Q3 2022 Imperial Oil Ltd Earnings Call
Good day and welcome to the Imperial oil <unk> earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Dave Hughes.
Vice President of Investor Relations. Please go ahead Sir.
Thank you Barry and good morning, everybody.
Thanks for joining us on our third quarter earnings call as usual I'm joined by <unk> Senior management team, including Brad Corson, Chairman, President and CEO , Dan Lyons Senior Vice President Finance and administration, Simon younger senior Vice President of the upstream.
Gary <unk>, Vice President commercial and corporate development, and John Whitmore, Vice President of the downstream.
Let me first go over the cautionary statement.
Todays comments include reference to non-GAAP financial measures definitions and reconciliations of these measures can be found in our attachment six of our most recent press release and are available on our website with a link to this conference call.
Todays comments may also contain forward looking information any forward looking information is not a guarantee of future performance and actual future performance and operating results to vary materially depending on a number of factors and assumptions forward looking information and the risk factors and assumptions are described in further detail of our third quarter earnings release that we issued this morning as well as our most.
Recent Form 10-K, all of these documents are available on SEDAR Edgar and on our website. So please refer to those.
As usual Brad and downward.
<unk> operating and financial update after which will cut over to the Q&A. So with that I will turn it over to Brad for his opening remarks. Thanks.
Thanks, Dave Good morning, everybody and welcome to our third quarter earnings call I Hope, you're all doing well.
I am really pleased to report another very strong quarter for Imperial we saw outstanding performance across all of our assets both upstream and downstream and we are also seeing the strong operating momentum continued into the fourth quarter.
The overall macro environment remains quite positive for our financial performance, we're continuing to experience high commodity prices driven in large part by supply challenges and ongoing geopolitical events, both of which serve to remind us just how important a stable and reliable energy supply is our.
Our unrelenting focus on safety and reliability enables our strong operating performance in this environment and underpins the results, which we will be talking about this morning.
And we continue to look for ways to further increase production and ensure reliable energy supplies when Canadians need them most.
And so far the fourth quarter seems to be a continuation of this economic environment.
With all of our major planned maintenance activities behind us our plans are to continue running at maximum levels. As we have so far this year. This sets us up well for a very strong finish to the year. So over the next few minutes, Dan and I will detail. The results of what was a very strong quarter.
So now let's review the third quarter results.
Earnings for the quarter were just over $2 billion.
And our cash from operating activities was almost three 1 billion. These results reflect the strong operating performance in the quarter as well as the strong commodity fundamentals. We are currently experiencing.
I would also remind you that along with strong financial results like this comes increased royalty and tax contributions to the government that go to support our local communities.
We achieved total upstream production of 430000 barrels per day in the quarter, which reflects a return to normal operations at hurdle post the second quarter turnaround and ongoing excellent performance at Cold Lake as well as the impacts of a large planned turnaround at Syncrude.
Performance of the downstream continues to excel our refinery utilization in the third quarter was 100%, which not only represents the fifth consecutive quarter of utilization above 90%, but also the highest utilization we have seen in over 40 years.
This sustained outstanding performance is so important in the current environment given the current supply challenges we have talked about.
The third quarter also saw significant cash generated including cash received from the proceeds of the sale of our interest in <unk> energy, Canada, which closed at the end of August we opted to use those sales proceeds to reduce our outstanding debt by $1 billion.
This also lowers our debt to capital ratio, even further from 19% at the end of 2021, so below 16% now.
In addition to this debt repayment, we continue to maximize shareholder returns.
Not only did we returned $227 million in dividends.
By mid October we have fully executed our current normal course issuer bid well ahead of the program's expiry in June of 2023.
These buybacks represented an additional $1 5 billion of cash return to our shareholders during the quarter.
And another $434 million in October .
And finally this morning, we declared a dividend of <unk> 44 per share payable January one of 2023.
That represents an increase of <unk> <unk> per share or over 29%. This is the largest dividend increase in imperial's history.
And we also announced our intention to initiate another substantial issuer bid.
Returning an additional $1 5 billion to our shareholders in the fourth quarter.
Altogether as of the end of the third quarter. We have now delivered record shareholder returns of $5 $1 billion this year with more to come.
And with that I'll pass things over to Dan.
Yes, Brad.
Getting into the financial results for the third quarter. Our net income of $2.031 billion was up $1 billion $123 million from 2021 were about $900 million when we exclude the impact of the <unk> sale. This increase was primarily driven by higher margins in the downstream.
