Q1 2020 Earnings Call
Good day, ladies and gentlemen, thank you for standing by welcome to Cenovus Energy's first quarter results. 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 answer session. You can join the queue at any time by pressing star one members of the investment community.
We will have the opportunity to ask questions first at the conclusion of that session members of the media Me then ask question.
Please be advised that this conference call.
Worried or rebroadcast without the express consent of Cenovus energy I'd now like to turn the conference call over to machinery Lad Director Investor Relations.
I had missed when.
Thank you operator, and welcome everyone to our first quarter 2020 results conference call. Today's call is a slight departure for us since we've all been working remotely for the last several weeks due to cope with 19, we're coming to you today not from our conference room downtown.
Hi, a cell phone from our respective home office assets. If we have any technical issues, we hope you'll bear with us to keep it simple and limit background noise, we have our president and Chief Executive Officer, Alex Pourbaix, Our Chief Financial Officer, John Mckenzie, Our executive Vice President upstream Norrie Ramsey.
And our executive Vice President downstream keep chefs.
On the call to answer your question.
The rest of our leadership team is in listen only mode today.
I refer you to the advisories located at the end 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 risks risk factors and assumptions relevant to this discussion.
Additional information is available in our annual M. DNA and our most recent annual information form and form 40 F.
The quarterly results have been presented in Canadian dollars and on a before well, let's he's basis.
We have also posted our results on our website at Synovus Dot com.
Next we'll provide brief comments and then we will turn to the Q and a portion of the call with snow was his leadership team.
We would ask analysts to hold off on any detailed modeling questions and follow up directly with our Investor Relations team. After the call. We would also ask that you keep to one question with a maximum of one follow up question and then rejoin the queue for any other questions. Please go ahead Alex.
Thanks, Sherry and good morning, everyone I hope that all of you your friends and your families or stage safe and healthy during this challenging time.
Before I get to our quarterly results I wanted to touch briefly for a second just on the steps we've taken in response to the cobot 19th endemic to protect the health and safety of our staff in service providers.
Continuity of our business virtually all of our office staff and some of our field staff, we don't need to be a site for our operations to continue running safely and smoothly have been directed to work from home or field operations. We've reduced the number of stop on site establish the extensive physical did some seen matter.
<unk> stepped up cleaning procedures implemented active screening for people traveling to site brought in mandatory shelf isolation policies and weve restricted business travel today, we have not how to confirm case of cobot Nineteena synovus.
And we're doing everything we can to reduce the risk of that happening.
Turning to our first quarter operating and financial results I expect you've all seen our news release. This morning, so I'm not going to spend a lot of time walking through the numbers I do want to provide you with some color on what's behind the financial results. We reported this morning, and I want to talk about health Synovus is positioned to navigate.
For the rest of this current downturn, what I think our potential is over the longer term.
These are obviously unprecedented times for our industry during the first quarter. The combination of a global pandemic that sharply reduced demand for oil and if supply dispute between two of the world's largest producers Saudi Arabia in Russia resulted in a significant drop in benchmark prices.
For oil and refined products.
Well, we expect to supply demand imbalance or to be relatively short term in nature. It has led to a rapid decline in share valuations for global energy companies, including Synovus.
And has temporarily impacted financial results.
For our industry and for arc our company.
As you know the balance sheet has always been a top priority for US and then this economic environment that is more true than ever over the last few years, we've been really let mostly focused on pay down debt, reducing costs and maintaining capital discipline and as a result, we came into this downturn with a relatively strong balance sheet.
We also have ample liquidity in place to see us through this downturn.
Right now are number one priority is protecting the health of our staff.
After that our focus remains on preserving our balance sheet, maintaining liquidity and continuing to manage our business to drive our cash flow breakeven as low as we can.
During the first quarter the combination of the sharp decline in benchmark oil prices and widening light heavy differentials in Alberta contributed to a more than 50% drop in realized pricing for our barrels compared to the first quarter of 2019.
And it's also resulted in a number of temporary impacts to our financial results. For example, the condensate we used to blend with our heavy oil was purchased a few months ago when prices were higher which negatively impacted our upstream results.
And the same principle applies to refinery feedstock, which negatively impacted our refining and marketing results.
In addition, due to the rapid decline in oil prices during the quarter, we recorded significant non cash inventory write downs in asset impairments, which combined with a nonoperating foreign exchange loss contributed to the operating and net losses, we reported this morning.
Inevitably we know this pandemic will perhaps the markets will recover.
And its benchmark prices begin to return to more normalized levels. We expect to see these price driven impacts to our business began to reverse themselves and I fully believe we'll see share prices for our industry follow suit.
It's not clear is exactly how long that's going to take.
Well, we can influence the macroeconomic environment, there's plenty, we can do to protect our balance sheet. During this challenging period and that's exactly what we've been doing.
We were in a strong financial position coming into 2020, we had net debt of 6.5 billion down almost 2 billion from a year previously we had and continue to have among the lowest cost structures in the industry.
2019, we demonstrated that in a west, Texas intermediate environment, a $45 U.S. or more we have significant cash generating potential in 2019, we delivered two and a half billion dollars and free funds flow I believe that reflects a true underlying strength of our assets our financial position.
And our business plan.
