Q3 2019 Earnings Call
As a reminder, today's call is being recorded at this time all participants are in listen only mode. Following the presentation. We will conduct a question and answer session. You can join the queue at any time by pressing star one members of the investment community will have the opportunity to ask questions first at the conclusion of the session members of the media.
Me then ask questions. Please be advised at this conference call may not be recorded or rebroadcast without the express consent of Cenovus energy.
Now, let's turn the conference call over to Mr., Jerry when director of Investor Relations. Please go ahead, Miss one [laughter]. Thank you operator, and welcome everyone to our third quarter 2019 results conference call I refer you to the advisories located at the end of today's news release. These advisories described the forward looking information non-GAAP .
Measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion additional information is available in our annual and DNA and our most recent annual information form and form 40 F.
Quarterly results have been presented in Canadian dollars and on it before royalties basis. We have also posted our results on our website at Cenovus Dot com.
Alex Pourbaix, our President and Chief Executive Officer will provide brief comments and then we will turn to the Q and a portion of the call with Synovus his leadership team.
We would ask analysts to hold off on any detailed modeling questions and follow up directly with our Investor Relations team. Following the call. We would also ask that you keep to one question with a maximum of one follow up her question and then rejoin the queue for any other questions. Please go ahead Alex.
Thanks, Sherry and good morning, everyone is I've done over the past couple of quarters.
I'm going to keep my prepared remarks short and to the point. This morning, I'm sure everyone is already seen or third quarter financial and operating results and we released a few hours ago. So I'm not going to go into detail on the numbers and most of you will have already seen our presentation from earlier this month at our Investor day in Toronto, where we spoke at length.
About our updated business plan through 2024, we highlighted the tremendous progress we've made over the past couple of years and delivering safe and reliable operations, maintaining capital discipline and industry, leading costs strengthening our balance sheet and improving our market access position based on these achieve.
Events, we've built a business that we believe is resilient and sustainable even at bottom of the cycle commodity prices around 45 dollar WT <unk> and our business plan includes significant capacity to generate free funds flow across the cycle, while also increasing returns to shareholders.
I'm extremely excited about the future prospects for our company. We're doing everything we said, we would do and in the third quarter. We continue to build on our excellent financial and operating results for the first half of the year, while demonstrating best in class safety performance.
I want to touch on safety for a minute safety is core to our business and I'm happy to report that we've achieved more than a 40% reduction and our significant incident frequency in the first nine months of 2019 as compared with the same period in 2018 and I want to send.
My thanks to our team for this very important commitment.
Another core element of our business that I'd like to draw your attention to is our cost structure.
Even at constrained production levels due to the government of Albertus mandatory curtailment program, we've kept our per barrel operating and sustaining capital cost low I'm really proud of the work our staff have done to achieve this for example at $6 a 90 cents per barrel, our third quarter oil sands offer.
Cutting costs were 21% and 24% lower respectively than in the second and first quarters of 29 team and even with a decrease in production at our deep basin operations per barrel operating costs were down, 9% and 11% respectively from the second in first quarter.
We've also got a good story to tell when it comes org Vinay costs, and we were significantly reduced our financing costs through our ongoing debt reduction activity.
And we're confident the great majority of our cost improvements over the last few years, our structural in nature and our sustainable.
To keep our costs low we're focused on maintaining the reliability of our facilities and we have defined plans to measure and improve each of our cost drivers through our supply chain channels materials and demand management and through technology improvements.
As a result of our low cost structure and our focus on maintaining capital discipline and balance sheet strength, we continue to demonstrate strong financial performance in the third quarter.
And all this generated free funds flow of more than 620 million in the quarter, bringing total free funds flow year to date to nearly $2.2 billion and notably we achieved operating earnings from continuing operations of over $280 million compared with an operating loss.
US in the third quarter of 2018 continued strong performance at our upstream operations contributed to our financial results for the quarter. This was offset somewhat by lower crude oil runs and refined product output year over year at our jointly owned us refineries, where we have some plan Turner.
