Q2 2022 Cenovus Energy Inc Earnings Call
One crack spreads above seasonal in historic norms, while the forward curve for the remainder of the year has come down somewhat it remains strong.
Gasoline cracks have softened over the past few weeks with refineries running at high utilization rates and gasoline inventories have returned to more normalized levels. However, while U S. Distillate stocks have been edging up they continue to remain below five year averages. Meanwhile, heavy crude differentials have widened in <unk>.
Not just at Hardesty well in the past widening light heavy differentials largely meant pain for synovus, we now receive a much greater benefit on the downstream side of the business.
Clearly the outlook for U S. Refining has changed drastically and we are now seeing the benefit of the integrated model, we put together with the husky transaction.
While our outlook for the financial performance of the U S. Refining business has dramatically increased so too have our expected cash taxes, our total cash tax of $900 million for the quarter was more than double what we saw in Q1.
Similarly, we have increased our full year cash tax guidance, mainly to reflect the significant shift in crack spreads with our Chicago 321 assumption, increasing nearly 50% since our last guidance at the end of April that said, we do expect cash taxes for the remainder of the year to be slightly lower.
We're then in Q2 more in the range of around 600 million for each of the third and fourth quarters.
We have also increased our operating cost guidance for the downstream this reflects turnaround costs and throughput impacts in the first half of the year, particularly on the joint venture refineries operated by our partners that said with almost all turnaround activity now completed for the year you can expect per barrel operating cost.
Costs to fall significantly in the second half versus the higher rates seen in the first and second quarters.
In terms of our financial results the quarters adjusted funds flow of $3 1 billion.
Was the highest in <unk> history free funds flow was $2 $2 billion in excess free funds flow was also about $2 billion.
Given net debt was between 9 billion and $4 billion at the end of Q1, we've allocated about 50% of Q2 excess free funds flow towards shareholder returns, which is over and above our base dividend as such we delivered over $1 billion to shareholders through share buybacks and the.
Second quarter as I've talked about before share buybacks are the preferred mechanism for variable returns at least when our share price is around the range. It has been recently, we will continue to look at share buybacks on an opportunistic and disciplined basis with a view to intrinsic value at mid cycle pricing of <unk>.
Round $60 <unk>.
Q2 was a great example of how our financial framework and shareholder return strategy can work in tandem to maximize returns to shareholders. While also continuing to deleverage the balance sheet towards our net debt floor.
The ability to deliver these returns is rooted in our continued operational strength to operate to optimize opportunities in the portfolio. We've increased our 2022 capital guidance, adding about $400 million.
This includes about $120 million this year for the restart of the West White Rose project. We have also added about $200 million in the oil sands about half of that will go towards towards Sunrise.
Taking my questions, maybe I'll just start with west White rose it looks like youre going to be spending about.
$500 million to $600 million a year on a net basis in the 2023 through 2025 timeframe and there they are not huge numbers, but they're not small either especially if inflation remains an issue. So I.
I guess my question is how much of the cost is locked in and are you seeing opportunities to further reduce your 56% stake in that project and if so is that something you'd be interested in doing.
Hi, its noted rumsey here from the upstream part of our business.
Ill now spend profiles 500 grew to 700 and those three years.
As you see.
Most of it is often we have we've previously purchased all the hardware equipment. So we're not exposed to inflation from those kind of areas.
We actually kept the asset activity can a warm so again all of this is recognized within the budget reset that we did as we restarted the project. So we don't expect any further exposure to cost escalation as we as we move forward our equity can assure just know is as it is.
Look we would like it to be for now we'll continue to work.
Co ventures to ensure that we can maximize the value from the project as we move forward and we'll look forward to safe production in early 2026.
Terrific and maybe ill just follow up with a quick question on heavy differentials in crude by rail WTS WCS currently in that $21 range WCS Maya in that $16 range. So maybe you can just comment on what we should be expecting in terms.
Activity levels from Guggenheim or even the hardisty hub and <unk>.
Whether or not.
Yes, whether we should see an uptick or do you need to see these differentials stabilize in this range for the foreseeable future before.
Committing to anything and maybe just remind us on the on the cost structure as well.
Yes.
Keith just on.
Really.
