Q2 2020 Cenovus Energy Inc Earnings Call
Thanks, Sherry and good morning, everybody I, how badly we're continuing to stay safe and healthy.
Although our economy is starting to open up it's clear we're still far from being able to look in the rear view mirror at the impact of coal that 19.
I wanted to start first off by giving credit to our staff at synovus for keeping our operations running safely and reliably and for adapting to all the additional measures. We've put in place in response to the pandemic. It really has been incredible to witness the resiliency of our people and their dedication to look for one another.
The staff have been Dutch and we finally in the new procedures to prevent the spread of the violence set our sights and camps and staff have embraced technology to remain productive while working virtually throughout all the changes. Our teams remained focused on safety performance and as an example of that we had zero significant.
Incidents across our operations in the first half a year and our deep basin team achieved a milestone of zero recordable injuries front untitled letter, which I think is truly.
Impressive given given the conditions that our employees and staff have had to work under.
After we're working remotely gradually started returning to the regular job locations.
Proceeding cautiously to help ensure the safety of our people than the reliability of our operations.
I will provide details now about our response to the recent downturn.
The worst quarter on industry has witnessed in recent memory.
The second quarter presented commodity price instability beyond what anyone I. Thank ever could have predicted the sharp drop in oil demand and resulting unprecedented low oil prices experienced earlier in the quarter at a significant impact on our financial results by the extreme volatility also highlighted what sets in overseas.
Apart from our peers it presented an opportunity for our marketing in upstream teams to demonstrate why shareholders should have confidence in this company one I'd love to leverage our low cost structure and the flexibility of our assets to strategically access the highest returns for our product products and maximize value.
Our shareholders.
In response to the sharp decline in oil prices in April we quickly reduced production volumes that are oil sands operations, while continuing to statements story to mobilize oil in the reservoir when the price of Western Canadian select increased almost 10 fold in June compared with April we acted faster ramp up our oil sands.
Production back up to take advantage of the improved pricing, our well cost structure means of with WCS prices at current levels, we are generating free funds flow and strengthening our balance sheet.
Essentially all the inventory that we wrote down in March was sold and we realized the inventory write downs that reduced adjusted funds flow and free funds flow by $529 million, excluding the impact of these write downs from the first quarter, we wouldn't have had positive adjusted for.
Funds flow of nearly $70 million in Q2.
We've also been purchasing low cost production credits from pillars, several Lincoln produced above our curtailment limit.
The pressure June oil sands production to more than 405000 barrels per day, including record volumes at our Christina Lake facility.
I cannot overemphasize the value of our ability to take advantage of rapidly changing market conditions in April when WCS prices were less than $5 per barrel, we voluntarily reduced oil sand production to an average of just under 344000 barrels a day.
And John when prices were nearly 10 times that we ramped up production by 60000 barrels a day and more than 17% increase that happened over just a few weeks.
At Christina Lake specifically, there was inrone thousand barrel per day difference for my Laura Daily production in the second quarter, two our highest day in June.
Strong businesses design for flexibility as well provide an opportunities in terms of both timing and location of sales.
I don't addition to time and our production over the past months. We're also able to use our diversified transportation and storage portfolio to defer sales from April ended June when we were seeing higher price signals. The class working relationship between our marketing and operations teams are giving us a competitive advantage.
They are quick action in June resulted in free funds flow for the month of more than $290 million.
No the flexibility of our refineries Matt.
Refining runs could be adjusted to take into account refined product demand signals to maximize value for our shareholders there as well.
We believe we're on the latter recovery from the low point in the downturn in April although we expect commodity price volatility for the foreseeable future.
We are not counting on a swift recovery second only to the safety of our staff balance sheet strength remains our priority. This downtime demonstrated the value of our relentless focus on paying down debt, reducing costs and maintaining capital discipline over the past years, you will continue to see that discipline.
At Synovus.
We finished the quarter with net debt at around 8.2 billion, we remain committed to getting net debt down to 5 billion or below over the longer term.
Even the outlook for pricing in the second half of 2020, we anticipate the level of net debt at the end of the second quarter to be the hype point for the year.
We have worked to ensure.
We continue to have ample liquidity to withstand a continued period of low oil prices if necessary.
