of the virtues of our industry, but Rona is here with us today and she's knee deep in this and You've probably got the most up to date and relevant information on this, Rona.

Speaker 13

Yes, Neal, I mean, I can tell you we are still full steam ahead with the pathways work, recorded. All 6 of our companies, but as well the federal and now the provincial government, there was kind of a bit of a recorded. Waiting period when the Alberta government was in the election campaigning, but you would have heard that there has been a bilateral recorded. Talks announced between the Feds and the Alberta government, so that's all positive. And the Pathways companies are right there.

Speaker 13

We're meeting every week with our government counterparts to talk about how we progress the policy and the fiscal frameworks that are needed to push forward with recorded. The Pathways foundational project, which is the 400 plus kilometer CO2 pipeline and the hub. But there's also there's still 70 other Technologies that the Pathways companies are working on that will progress us towards our net 0 2,050 target. But I think we're still pleased With the amount of attention that the federal and the provincial governments are putting towards this, I would say that it's unprecedented level of attention recorded. In Ottawa with multiple departments working together, they're taking this really seriously and the governments understand how important recorded.

Speaker 13

The CCS project is for not just for our sector, but for the entire country. So I remain very optimistic that we're going to get going on this. Recorded. We've been really clear, the next big spend would be for the Pathways companies would be the purchase of pipeline for that CO2 pipe project. And so governments understand that and they understand that they need to clarify things like the investment tax credit and give us more details on that and recorded.

Speaker 13

Thanks, such as contracts for difference that they've already announced, but I'm very positive this is still progressing at the right pace.

Speaker 14

Thank you so much.

Speaker 2

Great. Thanks, Neil.

Operator

Thank you. The next question comes from Menno Halsalt at TD Securities. Please go ahead.

Speaker 6

Thanks and good morning everyone. Maybe I'll just follow-up on Neil's question with a higher level government related question as well. Like what do you think of this week's Government announcement related to the potential phasing out of what they're calling inefficient subsidies. I know it's pretty refreshed, but when do you think we'll have a better sense of what that means in practical terms? And is it fair to say that ongoing negotiations on CCUS incentives are

Speaker 2

recorded. Yes. Manu, it's John. Sometimes, I don't know how they name these recorded. And then, I'll turn the call back to the operator for questions.

Speaker 2

Okay. And then, recorded. It probably should be a fairly short piece of legislation. One of the things I'd say is I'm not really aware of any Subsidies that are direct and unique to the oil and gas industry. I've been in this industry for a lot of years and many of those years I've been spent in finance.

Speaker 2

And I certainly remember writing a lot of checks to the provincial and federal government who don't remember receiving a lot of checks recorded. A couple of things I would say is, in 2022, we spent almost recorded. $4,500,000,000 on royalties and taxes, and that is that exceeds the amount of money we spent in capital, exceeds the amount of money recorded. That we return to shareholders. That is our single largest expense and we expect that number to be even higher recorded in 2023.

Speaker 2

So, we're kind of like you, we're waiting to hear what this is all about. We certainly hear political rhetoric recorded. With regard to oil and gas subsidies, we're just really not sure what it means because again, we're not really aware of any oil and gas subsidies for the industry.

Speaker 6

Recorded. Okay. Yes. Thanks for that, John. And maybe I'll just follow-up with a question on shareholder capital returns.

Speaker 6

Recorded. You've made it clear on many occasions that the relative economics of buybacks are tested at mid cycle $60 WTI. Recorded. But today we're sitting at about $80 The stock is off of its low. So my question is, how are you thinking about buybacks versus recorded.

Speaker 6

Variable dividends and I'm asking that with the understanding that we've only seen one variable dividend since the return framework was formalized.

Speaker 2

Recorded. Nothing changes in our framework, Menno. We screen all our capital at $45,000,000 We screen our buybacks at $60,000,000 We still think those are recorded. So the right low cycle and mid cycle prices. I think I'm looking at Cam and he's nodding his head.