And of course, we're not in a $45 barrel BTI world at the moment. So we've taken decisive steps to improve the resilience of our business and protect our balance sheet for the duration of this downturn.
March 9th and again on April 2nd we took advantage of the flexibility in our business to make significant adjustments to our 2020 budget and business plan, we reduced our plant production volumes for the year and are actively managing production levels as market conditions change to optimize the value we receive for our products.
We got planned capital spending by $600 million and reduced our forecast operating results for this year by about $100 million.
We trimmed our plan gionee cost for the year by about 50 million, which includes pay reduction for me, our board and our executives and to a lesser degree our staff, we deferred final investment decisions on growth projects and have now essentially ramp down or crude by rail program.
We suspended our dividend, which we've always said would be sustainable at a west, Texas intermediate price of $45 U.S. or more and we work to improve <unk> improve our already strong liquidity position, adding another $1.1 billion of committed capacity.
With some of our lenders this month together with our largely undrawn existing committed credit facilities and uncommitted bilateral credit lines, we have liquidity to sustain or operation through an extended period of low oil prices.
To sum up we've been proactive about protecting our balance sheet and enhancing our liquidity and I believe we are in a relatively strong position to navigate the current commodity price environment, although significant changes in the macroeconomic and business environment over the last couple of months of impact.
Got it our recent financial results, the underlying strength and value of our business has not changed.
And with that let's get straight to your questions. One thing I I should say since we're all not together in a in a room I, what I'm going to do is Oh, I'll, probably do a little quarterbacking and either take the call are all direct who I think should answer it just to try to make things.
A little more easy so with that Oh, let's open it up for questions.
Ladies and gentlemen, as a reminder, you can join the queue to ask a question by pressing star. One we will now begin a question answer session and go to the first color.
First question comes from that Greg Pardy with RBC capital markets.
Thanks, Thanks, Good morning, Alex and John and others.
A couple of quick ones for you I guess, just with respect to the 60000 that you've got shut in right now I'm just wondering to provide just a bit more background around that is is that all at Christina is it is it is this the implementation of dynamic storage again that you've used to successfully in the past and it has that number kind of climbing as we speak or.
At relatively stable.
Why don't I, Hey, Greg, It's Alex why don't I, I'll have norrie or respond to that and then I might give a little bit of color at the backend.
Sure Hi, its noted ramzi.
I'm just just put up in the context, we have taken about 60000 Boes a day a dime from Christina Lake that's correct.
A lot of its driven by our money to treat production curtailment top actually house in Calgary.
Sure.
Okay and and it's this is this this is dynamic starts in other words, you're still are you still injecting steam in the system or is this more akin to shut ins.
Yeah, I mean, we've just we've just tail, but some production so very little thanks.
And then move vehicle.
Ah coastal borrow some hope we're doing just snow is really just optimizing volume rather than book volume. So at this stage, we're not putting it into storage, but we have the ability to have that flexible ability to do that hasn't been acquired.
Yeah, and Greg, It's Alex I, just to kind of add to northeast comments.
We are continuing to steam the reservoirs and so this this really falls within that that dynamic storage process that we've talked about before a night you know I think the one thing I would say about it you know one of the one of the benefits of our businesses, we have very very low.
Variable cost of production.
And Ah you know, we're always going to do the right thing and Ah Ah, Yes, <unk> as long as a as we are covering our variable costs and making a contribution to the fixed costs generally <unk>. You know we would generally look to keep that production going Oh, we're gonna be very thought.
<unk> as a is to looking at at the overall situation.
Okay trip terrific last one from me maybe for John is and then you've got a lot of liquidity in place we've enhanced it which is good to see.
It looks like it's certainly you know very large in relation to what your cash burn might be this year, but just any color around that would be great as to how you see the your unfolding with obviously a lot of moving pieces right now.
Yeah. Thanks, Greg.
You know, it's it's very difficult to understand how the year is going to unfold because you're right.
There are so many moving pieces and they're all moving with the velocity that we haven't really seen before so what we've done in this is very consistent with our management philosophy.
As we have been very conservative in the way that weve positioned our balance sheet position to our liquidity.
In the way, we've cut costs to make sure that were.
Sustainable regardless, what happens through the end of year, but what we've done is on the liquidity side is we've added a 1.1 billion.
Revolver to our portfolio.
Just to increase our liquidity through time.
We've also got 4.5 billion as you know I'm in our syndicated facilities, we've got a 1.2 billion dollar.
So into that matures on November 22, and 3.3 that matures on November 23rd So altogether were up 5.6.
Billion of banking facilities today, so on top of that we also have some bilaterals.
Got one six.
Uncommitted bilateral theres about a billion of that that's available for L.C. support and about 600 million of that.
The can be drawn upon so all in its about 6.7 billion and we think that will be adequate.
To get us through sort of anything that the a the year is going to throw at us and certainly beyond into 2020 ones, we feel very good.
About that no in terms of sort of our cash burn in or profile. It you're right. It is really difficult today to get a firm hand on it because things are moving around.
But the way that we look at it <unk> is through a breakeven analysis and what we've done through the year by cutting the capital in cutting the dividend and taking the prudent steps that Alex talked about.
