Q1 2020 Earnings Call
The color too much rubber Bell Vice President Investor Relations. Please go ahead.
Thank you operator, and good morning, welcome to some corps first quarter earnings call with me. This morning are Mark Little President Chief Executive Officer, and Alister Cowan Chief Financial Officer. Please note that today's comments contain forward looking information actual results may differ materially from the expected results because of various risk factor.
And assumptions that are described in our first quarter earnings release as well as are our current annual information form both of these are available on SEDAR and guar and our website Suncor Dot com.
Financial measures referred to in these comments, you're not prescribed by Canadian gap for a description of these financial measures. Please see our first quarter earnings release.
<unk> remarks, well open up the called the question no handed over to Mark for his comments.
Good morning, everyone and thanks for joining us today.
At Suncor, our purpose is to provide trusted energy that enhances people's lives, while carrying for each other and the Earth.
We navigate these challenging times, our purpose continually reminds us that we have a critical role to play by providing energy to our customers, while supporting their health and wellness up our employees our customers and the community.
Safety is that the core of some course values and we moved quickly to respond to the cobot 19 pandemic to ensure that health and safety of our workforce in all our global locations.
Our experience what the calibrate floods in 2013 and Fort Mcmurray Forest fires in 2016, that's allowed us to proactively initiate our business continuity plans and effectively respond to this evolving circumstances related to covert 19, despite the pandemic being very differ.
And then what we have faced before.
Steps that we have taken include reducing staff at all or sites and offices to only essential personnel.
Implementation health surveys and temperature testing at all or facilities.
Well that's at airports for individuals flying into our northern facilities.
Adapting to longer shift rotations to reduce travel exposure and modified seem and flight logistics to maintain proper distancing.
Closing common areas and all our oil sands camps, along with providing full service meals and deep cleaning up facilities.
Implementing several on the job protocols, such as physical distancing and elevated hygiene practices.
I didn't help protective measures from employees and customers at our 1800, Petro Canada locations.
And finally, we've been talking with our employees about mental health and we have professional support available for all our employees and their families.
These steps have been very successfully keeping our employees safe and we continue to adapt our response as the situation evolves.
Our employees to provide an essential service supplying the trusted and reliable energy required for the transportation of critical supplies and goods across Canada.
During this period many of our customers are a central workers such as truck drivers, where we've made an extra effort to provide sanitized welcoming and fully functioning truck stops to support and protect these critical individuals.
It's our honor to be able to play our apart alongside all Canadians through these challenging times.
We've recently implemented that 3 million dollar essential worker and community support program and are more than 1800 locations across Canada.
The Suncor Energy Foundation together with our employees has also donated $2 million to support charities and a critical organizations to help communities got through this.
In support of Canada's Northern communities, we leveraged the company's supply chain to purchase and donate and 95 masks to the federal government to ensure northern medical facilities didn't <unk> not run out of these vital supplies.
Before we get into operational and financial updates I want to thank all our workers suppliers and partners and the many other a central workers across Canada and it all the countries in which we operate for all of their efforts in keeping a safe healthy and providing us with what we need.
Yes.
We can be cared for and care for each other.
At this time I would also like to stay extend our thoughts and best wishes to all the residents in Fort Mcmurray, who were impacted by the recent flooding.
We continue to work in the region assisting in providing lodging Joe displaced residence and then any other manner, we are able to do so.
The convergence of global events has created a turbulent market situation.
The covert 19 pandemic any associated rapid demand reduction is not unlike anything that's occurred in modern times.
Currently the Opex plus failure to reach consensus in early March resulted in increased oil supply into an already oversupplied global market.
These events have resulted in market conditions, which require a thoughtful and measured response.
And we provided updated corporate guidance on March 23rd, reflecting our response, which included increased liquidity and reduced capital and operating expenses.
Adjusted production.
Our continued focus on maximizing value also meant that we optimize the benjamin through our Upgraders and minimize Benjamin sales into the market, particularly towards the end of the corridor.
That's part of this focus working with our partners, we reduced our Fort Hills operations in April to one fully utilized mine train.
This decision is expected to contribute $200 million towards our operating cost reduction target and $100 million of our capital reduction target.