Speaker 2

I'm looking It's Jeff and he's nodding his head, but I think with where our share price is today, we're still more inclined to return capital to shareholders In the form of buybacks and that the share price today, in our view doesn't reflect the net asset value at $60 So I think you're going to continue to see that until or continue to see shareholder returns come back in the form of recorded. Largely buybacks until we get there, but we've been pretty clear on the framework. If we get to the point where we think it's in excess of mid cycle pricing recorded. The discounted value of the shares are in the excess of mid cycle pricing. I think you'll see a greater majority recorded.

Speaker 2

The returns come back in the form of special dividends. But Cam, I don't know if you have anything else to add on that.

Speaker 15

Hey, Manu, it's Cam. The only thing maybe I would just add is like I think keep in mind, we're going to keep continue to be disciplined. So 50% is going to go back to shareholders recorded until we get to that debt target of $4,000,000,000 And as John said, I think right now the bias continues to be towards buybacks. Recorded. I think the other thing you should be thinking about is we obviously did the warrant transaction back in the middle of June And we made it clear that that's something we're going to manage inside of that framework through the balance of this year and recorded.

Speaker 15

So the focus hasn't changed, the discipline hasn't changed around the framework and we'll continue on the path we're

Speaker 6

on. Appreciate the color. I'll turn it back.

Speaker 2

Recorded. Thanks, Manav.

Operator

Thank you. The next question comes from John Royall at JPMorgan. Please go ahead.

Speaker 16

Recorded. Hi, good morning. Thanks for taking my question. So first one is in refining. You've talked about the run rates.

Speaker 16

Just wondering on profitability and cash flows. On the prior call, you guided to Toledo and Superior being free cash flow positive by July. Recorded. Is that the case now or is the FCC impacting the ability to generate positive cash flows?

Speaker 5

Recorded. Hey, John, it's Keith. Yes, good question. I would say Toledo has been up and running since early June, recorded. Making products and selling products.

Speaker 5

So, we're highly confident on kind of cash flows there. Superior has been able to Sell products as well, but until we actually get to full gasoline make coming out of the FCC, it's kind of going to be recorded. I would say we're seeing that trend of improvement though through the quarter. I think the other thing to look at though is kind of where cracks have been and I think John alluded to it in one of his answers. They've kind of been recorded.

Speaker 5

Pretty wide and then very narrow and more recently have come back to kind of matching the various regions around the U. S. So recorded. Cracks are pretty supportive now. Differentials have tightened in.

Speaker 5

So obviously, the refiners that run heavy crude recorded. You'll lose a little bit of that crude advance, but we anything that we lose in our downstream, we actually get in our upstream. So, I think recorded. In general, it's setting up for a great Q3 like we anticipated. And as we've talked about, the last unit to come up

Speaker 16

recorded. Okay. Thank you. And then, in terms of the wildfire impacts on the upstream, I know it's a very fluid situation generally and it's tough for us who aren't on the ground to really understand the impact. How confident Are you that you're on the other side of the major impacts and that the 5 to 7 barrels per day 1,000 barrels per day offline couldn't go the other way and Just trying to understand the risks that the fire is posed as we stand today.

Speaker 12

Yes. Hey, John, it's Drew. Yes, great question. As you alluded to, it was a very wild quarter, no pun intended. I think one of the things I would start with is that recorded.

Speaker 12

Our teams did an outstanding job considering that we actually had the town of Edson and a lot of our staff there actually evacuated 3 times, recorded. 2 by wildfires and once by an actual flood, to be honest. So just to give you a little perspective on kind of the 5% to 7% that's still left to be brought recorded. The vast majority of that, almost all of it is still up in our Rainbow Lake asset just on the just inside the BC border in our bivouac dry gas play. Recorded.

Speaker 12

And the reason that we can't bring that back on yet is we just are waiting for some more secondary power lines to still be reactivated by 3rd party providers. Recorded. There are some wildfires in Northeast BC, nothing around our actual assets. As you can imagine, with the amount of impact we had, recorded. That fuel is now all gone.