And we remain focused on disciplined capital spending we won't be sticking with the reduced 2020 capital budget, we announced in April even if the price environment improves over the coming months.
Before I turn to your questions I want to encourage everyone to check out our environmental social and governance report that we released last week on Synovus Dotcom. This report provides context for the analysis, we performed before setting.
Focus area targets earlier this year as well as details of our 2019 sustainability performance.
We are committed to achieving those targets into continuously improving our SG reporting to ensure our shareholders and other stakeholders are fully informed about our performance I feel this report really raises the bar for our industry. When it comes due sustainability disclosure.
With that I'm happy to take your questions.
Ladies and gentlemen, as a reminder, you can join the queue to ask a question by pressing star. One we will now begin the question answer session and go to the first caller.
First caller comes from Greg, Greg Pardy with RBC capital.
Thanks, Thanks, Good morning, and thanks for the run down Alex.
Couple of questions I guess the first one is.
You mentioned that the 5 billion, that's gone kind of from the targets in the upper boundary.
As you maybe look at the new world in terms of oil prices might shake out or or what kind of volatility we're facing is there.
Is there were a lower boundary maybe even in the three you sort of looking at is.
Maybe maybe optimum often than the terms are like running a really under leveraged balance sheet going forward.
Yes, Thanks, Greg.
I think it's a really good.
Comment and I think John and I have been quite pointed over the last few months about talking about 5 billion is ultimately an upper Brandon I think the easiest way for me to answer that would be to say that.
Our balance sheet nothing has emphasized for me the importance of balance sheet than the past four five months and I and is not going to cause me any loss of sleep at night.
If if we if we don't see compelling opportunities driving driving that net debt down below 5 billion is not going to cause me any sleep and I think thats probably.
Directionally, that's probably something that our investors should be thinking about.
Okay terrific and then maybe a question for John maybe just trying to hedging I mean, we picked up the hedges.
You put in the so you've sold I don't know 88000, and then you've you've got purchases for 56006 pricing theres, a little bit of a differential there and there's a little bit of work you guys did on.
On this spread but how should we think about hedging and maybe why those were put in place what have you.
Yes, Greg what I would tell you is that at a corporate level nothing has changed we still see the balance sheet is the right way.
Ultimately hedger operations, but one thing you do need to understand this company is we do have substantial pipeline.
In storage assets.
That we use on a daily monthly basis to optimize our pricing so.
Hedge losses that you will see both on a realized and unrealized basis in the financial statements acute too.
I really related to the optimization work, we do and locking in margins around those assets, where we saw in Q2 was some pretty significant contango opportunities in particular.
Where those assets were quite valuable to us. So I'm just give you a quick example of how that works on an accounting basis, So you're not surprised on a go forward basis.
But if the marketers have an opportunity in May for example to sell at $20.
Or sell forward in June for example, at 24 weaken realized margin of $4 by storing those those barrels per month and selling them in June so.
So what they'll do is no forward. So when we use a financial derivatives to lock in that $4.
On the accounting side, what will show is for example of June then close at $40.
We'll show $40 realized nation, but a 16 dollar hedge loss. So we've locked in the 24.
In the month that we'd do it but with the accounting does it separates that transaction.
So when you see contango opportunities new CW T.I. rising through quarter like this thats kind of the result, you're going to see on a go forward basis, but it really reflects what we've done to kind of lock in margins as a company.
Okay I get the sales part, it's and I don't want to get to to find that we'd see here, but there were also you've also got like purchases right at that at a couple of Bucks higher is that this is that related to the same thing.
So all the same thing.
Okay.
Okay.
Thanks, very much guys.
Yes, no worries.
Next question comes from Emily Chen with Goldman Sachs.
Thank you.
Maybe as a follow up from Greg on to turn really double down on the message but.
That is only 29 level do you think about the deleveraging process ahead.
This time monitoring.
Good.
So look forward before maybe perspective gone all.
Simply concentrating on hitting that.
Now, let's let's consider all the areas to deploy capital.
Yes, I think.
From from our perspective absolute priority is the balance sheet until we get that debt back down to a level that we're a lot more comfortable with that so I would not expect to see anything anything that would have us deviate materially.
From that and in the near future.
Yes, Emilie, it's John I would just add onto that we are as a company still focused.