Finally, our subs stats show marketing experience a midstream logistics network has allowed us to focus on managing market exposures and capturing opportunities in real time.
Our midstream strength has been even more valuable in this volatile environments as global inventories have continued to rise we anticipate crude oil to reach fold storage capacity in the near term. Although we are encouraged by the pace of production shut ins globally.
This phenomenon means upstream production will either be shut in or be forced to balance with downstream product demand increasing commodity price volatility.
Our team has made significant progress in executing.
Short period of time, the business decisions, we announced in March.
We have put into place controls that make our workplace and retail sites as safe as possible, while operating our assets safely and reliably and maintaining the financial strength of the company.
We understand that the fundamentals of the market recovery will be dependent on how quickly governments restart their economies and the disciplined up our industry to achieve and maintain a balanced oil markets.
However, the pace of these factors is uncertain.
Since our March update we continue to monitor market conditions analyzing various recovery scenario as potential timelines and their impacts on future operating cash flow capital expenditure plans financial health and flexibility in the company.
Although we expect the crude market to substantially recover by 2022, the risk of an extended period of economic uncertainty translating into a weaker commodity prices and higher volatility remains possible.
Balance sheet strength and financial health up Suncor are the foundations of our capital allocation framework.
It is not something that can be put at risk by precision of models or describe it more blindly spreadsheet math.
Financial health and resilience, our maintained by taking actions, which are measured prudent and proactive.
As we have consistently stated hope it's not a strategy.
In the second quarter, we know our industry has been challenged by both a significant supply demand imbalance, which has resulted in the largest collapse in crude prices ever.
As market conditions require decisive leadership and action.
We have decided to target a further reduction in our 2020 capital expenditure program revising the range from $3.6 billion to $4 billion.
This represents an additional capital reduction of $400 million at midpoint compared to our March 23rd guidance.
Our board of directors remains committed to the overall business strategy of leveraging our long life low decline asset base, while providing energy to our customers and returning value to shareholders.
However, after having taken into account the significant capital and operating cost reductions announced to date. The board believes that a reduction of the current level of dividends is required to drive down the breakeven of the company to a W.G.I. price of $35 U.S. a barrel.
As a result, the board has decided to reduce the dividend by 55% to a quarterly cash dividend of 21 cents per common share down from 46.5 cents per common share.
This will take effect for the dividend payable on June 25, 2020.
The total actions taken with today's announcement.
In the March update targets, a reduction in our capital spend by $1.9 billion or 33%.
And our operating costs of $1 billion or 10%.
It also decreases our use of cash by $4.5 billion on an annualized basis versus our original 2020 plan.
The implementation of these decisions is expected to reduce our breakeven costs from $45 U.S. a barrel to $35 you asked a barrel covering all planned operating and administrative costs sustaining capital and dividends.
These actions not only support our strong balance sheet financial health and high investment grade ratings adds to the resilience of the company to maintain its focus on long term value creation.
I'll now pass it off to Al started go through some of the quarterly financial results.
Thanks, Mark as you know, we're long maintained a disciplined financing strategies, that's based on a strong balance sheet committed access to liquidity and capital and so on investment grade credit ratings.
We finished the first quarter, where the point $1 billion of liquidity and since the closing of the first quarter. We raised an additional 1.25 billion.
Issuance obtained your medium term notes and secured a this multi hundred million goals in or buying so.
This totaled 9.6 billion or kind of liquidity, we do expect to draw on a portion of this liquidity during the remainder of twentytwenty, given our expectations of lower crude oil prices.
We have the support of our key banking partners on the capital markets and therefore, we don't expect to be challenged by Insignificantly <unk> liquidity.
And that will allow us to love any protracted recovery in the crude oil mark.
An abundance of caution the actions, we've taken plus or minus the liquidity is anything or insurance against and that's.
The first quarter, our funds flow from operations was $1 billion largely impacted by you've added significant vifor loss of 446 million zones. We recognized as a result, a decline in commodity prices towards the latter half of the fourth quarter.
This is Rob and significant decrease in commodity prices also factored into the balance sheet coating value over inventory and their operating assets.
As a result, we've only done or crude and refined product inventory aftermarket volume, where the charge was $397 million after tax amount will be reflected in Q2 funds from operations.
