Q3 2020 Cenovus Energy Inc Earnings Call

Third quarter results Conference call as a reminder, today's call is being recorded at this time all participants are in listen only mode.

Following the presentation, we will conduct a question and 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 of that session members of the media May then ask questions. Please.

Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Cenovus energy I would now like to turn the conference call over to Ms. Sherri went director Investor Relations. Please go ahead next month.

Thank you operator, and welcome everyone to our third quarter 2020 results Conference call here with me is our President and Chief Executive Officer, Alex per day, our Chief Financial Officer, John Mackenzie.

Executive Vice President upstream Ramsey and our executive Vice President downstream, so keep trustmark.

I refer you to the advisories located at the end of today's news release either.

These advisories describe the forward looking information non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion additional information is available in our annual Mdna and our most recent annual information form and form 40, yeah.

The quarterly results have been presented in Canadian dollars and on a before royalties basis.

We have also posted our results on our website at Synovus Dot com.

Alex will provide brief comments and then we will turn to the Q and a portion of the call. Please go ahead.

Thanks, Gerry and good morning, everybody as you know one Sunday, we announced a strategic combination between Cenovus on husky to create a resilient integrated energy later this year.

Transaction Optimizes, our cost structure expands our market access and strengthens our balance sheet it positions us as a more resilient company with increased and more stable free funds flow. It also gives us opportunities to expand margins across the value chain lowering our breakeven and accelerating de leveraging.

And and returns to shareholders, you've already seen us to drive significant costs out of our business through corporate and operating optimizations I'm extremely confident that we will achieve the goals, we have set with the transaction and realize the potential of the combined company.

But today I'm here to talk about our third quarter results I want to start by giving credit to our staff at synovus for keeping her operations running safely and reliably and for continuing to adapt to all the additional measures. We put in place in response to this pandemic I continue to be impressed with the dedication of each and every one.

Of our employees and how they continue to support each other through this time [laughter] through all of this our teams remain focused on delivering safe and reliable operating performance. We've had zero significant incidents across our operations to date in 2020, our teams have successfully navigated the health and wellness challenges.

As of the pandemic, well, increasing production and executing planned turnarounds at our two oil sands facilities as well as in our conventional operations as.

As well this quarter, we saw some significant health and safety milestones.

Across our operations at Christina Lake, our drilling operations as well as completions and well services teams achieved one year without a recordable incident and our conventional operations marked a one year milestone since recording a significant process safety event.

This third quarter once again demonstrated our flexibility and ability to utilize our full suite of assets to maximize the price received for every barrel. It reinforced our commitment to disciplined spending and maintaining our low operating and capital cost structure and de leveraging our balance sheet as crude oil prices showed signs.

I have a gradual recovery through the summer we were able to increase our crude oil production and clear our inventory of stored barrels to capitalize on this significantly improved benchmark price for western Canadian Canadian select we.

We continued purchasing low cost production credits from peers. So we could produce above our curtailment limit that allowed us to produce high quarterly volumes that are Christina Lake facility. This.

This increase was partially offset by planned turnaround and maintenance activities.

Our oil sands operation. This this quarter averaged almost 386000 barrels a day up from 373000 barrels a day in the previous quarter.

At a 9% increase from the third quarter of 2019.

We recorded adjusted funds flow of $414 million, which was a significant increase from the second quarter of 2020, when the unprecedented drop in oil prices resulted in adjusted funds flow of negative $462 million and we generated free funds flow of 266 million.

In the third quarter and made meaningful progress on reducing our net debt.

At the end of the third quarter net debt declined to approximately 7.5 billion from $8.2 billion at the end of the second quarter of 2020.

We had an operating loss of 452 million and a net loss of $194 million in the third quarter of 2020. The operating loss was largely due to an impairment charge of 450 million on the borger refinery and negative operating margin from the refining and marketing segment.

Well, we are pleased with our performance in this quarter, we expect commodity price volatility for the foreseeable future. That's why we look forward to the increased cash flow stability and enhance free funds flow the transaction with husky will provide with that I'm happy to take your questions.

Ladies and gentlemen, as a reminder, you can join the queue to ask a question. The question by pressing Star. One we will now begin the question and answer session and go to the first caller first question comes from Anil.

Security.