Speaker 12

And so the risk to your question about could it go the other way, there's not a lot left to kind of burn and reactivate that risk for us. Recorded. And thankfully, we've had very little and almost no direct asset damage or concern around recorded. So the remaining that's offline now is still just waiting for power and it's 3rd party recorded. And it's on a dry gas play.

Speaker 12

The remainder are just some other remote sites recorded. It's more in Central Alberta that's waiting for the same thing. It's just some power. So I think the risk has been reduced significantly. And it's just the realities of recorded.

Speaker 12

How forest fires burn and where they've now been burnt, it's a very low risk that something in those areas could be reactivated, the fuels has been used.

Speaker 6

Thank you.

Speaker 2

Thanks, John.

Operator

Thank you. The next question comes from Manav Gupta at UBS. Please go ahead.

Speaker 3

Hey, guys. I just quickly wanted to touch base on Lloyd thermal volumes. Recorded. Looks like this was one of the stronger quarters, if not the strongest, since you got these assets. So help us understand some of the changes recorded.

Speaker 3

Thank you, sir. Thank you, sir. Thank you, sir.

Speaker 11

Recorded. Hi there, Manav, it's Nori here. Yes, we've talked about it in the previous quarter as well. I mean fundamentally, recorded. We've been applying our subsurface technologies and methodologies from our Foster Creek and Christina Lake assets over to our Lloyd thermal assets.

Speaker 11

Recorded. The assets are really, really good assets and we have lots of opportunities around the central processing facilities. So what we have been doing is basically drilling longer wells that have what we call higher conformance, so that they actually produce at a higher rate. Recorded. We've also been utilizing our 0 based design facilities and using submersible pumps to actually increase the rate of production.

Speaker 11

So we're basically the philosophy is trying to fill all of our plants that we have recorded and keep them full as we can go forward. So it's been very successful. We continue to build out new pads to sustain this level of production and at the same time, we should take advantage of opportunities as we understand them. So recorded. Our production currently is very, very strong and that's the kind of plan kind of going forward.

Speaker 3

Recorded. Perfect. And if I could just pick your brain around, I mean, you had some downtime in 2Q, some of your peers had downtime in 2Q. Now all you guys are ramping up. So recorded.

Speaker 3

Last few months, the apportionments were 0, but like what's your outlook for near term apportionment? Do you expect them to rise? And then eventually, What are you hearing on the TMX expanded pipeline startup? Thank you.

Speaker 5

Hey Manav, it's Keith. Recorded. Your bang on apportionment on Enbridge has been 0 for the past several months, which is just pointing to the fact that recorded. I think you're also bang on that some of the upstream has been taking turnarounds through this period. Recorded.

Speaker 5

With regards to TMX, it's scheduled to come on in Q1 2024. Recorded. Obviously, there's pre startup activities in line fill that happens into the Q4 of this year. Recorded. With all of that kind of happening, we actually anticipate for the first time in a long time that it would be sufficient egress recorded from the province even as we head into the winter months where all the upstream producers are back on and recorded.

Speaker 5

You're at that higher concentration of diluent in your bitumen blend. There recorded. Probably will be a little bit of widening on that just as the system normalizes. But recorded. And I think we're looking at tighter diffs and with TMX coming on, that should sustain itself for a longer period of time.

Speaker 3

Thank you so much for the detailed responses.

Speaker 2

Great. Thanks Manav.

Operator

Thank you. The next question comes from Harry Mateer at Barclays. Please go ahead.

Speaker 17

Thank you. Good morning. I guess first circling back on the debt reduction question at the start of the call, your $7,000,000,000 gross debt landing zone implies about $1,500,000,000 of debt reduction. Recorded. Rates markets have been tough to call here, but for the time being, you've got no shortage of options on your curve that are below par.