Fort Hills turnover and why even was operating ounces are being impacted by a further known card. So no one cost charge a $1.8 billion after tax and that's primarily as a result of the lower commodity prices.
We expect over the next few years.
During the fourth quarter, we returned over $1 billion to shareholders, comprising $700 million endeavor to 300 million barrels and buybacks, we did suspend the buyback and their remarks from commodity prices started this significant decline.
However, as Mark previously mentioned, we remain committed to returning value to shareholders, while maintaining our financial health.
We continue to see buybacks is a key element of our shareholder return strategy going forward.
During the first quarter, we box somebody's price realizes with approximately 80% of become news up soon product mix weighted towards later crude.
For two or 3% of repaying a repeats door with physically integrated with our upstream production important 3% off the company's refined product mix was weighted towards the diesel Dumont, which remains solid in the quarter.
As we model they meet your priorities. We will also continue our work to deliver on our strategic initiatives and driver company for work toward our 2 billion dollar incremental free funds flow chart.
Well the Cogen Enfortumab wind projects will be fair up to two years, we remain focused on executing projects.
Due to deliver approximately $1 billion of incremental free funds rule by 2023.
We have expedited autonomous hold trunk deployment at Fort Hills to further reduce costs maintain technology investments for supply and trading operations and their base business to reduce costs and increased margins and finally, we will complete suncor syncrude interconnecting pipeline.
Two on an operational on product flexibility.
We expect the remaining 1 billion Oh, the incremental free funds through targeted to be realized but 2025.
And this evolving market that are several other financial dynamics to complete with the decline in oil prices are anticipated royalty payments I know reduce.
Similarly, the expected corporate tax position of the company has shifted from being cash taxable to receiving refunds for taxes previously paid in prior years.
We've just been royalties and taxes significantly impact the corporate financial sense. Its entities that are provided to the market and as a result, these are being updated to reflect changes.
With that I'll pass it back to Mark will discuss the I've moved for the remainder of Twentytwenty.
Great. Thanks Alastair.
Our updated downstream guidance reflects our view of the significant demand reduction related to cobot 19 pandemic.
In the markets, we supply average demand for gasoline as down 50% jet fuel demand is down 70% and distillate demand is down 20% versus Q1.
In response to this demand reduction we've taken the following actions.
We've reduced our refinery utilizations in Q2, two approximately 65% to 75% of nameplate capacity.
We've increased the relative diesel mix by 10%.
We've leveraged the flexibility provided by our integrated model and midstream logistics assets, which generated over 225 million after tax of additional value in the first quarter.
We maximized our upstream production into the refineries as feedstock.
Although we do not guide quarterly production or financial estimates.
We didn't want to provide clarity and this dynamic environment as to how we see our business in the near term.
In my opening remarks, I stayed at the second quarter will be challenging given our business has been both impacted.
On the demand and supply side.
We are estimating refinery throughput to be approximately 25% to 35% below name plate to align with current product demand.
Anticipate our total upstream production volumes will be down by approximately 10% below the bottom of our production guidance range given upstream production will need to align what downstream utilizations.
We are maintaining our full year upstream guidance for 2020, as we expect to be able to perform some critical maintenance in the quarter, while respecting our cobot 19 health orders and protecting the safety of our personnel.
We expect consumer demand for refined products to be at its weakest in the second quarter. However, we are already beginning to see some strengthening and demand.
We anticipate consumer demand to steadily strengthened in the second half of 2020 as economies get restarted.
Our view is that the recovery for the industry will be led by the downstream as product demand improves and refinery margins strengthen.
Given the high level of crude inventories the upstream business will be forced to pace downstream demand given the limited ability to increase crude inventories further.
We also expect that the drawdown of excess of crude oil inventory will take an additional period to normalize.
This phase to recovery will highlight the value of our integrated model as we expect that downstream to lead the operating cash flow recovery.
Our midstream logistics assets and marketing team combined with the physical ability to place our barrels through to the end customer will allow us to maximize value with full knowledge of demand and real time.
Our demand recovery outlook is based on several assumptions and external factors, which we continue to closely monitor including.
Timing and pace of restart of the North American and global economies, including any new restrictions on business operations or trade.
Impacts of any government stimulus to kick start bad economy, such as infrastructure spending or other fiscal stimulus.