And improve realizations in the upstream now.
Now if we look sequentially, our third quarter income of $2 $31 million is down $378 million from the second quarter were down around $600 million, excluding the <unk> sale, reflecting softer good prices and refining margins that were partly offset by improved upstream and downstream volumes.
Looking at each business line, the upstream, which reported net income of $986 million is down $360 million from our second quarter net income of $1 $346 million were down about $570 million. When you exclude the impact of the <unk> sale.
The downstream reported net income of $1 $12 million relatively flat with the second quarter as strong utilization rates allowed us to continue to take full advantage of the attractive refining margin environment. Finally, our chemicals business continued to demonstrate solid performance.
With net income of $54 million in the third quarter, essentially flat with our second quarter net income.
Moving onto cash flow.
In the third quarter, we generated nearly $3 $1 billion in cash flows from operating activities an improvement of just over $400 million from the second quarter, bringing our year to date cash flows from operating activities to almost $7 $7 billion up about $3 8 billion from last year.
Reflecting strong conditions and favorable working capital impacts.
Yes.
Free cash flow for the quarter was $3 billion $453 million.
Bringing our year to date free cash flow to about $7 $5 billion around $4 $3 billion higher than last year, primarily driven by the increase in cash flow from operations Digests mentioned and by the cash received from the <unk> sale.
As Brad mentioned earlier, we completed the sale of our interest in <unk> during the third quarter we.
We utilized the proceeds from the structural change in our business to structurally improve our balance sheet by reducing debt by $1 billion further enhancing our financial resilience and flexibility going forward.
On previous earnings calls, we noted that we expected cash payments in 2022 of around $400 million debt that remains the case and that includes about $350 million that has already been paid in the third quarter year to date.
Looking forward there are of course, a number of factors that could impact our final income tax payment for 2022 that will actually be made in the first quarter of 2023.
But under current conditions, we continue to anticipate that this first quarter 2023 cash income tax payment would be on the order of $2 5 billion.
Finally, we ended the third quarter with just under $3 $6 billion of cash on hand.
Moving on to Capex.
Capital expenditures in the third quarter totaled $392 million up from $277 million in the third quarter of 2021 in line with our full year guidance of $1 4 billion.
Spending in the third quarter was primarily in the upstream with increased spend in our Grand Rapids project and volume Sustainment at Cold Lake as well as spending on our in pit tailings project, a new maintenance facilities at Kearl in the downstream we continued to progress our renewable diesel project that scrap Kona.
Shifting to my favorite topic shareholder distributions.
<unk> growing dividend remains the bedrock of our cash distribution strategy as Brad noted. This morning, we declared a fourth quarter dividend of <unk> 44 per share payable in January with this 10 per share increase we have now doubled our dividend over the last two years beyond base dividends, we remain committed to return.
Any surplus cash to shareholders through our normal course issuer bid program and other means we completed our most recent accelerated NCI program in October returning $1 9 billion to shareholders over the last four months looking back over the past 18 months we.
Returned seven one.
$1 billion to shareholders via share buybacks, reducing our share count by 129 million shares or 18%.
As Brad noted given our robust free cash flow generation, we intend to launch a second substantial issuer bid this year.
Returning up to an additional $1 5 billion to shareholders in the fourth quarter, the terms and pricing will be determined and the bid is expected to commence within the next two weeks.
Both the dividend increase and our second SIV announcements continue to demonstrate our ongoing commitment to return cash to shareholders now I will turn it back to Brad to discuss our operational performance.
Thanks, Dan.
Upstream production for the quarter averaged 430000 oil equivalent barrels per day, which is down 5000 barrels per day versus the third quarter of 2021, but up 17000 barrels per day versus the second quarter.
This increase reflects.
Our strong operating performance at Kearl, and Cold Lake, which more than offset the impacts of a major planned turnaround at syncrude.
While ongoing strength in commodity prices continues to be a key part of the story. This year I would note that the WTO WCS differential came under some pressure in the quarter, resulting in a widening of around $6 per barrel versus the second quarter.
And while these pressures have continued so far in the fourth quarter WCS absolute prices continue to be quite strong I would also note that at the same time.
We saw an increase in downstream crack spreads notice, notably for diesel which provides a counter to the wider differentials that highlights the value of integration that we have.
Additionally, our downstream directly benefits from the lower prices on the heavy crudes, we process, especially when coupled with the higher diesel crack spreads I mentioned.
