Q2 2020 Cenovus Energy Inc Earnings Call
We recorded at this time all participants are any 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 Committee will have the opportunity to ask questions first at the conclusion about session members of the media Me then ask questions.
Yes, I said this conference call may not be recorded or rebroadcast without the express consent of Cenovus energy.
Now, let's turn the conference call over to machinery went director Investor Relations. Please go ahead and that's one.
Thank you operator, and welcome everyone to our second quarter 2020, <unk> results conference call.
Due to covert 19, physical dispensing guidelines, we do not have the entire leadership team together in the conference room downtown.
Here with me is our President and Chief Executive Officer, Alex per day, our Chief Financial Officer, John Mckenzie, our chief executive or by our executive Vice President upstream Norrie, Ramsey and our executive Vice President downstream Keith <unk>.
They will answer your questions well the other leadership team members are in leaders in listen only mode today from other locations.
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 a risk factors and assumptions relevant to this discussion.
Additional information is available at our annual Mdna and our most at most recent annual information form and form 40 F.
The quarterly results have been presented in Canadian dollars and on or before royalties basis. We have also posted our results on our web site at Synovus Dot com.
Alex will provide brief comments and then we will turn to the Q and a portion of the call.
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 was a maximum of one follow up question and then rejoin the queue for any other questions. Please go ahead Alex.
[laughter] showing good morning, everybody.
Continuing to stay safe and healthy.
[music] economy, it's starting to open up it's clear, we're still far from being able to look into rearview mirror.
The impact of Cobot 19.
I wanted to start stop by giving credit to our staff that synovus for keeping our operations running safely and reliably and for adapting to all the additional measures we put in place in response to the pandemic. It. It really has been incredible to witness the resiliency of our people and their dedication to looking out for one another.
[laughter] had been doing generally follow in the new procedures to prevent the spread of the virus that are sites in camps and staff have embraced technology to remain productive while working virtually no changes our teams remain focused on safety performance.
An example of that we had no significant incidents across our operations in the first half a year and our deep basin team achieved a milestone of zero recordable injuries or an entire year, which I think is truly a impressive given given the conditions that our employees and staff.
We've had to work under [laughter], we're working remotely gradually started returning to the regular job locations.
Proceeding cautiously to help ensure the safety of our people and the reliability of our operations.
[laughter] details now about our response to the recent downturn.
Well this quarter our industry has witnessed in recent memory.
[laughter] presented commodity price instability beyond what anyone I think 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.
The extreme volatility also highlighted what sets an oversupplied from our peers. It presented an opportunity for our marketing in upstream teams to demonstrate why shareholders should have confidence in this company wants 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 for 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 stand in store the mobilized oil in the reservoir.
Perhaps the western Canadian select increased almost 10 fold in June compared with April wanted faster ramp up real sense production back up to take advantage of the improved pricing well cost structure means with WCS price is at current levels, we're generating free funds flow and strengthening our balance sheet.
[laughter] essentially all the inventory that we wrote down in March was so and we realized the inventory write downs.
The adjusted funds flow and free funds flow by $529 million, excluding the impact of these write downs from the first quarter, we might have had positive adjusted funds flow of nearly $70 million in Q2.
Well, that's purchasing low cost production credits from peers. So we can produce 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 and liberal when WCS prices were less than $5 per barrel, we voluntarily reduced oil sands production to an average of just under 344000 barrels a day.
In Japan when prices were nearly 10 times that we ramped up production by 60000 barrels a day and more than 17% increase it happened over just a few weeks.
At Christina Lake specifically, there was any 80000 barrels per day difference for my last daily production in the second quarter, two our highest day in June.
Strain business is designed for flexibility as well provide an opportunities in terms of both timing and location of sales.
In addition to time in our production over the past months, well nobody knows our diversified transportation and storage portfolio to defer sales from April to June when we were seen higher price signals. The close working relationship between our marketing and operations teams are giving us a competitive advantage.
There are quick action in June resulted in free funds flow for the month of more than $290 million.
No the flexibility of our refineries men.
The refinery runs could be adjusted to take into account refined product demand signals to maximize value for our shareholders there as well.