Outcomes of any medical advancements in the area of testing tracing treatments or vaccines for cobot 19.
And the opening of borders and reopening of domestic and international travel.
Our assumption is that we will begin to see progress in all of these factors towards the end of the second quarter and that the momentum will continue to build throughout 2020.
Canada, our primary markets move swiftly and then a coordinated manner to initiate shelter in place orders travel restrictions and healthcare preparedness.
Well this has caused a deep impact on the demand in the second quarter positions demand to rebound more quickly as the Canadian economy restarts.
As I noted in my opening remarks, our industry is experiencing a challenging combination of events. We are all understandably focused on a in the current environment.
However, our job is to ensure we respond to the situation keep the safety of our employees and customers and the financial health of our company as a priority.
We also look for the future and we're confident that the steps we've taken positions our company to create long term value for our shareholders.
Our confidence is based on our experience starting over 50 years ago. When our company first developed a technology to process and processes to extract oil from the oil sands.
Then many decades of processing cost improvements made the oil sands, not only profitable, but globally competitive an environmentally sustainable.
Following the financial crisis in 2008, 2009, we merged with Petro, Canada, creating a world class set of assets with operational integration and flexibility nearly impossible to recreate in today's world.
And trailed the North American shale boom subsequent oil price collapse and the Fort Mcmurray fires in 2015, and 16, we demonstrated the importance of financial discipline through our ability to significantly scaled down costs.
And now looking forward from today, we have confidence that we have taken the right measures to ensure suncor will continue to weather. The storm Suncor is competitive advantages of an integrated physical connection to the consumer sophisticated marketing logistics and infrastructure capabilities and always.
Maintaining our financial strength will allow us to emerge stronger than ever and with that I'll turn it back to your Trevor.
Thank you Mark and Alister I'll turn the call back to our operator to take questions first from the analyst community then if time permits from the media.
If you like who asked the question at this time. Please press star one on your telephone keypad, well pause for just a moment to compound acuity roster.
Your first question comes from the line of Phil Gresh with JP Morgan.
Hey, good morning.
Morning, Phil.
First question, obviously with with the decision on the dividend.
I guess would be for Alister, how do you think about where this positions you on the balance sheet.
For the rest of the year in as we move kind of through the trough with a situation do you have an absolute level debt. He you would want to target coming out of this in terms of the debt that accumulates through the down cycle, and where you'd like to be on a more normalized basis longer term.
Yes. Thanks, Phil Good question, if you look you're well positioned themselves you know, we're looking into the longer term to be cash breakeven in $35 going to yarn.
Clearly, we're not gonna be there this year.
So we would expect to be adding some more down onto the balance sheet towards the end of year.
I think if you look at my number is one of a 20 billion no gross debt.
Today, we'd expect to see billion more by the end do you really about as kind of where we think we'll copper.
Into next year on the expectation that will breakeven on a cash movies.
2021.
And then at that point is the idea that you he would want to reduce the debt from there are you comfortable as that absolute level.
No I.
Due to follow up yes, we would expect to started doing the debt.
As we recover from but but it will be in conjunction obviously with a measured a piece of increasing economic investment sales increasing returns to shareholders.
Okay, that's all but I guess I'll, just a little bit.
Echo question, how do you guys view this situation with WCS, obviously, you've talked about crude over supply for the rest of the year.
But with the El Penon cuts and and you.
You know as refineries in the U.S. start to increase run rates in the back half if your demand outlook that you're talking about is correct.
Would you expect to see fairly tight WCS supply demand dynamics that when we get to that point. Thanks.
Yeah, Matt maybe so I'm not particular point.
With inventory crude oil inventories so I, it's a little hard to tell what's going on and and part of the issue with it as we expect that it'll take literally until they ended the year to be able to get demand and the economy's restarted it might extend further.
So really the balance between WCS and the heavy barrel in Canada relative to the market just depends on whether at any point in time, it's been over supplied or undersupplied as it moves up and I think what you'll see us quite a bit of volatility and not returning to normal when once the market stabilize.
As we have a long ways to go to get back to where we were at the start of the first quarter.
Okay. Thanks.
Your next question comes from the line Greg Pardy.
With RBC capital.
