Q1 2022 Cenovus Energy Inc Earnings Call
Please standby were about to begin.
Good day, ladies and gentlemen, and thank you for standing by welcome to Synovus Energy's first quarter results.
As a reminder, today's call is being recorded at this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session.
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Members of the investment community will have the opportunity to ask questions first.
At the conclusion of that session members of the media made it ask their questions.
Please be advised that this conference call may not be recorded or rebroadcast without the express consent of sort of a synergy.
I would now like to turn the conference call over to Michelle Wiggs, Vice President Investor Relations. Please go ahead.
Thank you operator, and welcome everyone to Synovus is 2022 first quarter results conference call.
Please refer to the advisories located at the end of today's release.
These describe the forward looking information non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion.
Additional information is available and synovus as annual MD&A and our most recent Aif and form 40 F.
All figures are presented in Canadian dollars and before royalties unless otherwise stated Alex <unk>, our president and Chief Executive Officer will provide brief comments and then we'll take your questions. We ask that you. Please hold off on any detailed modeling call a modeling questions and instead follow up on those.
Lee with her Investor relations team after the call.
And please also keep to one question with a maximum of one follow up you can rejoin the queue for any other questions. Alex. Please go ahead.
Thanks, Sherry and good morning, everyone.
I want to start with our top priority is always which is health and safety. We continue on our top tier safety journey over the past month, our safety performance has fallen short of our own expectations, well thankfully the incidents where at the relatively minor end of the spectrum set just slips on ice they ran.
For us our need to be unrelenting with her focus and getting everyone home safely from their jobs.
Turning to our handling of COVID-19, I'm pleased to report that we welcomed our corporate Western Canadian staff back to the offices earlier. This month. This is the first time in two years as a combined company that we've reopened our head office without major capacity restrictions and I have to say, it's been great to have the full team here.
In person again for some teams. This has been the first opportunity to collaborate face to face since a husky transaction.
And with that being said, we know that COVID-19 hasn't disappeared and we obviously continue to closely monitor.
The situations.
Now regarding our announcement this morning about increasing shareholder returns since I came to this company. Our leadership team has been focused on positioning the balance sheet for increasing shareholder returns.
Excited that our new framework reinforces alignment of the company with our shareholders on the importance of long term balance sheet strength is the foundation for strong and increasing shareholder returns over time, our board has approved tripling the base dividend on our common shares effective for the second quarter dip.
And they've also approved the introduction of potential variable dividends. In addition to our continuing share buyback program.
We've also implemented a net debt to floor of 4 billion, which represents a leverage ratio of about one times adjusted funds flow at U S 45 dollar W. T I price this.
It provides shareholders more certainty around when they would receive incremental shareholder returns where the balance sheet rapidly improving.
Between 9 billion and 4 billion net debt, we will target 50% of excess free funds flow towards shareholder returns.
And the remainder to the balance sheet, our preferred mechanism for that will be share buybacks, which will continue to execute opportunistically to the extent our share price remains below intrinsic value at around U S 60 dollar W. T.
If the value of share buybacks in a quarter is less than 50% of excess free funds flow will use variable dividends to make up the difference.
When reported net debt is that the 4 billion floor. The company will target to deliver shareholders, 100% of that quarter's excess free funds flow again, our preference will be for opportunistic buybacks with variable dividends to make up the difference.
You will also continue to see the same capital discipline that you've come to expect from US the five year business plan, we laid out for you at our Investor Day in December remains in place and we will continue to test the investments in our business based on returns at the bottom of the cycle, including.
The U S 45 dollar W. T I price.
So, let's turn to financial results in the first quarter, we generated cash flow from operating activities of $1 4 billion and adjusted funds flow of $2 6 billion, our best financial results. So far as a combined company capital spending was $746 million, which.
It led to a free funds flow of over 1.8 billion overall in Q1.
This financial performance combined with proceeds from asset sales achieved in the first quarter enabled us to reduce our net debt to $8 4 billion at March 31, our net debt reduction was impacted by a build of working capital in the quarter, primarily due to higher crude oil and refined product pricing.
So turning to operations in the first quarter, our upstream assets have been performing exceptionally well, including delivering total upstream production of around 800000 Boe per day in the quarter oil Sands production was nearly 600000 barrels per day.
Once again, demonstrating the strength and dependability of these top tier assets.
Production at Christina Lake averaged around 254000 barrels per day in the quarter and I I think this clearly reflects not only the strength of the reservoir, but also speaks to the capabilities of our operations team they are continuously improving and innovating with her ongoing redevelopment and re <unk>.