A combination of two factors I would say, we're seeing kind of the light heavy spread in the U S Gulf Coast.
Kind of wide note and numerous numerous factors kind of contributing to that one being kind of the strategic petroleum reserve release, which we're anticipating that should lighten up in the August timeframe and currently forecasted to end in October but with those additional medium sour.
Errol's coming into the market as well as kind of the current <unk> structure, it's really impacting kind of the demand for for heavy barrels in that in the U S Gulf Coast.
And then when you look at Alberta, we're seeing obviously ramp up of all the oil sands projects following.
Turnaround timing and so we're seeing more production coming online interestingly enough to overseeing very low apportionment on the pipeline. So theres still sufficient egress and what I would offer up is as you know.
Crude by rail.
Although the spread is kind of getting into that historic norm theres been a huge ramp up in distillate prices, which is putting some pressure on on the cost of crude by rail. So you are not quite seeing it ramp up at this point in time.
From a from a company perspective, we're obviously a lot better position to benefit from a wider differential than than historically, we were in and between our Canadian operations and our U S operations. The downstream is capturing some of that crude advantage with these current wide differentials.
Terrific. Thanks, Keith that's all I had.
We will now take our next question from Greg Pardy with RBC capital markets.
Hey, thanks, Thanks, good morning.
Couple from me, but the first one is how should we think about sustaining capex as we kind of look into 'twenty three just given all the inflationary pressures and size of the business and everything else.
Hi, Greg It's John Mckenzie.
The guidance that we've given to the market pretty consistently since we did the husky acquisition was sustaining capital.
Kind of in that $2 $4 billion range.
And that included upstream downstream and kept production flat as well as our fixed plants in that safe and stable condition. So I think there's two things to consider one is we're adding assets. So as we can.
Take on the other half of Sunrise and bring Toledo up for example.
That will increase our sustaining capital requirements and then there is.
The inflationary pressure that you've talked about.
So we're currently working through our 2023 budget right now and we'll give you a more definitive answer to that question is as we work through that but I think it would probably be fair to say that.
It's moving from around $2 four into 262 $7 billion range, but as we add assets, we've got to take into account of that.
And then in some of the areas like conventional.
Some of our drilling costs, we are seeing some of that inflationary pressure, but it's not an order of magnitude higher it's incremental to where we were at $2 four.
Hey, Greg it's Alex.
I would agree with everything John said and just to kind of put it in perspective, if you think of that $400 million. Capital addition, probably about 100 of that represents kind of true inflation. So.
On the budget that we're talking about sort of a relatively modest single digit.
<unk> impact.
Okay no thanks for that.
Second one is just kind of an operating question.
The Bull case right on Synovus has been.
Favorable operating improvements in the upstream and I think you've you've demonstrated that but there's also lots going on in the downstream I'm. Just wondering if you can describe a few of the things maybe what's going on with Toledo or elsewhere in terms of just making that operation how much better and profitable.
Hey, Greg it's Keith.
Thanks for the question because there is lots going on.
I think in Alex's opening remarks, we talked about Lima kind of hitting.
Kind of record throughput in June of North of 170000 barrels a day into a high high crack market. So that was very good.
But we're also working with our joint venture partners and our U S downstream at some of our non op assets to further enhance capabilities. So Toledo is currently in a ramp up mode. But it has finished the second phase where it'll be able to handle higher tan barrels higher total asset number of barrels which.
Which gives us an additional crude advantage as well as additional heavier barrels so.
Significant increase in capacity there Wood River has gone through some.
Expansion projects to improve their clean product yield.
Which obviously in these type of crack spreads makes a big difference and then.
<unk> is now with a new pipeline connection able to access Canadian heavy barrels as well. So we're seeing a significant ramp up of Canadian heavy moving across into <unk> into.
Into Texas and into into that joint venture asset, which.
Which adds additional value in crude advantage and then finally.
We are in the process of taking over.
Construction at superior and starting to progress our startup of that refiner. So everything is tracking as per plan and for Q1.
Full product starts so so lots going on and pretty exciting time.
Terrific, Thanks very much.
We will now take our next question from Dennis Fong with CIBC World markets.
Hi, good morning, and thanks for taking my questions first one is just around the sunrise.
