Q2 2021 Imperial Oil Ltd Earnings Call
[music].
Yeah.
Good day, and thank you for standing by walking through the Imperial Q2, 2021 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instruction and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone.
Phone.
I would like to turn the conference over to your host Mr. Dave Hughes, Vice President of Investor Relations. Please go ahead.
Thank you Grace and good morning, everybody. Thanks for joining us on our second quarter earnings call I'm here today, with Brad Corson, Chairman, President and CEO and as usual with.
With Brad as the senior management team, Dan Lyons Senior Vice President of Finance and administration, Simon younger senior Vice President of the upstream John Whitmore, Vice President of the downstream and share either as vice president of commercial and corporate development first.
First thing I need to do is read the cautionary statement todays comments include reference to non-GAAP financial measure.
The definitions and reconciliations of these measures can be found in the attachment 6 of our most recent press release and available on our website with a link conference call. Today's comments May also contain forward looking information any forward looking information is not a guarantee of future performance and 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 second quarter earnings press release.
We issued earlier this morning as well as our most recent form 10-K and all of those documents are available on SEDAR Edgar and on our website. So I would ask you to please refer to those so we're following our usual format today Brad.
It's going to start offering some opening remarks, and then Dan is going to provide a financial update and then we'll go back to Brad for operational update following which we'll go into the Q&A session. So with that I'll turn it over to Brad.
Thank you, Dave and good morning, everybody and welcome to our second quarter 2021 earnings call.
I hope each of you and your.
Please are doing well and continuing to stay healthy.
It's great to see the high levels of both first and second vaccinations, we are achieving here in Canada and the significant reduction in case accounts across the country and hopefully this is bringing some sense of normalcy back to all of our lives which is desperately.
<unk> needed.
However, we do recognize we're not out of the woods, yet given what we are seeing globally and here in Canada with respect to the variance.
Think about how to best characterize the second quarter.
First on the market side, we saw another quarter of increasing commodity.
<unk> prices, but with continued slow recovery in demands.
And from an operational perspective, we continue to deliver very strong performance as.
As we've talked about on our first quarter call. We had plans to execute a significant amount of maintenance this quarter and.
To say this maintenance was executed successfully and now that most of our scheduled downtime is behind US we are in great shape heading into the second half of the year.
This is especially exciting as we've seen many of the pandemic related restrictions in Canada lifted and are looking forward to seeing a more pronounced.
I am pleased to recovery and demands.
So I'm very pleased with the strong execution of our plans and the subsequent results this quarter and likewise I am very excited about the momentum we're now carrying into the second half of the year.
Over the next few minutes, Dan and I will detail the results of what was it varies.
Pronounce on second quarter for us.
So now, let's turn more specifically to those second quarter results.
Earnings for the quarter were $366 million and our cash from operating activities was $852 million, both down slightly from the first quarter.
So it very much as expected given our turnaround activities.
We saw improvements in crude prices through the quarter, although our ability to fully capture this improved market environment was impacted by the high level of turnaround activities that I mentioned.
We've delivered a strong first half.
In 2021 underpinned by the actions we took last year and are building on this year to maximize the value of our existing assets.
And not only was our operating cash flow in the quarter higher than in the second quarter of 2020, it was actually higher than all 4 quarters of <unk>.
Combined.
Our upstream continues to perform very well.
And I will talk more about each asset in a few minutes, but I want to take just a moment now to highlight a major milestone we have achieved at kearl.
I am excited to let you know.
<unk> debt, we are implementing a new strategy this year to extend intervals between turnarounds at Kearl.
Consequently, we will only have a single annual turnaround starting this year.
Which we just completed.
Instead of the 2 we have typically had in the past.
So.
Total turnaround that was originally planned for September October this year has now been cancelled.
And while we have been talking for some time about our intention to make this change.
I am pleased to say we are delivering this a year ahead of schedule.
And this is due to the progress we have made.
On our multiyear reliability improvement plans and specifically the work we've been doing to prepare for this capability over the last several years.
<unk> demonstrated performance gives us the confidence to accelerate our plans.
And it's this type of performance that underpins our strong.
Made cash flow generation, which in turn supports our focus on shareholder returns.
During the second quarter of 2021, Imperial returned over $1.3 billion to shareholders through share repurchases and dividend payments.
This compares to.
Just over $900 million for all of 2020.
And in June the company announced the renewal of its share repurchase program, allowing us to repurchase up to 5% of our outstanding shares over a 12 month period ending on June 20.
8.2022.
I would also like to briefly highlight the launch of the oil sands pathways to net zero Alliance.
Imperial is very proud to be 1 of the 5 founding members of the alliance.
Which combined to account for around 90%.
<unk> of Canada's oil sands production.
As a group we are committed to working together.
Along with our federal and provincial government counterparts with a goal to achieve net zero greenhouse gas emissions from oil sands operations by 2050.