On the operating in DNA side, as we've really reduced are all in cash breakeven to about $38 Dolby T I.
That's predicated.
On a 70 cents dollar sort of a $13 Chicago crack WT I'd WCS differential $13 and a C differential to dobies vote, a $3 and the way to think about our cash burn on all in cash basis and that would include capital.
As we break even at about $38 and then on an operating.
Cash flow basis about $33, so taking up the the capital component brings us down to 33.
So for every dollar that there will be that our cash breakeven exceeds WT right. The annualizing burn is about $180 million to $150 million.
So if WT I averaged 38 quarter $28. For example, we would expect our annualized debt to grow by $1.5 billion to $1.8 billion.
As you mentioned this is really fluid and it really depends and all the underlying assumptions because the break even really as a calculated number that's how we think about it and that's how probably you can best model it.
I'm understanding the sensitivities all around the.
Maybe Alex you might want to talk a little bit about the additional liquidity that we've been thinking through with the governments as well.
Sure.
I think you know I mean, there's been a lot of talk about this and you know we we have had a.
Significant discussion with both the the Alberta government and the federal government and.
Both about the need for for incremental liquidity support and you know I think it that there are a relatively small number of companies like synovus and a number of the bigger companies who have.
I have been able to put in place or liquidity.
To support their business through this downturn, but I think it's fair to say that that does not apply to the entire industry. There is a a really significant need for government to provide immediate liquidity support.
To the industry and we've obviously been hearing for weeks that that support is coming weeks of Boston.
The industry is is still waiting and particularly you know the larger side of the industry the government the feds.
Good announced some some support that the at the smaller side.
Of the business and.
You know I think it's it's fair to say the province, and the country, our amassing significant deficits as a result of this crisis.
And once the current situation passes were going to need a rapid injection of revenue.
To support candidates economic recovery and I think it's as most people know this industry is the largest contributor to Canadian GDP.
You know weighed on nine it was the energy industry that actually led the recovery a in Canada and I think.
With adequate liquidity support from government.
I think the puts the industry.
Can do that again and you know I I think back to all eight or nine you don't the significant liquidity support that was provided to the Canadian auto industry <unk>, an important industry to to the country, but a much smaller industry. A then be the energy industry.
I I think there are so there are obviously precedence to this one last thing I would say on that is I don't think the industry is looking for a hand out at all what they're looking for as a temporary safety now and just as a final point I do want to give.
A a bit of an appreciation to the Canadian banks I and all my discussions with them I think to an institution or they see the importance of this industry and they have been very very strong it's andy beyond the industry in working with the industry to provide liquidity.
So just a bit of a shout out there.
So that that's that probably is enough on that thanks, Greg.
Yeah, no thanks, guys great answers.
Next question comes from M. leaching with Goldman Sachs.
Hi, Good morning, just a follow up from one of the Greg's question if I may.
During November 2018, I remember production across Foster Creek, Christina Lake was taking down by about 100000 barrels today, how should we think about the 60000 barrels that you're talking about today. That's you know a matter of taking the time to stay clear juice production, but.
And so therefore should we be expecting a CMO production cuts and then in the near term or is there something else that were not considering yeah.
No I mean, the thanks. Thanks for the the question Emilie the is as I said at a in a previous comment.
With with ER with respect to our decisions in the field. We're looking at those on a daily basis and our decision is very much based on our week covering our variable costs and are we making the contribution.
To our fixed costs and so those cuts that we have made today or are in line with that data analysis and as I said, we do that analysis on a daily basis back back in the fourth quarter of of 18, you know we did demonstrate we were able to take those.
Production cuts or that dynamic storage a down Oh, we were able to take a production down about 100000 barrels a day, we are completely comfortable that we could do that.
For a significant period of time and we believe that we could go further with further deeper production cuts if we need to and that's something that we've been looking out for quite a while here.
Got it thanks helpful and my follow up is just around the Capex profile for the remainder of the young given a full year guidance I think the midpoint is around $800 million I think going full on quarterly basis. This would imply about 170, Mel what does this mean for operations I don't necessarily same.
Capex at such low level I guess the question what types of activities make the cotton what doesn't thank you.
Nor is it do you want to take a take a shot at though.
Yes sure.
Constantly equivalent to retain the number old pods.
The ready to start up.
From a phase G development, well just like them on off to snow, we don't need to production. So those are the kind of cost stuff like we actually oh, no exposing ourselves to.
Additionally, we're really only spending money on the lowest cost <unk> block maybe hub activity wise. So we basically have just balancing been able to retain a little production and having the ability to have on pulp.
In the future as the oil price improves and I'd like some proof.
Yeah, and I think a Emily I would just add I I think we're quite confident that that kind of a of capital expenditure you're seeing there that we've we've announced we we can maintain that without much difficulty or certainly for the balance of the year and.
If things work [laughter].
And if things continue to be challenging in 2021, we think there's that we can continue for an extended period, but if you think about you know sustaining capital I think right now were down does sort of $2.50 to 60, something in that range I I don't think people should.
Think of that as sustainable I think you should think about us as we come out of this moving back up to that kind to.
Four to six dollar kind of range, you've seen us give guidance on in the past, but but we can certainly keep at this level.
Well, maintaining the integrity safety.