Programs.
Looking ahead now for a moment, we recently commenced a planned turnaround at Christina Lake. So you should expect that to impact second quarter production by around 20000 barrels per day.
At Foster Creek production for the first quarter was nearly 200000 barrels per day.
As expected we are seeing a modest decline from the prolific west arm pads that we've recently brought into service. These are some of the best Sag D wells drilled in the industry and this decline from peak rates was as expected.
While we have commenced another re drill program, which we expect to maintain around 200000 barrels per day of production at foster.
The Lloyd Mr. Thermals also continue to produce very reliably delivering an average of more than 96000 barrels per day in the quarter with the application of Synovus operating strategies here and now with increased gas injection and a re drill program. The team has brought production back to over 100000 barrels.
<unk> per day. In addition, the spruce Lake North project remains on track and will contribute another 10000 barrels a day of production at Lloyd by the end of this year.
You've already seen how synovus was able to significantly improve the operating performance at the Lloyd Mr assets by implementing our operating strategies and as we told you at our Investor Day in December this year, we're going to be taking a much closer look at sunrise.
Production at Sunrise and the in the quarter was 24000 barrels per day net to synovus.
Since the quarter has ended production has reached over 25000 barrels per day as we see additional benefits from our operating strategy rollout.
Facility.
As a nameplate capacity of 30000 barrels a day net to synovus and we are confident we can achieve this level of production over time.
Our realized prices for oil sands were very strong in this quarter supporting an average oil sands netback of over $56 per barrel overall, the oil sands segment generated $2 2 billion and operating margin in the first quarter.
So why don't we turn to conventional operations in that business continued to provide strong results generating an operating margin of 263 million in the first quarter with production of more than 125000 Boe per day, we benefited from our Q4 winter drilling program coming into production.
Allowing us to take an additional advantage of higher Ecu prices and while still early initial results have been better than anticipated.
Our offshore operations delivered 76000 Boe per day of production and an operating margin of more than $450 million in the quarter. We continue to see very strong gas demand in China, and we're having constructive discussions with our partners there an opportune.
<unk> to increase our gas sales to help offset some of the forecasted reduction in contracted natural gas from Lee 131, We also continue to progress our growth projects in Indonesia with the M. Fields. This month, we commenced drilling the first of five planned development wells in the M D. A.
The M P H and M. D. A fields are expected to start producing later this year. The new production is dry gas and is expected to increase Indonesia to around 20000 Boe per day by year end 2023 from current rates of around 10000 Boe per day.
You can expect some ramp up to begin in Q3 of 2022.
In the Atlantic region, the business delivered unit net backs of more than $83 per barrel, reflecting production of 14000 barrels per day and <unk>.
Higher overall commodity prices, the terra Nova floating production storage and Offloading vessel remains in dry dock in Spain and is expected to return to operation near the end of the year. This will add about 10000 barrels per day of production by year end. We also expect to make a decision on the west White rose.
Project with our partners in the coming weeks, we have taken the time over the past 16 months to substantially Derisk. This project as far as any decision to proceed with development it must represent meaningful increase value for synovus shareholders relative to decommissioning.
West White Rose is right now around 65% complete and if the decision is made to move forward. We estimate production net to synovus would ramp up by 2026 to a peak of around 45000.
Barrels per day by the late 2000 Twenty's.
Shifting to the downstream.
In the U S manufacturing segment utility our refinery utilization increased to 80% in the quarter and generated $423 million and operating margin. This risk flex stronger margin capture during the quarter with a much improved price environment in March and a rising price.
This environment like we had in Q1 our results also reflect the net benefit from the first in first out accounting of our U S refineries throughput.
Throughput in the quarter was impacted by some extended downtime at the Lima refinery as well as planned and unplanned maintenance at our joint venture refineries.
Looking ahead, the Toledo refinery began its once in every five years turnaround in mid April the refinery will be down for a large part of the second quarter and you should expect to see some higher unit operating expenses in Q2, given turnaround costs and lower utilization rates.
And our Canadian manufacturing segment, we saw utilization of 89% at the Lloyd Minster complex in the first quarter with an operating margin of $114 million. The refinery ran well however throughput was impacted by an unplanned outage at the upgrader, we also reduced.
Run rates later in the quarter as we were prepared for planned maintenance that began in April .
