Q2 2020 Imperial Oil Ltd Earnings Call
[music] good morning, everybody. Thank you for joining us on our second quarter earnings call.
To start I'm, just going to introduce the senior management here in our virtual room, we have Brad Courson, Chairman President and CEO.
Then Lions senior Vice President Finance and administration Teresa Redburn, Senior Vice President of commercial and corporate development and Simon younger senior Vice President of the upstream.
So I mean as usual I'm going to start with the cautionary statement and note that today's comments may contain forward looking information any forward looking information is not a guarantee of future performance in actual future financial and operating results can differ materially depending on a number of factors and assumptions forward looking information and the risk factors and assumptions are described in further detail on our first.
Our sorry second quarter earnings press release that we issued this morning as well as our most recent form 10-K and all these documents are on SEDAR Ed Garding on our website. So please refer to those are the format as usual we will start with some opening remarks from Brad and Dan is going to take us through the financial results and then back to Brad for an.
Operational update once that's done will then go to Q in Asia, So with that I'll turn it over to Brad.
Thanks, Dave.
Well good morning, everybody and welcome to our second quarter earnings call I Hope, it's a view and your families are staying healthy as we continue to manage through these challenging times.
As you know, we've been phase with unprecedented health and market conditions over the last quarter.
And unfortunately, many of the impacts are still with us today.
But as a company we have been able to demonstrate our ability to adapt quickly and although our second quarter results reflect just how challenging the environment has been I.
Im pleased with our response across the organization.
This response, along with our strong balance sheet and level of integration.
Has allowed us to weather the storm without taking on further debt and positions the company well to capture the value of improving market conditions going forward.
Before we get started with reviewing the second quarter financial and operating results I want to take a minute to give a quick update on our efforts to manage the health and safety of our workforce during the cobot pandemic.
As Youre aware, we've talked on the first quarter earnings call about multiple cases of co bid at our hurdle asset.
A detailed at that time the steps, we were taking to manage and address the situation such as working closely with Alberta health services, making voluntary cobot testing available to all employees and contractors at Carol and various other steps such as changing our rotation schedules reducing capacity.
On flights and buses and ensuring our workforce is employing best practices with safe distancing and use of proper protective equipment.
And as a result of these efforts I'm very pleased to say that Alberta health services declared the cobot outbreak to be over as of June 14th in fact, we have not had any new onsite cases related to the curl workforce since may 18, which is very positive.
Yeah.
I would also point out that we continue to take Covidien mitigation steps at all of our operating facilities and office locations across the country.
And finally I would also like to take this opportunity to once again express our deep and heartfelt appreciation and gratitude for all those working on the front lines of this global pen Devon, we just can't thank them enough for the sacrifices they are making each and every day to keep us all.
Safe and provide us with are essential services.
Thank you again.
So now, let's turn to second quarter.
The combination of demand reductions brought on by the Covance pandemic and the oversupply shock, resulting from the OPEC plus actions created an unprecedented challenging business environment.
As a company, though we have remained focused on maintaining the health and safety of our workforce, ensuring the strength of our balance sheet and preserving optionality for the future.
Significantly lower global demand heading material impact on crude oil and product prices.
Which in turn negatively impacted our reported financial results.
Early in the quarter, we communicated a number of steps we were taking to reduce spending and modify our business plans to adapt to these challenges, including capital and expense reductions revisions to our turnaround plans and suspension of our share buybacks.
Each of these steps was necessary and prudent.
And I'm pleased to say the entire organization has worked very hard and made excellent progress towards delivering on these commitments.
With respect to our optimize turnaround plans I'll provide more details when I speak at the asset level. However, let me just summarize by saying these revised plans as well as other efficiencies steps. We have taken resulted in our second quarter production and manufacturing expenses.
Being over 300 million.
Or 19% lower than in the first quarter, which puts us year to date over 450 million or 14% below 2019 year to date expenses.
These reductions are being delivered across the entire organization.
And while some are related to deferral of work such as some of our revised Turner turnaround plans.
Over 50% of these savings are structural in nature, and we will fundamentally reduce our unit costs and breakevens going forward.
And consistent with our long driving history of.
Of driving increased value in the business, we will continue to focus on identifying further efficiencies.
In addition, our capital expenditures in the second quarter were down 222 million or 52% versus the same period last year.
This reduction is being achieved in large part through adjusted pacing of project execution.
Which in the cobot environment helps enable us to ensure the health and safety of our workforce.
We continue to spend at typical sustaining capital levels, which of course is critical to ensure we do not compromise safety and reliability.
As well as spending on some selective growth and value enhancement projects.
So between the operating cost reductions and the Capex efficiencies, we have delivered so far.
We are well on our way to delivering the combined $1 billion and expenditure reductions we committed to at the end of March.
Now moving to operations, while production and refining volumes were down versus the first quarter.
This was not only driven by external demand factors, but also by the conscious decisions, we made to accelerate and extend planned turnarounds.
These adjustments were made to better align volumes with the demand challenges.