On the three things that Alex has talked about.
In depth and maintaining cost balance sheet integrity as well as.
Liquidity so.
Although we see a lot of green shoots coming out of June and we had a very good month, we are laser focused on generating free cash flow through the next few months and applying that to the balance sheet before we consider.
Reinstituting the dividend.
Great. Thanks.
Yes.
One follow up.
Just on spreads have been very tight.
But as you think.
Production ramping up.
In Canada, how do you think about where the light heavy differential comes out.
The backend as the year and when do you think production levels.
Canada or as a whole tend to pickup at 19.
Why don't I have that off to Keith and.
He can give his view and I might I might add a little bit of color.
Amalie. Thanks for the question then what I would I would like to say is when we were we were sitting in April we ramped down production.
And then coming into June we saw when I would say record tight differentials, then and I think between the low in April to the high in June we increased production at Christina Lake by 80000 barrels a day to capture that that record tightness and generate.
Significant free funds flow in the month.
As we look forward that that opportunity prevail, because theres significant upstream production off in Canada, and we think that persist through the summer months, but right. The as you indicate as we head into the fall there could be some additional production coming back on now.
It's uncertain, we think that currently there is over 500000 barrels a day still offline in western Canada, it's uncertain, how much of that actually does come back, but but it's something that we will watch.
Very closely and and obviously, we if we do see the differential widened and there are economics.
To to restart our rail program for for a longer period of time, we will we will look at that opportunity if it makes economic sense.
Yes.
Great that's helpful.
Next question comes from Phil Gresh with JP Morgan.
Hey, good morning.
First question, just I guess I'll ask one more on the de lever Jay.
And John I, probably asked you. This in the past, but is there anything else. You think you could do inorganically to accelerate the process of de leveraging asset sales or otherwise that you would think about maybe not in this exact environment, but as you look ahead.
Say 12 18 months.
Or would you say this is just going to be more of inorganic process.
Yeah, Phil I think for for your modeling purposes and for general assumptions, you should think of this being inorganic process.
One thing we've been really clear about is we're not going to do anything to impair the value of FCCL, we certainly see that his family silver.
And we're not going to do something in the short term that's going to have long term implications to the value that asset as it relates to the deep basin, we've been pretty clear we've stood down any kind of inorganic process there.
We don't think that transaction values today reflect long term value of that asset.
As well and then we're pretty happy with obviously, there will be RB which provides us the counter cyclical cash flow in insulation against some of the heavy oil differentials that we see in Western Canada.
So by and large you should just assume it's going to be organic.
Okay understood.
Second question would be just on the commentary about the June cash flow, obviously very strong.
The month I would you say that that is.
Sustainable as you move through the third quarter or that there were there any onetime factors.
The contributed to such a strong result on the month thinking maybe lagged condensate or something else I'm. Just curious how you think about the rest of the year playing out.
Yeah. So.
When you look at June you're absolutely right as you know on traffic month, and there's there's pieces in June.
That I would describe as one time in order of magnitude but.
Dramatically going forward they still exist.
Two big drivers for June one was the differential that though VTI WCS differential narrowed to just over $4.
So even on a historical basis that is an extremely tight differential and then some of the condensate that we were purchasing in April and May started to flow through.
Those two numbers so in terms of order of magnitude going forward I don't think you'll see the same kind of performance, but do realize that the differentials are still narrow for both July and August and the condensate pricing is still quite favorable so though I don't expect.
July August to be as good as June.
Directionally there consistently June.
Okay, great. Thank you.
Next question comes from Manav Gupta with credit Suisse.
But it little bit on this one key I'd just went up between 9 million.
Is it a onetime block on cognitive and should be as you know if it comes back.
As we go ahead.
Thanks segment themselves.
Sermon of I think the question was on the inventory build on the balance sheet.
It's a 329 million charge that you're looking at all taking market.
Yes. So once you will remember is at the end of Q1, we wrote off I think 588 million of inventory.
And what you see is that start to come through in the month of April in particular, so we realized.
Those inventory write downs that we took at the end of Q1 on a cash basis in Q2.
So the total inventory.
Okay.
Charge that we saw come through was 300 and some on the on the oil sands side and the residual on the downstream side.