So turning now to our 2022 corporate guidance updates, we have updated our commodity price assumptions to better reflect the current business environment. We've increased our guidance ranges for oil sands royalties and cash taxes. As a result, we've also revised our oil sands per barrel Opex ranges.
To reflect higher eco prices, which drive our fuel costs across the business.
On the Capex side due to inflationary impacts on labor and supply chain as well as increased costs stemming from COVID-19 impacts we revised total estimated rebuild capital.
For the superior refinery by 300 million that said overall insurance proceeds related to superior will still largely offset the rebuild capital to date about 1.1 billion has been received in insurance proceeds related to superior and we expect about another one.
<unk> hundred million to come in around the second quarter of this year.
In terms of an update on the rebuild itself we remain on schedule to restart by the end of the year and we will very much look forward to that day with a nameplate capacity of 49000 barrels per day superior will be an important addition to our heavy oil value chain is the first stop on the Enbridge mainline.
I was just going to take a moment to talk about the sustainability as you likely saw earlier this month, the federal government announced an investment tax credit for carbon capture utilization and storage projects.
This is a positive step and working collaboratively with governments to help Canada achieve its climate goals and ensure the country can be the world's preferred supplier of responsibly produced oil.
We applaud the federal government for recognizing the importance of both developing new technologies to help Canada fight climate change, but also the vital role our industry will play in supporting our country's energy security and economy. We continue to have discussions with the government to determine how the investment tax credit will.
We implemented as well as what other support will be available to advance GHT reduction technologies those.
Those details will help inform our capital allocation decisions as we move forward our target to reduce our absolute scope, one and two emissions, 35% by 2035, and our 2015 net zero ambition.
So as I look forward to the rest of the year and beyond I am really excited about the future of synovus commodity prices have recovered substantially in the past two years.
I I am seeing a growing acknowledgment of the important role our industry will play in helping the world diversify to a lower carbon economy, while protecting jobs economic contribution and global energy security, we are setting up for even stronger momentum in <unk> business for the second half.
Half of the year, our assets will reach full operations across the business. After completing important planned maintenance in the first half of the year. The <unk> price risk management program, we will have largely wound down we expect to see higher downstream margins with improved market cracks in the contingent.
Payment to Conoco Phillips expires as of May 17th.
We've built this business with a focus on free funds flow generation and we've made rapid progress on the balance sheet. We've also executed on 40% of our current share buyback program that represents over $1 billion above the base dividend that we've returned to shareholders.
Since we put the buyback program in place and today, we've laid out a clear path for how we will continue growing shareholder returns while positioning the balance sheet to support the returns growth profile for years to come so with that we're happy to take any ones questions.
Ladies and gentlemen, as a reminder.
You can join the queue to ask a question by pressing star one.
We now begin the question and answer session and go to the first caller.
As long as <unk> capital markets. Please go ahead.
Hi, good morning, and thanks for taking my questions.
The first one actually is.
As related to the share buyback program.
Your comments, you alluded to about being about 40% complete thus far.
Just given the strength in commodity.
And the potential situation around decisions around returning capital and what the return of buying back stock happens to be how should we be thinking about a scenario, where you complete your prescribed 10% and CIB prior to the timing of renewal potentially in the November timeframe does that just shifts automatically to variable.
<unk> or is there other mechanisms you can look at.
Buying back stock if the economics are the returns still is favorable.
I mean, maybe I'll I'll start out and camera, Jeff may want to jump in or John but you know I I I I. It we've always said that a share buyback is it for us I mean as long as we're in the ranges that we're thinking about.
It is a preferred mechanism for returning value to shareholders and and I've always said, it's opportunistic and if we find that we ended this program and our share price is still at a very attractive level I think we're going to take a very hard look at it continuing at I don't know if anyone else has any comments they would want to add.
Yeah, Dennis Thanks for the question I would just add I you know you shouldn't think about the N CIB as a limitation to buying shares.
Whether it's the N CIB and us renewing it or even looking at N. S. I B, we'll always have some option available to us as we think about the strategy going forward and so you know the.
The real gating item there is the point, Alex made which is looking.
Looking at what our intrinsic value at $60 is and if we see share price. It's attractive we will continue to buy shares if not we will shift to the variable dividend.
Great Great I appreciate that color. My second question My follow up I guess here is just related around.
Portfolio of assets that you have right now I know that by and large you are you've completed a lot of the rationalization and the optimization of <unk> portfolio.
Given that your balance sheet is in a considerably better position how should we be thinking about how you evaluate further capital allocation from more of a capex perspective things I know you've outlined west White rose, but more along the lines of other incremental growth projects and or assets to either be bought or sold.
