Q1 2020 Earnings Call
Good day, ladies and gentlemen, and 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 a 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 will have the opportunity opportunity to ask.
Since first at the conclusion of that session members of the media Me. Then ask question. Please be advised that this conference call. It may not be recorded or rebroadcast without the express consent of Cenovus energy I would now like to turn the conference call over to machinery Lynn Director Investor Relations. Please go ahead Ms. Wendy.
Thank you operator, and welcome everyone show, 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 covert 19, we are coming to you today not from our conference room downtown but via cell phone from our respective home offices.
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 shutdown.
On the call to answer your questions.
The rest of our leadership team is in listen only mode today.
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 risks risk factors and assumptions relevant to this discussion.
Additional information is available in our annual Mdna and our most recent annual information form and form 40 F.
The quarterly results have been presented in Canadian dollars and on a before royalties basis.
[noise], we have also posted our results on our website at Synovus Dot Com Alex 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. 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 19 pandemic to predict the health and safety of our staff in service providers in the continuity of our business virtually all of our office staff and some of our field staff, we don't need.
To be at site for our operations to continue running safely and smoothly have been directed to work from home at our field operations, we've reduced the number of staff on site.
Publish the extensive physical distancing measures stepped up cleaning procedures implement that active screening for people traveling to site brought in mandatory shelf isolation policies and weve restricted business travel today, we have not had a confirm case of cobot 19 at 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 how synovus is positioned to navigate through.
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, and Russia resulted in a significant drop in benchmark prices.
For oil and refined products.
Well, we expect to supply demand imbalance to be relatively short term in nature. It has led to a rapid the decline in share valuations for global energy companies, including Synovus.
And the has temporarily impacted financial results.
For our industry and for 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 relentlessly focused on paying 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.
It has 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 pass the markets will recover.
And as 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't influenced the macroeconomic environment Theres 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.
And in 2019, we demonstrated that in a west, Texas intermediate environment of $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 Wi Fi 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 on March 9th and again on April 2nd we took advantage of the flexibility in our business to make sense.
Nipigon 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 cut plant capital spending by $600 million and reduced our forecast operating results for this year by about $100 million.
We trimmed our plan gionee costs 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 our 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 weve work to improve or 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 our 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.
Well the significant changes in the macroeconomic and business environment over the last couple of months of impacted 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, what I'm going to do is so I'll I'll, probably do a little quarterbacking and either take the color I'll 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 Greg Pardy 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 is it relatively stable.
Why don't I, Hey, Greg, It's Alex why don't I I'll have norrie.
Respond to that and then I might give a little bit of color at the backend.
Sure Hi, its noted ramzi yet.
Just just little bit of context, we have taken about 60000 Boes a day a dime from Christina Lake that's correct on a lot of its driven by our money to treat production curtailment tops that we actually house in.
Calgary.
Sure.
Okay and is this is this is 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 tailed bought some production.
So we have very little thanks.
And then it will vehicle.
Cost football so hope of doing just snow is really just optimizing volume rather than volume. So at this stage, we're not putting it into storage, but we have the ability to how 'bout flexible ability to do that hasn't been acquired.
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 business is we have very very low variable.
Cost of production and the you know, we're always going to do the right thing and <unk> as long as a as we are covering our variable costs and making a contribution to the fixed costs. Generally you know we would generally look to keep that production goal.
Going Oh, we're going to be very thoughtful as a as 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.
Yes, Thanks, Greg.
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 we've positioned our balance sheet position to our liquidity.
And the way we've cut costs to make sure that were sustainable regardless what happens through the end of the year, but what we've done is on the liquidity side is we've added a 1.1 billion.
[noise] revolver to our portfolio.
Just to increase that liquidity through time.
And we've also got 4.5 billion as you know I'm in our syndicated facilities. We've got a 1.2 billion dollar facility that matures on November 22, 3.3 that matures on November 23rd So altogether were up 5.6.
<unk> billion of banking facilities today on top of that we also have some bilaterals.
We've got 1.6.
Of uncommitted bilateral theres about a billion of that that's available for LCD support and about 600 million of the.
On 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 with the the year is going to throw at us and certainly beyond into 2020 ones, we feel very good.
Of both that no in terms of sort of our cash burn or profile. It you're right. It is really difficult today to get a firm hands on it because things are moving around.
But the way that we look at it.
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 to bode.
On the operating in DNA side, as we've really reduced are all in cash breakeven to about $38 there'll be a T.I.