We saw in the market and to protect the health and safety of our workforce.
I'm very proud that the organization was able to complete the significant planned turnaround activities, both safely and cost effectively.
And one and with much of this activity completed now we are well positioned to capitalize on the strengthening market factors and are looking forward to the ongoing recovery.
I'd like to also point out that once again hurdle delivered very positive results relative to our revised guidance.
The new crushers continue to support our goals of higher reliability and lower unit operating cost SEC hurdle.
While we reported a loss of 526 million in the quarter. It's important to note that this was in large part driven by challenging upstream price realizations and significantly reduced downstream refinery throughput and product pricing due to weak demand fat.
Actors that we have little control over.
However, we did take actions to mitigate these impacts and in the areas. We do control we delivered strong results and I'll highlight these in greater detail.
I would also note that our earnings increased month over month as the quarter progressed.
Cash used in operations in the quarter was 816 million, including a working capital headwind of $170 million.
Our cash on hand, and cash conservation efforts supported capital expenditures of 207 million and a return to shareholders of 162 million by way of our second quarter dividend payment.
This was accomplished without increasing our debt position.
So let me say that again.
Without increasing our debt position.
My guess is you have not heard that very often this quarter.
While market factors, where a significant drag on cash generation in the quarter.
Cash from operating activities also saw improvement as the quarter progressed and commodity prices strengthened.
Combined with cost reductions.
Operational strength select growth initiatives and with a significant portion of our turnaround activity for this year completed.
We feel confident about the business going forward.
We also remain in a strong financial position within industry low debt to capital ratio of 18% and sufficient access to liquidity.
All of these factors support the third quarter dividend that we declared this morning of 22 cents per share unchanged from the prior quarter.
Our balance sheet remains strong and we ended the quarter with 233 million of cash on hand.
So at this point im going to pause and turn it over to Dan to go through our financial performance for the quarter in more detail.
Thanks, Brad.
Our second quarter results were a loss of 526 million as compared to earnings of 1.2 billion in the second quarter of 2019.
Driven by rising commodity prices at the end of the second quarter. Our second quarter 2020 earnings included noncash gain of 281 million associated with the reversal of the inventory write down we took in the first quarter.
Looking sequentially and excluding noncash charges, we were down $900 million from the first quarter of 2020, driven by low oil and product prices and co. The 19 demand impacts.
These negative factors were partially offset by the substantial reductions in production and manufacturing expenses mentioned by graph.
Looking at performance by business line upstream recorded a net loss of 444 million in the second quarter of 2020 compared to net loss of 608 million in the first quarter.
Excluding the favorable non cash impacts of the inventory revaluation change in the first quarter and its reversal in the second results were about.
Down about $300 million from the first quarter. These results were mainly driven by lower realizations and lower volumes, partially offset by our focused efforts to reduce operating expenses.
Turning to the downstream downstream results decreased about $430 million from net income of 402 million in the first quarter two net loss of 32 million in the second quarter again, excluding the impact of the noncash inventory revaluation results were down around 530 million results remain.
It was the impacted by lower margins and lower sales volumes. These items were partially offset by favorable foreign exchange effects and lower operating expenses associated with our cost reduction efforts.
Chemical earned 7 million in second quarter, compared to 21 million and the first quarter of 2020 with the change primarily driven by lower margins.
Looking at cash flow.
Cash used in operating activities was 816 million in the second quarter down from cash generation of $423 million in the first quarter of 2020 cash flow is impacted by negative earnings and unfavorable working capital facts. Nonetheless, we ended the quarter with just over $230 million.
Cash on hand, as Brad noted and as Brad noted our total debt remained stable at $5.2 billion.
Imperials liquidity remained strong with substantial undrawn credit facilities.
And industry, leading credit rating and ready access to commercial paper and term debt markets.
Moving onto Capex.
Capital expenditures in the second quarter totaled $207 million down 124 million from the first quarter.
Year to date 2020, Capex totaled 538 million down 420 million from year to date 2019, consistent with our commitment to reduce capex by 500 million and in line with our guidance of $1.1 billion to $1.2 billion for the full year.
Reduced year to date spending compared to last year reflects the suspension of the Aspen project completion of the curl crushers lower unconventional capex as well as significant reductions in downstream capex.
As Brad noted.
Our ongoing Capex is focused on ensuring safe and reliable operations over assets, while continuing to progress high value growth and efficiency projects like autonomous haul trucks at Kearl.
Moving onto dividends.
Okay.
In the second quarter, we paid $162 million in dividends at 22 cents a share an increase from $147 million at 19 cents a share in the second quarter of 29 team as Brian noted in any case you missed it we did this without increasing our debt.
Our integrated business model and strong balance sheet position us well and this dynamic and challenging economic environment to continue to return cash to our shareholders.
Earlier today is Brad noted, we announced the third quarter dividend of 22 cents per share.
Ill now turn it back to Brad to go over our operational performance.
Thanks, Dan.
Upstream production averaged 347000 oil equivalent barrels a day in the second quarter, reflecting significant turnaround activity at curdle Cold Lake and Syncrude.