Around activities and unplanned downtime.
We've continued to use our capacity to generate strong free funds flow to further reduce debt at the end of the third quarter. Our net debt was 6.8 billion down from 7.1 billion at the end of the second quarter and our net debt to adjusted EBITDA ratio was 1.9 times.
Down from 2.4 times at the end of the second quarter.
We remain firmly focused on achieving our long term net debt target of no more than $5 billion at that level, we anticipate being in a position to achieve and maintain a target ratio of less than two times net debt to adjusted EBITDA at bottom of the cycle commodity prices.
We also remain firmly committed to maintaining our three existing investment grade credit ratings and as a result of our continued success and improving our balance sheet I'm happy to say that we've made progress towards reestablishing at investment grade credit rating with Moody's Investor Service last week move.
It is a from Cenovus is BA one credit rating and improved its outlook first synovus from stable to positive.
In the third quarter. We also demonstrated continued progress in ramping up our oil by rail capacity in September we reached an average of more than 80000 barrels per day of oil transported by rail for delivery to us destinations, where we continue to increase our exposure to global pricing for our products.
We are well down the path to reaching our target of approximately 100000 barrels per day of rail loading capacity, which we continue to expect to achieve by year end.
This leaves us very well positioned to benefit from the government of Alberta as adjustment to the mandatory curtailment program announced this morning, which will allow producers to ship barrels in excess of mandated curtailment levels. If those barrels are transported by rail as you know we've been proponents of this measure for some time.
Im now we think it's a great way to incense further rail takeaway capacity out of Alberta, and we applaud the government for moving forward with this initiative.
Well, we're on the subject to market access I want to take this opportunity to highlight the we remain at a critical juncture forgetting new pipelines built in this industry. It is crucial that the federal government follow through on its commitment to get the Trans Mountain expansion project built without further delay, allowing this process.
Correct to languish further would be a national tragedy.
As we have always done we will continue to work with the government to press for reasonable Canadian Energy policy. We believe the best path forward to improved global emissions and environmental performance is to support a vibrant Canadian energy sector that can invest in emissions reducing technologies.
While continuing to make a strong contribution to the national economy create jobs invest in local communities and support indigenous business and employment.
At Synovus, we're committed to continuing to deliver leading environmental social and governance performance. This includes ongoing work to identify meaningful practical targets and plans to achieve them for our for SG focus areas climate in GHG emissions indigenous engagement low.
And in wildlife and water stewardship. It also means we will remain focused on delivering excellent safety performance and maintaining healthy and safe work sites for our staff as part of our ongoing commitment to responsible development.
In closing I'd like to leave you with this I think of our third quarter performance as yet another chapter in a turnaround story that has been a couple of years in the making but one that really started to take hold at the beginning of 2019, when our cost discipline and historically strong operational performance.
Started to provide strong financial performance you can expect us to continue to deliver on the commitments we've made to our shareholders and I believe we are on the right path to create significant additional value in the months ahead, so with that why don't we get to everyone's questions.
Thanks.
Ladies and gentlemen, as reminder, you can join the queue to ask a question by pressing star. One we will now begin the question and answer session and go to the first caller. Your first question comes from Greg Pardy with RBC capital markets. Your line is open.
Hi, Thanks, Good morning couple of quick ones for you.
The first is.
In terms of the ramp up at Christina Lake typically that's done over 12 months, but you guys have been injecting steam for some time. So if you were permitted to ramp up as quickly as you could what kind of a profile do you think we would see.
Hey, good morning, Greg It's drew here so.
Christina Lake Phase G. We we did have an facility early this year, we started utilizing the steam generation, we continued to steam existing pads and under curtailment that still limited us from bringing any additional new pads on that would actually feel the phase G kit so you're asus.
Option is right for us to still get full utilization of the phase G facility, we still need that six to 12 months to fully ramp up. So we have been utilizing steam we continue to steam the existing reservoir to maintain its effectiveness, but in order to bring incremental new volume now with this.
Ill announcement.