Oh, Hi, Dennis it's John Mckenzie.
I think addressing.
Addressing the latter part of your question first just in terms of dispositions.
One of the things we did post the acquisition of Husky is we did a comb through of all the assets to you know look at assets that were on strategy versus assets that are not not on strategy or non corn.
I think we've been pretty clear, we're getting close to the very end of that program I think we still need to close on the retail assets.
Don't think about you know this portfolio that we've got today as being something that.
It isn't completely congruent with our strategy.
As we think about growth and think about our capital investment you know we have a pretty firm.
Capital allocation criteria and it's all rooted in bottom of the cycle pricing and generating cost of capital returns.
Or above at $45. So we do think you know every dollar that we invest needs to generate a return for our shareholders that those pricing. So we still screen everything there.
Do we think about the pricing environment that we're in today you know there are additional opportunities to do some short cycle things and Alex mentioned some of the growth projects that we've got that are going to come on later this year, whether that'd be Indonesia, or spruce Lake north or later in the year, we've got turnover coming back on stage.
But we are kind of very religious on how we allocate capital living within that framework.
Perfect.
With that color I'll turn it back in and let others ask questions. Thanks.
Thanks Dennis.
Thank you we'll take our next question from Greg Pardy with RBC capital markets.
Thanks, Thanks, good morning, and great rundown, so I, just I wanted to stay with that buyback a little bit.
And maybe I'll try and put words in your mouth, but I'm.
Im wondering if you can maybe provide some perspective on whether your shares today represent compelling value.
And then secondly to the extent that that intrinsic value is in 80 days since your decades down that intrinsic value clearly would continue to head north here. So I mean, we could we be in a situation where you know any shares just continue to be just the preferred method.
Yes, I think Greg.
You know that the.
I would largely agree with the comments that you made in and I think the important thing as Cam mentioned is that we really do target share buybacks at middle of the cycle. So you know well I probably won't share our exact view of we're in a V is we do look at it.
You know, we do calculate that in the context of kind of a 60 dollar W. T I another middle <unk>.
Cycle numbers are for the other important metrics in our business than you you are accurate as as you know we continue to execute on this plan. We would expect to see that continue to grow which I think would continue to leave us with opportunities you know depending on where the share price goes.
But.
All things remaining static I mean are we would see a continuing opportunity to buy back shares.
Okay. Okay. Thanks for that and then maybe just switching just on the operations side just to leave one is there is there any commentary you can provide around just extension of gas sales contracts help pricing could look in that market at least one.
Yeah, Greg it's drew so.
Yeah with Leon 29, one we we've actually.
Just finished the negotiation for supplemental contract sales. So we are increasing our.
The sales contract volume there.
Pricing is still very strong as you see it's probably still some of the best net backs we have in the company. So pricing around that negotiation is is at least as good as that.
Having completed that negotiation here.
Literally just in the last week or two we are quickly quickly shifting to three dash one there's very strong demand in that area for for gas. We've got a lot of good reserve base, there and so we are quickly shifting now our focus to potentially.
Reinstate or look to add a supplemental sales agreements in the $3 one area as well and again pricing is a quite strong and we expect to be in the similar at least at similar pricing that we've had for the last number of years.
Okay. So with what you just told me can I is it fair to assume that concern to think about the one as being kind of flat into 'twenty three 'twenty four at similar pricing scenarios.
We'll provide guidance later this year as we go into 'twenty three budget, Greg but the.
The 29, one Lee one contract. We just finished actually is incremental volume to what we've had in the past.
Okay. Okay. Good enough thanks very much.
Yes, Thanks, Greg.
Thank you we'll take our next question from Phil Gresh with J P. Morgan.
Hey, good morning, I just wanted to ask first about the updated that target in the past you've talked about.
One times EBITDA or 6 billion of debt and now you're talking about one times cash flow or $4 billion of debt.
Presume EBITDA versus the cash flow or are roughly equivalent, but I just thought I'd clarify on that and then just in terms of this lower absolute debt target of the $4 billion.
Is it just a desire to have a bit lower debt, which obviously would make sense or something different just wanted to unpack that a little bit more if there's anything to add.
Thanks, Phil It's Cam maybe.
Maybe what I would say to that is I think you know broadly speaking that the debt target, yes has come down.
You know that you know when you look at our.