Speaker 17

So just how are you thinking about prioritizing? Is recorded. Maturity Ladder coupon, ability to buyback below par CAD versus USD and then open market versus doing something a little bit recorded. Yes.

Speaker 8

So it's Jeff here and the answer is yes recorded to all of it. So we'll be balanced on that as we'll look at relative interest costs, where we see, recorded. You'd say discounts relative to premiums and then the end tower structure. And so and then as far as execution goes, Again, it will be yes, we'll look at both what does it look like on a tender and open market purchases. So we'll be we'll spread it around in all of that and take a balanced approach recorded.

Speaker 2

Yes. Harry, we don't mean to be coy on that, but obviously, we can't ask you that question literally.

Speaker 17

Yes. No, I got it. Second one is going back to something that came up last year a couple of times on calls is just around your JV and your strategy going forward. And at the time, you indicated recorded. And you've taken some steps towards this in some of your assets, but the strategy is to be an operator and 100% owner of your refineries where possible.

Speaker 17

Recorded. Just curious, is that still the case? Is that still the vision? And are there any discussions you've had on that front that might have advanced beyond a preliminary stage?

Speaker 2

Recorded. Yes. Harry, one of the things we've been successful in is unwinding the JVs we've had with BP and we've purchased the 50% of the Interest in Sunrise that we didn't own and more recently we bought the 50% of Toledo and assumed operatorship of that refinery. Recorded. The way we think about, the refineries where we have an ownership interest is those are core assets for us.

Speaker 2

Recorded. In core assets, you want to have both operating and strategic control. We think that is important. So we have always signaled to the market recorded. We have a desire to own and operate, those assets that we have an interest in that we believe are core to the future of this company.

Speaker 2

So nothing has really changed recorded. There's certainly no update on any kind of discussions that may or may not be happening with recorded in and around that JV. We're happy to own those assets in the form that they're in, understanding that longer term, recorded. We want to own and operate the assets that we would consider core to our portfolio.

Operator

Recorded. Next question comes from Dennis Fong at CIBC World Markets. Please go ahead. Recorded.

Speaker 7

Hey, good morning. Thanks for taking my follow-up. Just 2 on the one on the upstream side.

Speaker 12

I know you provided

Speaker 7

a brief update on the Narrows Lake to Christina Lake connection and development. Can you provide a little bit more details in terms of what the next recorded. I know there is some CapEx this year, but also maybe an update on timing and how we could see that kind

Speaker 14

of ramp up through time.

Speaker 11

Recorded. Yes. Hi, Nader Ramzi here. We continue to make good progress. The context is obviously Narrows Lake is an extension from our Christina Lake operations and it's a 17 kilometer pipeline that takes us up to Another very rich area for development.

Speaker 11

The pipeline is 2 thirds kind of complete. Recorded. We expect to actually be starting to steam up our first pads, which we've actually started to drill already recorded in early 2025. So by about mid year 2025, we should expect to see impact production coming from that asset area. Recorded.

Speaker 11

And the first phase of development are 4 rich pads up in that area that will tie back to Christina Lake. Recorded. And that really reflects our long term business plan. And then we'll start building out from there into the second and third phase recorded. So it's all on track.

Speaker 11

It's going to it's a very exciting opportunity. Recorded. We like the rock there. It's very clean and very thick. So it's a great opportunity quite innovative rather than building a central processing facility away up at the site, been able to tie it back to our existing plant

Speaker 7

recorded. Great, great. Thanks. And my next question is just recorded. More on carbon capture and GC emission reduction plans.

Speaker 7

Under the list of projects for CCS, you have both the Lloydminster Upgrader as As well as Christina Lake Phase 1. I was hoping to get a little bit of an update on the progress potentially in identifying opportunities at this kind of Phase 1 Christina Lake recorded. And then secondly, just with the Lloyd Upgrader Carbon Capture, is that contingent on the Pathways recorded. Pipeline project moving forward or are there other opportunities to store and sequester carbon that's captured from that facility?