Hi, Good morning, everyone. I have one question then its unrelated to the to the Husky transaction, maybe you could just give us your thoughts on the outlook for your.

The operations over the near term and more specifically to the extent that.

W.G. I continue to trade in the mid Thirtys in the heavy differential.

All that in the in the $10 range, what can we expect to operationally through year end and maybe even early 2021, I'm, assuming a dynamic storage becomes part of the conversation, but any thoughts on that front would be would be helpful.

Sure.

No it's Keith just on.

I'll start and maybe not can talk with the operational side of things, but when we look at kind of the economics, even in the mid $30 W. CCI range and the tight differential that we see we still see ourselves as as variable cost netback positive. So we would anticipate to produce through this time ad.

At full rates.

You know as we look forward, obviously with curtailment ending in December we are unconstrained and no longer have to have to acquire a production credits to be able to do so so we it's something that we watch really closely and monitoring and because of the low cost nature of our production.

Well the produce and generate a positive.

Positive variable cost nothing.

Just to add to this noted ramzi from our upstream business if you remember.

In the second quarter, we are.

Actually curtailed.

Production no signs business by month on month, so that 60000 Boes a day and some in some days it was actually don't need 2000 Boes a day brought.

Brought not all back on as you can see in the third quarter as 9% higher than the second quarter. Overall offers production we have flexibility to.

To increase that up to.

Hi levels again curtailment was obviously limiting what we could do on once.

From December one virtual of a lot more flexibility, but it's always going to be a value conversation.

It's the volume rather than the actual volume of production that would be most interested in.

Thanks, Matt.

Thank you.

Next question comes from Greg Pardy with RBC capital markets.

Hi, Thanks, good morning.

Couple of free up maybe Alex just to pick up on the safety theme.

Just wondering if there are specific actions or thoughts you have that will be taken.

To ensure that the combined entity here post is going to have similar safety and reliability as snow. This is there anything you can add around that.

Yes, no Greg I'm happy to talk about that and I think as you guys can tell every quarter I, usually start out by talking about our safety performance and it.

It is the number one focus of this company a commodity prices can come and go but our commitment to to human safety and process safety is our number one criteria at all times so.

As we get through this deal and the deal closes ever.

Everybody can expect that the exact same focus on human and process safety that you've seen from us. So over our entire history is going to continue and we're going to ensure that we put the resources.

Towards that to ensure that we can deliver that that exact same.

Track record.

Okay, Great and the second one really comes back to how we should be thinking about hedging policy again.

You know in the context of the new organization very different integration prospects, but.

Also kind of tied to that question would be is with if you were to continue hedging would remain connected with storage optimization I'm. Just wondering if you could dig into that.

Sure maybe Keith can can start that and then John may want to weigh in.

Yes. Thanks. Thanks for the question you know when we looked at hedging this kind of really to two different components. One is around kind of the optimization side of the business. We are really trying to capture value from our storage and transportation assets.

When we think about that really we're we're seeing a value opportunity over a period of time or in different locations and to capture that opportunity we lock up.

Both sides of that transaction so.

From a financial side, we may lock it up and then as a as that price settles there could show plus or minus is but when we actually physically.

Physically sell the barrels we realize that on the netback side of things. So so we actually see a an uptick and maybe just a key example of that was kinda in April where our.

Our barrels were selling for about $4 a barrel, we could have produced and sold in hardisty for that price. We chose not to do that we steward those barrels are transferred those barrels down to the Gulf coast and store them. There and then come June or July we sold those barrels and realized an uplift of almost $25.

$80.

In that transaction, though we would have locked in the W.T.I. components as well as physical sale and because of that you know if W. Have settled that 35, we may have shown a realized loss, even though our netbacks were were materially higher than what they would have been in April. So when we think going forward obviously a.

Combined entity has a lot less exposure to the WCS differential in hardisty. So.

So that becomes less of a concern for us, but the combined entity still has no exposure to Devry CCI. So so maybe with that John if you want to pick up on kind of our corporate hedge so Greg I think theres three.

Answers to your question that I would give you know I think Keith really touched on in the first as part of this transaction is.

Is about us acquiring a number of other assets that give us many many more options to take or molecules to market to optimize the value that we get for them.

So you should absolutely believe that we're going to continue with the type of optimization hedging that Keith has just described for example.