Thanks. Thanks, Good morning, I wanted to check some back in the onboard math with you. So just on.
Thinking about 2021 Mohamad was helpful enough to suggest that I think in that 35 dollar T.I. breakeven I think theres, a $12, a new York Harbor embedded in that but would that kind of mapped to call. It somewhere between two and two and a half a billion dollars in the downstream all in.
Oh, Yeah, Greg I think that's close to it would be I'd have to go back to the spread too but.
I don't I'm familiar, but we were probably close to about.
Okay, Alright, and second question is I'm sure you know as you've gone back and re examine supply chains and and everything else.
Can you comment maybe on on how much downside there might be in terms of a go forward sustaining capital <unk>.
Is there a deflationary opportunity there do you think it will be relatively stable from what it's been.
I think theres opportunities there Craig.
I think part of this for US is one of the things we're trying to do as we've taken a focus on taking a billion dollars out of our cost structure versus what we spend last year or approximately 10% of our total costs.
And we continue to look at structural changes to the business going forward. So we've talked about somebody items like the autonomous haul trucks, the interconnecting pipeline and also putting in our enterprise wide processes. So what you're seeing in our guidance as reflecting the immediate effect of our action.
But there's absolutely no question, we continue to drive down the overall cost structure of the business and continue to progress those initiatives supply chain as one of those areas that we will continue to focus on we've made some great progress in the near term although.
Many of the suppliers and supply chain have been deeply challenge for quite some period of time. So it's hard to know just where that ends up.
Okay, Great and last quick one for me is just on the dividend we've had some questions coming in should we be thinking about this is permanent or temporary you mentioned a willingness to return capital to shareholders with time, if the world begins to normalize in 2021 2022.
Is it realistic to believe then that you know that the dividend is is gonna grow from where it is now.
Well, where we're at Greg on that as we are committed to shareholder returns and dividend in stock buybacks are an important part of that commitment, obviously and weve used both significantly so as we've reduced our.
Our operating costs and capital expenditures to maintain the balance sheet and such we also decided that the dividend was an important point through this period of time. So we are committed to increasing our shareholder returns as we go forward.
And and not would both be and the dividend and continuing to grow that as we have in the past as well as leveraging share buy backs to return capital to shareholders.
Okay terrific, thanks very much.
Your next question comes from the line of Associates fan with Bank of America.
Thanks, Good morning, I have a quick one from Mark and then one for Alister Mark on you mentioned benefits from a midstream logistics Ah. Thank you quantified at 200 million dollar number.
Benefit in Q1 did I hear that right and could you provide a little more color on that I know suncor has substantial storage and real footprint any any thoughts on <unk>.
Future benefits.
Yeah, I'll take that I see a yeah I can confirm its about 230 million also talked span of it from our marketing and logistics business.
And in fact, we lost what you'd expect to see in a volatile pricing market.
And our stresses on the physical tokens.
Moving on of oil validates, what we expect from a or Ah Ah team and the marketing group in the logistics.
Anyway, and I'd say if in the stories access.
Across North America. So my expectation is is during this period the volatile times, you're going to see that continues to be added volume.
We we give throughout our integrated model.
Now, it's or maybe I'd just add to that as.
Like I've been very impressed with how that team has performed and capability that they've had to not only understand the market, but to protect us against some of the rest of showing up in the market, but I think I've been very challenging for others as well as capture opportunities I think you will see.
The significance of that as we go through this event in a certainly in Q2 in the quarters ahead.
Great and I'm just on the dividend level yeah.
And the new dividend level, I would say well what was the some of the broad macro assumptions that you're making over the medium term and particularly when you're looking at the framework and you gave a nice breakeven framework is that the new framework or is it something to do the person to person of normalized cash flow, how you're thinking about the level I know you talked about.
Additional return to shareholder, but what's a normalized dividend output level.
Well if you go back to the way we've talked about this in our capital allocation framework now for many many years, we essentially picked $45 WT I guess, if you go back over the last decade or too you start to react or we viewed that there was essentially a floor there that naturally.
Mitigated a the decline in prices beyond that for any significant period of time.
So as a result of that we structured our dividends and our capital allocation and the cash generation to breakeven at W.G. I $45. Clearly, we did not foresee this pandemic and the implications of that on the company and I think the view as US okay, well, maybe we didnt.