Speaker 5

Recorded. Thanks. Maybe I'll take the second part first, Dennis. It's Keith. And just around Lloyd Upgrader and then I can hand it over to someone else to talk about Christina Lake Phase 1.

Speaker 5

But the interesting thing with the Lloyd Upgrader is recorded. We have a steam methane reformer there, relatively high concentration carbon dioxide source, relatively straightforward to capture. And the other interesting part is obviously we have a very large resource recorded in a close proximity to the upgrader that we can actually use for enhanced oil recovery. So I would say it's recorded. It's not dependent on pathways.

Speaker 5

We can build the infrastructure and have an economic project recorded at that asset. So hence why we're advancing today through our standard project development process recorded. And looking at ways to integrate that with our upstream business for enhanced oil recovery. And maybe I'll hand it off for

Speaker 11

the upstream. Nora here since it's a Christian O'Lakes question.

Speaker 2

As we've

Speaker 11

kind of explained in our public recorded. Our first phase of our carbon capture is at Christina Lake. There's the ability to have a number of phases there and it's core to our commitment and the pathways. The pipeline will run adjacently to our operations there. So we've actually started preliminary engineering to understand the size and scale of this complex project, which is recorded by its scale almost kind of a world's first.

Speaker 11

But again, it's in the plan. It's consistent with our pathways commitments. And we're just continuing to derisk it and understand how we'd operate something like this going forward.

Speaker 13

Recorded. And Dennis, it's Rona. And just to add on to that, just to make it even more confusing, the while everything that Keith was explaining and Nouri is absolutely correct, When you look at the numbers overall, when you're talking about Pathway's target of 22 megatons by 2,030 of a reduction, recorded. Lloyd Upgrader is part of that because the federal government includes the Lloyd Upgrader in its oil sands emissions numbers.

Speaker 7

Recorded. Okay, perfect. Thank you all for that context. I'll turn it back now.

Speaker 2

Great. Thanks, Dennis.

Operator

Recorded. Thank you. First question from Chris Varcoe at Calgary Herald. Please go ahead.

Speaker 2

Good morning.

Speaker 10

Hi, John. This is a question about differentials. What impact recorded. What impact have the narrow differentials had on you in the first half? But maybe more importantly, where do you see heavy or light differentials going in the second half of this year?

Speaker 2

Recorded. Yes. Maybe I'll take the first piece of this and then I'll turn it over to Keith because he lives and breathes this every day. But we saw a real narrowing of recorded. The differential from the Q1 to the Q2 and for this company, it's more beneficial for us To have a narrow differential than a wider differential.

Speaker 2

With the processing assets that we've gotten the takeaway capacity that we have inside the recorded. We can mitigate roughly 75% of the location differential and about half of our heavy oil differential. Recorded. So having those narrow differentials certainly helps us and you saw that in the second quarter. Where we go from here, Keith's recorded.

Speaker 2

Got some views on, I'll just turn it over to him.

Speaker 5

Hey, Chris. We kind of look at this in 2 parts, kind of in Western Canada and also in the Gulf Coast recorded. On a global basis, we're seeing pretty good strength in the differential, driven mostly by kind of the heavy refinery utilization and some additional refineries coming on in Asia that consume heavy barrels. Recorded. That coupled with the OPEC cuts being predominantly heavy barrels and then the U.

Speaker 5

S. Strategic Petroleum Reserve starting to refill, all recorded. Drives a pretty healthy demand for Western Canadian heavy production. In kind of Western Canada, with TMX recorded. We actually see an opportunity for differentials in Alberta to stay relatively tight as well.

Speaker 5

So setting up for a pretty good fall, winter and into next year.

Speaker 10

Recorded. And just to follow-up on something that you referenced earlier, John, I wanted to ask you about what impact recorded. Does the talk from the federal government of phasing out these fossil fuel subsidies and their plans for an incoming emissions gap recorded. Have on the Pathways projects moving forward? Does it have any impact at all?