Today, we would have about 10 million barrels of storage going forward, we're going to have closer to 16 as well as incremental pipe. So those opportunities are going to present themselves and.

In increased ways for us and we intend to take full advantage of the.

Secondly, I would say that one of the major reasons for doing this is to reduce volatility in our cash flows. So.

So sort of at a corporate level.

That becomes an inherent hedge.

This transaction will become an inherent hedge.

Now, we manifest or cash flow streams finally.

I would come back to you know something that Alex said.

Time, and time again is under Levered balance sheet.

The best.

Way to hedge at a corporate level to ride through these commodity price fluctuations and we've been really clear since we started talking about this transaction the balance sheet de leveraging is our number one commitment and you can expect us going forward.

To continue to prioritize the balance sheet on the free cash flow basis until Weve reached a point that we're comfortable with our debt levels.

Okay terrific. Thanks all.

Your next question next question comes from Chris Schott Route with Citigroup.

Good morning.

Thanks for taking the question I just wanted to talk.

Talk about the hedge is just a little bit more.

We should all the color you've given on the current program, though and.

And I think you can.

Indications seem they are staff at Synovus did a good job of communicating this to.

To all of us in the MDM and then be in a disclosures highlighting about from to Cuba.

The current program, how should we be thinking about you know how much volatility that might cause an AFFO per share.

Next quarter or I guess, this quarter and next quarter and and I guess related to that question.

If we adjust for those impacts this quarter it seems that.

The the core sort of FFO per share was was really mid 40 cents per share which.

I think speaks to the underlying quality of asset base to perform in this environment. So just curious about that and that's sort of thinking about how we should think about the remainder of this hedging program. We entered into going forward over the next sort of four to six months and and also sort of you know if that's the right takeaway there about the core reliability and performance of the assets.

Yes for sure. This is John Mackenzie I think you're thinking about the hedge program the wrong way.

And the hedge program that we've put in place.

Locks in additional profitability and my suspicion is you're confusing accounting treatment with with straight up economics, and you'll notice in this quarter, we sold many more barrels than we produce.

And we took the opportunity in Q2 to start storing barrels rather than sell them into the market.

What we do is we lock in that contango, along the curve. So that we're locking in sort of a four or five dollar per barrel margin.

By selling in Q3 versus selling in Q2.

If Dolby TCI rises by more than that that four or five dollar Inc.

Increment that the curve was showing us back in Q2 will show a hedging loss, but the reality is we're.

We're not speculating in the market and what we're doing is locking in incremental margin by selling in one period versus another so don't get confused.

By the hedging gains and losses, they really are a function of how W. T is moving in the marketplace, whether it goes up through one period or down through one period, but our hedging program is designed not to speculate but to lock in incremental margin.

Okay.

Thanks for that clarification.

I think another question I had was returning to the transaction I.

I appreciate that you probably can't give too much color around this right now but when.

When you look through asset monetization opportunities are sort of I guess.

Optimizing the portfolio Pam past post transaction post merger.

Could you maybe help us think about how you evaluate that just sort of what's the.

What's the construct by which you go through and and balancing profitability versus synergies with the overall portfolio.

Specifically I'm thinking outside of the thought of sort of black oil production.

The bad portfolio that you have on a consolidated basis any color there would be helpful.

Sure.

Anytime you you put two companies of this kind of scale and.

And scope together, you're going to go through a process and we have and are continuing to go through a process of.

Determining what is core to this business and what is non core and.

As you can imagine there are a lot of criteria that kind of going into into those decisions, but but really it at the base of them.

It is about the value of those assets can can generate.

In their strategic importance to the company. So you know what.

We will I think people can take it as a given.

That we are we are going to proceed.

To look at monetizing non.

Non core assets that are falling out of this combination.

From my own from my own perspective, I mean, I think I I don't know that I'm I'm willing to share at right now, but I think we already have a pretty good understanding of the kind of the kind of assets that were going to take a really hard look out.

In that regard and we're also going to be cognizant.

Of are they worth more to what are they worth more to other people, but I think the other issue.

Is is going to be is the time right and can we actually transact at values that are value, creating for our shareholders. So.

Expect more from US on this I think we're going to act.

Fairly fairly quickly and and.

Yeah, I mean, it's just going to take us a little bit of time.