This level of emissions.
<unk> is clearly a significant task we have facing us.
And we are looking forward to working together with our industry and government partners to overcome this challenge.
It's also a further example of why Canada continues to be the best place globally to produce oil.
As we have talked about in the per.
Rich.
Canada continues to lead all major reserve holders in all 3 aspects of E S and G environmental social and governance.
This unprecedented alliance serves to further underscore how important Canada is as a producing.
Past and and the role we play on the global stage.
The first phase of this foundational project, a major carbon capture utilization and storage trunk line connected to a carbon sequestration hub, which will enable multi sector.
<unk> tie in projects for expanded emissions reductions and this is only the start and we believe that through collaboration Canada has what it takes to be the responsible energy provider to the world.
And with that I'll now turn it over to Dan to go through our financial performance for the quarter in more detail.
Thanks, Brad.
Getting into the financial results for the quarter, our net income in the second quarter was $366 million up $892 million from the second quarter of 2020 or up almost $1.2 billion when looking at earnings excluding identified items.
This.
This increase was driven primarily by stronger upstream realizations and volumes and by stronger margins in the downstream and chemicals.
Now looking sequentially, our second quarter net income of $366 million is down $26 million from the first quarter of this year as higher.
Realizations in the upstream were more than offset by the impact of significant turnaround activity at curl, Syncrude and stress Kona, which together reduced earnings by about $400 million.
As well as weaker realized margins in the downstream.
Looking at each business line the upstream.
Quarter net income of $247 million up about $170 million from the first quarter's net income of $79 million driven by higher realizations, partly offset by lower volumes as a result of turnarounds at curl and Syncrude.
Downstream is net income was $60 million.
In the second quarter down from $292 million in the first quarter was the lower earnings reflecting the impact of a 55 day turnaround Thats draft Kona, along with lower realized margins driven by timing impacts.
Our chemicals business demonstrated continued strong performance in the second quarter.
Earning $109 million compared to net income of $67 million in the first quarter, making the second quarter of this year the highest quarterly results for our chemical business in over 30 years. These strong results continue to be driven by higher margins.
Moving on to cash flow.
In the second quarter, we generated $852 million in cash flows from operating activities were $893 million, excluding working capital effects.
Despite the execution of 3 major turnarounds, our free cash flow in the second quarter was $645 million, bringing our free cash flow for.
The year to just over $1.5 billion up $2.4 billion from last year. These strong cash flows enabled us to return over $1.3 billion to shareholders in the second quarter, mainly via share buybacks.
While still ending the quarter with a cash balance of almost $800 million looking.
Ahead, with our major turnarounds complete strong commodity prices improving product demand and continued capital discipline, we are well positioned to generate substantial free cash flow over the remainder of the year.
Now moving on to Capex.
Capital expenditures in the second quarter total 259 million.
Colors up about $100 million from the first quarter, reflecting a continued ramp up in activity, including increased spend related to the sarnia products pipeline in the downstream and the curl in pit tailings project in the upstream.
Consistent with our previous guidance, we continue to expect capital expenditures for the year.
Year to be about $1.2 billion as spending continues to ramp up on the Sarnia products pipeline and the curl in pit tailing projects and as we increased spending on volume Sustainment at Cold Lake as well as mine progression and efficiency projects at curl, including converting additional trucks to.
Economists hall, and recovering heat from boiler flue gas.
Shifting to shareholder distributions as I previously mentioned, we returned over $1.3 billion to shareholders in the second quarter repurchasing about $29.4 million or 4% of our outstanding shares for about.
$1.2 billion in May and June.
And paying a $160 million in dividends in April at 22 per share on June 23rd we announced that we would be renewing our share repurchase program as of June 2019 to repurchase up to 5% or about $35.6 million of our outstanding.
About 1 over the following 12 months and in early July we paid our second quarter dividend of 27 per share an increase of around 23% from the first quarter dividend earlier today, we announced that we will pay a third quarter dividend of <unk> 27 per share on October 1 these actions demonstrate our confidence.
Share in future and our and are consistent with our long standing commitment to return surplus cash to shareholders now I'll turn it back to Brad to discuss our operational performance.
Thanks, Dan So now let me talk about our operational performance in the second quarter.
Upstream production.
<unk> averaged 401000 oil equivalent barrels a day in the second quarter, which was up 54000 barrels per day versus the second quarter of 2020.
And this represents our highest second quarter production and over 25 years.
The increase was a result.
<unk> strong operating performance.
And although we were in the very early stages of the pandemic in the second quarter of last year, and we're taking steps to manage production levels in a highly volatile market environment at that time. It is also notable that the second quarter of this year was it.
<unk> of where we had significant planned maintenance.
Production was down 31000 oil equivalent barrels per day versus the first quarter of 2021, mainly due to the significant turnaround activity at Syncrude.
I will now talk in more detail about each assets.
Starting with Carl.