And production for an extended period of time.
Got it that's helpful. Thank you.
Next question comes from Manav Gupta with credit Suisse.
Oh, Hi, guys can you help us understand a little bit how the condensate price slide was a headwind in one Q and add condensate prices have come in materially how should we expect that helped you in terms of bitumen realizations as be going to Twoq you actually Q.
Well I'll leave that to John or Keith can arm wrestle as to who wants to take that one.
Why don't what am I take a crack at it Alex and then and then Keith can provide some color someone of what we source condensate from from two pools resource condensate from Western Canada, and we also source condensate.
From the U.S. fruit from Mont Belvieu.
And the way they the condensate travels from Mont Belvieu users, usually at least to two or three month lag between that time, we procure the condensate and the time that it comes up explore coaching.
Into Fort Saskatchewan and gets to our facilities gets turned around and ultimately gets you get sold so we carry our inventory I'm on a weighted cost basis, and then that flows through the financials as its consumed so my expectation is that the condensate.
Lag that you're seeing in Q1 will continue through this month and then by the time, we get through mid may will be into the much cheaper condensate.
But you see in the market today.
[laughter] quick follow up here is you have suspended for any contract I'm just trying to understand here the transportation and blending costs at Foster Creek is still on the high end side done it took to Christina like instead of point any kind of start thinking about you know.
Oh, the that's propagation costs at Topotecan, blending and Muslim Alpha sounds like across four different shocking to come down as some of these lean contracts rolling off.
Yes, John again, you're exactly right. So in Q1, we move much more the Foster Creek production through our rail connectivity to the Gulf Coast.
And you'll see in our results we were still moving about 100000 barrels a day through the quarter.
That will.
The ramp down or is ramped down as of today, so what you'll see.
Twofold is you'll see the the impact of the reduced rail costs in your transportation and blending as well as the reduced cost of condensate.
Coming through in Q2.
Thank you guys think about taking my question.
No worries.
Question comes from Phil Gresh with JP Morgan.
Hey, Good morning actually my first question was a follow up just on the transportation costs with respect to the rail.
Contracts that you have.
I think in the past you said that maybe about a third of those costs are fixed.
So I guess should we expect to see.
Yes, maybe you could just elaborate a little bit more and how that would influence to Q and going forward in terms of your transportation.
Costs and whether there is any flexibility around us.
Well, if John again, maybe I'll speak to the cost and then I'll, let Keith talked to how they're managing down that business.
Oh, and where they are today, but if you look at our full rail costs on a fully loaded basis for one year, it's about $81 million.
By ramping down and these are run rate numbers, so you'll have to give them the appropriate.
Sequencing through the through the year, but when we when we ramped them down including transfer, including the cost of 'em storage for the railcars.
The costs get about $18 million here. So there's a there's a very significant.
Reduction in the.
Railcars for when you move from fixed cost of 18 to the fully loaded plus variable of 81.
So that's the net savings in one of the reasons that we chose to ramp down rail when we did.
It looks increasingly like that was the right decision based on where differentials have gone is we're only really looking at about a 39 million dollar uptick by moving our crude through Bruderheim and hardisty to the Gulf coast. So with that may be turned it over to Keith and he can talk little bit more operationally about what we're doing with or rail business.
Yes, thanks, John So so were essentially a ramp down at the end of April we.
I spent a little bit of capital back and not 2019.
Some storage capacity for cars that are Burger hundred facility. So that's in place to restore encouraged there. We also have destination locations, where we can store. Some cars. So so we actually have the ability to utilize that those cars for storage if needed or quickly ramp back up the program. If prices indicated are shown that but John.
That sounds exactly right that.
Kind of ongoing fixed costs or are in that 20% range of.
Where we were running out when we ran full program.
Okay, great. Thank you.
Second question is a follow up John to all of your comments around the Breakevens, which was very helpful. Just curious on the the tax situation. This year your guidance had said no cash taxes, it's obviously.
Material pretax losses, I guess, Oh, I presume all of that is generally factored into the way you frame that that breakeven, but I just want to make sure I understood. If there's any kind of in store.
Tax situation for hasn't those numbers. Thank you.
Yes, so we're not anticipating being cash taxable in Canada or the U.S. this year and we've really.
In a position we're all of our add backs or have been largely used up so there's nothing to recover from prior years. So zero cash taxes is really what you should be modeling for a 2020.
Okay, great. Thank you.
Next question comes from them with Bank of America.
Thanks, Good morning.
Alex Good morning, and it's just a hate to follow up on the earlier question on.
On the dynamic storage, so if I'm looking at slide nine and.
100000 barrels a day number which obviously you guys have done and for Q 18, you mentioned maintaining reservoir integrity.
First off the question on <unk>, you mentioned earlier I think the 100000 balance or they could be a little higher but could you talk a little bit about to be able to consider to avoid the reserve or damage issue.
Sure why don't no redid. It did you want to yep sort of give your thoughts on that.
Yeah sure I'm, so what we hope we're doing when we actually curtailing just now is that actually just slowing down.
I'm going to the surface on that allows us to routine oil as much as we want to send the reservoir.
Fluid levels, just rise and that's the that's a dynamic storage so as we do though.
