Q3 2020 Cenovus Energy Inc Earnings Call
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 of the pandemic, while increasing production and executing planned turnarounds at our two oil sands facilities as well as in our country.
Additional operations.
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 maintaining our low operating and capital cost structure and de leveraging our balance sheet as crude oil prices showed signs.
Of 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 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 activity. These are.
Our oil sands operation. This this quarter averaged almost 386000 barrels a day up from 373000 barrels a day in the previous quarter and 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.
While 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.
As a reminder, you can join the queue to ask the 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 soft with security.
Good morning, everyone I have one question and its unrelated to the to the Husky transaction, maybe you could just give us your thoughts on the outlook for your side the operations over the near term and more specifically to the extent that Wi Fi continues to trade in the mid Thirtys in the heavy differential.
Call it in the in the $10 range on what can we expect to operationally through year end and maybe even early 2021, I'm, assuming dynamic storage becomes part of the conversation, but any thoughts on that front would be would be helpful.
Sure.
And the notes Keith just on.
Ill start and maybe Mark can talk with the operational side of things, but when we look at.
Kind of the economics, even in the mid $30 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 at at full rates.
As we look forward, obviously weve curtailment ending in December we are unconstrained and no longer have to have to acquire our production credits to be able to do so so we it's something that we watch really closely and monitoring and because of the loan cost nature of our production we are able to produce.
And generate.
Positive variable cost netback.
And just to add to that is noted ramzi from our upstream business. If you remember.
In the second quarter, we actually curtailed.
Production in auto signs business by month on month of 60000 barrels a day and some in some days it was isolated oneq 2000 Boes a day.
Well brought not all back on as you can see in the third quarter as 9% higher than our second quarter overall average production.
We have flexibility to.
To increase that up too.
Higher levels.
Again curtailment was obviously limited in what we could do on lunch.
From December onwards, we'll have 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 Minto.
Thank you.
Next question comes from Greg Pardy with RBC capital markets.
Hi, Thanks, good morning.
A couple for you 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 proposed is going to have similar safety and reliability as synovus is there anything you can add around that.
Yes, I know, 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 is the number one focus of of this company 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.
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 will be is with if you were to continue hedging would it will remain connected with storage optimization I'm. Just wondering if you can dig into that.
Sure maybe Keith can can start that and then John may want to weigh in.
Yes. Thanks. Thanks for the question when we look at at hedging this kind of really to two different components. One is around kind of the optimization side of the business, where we're really trying to capture value from our storage and our 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 as that price settles there could show plus or minus is but when we actually.
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 are our barrels were selling for over $4. A barrel. We could have produced and sold and hardisty for that price. We chose not to do that we stored those barrels or transfer 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 of almost $25 $30.
In that transaction, though we would have locked in the Wi Fi components as well as the physical sales and because of that if WT I've 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.
The combined entity has a lot less exposure to the WCS differential and hardisty.
So that becomes less of a concern for us but of the combined entity still has no exposure.
Exposure to WT ISO so maybe with that John if you want to pick up on kind of our corporate hedging. 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 about us acquiring a number of other assets that give us many many more options to take our 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 in for example, you will too.
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.
Mhm increased ways for us and we intend to take full advantage of the sales.
Secondly, I would say that one of the major reasons for doing this is to reduce the volatility in our cash flows.
So sort of at a corporate level.
That becomes an inherent hedge or this transaction will become an inherent hedge.
And now we manifest for cash flow streams finally.
Come back to you know something that Alex said.
Time and time again is a under Levered balance sheet is 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 you can expect this going forward.
You know to continue to prioritize the balance sheet and free cash flow basis until Weve reached a point that we're comfortable with our debt levels.
Okay terrific. Thanks all.
Thanks, Greg next.
Next question comes from for Scott Brown with Citigroup.
Good morning, Thanks for taking the question I just wanted to.
Talk about the hedge is just a little bit more I appreciate all the color you've given on the current program, though and.
Okay, and if I.
Communication Sinjar staff Hudson I, just did a good job of communicating this to two.