As you May recall last quarter's hurdle production set a best ever Mark for the first quarter and that strong performance continued through the second quarter curl is really delivering now.
Total gross production was 2.
255000 barrels per day, which is actually up 4000 barrels per day from the first quarter of 2021.
This is not only the best second quarter production throughout curls history.
But also the second best quarterly production ever.
For any quarter at this asset.
What makes this even more impressive is that these records were achieved during a quarter with a major turnaround.
A turnaround that was completed on time and on budget during a challenging period in the wood Buffalo region due.
Pandemic.
The highest production quarter was the fourth quarter of 2020, which was a quarter with no turnaround.
I would also note that 8 of the last 9 months.
Have been individual monthly production records for Carl.
The exception was may of this year, which was just short of the previous best ever may by around 3000 barrels per day due to the turnaround this year.
I would say, though I look forward to next may when we will take another shot at that record.
And at 311.
Due to the <unk> thousand barrels per day in June.
June is now the highest production month on record for Carl.
And as of yesterday.
July 29th Curls production for the month has average.
<unk> just over 290000 barrels per day.
Which puts us on track for another monthly record for the month of July. So this strong performance just continues.
And this is the point at which I would normally be providing some comments on.
Kent annual turnaround at Kearl, but as I mentioned earlier, we won't be having won this fall.
Moving to a single turnaround per year effectively doubling the maintenance intervals is something we've been talking about for a long while is a key part of our journey to 200.
<unk> 80000 barrels per day.
And at our Investor Day last November we indicated that we would be taking this stuff. This step in 2022.
Advancing these plans by a full year is a testament to all of the work that <unk> team has done over the last few years as part of our.
Our overall reliability improvement strategy.
And so with this in mind and as a.
<unk> of the strong performance of the asset continues to demonstrate.
Today, we are raising our curl annual production guidance for 2021 to 260.
65000, total gross barrels per day, which represents an increase of 10000 total gross barrels per day relative to our earlier guidance.
I want to take a minute to talk about unit cash costs at Kearl, which continue to be a positive story as well.
We've talked about a target unit cash cost of U S $20 per barrel all in at Kearl and highlighted that we were very close to reaching this target late last year and with a firm commitment for this year.
And we continue to focus on reducing our opera.
Operating costs and are making great progress.
<unk> costs are down year to date, almost $3.50 Canadian per barrel versus 2020.
However, I would also note that while the strong Canadian dollar is creating some pressure on this U S dollar.
Equivalent.
We continue to target U S $20 per barrel for full year 2021.
I'm also pleased to report the startup of the first boiler flue gas heat recovery unit at Kearl.
This technology will allow us to recover heat from boiler example.
<unk> and use it to preheat process water.
This is exciting is not only does this provide operating cost reductions.
But it is also estimated to reduce emissions by up to the equivalent of 30000 tons per year of carbon dioxide.
And thats on a single.
Boiler, we have 5 additional boilers that we plan.
To apply this technology to as we continue to take steps to reduce the greenhouse gas intensity of our operations. This is a great example of emissions reductions efforts that also deliver value to the bottom line.
So now let's talk about cold Lake.
Cold Lake had another strong quarter as well with production of 142000 barrels per day.
This is up 2000 barrels per day versus the first quarter.
And up 19000 barrels per day versus the second quarter.
<unk> thousand 20.
The second quarter of 2020.
At a high level of planned maintenance, whereas we had relatively light maintenance activity in the second quarter of this year as I mentioned on our first quarter call.
While this accounts for a large part of the year on year increase.
We realized.
The improved reliability and optimizations, we made at Cold Lake are also contributing to the strong performance.
And given this strong performance.
Full year production is now expected to be 135000 barrels per day.
The increase of 5000 barrels per day over our prior guidance.
I will also note that we do have some additional minor planned maintenance at the Mohican plant in the third quarter at Cold Lake and would estimate the production impact to be around 2000 barrels per day over.
For the quarter.
Now moving to Syncrude.
Imperial share of Syn crude <unk> average production was 47000 barrels per day in the second quarter.
This was down 32000 barrels per day versus the first quarter and down 3000 barrels per day.
And so as the second quarter of 2020.
This drop is due to the large turnaround on 1 of the coker thats in crude during the quarter.
By comparison Sim crude did have debt sorry did not have a turnaround in the first quarter of this year.
And recall the turnaround originally.
Originally planned.
Planned for the second quarter of 2020 was deferred due to the pandemic and did not start until later in June.
So specific to the turnaround most of the major work was completed within the second quarter and impacted most of the quarter. However, as you Rick.
Hey, verbal we talked on the first quarter call about the COVID-19 outbreak and wood Buffalo at at that time.
And I would note this did impact the turnaround to some extent the outbreak necessitated executing the work with a reduced workforce.
So there was an impact of the duration.
The turnaround was completed in 95 days versus an original plan of around 80 days.