We continue to inject steam into the the various pods and depending on how will the off to actually keep the temperature cracked and actually keep the pod flowing with oil. So we're very comfortable that we could do this for.
A long time, basically and continue to store, obviously to doyle within but as a lot itself. So that's the principal little bit.
And Norway, maybe maybe talk just a little bit about you know what what integrity issues with the reservoir you know, we're managing to ensure that the the a reservoir it's not damaged in anyway.
Yes, certainly obviously, what we do have been good actually extracting oil is where she thing but I supply.
And what actually creating a common old compete which then fluids loves the oil to slow the and its extracted. So what we're doing is just keeping the dynamics of thought to keep the reservoirs are the click temperature, we also Cowen Jay.
Oh gosh I'm in a number of deposits and that's to keep that session at the right level and that's how we ensure that the reservoir will always be you know a good condition to flow oil and that we're balancing here how long, it's going to take us to get back to bump up to full production as we do that so that's how we.
Protect the reservoir.
Yeah.
<unk> I would I would say you know one of the one of the benefits that we have a if you can call. It a benefit is having gone through this in sort of Q4.
2018 in the early part of 2019.
It is as we dialed back production you know with dynamic storage. We we did a great deal of analysis at that time.
And since that time have have looked back at all of the decisions. We made and I think it's fair to say that noria and his team are extremely confident that we can maintain 100000 plus barrels a day for an extended period without without any concern to reservoir integrity.
Thanks very helpful not an already thanks for the color Alex said, that's my follow up is perhaps for you on when you're thinking about the the crude by rail program and I'm thinking longer term, a 21 and beyond and I'm thinking about rail versus buy clearly biplane spaces or.
I spaces, freeing up and when you're thinking about the plus arbitrage of transportation as it plays out over time.
And with CBR being pot of money for some time, how what are you thinking about the balance of the two and strategically not more more long term <unk>, sorry between pipeline and I missed.
By rail Yep, Yeah, you know I I mean, I think for US. It if you don't you heard.
John talk about Ah you know what the fixed cost for that program are and what the all in costs are in for for me. It. It really are relates to where you know what are the market eat graphs challenges getting out getting out of Alberta, and getting to our markets and as you quite rightly.
He noted as production is coming off in Alberta differentials are narrowing a and there's really not a call on rail right now, but I I do expect I don't want in any way shape or form view. This situation, we're in to be a permanent or to become the new normal and and I expect.
ER as as we see a global demand then and the lower 48 demand improved I expect we're going to see that production come back on in the province, largely if not entirely. So we just we we really you know we kind of ER, we kind of.
Hey, Jeff on our there is their economics are in moving oil by rail.
And and you will recall that most of our railcar trucks are relatively short term in duration.
And I think there I I suspect there could be a point here within the terminals contracts, where we may.
See an opportunity to move but because of our low fixed costs.
So shaded with it or if it's not there. It's you know it's really not of a big imposition on US and you know we are we do remain confident or with the larger <unk> pipeline development projects that you know over the kind of a two to three years.
Expect we're going to get some relief there. So you know which is really why we've we've kept the rail commitments to a relatively short tenure.
Appreciate the color Alex Thank you.
No worries next question comes from Benny Wong with Morgan Stanley.
Hey, guys. Good morning, Thanks for taking my question I hope everybody on the line is staying safe and healthy.
First question is is really around storage, obviously, a lot of focus in a market around what's in tank tops and congestion just just wondering if you could maybe give us a no update in terms of.
What the storage or inventory levels are in Alberta, how that situation playing out and personal the specifically beyond a deeper production cuts or curtailments you mentioned, maybe maybe if there's any color you could provide on the marketing storage capability side.
You guys have to navigate through this as well.
Sure. Thanks span a wide Keith why don't why don't you take that and talk about what we're seeing in this in the storage situation or in in Canada, and then you can maybe talk a little bit about our storage.
Opportunity.
Sure Alex Thanks for the question Benny you know, maybe I'll, Oh, I'll step back and just to answer but other question on how we're looking at kind of the production levels that we are at and and really running to a a a variable cost snapped back when we look at that we look at a bunch of things you. Obviously are variable cost, but the company has done a great job.
And cutting its cost of and pass for five years to get them really low but one of the other things. Obviously, we are looking at is kinda demand for the product and inventory levels and I think this is kind of where you're going with your question Ben and a you know we currently see Alberta, essentially flat on inventory levels, so kind of sitting in that 32 to three.
33 million barrel range, and and not really a material builds kinda weaken week. So we actually think the market is reacting to the the requirement to reduce production and balancing.
Balancing on that on top of but you know cenovus has a significant storage capacity, both in Alberta as well as down in the U.S. Gulf coast in U.S. that exceeds over 10 million barrels. So so we have a lot of opportunity to use that storage to capture Merck.
Opportunities that become available both here in Alberta, as well is down in the Gulf Coast.
Yeah, Ben if any it's Alex you know the the <unk> you know, there's there's obviously pros and cons in every business, but you know I think one of the real attractive features of our businesses are very very low variable cost of production, which is I think most people know is really kind of in the very low single.
Dollars per barrel, which which is Ah you know, which allows us to make a contribution.
Two or fixed costs at a at a at a very low.