I see it and forecast that into how we originally said, we've just now reset at to align with.
This environment. This unforeseen environment, so I think agility and being proactive is super important to us going forward, but I think maybe even more importantly than that.
Our commitment to shareholder returns the strategy of the company and our journey on E.S.G. as I know wavering and has not impacted at all by this action that we've had to take.
Appreciate the color Mark Thank you.
Your next question comes from the line of Neil Mehta with Goldman Sachs.
Thanks, Ed Thanks, guys for at the time this morning, Mark maybe in the first question is on the absolute level if the dividend in the magnitude of reduction can you take us into the boardroom has you were having these discussions between the March 20, Threerd announcement, and then ultimately when do you elected to reduce.
The dividend what were some that discussion points that you guys were getting your head around in terms of setting the dividend level or why do you elect to take down by 55% versus a higher or lower number.
And what were the pros and cons are debating I think helping us.
I understand the thinking will help us evaluate this decision a little bit better.
Okay Neal thanks.
I would say, there's a couple of factors that fit into that first of all a lot about was a discussion about at what level, we need it to get too. So that we can stabilize the cash position that the company and as we look out to 2021 as Alister mentioned, we believe.
Yet.
We will not continue to draw on that as we go into 2021, because we believe that there's a reasonable chance that we will see W.G. I $35 on average for the year, but as he mentioned, we don't expect that to happen in 2020, and we continue to lean on the balance sheet.
And that in the very lows of this environment.
And then I think maybe the second piece to your question is.
Why now and and one of the things that we got into and I would say this has been debated for some period of time.
But there's absolutely no question that the second quarter will be far more challenging than the first quarter, both in the upstream and downstream sides of the business.
So as we see improving market conditions, and such yes, that's happening, but its from the low up the loss and so we're expecting the second quarter to be far more challenging than when you get into it then the question came as well what probability is there that we would cut the dividend at the end of the second quarter.
And our view wise is that the probability of having to cut it at the end of the second quarter was very high.
And so then the issue as it did we want to spend money by keeping paying the dividend when we thought that it was very high probability we would have to cut it and stop putting that onto the balance sheet and so.
Although if you had asked alister and I literally three months ago, whether we would cut the dividend I think we would have been very confident that the answer to that would have been no. We can't foresee a circumstance where that would occur.
Given this incredible circumstance that is having huge global implications, we view that it's very important that we'd be proactive and this is very prudent and managing the financial strength of the companies. So that we can keep the company's strong through this and not continue to take on that.
Yeah that makes a lot a sense, but the follow up is on the buyback strategy. We're as is the oil price improves a you've indicated that you're going to be more aggressive around share repurchases. How do you ensure that you're not buying back stock close to quickly and using.
Repurchases as a flywheel, but then.
Not getting the best entry printers are buying your shares.
Yes in the past the way we've done it as Ratably bought back over a period of time and I think some of this will depend on the fundamentals that are supporting the market.
We will have to make those decisions as we see the market go out, but that's always the challenge when you buy back I don't know Alister did you want to add anything done yeah, I would just say.
End of the day, we will considerably strengthened the balance sheet as we move forward, we will execute on a pro Colorado boost from a dividend stock buyback will also go lives the capability when we underwrite and legal through another downturn in a few years to a have a very.
So on balance you taking advantage of us situation.
Alright, Thank you very much.
Your next question comes from the line of money Gupta with credit Suisse.
Thank you guys have I have a quick question on hotels, the realization scheme and the net back in the Navy, Kansas and weaker <unk> lessens, our modern I'm trying to understand what the just the timing on the condensate purchases of the lag which caused this all of that any of that that that's because of its the operating.
Backend flicker leakage.
<unk>.
I'll take a woodmark really it was really a gone through Joe you and question here.
Whereby you know a recovery those are committed to out or bought about early on at higher prices. So that was really the main driver in there yes.
And just a quick follow up on is like.
The operating netback doesn't improve from current levels remain low on the site is <unk> point that you look at Fourq or going Independent project, then see maybe 60000 bonds annual guidance on this one Minogue code.
Yeah, I think part of the issue with it and as this is a very significant asset.