But on a very positive note I would also highlight that the asset did leverage the new interconnecting pipeline.
Between Syn crude and Suncor base plant to allow.
Recall the export of bitumen for the first time in the assets history in late June which helped mitigate some of the impact of the extended turnaround.
As we look forward there is no more turnaround maintenance plan for the asset for the rest of the year. So we would expect to see strong production going forward.
And the owners continue to focus on the transfer of operator ship and still expect this to be complete by the fourth quarter.
And just for completeness I would note that there are no changes to the production guidance for Syn crude.
So now let's move to the downstream.
Stream.
We refined an average of 332000 barrels per day in the second quarter, which was down 32000 barrels a day versus the first quarter.
Up 54000 barrels a day versus the second quarter of last year.
Utilization in the quarter was 70.
<unk> percent, which was down from 85% in the first quarter, but up from 66% in the second quarter of 2020.
The higher utilization versus the second quarter of 2020 is reflective of the demand recovery, we have seen since last year.
The lower utilization versus the first quarter of this year is due to the major planned turnaround at our stress Kona refinery.
This turnaround started in early April and was completed on schedule and on budget by the end of May.
And had an overall impact on throughput of about 70000 barrels.
Per day in the quarter.
I would also highlight that stress Kona represents almost 50% of our refining capacity in the country.
So a turnaround of this magnitude does have an impact on the downstream financial results.
In addition, while on average.
Western.
<unk>, Canada saw some stronger industry margins in this second quarter. The margins were lower in June which was when stress Kona completed their turnaround and resumed full production.
This impacted our ability to fully capture the stronger industry margins in the quarter.
And to give you an idea.
<unk> of where we are now after the successful completion of the stress Kona turnaround overall refinery capacity utilization has increased to around 93% in the month of June.
Looking forward, we do have some further planned maintenance activity later this year, but.
But not on the same scale as the second quarter.
This specifically involves a small turnaround at our nanticoke refineries starting in mid September and running until late October but this is expected to have a small impact on utilization and margins in the quarter.
Yes.
Petroleum product sales in the second quarter were 429000 barrels per day up 15000 barrels per day from the first quarter and up 72000 barrels per day versus the second quarter of 2020.
The improved sales in both cases are driven by.
By strengthening demands as the country uses many of the pandemic related restrictions, although the second quarter for Canada was still limited by the pandemic and associated Lockdowns.
As of June though.
We were seeing industry fuel demands around 90% of normal for gasoline.
Jed it around 50%, which is a significant improvement versus prior quarters and now with diesel remaining close to historical levels.
Looking forward, we expect to see continued strengthening in the demand for motor gasoline.
Most jurisdictions in Canada have effective.
<unk> lifted their Lockdowns and Canada has now surpassed the U S and administering first and second vaccine doses, we fully expect that this along with the fact, we are now in the summer driving season will result in a further increase in gasoline demand in the quarter.
And finally.
<unk> also launched the redesign synergy Supreme premium gasoline at Esso stations across the country.
This is very exciting as this new formulation will help keep engines 3 times cleaner and also offers enhanced engine protection.
And.
We all local business continued its outstanding performance as well delivering an impressive $109 million in earnings in the second quarter.
The highest quarterly earnings in over 30 years.
This also represents a significant increase of $42 million versus the first.
First quarter of 2021, and $102 million higher than the second quarter of last year.
Chemical volumes have continued to stay strong as have margins, which continued to be impacted by supply challenges and demand strength in North America.
And our cash flow to sum it up before we move to the Q&A session.
The second quarter once again demonstrated imperial's resilience by delivering strong financial and operating performance in a quarter, where we had a significant amount of planned maintenance.
And that strong performance underpins.
The increase in our annual production guidance by 15000 total gross barrels per day as well as our ability to return material amounts of cash to our shareholders.
I would also reiterate our ongoing focus on cost discipline and long term structural.
<unk> enhancements.
While the last year and a half has been marked by a high degree of market volatility our attention on what we can control is ensure that we continue to maximize shareholder value.
And Im looking forward to continuing along this path.
As the year moves forward.
So with that I'm going to turn it back to Dave to facilitate the Q&A session. Thank you.
Okay. Thanks, Brad as usual, we had a few questions pre submitted so I think I'll start by going to a couple of them.
Our first question comes from Phil Gresh at Jpmorgan.
1 of your oil sands peers referenced approximate.
<unk>, 10% inflation risks on Capex, what are you seeing here and from an activity level perspective, how are you thinking about any potential changes to your plans from last year's analyst day, given the higher prices are you seeing any opex inflation headwinds.
Well thanks for that question, Phil Let me first.
I meant on Capex, and then I'll comment on Opex.
We do see some pressure from inflation, particularly on steel prices.
But it's really not having a significant impact on our overall operating and capital.
<unk> given the nature of our projects, our current activity levels and really our ability to find offsets.