Mass predicated.
On a 70 cents dollar sort of a $13 Chicago crack WT I'd WCS differential $13 and a C differential to dobies.
$3 and way to think about our cash burn a hole in cash basis and that would include capital.
As we break even at about $38 and they want to operating.
Cash flow basis about $33, so taking over the the capital component range just over 33.
So for every dollar that they'll be that our cash breakeven exceeds WT guy the annualized burn is about $180 million to $150 million.
So if WT I averaged 38 or $28 for example, we would expect.
Our annualized debt to grow by $1.5 billion to $1.8 billion.
But as you mentioned this is really fluid and it really depends at 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 of both to the additional liquidity that we were 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 you know boat about the need for for incremental liquidity support then.
I think it that there are a relatively small number of companies like synovus and a number of the bigger companies, who you don't have been able to put in place or liquidity or 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 support is becoming a week's of Boston or the industry is is still waiting and particularly you know the larger side of the industry the government the feds.
Did announced some some support to be a smaller side.
Of the business and.
You know I think it's it's fair to say the province in 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.
In a way to own nine it was the energy industry that actually led the recovery a in Canada, and I think a with with adequate liquidity support from government or I think the opposite the industry I can do that again and you know I I think back to all laid on nine you don't want.
The significant liquidity support that was provided to the Canadian auto industry.
Important industry to to the country, but a much smaller industry.
Then the energy industry.
I I think there are so there are obviously precedence to this one last thing I would say on that is you know 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 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 its daddy beyond the industry.
In working with the industry to provide liquidity, so just a bit of a shout out there.
So that that that probably isn't enough on that thanks, Greg.
Yeah, no thanks, guys great answers.
Next question comes from Emily Kim with Goldman Sachs.
Hi, Good morning, just to follow up from one of them Greg's question, if I may.
Oh during November 2018, I remember production across Foster Creek, Christina Lake was taking down by about 100000 miles today, how should we think about the 60000 barrels that you're talking about today that you know a matter of taking the time to stay clear juice production funnel and so therefore should we be expecting me.
Remote production cuts and then in the meantime, well is that something else that why not considering yeah.
No I mean, a is it. Thanks. Thanks for the question Emilie the as I said at a in a previous a comment.
But with a with respect to our decisions in the field you know we're looking at those on a daily basis spend and ours. Its they've done is very much based on you know are weak covering our variable costs and are we making a 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, a 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.
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 awhile here.
Got it thanks, that's helpful and and my follow up is that 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 forward 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 activity make the cotton what doesn't thank you.
Nor do you want to take a take a shot at though.
Yes, sure at Christina Lake was thought to retain the number old pods.
The already to stop <unk> from a phase G development well just last name on off just now we don't need to production. So those are the kinda cost stuff going on but we actually a note exposing ourselves to additionally, we're really only spending money on the lowest cost netback maybe.
How about activity wise, so we basically I, just balancing been able to entertain a little production and having the ability to ramp up.
In the future as the oil price improvement on that likes improve.
Yeah, and I think a Emily I would just dad I I think we're quite confident that that kind of a of capital expenditure, you're seeing or that we've we've announced last week, 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 of you know four to $6 kind of range, you've seen us give guidance on in the past, but but we can certainly keep at this level, a while maintaining the integrity safety ER and production.
No 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 the headwind in one Q and add condensate prices have come in materially how should we expect that Henson comes up bitumen realizations as be going to to kill antique you.
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. So whenever 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, there's usually at least a two or three month lag between the time, we procure the condensate and the time that it comes up explore coaching.
Into Fort Saskatchewan, and it 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 is 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 a mid may will be into the much cheaper condensate.
But you see in the market today.
[laughter] quick follow up head is you have suspended for any contract I'm just trying to understand here the transportation and blending cost at Foster Creek is still on the high end side done it took christina like instead of point when he kind of start thinking about you know.
Oh, the that transformation costs at California fans attending a more from call. It sounds like a crosspollination shopping to come down that's some of these lean contracts rolling off.
Yes, John again, you're exactly right. So in Q1, we move much more of 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 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. Thanks for taking my question.
No worries.
Next 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 had I.
I think in the past you you've said that maybe about a third of those costs are fixed.
So I guess should we expect to see I guess, 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.
So it's 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 ramp them down including transfer, including the cost of 'em storage for the railcars.
Costs get to both $18 million here. So there's a there's a very significant.