Price, which which is a you know certainly different than than other other businesses. So that that is that's helpful to us in this present circumstances.
Great. That's that's very helpful. Appreciate those thoughts my follow up question.
I'll just follow up on the condensate <unk> question earlier, but maybe looking a little further out just just curious in terms of.
Outlooks in terms of your where your condensate Cogs is going to trend a little bit more in the medium term you know I think obviously, there to potentially lower demand and near term with production cost and maybe more of a moderate growth outlook, particularly in the oil sands a in a normalized environment, but the same time, we could potentially see less supply coming from the U.S.
As well just just curious to see how you see that balance out as you kind of look at your your input cost over the medium term.
Sure Keith what why don't you take a shot at them.
Yeah. Thanks, Bonnie obviously, a lot of volatility in all commodity prices right now condensate or.
The exception.
As producers continue to reduce production, we're seeing some of the condensate come back into the market, but obviously, that's somewhat offset by by some other producers even of condensate turning down production. So a lot of volatility.
We're currently seeing at that'd be CCI minus prices over the over the longer term as commodity prices.
Recover back to historical norms, we kind of see it kind of building back up to that W. CCI type pricing, but we do think over the shorter term that.
I would say pricing I will be depressed for a for for the next couple of quarters.
Got it thank you very much guys.
Thanks spending next question comes from Georgia with mortgage Morningstar. Please go ahead.
Thank you just a quick question on how you think long term about.
Good access I think it's been public. That's you know is supported the Canadian mainline push for the take or pay contracts, you're talking about how maybe that's about right.
Reshape your views or if you I still stand by or views.
Sure Keith what why don't you take a shot at that and then I may or may jump them.
Yeah sure Alex So Joe you know in reality market access has been a big Big challenge for Canadian oil producers are historically at least over the past decade.
Obviously, it looks like we're starting to see some progress on a couple of the growth project.
TMX is under construction in a few areas I can't sell obviously came up with the recent announcement that supports the provincial government and construction started I'm not pipeline. So you know market access for the oil sands producers is is a significant.
Opportunity and it looks like some of those projects are progressing on the mainline Ah you know we have been a supporter of a have a enbridge moving to a mainline nothing has changed there. It does feel like because of the the cobot crisis that that process may or may dray go a little bit longer. So so we'll obviously a participate.
Great and monitor as that progressed through 2020.
Thank you.
Next question comes from Harry Mateer with Barclays.
Hi, good morning.
First question.
It's still over two years before your next bond maturity of Usfive hundred and second after 22, but.
You are going to come out of the cycle with higher debt than you are going in and now you have two or three credit ratings below investment grade. So I'm curious what point do you start to think about preparing for those maturities and then do you know more broadly are there any other liquidity or balance sheet levers you might be considering.
John one of these pick up.
Sure.
Thanks, Harry it's John one of things Harry the we have been.
Absolutely clear about in this company is that we really value those investment grade ratings.
And it's important for this company to have investment grade ratings across the board, but correct you a little bit we'd have to afford investment grade ratings on the one of three.
What I would say I'm too. This is a we come out of this nothing has changed for this company in terms of the strategy in the direction, we're going in.
We are going to be looking at doubling down on on the debt reduction as we drive towards that 5 billion dollar target. We are thinking about the 22 and 23 maturities.
And there's probably more color to come but today, we're really just focused on ensuring we have liquidity to get through this and that we're doing everything we can to cut costs.
But we think we've got adequate liquidity now we're not really looking at anything.
Nuclear left of center I would say in terms of doing something different to think that with the bank facility.
That we've secured through this quarter, we have more than enough liquidity to get through this and then we'll deal with the 20 twos and 20 threes.
Over the coming quarters.
Good thanks for that and up and you're right apologies for overlook India. The deep arrest rating my my follow up.
You've been asked a couple times about condensate dynamics and how those weighed on you in the first quarter and how you know I expect that to go. The next couple of quarters. Just wondering if maybe you can speak a bit more broadly to overall working capital moves for the balance of 2020, and how you see that unfolding.
So I'll speak to that obviously, the working capital in in a depressed commodity price environment.
Comes down and you would've seen now through the quarter as well.
So we typically carry about 20 to 24 million barrels.
In inventory through the cycle and that's roughly split.
Evenly between.
Upstream and downstream so speak does speak to the upstream piece.
We actively manage that down we do take.
Some opportunities to take advantage contango plays with the amount of stores that we've got.
The way you should see going forward is with us ramping down our rail program.
You'll start to see that inventory piece come down in terms of total barrels that we're carrying through the cycle. So that did consume some of our working capital which would be relieved.
And then you again, you'll see the continued.
A relief on the inventory or on the working capital flow through as the full impact of this pricing environment to come closer the financial statements.
Got it thank you.
Next question next year.
They leave with Odlum Brown.
Hi Fi here I was just wondering that net debt to capital ratio reporting or find out to the 30% how close says that two they reach with calculators covenant purposes, I'm, just wondering if not how the non cash onetime write downs affect the ratios as calculated for the Covenant group.
Is it.
Hey, <unk>, John why don't why don't you hit that.
Sure. Thanks, Bye, what I will tell you file as is the the capital ratio of.