All of us in the MDM and then be in a disclosure is highlighting that firm 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.
If I, 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 the asset base to perform in this environment. So just curious about that and I sort of thinking about how we should think about the remainder of this hedging program you entered into going forward over the next sort of call. It four to six months in and also sort of cleanup if.
And what'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.
And what we do is we lock in that contango, along the curve. So that we're locking in sort of a four or $5 per barrel margin by.
By selling in Q3 versus selling in Q2, now FW T. high rises by more than that at four or five dollar increment that they are curve was showing us back in Q2 will show a hedging loss, but the reality is 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.I. 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 appreciate that you probably can't give too much color around this right now, but 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 to think about how you evaluate that just sort of what's the.
What's the concentrate by which you go through and and balancing profitability versus Sina synergies with the overall portfolio.
Specifically I'm thinking outside of the thought of sort of black oil production.
But that portfolio that you have on a consolidated basis any color there would be helpful.
Sure.
You know anytime you you put two companies of this kind of scale and and scope together, you're you're 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 you know as you can imagine there are a lot of criteria that kind of go in into into those decisions, but but really it at the base of them you know what it is about the value of those assets can can generate.
In their strategic importance to the company. So you know we will I think people can take it as a given.
That we are we we are going to proceed.
To look at monetizing non.
Non core assets that are falling out of this combination and then you know what I from my own from my own perspective, I mean, I I think I 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 of are they worth more to weather are they worth more to other people, but I think the other issue.
It is going to be is it the time right and and can we actually transact at values that are value, creating for our shareholders. So.
You know expect more from us on this I think we are going to act a fairly fairly quickly and and Oh, just yeah. I mean that it's just going to take us a little bit of time too.
Until we're at a point, where we can talk a little more freely about it.
Okay I appreciate that thank you very much yeah.
Yeah North.
This question comes from Phil Gresh with Jpmorgan.
Yes, hi, good morning.
I was just thinking about the rail contract that you have that 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 with that.
Once we get to the end of the period and now that you have to take it away.
The excess takeaway that housekeeping provide.
[noise] you fill it so cute chess on yeah, you're right you're right that some of those contracts fall off kind of at the back end to 2022. So we'll we'll evaluate that at that time.
You know 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 our very.
Double cost on those contracts and because of you know 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 a this overall probe.
I'm not lending itself to kind of quick ramp up and ramp down you know in the span of kind of less than six months, but with 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 a kind of market opportunities.
Be able to do that at those reduced costs for transport to the Gulf coast kind of over the next couple of years and then you know coming at the end of the contracts you know, we'll 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, Yeah, I guess my follow up to that would just be with.
With your comments about having lower the cost is does this mean that the new transfer cost and we've seen this quarter, which are lower than prior quarters is a function of that cost reduction given.
Yeah.
Real not being utilized and then.
Is this the right way to think about the go forward.
And if we go into if they're coming out of curtailment 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 continent in the fourth quarter. Here. We are we are looking at starting up a portion of the program in November it still enables us to to accumulate additional production credits versus having to acquire them in the market through the supplemental production allowance and.
In 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 cost you. We can actually make this program economic to run barrels down to the Gulf coast and realize higher Netbacks I. So you shouldn't be surprised to see us move some volume obviously not the full program through the fourth quarter, but some.
Going through the fourth quarter, which will help improve our overall netbacks yeah, Phil its its Alex just maybe one thing I'd add to that that it you know this this a improvement in pricing we've been able to achieve is is really significant and it's a it's a tribute to keats team, but but also our freight partners.
So they have been a really good to work with and and making this a much more compelling opportunity going forward.
And Alex from a macro perspective.
With the removal of the curtailment do you think the broader industry is going to need rail and I know that.
Yeah, the commentary suggested not until mid 2021.
And as the decision going for her.
For why to remove the curtailment, but what's your view.
Yeah, I mean, I I I suspect I mean, I 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 as you know.