Given the current production levels, how should we be thinking about the potential projects that you have either underway or potentially underway at the timing of the close as well as potentially the timing or ability to return production to at least 60000 barrels a day or higher.
Just kind of given what you see currently on the asset and the relative under spending that it forwards.
Hi, Dennis noted rumsey from our upstream business again.
Yes, we're actually quite excited about.
The Sunrise asset.
We take over a 100% can ownership all of it.
Our development plans are unchanged.
We are actually looking to continue to apply our foster Creek and Christina Lake subsurface philosophies to the site.
As we as we do.
Expand the site, but actually seeing very very good re Dave regional opportunities.
To date the.
The wells that we'll be drilling there coming in.
Slightly above our forecast, which is going to reassuring and as we've as we virtually studied the geology, we are seeing a lot more opportunities.
The asset was really underinvested for a number of years and what we're doing is reinvesting and getting it back to how we like to operate.
I am confident we can actually get above the nameplate of 60000 Boes a day and rotate the next 24 30 months to actually get there.
Meantime, we continue to grow production through this year and into next year.
Okay.
So so showing up exactly as we would.
As we are.
We're forecasting as we go forward. So I would expect probably within three years, you'll see us above nameplate levels and.
We'll try and reach those numbers as quickly as we can.
Great Great. Thanks, My second question.
A little bit maybe more around capital allocation here.
Given kind of what we've seen with respect to reduce cost structures.
<unk> side the term debt retirement that you've done this for this quarter and potentially further along as youre generating incremental free cash flow. How are we thinking about kind of the increased level of profitability within the active integration the upstream and downstream initiatives that were already outlined and how does that potentially affect you or maybe guide.
Did we lose you.
Yes, actually I'm sorry, it looks like his line has disconnected.
Yes.
Okay, well, maybe we will move on and if Dennis comes back we can we can answer that.
Got a problem. Your next question will come from Neil Mehta with Goldman Sachs.
Yes, good morning team I wanted to start off on capital allocation and then it looks like you guys.
Slow dammam buyback when the stock ran and then post the quarter, you're really leaned into it I think devin good job.
<unk> in your cost base, just talk about your philosophy around.
Around capital allocation and how you think about the buyback versus the variable dividend and.
The company is on track to ship to 100% free cash flow payout as we think about 2023.
Sure Neal, it's Alex I'll jump in and others May may have some thoughts, but when you think about that financial framework.
That the thinking behind that is has not changed at all and I think when you think about how we look at dealing with that free cash flow.
We will always think about the discipline that we will apply it is entirely focused on shareholder value and you quite rightly note that we leaned into the share buybacks quite heavily in Q2 and that at periods, where we felt.
Represented real significant value versus our NAV at.
It kind of a mid mid commodity commodity case.
Aye.
I suspect I mean.
Going going forward.
We will be very much focused on shareholder value and we will go after.
One of the two of those depending on where we think we're driving the most advantage for our shareholders. So.
If you see the share price of 16 Bucks and we got a lot of spare cash no one should be terribly surprised to see us focus on shareholder returns and vice versa. If we're at 30 Bucks will probably be focusing on variable dividends, but the real the real important commitment is between.
9% and $4, 50% of that is going to shareholders. Once we hit four it's 100%.
In terms of kind of forecast.
We don't forecast.
Cash flow, but.
I look at where all of the analysts are and I think most of them expect that will probably be at that 4 billion.
Billion floor sometime either before or around the end of the year and while I wouldn't see anything that would move me off that view.
And the stock price, where Canadian I would imagine is your your view yeah, Yeah and then.
Your view of mid cycle, if I remember Alex was $60 is kind of WTS.
I have talked about has the world changed for you in any way I mean, there's a lot of reasons to think that that mid cycle could have been repriced higher so I'd be curious to your thoughts there.
I don't know.
I'm, a simple guy and I'm not sure the world has changed that much.
A lot.
A lot of people in my position have gotten a lot of trouble by assuming we're in a new.
New era of commodity prices, we we still think we still think there are there are times in the cycle, where oil can get to $45 or potentially even below.
We don't think.
The World works at $45 oil, so, but we still I still think those fundamentals apply a lot of oil can be brought on in this world for 60 Bucks and for the time being we're going to continue with that.