Debt to consolidated capital is on a book capital basis, and I will tell you that we will run out of liquidity long before we ever get close to that 65.
Percent range, even if we were carrying something around the 12 billion of debt, we would only be about 40%.
That to a consolidated capital so the write down that we had is de minimis in terms of impacting.
That caused that a covenant.
Okay, but to write downs do affect the covenant calculation for.
Covenant purposes.
Yes, they do.
Okay and I was also wondering about the strategy on the financing strategy as you.
Looking further out we've had a couple of downturns, where having U.S. denominated debt hasn't helped you.
Any thoughts about whether switching the strategy to owning more Canadian dollar denominated debt and future.
Yeah, I mean, you you're exactly right we have tapped the U.S. market in the past and when you kind of think of both the transaction. This company went through.
In 17 increased 17.
You know, that's obviously, a very deep market and very attractive to.
Consumers of capital and you know that still has a very attractive market to us not understanding or notwithstanding with what's happened to our credit ratings.
The Canadian market has really opened up over the next few years and its pricing relatively attractively to the U.S. market.
And you know we like both of those markets I think I think your question really comes into the translation, which you know is noncash until you actually have to pay.
Those funds back and you.
You know at at this point of time I, you know him.
I think about both markets, but I don't necessarily think about it in terms of one being preference to the other outside of the pricing of the debt.
Okay. Thank you.
Next question comes from his help on that with Wall Street Journal.
Hi, everyone I'm.
I'm just wondering if this a recent volatility is making it all we think you're a hedging strategy I know in the past.
So.
I'd like to depend on the balance sheet does this change your posture.
Hi, Matt.
Hey that Paul why don't I, I'll, let John or take a shot at that and then maybe I'll wait and at the end.
Like I'm going to lose my voice.
[laughter] listen we've been we've been really clear and Alex and I are and Keith are absolutely aligned on this the best hedging policy is to have a bulletproof balance sheet.
And we've been also been really clear. The this is a very difficult product that we sell to hedge home.
In a clean way any kind of hedge that you put on dry bitumen you know typically has whom.
It's a dirty hedging here in your view, you're going to have some some pieces of that commodity that you can't hedge out there is no forward market for try bitumen, it's a calculated number with all the different components.
We've also said fundamentally we don't have a at version to hedging. It's just that we want to do it in a way that we're not going to have any and unintended consequences. If we were to go there.
So we haven't necessarily.
You know solve that problem in terms of creating a clean hedge but we've also been unclear as well that at times, we may be opportunistic known this market in a down market like this to have an appetite to hedge at $15.
WT I know.
But as we go forward you know we continue to look at and we continue to think about it.
Maybe you've got some other comments to Alex.
I would like I would agree with everything that the John said and you know I tend to you know I tend to be pretty simple and how I think about hedging decisions and you know as you get down towards the all time historic lows of the commodity for example, W.P.R.W.
You see outside I, just think I'm I'm much less inclined to hedge and as you move up to a higher prices a in relation to historical trading ranges.
That I said, I think I'm I'm <unk> I become a more interested in that but other than that I, yes, I mean hedging today to lock in losses.
Doesn't strike me as a as a have a very thoughtful hedging hedging plan for for the next level while anyway.
Thanks, guys.
Thanks.
Next question comes from Chris Barcode, Calgary Health Harold.
Hi, I have a question a follow up for Alex Alex.
Just a little bit about the liquidity measures from the government I'm wondering what more do you want to see from the federal government on liquidity and how does that fit into the longer term the future of the Canadian oil.
Yeah, Hey, Chris you know I think and and as I said I'm <unk> when I'm talking about liquidity I think it's important to to understand that that I'm I'm I'm really talking about liquidity for the industry rather than necessarily liquidity for four synovus as you heard.
John talk we've already done quite a bit in terms of shoring up and assuring liquidity for the company, but you know that this is this is an extraordinarily important the industry.
For the country or it has taken a an unprecedented yet with the combination of the demand destruction of coal that 19, coupled with.
The the the price war or that we saw a the saudis in Russia enter into early in March.
And an answer and I as I said in my prepared comments I think everybody expects that as its covidien receipts were going to see <unk> global demand come back and I think we'll see a return.
To commodity prices that are the Canadian producers will be a.
Profitable at paying taxes paying wages, but in the interim we have this incredibly acute short term issue.
And I think it it is really important that that governments are there.
You know to support it and to support the industry and I, obviously, it's not just the energy industry. There there's many other industries.
I'd have been similarly affected I, obviously, the aviation industry is one that comes quickly to mind or the hospitality industry and I think it's important that govern the government government step in and ensure some liquidity support to bridge these industry.
<unk> through this very tough time period.
So there, they're there and ER and healthy and able to contribute to the recovery. So that that was really the the message that I was sending then you know there and I don't want us to Jeff.
All that said there are no discussions going on I know that you know the Alberta government has been great to work with I know there are very actively trying to see how what they can do.
And I know, they're talking to the federal government I know the federal government is considering that and I M simply making the point.
This is a solution that the industry in the Canadian economy needs.
In in the very short term. This is this is not going to be very helpful. It for leaf comes to the industry six months from now that's a very urgent short term issue.