Cash flow at 45, it's probably in that four to four and a half range. So it does equate to approximately one times I think one of the things. We spent a lot of time thinking about as we put this framework together as you know the tradeoff between moving towards say, the 100% of excess refunds flow going back to shareholders and where are we.
You don't want to take the balance sheet permit Herman no regrets perspective. So I think you know 4 billion from our perspective is the right level to be.
If we're going to commit a giving back all the cache of once we get there and it really allows us optionality, whether it's you know continuing to Opportunistically buy back shares.
Opportunities that could come up.
In the future that we would look at and put the company in a really really good position to be.
Very opportunistic in terms of what can come so I think at the end of the day, we were comfortable with with $4 billion.
You know I think we looked at all scenarios for them.
Leaving it at six to even going to know that and I would say from our point of view, it's the certainty around having a clear floor was important to us.
But also putting it at a level that are felt appropriate given the commodity price environment, we're in and where we'd like to be if commodity prices ultimately come down.
That makes a lot of sense. It seems like you can get there pretty quickly actually.
And then just on the M&A.
M&A side since the framework does allow.
For M&A just wanted to ask.
Ask a little bit more here, you've talked about the potential to clean up your downstream JV structures.
I'm curious if that's something that you would consider.
Somewhat of a near term priority for the company.
Or and or would you be considering upstream opportunities at this point just what are your latest thoughts on M&A.
I mean I, it's it's a it's Alex Phil.
I would say with respect to M&A.
We've always said it it is very opportunistic we're very value value focused when when it comes when it comes to that but we also prioritize shareholder.
Our focus is on shareholder value.
And I do think we have some opportunities to continue to drive shareholder value by expanding margins, but ultimately if we intend to continue to grow shareholder value. You know, we we are going to have to grow the top line, but as I said nobody should expect a you know that.
That theres any word salad here, where we're looking to move away from the discipline that we've shown to date, we have talked in the past and John may want to add a comment or two but.
We do have some focus is on on the downstream side and you know that is owning and operating our assets and we'll continue to look at that but none of that is it should be looked at as we're going to lose any of the discipline we've shown to date.
No I think that sums it up well I think we've been really clear since we acquired husky that one of our strategic goals is to own and operate and have strategic direction over our business.
I guess in the U S downstream, none of that has changed but as Alex mentioned this.
This has to be done within the framework of the financial discipline that we've set forward.
Okay, great so probably more downstream than upstream I guess is my takeaway if youre looking at taxes is out there.
Yeah, I mean, so I mean, if you kind of look at our upstream and you stick within the North American context, we we operate most of.
We participate in and then you know.
The opposite in the U S downstream. So it's just really a function of the asset base versus a preference one way or another.
Understood. Thank you very much.
Thank you and once again Thats Star one if you would like to ask a question. We'll take our next question from Neil Mehta with Goldman Sachs.
Thanks.
Thank you, Alex and Jeff Let me start by congratulating you that that the last 18 months of a terrific business and the taxi can culminate this with a very clear return of capital strategy shows how how long how far the business has gotten so.
Grant's on the progress I had a couple of questions for you.
First is around capital spending levels being bumped up this year.
It looks to us like that's just superior.
So but is there any thought that you'd think that carries forward given the inflationary forces that the industry is contending with and then as it relates to superior just any update there are about the confidence in getting that project online.
How do we think about insurance proceeds.
<unk>.
<unk>.
Offsetting some of that higher specced. Thank you.
Sure Neal I bet as to your first question the that that capital increase relates exclusively to superior we are seen a we're starting to see some some cost pressures in the business and you know maybe maybe we can get some comments from some of the other lead.
Our ship team, but maybe I'll first have Keith.
Keith talk about how how we feel we're doing on superior.
Thanks for the question you know just you know in Alex's opening comments he talked about the strategic nature of superior being important to us. It is the first stop.
On the mainline system, you know it helps us mitigate our heavy oil.
Heavy light spread in Alberta, and it does consume our molecules and Diversifies our product mix. So nothing is changing with regards to seeing it on the strategy.
Even with the cost pressures that we're seeing.
No I think we talked about $1 $2 billion of total capital cost of $1 $1 billion of insurance proceeds already received with another 100 million to come. So I think we've always been saying essentially offset by insurance proceeds, which which still holds and and you know the other thing I would offer up is even though we're seeing some of these costs.
Pressures, we're not seeing schedule slippage. So we're still on track to start up and operate the refinery at full rates in Q1 2023.
So still looking good on on kind of the overall schedule.