For example, 1 of our key capital projects as the Sarnia products pipeline, which by its nature has a lot of steel associated with it but.
But here.
<unk> already purchased most of the pipe and valves required for that project. So we really have limited exposure at this point to inflationary pressures.
Another major project for US capital project is our curl in pit tailings <unk>.
Project.
But that project is mostly <unk>.
<unk> Earth works.
So theres really.
Ltd pressure caused by by steel inflation and not really material.
Now shifting a little bit to operating costs.
It is fair to say that debt.
We are seeing higher energy costs driven by.
Natural gas.
<unk>, and especially compared to a year ago.
So that is impacting some of our costs.
But when you set that aside.
Actually are.
Debt was companywide operating costs are essentially flat with the first half of last year.
Okay, and Phil had a follow up what's your latest thinking on temporary versus permanent opex savings relative to the $1 billion you took out in 2020.
Well thanks.
Our cash for that question, Phil and maybe just.
Building, a little bit on my earlier comment.
On opex and inflation, but but first.
Just to remind you and everyone.
Last year, we were able to.
We do.
Our operating costs by about a $1 billion versus the prior year.
And what we've said.
Over the course of last year was that about 50% of that cost savings was structural and the other 50%.
We're more.
Do salary or 1 off type impacts, but as we moved into this year, we had a very.
Our strong focus on trying to maintain that full $1 billion of savings.
And so where there were things.
Tempo were temporary or 1 off in nature, we are working hard to offset them.
In all parts of our business.
And I'm quite pleased that we are making progress on that.
And as I said other than some of the pressures.
Things that we're seeing from from energy costs, especially on fuel gas purchases.
Other than that we.
We are maintaining pretty flat levels of costs versus last year, which is a significant.
<unk>.
And then of course.
Also important to keep in mind that while we're keeping those costs flat.
We have been raising our upstream production and so when you look at unit cost trends those are continuing on the.
The downward.
Trajectory that that we talked about it.
At Investor Day, and continues to be core to our strategy to maximize value of our existing assets.
Okay.
Operator can we can we move over to the live Q&A line now please.
Okay.
Also I just wanted to pick a reminder, AGA to ask a question.
Please press Star then the number 1 on your telephone keypad. Your first question comes from the line of Dennis Fong from CIBC World markets. Your line is open Sir.
Hi, good morning, and thank you for taking my questions.
The first 1 really relates to curl, obviously, you guys have showcased a lot of.
Good work there.
They're driving stronger throughput and production.
Just referencing back to 2019 and 2020 Investor days, you outlined I think it was 6 items that can help drive production levels to 280000 barrels a day and 1 of the previous conference calls you've kind of indicated that some of those initiatives had already been <unk>.
<unk>, which it seems like part of the driving factor to raising our full year guidance at Kearl.
I was just curious as to what some of the remaining <unk>.
Incremental projects you have left to help drive you to that 280000 barrels a day given your accelerated timeline of kind of switching to 1 turnaround.
Year.
Yeah. Thanks, Thanks for that question and I appreciate your recognition of the great progress, we're making on our on our journeys at at Pearl and I must say.
No pun intended but but curl is.
Around the dollar for us.
And they just continue to deliver.
So many ways.
<unk>.
Ranging from reliability improvements other volume enhancements cost reduction initiatives, a whole range of things.
Iraq and as you pointed out we laid out.
A core strategy to to enable us to to ultimately achieve 280000 barrels per day.
Over a several year timeframe and there were many.
Projects underpinning that.
A couple.
Couple that are still very much a focus of ours involve some further debottlenecking of our equipment there it curl, which will allow higher throughput.
We're also continuing some mining and resource optimization activities.
Yes.
Digital is still a key focus area for us.
And so there are still more initiatives.
That debt, we're very focused on to get us to 208000 barrels a day.
But as you're also seeing we're accelerating that.
Being able to raise our guidance to $2.65, obviously puts us much closer to 280000.
Look forward to our November Investor Day, and we'll give you an update on the timeline to get to $2.80, but rest assured it's going.
Plan quicker than what we've projected in the past.
Thanks for the question.
Great. Thanks, and just 1 quick follow up here, just shifting over to capital allocation.
Obviously, you've outlined multiple ways that you're returning cash back to shareholders through the share buyback program.
B in your dividend.
As well as continuing on.
A core focused capital program, which is looking at optimizing essentially your base production kind of carrying that through this year, obviously, given the stronger oil price environment.
You're looking to pay back a significant amount of debt just because there are no.
Graham options at the time being for per allocating capital.
Are you thinking about.
Just that thought process.
What do you think is an appropriate capital structure and what are the other alternatives that you are looking at with respect to capital allocation.
Yes, good question and dance here I'm going.
No other than talk about kind of our approach to capital allocation and our view is the best use of cash, but I would say just before I turn it over to him that we do not necessarily view it as a priority to pay down debt.