While volumes were down 53000 barrels per day versus the second quarter of 2019, we continue to see exceptionally strong performance at Kearl.
As I told you on the first quarter earnings call, we expected upstream production volumes to be negatively impacted in the second quarter as we dealt with the unprecedented drop in demand.
As Canada, along with the rest of the world dealt with the necessary travel restrictions self isolation and social distancing measures to address the global pandemic.
And in fact, we did see our production volumes dropped 72000 barrels per day versus the first quarter due in large part the steps we chose to take to optimize turnarounds in the current environment.
However, even with the reduced demand we have seen so far this year, we still expect to see a slight year on year volume growth, albeit less than originally planned.
I would also note that we are not driven by volumes, but rather value.
And at current prices the value equation drives us to maximize production. So that is exactly what we are doing once the turnarounds are completed.
And with our focus on reducing costs.
Our year to date production and manufacturing expenses in the upstream are down almost 15% versus the first half of 2019.
Now while no one should be surprised that volumes are down this quarter.
Let me tell you about the positive side of this and Thats correct.
In the second quarter, we produced 190000 barrels a day on a gross basis at Carl.
Down from 226000 barrels per day in the first quarter and down from 207000 barrels a day in the second quarter 2019.
The lower production volumes versus prior quarters are reflective of the revised planned turnaround activities at one of corrals two plants.
As we spoke about back on our earnings call last quarter, we made the decision to advance and extend our typical second quarter turnaround at Kearl to roughly an eight week duration versus four weeks. So that we could better manage the health and safety of our workforce through appropriate physical distances.
Yeah.
The turnaround started in early May and was completed in late June.
Actually ahead of schedule.
With less than seven weeks duration and at a 40% lower cost.
Our view at the time was that we would see production at Kearl average around 150000 barrels per day gross in the quarter.
So the actual production of 190000 barrels per day is an excellent result.
Driven not only by our ability to complete the maintenance activities ahead of plan, but in addition, we have seen the assets performed above expectations outside this turnaround period again, a testament to the effectiveness of our new crushers.
In fact, despite the significant extension of our planned turnaround.
Carl will still able to deliver a first half production record.
The highest first half volumes for any year in curls history.
And since the train was restarted.
And up to the point, where we commence the turnaround of the second train, which I'll comment on in a minute.
Hurdle averaged nearly 300000 barrels per day gross production over a period of more than two weeks, which is a strong indication of its capability.
Given the success of our revised second quarter turnaround activities, both in terms of managing health and safety and in completing the same scope of work at a significantly reduce costs, we decided to move up our annual turnaround of the second plant that Carl.
This effort is normally conducted in the late third quarter to early fourth quarter timeframe.
But instead, we have now commence this work as of July 11th and expected to be completed in late August.
This will leave us well positioned to take advantage of the ongoing economic recovery.
And again, the current pricing environment supports maximum production at Kearl once the turnaround is completed.
The other thing I would note is that although we had committed to an annual gross production rate at hurdle of 240000 barrels per day for this year.
The decisions driven by the market environment to extend both of our annual turnarounds suggests now that our annual production will be slightly lower closer to 220000 barrels per day on an annual average, but still reflecting year on year growth.
I would like to underscore however.
At this revised production level is not in any way reflective of operational limitations as I have pointed out the asset continues to outperform expectations when the environment supports running at maximum rates.
In fact this strong volumes performance is what has resulted in such a small revision to our initial annual guidance. Despite the extended duration of the turnarounds.
We've seen significant operating expense reductions at hurdle.
With production and manufacturing expenses for the first half of this year down over 20% versus the first half of 2019, which reflects a unit cost reduction of close to 30% and exceeds our $4 per barrel reduction target for this year.
This is in large part due to both the performance of the new crushers and to the way.
In which we executed the turnaround.
By extending the duration.
The turnaround staffing levels were more than 65% lower than typical.
And we were able to extensively leverage imperial employees for much of the work.
In addition, we continue to invest in projects that will deliver further value such as the fleet conversion to automated haul trucks.
Altogether this reflects material progress towards our us $20 per barrel unit operating costs commitment.
Moving to Cold Lake.
Production at Cold Lake was 123000 barrels per day for the quarter.
In line with the 15000 per day.
15000 barrels per day impact, we communicated on the first quarter call related to the planned turnaround work at our Mohican plant.
Which was an almost five week effort and is now complete.
Year to date production and manufacturing expenses that Cold Lake are also down in fact, nearly 10% down as a result of the cost efficiencies, we have been focusing on with that asset.
And as we look at the rest of the year for Cold Lake, We expect full year production volumes to be around 135000 barrels per day, which is slightly behind our original plan of 140000 per days barrels per day.
The drip the differences driven mainly by steam management challenges. We are currently experiencing at Nab VA.
We're also continuing to progress our future growth investment in Grand Rapids, where we will be deploying our essays SAGD the technology to grow volumes at reduce costs and lower greenhouse gas emissions intensity.