Yeah, Neal it's drew here, maybe I'll jump in on the first part of your question. So.
You know, what I would say and you know to.
To represent probably north area in our supply chain team have actually done a really good job in kind of the thermal oil sands business, where we've got longer term sustaining program based capital being deployed.
They've actually done a really good job.
Being well ahead of some of this pressure that we're seeing we've got a lot. Most the long lead items are all kind of on the ground. We're well ahead on tubular buying and whatnot. So.
You know that business is probably a little more insulated from some of this near term pressure, but what I would see more of a conventional short cycle business.
Just in breakup now we started seeing a lot of pressure right near the end of the kind of the completion frac drilling season here.
We are having a look now over breakup before we.
Re kind of restate our activity here mid year, we are having a look at what do we want to do from a capital level in the second half because we are seeing pressure on steel drilling rig service rigs, particularly where we don't have multiyear contract commitments, which you know and in a short cycle business, how your conventional world Historically you haven't.
We haven't pushed herself to do that so you know we are having a look at that you know we have to make some decisions here over the next quarter on what we want to do because we are seeing some pressure in that part of the area that part of our business.
Thanks drew and as a follow up is just around the tap waste project. It looks like we're getting closer to having some clarity around.
Government subsidies around that but Alex would love your perspective on why you think this project is important but also more importantly for US is just trying to figure out the timeline.
The aid with spend and when you think that can come into service and this it's difficult for us to validate to our models until we have a little more clarity around a timeline.
Yeah, No I'm happy to give a little bit of color on that Neil like you know I think the the government announcing the ITC was a really positive step.
And really does I think show that the industry and particularly the oil sands industry as represented by pathways has really had quite a good collaborative and productive.
A discussion with with the federal government.
Thank you know we are still you know I think before you see the industry kind of announce an F. D. On a on the pathways foundational project, which is really the the carbon capture and the transport of the C O two.
And to the Cold Lake area for sequestration, where we're gonna have to get a lot more detail.
One around the ITC around other programs.
That that are also going to be Oh, I suspect will be in place to help industry.
Funding and and cover the costs associated with that but at the same time, we are Oh, we have made commitments.
For carbon reduction and in the 2030 timeframe so.
I I I don't think you're going to have to wait very much longer.
We're already.
Budgeting in our five year plan things around methane reduction a lot of another initiatives and those are already included but I think you're you know you're going to see over the next year or so.
A lot more granular detail on on the costs associated with those larger larger scale projects.
And I'm, sorry, and that's going to take us getting getting through these discussions with the various levels of government.
Yeah makes sense. Thanks again.
No worries.
Okay.
Thank you we'll take our next question from <unk> Gupta with credit Suisse.
Thank you guys wanted to congratulate you on the three fold increase in dividends. My question here is on the dividend hike I think in the past you guys have indicated that even.
Even at 45 W. D. I you can make over $4 billion in cash and your Capex is kind of 2.5. So a three fold increase is great just wondering the dividend burden could be.
Well 1.3 billion. So you could have gone with a fourfold increase make the yield even more competitive and so just trying to understand the thought process again very appreciative of the people increase but trying to understand the thought process of not making it affordable increase if you could talk about that.
Hey, Manav, it's cam.
So a couple of things that I would say I think first off I think.
No.
The base dividend I would say is one component of our shareholder return strategy. So I think you should really think about it.
All three components as we think about.
What our value proposition is to shareholders.
I think when you look at the base dividend in isolation.
Yes, we triple that we have talked about.
Our capacity to grow that dividend sort of in that one.
$1 billion plus range overtime, as we execute our business plan.
And I think what's important there is a number one is we have to continue to invest in the assets to.
To ensure that that dividend capacities there through that five year period that we outlined back in December .
So I think.
Very comfortable with the tripling here, we see lots of opportunity I think to continue to ratably grow it I think one of the things.
We're really mindful of is continuing to have a dividend that we can commit to earn and grow over the next five year period, and so that that increase that we put in is really reflective of that and I would say as we continue to execute on the plan. We've outlined we see line of sight to continue to grow that over the next five years.
On top of that you know obviously the buyback program as we highlighted we are a $1 billion into it but.
But.
As we continue to see commodity prices stay even in this range. You know we expect we should get pretty close to that 4 billion dollar debt target here by hopefully by the end of this year and that's going to really pave the way for increased returns both.
Both revisiting the base dividend along with the other two components we talked about.
Perfect.
Could you also comment a little bit on the.