We do believe there is there is better.
<unk> uses of our of our capital So I'll, let Dan talk about that our debt levels are low.
On an absolute basis relative to our peers the cost is low.
Always an option, but as Brad said, it's not a priority.
And as we've said at various Investor days.
And other things in a pretty consistently we remain committed to returning.
Surplus cash to shareholders and obviously, if you look at today's commodity prices that I kind of talked a little bit about my comments and the production levels. We have going forward, we could see we hope to see a very strong cash generation.
So we start as always with a reliable and growing dividend to our go to after that's the NCI V. We just completed.
4% Amendment over a couple of months and now we have the new 1 we launched 5% over the next 12 months and we did we still could grow cash balances significantly net of all of that.
<unk>.
And so as we've said before.
Our commitment to return surplus cash remains and so we have to look at other other.
Other methods of share buyback, we have to look at special dividends and we haven't made any decisions in that area, but but I think the key messages.
We are committed to return surplus cash.
Thanks for those questions.
Operator.
Okay and going on we have your next question from Greg Pardy from RBC capital markets. Your line is open Sir.
Thanks. Thanks.
Good morning.
Thanks, as always for the very thorough rundown.
Most of my questions have been answered, but I guess I wanted to come back to the.
Pathways to net zero, which you're a part of the quintet.
Bryan what's most important in your mind in terms of milestones that we should be.
King for you guys as you've come out with this in early June there is a consultation period underway.
But what how should we sort of grade performance here and perhaps over what timeline.
Yes. Thanks, Thanks for the question Greg.
The pathways to net zero allow.
Clients in our objectives there are.
Very high priority for us as a company and more collectively.
I've have us on behalf of our industry.
The undertaking is huge it's complex.
<unk>.
It's going to require.
A lot of collaboration and support.
And right.
Right now we're very focused on.
First of all defining the optimum if you will technical solutions.
What the base project will entail.
And.
We're leveraging all of the 5 companies strengths. There. We're also in parallel working with provincial and federal governments to debt.
Find the nature of support.
<unk> that we will need from them.
Both in terms of.
Fiscal support.
The projects certainty around our investments.
And also access to poor space.
<unk>.
Okay.
Along the pipeline and where we see some C question sequestration hubs.
So in the near term I think between now and the end of the year. That's the focus is on defining what that.
Yeah.
What level of support.
<unk>.
And then also.
Marrying that up with all of the physical elements of the project.
I'll tell you.
In terms of where does this fit into our priority.
For myself and the other 4 Ceos.
We are meeting.
On a very regular basis in most cases once a week.
We all have our own teams that are working together and they're meeting multiple times a week.
So this is this is a huge undertaking for us and.
It's obviously.
Multi year multi decade project.
But critically important that we get it set up right.
Here in the very early months and so that's what we're working on.
Understood Thanks very much.
As always yes, thanks very much Greg.
Okay. Thank you.
Thank you and your next question comes from the line of Neal Matta from Goldman Sachs. Your line is open Sir.
Thank you Brad this question might be premature and I recognize that it is a board decision, but you brought up the comment around the special dividend with.
And then the cash flow generation that I would think you'd had in the back half of the year at the forward curve.
It becomes a real possibility.
As you think about the potential for special dividends, what do you think.
Positive cases, and what do you think the risks are to the idea and then we've seen it employed in a different a couple of different ways.
Some have done it.
In a in a codified framework through variable construct and some have opportunistically provided 6 special dividends.
I thought I'd just.
Create a forum for you to weigh in here on anything debt.
Relevant as it relates to the concept.
Yeah. Thanks, Thanks for the question Neil and.
And Youre right.
As we look.
Through the rest of the year, we do think we're going to be in a very strong cash position and we're going to be.
Think faced with some some really positive choices.
And.
And <unk>.
Between ourselves as a management team and certainly with the board we continue to reflect on those in and talk about what is the best way to deliver value to our shareholders.
But I'm going to pause there and give.
Dan a chance to comment maybe on some of the particulars.
Yeah, Thanks, Brad and Neil obviously, it's a good question and we don't have.
Any particular religious philosophy, whether you do special dividends or or or.
Or buybacks or even this does variable dividend.
Referred to but I think what we hear from our major shareholders. Indeed, indeed equity analysts is there's a really a preference for a reliable and growing dividend. So I think that debt.
That could change.
If the preferences of the market change and our shareholders. We can we think about that and go into some other method of various.
Or what have you, but we're pretty committed to reliable and growing dividend as consistent with what our shareholders want.
And so it would be so the variable dividend is not something where we're really pursuing at this point.
And then it's more special dividends or share buybacks and each has its pros and cons.
And we'll make that decision with the board as we go forward.
Forward.
Thanks, guys and then the second question is capital spending in the first half of the year.
It's clearly tracking well below your full year guidance.
How do you feel about the debt.