Reduction in the railcars for when you move from a 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 and it looks increasingly like that was the right decision based on where differentials are going.
As we were only really looking at about a 39 million dollar uptick by moving our crude through bruderheim and hard to see to the Gulf coast. So with that I'll, maybe turn it over to Keith and he can talk little bit more operationally about what we're doing with their rail business.
Yeah. Thanks, John So so were essentially a ramp down at the end of April we we spent a little bit of capital back in 2019 built at some storage capacity for cars that are Burger Hot facility. So that's in place or store in curves. There. We also have destination locations, where we can store suncors. So so we actually.
You have the ability to utilize that those terms for storage if needed or quickly ramp backup. The program. If prices indicated are shown that but John side. It sounds exactly right that you know kind of ongoing fixed costs or are in that 20% range of where we're running out when we ran the full program.
Okay. Great. Thank you second question is a follow up John to all of your comments around because the Breakevens, which was very helpful. Just curious on the the tax situation. This year. Your guidance had said no cap specs that aside.
See you know with material pretax losses, I guess, Oh I presume, although that is generally is factored into.
The way you framed that that breakeven by just wanted to make sure I understood. If there's any kind of influence that that 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 I'm 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 20.
20.
Okay, great. Thank you.
Next question comes from them with Bank of America.
Thanks, Good morning.
Alex Good morning, and 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 in for Q 18, you mentioned maintaining reservoir integrity.
First off the question on <unk>, you mentioned earlier I think the hundred thousand relative 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 well be overdoing it wouldn't be out your curtailing just now is that actually just slowing down a rod pumps the pump loyal to the surface on that allows us to routine oil as much as we launch in 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 various pods and depending on how well. They are two actually keep the temperature cracked and actually keep that popped flowing but 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 principle of it.
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.
Yeah, certainly obviously, what we do have been good actually extracting oil is where she ting, but as a walk.
And what actually creating a common old of heat, which then fluids loves the oil to flow Doug and its extracted. So what we're doing is just keeping the dynamics of thought to keep the reservoirs are the check 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 do we ensure that the reservoir will always be not a good condition to flow oils, and that's what balancing here how long, it's going to take us to get back to ramp up to full production as we do that so that's how it.
Protect the reservoir.
Yeah.
<unk> I would I would say you know one of the one of the benefits that we had a phone call. It a benefit is having gone through this in sort of Q4.
2018, and 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 look 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 nor 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.
21, and beyond and I'm thinking about rail versus five clearly biplane spaces or by spaces, freeing up and when you're thinking about the cost arbitrage of transportation as it plays out over time.
And with CBR being pot of money for some time, how are you thinking about the balance of the two and strategically not more more longer term <unk>, sorry between pipeline and I missed.
And by rail Yep, Yeah, you know I I mean, I think for upset if you know when you heard a John talk about Ah you know what the fixed cost for that program are and what the all in costs are in for me. It. It really are relates to where you know what are the market.
He graphs challenges getting out getting out of Alberta, and getting to our markets and as you quite rightly 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.
Our view this situation we're in to be a permanent or to become the new normal and and I expect a 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 we kind of ER, we kind of gauge it on our there is their economics.
In in moving oil by rail a 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 term of those contracts, where we may.
See an opportunity to move but because of our low fixed cost.
Associated 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, a I 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, that's a staying safe and healthy.
First question is is really around storage, obviously, a lot of focus in a market around which in tank tops and congestion. Just just wondering if you can maybe give us an update in terms of.
What the storage our inventory levels are in Alberta, or how that situation playing out and personal what specifically you know 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.
Do you guys have to navigate through this as well.
Sure. Thanks, Betty why I've, 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 ER and thanks for the question Benny you know, maybe all 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 perhaps four or five years to get them really low but one of the other things. Obviously, we are looking at is it's kinda demand for the product and inventory levels and I think that's just 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 week by 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 the capture market.
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 if I think most people know is really kind of in the very low single.
<unk> dollars per barrel, which which is Ah you know, which allows us to make a contribution.
Two or fixed cost said at a at a at a very low.
Price, which you know which is a you know certainly different than than you know other other businesses. So that that is Ah 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 your outlook 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 potentially lower demand in near term with production cost and maybe more of a moderate cocowalk, particularly in the oil.
Sends a in a in a normalized environment, but the same time, when we could potentially see less supply coming from the U.S. as well just just curious and see how you see that balance out as you kind of look at your your input cost over the medium Tom.