We've had to slow the pace of development due to covert considerations with execution, but continue to progress it as a high priority growth opportunity.
Sim crudes average production of 50000 barrels per day, our share in the second quarter came in at the high end of the 45 to 50000 barrels per day range, we provided on the first quarter call.
As we discuss back then.
The owners agreed to move forward with a revised turnaround plan whereby the turnaround efforts would be managed as a number of smaller discrete scopes of work.
Which can be completed by a smaller workforce, enabling appropriate physical distancing.
This plan originally had the work running through October but.
But it now looks like the majority of the work should be completed in September as that turnaround is going better than planned.
The key work completed up to this point also provides flexibility around production levels through the third quarter, depending on changes to market conditions.
The asset continues to move ahead with the construction of the bi directional interconnecting pipeline, which will support increased reliability and utilization.
This line is still expected to be in service in the fourth quarter of this year.
And this is just one example of how the asset and the ownership are working together to identify structural changes and capture efficiencies to optimize the operation against the backdrop of a very dynamic market.
Now, let's move to the downstream.
We refined an average of 278000 barrels a day in the quarter, which was down 66000 barrels per day versus the second quarter of 2019.
The difference is mainly due to reduced runs associated with covance related demand.
Reductions and our revised turnarounds.
Which are progressing very well I will note.
Now, let's talk briefly about those revised turnaround plans, which why initially talked about on our first quarter earnings call as part of our efforts to manage our operations in this current environment.
We revised the second quarter Sarnia turnaround to include primarily just the coker and expanded the duration to reduce onsite personnel.
This turnaround started back in April.
Continues today and is going very well.
We're proud to say that based on progress today, we expect to complete the turnaround 13% below plan on a cost basis and have kept all of the workforce safe and healthy with our cobot protocols.
The work will be completed in mid August as per our current plan.
And similar to the work apparel the changes here contributed to our reduced expenses in the quarter.
We also had a turnaround plan for our stress Kona refinery.
That was originally expected to start late in the third quarter.
In this case, we accelerated.
The shutdown work into the second quarter, but was significantly reduced scope.
And that work has now also been completed.
Our Cogen project that strap Kona is nearly complete and is expected to be online by the end of August.
The Cogen will deliver operating cost reductions as well as environmental benefits.
And these are just a couple of examples of various efforts executed in our downstream business that.
Cumulatively are expected to contribute over $200 million towards the company's 2020 cost reduction efforts.
I am extremely happy to have much of this essential work behind us this year.
Leaving us well positioned to respond to improving product demands.
It's really a testament to the agility of the organization to respond to rapidly changing demand and price signals, especially recognizing that these turnarounds are multiple years in the planning and we adjusted them in a matter of weeks.
I want to emphasize that all business critical work will be completed as planned to ensure optimum operation once things returned to normal none of the work deferred will impact the safe and reliable operations of these assets.
As for how the rest of the year looks while we are seeing demands for refined products recovering.
Given the uncertainty in the marketplace, we're not offering updated guidance at this time.
We will continue to adjust and adapt as demand and market conditions change.
However, with most of our downstream maintenance behind us, we're very well positioned to respond consistent with the recovery end market demand.
As with the upstream or downstream organization has been focused on cost reduction and our year to date operating expenses are down over 12% versus the first half of 2019.
On the sale side petroleum products sales were 357000 barrels per day in the second quarter down from 477000 barrels per day in the second quarter of 2019.
Consistent with the refining throughput the demand impacts due to cold that have resulted in volumes that are significantly lower than we would typically expect to see in the quarter.
But now a bit more.
Comments on demands for the various products, we may can sell.
On the first quarter call I mentioned, we were seeing demand reductions in the range of 50% to 60% on motor gasoline.
Probably 20% to 30% on diesel and 80% to 90%.
Reductions on jet.
Through the second quarter industry demands did start to recover as various jurisdictions around the country move towards reopening.
While current demands vary depending on a number of factors, including geography.
I have seen industry numbers that indicate demands for motor gasoline are approaching 90% of typical.
Diesel is in the 85% to 95% range.
Jeff demand has seen some minor improvement, but still sits at only around 30% to 35% of normal. So clearly the most challenged from a recovery standpoint.
We saw petroleum products sales increase each consecutive month in the quarter reflective of the ongoing recovery in the economy.
However, I would also point out that in this tough demand environment.
Our demand for asphalt remained quite robust and we were able to deliver very strong results in that segment.
In fact, we set an all time production record at stress Kona for the month of May and sales in the east were at record levels in both May and June enabled by shifting Jeff production to Sarnia. So we could produce more asphalt at Namoya code to meet the stronger demands.
Shifting to chemicals, our chemical business continues to be profitable in the current market with earnings of $7 million in the second quarter.
Although this was down from $21 million in the first quarter.
Volumes remained fairly flat, but we continue to experience margin pressure as we've talked about for the past few quarters.
Although our strong integration with the refinery and proximity to customers does mitigate this impact.
Okay.
Just before we wrap up I'd like to also highlight.