I think all of us have been very successful in driving costs out of our operation and then you know I I suspect with curtailment going away are those barrels on the sidelines be they you know sort of you know 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 or you know I I don't think we're going to see it at where it was a year and a bit ago, but I as Keith said, you know it it looks like it's making a real economic sense for us and I wouldn't be at all surprised to see rail volumes move.
And up here over the over the next few months.
Great. Thank you.
Next question comes from Manav Gupta with credit Suisse.
Hi, guys I'll talk a little quicker there was a lot of improvement in the net back obviously, the benchmark sudden more supportive, but just trying to understand a lucky plus condensate pricing a big headwind for you in Q and as that kind of lagged Glenn elite you started closing the gap to the benchmark and that.
The improvement in net backs. It your quick I'm not going to do on the condensate fighting that and Holly asking let hug dealing to hemolysis.
Hi, Manav. It's it's key 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 out of one period into another you know so so in the second quarter, we were able to store a lot of barrels obviously.
It was the pricing if we have sold them in that quarter would have been that at a very low pricing and we store those and move those into Q3 quarter and realized a much higher realizations for those so I think if you look at our sales relative to production you can see you know an increase in sales in the third quarter relative to production and that's really put.
During those barrels in the market in a higher price environment, and ER and that obviously all flows back into an improved netback for us.
Let's take 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 bond nothing but if you look at from one cumulated plus looking 37 now all the way down to eat 60 is there anything else that had doing at foster creek to push the cost down and.
Transport and lending decides to me it can helping you out.
You know one of I think you'll see a lot of variability you know.
Quarter to quarter. It all depends on you know 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 you know you we're going to utilize obviously our assets to maximize that value, you're 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 <unk> to catch.
Sure incremental value for the company. So so you will see a a bit of a variability.
Variability quarter to quarter asset asset.
And last question is envisioned 19 replacement any callout anything you are hearing out there on do you think this could be a 2021 event. Thank you.
You know everything that were hearing manav is that they are marching towards a you know a 2021 start up obviously some critical decisions coming here in the November time period.
Around some permits and that will then drive construction.
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 Chris.
<unk> 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 didn't also record any impairment at Wood River and just anything that maybe differentiated bad 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 at.
And obviously with you know refining cracks dropping has precipitously as they have been in and not recovering as quickly as they have.
You know, 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 is the wood River is a more complex refinery with much greater scale efficiency than we have in border. So you know the reality is when we look at that one versus the net book value.
And then we kind of ran it out 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 kind of physical integration between FCCL more complex and.
I'm curious how much you you're doing value chain. You think you can integrate there and you know I believe your current doing slides also types in longer term contracts on coal they can and Polaris and.
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 season 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 in operating synergies are really those synergies that we have a really high confidence that we're going to be.
Well to get into very short period of time.
So when you talk with the broader physical integration between FCCL in Lloyd through time.
That's an exciting opportunity for US you know, we think that you know 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 that condensate coming back.
Is something that we are working through today, but it's too early in our minds to be talking about.
You know future values and.
You know magnitude of integration that's possible there, but it's really clear to us that is a legacy asset at Lloydminster and it's going to give us a lot of optionality on the integration going.
Maybe just a a lots and is slated for way due to to achieve that physical integration to do 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 the acquisition remains laying out your <unk> your current ambitions over the long term and that it will take some time to work through are firming up plans, there, but I guess given the perception of oil sands as being more missions insensitive and other barrels around the world and certainly appreciate that all oil sands in quite the same but but given those ambitions.
Just wondering if you guys could provide a bit of a teaser on some of the things you're thinking about in meeting those emissions whether were talking solvents.
Carbon sinks or otherwise thanks.
Yeah, Thanks, Matt I mean, when when we came out with with our targets and our E. S.G. targets in the spring I mean, where I think we gave a little bit of color are around that and what I would tell you is you know we we didn't come out with those targets until we had done a comprehensive.
Of 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 plan. We went it would be pointless to come out with an E.S.E.S.G. targets that a word grounded in the business plan and so that that was what we did then.
And if you think about it you know I would kind of say, it's it's a little bit all of the above that.
You know Weve, obviously been a leader in solvent technology.