We want to write a recovery from the low point than the downturn in April although we expect commodity price volatility for the foreseeable future.
We're not counting on a swift recovery second only to the safety of our staff balance sheet strength remains our priority. This downturn 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.
It's synovus.
We finished the quarter with net debt at around 8.2 billion, we remain committed to get a net debt down to 5 billion or below or the longer term given 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 high point for the year.
We have worked to ensure we.
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 Dot Com. This report provides context for the analysis, we performed before setting our ideas chief 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 E.S.G. 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, and 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 that 5 billion, that's gone kind of from the target to 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 or is there a lower boundary maybe even in the threes that you'd be sort of looking at is as.
Maybe maybe optimum optimum the terms are like running a really under leveraged balance sheet going forward.
Yeah. Thanks, Greg you know 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 bound and I think the easiest way for me that 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 or five months and I. It is not going to cause me any loss of sleep at night.
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 that's probably.
Directionally, that's probably something that our investors should be thinking about.
Okay terrific and then it might be question for John maybe just trying to hedging I mean, we picked up the hedges.
You put in 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 the 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 about this company is we do have substantial pipeline.
And 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 for Q2.
I really related to the optimization work, we do in 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'll just give me a quick example of how that works on an accounting basis. So you're not just on a go forward basis.
But if the marketers have an opportunity in May for example to sell a $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 what they'll do is no forward sell them and they use a financial derivatives to lock in that $4.
On the accounting side, what will show is for example of June damn close at $40.
We'll show $40 realize Asian, but a 16 dollar hedge loss. So we've locked in the 24.
In the month than we do it but what the accounting does it separates that transaction.
So when you see contango opportunities you see WT I rising through quarter like this that's 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 walk 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.
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 Chang with Goldman Sachs.
Thank you.
Maybe as a follow up from Greg and to turn really double down on the message, but that that is back early 2019 levels than what he thinks about the deleveraging process ahead of you.
This time bowed out or any kind of interim targets.
So look for before maybe could you could give him back on all.
Now complete concentrating on hitting that $5 billion net.
Consider all the areas.
Capital.
Yes, I think.
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 and so I I would not expect to see anything anything that would have us deviate materially from.
That and in the near future.
Yes heavily 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 that's clear.
One follow up.
Just on spreads have been very tight over the second quarter, but if you think about production ramping up.
In Canada, how do you think about where the light heavy differentials comes out.
Back end of the year and when do you think production levels, and Canada or as a whole retentive uncovered 19.
Thank you Emily what what do I have that off to Keith and.
He can give his view and I might I might add a little bit of color.
Yeah. 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.
Then coming into June we saw what I would say record tighter differentials and and I think be between the low in April to the high in June we've increased production at Christina Lake by 80000 barrels a day to capture that that record tightness and generate.
A significant free funds flow in the month.
As we look forward you that that opportunity prevail, because there's significant upstream production off in Canada, and we think that persist through the summer months, but rightly 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 their 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.
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'd, 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 going to be more of an organic process.
Yeah, Phil Thanks for your modeling purposes and for general assumptions, you should think of this being inorganic process.
One thing we've been really clear abode 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 of 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 and 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.
For 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 due to such a strong result on a month thinking maybe lagged condensate or something else Im just curious how you think about the rest of the are playing out.
Yes so.
When you look at June you're absolutely right as you on traffic month, and there's there's pieces of June.
That I would describe as one time in order of magnitude but.
The magically going forward they still exist two big drivers for June one was the differential dwt 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 and 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.
Although I don't expect.
July August to be as good as June.
Directionally they are consistent with June.
Okay, great. Thank you.
Next question comes from Manav Gupta with credit Suisse.
But it little bit on this inventory adjustment, though between 9 million.
Is it a onetime block contributed to it and should be as you know if it comes back.
As we go ahead this isn't the lifetime segment of course.
Sure enough I think the question was on the inventory build on the balance sheet.
It's a 339 million charge.
Operating margin.
Yes, so what you'll remember is at the end of Q1, we wrote off on a 588 million of inventory.
And what she sees that start to come through in the month of April in particular, so we realized.
As inventory write downs that we took at the end of Q1 on a cash basis in Q2.
So the total inventory.