At the Canadian centre for diversity and inclusion CCBI.
Has awarded Imperial it's employer initiative of the year Award for Western Canada, as a result of our benefits focused indigenous business performance.
In the as at the Basket program.
We are very very proud of our relationships with the indigenous communities, especially near our operations and in this particular instance, it all started quite a few years ago, where the realization that indigenous communities near our curl operation, we're facing challenges funding a variety of necessities and.
Alluding housing power generation community infrastructure training and education.
Imperial came up with a novel approach to contracts and partnerships that has benefited all parties. We started providing indepth support for business development of indigenous suppliers that helps these companies grow and learn to compete in the marketplace.
This priority focus on growth in our partnerships with indigenous businesses and communities is happening near many of our operations and we are pleased to be recognized for this as one example of our commitment to SP.
So now to wrap up.
While there is no question that the second quarter was extremely challenging.
In fact, probably one of the most challenging quarters in the history of our company.
I'm very pleased with our operational results and how effectively we were able to safely execute our revised turnaround plans.
Our turnaround work was completed in a way.
That not only resulted in significant cost savings, but also at a time when the financial impact of the lower production was minimized due to the low price and demand environment.
Now that we are seeing some recovery on the demand side, having most of this key turnaround activity behind us positions us well to take advantage of further recovery.
Our progress towards delivering the key operating and its operating expense and capital reductions is another highlight.
Across our entire business.
In all departments in all locations the company has risen to the challenge and deliver material cost reductions.
The savings we delivered in the second quarter should provide everyone with confidence that we will deliver on the annual commitments we are making.
These savings also support our ability to continue to deliver returns to shareholders.
We again maintained our dividend in the quarter.
And have achieved this with no change to our debt position.
This underscores the financial strength of imperial and our ability to weather the more challenging times in this cycle.
So with that I'll turn it over to Dave for the Q and a session. Okay. Thanks, Brad we did have a couple of questions submitted in advance. So I think we'll go to those and we'll move over to the live Q anyway. So the first question Brad comes from mental health that TD.
It's on the Grand Rapids.
The plan as of late last year was to develop the Grand Rapids to curb Cold Lake declines with startup targeted for 2021, how much of this plan changed given the downturn and his 2023 still a reasonable expectation for sustained recovery do a 150 plus thousand barrels a day.
Thanks for that question Menno.
You know Grand Rapids continues to be a high priority.
Growth project for Us for the reasons I described both in terms of its contributions.
To to our cost structure, obviously volumes, which.
We expect to be quite profitable, but also has a material impact in lowering the greenhouse gas intensity of our operation. So.
Through this very challenging time it continues to be a priority for us we have had the slow it down just to manage.
Kind of coded safe distancing, which impacts the scan the execution schedule.
But the team has.
Been very creative and working hard to see how they can main Ted maintained schedule as best as possible our current outlook shows that.
We would expect to complete the first pad and be able to start injecting steam.
In early 2022, and and would have volumes.
Produce thereafter, and so at this point, we're still quite optimistic that by 2023, we will see a substantial contribution from Grand Rapids.
And obviously that is a key enabler to us sustaining our recovery two to 150.
Thousand barrels a day.
Now when we have our Investor day in November our plan is to give a complete update on Grand Rapids.
As well as cold Lake in general and so we'll be able to talk more specifically to what that volume profile looks like in the out years. So thank you for that question and minimal also had a follow up with the full understanding that's still very early days in terms of setting. The 2021 budget can you Directionally talk us through some of the key consider.
Ratios across your upstream and downstream assets assuming district.
Yes, and I refer you are I assume you're mostly talking to our capital budget in that regard and you're right. It is early days were right in the middle of our business planning cycle, which we would expect to conclude over the next couple of months.
You know, where we started this year of course was we expected to have capital spending at the 1.6 to 1.7 billion dollar level and we very purposely adjusted that in light of the market conditions.
To a lower a $500 million lower number of 1.1 to 1.2 billion and as you heard in my comments and Dan's comments, we're well on track to delivering that.
And so if you were to assume that we would end up the year somewhere around that 1.1 to 1.2 billion range.
Yeah.
No I think we're going to find ourselves.
Somewhere.
Close to that number for next year, maybe a bit higher I don't see us returning to the one six to one seven.
But will be somewhere in that range and I would say the key is that we're approaching next year very much as we are currently in that where we absolutely have to progress the sustaining capital projects that maintain safety integrity reliability of the of the operator.
Once we do have some high value selective growth projects.
Like Cold Lake that I, just spoke to and we've got some in the downstream.
As well as infrastructure projects as well and so we want to progress those as timely as we can a big question right. Now is you know what was the Covance situation look like as we finish up this year and move into next year.
And so because of that we're going to maintain flexibility with our plans.
Just as we did this year and so again in November at Investor Day, we'll paint maybe a more clear picture of of exactly what that updated guidance is for next year, but as I said, it's going to be somewhere in the range between where we end up this year versus where we expected.
To start this year.
And next question comes from Prashant Rao at Citi.