I expect that to solve and technology will will be a part of that carbon sinks. This is something we are you know we're looking at a carbon capture and sequestration, but you know one of the things I <unk> and and you know 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.
You know whether it is whether its cogen, whether it is solvent technology carbon capture there's actually we believe there are a great deal of of benefits that we can reduce our G.H.T. intensity by changing how we operate the assets and so there's actually a whole.
Suite of a whole suite of things and you know now with with Husky coming on you know there there's not only how we operate assets, but what assets on a go forward basis get capital and what assets don't get capital in all of those have the ability to meaningfully improve.
The GHG intensity.
Yeah I appreciate the thoughts there if I may and follow up on a completely unrelated note I'm just on the approach to integration with the Husky transaction I guess, if I go back to 2019 Investor Day excuse me for example, which I. Appreciate it is a world away 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 rather than owning it yourselves for from a sort of integration.
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 in how you're thinking about the value of integration, whether a read through and how you're thinking about pipeline progression from Canada.
Yeah, Yeah, I mean, it's a whole lot of things, but you know what I I'd, maybe go back to where my comments have been on integration from the start Matt and I. You know I think I think what I've been very consistent and I've always said look I I love the integrated business model I I looked at our competitors and said it would.
Be fantastic 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 you know probably like very in depth play a couple of years ago. You know at the time, you know crack spread.
It's reighteen $20.
And Ah every refining or or processing upgrading business or asset we looked at where it was just extraordinarily highly valued and 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, focusing on rather than on on processing of actually looking at opportunities to you know to get our barrels to market you know via logistics opportunities via logistics or whether it's whether it was pipe or rail where we could achieve a global price for.
For our for our heavy barrels and you know the obvious differences 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 the valuation metrics of of the 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.
All that that that downstream 400000 barrels a day of molecular early integrated upgrading and refining or to our to our barrels.
And the valuation what was absolutely a compelling.
Yeah, I would just add to that Matt I think Alex used a really important trade as they're called molecular integration.
That's what this up this opportunity really presents a for synovus going forward is the ability to have processing units.
Are tied to our molecules you know that consume the molecules that we produce.
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 them to the extent that we can.
Next question comes from Chris <unk> with Barclays.
Yeah.
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 There. My read is that it's just 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 and 2021.
Hey, Chris its Alex No I mean, I I mean, you you look at yeah. We've obviously been very disciplined over the last few years with the D base and then you know 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 then.
You know that this is an opportunity a you know with with the gas prices as you've mentioned you know we we can we can lock up gas prices for a few years at very attractive levels.
It's a it's a short cycle. These are very very high IR are kinda drill to fill opportunities and it allows us.
To take that asset from a decline to basically a <unk> 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 that the pro forma company.
Yeah, I mean, I <unk> I had responded to that question earlier about about asset sales and I think as everybody knows you know we took a really hard look a couple of years ago at whether there was you know whether there was an opportunity to monetize a portion of that convinced of that convert.
Additional business for Synovus and you know I think you can kind of assume if you put cenovus is conventional business together with Huskies in a you know in a higher price environment.
<unk>, Yeah, we're going to take a really we're going to take a really hard look at that I think my observation today is even though the prices have come up it it's still a pretty tough market for value, but I expect that will likely improve over over the over the next little while especially if prices stay where they are so we're going to work.
Going to take a very hard look at that.
Okay, Great. That's helpful. Thank you.
No worries.
Next question comes from Neil Mehta with Goldman Sachs.
Thanks, Guy said twice and we can sell the I guess the first question here and maybe it's for you yet given you know the husky assets really well, but as he looked at you know the last couple of years and Husky learned to challenges has been operational execution excellence and that's showing up in different ways and in both.
Its upstream and downstream in terms of perform.
Performance.
As you look at those assets and 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 of valuing these assets how did you take that into consideration.
Yeah, It's a it's John not Jeff meal, [laughter] that does I didnt.
[laughter], maybe 20 minutes ahead of yourself.
Oh, I see I'm, sorry, yeah, [laughter], but I tell you. This was a 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 you know this asset base I would tell you that we had unfair.