So it has lots of obligations on pipelines and commitments on logistics and stuff associated with it so.
You can't just shut off because there's a whole bunch of commitments that need to carry on so we are looking at the margins associated with that one of the huge challenges with Fort Hills is that coming into this it was curtailed and so it could not operate efficiently we essentially radnet.
About 75% utilization because of the constraints from curtailment and in this environment you cannot run assets inefficiently. So we found in that particular case it was much easier for us to shut down one train and that's why we came saying that we're running one and train fully utilize.
Sized very efficiently and then shed the costs what the other train where we can only get essentially half productivity for it and this environment you cannot have the inefficiency in the environment. So going to one train was far more straightforward then whether you would shut down the entire asset and.
The second piece I guess associated with that as as prices have collapsed a lot of the incremental value you would normally get an uplift on the on a product that we produce from Fort Hills, because it's a higher product quality and gifts higher yields.
Doesnt show up in this environment, because all the all the spreads essentially get collapsed together and so that's another factor as well, but so we look at all the various scenarios and then optimized for what generates the most cash.
That makes it on okay. Thank you for taking my question.
Your next question comes from the line of Dennis phone from Canaccord Genuity.
Hi, Thanks. Good morning. Thank you for taking my questions. The first one is just wanted to know what I appreciate the incremental color around the the logistics and marketing slides.
Slide four in your presentation, and I was hoping to dig into that a little bit more just characterizing your.
Plus or minus 50 million barrels of storage capabilities, how could that play into kind of potentially increasing the $225 million of after tax marketing logistics.
That you provided in terms of color this quarter and how does that potentially we'll call. It impacts your upstream and downstream I guess in margins now that youre disclosing it separately as well I think was probably predominantly blended into your realizations prior to today.
Yeah I'll take that.
Yeah, the a that storage and logistics not one of the we've disclosed about new slide in a row.
Now a day, because I feel extremely important generating about additional volume.
There we disclose the journey.
You don't so.
It will continue to be she is regal forward. It gives us flexibility on moving both crude and refined products are running North America Wala, Steve.
Utilization, though refineries higher than others and there will always continue to keep producing.
From the upstream assets others, you really fans, we felt we harvested itself to shut in.
Well there on the go.
We will be extremely important as we go forward so allocate a as you saw from our numbers.
Although it's part of a.
John do fairly familiar does get allocated buck up into the upstream and downstream.
Well, we have separately disclosing is to highlight the total in Maine.
Volume, resulting from a but a group and the logistics assets.
And maybe just add to that as it certainly gives us a much deeper understanding of what's going on and all the various regional markets and in these types of very volatile situation just see dislocations from one part of the market to another and so as a result of that it provides us with opportunity.
And it also helps us and being able to protect against situations, where there is very rapid crude movements or product movements and in some cases, we can just put the product into storage versus wholesaling that out at a massive discounts.
Great.
She really good segue to my follow up here so.
Obviously, you've made changes to your operated production on the upstream side of things to limit your exposure there how should we be thinking about the use of equity barrels versus purchasing barrels in the markets in terms of your view of I guess your current refining capacity, even at the reduce Throughputs and show.
We think of the Q2 level of I guess physical integration as being kind of the the Maxim that you guys are able to put through your own your own refineries. Thanks.
Yeah, it's interesting that not because we have a so we have an increase the amount of equity barrels that we've put in and and as al start talking about he said, we put 43% of our equity barrels and in Q1 hundred 2020 and that was 35% in 2018. This is an area.
We continue to work on we're expecting in the second quarter that numbers more like 50% of our total barrels going through our physical assets.
That also means that the other 50% or buying in the marketplace and in some cases.
It's a driven by pricing in some cases, it's driven to get the molecules, we need to make the various products associated with it so.
We this gets optimize literally every single day word looking for opportunities between storage production movement of logistics, and our refineries and the product mix to be able to constantly optimize that to maximize cash flow.
Great. Thanks, I appreciate the incremental color.
Thank you.
Your next question comes from the line up precise Ral with Citigroup.
Good morning, Thanks for taking my question.
I had to a broader picture question on the pace of recovery.
Can you give them very good color about how you see the cadence of demand recovery in 2020, and then sort of a longer term goalpost, they're about 2022 potentially being the first year of a return to something that approximates normal assuming a lot of things go right along the way maybe my question is really on the interim into.