Speaker 2

Recorded. The second part of your question, I don't believe it does have any impact on Pathways at all. First part of your question, I think I was relatively clear. I really don't know what they mean by subsidies to the oil and gas industry. Recorded.

Speaker 2

I'm genuinely not aware of any subsidies that are direct to the oil and gas industry that they may or may not be speaking of. Recorded. Like you, we're waiting for more detail on this, similar to waiting for more detail on the emissions cap and how that's going to play in, but we don't necessarily see recorded.

Speaker 10

Thank you.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from Alex Bill at All Newfoundland Labradore. Please go

Speaker 14

ahead. Good afternoon or morning where you are. John, I was wondering if you guys could provide any comment or color on the Irving assets recorded. That are on the market right now and assets I would imagine you're pretty familiar with. And you may have answered part of this earlier with some of the comment on debt, recorded.

Speaker 14

But is there any appetite for M and A at all right now?

Speaker 2

I think, Alex, we are really focused on staying close recorded. This organization has been through a lot of change in growth, over the past number of years. And as I mentioned in some of my comments, We've really got the assets configured and built in a way that we are really happy with recorded. So I think for us, over the next few quarters, it's really about demonstrating the earnings recorded. And cash flow capability of these assets, running them in a safe and reliable condition and demonstrating the profitability of what we've built.

Speaker 2

Recorded. That is priority 1 and job 1. In terms of Irving, we're aware that just like you of the recorded. But I haven't worked there in almost 10 years. Recorded.

Speaker 2

We don't have any unique insight into that, but we as a company will stick with our knitting for or stick to our knitting over the short to medium term.

Speaker 3

Recorded. Okay.

Speaker 14

Thanks for that. And as my follow, I'm wondering if you can provide any color on the asset life extension for the SeaRose and specifically if the shipyard has recorded. And where that stands parallel to West White Rose?

Speaker 2

Sure. I'll turn that over to Nouri. Nouri has been the one who's been leading that effort on our recorded.

Speaker 11

Hi, there. Nora here. Yes, just to confirm, the asset life extension is a statutory requirement to, recorded. In simple terms, recertify the SeaRose FPSO and make sure it can stay out for the duration recorded. Of the period we wish to develop the West White Rose project.

Speaker 11

It's obviously commercial, what we're kind of doing. So I'm not in a position to talk about recorded. Any details of the supply chain, but the principle is we will take the FPSO. There's 2 pieces of work. There's offshore work recorded in the subsea components that are offshore in the Boy area.

Speaker 11

So again, that uses local recorded. Subsea expertise within the province and we will be taking the FPSO early next year to an appropriate yard. But as I said, we're just not in a position to disclose that until we've completed all our commercial processes.

Speaker 6

Recorded. Great.

Speaker 2

Thanks, Alex.

Operator

Thank you. And the next question recorded from Robert Tuttle at Bloomberg News. Please go ahead.

Speaker 4

Yes. Hi, good morning. Thanks. I just want to get your insight on where recorded. The tolls on the Trans Mountain have come out.

Speaker 4

There's been a lot of unhappiness by some producers with those tolls as being recorded. I'm just wondering how this will play out in terms of oil exports. Recorded. How competitive will this pipeline be when it comes to reaching Asia? Or will the oil end up mostly going down to the U.

Speaker 4

S. West Coast? How competitive will it be to reach say China versus going down to the Gulf Coast? Just want your insight.

Speaker 5

Recorded. Hey, Robert. Suffice it to say, obviously, the commercial arrangements are sensitive. But in general, recorded. There's components of our toll structure that are fixed and components that can fluctuate with increased costs.

Speaker 5

And you would have seen a few letters going into the CER, just making sure the allocation of those costs was done appropriately. So that's kind of the work that you're seeing recorded around that avenue. From a competitiveness, this is one of the first pipelines that have been built recorded and providing egress out of Canada in a long period of time. First one that kind of goes to the West Coast and doesn't go through the U. S.