<unk> access to do our due diligence and we have been.
At this for you know 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, particularly on the NP side, when we look at the asset base 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 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 and the operations there.
So it's something we took our time on it 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, you know we're on the right path and we.
You know satisfied ourselves that you know we we are not going to have these kind of instance going forward.
Okay, Great and then 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 weather.
It's gets us to the bread crumbs to getting back to investment grade.
You know I can't speak for the rating agencies have all put out their their comments now and you know you can read into those what you will but you know whats 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 Ken Thanks, Alex.
Thanks next question.
Next question comes from Mike Dunn with Stifel first energy.
Thanks, Good morning, everyone I'm not.
Not to beat it to death, but I didn't have a another question on the I guess the hedging strategy around timing of your sales versus your production.
You know maybe not easily I had thought that this was something a generally they do some of the oil sands big players would.
Would do based on what their outlooks for for for maybe seasonal turnarounds for them and others.
So just wondering John or Alex if if if.
Timing of sales versus production was something that was strategic we've done in the past I would 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 you.
Walking in that contango by buying third party barrels and delivering them later.
Thanks.
Yeah, I'm, Mike It's John listen this is something we've always done.
But what I would tell you.
Going forward is what is really important to us is maximizing the free cash flow to the organization.
So when we look at is can we sell into the future using the assets that we have in and we have pipelines and about 10 million barrels of storage available to us to increase the free cash flow in any future period now we do attach a cost to that there is an internal cost.
Of doing that and you know that kind of approximates you know a few hundred basis points beyond our cost of capital.
But we you know we do that on a a diligent and rigorous basis to make sure that I'm you know, we're maximizing free cash flow maximizing returns to shareholders.
Okay. Thanks, John that's it for me.
Yeah. The other thing I would say Mike is is you know 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 company.
Right and John Forgive me, there's been a lot of quarterly press releases. So if I missed it on the in the body of your Ah I mean do they.
Did you guys quantify like all in including the financial WCS hedging losses, you know the net gain from.
From that strategy versus I guess timing your sales to be.
All in line with your production volumes.
Yeah, well, we haven't given you is the net gain but what you see is the accounting and the M. DNA and 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.
Close your chest okay.
Great. Thanks.
[laughter].
Next question comes from Harry Mateer with Barclays.
Hi, Good morning, your first question.
Can you maybe talk about your intentions with the pro forma debt structure and if you plan to have purposely treatment for the synovus and housekeeping ones. After closing and then 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 Hum.
That's that's something we'll we're going to have to get back to you on a month to.
I'm not going to talk about that this morning, what I would say, though is you know we are of the view that investment grade is you know very important to this new company. It's one of the you know.
[noise] synergies that we believe.
Haven't taken any value for it but we think it's really important going forward. So you can expect us to do you.
You know everything required to get us back into that space. So what weve also committed to do.
We'll do this in a reasonably short term.
Tournaments, we'll come back to you with you know a complete 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 certainly that'll be helpful. And then apologies if I missed this you out 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.
Yes.
Hey area. It's Alex you know I think that if you want to think about sort of the cost of a of putting the two companies together think about a one time cost 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 done in 2020 watt and get the entirety of the men 2022.
Thank you that's helpful.
Okay.
Last question comes from the media with Robert Tuttle with Bloomberg News.
Yeah, Hi, I noticed there was a 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.
Are you what's your outlook on that I mean is there a plan to perhaps have long marathon or a bigger while operating warm up your rail terminal.
<unk>.
Hey, Robert Tas keeps on you know we filed that a 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 the D are you and and the location of the D are you. So that was just a.
A step in the process to make sure that we had a flexibility.
Yeah, Robert it's it's Alex just to be really crystal clear on that we we kind of said when we were looking at the D. R. U that we were going to do the engineering and permitting to give us the ability.
They have the option to go forward on a on a D.R. you and no. One no. One should think about that filing is anything more than just a carrying through on on on that direction.
Okay. Thank you.
No worries.
At this time I will turn the call over to Mr. prevail.
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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