Q2 2021 Imperial Oil Ltd Earnings Call
[music].
Yeah.
Good day, and thank you for standing by walking through the Imperial Q2, this off and 'twenty 1 earnings call. At this time all participants are in a listen only mode. Later, and we will conduct the question and answer session and instruction and instructions will follow at that time and find out I should've kind of assistance. During the conference. Please press Star then zero on your Touchtone telephone.
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.
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 Sherry <unk>, Vice President of commercial and corporate development first.
The 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 and attachment 6 of our most recent press release and available on our website with the Linc conference call.
Todays comments may also contain forward looking information any forward looking information is not a guarantee of future performance and the actual future financial and operating results can differ materially depending on.
And a number of factors and assumptions forward looking information and the risk factors and assumptions are described in further detail and our second quarter earnings press release the.
We issued earlier this morning as well as our most recent form 10-K, and all of those documents are available and Cedar Edgar and on our website. So I would ask you to please refer to those so we're following our usual format today Brad is.
Gonna 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.
And I hope each of you and your.
And these 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 of accounts across the country and hopefully this is bringing some sense of normalcy back to all of our lives which is desperately.
We need and.
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.
Addity prices, but with continued slow recovery and demands.
And from an operational perspective, we continue to deliver very strong performance.
As we've talked about on our first quarter call. We had plans to execute a significant amount of maintenance this quarter and I.
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 and Canada lifted and are looking forward to seeing a more pronounced.
Im pleased 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.
And over the next few minutes, Dan and I will detail the results of what was a very.
<unk> strong 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 all of it very much as expected given our turnaround activities.
We saw improvements and crude prices through the quarter, although our ability to fully capture of this improved market environment was impacted by the high level of turnaround activities that I mentioned.
We've delivered a strong first half.
And 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 and the quarter higher than in the second quarter of 2020, it was actually higher than all 4 quarters of <unk>.
On the combined.
Our upstream continues to perform very well.
And I will talk more about each asset and a few minutes, but I want to take just a moment now to highlight a major milestone we have achieved at kearl.
Im excited to let you know.
And that 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.
Hurdle 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.
And this is due to the progress we have made.
So the kind of our multiyear reliability improvement plans and specifically the work we've been doing to prepare for this capability over the last several years.
The <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.
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.
The eighth 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%.
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.
The reduction 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 of further example of why Canada continues to be the best place globally to produce oil as.
As we have talked about and the <unk>.
Canada continues to lead all major reserve holders and 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.
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.
The Thai and 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 and more detail.
Thanks, Brad.
Getting into the financial results for the quarter, our net income and 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 and 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 and.
It's higher.
Higher realizations and the upstream were more than offset by the impact of significant turnaround activity of curl, syn crude and stress Kona, which together reduced earnings by about $400 million.
As well as weaker realized margins and the downstream.
Looking at each business line the upstream.
Recorded 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 Kearl and Syncrude.
Downstream is net income was $60 million.
Extreme and quarter down from $292 million and the first quarter with the lower earnings reflecting the impact of the 55 day turnaround at stress Kona, along with lower realized margins driven by timing impacts.
Our chemicals business demonstrated continued strong performance and the second quarter.
The earning $109 million compared to net income of $67 million and the first quarter, making the second quarter of this year the highest quarterly results for our chemical business and over 30 years. These strong results continue to be driven by higher margins.
Moving on to cash flow.
And the <unk> and the second quarter, we generated $852 million and cash flows from operating activities were $893 million, excluding working capital effects.
Despite the execution of 3 major turnarounds, our free cash flow and the second quarter was $645 million, bringing our free cash flow for.
Or 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 and the second quarter, mainly via share buybacks, while still ending the quarter of the cash balance of almost $800 million looking.
For the year 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 and the second quarter totaled 259.
Up about $100 million from the first quarter, reflecting a continued ramp up and activity including increased spend.
To the Sarnia products pipeline, and the downstream and the curl and pit tailings project in the upstream.
Consistent with our previous guidance, we continue to expect capital expenditures for the year.
Ahead to be about $1.2 billion of spending continues to ramp up on the Sarnia products pipeline and the curl and pit tailing projects and as we increased spending on volume Sustainment at Cold Lake as well as mine progression and efficiency projects at kearl, including converting additional trucks 2.
A year and this hall and recovering heat from boiler flue gas.
Shifting to shareholder distributions as I previously mentioned, we returned over $1.3 billion to shareholders and the second quarter repurchasing about $29.4 million or 4% of our outstanding shares for.
<unk> $2 billion in May and June.