We still need to six to 12 month window here in order to actually ramp up new pads with new incremental volume.
Great. Thanks for that true and then the second one is just around the crude by deal announced this morning could you just explain the mechanics in the context of 100000 barrels a day of crude by rail that you you've already contracted and that you're ramping up on how that will work.
Hey, Greg it's Alex what did I want to have Keith kind of walk walk everyone through them.
Thanks for the question Greg.
As the industry has been working with the government over the past several months to come up with a.
Workable compromise solution and we do really see this is a win win win win for industry to fully maximize the rail facilities in the province, a win for the province.
And the taxpayers have the province to to generate more royalty revenue in a win for the service providers the railroads that.
We'll be able to fully utilize all the installed infrastructure specifically for synovus. The Q1 baseline would mean that.
We would have approximately an additional 85000 barrels a day of dilbit capacity, which will fully allow us to ramp up.
Our oil sands assets as well as phase G.
Terrific, Thanks very much.
Your next question comes from Emily Chang with Goldman Sachs. Your line is open.
Thank you.
My first question is just around operating costs. There was quite low this quarter and I was just curious as to how sustainable. This is going forward and Pat can you discuss some of the operational changes driving these one off off.
Sure. Good morning family. It's drew here so in oil Sands I'll, just remind everyone coming out of Q2, we had a major turnaround at Christina Lake So for that quarter, we would have had.
Some increased costs as part of that turnaround.
But again it just goes to show the teams both in oil Sands, Andy bases, and we'll give you some deep basin context in the second the teams just continue to operate very well continuing to look at all of our cost drivers continue to increase the reliability of our assets and even under.
Curtailment in a less production per barrel to the teams keep finding good ways to operate these facilities and.
I'm.
Still optimistic that the teams are going to continue to still find good cost structure changes and continue to make small improvements.
So still excited about that for the deep basin I'm very proud of that team. We in the first half of this year, we took the opportunity in reset the de basins and turn operating model basically the systems. We use how we operate internally to manage those assets and we're starting to see the fruits of some of that work that the team spent a lot of climate.
A lot of effort in the first part of this year.
As far as an absolute cost standpoint, as we look forward I think for the deep basin, we're going to continue to find.
Avenues to keep our absolute costs in check.
But as we you've seen from investment standpoint, the deep basin, our volumes are going to be continuing to come down somewhat but on an absolute cost basis I still think the teams are finding good improvements in both oil sands entity basin.
Great. Thanks, and just one follow up if I may.
Around project sanction can you remind us what we need to seen tons of mark Congrats to sanction phase HM Foster Creek.
Given the rail above curtailment and good morning.
Still reeling a pipeline.
Dependent decision in conjunction with where the commodity prices tracking.
Emily It's Alex I.
I think I think the way to look at it and similar to how we discussed at the Investor Day is.
Right right now those age phases are in our base five year plan.
But at the same time, we are going to be very thoughtful about this and add it would be not a very sensible decision to sanction those projects. If we're not confident that we have market access so.
It's hard to say what that bright line test for that would be but I definitely know what it's going to look like we will sanction those projects if and when we have high level of confidence that we will have long long term market access to get those barrels to market. So that's that's the.
The question that there will consider over the next year as we bring those projects closer to an F.I.D. decision.
Great. Thank you.
Welcome.
Your next question comes from Manav Gupta with Credit Suisse. Your line is open.
Hey, guys.
First is.
About 600 free cash even in this quarter.
Yeah.
Broken that 7 billion Mark.
Almost on a free cash flow.
Just speak to lower leverage or.
Cash.
On your balance sheet.
John Justin.
Conical.
Yes, I'm gonna have its John .
What you should assume as the free cash flow. The we produced on a go forward basis is.
By and large go into the balance sheet I think related.
Out a pretty clear deleveraging plan in October as far as.
Other priorities, including CLP were pretty clear as well I think that between 7.5 billion.
If CLP was to come to market with.
Their shares we would like to participate in one form or another whether that be directly or indirectly.