Further syncrude synthetic product commanded a strong premium in the third quarter.
So now let's move on and talk specifically about Pearl.
Production in the third quarter averaged 271000 barrels per day, gross which was up 47000 barrels per day versus the second quarter, which included our annual major turnaround and just under the 274000 barrels per day from the third quarter of 2021.
This year's third quarter production represents the third highest quarterly production in <unk> history.
And operations remained strong at hurdle and I am pleased to report that October month to date production has averaged 305000 barrels per day I.
I would also like to highlight that so far in October Pearl has set a number of single day production records with the best ever single day production.
And the history of the asset being 357000 barrels per day on October 12.
Back on the second quarter call. We provided updated full year guidance of around 245000 barrels per day for apparel, reflecting the challenges we faced in the first quarter and given the strong performance in the third quarter and so far into the fourth quarter. We are reiterating the current full year guidance of.
Around 245000 barrels per day.
Finally, turning to operating costs, we saw a reduction in unit operating costs accrual in the quarter of around U S $6 per barrel versus the second quarter to just over at U S $25 per barrel.
Though we are still facing pressures from high energy prices. This reduction reflects the absence of the second quarter turnaround as well as the impacts of our ongoing focus on optimization and improving reliability. We continue to work towards a sustainable unit operating costs at or below U S $20.
Per barrel at Kearl.
Moving to coal by 2022 continues to be a great year for our cold Lake asset <unk>.
Production for the third quarter averaged 150000 barrels per day, which was up 6000 barrels per day from the second quarter and up 15000 barrels per day from the third quarter of 2021.
This was also the fourth consecutive quarter with production at or above 140000 barrels per day.
As I've talked about before these results reflect our ongoing focus on production optimization and reliability, resulting in year to date production of 145000 barrels per day.
And if you recall our original guidance for Cold Lake was 135000 to 140000 barrels per day for the year.
With these strong year to date performance results. We are now increasing this guidance to a range of 140 to 145000 barrels per day.
And I expect it will likely be at the upper end of that range.
Imperial share of Syncrude production for the quarter averaged 62000 barrels per day, which was down 19000 barrels per day from the second quarter and down 16000 barrels per day from the third quarter of 2021.
The lower production reflects the impacts of a major planned turnaround at the asset in the third quarter of the year, which is now largely complete and operations are returning to normal.
The interconnecting pipeline between Syncrude and Suncor was heavily leveraged during the turnaround bumps averaging about 7000 gross barrels per day of bitumen and other products during the quarter.
This highlights the value of the interconnecting pipelines in support of increasing utilization at the site.
To wrap up my comments on the upstream I would also note that we successfully closed the sale along with Exxonmobil, Canada of our <unk> assets at the end of August .
Imperial's, 50% share of these assets represent production of around 5000 barrels per day of liquids and 65 billion cubic feet per day of gas.
Cash consideration for imperial share of the sale was around $900 billion withstand already mentioned, we used to pay down debt.
While that remains a lower capital allocation priority for us given our strong balance sheet. We felt it made sense to use this non operated source of cash for that purpose serving to further enhance our already strong balance sheet and improving our financial flexibility going forward.
So now let's move on and talk about the downstream.
In the third quarter, we refined an average of 426000 barrels per day, which was up 14000 barrels a day versus the second quarter and up 22000 barrels per day versus the third quarter of 2021.
This reflecting continued strong operating performance and minimal plant turnaround activity.
Refinery utilization was exceptional at 100%, which is the highest quarterly utilization in over 40 years and as a result of our continued focus on reliability and optimization.
This is up from 96% in the second quarter and 94% in the third quarter of 2021.
This is tremendous performance and I would like to credit our refinery teams, who remain focused on reliability and optimization to deliver this phenomenal results.
Year to date utilization is 96%, which not only reflects strong operating performance, but also the fact that 2022 has been a light year for planned maintenance, we expect to see 2023 go back to more typical maintenance levels and we will be providing more details on the turnaround schedule.
We released our 2023 guidance later this year.
But needless to say, having such a light turnaround year has served us very well in the high refining crack spread environment, we have been seeing throughout 2022.
We are also continuing to progress distress Kona renewable diesel project and expect a final investment decision in the coming months.
To that end you would have seen our announcement about entering into a long term contract with air products to supply low carbon hydrogen to the project an important milestone as we continue.
Progress our plans to build Canada's largest renewable diesel manufacturing facility.
Yes.