That remain controlled through the quarter unexpectedly net debt to capital moved up does it feel like where the balance sheet stood at the end of the quarter is pretty much the high end of where leverage will go during this downturn or is there room to gear up a bit more if needed.
Well I might turn that over to Dan, let Dan talked little bit about above where we are with debt to capital in our views. There sure clearly we have plenty of the ability to lever up if that is what's needed we have.
Quite a bit of Undrawn committed facilities, we have ready access with our credit rating commercial paper and term debt markets. As I said now the question is well we need to do that and that's going to depend on market conditions I think we were optimistic.
With market conditions and pricing as it is an improved pretty pretty dramatically from from a really kind of horrific April to June being much better month for the industry.
With those kind of continued improvements we're optimistic we won't caf two increased debt, but obviously, if we do we have we have the capability and we'll do that as needed.
Sean had a follow up also how to downstream utilization trend sequentially through the quarter and based on three key to date is 80% plus a reasonable expectation for the third quarter related to this can you. Please discuss how the impacts to your downstream network.
To the pandemic may have deferred from peers book Canadian and US Okay. Thanks for that question for Sonic.
Okay.
Over the course of the quarter, obviously a lot of volatility.
Certainly.
We changed our turnaround plans as I described in that moves some significant downtime into the quarter, especially with Sarnia, which is continuing we had some smaller smaller downtime event that at stressed Kona as I mentioned as well.
[music].
And so that was kind of the foundational piece of it which again, we made those decisions based on our assessment of significantly reduced demand for for our products.
And.
And that was the other key driver.
Every day.
That the downstream organization is optimizing their crude runs around what what the demand profile looks like and.
That was.
Sharply down.
In in the month of April we saw it pick up in May and June and so as a result over the quarter our utilization ranged from 60% at the low end back in April 275% at the high end.
And.
And in June.
June July was also kind of in that range of around 75%.
And who knows what the rest of the year will look like at this point again, we're going to be well positioned.
To operate at high utilization rates.
It should the market demand and the economics be there to support that.
We're very encouraged by.
By some of the demand profiles were seeing as I talked about the Adele and all three key segments motor gasoline were seeing improvements. These so we're seeing improvements.
And even in jet we're seeing some improvements.
Now those improvements you know have been right here at the peak of the summer months and as we all know Unfortunately, we are seeing some increased.
Cultivated cases across the country.
And so have a big question you know as to what that recovery period will look like.
We continue to be optimistic that will continue on this positive trend.
But but they're still uncertainty.
With that.
[music].
Your question about you know how do these impacts.
Hi, compare with our peers, both Canadian and US you know I think there they're very much in line with with what we've seen ill across the industry.
Although each operator is is having to make individual choices based on you know kind of their own specific economic situation, but.
I feel very good about where our downstream is positioned coming out of the second quarter and now moving into the third quarter.
Thank you for that for Sean.
Okay, we're going to switch over operator to the life Q in a would just ask folks pleased to as usual one question and one follow up.
Certainly ladies and gentlemen, if you have a question at this time. Please press the star and the number one key and your telephone to move yourself from the Q. Please press the pound.
Our first question comes from Greg Pardy with RBC capital markets. Your line is open.
Oh, Thanks say good morning all.
Brad you you touched on the steam management challenges that Navios, just wondering if you could add a bit more color. There in terms of how problematic. It is I mean that that project is how to checkered past I think as we all know, but just wondering if you can round that out at that.
Yes, Greg good to hear from me and thanks for the question.
You know.
Navios has been challenged project for US you know with mainly because of the reservoir performance and some surprises there with how the reservoir is responding to steam.
And so we continue to learn with that and we have seen some even slightly lower production than than what we had anticipated for this period of the year.
And that's that's causing us to to slightly revised downward our our thoughts on cold Lake for for the year.
I would still say it's nothing.
Two material in the context of Imperials overall.
Oil production volumes and the and the bright side. The upside is you know that with.
Grand Rapids, we're going to put that anew steam to good use and efficiently develop the Grand Rapids reservoir. So you know not.
Probably more will take more time at the Investor day to talk about Namdar.
But I.
I would be overly concerned about it in the big picture of of Imperial and as you just heard you now.
We are far.
Kind of compensating for for any slight nabih, a reduction with what's going on with Carl.
No no for for sure for sure.
And then just the second question is just on CBR, just crude by rail movements and we know that's pretty door market right now, but can you comment on maybe how much you had moving in the.
Second quarter, and then what the thinking is through the balance of the or it's got to be pretty limited I would think just given spreads but wanted to ask that anyway.
Yes, I know, it's it's a fair question and and normally I would cover it in my.
In my remarks at the front ended the call.
But you're exactly right. It has been very limited this quarter, so I didn't really feature it.
But in direct to answer to your question over the quarter. We moved on average about 15000 barrels per day, but that was all third party volumes.
So for Imperial volumes, we did not move any on rail over the quarter.
As as we look forward to the rest of the year.
As we've always said you know having rail available to us is a very strategic.