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.
Backs on Board Foster Creek at Christina Lake that negative for the quarter full should we assume basically you had a very bad if and when things improve a little in me and then Divini will be in June that that I need to think about it.
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 mid June was much much better ways to for an average.
Okay and last question is do you have a temporarily suspended.
Foster Creek the.
Program and.
In the quarter of the council.
Lending calls as I actually thought it came down so I'm just trying to understand how should we assume a more trending downward as some as living is I mean suspended of this will also functional Philip condensate right.
[music].
Oh boy, sorry, you're thinking of the rail program was that the question Mina yes.
Trying to look at the cost will be going and blending cost at Foster Creek started to come down from 47 to 11 that Eagle I'm just trying to onsite has the spending of the meal program as well below that.
Yeah, no absolutely it has and if you look at rail on.
Fully loaded basis to move 100000 barrels a day.
Of.
Crooner 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 ball, but the true savings is about 60 million to months, 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 first questions around.
Your production profile in the back half of the year.
As you guys exited the quarter with very strong volumes.
I am assuming oil prices will be a factor is also wanted to get your thoughts around availability to utilize more curtailment credit.
Lastly back half 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.
Yep any I mean, we certainly we're able to take advantage in in Q2 of some really attractively priced.
Credits and I think.
The the word is out and we've seen those.
They've increased somewhat in price, but maybe I'll, let keith kind of comment on what we think for the balance of the year.
Thanks for your question. Many you know as we look through kind of the back half of this summer.
There are still is significant turnaround activities happening in the industry that keeping a fair amount of production offline. So.
The ability of those credits to be able to produce we think is 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 while 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 careers 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.
Look this is more for Alex I guess I just wanted to tap into your extensive midstream and pipeline experience and get your mix perspective around the headline we've been seeing around like five and doubtful.
Do you think about the risk, particularly have you seen extended shutdown at those pipelines.
And just more broadly.
Is this 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 and I I wish I am not im 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.
I have some impact on on the lighter grades but for us.
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 of a pipeline. The went through an incredibly exhaustive environmental review and regulatory process.
[music].
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.
I hope it is just I hope that the legal issue is 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 basically all infrastructure.
Across North America. So I think it is a significant issue I you know from my perspective.
We identified.
The probably the first day I got here identified that one of the biggest challenge for Synovus was market access in the grass and as I've said to many people hope in prior periods in the strategy.
And we need to have plans it particularly in a world where we may see continued challenges the pipelines and Thats why you you've seen us do the things we've done to secure more pipeline capacity the work we've done.
On supporting Enbridge is contract carrier regulatory application and the.
The the early work that we did on the D. R U 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 those talk.
Yes, 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 really interesting on Christina Lake production volumes.
And I think.
Shows that Youve managed to your volumes pretty well with WCS.
And I think Alex you mentioned.
80000 barrels a day swing my question is.
Christina Lake has slow SLR and a low operating costs I think in the six or $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 hope we did obviously in April is reduced 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 sub two again throughout the year.
So I'm relatively speaking just stays flat.
We are 15% year on year down from 2019.
But but I don't know on Opex will stay within the guidelines that we provided daily.
Okay. Thanks, sorry, and then my question on.
Third project 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.
There are readily available.
We see that kind of persisting through the back half of the summer 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.
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 Alberta 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.
And 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 of railing and the government also has the program in place that 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 on.
Appreciate the color Keith just.
So the credit market fairly liquid.
Yes, it's fairly liquid I mean that kind of runs month to month, John Thanks cycles. Thank you.
Thanks once once again, if you would like to ask a question. Please press star one on your telephone keypad and we have a question from Joe Giordano with Morningstar.
Great. Thank you kind of quick question as you think about your balance sheet.
Do generate free cash flow, but rest of the are you expecting it paying down your revolver mix.
I think if I think sort of maturities that sorry.
Up in the next few years.
Yes, Joe it's John.
You're right in your thinking that.
The dollars today would 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 again 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 went.
Thanks, operator, and thanks, everyone for joining us today that concludes the Q and am concludes our call.
As a great.
Thanks, everyone.
This concludes today's conference call you may now disconnect.
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Yes.
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