And the closer and we are to 5 billion would really determine the order of magnitude that we'd be able to participate in the but.
We are focused on 5 billion and really the CLP block is outside of our control, but if and when they come to market.
We will participate in one form or another.
Thanks.
Oh.
Okay.
Maybe I missed part is that an update.
Going back to root causes.
That to somebody.
The inevitable Alex the.
Never meant has has not yet announced.
The disposition of those rail contracts that process appears to be ongoing.
Thank you.
Your next question comes from Phil Gresh with Jpmorgan. Your line is open.
Hi, good morning.
I guess is just a quick follow up to John on the Nofs question there.
Maybe just where it is really differently, if we're to get to the 5 billion.
Net debt target.
How would you kind of assess.
The the magnitude of.
Your capability to participate.
Given the sizes or the amount of shares that.
Our owned by Conoco.
When we get to the target.
Yeah, Phil if you're asking for an absolute number im.
I can't give you one and I wouldn't be inclined to give you one bill what I would say again is the closer we yet to five and even going beyond five.
Just gives us more flexibility in how we respond to that so if you're asking me what is the absolute.
With that we'd be willing to allocate to that.
I'm not really prepared to go there, but certainly order of magnitude you should we think about us being more participate of as we get closer to five and more than that if we go below five.
Sure. Okay appreciate it.
Difficult question so.
I guess the second question just.
With this situation with the Keystone pipeline I realize you guys don't as we disclosed in your analyst day, you don't have any specific commitments on the pipeline.
But I presume that wood river.
Indirectly does.
This that pipeline, so I guess.
Could you confirm that and is there any business for extended would there be any kind of operational impact of you might want to be thinking about.
Hi, Phil it's Keith there.
It's early days, obviously the operators is responding to the event, we don't have a lot of details on exactly the duration of the outage.
What I would I would indicate is for synovus, obviously with our rail program and wrapping up to 100000 barrels a day our pipeline access.
Binds other than this one.
We also have.
Almost 3 million barrels of of cavern storage available to us.
But I think it's it's a clear indicator, it's an unfortunate incident that happen, but a clear indicator of kind of the need for additional pipelines and and the fact that.
The current Alberta government has.
A curtailment tool to ensure that.
Differentials kind of stay narrow with regards to our refinery our partner operator is addressing that issue and watching it real time.
Okay, and just one final isn't refining.
Operating costs.
Guidance, the again for the year.
Seem to be tracking a bit above that.
I just want to get some clarification on.
Perhaps maybe they're just some onetime factors this year after than that but any additional color. Thank you.
Yes, thanks, Phil.
Basically we've had some turnarounds happen early in the year and are currently actually in.
Some turnaround activity as well that both of our refineries that are driving up some of those maintenance costs.
Okay. Thanks.
Your next question comes from Mike Dunn with JMP first energy your line is open.
Thanks, Good morning, everyone.
Apologies if this was answered earlier.
But just curious as to whether or not you can pick a number or a rough number on.
How much youre oil production has been curtailed this year relative to what it otherwise might have been I guess if we.
Excluding.
Excluding phase G. Christina Lake just trying to get a sense of.
Where to take our numbers as we think about.
The crude by rail above curtailments.
This morning. Thanks.
Yeah. Good morning, Mikes drew here, so you'll recall here the government has adjusted it here over the year.
So our latest guidance, you're still has us probably gets to your I think would your question really is about as it as the crude by rail comes into effect what could you expect from US here from an initial production change and we probably have about 10 to 20000 barrels.
That could come on fairly quickly as we would apply for that crude by rail allowance now that the government announced through this morning.
And as I reiterated earlier to Greg's question, we still need to take about a six to 12 month window here in order to bring on incremental production to that amount as Fiji was to ramp up. So we probably about 10 to 20000 that we can bring on fairly quickly and then the incremental phase G will be six to 12 months following.
But just it.
And sorry, Mike It's Alex just one thing I mean, our intention with this government announcement is we will begin to fully bring Chris Christina G on now.
Right.