Two.

Well, we're at a point, where we can talk a little more freely about it.

Okay I appreciate that thank you very much.

Yes north.

Next question comes from Phil Gresh with Jpmorgan.

Yes, hi, good morning.

I was just thinking about the rail contract that you have you signed up.

A little while ago I think it goes maybe till the end of 2022 and I apologize. If you addressed this on the last call, but what did around what happens is.

Once we get to the end of this period and now that you have the take away.

The excess takeaway that housekeeping provide.

Thank you Phil it's Keith just on yeah, you're you're right that some of those contracts fall off kind of at the back end of 2022. So we'll we'll evaluate that at that time.

What I would tell you is we quickly ramped down the program in a in the first part of this year when commodity prices collapse, but we didn't we didn't sit on our hands through that time, we actually continue to negotiate around those contracts and and have been able to further reduce are very.

Double cost on those contracts and because of some.

Some small investment that we made in the Bruderheim facility last year, we're actually able to store a bunch of unit trains at the facility, which which allows us to ramp up the program relatively quickly. So I think in the past we've talked about this this overall program not lending itself to kind of quick ramp up and ramp down.

In the span of kind of less than six months, but what we've been able to do is take a portion of the program and really have a agility and flexibility to ramp it up and ramp it down over the period of a couple of months now so we will look at.

On a market opportunities to be able to do that at those reduce costs for transport to the Gulf coast kind of over the next couple of years and then coming at the end of the contracts will kind of look at E grass and how it's all shaken out whether or not we would want to extend those or not.

Right. Okay, Yes, I guess my follow up to that would just be with.

With your comments about having lowered the cost is does this mean that the new transfer cost that we've seen this quarter, which are lower than prior quarters is a function of that cost reduction given.

Yes.

Yes.

Real not being utilized and then.

Is this the right way to think about the go forward.

And if we go into for coming out of curtailed that do you think you'd actually maybe start using that rail as we move into 2021.

Yes, so Phil you shouldn't be surprised to see us use the rail kind of in in the fourth quarter. Here. We are we are looking at starting up a portion of the program in November it's still enables us to to accumulate additional production credits versus having to acquire them in the market.

Through the supplemental production allowance and then in December you know it really comes down to a cost benefit analysis and with the cost reductions we've been able to achieve on the variable costs. We can actually make this program economic to run barrels down to the Gulf coast and realize higher netbacks.

You shouldn't be surprised to see us move some volume obviously not the full program through the fourth quarter, but some volume through the fourth quarter.

Which will help improve our overall netbacks, yes, Phil its Alex just maybe one thing I'd add to that that yet.

This this improvement in pricing we've been able to achieve is is really significant and it's a it's a tribute to keith's team, but but also our freight partners they have been.

Really good to work with and making this a much more compelling opportunity going forward.

And Alex from a macro perspective.

With the removal of their curtailment do you think the broader industry is going to need rail and I know that.

The commentary suggested not until mid 2021.

In as the decision point for Kirk.

For why to remove the curtailment, but what's your view.

Yes, I mean, I I suspect I mean, I think I've been pretty consistent about this but you know I think one of one of the very clear features of our industry is.

I think all of us have been very successful in driving costs out of our operation then.

Hi, I suspect with curtailment going away those barrels on the sidelines be they sort of you know too.

200 to 400000 barrels a day I do expect them to come back and and I would not be terribly surprised at all to see rail.

Well I I don't think we're going to see it at where it was a year and a bit ago, but as Keith said it looks like its making.

Economic sense for us and I wouldn't be at all surprised to see rail volumes moving up here over the over the next few months.

Great. Thank you.

Next question comes from Manav Gupta with credit Suisse.

Hi, guys.

Quarter over quarter, there was a lot of improvement in the net back obviously the benchmarks are more supportive, but just trying to understand look close condensate pricing a big headwind for you in Q and as that kind of lag Lengthily you cited closing the gap to the benchmark and that led to the improvement in net backs that you could.

I'm going to leave you on the condensate pricing that and Holly asking let hug dealing tuberculosis.

I'm going to have it's a it's Keith you know I think this is kind of a build on what John had talked about earlier and and kind of how we are trying to improve our netbacks by moving barrels at a one period into another so so in the second quarter, we were able to store a lot of barrels obviously those.