And paying a $160 million and dividends in April at 22 per share on June 23rd we announced that we would be renewing our share repurchase program as of June 29th to repurchase up to 5% or about $35.6 million of our outstanding.
And <unk> over the following 12 months and in early July we paid our second quarter dividend of 27 per share and increase of around 23% from the first quarter dividend earlier today, we announced that we will pay of third quarter dividend of 27 per share on October 1 these actions demonstrate our confidence.
Ending shared and the future and are 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 and 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> very strong operating performance.
And although we were and the very early stages of the pandemic and the second quarter of last year, and we're taking steps to manage production levels and a highly volatile market environment at that time. It is also notable that the second quarter of this year was.
<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 asset.
Starting with Carl.
As you May recall last quarter's curl 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.
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 <unk> history.
But also the second best quarterly production ever.
<unk> 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 and 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 crude oil.
Due to the 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 300.
And then 1000 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.
A lot of 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 and which I would normally be providing some comments on.
Rich.
Annual turnaround at Kearl, but as I mentioned earlier, we won't be having 1 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.
And the 80000 barrels per day.
And at our Investor Day last November we indicated that we would be taking this stuff the step in 2022.
Advancing these plans by a full year is a testament to all of the work. The curl 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.
<unk> 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 cost at Kearl, which continue to be a positive story as well.
<unk>, we've talked about of target unit cash cost of U S $20 per barrel all in at Kearl and.
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 operating.
Operating costs and are making great progress.
And it 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 the 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.
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.
Boiler <unk> thousand 20.
The second quarter of 2020.
At a high level of planned maintenance, whereas we had relatively light maintenance activity and the second quarter of this year as I mentioned on our first quarter call.
And while this accounts for a large part of the year on year increase.
Of 2.
We realized.
The improved reliability and optimizations, we made at Cold Lake are also contributing to the strong performance.
And given the strong performance.
Full year production is now expected to be 135000 barrels per day.
And increase of 5000 barrels per day over our prior guidance.
I will also note that we do of 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.
<unk> quarter.
Now moving to Syncrude.
Imperial share of Syncrude of average production was 47000 barrels per day and the second quarter.
This was down 32000 barrels per day versus the first quarter and down 3000 barrels per day.
The courses the second quarter of 2020.
This drop is due to the large turnaround on 1 of the coker thats and crude during the quarter.
By comparison Sim crude did have the sorry did not have a turnaround and the first quarter of this year.
And recall of 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.
Day verbal we talked on the first quarter call about the COVID-19 outbreak and wood Buffalo and at that time.
And I would note this did impact the turnaround to some extent the outbreak necessitated executing the work with the reduced workforce.
So there was an impact of the duration.
And the turnaround was completed and 95 days versus an original plan of around 80 days.
But on the very positive note I would also highlight that the asset did leverage the new interconnecting pipeline.
And between Syncrude and Suncor base plant to allow.
Recall, the export of bitumen for the first time and the assets history and 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 Syncrude.
So now let's move to the downstream.
Stream.
We refined and average of 332000 barrels per day, and 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 and the quarter was 70.
8%, which was down from 85% and the first quarter, but up from 66% and 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.
<unk> per day and the quarter.
I would also highlight that stress kona represents almost 50% of our refining capacity and the country.
And so a turnaround of this magnitude does have an impact on the downstream financial results.
In addition, while on average.
Western.
Canada saw some stronger industry margins in the second quarter. The margins were lower in June which was when <unk> completed their turnaround and resumed full production.
This impacted our ability to fully capture the stronger industry margins and the quarter.
And to give you an idea.
And of where we are now after the successful completion of the stress Kona turnaround overall refinery capacity utilization has increased to around 93% and the month of June.
Looking forward, we do have some further planned maintenance activity later this year, but.
And on the same scale as the second quarter.
This specifically involves the 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 and the quarter.
Yes.
But not only and product sales and 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.
Put 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 no.
We were seeing industry fuel demands around 90% of normal for gasoline.
Hi, Jed it around 50%, which is of significant improvement versus prior quarters and now with diesel remaining close to historical levels.
Looking forward, we expect to see continued strengthening and the demand for motor gasoline most jurisdictions in Canada have effectively.
<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 and the summer driving season will result, and a further increase and gasoline demand and the quarter.
And finally.
And so 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 the coal business continued its outstanding performance as well delivering an impressive $109 million and earnings and the second quarter.
The highest quarterly earnings and 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.
The chemical volumes have continued to stay strong as have margins, which continue to be impacted by supply challenges and demand strength in North America.