I assume so thanks, that's all for me that that answers it perfectly.
Okay. We will now take questions from the media as reminder, you can turn the Q.
Ask a question by pressing Star one your first question comes from Joe Giordano with Morningstar. Your line is open.
Great. Thank you just.
Just when they went out I'm not a member of media I'm an analyst Morningstar.
Yes.
Thank you. Thank you just just a quick question how have you thought about all the pushback on the Enbridge mainline totaling I know Cenovus has been reported to be a reporter does that change a supporter of excuse me because that change or overall thoughts for long term growth or can you shed any light on.
Sorry is Joe was a question to describe our why we supported or.
I wasn't quite sure where you're getting sorry, yes, if you could shed some light as to do you continue to support it and.
Why the pushback might be out there do you think that pushback may actually prevented from moving to the contracts.
I have to say I'm I'm I'm somewhat surprised.
By the industry pushback I think we tend to look at it in a very simple way.
Just the way that Enbridges mainline system has developed over the decades.
And with their requirement for downstream verification.
For pretty much its entire history that pipeline has largely been controlled by downstream refiners.
Because of this downstream verification requirement.
In order to ship on that pipeline you have to be able to demonstrate the you have a home for the oil at the other end of it either a refinery storage or a downstream pipeline. So it just the effective that as it has been controlled in large measure by refiners and from certainly from my perspective, I think we have.
All seen that.
That situation has has varied greatly benefited the refining industry and has very significantly impacted the upstream sector my own personal view and very simply is that one of the biggest issues affecting our industry right now is.
Labels concern over market access and I see saw Enbridges proposal to convert to a contract carrier as an opportunity where producer like synovus could actually for the first time.
Be the master of its own.
Future with respect to getting oil to market and I my own personal view was that this represented.
Really interesting opportunity for a company like ours and other companies in the upstream in Alberta to get from access to the Chicago market and from there get it to get that oil to both to the Chicago markets and other markets and do that at a what I view.
As a pretty reasonable price really happy to see that Enbridges is going to continue to make the application to Canada as energy regulator.
And I just I think it's a shame that we're now going to face further delays, while the regulator opines.
On on the merits of of the application I think we could have got out this faster.
Great.
Site.
Thanks.
Your next question comes from JV with Odlum Brown Your line is open.
Hi Fi here.
Alex your debt target.
$18, a 5 billion, but your debt denominated us dollars and in a bottom of cycle.
Scenario.
Not unforeseeable to see the FX exchange weak and I'm just wondering how do you think about that in the context of your debt target.
That could possibly increase just because exchange rate weakens.
It's Alex I could answer that but I would just get corrected by my CFO . So why don't I, let EM.
After that for you.
Yes, five not you're absolutely right there does tend to be a correlation between.
Oil prices in the Canadian dollar so certainly for.
Okay.
By and large again, you're going to see that correlation it hasn't been a strong in recent years. It has been in the past, but if WT eyewear to weakening we would have a downtick you would see or or.
US dollar denominated debt grow and Canadian dollar terms.
That all being said.
The FX works both ways for us it also increases or cash flow at the bottom of the cycle. So as the Canadian dollar weakens you do tend to get.
The opposite effects, we stress tested this across a number of different.
FX and WT prices to ensure that thesis still holds and by and large we're still comfortable.
They are getting our debt down to 5 billion is the right number.
Although you're right. It's it's the long term desks nominated in us dollars.
Okay. So not just follow up and so if.
That goes up in the U.S. dollar amount on the balance sheet, but then in theory on market will retain more cash to get you back to the five.
Thought process, yes, so what would happen is if typically again as the economy weakens in WCS price goes down our us denominated debt would grow in Canadian dollar terms, but so what our cash flows in that.
For us dollars converted back to Canada on cash flows increases. So there is a quid pro quo. There in terms of how these things tend to move together.
Okay, great. Thanks.
Your next question comes from Chris Varco with the Calgary Herald. Your line is open.
Hi, Thanks for taking my question.