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 no exception you know as 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 of the producers even of condensate turning down production. So a lot of volatility Oh, we're currently seeing they'd be CCI minus prices.
Over the over the longer term as commodity prices.
Recover back to historical norms, we kinda see it kind of building back up to that W.G. I take pricing, but we do think over the shorter term that condensate pricing I will be depressed for a for for the next couple of quarters.
Got it thank you very much guys.
Like spending next question comes from Joe Jennie O with mortgage Morningstar. Please go ahead.
Thank you just a quick question on how you think long term about market access I think it's been public pets and always supported the Canadian mainline push for the take or pay contract can you talk about how maybe this environment could have reshaped your views or if you are supposed to end buyer I abuse.
Sure Keith what why don't you take a shot of them and 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 projects.
She amex's is under construction in a few areas I catch all obviously came up with the recent announcement that support the provincial government and construction started I'm not pipeline. So no 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 Oh, we have been a supporter of Ah of Enbridge moving to a mainline nothing has changed there. It does feel like because of the cobot crisis that that process may or may Drake out a little bit longer. So so we'll obviously a participate.
Ladies 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 and you know second after 22, but.
You're gonna come out of the cycle with higher debt than you had going in and now you have two or three credit ratings below investment grade. So I'm curious if the 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 leverage you might be considering.
John what are you pick up.
Sure. Thanks, Harry it's John one of things Harry that we haven't 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 up cracked a little bit we'd have to afford investment grade ratings.
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 a the 22 and 23 maturities.
And there's probably more color to come but today, we're really just focused on ensuring we have the 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.
Look are left of center, where I would say in terms of doing something different to think that with the bank facility.
That we've secured through this quarter I'm, we have more than enough liquidity to go through this and then we'll deal with a 20 twos and 20 threes.
Over the coming quarters.
Got it thanks for that and up and you're right apologies for overlooking the the deep arrest rating my my follow up.
Even asked a couple times about condensate dynamics and you know how those weighed on you in the first quarter and how you 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 of moves for the balance of 2020, and how you see that unfolding.
So I'll speak to that obviously, the working capital in and in a depressed commodity price environment comes down it would have seen them 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 a inventory piece come down in terms of total barrels that were carried through the cycle. So that did consume some of our working capital which will be relieved.
And then you again, you'll see the continued.
Relief on the inventory or on the working capital flow through as the full impact of this pricing environment to flow through the financial statements.
Got it thank you.
Next question next year.
Hey, Lee with Odlum Brown.
Hi Fi here I was just wondering if they had net debt to capital ratio reporting your find out to the 30% how close says that two they ratio with calculators covenant purposes, I'm, just wondering if and how the non cash onetime write downs effect a the ratio.
As calculated for the covenant purposes.
Hey, <unk>, John why don't why don't you hit that.
Sure. Thanks, Bye, what I will tell you find as is the the capital ratio of.
Death 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 that we would only be above 40%.
[noise] debt to consolidated capital. So the the write down that we had is de minimis in terms of impacting that caused that a covenant.
Okay back to write downs do affect the covenant calculation for.
Covenant purposes.
Yes, they do.
Okay and I was also wondering about the strategy on that [laughter] financing strategy has <unk> like further out we've had a couple of downturns, where having U.S. denominated debt hasn't helped to any thoughts about whether switching this gratitude only more Canadian dollar denominated debt in future.
Yeah, I mean it.
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.
17 increased 17, you know that's obviously, a very deep working very attractive to.
Consumers of capital and you know that's still is a very attractive market to us not understanding or notwithstanding what's what's happened to our credit ratings.
You know the Canadian market has really require 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.
No at this point of time I, you know him.
You know I 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 how long that with Wall Street Journal.
Oh hi, everyone.
I'm just wondering if this a recent volatility is making at all we think you're a hedging strategy I know in the past you said you don't like to depend on the balance sheet does this change your posture.
Hi, Matt.
What if it's all why don't I I'll, let John or take a shot at that 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 money or and Keith are absolutely aligned on this that 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.
In a clean way any kind of hedge that you put on dry bitumen you know typically has.
Oh, it's a dirty hedge in any of you you're going to have some some pieces of that commodity that you can't hedge out there is no forward market for try bitch minutes, 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 gonna have any of that 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 no. This market in a down market like this to have an appetite to hedge at $15.
W. T I know.
But as we go forward you know we continue to look at it and we continue to think about it.