I would view.
You, especially given that you know this recovery will be led by the downstream and upstream we'll have to paces.
How do you think about 2021 in terms of the cadence of.
The demand year, and how that plays out from the downstream and some of the factors I'm thinking about here too or some other deferrals. We've seen globally on maintenance that May show and 2020 that may show up on downstream assets and 2021, perhaps a little bit of lingering product demand suppression in jet fuel, there's a lot of moving pieces, there, but kind of the bridge.
Between the 2020 shorter term recovery and then a 2022 as more of a mid cycle year, how should we think about the broad strokes and how are you planning for that.
Yeah, [laughter] well, that's an interesting question for side its a.
That's actually the challenge and I think I commented in my tax didn't there as well we know how this will play out it's the pace that's uncertain and so you know that the question you get into is okay. So when does it backs I mean, a vaccine show up as an example, and then how fast is that get penetration so that people go back.
To their normal lives I think if you look at the airline industry. That's been an industry. That's been hit very very hard and you just wonder about how long will it take a four people feel comfortable going back to flying and doing the things that they've done in the past now when you start taking the cruise ships out and the air.
Airline industry, and such that might actually provide some strengthen the gasoline side, but it will certainly prolong.
Some weakness and jets, so what we're expecting to see as probably we might even see a little bit stronger gasoline than we've seen in the past if people want to get out and travel associated with it but but for all other reasons you mentioned the uncertainties very high and we think that's in some cases.
I think you'll see that there's going to be some false starts and that in various economies and such so I think it's going to be variable EM and we're gonna be managing our inventories and integration as we do every single day to maximize value in cash flow and agility will be a key attribute of stayed strong.
Through this period, because it's impossible I I know one actually knows the answer to how this will play out and so staying agile as an organization and responding as we see these trends wonder that huge advantage as we've had that we've talked about is the fact that we are participating and our players in a number of these mark.
Cuts across North America, and in the international markets and so we see this in real time, and we have the ability to adjust as we go forward. So we do think that our view if you look at the forward market right now shows mid Thirtys for W.T.I.U.S. dollar.
A barrel next year.
And will it be that.
No one really knows that's what the market spending at this stage of the game on well stay agile and see how it plays out.
Thanks, Mark appreciate that I know, it's sort of a tougher question to answer. So appreciate the color. There my follow up so I'm just sort of related to that if we do see these fits and starts and maybe some some parts of the barrel that take longer to recover on the product done the product side.
You know, which would then have an implication for overall oil demand sort of making that last fit into normal demand levels. You know from from historical perspective, how does that.
How does that make you think about you know the progress we've made in the plans that you had before all this on the renewable side does it maybe hasten the piece a little bit and and also what does that do you think you could see maybe the narrowing in the cost of capital difference between sort of traditional oil and gas than some others renewable products, specifically, because we've just gone through so much.
Excluding the market coming out on the other side of this might there be you know more financing appetite to go there might be hasten the pace of that or is that maybe not so much a concern.
Well I think what you would I would say book in the energy markets is.
All energy markets have taken a hat and in fact, we announced two investments which was the 40 mile Wind farm and the Cogen at base plan, both of which we've had to stop working on in this environment.
For cash reasons and so those those have been slow down and I think what you will find across all energy investment is that all of its gonna got slowed down oil renewables electrical projects and such associated with it so.
In our particular case and I go back to what I said before as you know despite the fact that we did cut the dividend our commitment to returning shareholder value has not changed a strategy of the corporation hasn't changed and our commitment to U.S.G. hasn't changed although the pace.
At which we can do some of those things has needed to be adjusted to keep the company financially strong, but you know I think at you were going to see implications across all of the various forms of energy and almost all industries.
Thank you very much park appreciate that.
No no further questions at this time.
I was on the call over back to Mr. Trump or bill for closing remarks.
Great. Thank you operator, and thanks, everyone for attending today really appreciate it myself and our team.
Yeah, our around all day, given the circumstances, where all working remotely. So please just drop us an email or you have our fall our mobile numbers give us a showed if you have any follow up thank you very much.
Thank you. This does conclude today's conference call you may now disconnect.
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