Okay and one quick follow up obviously June was very strong, but let me look at the.
Thats on board also thinking we'll see on lake that negative for the quarter full should we assume basically you had a very bad if the and then things improve a little from me and then designing building Jones said that I think to think about that.
Yeah were you should think about in terms of.
Those Netbacks is April was very weak as we realize those inventory write downs.
And then June was substantially better so even with.
I think the price of WT I went from 16 to 38 through the quarter and it was even more dramatic on the WCS side, where I think we went from three to 40.
Sorry, three three to 30.
For.
So what you've seen through the quarter is.
A period of improving performance, but on average.
It looks relatively weak when you take into account the inventory write downs with June was much much better ways to for an average.
Okay and last question is we'll have a temporarily suspended.
I'll stick to the.
The program and.
In the quarter of the council.
Lending calls as I have seen Saudi to 10 balance on the side on the stock should we assume a more trending downward as soon as levine's remain suspended of this will also functional condensate right.
Yeah.
Oh, sorry, sorry, you're thinking of the rail program was that the question enough. Yes. So I mean I'm just trying to look at the consultation lending cost at Foster Creek, Yes, I think have come down from 47 to 11 that Eagle I'm just trying to understand how has the spending of the rain program as well below that.
Yes, no absolutely it has and if you look at rail on on a.
Fully loaded basis to move 100000 barrels a day.
Of Croda Bruderheim, we were spending about 80 million a month.
Now that we've ramped down we're incurring just the fixed charges, which is about 18 to 20. So that all gets reflected in the transportation costs no. It doesn't all go to Foster Creek, it really depends on which barrels we move.
So it can be both the true savings is about 60 million a month, which is reflected across the company in our transportation costs.
Thank you so much for taking my questions.
Next question next question comes on Benny Wong with Morgan Stanley.
Hey, guys. Thanks for taking my question my.
My first questions around.
Your your production profile in the back half of the year.
You guys exhibit a quarter with very strong volumes.
I'm, assuming oil prices will be a factor is also wanted to get your thoughts around availability to utilize more curtailment credit.
Especially backup year, there's going to be less industry maintenance activity going on.
On the refining demand side still relatively small to normal levels. Just wanted your thoughts around how you think about that.
Yeah, Benny I mean, we certainly we're able to take advantage in in Q2 of some really attractively priced.
Credits and you know I think a the the word is Elton and we've seen those are they have increased somewhat in price, but maybe I'll, let key kind of comment on what we think for the balance of the.
Yes. Thanks to the question. Many you know as we look through kind of the back half of this summer.
They are still is significant turnaround activities happening in the industry that keeping a fair amount of production offline. So no availability of those credits to be able to produce we think is a is going to be there.
As we head into the back half of the year, there's still a big question Mark about how much of that production actually does come back and that will really drive the availability of acquiring those credits.
But I would I would reiterate that if if the differentials do wide. We do have a rail program there that can generate production credits as well and the way we stop the program is in a fashion that we have our cars stored at both our Bruderheim facility in some of our U.S. destinations to enable us to decline.
We ramp the program backup if the economics makes sense and we see a structural reason the want to do that for a longer period of time.
That's great. Thank you appreciate your thoughts there Oh my follow up it is more for Alex I guess I just wanted to tap into your extensive midstream and pipeline experience in and get your perspective around the headline we've been seeing around like five and doubtful. How do you think about the risk, particularly have you seen extended shutdown at those.
Pipelines.
And just more broadly.
It's just an early indication of it and even tougher environment ahead of us for just energy energy infrastructure overall.
Yes, I mean, it's.
It's a really good question Benny at I. I wish I I'm not I'm not sure my experience gives me any any deeper insight but.
I guess I'd respond to maybe specifically to synovus and then maybe I'll respond more broadly with respect to to our business, where we don't see dapple or line five really having significant implications.
For our business, we do think it it could obviously.
Have some impact on on the lighter grades but for US you know we're not we don't see it is particularly material, but I think as an industry.
My own personal observation dapple I think is a great example of a have a pipeline the went through an incredibly exhaustive environmental review and regulatory process.
Finally after after.
Extended debate it it received all of its permits it's been an operation for two or three years and we now have a judge who is.