Insurance policy for us to ensure that we have multiple avenues of ie gris for our produced volumes.
And so you know as.
Production continues to pick up over the course of the year.
You know, it's very possible that rail will come back into the mix, especially depending on the arbitrage for movements between here in the Gulf Coast. So it is possible that it will pick up at the end of the year.
But as we sit here today. It has very limited utility in effect I think even gen. Scape shows that you know over the entire industry. There is probably 30 45000 barrels a day is all this move and not in rail right now and a lot of assets because there is.
Surplus capacity in pipe.
You know with which of course generally is the more cost efficient means of of transportation.
But again, we're starting to get signals that some of that.
Surplus capacity is about to get consumed you know as we move well into the third quarter. So so again that that may come back in the question.
Right understood thanks very much.
It's Greg.
Thank you and our next question comes from Benny Wong with Morgan Stanley. Your line is open.
Hi, good morning, Thanks for taking my question.
Brad appreciate your thoughts around egress and differential there I guess just sticking a one step further obviously, we've seen some headlines around.
Slide five and doubtful I guess I just wanted to get your perspective.
There is risk of line five being disrupted for an extended period, maybe talk about your flexibility and optionality there for your refinery than eastern Canada and for Dapple. Just curious in terms of any thoughts if if there's an extended disruption what impact that might have on some of the synthetic and NSW differentials.
On that site.
Yes, Thanks for your question Benny.
In terms aligned five we saw a very short term disruption.
Last month I guess.
As a result of you know at the time, some some concerns about that line but.
Fairly fairly quickly.
And bridge was able to work with the regulator and convince them that it was.
That the integrity was was sound and it was appropriate to put it back in service and they've got support for that and that's where we are today.
You know wins and so we feel quite good about.
The reliability of line five going forward based on our understanding of the nature of those concerns. So so we really don't view that theres much risk for us to have any extended interruption of line five.
But having said that the interruption, we had obviously caused us to mobilize contingency plans and through that we were able to put plans in place that was sufficiently.
Cover our refinery demands of both.
So with the potential for alternate.
Pipeline supply.
As well as rail and if needed even waterborne supplies. So you know our downstream team reacted very quickly to make sure there would be no interruption to our operations and Fortunately the weren't but but that has given a.
Since going forward as well.
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In terms of Dapple Dept, Apple really doesn't.
Affect us directly where we're not.
Acquiring any bakken crude directly from that system.
Certainly you know with it has the potential with an extended out is that that it could impact.
The differentials on the light crudes and of course, our refineries on balance Ron a light slate and and so.
Any widening of that differential could certainly be advantageous for us.
Got it appreciate those thoughts right.
My second question is really around.
Interconnect pipeline within crude.
Just curious in terms of how.
Strategically and how you guys managed that projects going to change going forward.
It's increasingly more tied to.
Cores assets and how they operate it I'm just curious in terms of how you guys think about that commercially and strategically and correct me if I'm wrong, but I believe the partners are responsible for managing to own barrels.
If that indicate than how does that change going forward when.
As much more interconnect within those two plants.
You have any.
You know I guess, what I would say is first of all.
This project is viewed as haven't.
Balance strategic benefits of between both the both Syncrude and Suncor, you know and that underpins kind of the commercial framework that's in place.
Broadly speaking, having that interconnection does provide.
Flexibility for both operations.
During periods of both planned and unplanned downtime and by having that flexibility it should allow.
For overall improved production.
And so thats the objective.
It's not appropriate for me to get into the commercial terms of that but but needless to say the partners are all actively engaged in how those decisions are made to how the pipeline has operated how the value is shared to make sure. It's all fair in appropriate but.
We feel very good about having that additional flexibility of force for Syncrude.
Great. Thanks, Brad.
And as I mentioned, Benny it is progressing towards fourth quarter startup. So it's very positive that we've been able to kind of keep that moving ahead during during the pandemic.
Thank you and our next question comes from the line Zhang with Goldman Sachs. Your line is open.
Hi, Good morning, and I just have one question and it's around our latest you around M&A.
I guess the questioning.
Now that we have Dan a couple Oregon isn't market.
It seems like.
Premium that the hot.
More amenable by potential Paul yet one of the handles that you think about.
I don't when you think about inorganic transaction.
Yes, Thanks for that question, Emily and as you can imagine we're watching that space very closely.
You know M&A is something that we do look at we do consider as we think about you know what our prudent investment choices and growth choices for the long term and as I've shared with review and others on on earlier calls.
We are keeping that aperture open up for any potential opportunities that we think with may very good strategic economic sense for us and our shareholders.
The market continues to be I think a bit volatile when it comes to M&A.
You know the I won't really speak to the two key transactions that were announced in the last month.
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Other than to say you know clearly there was.
A very unique fit the and I'll be between the.
Between the purchase or in the seller and Thats what allow those transactions to go forward.
But I would still stay on balance there is probably.
A pretty wide if you will bid ask spread.
Between sellers and buyers that is driven by different views of the price market now we have seen a little bit more stability in the month of.