So 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 and a quarter, where we had a significant amount of planned maintenance.
And that strong performance underpins.
The increase and 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 and 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 I am 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.
And 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 and let me first.
<unk> comment 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.
Plans, 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 is by its nature has a lot of steel associated with it.
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 and pit tailings <unk>.
Project.
And we want but that project is mostly and <unk>.
<unk> Earth works.
So theres really.
The limited pressure caused by by steel inflation and not really material.
Now shifting a little bit to operating costs.
It is fair to say that.
That we are seeing higher energy costs driven by.
Natural gas.
Reising, and especially compared to a year ago.
So that is impacting some of our costs.
But when you set that aside.
Actually our.
But any wide operating costs are essentially flat with the first half of last year.
Okay and fill out of 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.
And for that question, Phil and maybe just.
Building, a little bit on my earlier comment.
On Opex and inflation, but first.
Just to remind you and everyone.
Last year, we were able to.
The <unk>.
Our operating costs by about a $1 billion versus the prior year and.
And what we've said.
Over the course of the last year was that about 50% of that cost savings was structural and the other 50%.
We're more.
And do slurry or 1 off type impacts, but as we moved into this year, we had a very.
The strong focus on trying to maintain that full 1 billion dollar of savings.
And so where there were things.
Temperature of temporary or 1 off and nature, we are working hard to offset them and 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.
We are seeing from from energy costs, especially on the fuel gas purchases.
Other than that we.
We are maintaining a pretty flat levels of costs versus last year, which is of significant.
<unk>.
And then of course.
Also important to keep in mind that while we are 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.
The 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.
And so I just wanted to quick reminder, are the to ask the question.
Please press Arden and the number 1 on the telephone keypad.
First question comes from the line of Dennis Fong from CIBC World Markets. Your line is open and Sir.
Hi, good morning, and thank you for taking my questions.
The first 1 really relates to curl, obviously, you guys of showcased a lot of.
Good work there.
They're driving stronger throughput and production.
And 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 barrel a day and and 1 of the previous conference calls you kind of indicated that some of those initiatives had already been completed.
It seems like part of the driving factor to raising our full year guidance at curl I was just curious as to what some of the remaining incremental projects you have left to help drive you to that 280000 barrels a day given your accelerated time line of kind of switching to 1 turnaround.
Greeted with year.
Yeah. Thanks, Thanks for that question and I appreciate your recognition of the great progress.
We are making on our on our journeys at.
Apparel and I must say.
No pun intended but curl is.
Around the dollar for us.
And they just continue to deliver.
And so many ways.
<unk>.
Ranging from reliability improvements other volume enhancements cost reduction initiatives, a whole range of things.
And as you pointed out we laid out.
A core strategy to to enable us to ultimately achieve 280000 barrels per day over a several year timeframe and there were many.
Projects underpinning that.
A couple.
Couple of that are still very much of a focus of ours involve some further debottlenecking of our equipment, there at curl, which will allow higher throughput.
We're also continuing some mining and resource optimization activities.
<unk>.
Digital is still a key focus area for us and.
And so there are still more initiatives.
And that that we're very focused on to get us the 280000 barrels a day.
But as you're also seeing we're accelerating that.
That plan.
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 the $2.80, but rest assured it's going to be.
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.
The dividend.
As well and continuing on.
A core focused capital program, which is looking at optimizing essentially your base production and kind of carrying that through this year, obviously, given the stronger oil price environment.
You're looking to payback of significant amount of debt just because there are no other.
And at the time being for per allocating capital how are you.
And 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 to let.
Let Dan talk about kind of our approach to capital allocation and 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.
Other option uses of our of our capital So I'll, let Dan talk about the yeah, I mean, our debt levels.
Levels are low on an absolute basis relative to our peers the call.
Cost is low.
And that's always an option, but as Brad said, it's not a priority.
And as we've said at various investor days and.
And other things and pretty consistently we remain committed to returning.
Surplus cash to shareholders and obviously, if you look at today's commodity prices and I kind of talked a little bit about and my comments and the production levels. We have going forward, we could see we hope see very strong cash generation.
And so we start as always with the reliable and growing dividend and our go to after the asked the NCI and we just completed the.
The 4% amendment and over a couple of months and now we have the new 1 we launched for 5% over the next 12 months and we did we still could grow cash balance of significantly net of all of that.
And so as we've said before.
Our commitment to return surplus cash remains and so we have to look at other.
Other methods of share buyback, we have to look at special dividends and.
We haven't made any decisions and that area, but but I think the key messages. We are committed to return surplus cash.