The pricing if we have sold them in that quarter would have been at a very.

Very low pricing, we stored those and move those into Q3 quarter and realized much higher realizations for those so I think if you look at our sales relative to production you can see now and.

An increase in sales in the third quarter relative to production and that's really putting those barrels in the market in a higher price environment and and not obviously all flows back into an improved netback for us.

Thanks, a quick follow up here is you're seeing a very positive trend in transport and blending cost going down next foster obviously, mainly as a part of it but if.

If you look at from one cumulated plus 14 Cookie seven now all the way down to 860 is there anything else that you're doing at Foster Creek to push the cost down in transport and lending decides screen, which is helping you out.

Manav I think you'll see a lot of variability.

Quarter to quarter. It all depends on barrels that we move by rail as you indicated but also barrels that we move on pipeline and which which production we choose to move down the pipeline. So some some months and quarters. It may be foster some months and quarters. It may be Christina Lake. It all depends on how we can get the maximum value for our barrel.

And that will drive some of that variability and and transport cost, but but we.

We are going to utilize obviously our assets to maximize that value you're right that with rail off through the third quarter, our transportation costs are down.

Because of that but you know we will use those assets to.

To capture incremental.

Thank you for the company. So so that you will see a a bit of a.

Variability quarter to quarter asset that asset.

And last question is envisioned 19 replacement any color anything you are hearing out there do you think this could be a 2020 lending event. Thank you.

You know everything that were hearing manav.

Is that they are marching towards two.

2021 start up obviously, some critical decisions coming here in the November time period.

Around some permits and that will then drive construction of.

That project, so we'll be watching kind of through the fourth quarter.

Intently and if they get their permits and start construction then than we do think that 2021 startup is realistic.

Thank you for taking my questions.

Next question comes from.

With Raymond James.

Hi, Thanks, guys and thanks for taking my question, maybe just the first one well in the quarter just any comments on why you Didnt also record any impairment at Wood River and just anything that maybe differentiated that asset test versus what he conducted an order.

Yeah, Thanks, Chris its John Mckenzie, one of the things, we do with all our assets every quarter is assessed for indicators of impairment.

And obviously with the refining cracks dropping as precipitously as they have been in and not recovering as quickly as they have.

We took that as an indicator of impairment in our downstream. So we evaluate both of those assets and the one thing I would say.

As a wood river is a more complex refinery with with much greater scale efficiency than we have in order. So.

The reality is when we look at that one versus the net book value and we kind of ran a note on the discounted cash flow basis.

We got to the answer to that is that we didn't get to but relative to the carrying value of wood River. We did not have an impairment.

Okay. Thanks, and then maybe circling back to the transaction with Husky here just wanted to dig deeper into some of the talk about physical integration between FCCL Lloyd complex.

I'm curious how much you you're delivering value chain, you think you can integrate there and I.

I believe your current doing slides also types and longer term contracts on coal they can and Polaris and how.

How do you think those contracts on those pipelines might play into those plans or even some of your other contracts for the downstream.

Yeah, We're we're right on the front end of this assertion and when we did our synergies and put out our targets. We were really clear that we didnt want to include any of that.

In our synergies the 1.2 billion that we put out as capital and operating synergies are really those synergies that we have a really high confidence that we're going to be able to get in a very short period of time.

So when you talk with the broader physical integration between FCCL in Lloyds through time, you know that.

It's an exciting opportunity for us we think that.

Through time Lloyd is going to be a very strategic asset.

And how we.

Integrate that and work through the molecular inter integration not just on FCCL molecules going into Lloyd, but the condensate coming back.

Is something that we are working through today, but it's too early in our minds to be talking about.

Future values and.

Magnitude of integration that's possible there, but it's really clear to us that his legacy asset at Lloydminster and it's going to give us a lot of optionality on the integration goes.

Maybe just off into slated for way to.

To achieve that physical integration.

It will it require negotiations with other parties between other than just you and husky.

Yes, it will.

Okay. Thank you.

Next question comes from Matt Murphy with Tudor Pickering Holt.

Hi, Thanks, guys I appreciate with the acquisition really playing out here your carbon emissions over the long term and that it will take some time to work through are firming up plans, there, but I guess given that perception of oil sands is being more missions insensitive and other barrels around the world and certainly appreciate that all oil sands isn't quite the same but but given those ambition.