Just a follow up does the Canadian industry still need to studied more production in your mind and if so do you think it should be up to the provincial government to do it to their curtailment mechanisms or should they just let the market forces work.
You know, Chris I mean, my observation right now from China, and I I like preface this by saying that we don't have a you know any sort of a unique insight into this a other than our own production but.
I think that.
We are seeing the market right now is working I you know we've seen significant production come off.
In April and and I think everybody is expecting that production to continue to fall.
In may so the market seems to be working and and as a result, I don't know that I see entered an immediate need for the government to step in that I think a really important things, though for people to keep looking out is where it's where are storage levels going into province said you know right now we have.
A reasonable cushion and I think you heard you Chase on mentioned that you know storage and we're not seeing a massive growth right now and in storage, but it's important we watch that in it and if we were to see that start getting moving toward tank tops kind of in that four.
I'd to 43 million barrels of storage and in Alberta at that point things could happen very fast and you could see so there could be some real unanticipated consequences. So I think I think the government doesn't need to step in but I do think it's important for the government to have a plan is.
So what you know the range of options. They they may have in the event that we see storage in the short term kind of heading heading towards its upper limits and and I know, they're thinking about that.
Next question, Thanks, Chris Van den dealing with Canadian.
Hi, Good morning, Thanks for taking my question I have a a couple of questions on the Genie print Silversun and a lot of other companies are having more people work from home I'm wondering if there is a or a permanent or long term savings for the company and do you Uh huh.
This enhanced flexibility and allowing workers more and more choices and I'm not meeting as much office space, particularly in calendar.
You know it's a it's a really good question dad, and ER and I you know I'm I think we're we're only kind of figuring this out right now what what I would tell you. My observation is right now my company seems to be maintaining high low.
Levels of a of productivity and I think you know I think one observation Ah that's that everybody is having is maybe a we don't need to have all these face to face meetings that that used to play.
Our you know most most companies in most industries like I think in some ways. There are some benefits, but I will tell you that I you know I do worry that if this.
I think right now it's kind of been an interesting experiment for five or six weeks.
I do I think the judgment is still to be determined a longer term I I kind of feel that ER. We ultimately we are going to see some productivity concerns a in especially with certain working groups. If this were to continue longer term, but I think I think right now.
Now most companies are finding other able to manage it and without a massive productivity losses, but I think when this is over there it's going to be a really interesting discussion and debate in all industries. A about is there an opportunity for more remote working in <unk> and are there some some financial and other benefits really.
Got it to that.
Okay and also on the Gina.
Given how much you've cut back on on on doing things and so on Hudson other seen a net decrease and its head count compared to last year.
Yeah, I mean, I think one of the one of the benefits. Its synovus Chad you know certainly during that time I've been here you know the company made a lot of really tough decisions.
On staffing.
A number a couple two years three years ago, a and and we really feel that you know were largely at this point.
At an appropriate level bid because of those very tough decisions that we made in the past and you know as as we have ramped down work in the field, we're certainly not employing as many contractors or as as we would've had we had a fully baked and an executed a cat.
Total plan that we would have started.
The year with but yeah right right right now you know I I think a other than that that sort of reduction in our contractor headcount I think we pretty much executed on on the the tough staffing decisions of the company needed to look out.
Great. Thank you.
I think that.
Next question comes from Kevin or land with Bloomberg News.
Hi, Good morning, Thanks for taking my question I know this is a tough one if I just wanted to see.
What you're expecting for how long it might take for oil demand to return to.
To normal or something close to normal and North America, and just your thoughts on the broader supply and demand picture in North America and the in the months ahead.
Yeah. It's you know cabinet that that's a really good question and it's something we you know we we spend a lot of time thinking about and I personally.
And a lot of time thinking about I, you know I think here's what I would say <unk>.
I think you really have to look at how quickly is North America and the rest of the world going to come out of this the social distance seen situation that we're in right now and I think a good example would be China I think were what were seen in China.
So with refined product consumption and demand is that as it is it is basically moving back.
Two pre cold that 19 levels.
And I I think that's I think that's a pretty good teach study for what I hope will happen in North America. We're obviously starting to see you know certain states and we we've heard about our provinces certain of them, a you know starting to execute or thinking about execute executing.
And on kind of cautiously relaxing social distant scene and getting the economy's moving so you know I my own personal view a is that we're probably going to see in North America demand I think we'll see it start increasing here over the next may.
Theres, so and I I would expect to see that.
Significantly increasing the as we move into the summer and I think you know the refineries.
We'll obviously return to.
Ah Ah you know full production <unk> you know over there are more or less full production I think over that time period.
The upstream.
I think we're we're obviously going to see a recovery here too and it's only going to be a extended a little bit because a or to some degree because of the storage builds a that we've seen.
Of crude oil and it's going to take some time to work through those but.
I do expect we're going to start seeing a real improvement on the downstream side in demand heading into the summer.
Thank you.
Thanks, Kevin.
At this time I'll turn the call over presenters.
Well I I don't here I don't hear Sherry here, so on behalf of Synovus and our leadership team I just want to thank everybody.
For a taking the time too.
Here, our presentation and and the question so you've asked and I'd just say.
Hey, Thanks, everyone and please keep safe in these challenging times take care.
This concludes todays conference call you may now disconnect.
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