Right.
Thanks for those questions.
Yeah.
Operator.
Okay and going on we have the next question from Greg Pardy from RBC capital markets. Your line is open and fair.
Thanks, and thanks.
Good morning, and.
Thanks, as always for the very thorough rundown.
Most of my questions have been answered, but I guess the wanted to come back to the.
Pathways to net zero, which you're a part of the the quintet.
And what's most important and your mind in terms of milestones that we should be.
For you guys as you've come out with this and in early June and Theres, a consultation period underway.
But how.
How should we sort of great performance here and perhaps over what time line.
Yes. Thanks, Thanks for the question Greg and.
The pathways to net zero Alliance.
Clients and our objectives there.
Our.
A very high priority for us as a company and more collectively.
Either of us.
And 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.
And tail.
And we're leveraging all of the 5 companies strength. There. We're also in parallel and working with provincial and federal governments to the.
Find the nature of support.
Work that we will need from them.
Both in terms of.
Fiscal support.
For the projects certainty around our investments.
And also access to poor space.
And.
And.
And along the pipeline and where we see some see quest 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.
Kind of level of support.
Falls.
And then also.
Marrying that up with all of the physical elements of the project.
And 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 the huge undertaking for us and.
It's obviously.
Multiyear 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 and so I hope that 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 and saying.
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 rich.
And then the cash flow generation that I would think you'd have in the back half of the year at the forward curve.
Becomes a real possibility as you think about the potential for special dividends, what do you think the.
Positive cases, and what do you think the risks are to the idea and then we've seen the employed and a different a couple of different ways.
Give him have done it and.
And of codified framework through of variable construct and some have opportunistically provided 6 special dividends.
And I thought I'd.
And 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.
And Youre right.
As we look.
Through the rest of the year, we do think we're going to be and a very strong cash position and we're going to be.
Think faced with some some really positive choices.
And.
And the.
Between ourselves and the management team and certainly with the board we continue to reflect on those and 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.
And of referred to but I think what we hear from our major shareholders. Indeed, indeed equity analysts is theres, a really of preference for a reliable and growing dividend. So I think that that could change.
If the preferences of the market change and our shareholders. We can we think about that and and go into some other method of various.
Or what have you, but we're pretty committed to a 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.
And we'll make that decision with the board as we go forward.
Forward.
Thanks, guys and then the second question is capital spending and 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.
Still think youre on track for that level.
Remind us again, what causes the acceleration and spend and 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.
Youre.
The 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 and.
On several large projects and so.
When you look at second quarter compared to first quarter Youll see a significant ramp up.
And I forget.
40% and 50% or something and so if you extrapolate that that trend I think that will give.
Give you kind of.
<unk> confidence and our ability to get to that $1.2 billion and.
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.
We have been.
Actively ramping up construction activities for our Sarnia products pipeline.
Yes.
1 of our largest projects and the downstream and.
And on the upstream.
We're actively ramping up our construct.
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 and the second half of the year relative to the first half of the year.
Now through all of that we continue to look for.
Efficiencies optimizations.
We have a long track record of capital discipline.
And so whats most important is achieving those projects.
Kind of.
Within the timeline and achieving the ultimate objectives, and if we can do that.
Trucks, and a 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 the spending a little bit more of 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 of more that were pre submitted so I'm going to go to those right now the.
First 1 comes from Menno <unk> with TD can you quantify the impacts of the <unk>.
Expansion of the turnaround interval occur in 2022 and beyond downtime unit costs turnaround costs 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 and.
And when you think about turnarounds and I think.
And Dan's remarks, he highlighted that.
And this last quarter, we had 3 major turnarounds, we had we had <unk>, we had syn crude and we had strength Kona and the collective.
Financial impact of those turnarounds was about $400 million on our earnings.
And all of that work was necessary and underpins the long term.
Safety integrity reliability of our operations, but to the extent and we can figure out.
More effective ways to accomplish that work and extend.
Holes 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.
And 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 is there is the lost.
Margin associate.
Innervated with where those barrels so.
It's a priority focus for us that's why it's so exciting that we can announce so 1 year acceleration of those plans.
And so.
It continues to be and ongoing focus.
So all of our turnaround activities and how can we.
Reduce the time line 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.
4 of them 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 curls, the big price and Thats why so exciting.
Net 4 announce that today.
The next question is turnaround related as well, but and the downstream. It comes from Manav Gupta of credit Suisse help us better understand the impact of downtime of stress on the refinery how much was the throughput lower and what was the total expense of the turnaround and what was the opportunity cost.