And just wondering if you guys could provide a bit of a teaser on some of the things you're thinking about meeting those ambitions whether were talking solvents.

Urban thinks or otherwise thanks.

Yes, Thanks, Matt I mean, when when we came out with with our targets and our E. C targets in the spring I mean, I think we gave a little bit of color.

Around that and what I would tell you is we we didnt come out with those targets until we had done a comprehensive economic and and engineering analysis of sort of what options not not just what what were possible, but what options were actually achievable within our business.

As planned we would it would be pointless to come out with an E. CSG targets that werent grounded in the business plan. So that that was what we did then and if you think about it.

I would kind of say, it's a little bit all of the above that.

We've obviously been a leader in solvent technology, I expect that to solve and technology will will be a part.

Part of that.

Carbon sinks. This is something we are you know, we're looking at a carbon capture and sequestration, but one of the things I and and there may be you know there could be an element of.

Acquiring carbon offsets, but the one thing I would say that I think a lot of people don't appreciate.

Although there are a lot of projects that require capital.

Whether it is whether its cogen, whether it is solvent technology carbon capture there's actually we believe there are a great deal of benefits.

We can reduce our ghd intensity by changing how we operate the assets and so there's actually a whole suite of a whole suite of things and now with husky coming on get all their theres not only how we operate assets, but what assets.

A go forward basis get capital and what assets don't get capital and all of those have the ability to meaningfully improve the.

The GHG intensity.

Yeah I appreciate the thoughts there if I may and follow up on a completely unrelated note.

Just on the approach to integration with the Husky transaction I guess, if I go back to.

29, Investor Day, excuse me for example, which I appreciate his his role to at this point, but I think the strategy at the time was to take advantage of accessing a healthy amount of refining capacity in the U.S. market.

Other than owning yourselves for from a sort of integration I guess can you talk about what's changed there and the thinking was it just an opportunity with husky that was just really hard to pass up or did something I guess change and how you're thinking about.

The value of integration, whether a read through and how you're thinking about pipeline progression from Canada. Thanks.

Yes, I mean, it's a whole lot of things, but you know what maybe go back to where my comments have been on integration from the start about it I think I think what I've been very consistent on I've always said look I love the integrated business model I looked at our competitors and said it would be fair.

Past stick to have that kind of business model and take the volatility out of out of our cash flow and earnings related to our exposure to Alberta heavy oil pricing, but when when we looked at that like very in depth only a couple of years ago.

At the time.

You know crack spreads reighteen $20.

And every refining or or processing upgrading business or asset we looked at where it was just extraordinarily highly valued and I'm just not very interested and then picking off assets at the peak of the market and that's why we came to a strategy at that time.

I'm focusing on rather than on on processing of actually looking at opportunities to.

To get our barrels to market via logistics opportunity via logistics, whether it whether it was pipe or rail, where we could achieve a global price for our for our heavy barrels and.

The obvious difference is since the pandemic you've seen a you've seen a situation where everybody's values have come down, but if you look at the valuation metrics of of the husky merger.

You would see you know if you kind of break that business up into an upstream and downstream business. However, however, you do it.

You know that that that downstream 400000 barrels a day of molecular Lee integrated upgrading and refining.

To our to our barrels I mean, the valuation was was absolutely compelling.

I would just add to that Matt I think Alex used a really important trade as they're called molecular integration.

And that's what this up this opportunity really presents.

For Synovus going forward is the ability to have processing units.

That are tied to our molecules you know the consumed the molecules that we produce and I think that gives a whole different level of optionality as well as a whole different reduction of volatility going forward. So this isn't just about integration, it's about molecular integration going forward and tightening up our value chains and shortening up.

Then to the extent that we can.

Next question comes from Chris <unk> with Barclays.

Hey, guys. Good morning, Thanks for taking my question just a quick one for me.

On the conventional side it looks like your resuming some activity there in the fourth quarter.

And then Mike.

My read is that it's tied to sort of stronger seasonal pricing.

But just wanted to confirm that or or see if maybe no. This was a sign of interest to pursue some incremental opportunities on the conventional side in 2021.

Hey, Chris its Alex no I mean I I.

You you look at <unk>.