Full year number or is there a downward bias to it.
And to the extent you.
Still think youre on track for that level.
Remind us again, what causes the acceleration in spend in the back half of the year.
Yes, it's a really good question and and first I would just summarize by saying we continue to be focused on the capital.
<unk> plans, we laid out at Investor day.
And those underpin our guidance of $1.2 billion for this year.
And we maintain confidence that we can achieve that.
You are exactly.
Right when you look at the first.
Half of the year, we've only spent probably 35% of debt $1.2 billion. So we are tracking behind but.
We are aggressively ramping up activity.
On several large projects and so.
When you look at second quarter compared to first quarter Youll see a significant ramp up in.
And I forget.
40% to 50% or something and so if you extrapolate that that trend I think that will give.
Give you kind of.
<unk> confidence in our ability to get to that $1.2 billion.
Right.
Within our project portfolio or multiple projects with their own individual timelines and and some of them just happened to be more heavily weighted.
It's the second half of the year.
We have been.
Actively ramping up construction activities for our Sarnia products pipeline.
Yes.
1 of our largest projects in the downstream and on the upstream.
We're actively ramping up our.
<unk> activities at curl with our with our tailings project and so those are those are 2 examples of where we expect to spend significantly more capital in the second half of the year relative to the first half of the year now.
Now through all of that we continue to look for.
Efficiencies optimizations.
We have a long track record of capital discipline.
And so what's most important is achieving those projects.
Within the timeline and achieving the ultimate objectives, and if we can do that.
For slightly lower costs actually we want to do that and so we're going to continue to look for that and maybe that will result in a spending a little bit more a little bit less money by the end of the year, but but not with any <unk>.
Compromise to the project objectives or timelines so.
I think we're going to be pretty close to that $1.2 billion.
Alright, Thanks Brent.
Okay.
Brent we are a couple more that were pre submitted so I'm going to go to those right now.
First 1 comes from Menno <unk> with TD can you quantify the impacts of the.
Of the turnaround interval accrual in 2022 and beyond downtime unit costs turnaround cost et cetera is the plan to apply this approach to other projects, if so which ones and when.
Yeah. Thanks, Thanks for that question Menno.
When you think about turnarounds and I think.
Extended low in Dan's remarks, he highlighted that.
In this last quarter, we had 3 major turnarounds, we had we had Carl we had syn crude and we had stress kona and the collective.
Financial impact of those turnarounds was about $400 million on our earnings.
<unk>.
And all of that work was necessary and underpins the long term.
Safety integrity reliability of our operations, but to the extent we can figure out.
More effective ways to accomplish that work and extend.
Intervals and do it at lower cost, while that's a huge price for us and Thats what underpins this strategy at Kearl.
And so specific to curl.
When you look historically over the last few years at at our turnarounds.
Single turnaround will typically impact.
Impact us somewhere around 10000 barrels a day on an annual average and that turnaround will typically costs us $50 million to $70 million.
And cost and then on top of that there's there's the lost.
Margin.
Created with with those barrels so.
It's a it's a priority focus for us that's why it's so exciting that we can announce a 1 year acceleration of those plans.
And so.
It continues to be an ongoing focus.
The social all of our turnaround activities, how can we reduce the timeline reduce the financial impact, but I would say that for our other assets.
Those plans and approaches are quite optimized.
We've been working on that.
<unk> at those for many many years and so I don't think theres much applicability there most of our other turnarounds are on a longer interval already.
But we're going to continue to look for more opportunities, but hurdles the big price and Thats why so excited.
That to announce that today.
The next question is turnaround related as well, but in the downstream. It comes from Manav Gupta of credit Suisse help us better understand the impact of downtime and stress Kona refinery how much was the throughput lower what was the total expense of the turnaround and what was the opportunity cost.
Yeah.
Okay.
Exciting yes. Thanks.
Again.
I appreciate why there is so much focus on the turnarounds.
Same same for US is for you.
In terms of stress cone again.
Largest refinery of the 3 that we have representing about 50% of our.
Our refining capacity.
That particular turnaround its draft Kona was $55.56 days in duration. So nearly 2 months of the quarter had a impact of about.
70000 barrels per day.
<unk>.
And.
And then the financial impact was around $90 million in terms of.
Both cost and margin impacts so.
A pretty significant impact.
Impact to us, but again 1 net.
Net is quite important for us.
To accomplish that work and now have it behind us as we look to the future.
Okay. We have a question from Phil Skolnick capital.
How do your montney assets fit with our corporate strategy.
Well thanks for that question Phil.
Our corporate strategy is very much focused on maximizing the value of our existing assets and so.
Thinking about major growth.
In the Montney.
The current priority for us.
We have very purposely put our focus on our core oil sands assets and looking to further drive down costs, improving reliability, the low cost debottleneck.
And we've demonstrated.
Our ability to generate.
Significant value from that.
And so.