Potentially conservative outlook, but thats really the discipline, we're applying here.
Yes, we appreciate that thank you so much.
Sure.
We will now take our next question from Manav Gupta with credit Suisse.
Hey, guys as we get closer to the startup of superior refinery.
Can you help us in your mind, what would be the feed slate heavy light WCS crude and also what would be the output looking like I mean in terms of gasoline yields diesel yields and then secondly product yield if you could talk to the reconfigured superior refinery as it starts to come online.
Yeah. Thanks, Manav, it's Keith.
You should think of superior as kind of being reconfigured it used to run in batch operations and through the rebuild we're actually going to be able to run continuous operations. So we're looking at a throughput of around 49000 barrels a day.
When it starts up and a large percentage $60 to 70% of that will be Canadian heavy product that will be able to run through it when you think of the.
The product slate vote, a third is we'll be asphalt and then two thirds are going to be finished product with some accelerated products as small percentages. So that's the way you should be thinking about it.
Like I said that.
It is gearing up for for Q1 2023.
Perfect and then one quick follow up is I think last quarter earnings call. I did ask you guys. A question that do you envision a world where you could be the 100% I'll take her off Sunrise and then BB Toledo refinery I think one of those things has already come true and I guess I wanted to go back and revisit.
Although you didn't do a combined deal would we can.
Can we still see the possibility that for the right price you could be the full operator there'll be Toledo refinery.
Hey, Manav, it's Alex.
That guidance that I suspect that one of US gave you in the last quarter would have been that.
Our goal ultimately in terms of our assets is too.
One our assets and operate those assets that are core and strategic to us.
We think the Toledo refinery is a very strategic asset.
For Us I would also note that we've been going through probably one of the biggest turnarounds that refinery has ever gone through and that would probably not be a good time.
At which to contemplate.
A change of ownership, but it is something we continue to be focused on and we think there's a lot of industrial logic.
Of.
Eventually having a larger role there.
Thank you so much for taking my questions.
No worries.
We will now take our next question from John Royall with Jpmorgan.
Hey, good morning, guys. Thanks for taking my question.
So just looking at your adjustments to the downstream Opex guidance can you give us a sense for the magnitude of the bump up from the maintenance side relative to the other pressures you called out on gas and labor et cetera.
I'm wondering is if there was a meaningful portion of it from the wet or inflationary type pressures.
What was better.
Upstream side, where we did see a bump there.
Hey, John It's it's Keith.
A large percentage of that is due to the maintenance activity and it's kind of the numerator and the denominator.
Couple of our joint venture turnarounds went longer so we saw some impact in and utilization.
That that's impacting kind of throughput for the year.
In addition.
People may not know, but we expense our turnaround so a lot of that turnaround costs goes right into the opex side of things and when they run long they cost more so.
A large percentage of the bump was.
In the unit Opex was associated with with both the throughput reduction as well as the cost overruns on the joint venture refineries.
I think when you look at the second half of the year.
All of that maintenance is is behind us and we should see a significant reduction in unit opex going forward.
Got it that's really helpful. And then can you talk about the drivers.
Behind the deferral of the turnaround at Foster Creek or is it simply just around trying to capture today's prices with.
Corrugated curve into next year are there other drivers and pushing that out.
Yes, it's norrie Ramsay here from the upstream.
I mean, we have ongoing maintenance planned maintenance throughout the year and all of our assets.
What we tried to do is minimize the opportunities for fool otg's.
So I mean this was as straightforward as we we basically assess the work scope we.
We are doing regulatory inspection this year. So I mean on the assay is about $1 five MB deal in the year reduction against what we could be doing even with the deferment.
Literally just a case of.
As we as we go through the planning of our turnarounds in our large maintenance programs, we try and actually optimize and spread it across multi year as much as we can so.
It is a relatively straightforward process, we've done essential maintenance this year and that will continue to do that.
And we're really just deferring the outage to minimize it and we can do that early next year. So it's just part of an annual process.
Hey, John It's John Mckenzie, and I'll, just chime in and elaborate a little bit more on what morry was talking about but anytime that we defer a turnaround.
Scope from a turnaround we do a thorough risk evaluation safety and reliability of our assets is always paramount.