We've obviously been very disciplined over the last few years with the deep basin, then given given gas prices, where we found them over the last two or three years. The right decision was it was not to put material capital to that asset than this.

This is an opportunity.

With with gas prices as you've mentioned.

You know we can we can lock up gas prices for a few years at very attractive levels.

It's a short cycle. These are very very high.

IR are kind of drill to fill opportunities and it allows us.

To take that asset from a decline to basically.

Keeping it at least flat to modestly growing.

Understood. Thanks for that and then maybe just as a follow up anything you can offer in terms of the role that those assets might play in the pro forma company.

Yeah I mean.

I had responded to that question earlier about about asset sales and I I think as everybody knows.

You know we took a really hard look a couple of years ago at whether there was whether there was an opportunity to monetize a portion of that convinced of that conventional business for synovus and.

I think you can kind of assume if you put synovus as conventional business together with Huskies.

In a in a higher price environment.

Yeah, we're going to take a really we're going to take a really hard look at that I think by observation today is even though the prices have come up it's still a pretty tough market for value, but I expect that we'll likely.

Prove over over the over the next little while especially if prices stay where they are so we're going to we're going to take a very hard look at that.

Okay, Great. That's helpful. Thank you.

No worries thanks.

Next question comes from Neil Mehta with Goldman Sachs.

Thanks, Guy said twice a week and so the I guess the first question here is it maybe it's for you had given you know the husky assets really well, but as you looked at the last couple of years Husky learned to challenges has been operational execution excellence and that's showing up in different ways and.

In both upstream and downstream in terms of.

Performance as you look at those assets you think there are things to know this can bring to the table to kind of get them up to speed and how do you as you went through the process.

Valuing these assets how did you take that into consideration.

Yeah, It's a it's John not Jeff Neal.

Hi, guys I thought you said Thats I didnt.

[laughter].

Let us ahead of yourself.

Oh, I see I'm, sorry, [laughter], but I tell you. This was an absolute number one concern for for US Alex as mentioned right off the top of this call. The safety is always has been and always will be our number one concern going forward. So when we looked at this.

This asset base I would tell you that we had unfettered access to do our due diligence and we have been.

At this for nearly six months and I would say the diligence that was done.

On all aspects of these assets is really unprecedented in terms of my experience with the M&A market.

Typically on the PC side, when we look at the asset base that we acquired.

You know everything on the upstream that is operators is really right in our wheelhouse that it's right inside what we really do well as a company and we are very comfortable.

With the reservoirs the conditions of the assets the conditions of the commercial arrangements over the top and we think we can add value there.

And we think that that value can be realized in a fairly short period of time.

As it relates to the downstream we took a lot of time to look at some of the improvements in some of the.

Changes that Huskies been making through time, all the way from new personnel coming into their operation all the way through their safety process.

Safety systems as well as their.

Asset.

Condition reports as well as reliability and safety practices and I remind you we have two directors on our board who are very very deep in terms of.

Refining assets in the operations there so.

So it's something we took our time on its something that was absolutely top of mind for ourselves and the board I think we've done a thorough job of.

Ferreting out our level of comfort in this and we're comfortable that on a go forward basis, we're on the right path and that we've.

Satisfied ourselves that.

We we are not going to have these kind of instance going forward.

Great and and the follow up here is.

I had asked about this over the weekends, but I don't know if there's been a subsequent update any conversations with either the ratings agencies are your or credit investors about how how they view this transaction our pro forma away and whether this gets us to the bread crumbs to get back to investment grade.

You know I can't speak for the rating agencies, the volt put out their their comments now and you can read into those what you will but that's our expectation.

But we are sowing the seeds for a return to investment grade in short order.

That would be something that's very important to us.

Thank you Chad Thanks, Alex.

Thanks next question.

Next question comes from Mike Dunn with Stifel first energy.

Thanks, Good morning, everyone.

Not to beat it to death, but I did have a another question on the I guess the hedging strategy around timing of your sales versus your production.

Maybe not easily I had thought that this was.

Something that generally maybe some of the oil sands big players we would.

Could do based on what their outlooks for for for maybe seasonal turnarounds for them and others.

So just wondering John or Alex if if.

Timing of sales versus production was something that was strategic we've done in the past with hedging.

And then second part to that is.

How did you weigh the cost benefits of.