Much improved performance in the downstream U S downstream in particular in <unk> versus <unk> I think you had some turnarounds in fourth Q, but even at 80% utilization. This was a much better quarter. So yes.
You have some turnarounds coming up into Q, but overall, how do you look at the downstream margin environment and we are for the second half of this year that you would be running all out and it looks like product cracks are pretty strong at this point of time.
Eminem.
Keith just on here.
Yeah, you know what I would say is we started seeing a turnaround in the March timeframe, you know cracks early in the year, we're still a little tighter, but we were able to capture those with.
With Llaima running relatively full out in the March timeframe.
But as you alluded to Q2 is a pretty heavy turnaround period for us both in the U S as well as in Canada. So we will have a lot of our.
Didn't venture assets refined assets offline in our in our Canadian assets offline through the quarter. So we are looking forward.
Q3, where a lot of that turnaround turnaround activities behind us utilization will increase and our you know as we look forward to to kind of product markets, we're seeing a pretty pretty robust market gasoline demand is kind of back to pre COVID-19 levels diesel demand is well above.
You know pre COVID-19 levels, and and you know Jeff demand is still behind becoming back so it's actually setting up pretty well for a really good back half of the year.
I'll take my last quick one is.
We envision a scenario in two or three years.
And if the price is right then so no. This is the operator of the BP Sunrise as well as the operator LBP Toledo. So you have European guys, who are trying to move out of a sense for whatever reasons and refining and if the price is right is that a possibility that you out of the solar.
And the owner of both Sunrise and the Toledo refinery. Thank you I'll leave it there.
Well I guess anything is possible as you you might want to go ask our partners.
They think of that I'll I'll, probably de mirror for the time being.
Yeah.
Thank you.
Thanks.
Thank you, we'll take a follow up from Dennis Fong with CIBC capital markets.
Okay.
Thanks for taking my my second round of questions here just in your opening commentary you alluded to some of the great work that the teams are doing at Foster Creek and Christina Lake in terms of.
So getting really strong production volumes from those two assets.
Was just hoping to maybe get a bit of an update from I know I know it's.
Five months into your five year plan, but just around the about $1 billion worth of operating margin improvements that you can see from the oil sands in the downstream side I just wanted to get a bit of an update there as to how you're seeing some of them be optimization work at S. ECL from the application of our operating model on the.
Husky assets as well as the margin expansion opportunities at <unk> and at Toledo, I wish I presume could come through after this major turnaround.
Yes, no happy to do that Dennis maybe what I'll do is I'll get norrie.
To talk about the upstream side and Keith can maybe a chip in on on on on the downstream side.
Hi, Dennis Nora here.
Yeah, just to start with the upstream optimization.
We've been applying or F. C C L processes across into the the legacy assets that we've made.
We've purchased.
The kind of the biggest solid one as in the Lloyd thermal area, we've really put a lot of effort and.
Investment into the asset and what we've been doing is will be nothing what we call N. C. G. So we've been utilizing our steam and as well as.
B same co injection and what this is allowing us to do is to deploy steam and in the.
The best areas as we can now move forward. We also have so.
So far this year, we've actually added a bit.
20, well pairs to Lloyd and again, we're what we're doing is pulling them and optimal positions at longer wells.
Where what kind of applying of Foster Creek, and our processes and you see that strong production coming through the other thing. We're doing is we've identified this year an additional 28.
Readout of regional opportunities at Lloyd thermal.
Again these are basically it is being steamed up already.
We're able to drill into these areas.
Evacuate the oil basically very cheaply. So we expect that to continue over the next number of years as we kind of go forward and similarly sunrise.
We are we are actively putting in place an investment program with a four well pad program and as that has kind of taken shape, where also we have 11 readouts regional opportunities. This year and that's kind of as Youll see us keeping our production very strong as we go forward so everything's.
Working.
As we are.
Or is that would you expect to see this continuing over the next two to three years in the same vein.
And Dennis Keith here, just picking up on kind of the margin expansion opportunities.
Those are those opportunities are gonna, becoming a real time at our wood River refinery what was required is being executed during this turnaround process. So when it comes back out of that turnaround. It will have the improvements made to expand our product yields and then on the Toledo turnaround.
No we're meddling up the refinery to be able to handle a full high tan crudes, so basically taking advantage of discounted crudes.
Coming out of Canada, you know when we think are for further margin expansion. We are advancing the rewire, Alberta projects. So a way to introduce Foster Creek and Christina Lake crudes into the upgrader and the refinery.