Alex we see the number of drilling companies moved the rig South recently, we today, we saw Encana say, it's going to move its base to the United States can become an American domiciled company I guess I'm just wondering your opinion, what signal our message should Canadians and government take away from these these trends.
Hey, Chris It's Alex Thanks for the question Hi, I don't think Theres any other way to describe it I think this is.
That tragedy for Canada.
I could focus on the energy industry and goodness knows we've seen the vast majority of international companies.
That we're investing billions of dollars in this this country have exited.
But I think theres, a more fundamental issue issue going on and that is over the past five or six years, we have generally seen an exodus of investment both by international companies and frankly Canadian companies into this country and it's an element of our competitiveness our Roe.
Dilatory.
The regulatory world that we're in right now.
I look at it you'd look at you look at Encana I think it's a great example, not too many years ago that company was the by market cap the largest company in Canada.
Obviously, it was a predecessor company.
Two synovus at one time and to see.
Company of that importance of Canada to Canada now.
Exit exit its head office from the country I think it's it's a tough day for Canada, and we got a remains very very focused on call on how competitive.
Conditions are for our industries.
Just a follow up on a slightly different topic talking about the crude by rail obviously the government going to provide some details later on this morning about the plan, but is there any concerns are there any challenges in your mind to what this plan might mean for oil price differentials.
Increasing again.
You know, Chris I guess, I'd say, a couple of things on it and first I kind of want to reiterate a comment that Keith made.
This this was a proposal that was created by industry I think it was a great example of industry collaborating on on something that we really see as a benefit for for all concerned.
From the from the perspective of what it will do to differentials I actually think.
You're going to see almost two markets develop by I think you're going to see I would hope I really expect we will see.
Crude by rail ramp up probably two or close to the full capacity of the existing rail loading facilities in the province and in the producers that take advantage of that are going to pay.
The the rail cost.
To get that to market and get a netback commensurate with that and then.
We still have all of the other barrels in the province.
And with with the government's mandated curtailment I think we would probably expect to can probably I I think we're probably going to see.
Different different netbacks for those two pools of production if you will.
Yes.
Thank you.
Territories.
Your last question comes from Dan healing with the Canadian Press your line is open.
Good morning, Thanks for taking my question.
I just had a.
Looking for some more color on the crude by rail.
You mentioned that you'd be able to bring on 10000 20000 barrels today right away and that the Christina Lake Phase G would be able to go ahead within six to 12 month can you.
And the 20000 comes from and would that be all.
Yes, Thanks, Dan its Alex.
The 10 to 20000 barrels really come.
From a strategic this an operating decision that we made when curtailment was first announced we we made a decision at that time to largely continue to make full use of our steam generating capability on our oil sands. So we were continuing to apply.
For more or less maximum steam to our reservoirs and all we did as we dialed back the production so right now.
At both of our at both of our oil Sands sites, we have significant amounts of oil that is mobilized liquid in the reservoir and as drew mentioned, we will be able to ramp that up very very quickly.
That accounts for the 10 to 20000 and then.
The remainder of the Christina G. We're just going through the standard process. We would go through when we commission.
A new oil sands phase and as drew said it typically we that occur you'll see that production ramping over a six to 12 month period.
Okay, and how much are you shipping by rail right now.
Probably around 80, probably will at 85000 barrels a day given the government and this is a point worth noting but given the governments.
Announcement that the baseline for rail above curtailment is Q1 of this year.
That time, we were moving about 15000 barrels a day so under that scenario we have approximately.
We will have relief from curtailment as long as that oil moves by rail of about 85000 barrels a day of our 100000 barrel a day rail commitments. So we have ample rail capacity both to to undo the impacts of curtailment on our existing facility.
These and to to allow the full production from Christina G now to come onto market.
Okay, great. Thanks.
That concludes today's session I would now like to turn the call back over to Mr. Parfait.
For final remarks.
Well I would not much more to say I just want to thank everybody for joining us today and with that will sign off thanks, everyone.
This concludes today's conference call you may now disconnect.