Given that we're continuing to.
If you will prioritize.
Where the unconventional assets fit in our portfolio.
There are elements.
<unk>.
<unk>.
That asset that are performing very well delivering a lot of value to us and we're going to continue.
To advance some of those opportunities, but I would say they are lower on our priority list.
Relative to our core.
Core oil sands properties, but.
We need to we take a long term view, we've got a lot of acreage in the unconventional plays.
And so we're going to continue to reflect on them continue to update that opportunity space see how it fits in the market.
And we'll continue to keep those strategies current but for now our priority is really on the oil sands.
And we have 1 final question that was pre submitted around the sustainability of chemical margins and that came from Phil Gresh at Jpmorgan. So on chemicals, how are you thinking about that.
<unk> margin normalization.
Well first I would just reiterate.
It's a very strong quarter for chemicals.
As I mentioned.
$109 million of net income and that compares quite favorably.
Pay $78 million of net income for all of 2020.
And and also.
Compare quite favorably to $108 million for all of 2019, so a very strong quarter for us.
The highest in 30 years.
<unk>.
And it's really being underpinned by by a few fundamentals. So I mean first of all.
We have.
An advantage chemicals business, we've got.
Our low cost low cost.
2 structural advantages driven by our integration with the Sarnia refinery or access to.
Yeah.
Readily available feedstocks close proximity to key customers to market our products.
All of those.
We've got to put us in an advantaged position.
And then on top of that what we've seen is.
Some.
Impacts from the winter storms down south and outages and some of the Gulf coast facilities.
Thats put pressure on.
On the supply side of the market.
Sure.
And then.
And on top of that as the economy is recovering from from Covid, We're seeing an increased demand.
For polyethylene in consumer goods related to that and so all.
Things together are creating a very strong market environment.
As we look longer term.
Into the second half of the year and.
And approaching year end I do expect there'll be probably some normalization of <unk>.
Are those things.
But very difficult to speculate.
On what Thats going to look like in terms of dollar per ton.
But probably some normalization kind of given some of those impacts are more seasonal in nature and longer term I think.
Price. This is a very cyclical business there there will be.
New sources of supply coming on the market and all of those things what will have an impact, but but again, we still feel very good about.
Where we are.
And the advantages, we have with our business and as.
As we look even to the end of 2020, I think it's going to continue to be very strong for us.
Okay, operator can I turn it back to you. Please.
Sure Andy.
We have a follow up question from Dennis Fong from CIBC World markets. Your line is open Sir.
Hey, Thanks for taking my follow up questions I've got 2.
1 is just on boarding of new gas project.
Rolled it out to 1 particular boiler.
The indicators 5 incremental debt you can look at installing new.
Net new technology on whats the timeframe of that potential installation as well as are there any other locations throughout your portfolio that you can look at applying.
And then secondarily, if you wouldn't mind, providing a bit of an update as to where youre at with respect to the Grand Rapids project.
Okay.
Yes first on on the border flue gas.
Youre right.
We've completed 1 we have.
We have a.
5.
5 additional ones that we are in the process of phasing into into our <unk> operations.
<unk>.
We would expect that it will take.
Probably 2 to 3 years to complete all of those.
Because.
We need to.
To time it.
With downtime on that on those pieces of equipment and and we want to be very orderly in the implementation, but but.
But a very positive project as I mentioned, not only cost advantages but.
But also emissions advantages so.
That will.
We look forward to implementing that and it's part of our pathway to.
A 10% reduction in our greenhouse gas intensity between now and 2023.
And then in terms of Grand Rapids.
Lot of activity underway at Cold Lake.
More recently, we have.
We have shifted our focus to optimizing.
Our existing assets at Cold Lake.
<unk>.
Some infield drilling and further optimization of production and Thats.
That's driving those great volumes that youre seeing at Cold Lake.
And the reason that.
That we were able to increase our guidance by 5000 barrels.
A day.
So that's been our priority in the near term.
To accelerate volumes, but we're keeping obviously have a very clear line of sight on some longer term project opportunities like Grand Rapids. So so.
We are continuing to.
Is that project in our portfolio.
And.
When we get to Investor day, we'll give kind of a more wholesome update but we've made.
We made progress on that project and we continue to see that it's going to add a lot of long term value.
But again equally important is what we're doing that with NAV VA in the base Cold Lake, which is also adding near term volumes.
Which are very profitable right now.
Thank you. Thank you.
I'm showing no further questions at this time I would like to turn the conference back to Mr. Dave Hughes for any closing remarks.
Okay. Thank you operator.
That.
Concludes our second quarter earnings call.
On behalf of the management team here. Thank you very much for joining US today, if you have any further questions or want to.
Continuing discussions please don't hesitate to reach out and contact the Investor Relations team. Thank you very much.
Thank you ladies and gentlemen that concludes today's conference call. Thank you all for joining you may now disconnect.
Okay.
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