June and now into July with crude prices you know so so maybe that does create some space for alignment.
But but I think thats. The biggest question Mark right now and especially if people are wondering now is the the co bid recovery going to continue on the current half or is there going to be a setback in all those things weighed heavily on.
On investors' minds and.
And so I think it's going to continue to be fairly slow M&A market.
In the foreseeable future there might be some one off transactions, but I don't think theres going to be a big wave.
Sparked by these most recent transactions.
Thanks for your question then.
Thank you and then next question comes from I sit Sen with Bank of America. Your line is open.
Thanks, Good morning, Brad Thanks for all the detailed some Carl if I could follow up on that you've been able to ramp up production up and down fairly successfully the supplemental crushers have clearly helped in your exceeding.
The unit cost reduction target and could you provide an estimate for let's say again, it's a moving target on WCS pricing, where revenues cover your variable cost and then I thought I heard you talking about maximizing production at current pricing could you.
Could you elaborate on that.
Yeah. Thanks, Thanks for that question I mean, again perils of a very positive story for us and and certainly.
No being able to have a highly reliable operation with a.
Continued improving and increasingly competitive crop cost structure.
Puts us in this position, where we do want to maximize production then we have seen although.
Prices in April and May we're very challenged realizations were very very low.
You know in the month of June we have seen the prices recover.
Pretty significantly at least relative to where we work and you know so in terms of WT I you know we've seen that pretty stable you know in that whatever 41 $42 range.
But equally important to hurdle is what happens with a differential and as you mentioned that that W. CS different differential has actually strengthened and remain quite tight.
Over the last couple of months and so you know that ill that results in realizations for hurled better quite competitive for us quite profitable for us and so.
That's why we're certainly keen to get this turnaround behind us.
And we'll be there and just a few weeks and and then there should be no barriers for us maximizing production that hurdle and maximizing cash flow at at hurdle.
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And as I said earlier I'm I'm, just super thrilled with the performance of the organization.
Not just volumes, but especially what they've been able to do on the cost structure.
Now.
Well when we set out our expectations back at Investor day for that $4 per barrel.
Reduction in unit cost that was going to get us in the mid twentys by the end of this year.
But I'll just tell you where we're operating everyday in the low twentys now and so this ultimate target of $20. A barrel is just around the corner for us so.
Im quite encouraged by that.
Appreciate thats very helpful bread, and if I could follow up on the cotton turnaround that you mentioned I thought 40% lower cost in the program outside of labor caused.
Such as moving away from contractors, what are some of the other areas of savings any particular buckets that you want to highlight that could be.
Using future turnarounds.
Yes.
I mean, a couple things I would say would be first of all.
Technology I.
I think that is a key enabler you know just as an example.
We have some very large pieces of equipment.
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That when we have a turnaround we want to do inspections.
Even if theres no issue, we want to use that downtime to confirm its you know its operating at the right level and there was no you know corrosion or other integrity concerns and normally we would have to go to great lengths took for not only clean out.
The vessel, but then to set up of proper entry procedures to make it safe for person for personnel.
May be lots of scaffolding inside of a large vessel will now what we're doing is we're deploying drones to do those inspections for us and.
We've been using drones for several years for external inspections, but now we're actually use in drones for internal inspections and I've seen the photos myself and it's just amazing that clarity.
Of visual that we can get with these drones and what that allows us to do is just minimize all the cost to prepare for the inspection.
Conducting the inspection itself is low cost and we can do it much quicker and so all those things add a lot of value.
So that so that's just one example, you know the teams also been doing a lot of work with some of our business partners around procurement material costs things like that and certainly that is.
As having a beneficial effect as well.
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We've been able to.
You know to conduct the turnaround with and some of these comments apply also to the downstream with our refineries there, but we're able to to do the work with if you will less overtime costs. So you know the overall cost the labors come coming way down.
So theres a few examples for you.
Thanks, Brett.
Thank you and our next question comes from Mike Dunn.
Your line is open.
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Thanks, Good morning, everyone.
My question was just asked.
My second one note can you guys just remind me the cogen at Strep Kona, how we should be thinking about.
I guess margin improvements.
Today or what's that starts up obviously.
I would probably have an escalating benefit over time.
Clean fuel standards implemented et cetera, but.
What should we be baking into our models for that thanks.
Yes.
Thanks that question Mike.
You know the Strep Kona Cogen project is a really important project for us both in terms of.
Of the efficiency.
Gains for power and energy consumption, but but also for.
Emissions improvements.
I actually don't have at my fingertips what.
What what the actual cost savings so that will be but certainly we can follow up with you offline.
Okay.
But but a very very beneficial project for us.
Thanks, Brett.
Thank you and I'm not showing any further questions at this time I'd now like to turn the call back to your speakers for any further remarks.
Okay, well. Thank you everybody. Thanks for joining us. This morning, just like to remind you as always if you have any further questions. Please don't hesitate to reach out to the IR team.
We're happy to help and just like to wish everybody all the best so thank you very much.
Thanks folks.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a good day.
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