Who believes that its appropriate to take that infrastructure out of service.
Well we debate.
The the environment, some environmental aspect, so I I think thats quite concerning and.
No I hope it is just I hope that the legal issue as dispensed with very quickly and everything gets gets back to normal and this is not an issue.
For the oil industry I mean, we're seeing this on on basically all infrastructure.
Across North America. So I think it is a significant issue I you know from my perspective.
We identified.
At the probably the first day I got here identified that one of the biggest challenge for Synovus was market access any grass and as I've said to many people hope in prior periods into strategy.
And we need to have plans it particularly in a world where we may see continued challenges the pipelines and Thats why you've you've seen us do the things we've done to secure more pipeline capacity the work we've done.
On supporting Enbridge is a contract carrier regulatory application and the.
The early work that we did on the D.R. you and all of that was from a perspective of creating options in a world where it might be might be more challenging.
Thanks, Alex appreciate the thoughts.
No worries thanks Bonnie.
Next question comes from said Sen with Bank of America.
Thanks, Good morning, if I could go to slide 10, which was I think fairly interesting on Christina Lake production volumes.
I think.
Shows that Youve managed to your volumes pretty well with WCS.
And I think Alex you mentioned 80 to 80000 barrels a day swing my question as you.
Christina Lake has slow SLR and a low operating costs I think in the six to $7 range. How does operating cost fluctuate. When you when you shift volumes to sharply is there an impact on operating cost.
Hi, its noted ramzi here from the upstream business.
What we put we did obviously in April is reduced so our production at Christina Lake and drove back up again in June so for a short period of time, our steam oil ratio went from what was normally to up to 2.1 I know it will go by doing some sub two again throughout the year.
So I'm relatively speaking just stays flat.
15% year on year down from 2019.
But that auto on Opex will stay within the guidelines that we provided daily.
Okay. Thanks, Sorry, and then my question on third third party credits that you acquired in May and June any any thoughts on pricing how much does it cost you and then looking forward in the back half of the year.
Well that will comments made on that but how about.
The magnitude availability of credit.
How should we think about that.
Like we.
See we can't give up all of our commercial secrets, but.
Why don't I want to let Keith.
Responded.
Yes the.
Obviously.
Pretty commercially sensitive information, but what I would say is.
What we saw through the second quarter was significant upstream production turned off.
So the availability of those credits they are readily available.
We see that kind of persisting through the back half of this summer I kind of the July August timeframe as turnarounds are getting extended in with some of our peers and therefore more production remains offline that may be originally envisioned.
What I would say as you head into the fall, obviously doing turnarounds in Canada in the winter is not a good idea. So so we do expect some of that production to come back and the critical part will be relative to the overall curtailment levels. The over government has set and the amount of production offline and the amount of rail that's moving.
Are we in a essentially balanced market or is there additional progress challenges and then how quickly does rail ramp up to meet those egress challenges all that will then determine kind of where the differential settles and the economics of railing and the government also has the program in place.
If you rail.
You do generate additional production credit so in an economic where that makes sense economically we would look at.
Turning our program back off.
Appreciate the color Keith just.
So the credit market fairly liquid.
Hi, yes fairly liquid I mean that kind of runs month to month, John the tanks cycles. Thank you.
Thanks once once again, if you would like to ask a question. Please press star one on your telephone keypad and you have a question from Joe We can know with Morningstar.
Okay. Thank you kind of quick question as you think about your balance sheet.
Do generate free cash flow.
We are you anticipating it paying down your revolver, maybe some of the I think if I think sort of maturity sorry.
I will hop in the next few years.
Yes, Joe it's John.
You're right in your thinking that.
The dollars today, we'll go to the revolver versus.
Into the bond market and that all being said, we are thinking about our 20 twos and our 20 threes.
And how we would refinance those going forward. So it all comes into our thinking but over the short term.
Any free cash flow is really going to get applied toward banking facilities.
Thank you.
Once again, if you'd like to ask a question. Please press star one on your telephone keypad.
And we do not have any questions at this time ill turn the call over to Ms. Wendy.
Thanks, operator, and thanks, everyone for joining us today that concludes the key linae and conclude their call.
Have a great hey.
Thanks, everyone.
This concludes today's conference call you may now disconnect.
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