It has several benefits it it allows us to recycle more of the condensate in the province, It allows us to expand our margin because were using lower a lower quality lower cost crudes in the upgrader and the refinery versus L. L. B, which will then just.
Well to the market and you know obviously the expansion helps us on our unit costs and product mix. So.
Good initiatives underway, there that the other kind of margin expansion, obviously is associated with <unk>.
Scheduled to come online at the backend of 2023 early 2020 for them.
And we're fairly sizable shipper on that so that will give us opportunity to move a move our crude oil to higher value markets and then the other big one and the margin expansion is just around turnaround schedule. So both Lima, and Toledo have kind of gone through their one in five major turnaround cycles and you know as we've.
<unk> seen in our fourth quarter of 2021, and this quarter coming up you know it has a pretty.
Pretty sizable impact on on not only our utilization, but also cost. So those are now through their five year turnaround cycles. So.
It's a pretty good run time for for those two refineries going forward.
Oh perfect.
It was a great summary, really appreciate it thank you.
Yeah, no worries thanks Dennis.
Thank you we'll hear next from Christopher <unk> with the Calgary Herald.
Hi. This is a couple of questions for Alex regarding the U S is the federal investment tax credit enough in your mind to proceed with phase one of the pathways foundational project or do you need to see some sort of incentives and assistance from the province of Alberta.
You know, Chris if you take a look around the world, where you know where Cc U S projects have gone forward.
What you've generally seen as is government participation in both capital.
As is often at that kind of 60% to 70% level theres, usually some operating costs support so I as I kind of alluded to I think the investment tax credit is a very good start I think you know, we're certainly as an industry, we're going to require some some more.
Help at a steady state two to probably you'll go forward with these really meaningful large scale <unk> projects and I would I would suspect there'll be contribution from both levels of government ultimately in that.
Just a follow up then with such strong earnings.
How do you explain to the public I guess the need for ITC, but also maybe financial assistance from the province of Alberta.
Yeah, you know it's.
Chris I I I I I I've I've I've I'm always interested in these debates about commodity prices and it is one of the elements of it as I think everybody on both sides of the debate has a very short memory and.
I I I personally have a pretty long memory about this and I remember oil being about 10 Bucks a barrel a couple of years ago, and if you take a look at where oil the average price of oil over the last sort of 10 or 12 years.
I haven't looked at it recently, but I would add I would expect it probably looks more like you know $50 or low $50 a barrel over that time period. So you know oil you know oil prices go up oil prices go down, but when we make these kind of investments. These are you know the the.
The kind of investments like that pathway is foundational project. These are multibillion dollar projects and and we have to have certainty that.
That they are investable and in there we can manage those investments over the entire commodity price cycles. So although I I you know you oil prices right. Now are obviously very attractive we know probably before that project is ever and service will probably test the bottom end of those prices again.
So we really have to look at this over the long term and and I suspect over the long term much as we've seen in other jurisdictions, where you know where.
We're going to require a real collaboration both from industry, who will invest tens of billions of dollars in these projects, but we're also going to need some support from government. There, we're really talking about a massive change in how energy is produced and delivered as we do.
Decarbonize the upstream.
Just finally on that front what work is going to be done. This year is on pathways. When do you anticipate an F N b.
Made and you talked about the fact that you needed more detail, but I guess I'm just wondering what details do you still need to have in hand before you can make that decision.
You know that the larger scale announcement of the ITC has obviously occurred but there's going to be a lot more detail.
About you know how how that ITC is going to work and that that is really just that just takes the government a little bit of time to come out with with that information right now for us.
Pathways group, we have already commenced preliminary engineering.
For that foundational project the the carbon capture at site the transport on the C O two trunk line and the and the eventually the sequestration. We're in the process of making application to the Alberta government for Boris.
Base.
To get in there and we have kicked off significant work environmental work in the other studies that are required for the permitting the application.
For the permits to ultimately develop and construct that project. So there's actually a huge amount of work going on the part of the pathways partners. We have second it literally dozens of people into the organization with more to come. So we are in in full scale development mode.
Right now at pathways.
Thank you.
No worries thanks, Chris Thank you.
Thank you that does conclude today's question and answer session I'd like to turn the conference back over to Mr. Boyle for any additional or closing remarks.
Well, thanks, very much and thanks, everybody for.
And for your continued interest in the company and taking time this morning to spend with us. So once again, thanks, and we'll let everyone get back to their day.
Thank you that does conclude today's conference. Thank you for your participation.
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