But where you have an opportunity to defer maintenance into the future and you can do at managing the risk in a safe and reliable way and adds value for everybody. So it really didn't have anything to do.
With how we were seeing pricing today. It was just an optimization and Orient his group, we're able to undertake.
Great. Thanks, guys. Thank you very much.
We will now take a question from Dennis Fong with CIBC World markets.
The the kind of final bit of that question was really just around the base dividend I'm not sure. If you guys answered it.
So, let me know and I'll, let <unk>.
The replay.
No we didn't.
Dennis we we didn't get around to talking about the base dividend, but.
Why don't you repeat the gist of your question.
And we will try to give you an answer.
Sure and then just.
Round.
You've done a lot to reduce cost structures, including term debt requirement.
Retirement excuse me.
As well as a lot of the asset integration the increased working interest from Sunrise and some of the initiatives from both the upstream and downstream and the superior refinery coming back online. So just given all of those things and there is capacity.
Four increasing off the base dividend versus that sustainability level and kind of that $45. <unk> range. How are you guys looking at based on a go forward basis is it more kind of pegged I guess towards leverage.
Or is it again still just given again there is the opportunity now to look at increasing the dividend how are you guys.
Getting it right now.
Okay.
<unk> Leverages, a part of it but but really I mean, when we look at that base dividend. It's all about sustainability at the bottom of the commodity cycle.
And we're as I kind of alluded to earlier, we're not moving off that kind of $45. We call. It our resilient case and we we will we believe fundamentally.
That it is important for a dividend paying company to have a competitive dividend and to have a reliably growing dividend and that is our plan and the five year plan. We have in front of us would contemplate that if we are able to continue to deliver as we expect.
We would we would expect that dividend the base dividend.
Would would also grow.
Pace as we continue to to grow the business.
Yeah.
Great. Thanks, and then if you'll just indulge me for one more just more on the ESG side, I know or at least from both your opening comments as well as the news release some of the Capex.
Belief in the conventional side is related to decreasing emissions can you discuss a little bit about what some of those initiatives happened to be for this year and how that might carry on into 2023 as well as.
A little bit further down the line, helping kind of contribute to that 35% emission reduction plan that you outlined.
Both within your sustainability report, but also previously at your Investor Day.
Hi, it's thrown at El <unk>, Yes. So we have as we said we have about $1 billion in our five year plan right now and as we're working over the next months to update that five year business plan youll be seeing some more specific details about exactly where we're going to be designating that those capital dollars.
And so we're on track for where we are I mean. These are these are long term targets into 2035 and beyond for the emissions in particular and so we've mentioned some of the Ccs projects that we're doing feasibility studies on those are some of the big dollars, but youre not going to see the in the early years its more about figuring out what the best.
Pathway, yes, and Thats, where were putting a lot of the capital in the early years.
What we are seeing in the short term, though is opportunities in conventional to reduce methane emissions and.
Our well pads going forward are our net zero, well pads, basically, but youre going to see some of that paying off closer to that 2030 around their 2035, as we're getting closer to that target.
Okay. Okay perfect. So it is more.
The reduction.
Yes, and you'll get more detail when we come out with our revised five year business plan at the end of the year.
Alright, Thank you very much.
And thanks to all of our analysts.
Analysts.
And as a reminder for analysts if you would like to ask a question. Please signal by pressing star one on your telephone keypad and well pause for just a moment.
And it appears there are no further questions from our analysts today, if anyone from the media would like to ask a question. Please press star one at this time.
Yeah.
And we'll now take a question from Chris <unk> with the Calgary Herald.
Hi. This is a question for Alex Alex you talked a little bit earlier about inflation and Im wondering where are you seeing inflation bite the most and at what point does it become a concern for you as you're putting together your capital spending plans for the rest of the year and into 2023.
Okay.
Hey, Chris.
Others May may jump in on this but I think where we've really been seeing it.
Is up in the oil sands. It it is definitely an issue it's not been as big an issue for us and I think that is largely because a lot of our most of our activities in the oil sands are really planned out in stage two years in advance. So we have the benefit of lots of.
A lot of our contractors on long term contracts a lot of our materials procurement being procured well in advance. So it has been it hasnt hit us hard on the oil sand side, we are seeing a lot more pressure on the conventional side and that would be in things like tubular is lake.