Delaying the sales of your own.

Equity barrels versus.

Walking in that contango by buying third party barrels and delivering them later.

Thanks.

Yes, Mike It's John listen if this is something we've always done.

But what I would tell you.

You know going forward is what is really important to us is maximizing the free cash flow to the organization.

So we look at is can we sell into the future using the assets that we have and we have pipelines and about 10 million barrels of storage available to us to increase the free cash flow.

And any future period now we do attach a cost to that there is an internal cost.

Of doing that.

I kind of approximates a few hundred basis points beyond our cost of capital but.

But we we do that on a diligent and rigorous basis to make sure that we're maximizing free cash flow maximizing returns to shareholders.

Okay. Thanks, John that's it for me yes.

Yeah. The other thing I would say Mike is this this is not something we're speculating on you know what we're doing is taking what the market gives us in terms of the shape of the futures curves and all we're doing is using our assets in playing along the length of that curve to maximize future cash flows for the.

The company.

Great and John Forgive me, there's been a lot of quarterly press releases. So if I missed it on the in the body.

Sure.

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Did you guys quantify like all in including the financial WCS hedging losses, but.

The net gain.

From that strategy versus I guess timing your sales to be you.

In line with your production volumes.

Well, we haven't given you is the net gain.

But what you see is the accounting in the Mdna and yeah, I think that's what's causing the confusion is the mark to market on the financial components of this versus what the underlying physical business is doing.

Okay, so you're keeping that number.

Of course your chest okay.

Great. Thanks.

Next question comes from Harry Mateer with Barclays.

Hi, good morning.

First question can you maybe talk about your intentions with the pro forma debt structure and if you plan to have very pricy treatment for the synovus and ask you've owned that for closing and perhaps if so how are you going to go about doing that.

Yeah, Harry it's John again, we're looking at all the options as around to your question Perry pursue and.

That's that's something we'll we're going to have to get back to you on a month.

I'm not going to talk about this morning.

What I would say, though.

Is.

We are of the view that investment grade is very.

Very important to this new company, it's one of the.

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Synergies that we believe having.

Haven't taken any value for but we think it's really important going forward. So you can expect us to do.

Everything required to get us back into that space. We've also committed to do and.

We will do this in a reasonably short term.

Tournaments, we'll come back to you with.

Fleet financial framework that would not only talk about capital structure, it and how we see that playing into that but it will also talk about capital allocation and the screens that we intend to run on that.

Together with shareholder returns, but we want to do that in a comprehensive way rather than give you one piece of the framework or do it incrementally through time.

Okay, great that's the.

And that will be helpful and.

And then apologies if I missed this.

On the call last week in earlier today, but have you guys talked about upfront cost to realize your synergy targets include there a major driver of the deal, but I'm just wondering sort of how much cash you think goes out the door initially to actually capture those.

Hey area, it's Alex.

I think the if you want to think about sort of the costs of putting the two companies together think about a onetime costs of just over about $500 million and that compares to the 1.2 billion a year of annual run rate synergies that we expect a largely get.

In 2020 watt and get the entirety of the men 2022.

Thank you that's helpful.

Okay our.

Our last question comes from the media with Robert Tuttle with Bloomberg News.

Yes, Hi, I noticed there was a a permit.

Permit or something filed with they are above a VR you that's going to be built near your rail terminal and you guys were looking at.

Our use what's your outlook on that I mean is there a plan to perhaps have long merit.

A bigger we're operating one of your rail terminal.

Yes.

Hey, Robert that keeps us on you know we filed that regulatory application just to give us the flexibility around that project, obviously with the.

With the transaction that's that's underway obviously, we're taking a another look at obviously the deal for you and and the location of the D are you. So that was just a.

Step in the process to make sure that we had a flexibility.

Yes, Robert it's Alex just to be really crystal clear on that we we kind of said when we were looking at the deal are you that we were going to do the engineering and permitting to give us the ability to.

To have the option to go forward on a on a D.R. you and no and no. One should think about that filing is anything more than just the carrying through on on on that direction.

Okay. Thank you.

No worries.

At this time I will turn the call over to Mr. probate.

I think that's the the end of our questions. So thanks, everybody for taking the time and enjoy the rest of your day.

This concludes today's conference call you may now disconnect.

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