Maybe you've got some other comments to Alex.
Yeah, I I would agree with everything a that the John said and you know I tend to you know I tend to be pretty simple in 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. tea.
Our WCS fine 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, then I think I'm I'm <unk> I'd become a more interested in that.
Other than that I, yeah, I mean hedging today to lock in losses or doesn't strike me as Ah Ah It's a very.
Very thoughtful hedging hedging plant for for the next of a while anyway.
Thanks, guys.
Thanks.
Next question comes from Chris Barcode Calgary help Harold.
Hi, I have a question a follow up for Alex Alex talked 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 we've already are 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 a it has taken a an unprecedented yeah with the combination of the demand destruction of coal that 19, coupled with the 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.
To commodity prices that are the Canadian producers will be profitable at paying taxes pain wages, but in the interim we have this incredibly acute short term issue and I think it it is really important.
And that that governments are there.
You know to support it had to support the industry and I, obviously, it's not just the energy industry. There there's many other industries.
That have been similarly affected I you know 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 or government step in and ensure some liquidity support to bridge these industry.
Trees 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's you know that that there are no discussions going on I I know that you know the Alberta government has been great to work with I know there.
A very actively trying to see how what they can do a and I know they're talking to the federal government I know the federal government is considering that then 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 you know Anna 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 you know 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 a that production to continue to fall in may so the market seems to be working then 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 thing though for people to keep looking.
That 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 mention that Ah Ah you know storage, where we're not seeing.
A massive growth right now 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 40 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 as to 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 toward.
It's a it's upper limits and and I know, they're thinking about that.
Next question. Thanks again.
Dealing with Canadian pets.
Hi, Good morning, Thanks for taking my question I had a a couple of questions on the Genie front sound listen 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 or the company and do you, Oh death, or enhanced flexibility and allowing workers more more choices.
And I'm not needing as much office space, particularly in calendar.
You know it's a it's a really good question data and ER and I you know I'm I 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.
It seems to be maintaining high levels of a of productivity and I think you know I I think one observation 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 and most industries I 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 in an interesting experiment for five or six weeks you know I do I think the judgment is still to be determined a longer term I I kind of feel that we ultimately we are going to see some productivity concerns.
Hi Inn, especially with certain working groups. If this were to continue a longer term, but I think I think right now most companies are finding a they're able to manage it and ER without a massive productivity loss, but I think when this is over there it's going to be a really interesting discussion and debate in all industries or.
About is there an opportunity for more remote working in <unk> and are there some some financial and other benefits related to that.
Okay and also on the Gina.
Given how much a you've cut back on on on doing things and so on has another seen a net decrease in in its head count compared to last year.
Yeah, I mean, I think one of the one of the benefits. It's an over Chad you know certainly during that time I've been here you know the company made a lot of really tough decisions. You know on staffing you know a number a couple two years three years ago.
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 is as we have ramped down work in the field a we're certainly not employed as many contractors.
As as we would've had we had a fully baked and an executed a capital plan that we would have started a 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 at the company needed to look out.
Okay. Thank you [noise].
I think that.
Next question comes from Kevin or land with the bird.
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 a to normal or something close to normal and in North America and just your thoughts on the broader supply and demand picture in North America and in the months ahead.
Yeah. It 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 you know 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 distant seen situation that we're in right now and I guess.
Good. Good example would be China, I think we're well worst seed in China with refined product consumption and demand is that as it is it is basically moving back.
To pre cold, but 19 levels, Bob and I I think that's a I think that's a pretty good h. study for what I hope will happen in North America, We're obviously starting to see.
Certain states and and we we've heard about our provinces certain of them are.
Starting to execute or thinking about execute on executing on kind of cautiously relaxing social distance scene and getting the economy's moving so you know I my own personal view a is that we're probably going to see a in North America demand I think.
We'll see it start increasing here over the next month or so and I I would expect to see that are significantly increasing as we move into the summer and I think you know the refineries I will obviously return to you know full production.
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 a of crude oil in its going to take some time to work through those but I do expect we're gonna start seeing.
A real improvement on the downstream side and demand heading into the summer.
Thank you.
Thanks, Kevin.
At this time I'll turn the call over presenters.
Well I I don't hear a 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 to Ah.
Here, our presentation and and the question so you've asked and I just the say thanks, everyone and the please keep safe a in these challenging times take care.
This concludes today's conference call you may now disconnect.
[noise].