Drilling pipe casing.
Drilling contractors drill rigs completion rigs frac rigs those sorts of things.
And I think.
I think overall, probably we're seen escalation of costs right now kind of maybe up towards that 10% range, but individual components could be significantly higher but we've been able to manage it kind of in and around that level or a little bit below.
Just to follow up on that.
How does that influence I guess through 2023 capital plan do you expect them to have to escalate because of that.
Just how do you position that I guess as you're as you're assembling those programs for 2023.
Yes.
We're right we're right in the process of developing our budget for 2023 and it obviously inflation is going to be something that we have to consider I mean, my my challenge to the team is always to try to find a way to eat inflation or makeup for inflation.
Then.
Some years, we're able to do that next year might be a bit of a challenge, but I think I think it's definitely something we have our eye on but I think right now it's something that is manageable and is not going to meaningfully sort of change any of our investment decisions over the coming year.
Just finally, one last question I wanted to ask you about the federal government releasing its discussion document last week for the oil and gas emissions cap I guess I was wondering what your general reaction to it was in the two options that were presented in terms of the cap and trade system versus a higher carbon pricing that would be directed towards the oil patch.
Yes.
Chris I mean first off maybe I'll talk about the two policy options.
<unk>.
The government talked about in there.
Our paper.
I would say either of those options are more ambitious than what can be reasonably achieved I am I am very worried.
But if we remain on this path it could lead to shutting in production.
And at a time when the world is literally crying out.
For more oil oil and gas production.
We're talking about a plan to reduce.
Oil and gas sector emissions by 42% from 2019 levels by by 2030.
You, obviously would be aware of our pathways initiative.
Are those targets that we put out including the 30% target by 2030.
That was intended to be.
That target was intended by pathways to represent the best case that we could do if everything worked out.
Really really well and we were able to get investing in these carbon reduction strategies very very very very quickly.
I look at those goals those are much more aggressive goals that are being asked of any of the other industrial sectors.
And in the country, including agriculture, heavy industry and transportation and as I said.
I think theyre going to be incredibly difficult I don't think there possible to hit.
And if we stay on them, what you're going to see is a.
Ultimately the risk could be a cut in production.
From Canada at a time when that these resources are just incredibly desperately needed worldwide.
Yeah.
Thank you.
No worries.
We will now take our next question from Neil Williams with Reuters.
Hi, Dan.
Thank you, Brian about how they desperately need oil and gasoline.
No.
Thank you Glenn.
Actions there.
There as well or will you be quite cautious on perhaps some clients given.
I am asking about Intel's Ian Nelson.
Congratulations David Youre talking about.
Well I.
I think there is there is certainly going to be and I think the government intended that there'll be a great deal of consultation and discussion.
Before any of any of those things are are finalized so.
I think the decisions, we're making right now are more focused on sort.
Practicality and what is what is possible for our company to do and I think.
We have been talking about since the Husky acquisition, we've really been talking about organic.
A lot of organic growth in the business kind of brownfield growth call it capacity creep debottlenecking.
Rather.
We're not focused on any large scale projects, but I would just give you. An example, if you look at.
Last year, we ended the year at around 800000 barrels a day in.
In the interim period, we have divested of over 40000 barrels a day production and you just heard US say today that we expect to end. This year once again back at about 800000 barrels of production I.
I think that's pretty meaningful growth.
And we've been able to avoid any any really large scale.
Greenfield projects in doing so.
And what about production next year, what are you anticipating.
Hello.
I would we haven't completed that work, but if we ended this year as norrie suggests that at around 800000 barrels a day.
I would expect we will be in that range.
Suspect the company will continue to be able to find ways to add barrels.
Here or there and we will continue those kind of what I would call organic brownfield kind of debottlenecking growth opportunities.
Okay. Thanks.
Yes, no worries thanks Neal.
And it appears there are no further telephone questions I'd like to turn the conference back over to Mr. <unk> for closing comments.
Well thanks for thanks, very much operator, and once again, thanks, everybody for taking the time out of your busy days and I'm sure a number view from your vacations and.
Everybody take care and be safe.
And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.
[music].
Okay.
Yeah.
Yeah.