Speaker 5

So we think recorded. It will provide a very attractive alternative for Canadian producers to move their barrels to market in a different fashion and potentially even access different markets. So, our view would be that this pipeline, went up and running, will run full recorded and provide pretty good economics, not only to the producers, but to the country to move those barrels Excess barrels outside of Canada.

Speaker 2

Yes. I'd just like to kind of pile on with what Keith is saying, and the tolls get a lot of attention right now and justifiably so, but we will work through that recorded with TMX. But the reality is this is an absolutely necessary piece of infrastructure, not only for Cenovus, recorded also for the oil and gas industry in Canada at large. This is going to take another 590,000 barrels of Canadian oil to market recorded at a time when the world is really needing more energy and the demand for oil and gas is growing and those barrels should come from Canada. Recorded.

Speaker 2

Beyond the tolls, you do have to realize as well that this is an asset that's going to be in service for decades. It's going to provide jobs. It's going to provide tax dollars. Recorded. This is going to provide royalties for Canadians going forward.

Speaker 2

So we think this is a very good news story for Canada, recorded. Understanding that there are cost overruns and implications for tolls in the short term, but something that is very, very important for this country.

Speaker 4

Recorded. Thanks. And I'm wondering the reality is there'll be more capacity than there'll be production at least initially. I mean, recorded. Which lines are going to you see lose the spot?

Speaker 4

Will that come off Enbridge? If you got TMX full, will that come off Enbridge? Recorded. Or will TMX not actually run full, at least some of those spot barrels will go down to Enbridge. Where do you think that will happen there?

Speaker 2

Recorded. Well, one of the things, Robert, I'd tell you is this industry has a great habit of expanding to fill pipeline capacity. Recorded. And I talked about the 590,000 barrels a day of incremental takeaway capacity that recorded. This pipeline will be able to take away that will be filled I think in relatively short order over the coming years.

Speaker 2

The reality is this industry has grown by almost 800,000 barrels a day since 2015. And those kind of infrastructure projects that increase our ability to get to market, tend to get filled fairly quickly with the amount of resource we have in Canada. So you're quite right, there'll be some short term rebalancing, recorded. But longer term, we'll fill this pipeline and I think probably sooner than most people think.

Operator

Thank you. There are no further questions at this time. I will now turn the call back over to Mr. Mackenzie for closing comments.

Speaker 2

Recorded. Great. Well, listen, thanks everybody for joining us today. We always appreciate the interest in this company and the questions that come with it.

Operator

Recorded. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.

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Key Takeaways

  • Executive reshuffle: John Mackenzie succeeded Alex as CEO and announced several key moves—including Keith Chaisson as COO, Doreen Cole heading Downstream, Drew Ziegel as CCO, Andrew Dhillon and Jeff Hart shifting roles, and Cam Sandar as new CFO.
  • U.S. refinery ramp-up: Toledo and Superior are nearing full operation (FCC restart days away) while Lima, Wood River and Borger ran at high utilization, positioning Q3 for strong throughput.
  • Canadian upstream & downstream results: Oil Sands upgrader and refinery ran at 86% utilization, Foster Creek turnaround finished on budget, and overall guidance lowered to ~775 k BOE/d after wildfire outages and slower Lloyd Thermal ramp-up.
  • Strong cash generation: Delivered ~$2 billion adjusted funds flow in Q2, returned ~$575 million via dividends and NCIB, repurchased warrants, and will allocate 50% of excess free cash flow to shareholder returns until net debt hits $4 billion.
  • ESG and carbon capture: Released 2022 ESG report, set an 80% methane reduction target by 2028, advanced carbon capture feasibility at Christina Lake and Lloyd Upgrader, and support the Pathways CO₂ pipeline initiative.
AI Generated. May Contain Errors.
Earnings Conference Call
Cenovus Energy Q2 2023
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