Yes, thanks and.
Again I appreciate why there is so much focus on the turnaround so.
The same same for US is for you.
In terms of the stress cone again.
The largest refinery of of the 3 that we have representing about 50% of our.
Of our refining capacity.
<unk>.
That particular turnaround and stress Kona was $55.56 days in duration, so nearly 2 months of the quarter.
Had a impact of about.
The 70000 barrels per day.
And and.
And then the financial impact was around $90 million in terms of.
Both cost and margin impacts so.
And a pretty significant impact.
Impact to us, but again 1.
And that 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 of capital.
How do your montney assets fit with the 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.
And in the Montney and.
And is not.
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 of the low cost the bottlenecks.
And we demonstrated.
And our ability to generate.
Significant value from that.
And so.
Given that we're continuing to.
If you will prioritize.
And where the unconventional assets fit and our portfolio.
There are elements.
Some of.
That asset that are performing very well delivering a lot of value to us and we're going to continue.
The 2 to advance some of those opportunities, but I would say the lower on our priority list.
Relative to our core.
Core oil sands properties, but.
We need to take a long term view, we've got a lot of acreage and the <unk>.
Conventional plays.
And so we're going to continue to reflect on them continue to update that opportunity space see how it fits and the market.
And we'll continue to keep those strategies current but for now our priority is really on the oil sands.
Okay, and we have 1 final question that was pre submitted around the sustainability of chemical margins and that came from Phil Gresh of J P. Morgan. So on chemicals, how are you thinking about the.
The pace of 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.
<unk> $78 million of net income for all of 2020.
And and also <unk>.
Impairs quite favorably to $108 million for all of 2019, so a very strong quarter for us.
The <unk>.
Highest and 30 years.
And it's really being underpinned by by a few fundamentals I mean first of all.
We have.
And advantage chemicals business. So we've got.
The low cap low cost.
2 structural advantages driven by our integration with the Sarnia refinery or access to.
Yes.
Readily available feedstocks close proximity to key customers to market our products of.
All of those.
We've got and put us in an advantaged position.
And then on top of that the what we've seen is.
And 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.
And then.
And on top of that as the economy is recovering.
From Covid, we're seeing and increase demand.
For polyethylene and consumer goods related to that and so all.
The <unk> things together are creating a very strong market environment.
As we look longer term.
And of the second half of the year and and.
And approaching year and I do expect there'll be probably some normalization of <unk>.
Of those thing.
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 such as the very cyclical business there there will be.
New sources of supply coming out of the market and all of those things 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.
And we.
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.
The 1 is just on the point if the gas project.
Rolled it out to 1 particular boiler and.
The indicators 5 incremental debt you can look and installing that day.
The new technology on what's maybe the timeframe of that potential of installation as loans are there any other locations throughout your portfolio and that you can look and applying.
And then secondarily, if you wouldn't mind, providing a bit of and update as to where youre at with respect to the Grand Rapids project.
Yes first on on the border flue gas.
Youre right.
We've completed 1 we have.
We have.
5.
And 5 additional ones that we are in the process of phasing into into our current operations.
<unk>.
We would expect that it will take.
Probably 2 to 3 years to complete all of those.
And because.
And we need to.
And to time it.
With downtime on the on those pieces of equipment and and we want to be very order and orderly in the implementation, but the.
But a very positive project as I mentioned, not only cost advantages but.
But also emissions advantages so.
And that will.
The forward to implementing that and it's part of our pathway to.
A 10% reduction and our greenhouse gas intensity between now and 2023.
And.
And then and then in terms of Grand Rapids.
We.
Lot of activity underway at Cold Lake and.
And I would say.
More recently, we have we.
We have shifted our focus to optimizing.
And our existing assets at Cold Lake.
With some.
We have a lot of infield drilling and further optimization of production and that's that's driving those great volumes that youre seeing at Cold Lake and.
And the reason that.
That we were able to increase our guidance by 5000 barrels.
The day.
That's been our priority and the near term to accelerate volumes, but we're keeping obviously of a very clear line of sight on some longer term project opportunities like Grand Rapids. So so.
We're continuing to.
Some of that project and our portfolio.
And.
When we get to Investor day, we'll give kind of of more wholesome update but we've made we've.
We made progress on that project and 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 Nab VA and the base Cold Lake, which is also adding the 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. Davis for any closing remarks.
Okay. Thank you operator.
That concludes.
Concludes our second quarter earnings call.
On behalf of the management team here and thank you very much for joining US today, if you of any further questions or want to.
Continuing the 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.
And.
And.
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