Petroleum product sales in the quarter were 484000 barrels per day, which is up 4000 barrels per day versus the second quarter and down 1000 barrels per day versus the third quarter of 2021.
Gasoline and diesel demands remain strong at levels similar to the second quarter and jet fuel demand has stabilized at close to pre pandemic levels.
We continue to see a positive downstream margin environment in the third quarter and although we have seen some softening of motor gasoline margins through the third quarter diesel margins remained extremely strong. These dynamics are driven by a number of factors, including low product inventories and a global shortfall.
For diesel fuel.
And that brings us to chemicals this business delivered $54 million in earnings in the third quarter, which was essentially flat or up $1 million from the second quarter, but down $67 million from the third quarter of 2021, which as you know was a period of all time high realizations.
<unk> for us in the chemicals business.
Performance, we have seen so far this year is more indicative of mid cycle performance and has been very stable throughout 2022.
As always I'd like to wrap up by highlighting a few other items of note, particularly as it pertains to our ongoing commitment to improving sustainability and reducing our overall environmental footprint.
First the government of Alberta selected the pathways Alliance to continue exploratory work on the development of a Ccs hub, which will allow operators to safely store cotwo in the cold Lake area.
This is the poor space, which we have been talking about recently and an important milestone in the pathways plant to develop infrastructure and collaboration with governments to help achieve Canada's net zero goals.
In addition.
The Alliance has completed pre engineering work on the 400 kilometer carbon trunk line and has begun early engagement with more than 20 indigenous communities along the corridor as a reflection of its commitment to meaningful engagement throughout the full cycle of the network's operations.
The Alliance is also conducting engineering studies for the first phase of the Seo to capture facilities as well as executing environmental field programs to support the necessary regulatory application submissions, so really a lot going on here.
Second during the quarter, we released our annual corporate sustainability report, which highlights our plans and progress in key environmental social and governance areas. We are very proud of the progress we have made so far and intend to build on that momentum in the coming years.
And most recently in fact, just last week, we announced a unique collaboration with a leading electric electric vehicle charging solutions company called flow.
To jointly develop charging service options for Imperial's, Esso and mobile branded wholesalers, which includes an agreement to transfer credits to imperial under Canada's clean fuel regulations.
This is expected to support Canada's net zero emissions goals by expanding flows charging network for electric vehicles, our collaboration with flow will complement other imperial.
The house gas emission reduction efforts, including plans to produce and supply lower emission fuels next generation resource recovery technologies and carbon capture.
In closing another excellent quarter, we saw a high reliability in our operations across the board, including record high utilization in our downstream, allowing us to continue to benefit from the strong business environment and to deliver very strong financial results.
We also closed the sale of our interest in <unk> energy, Canada further advancing our strategy to maximize.
Shareholder value by focusing upstream resources on our core long life low decline oil sands assets.
We returned over $1 7 billion to our shareholders in the quarter via our reliable and growing dividend and the accelerated execution of our current normal course issuer bid.
And today, we announced our largest dividend increase in history as well as our plans to initiate our second substantial issuer bid of 2022, both of which continue to underscore our ongoing commitment to drive shareholder value and our continued commitment to shareholder returns.
Progress continues on our efforts to lowering our carbon footprint.
In addition to signing a hydrogen supply agreement with air products, We expect a final investment decision on the Strat Kona renewable diesel projects in the coming months.
And we continue to advance our deployment of next generation Institute technology with the Grand Rapids project at Cold Lake.
Excuse me.
We also released our latest sustainability report.
And I would encourage you to have a look to learn more about our plans and progress in this important area.
When you couple this with our recent announcements such as our collaboration with flow on electric vehicle charging service options as well as the government of Alberta is awarding a poor space is just a couple of examples I hope you can see the active role Imperial is playing in the energy transition and in our journey.
Towards a lower carbon future.
As always I'd like to thank you once again for your continued interest.
In support of our company and lastly, a big shout out of thanks to the entire Imperial team, who have worked so hard to deliver these great results.
And now we'll move to the Q&A session. So I'll pass it back to date.
Okay.
Thanks, Brad.
I'd like to remind everybody. Please if you could limit yourself to one.
One question plus a follow up that just ensures we can get all the questions Jim.
Mary would you please open up the Q&A line.
Thank you if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment again. Please press star one to ask a question.
We can take our first question now from.
Greg Pardy of RBC capital markets. Please go ahead.
Yeah. Thanks, Thanks, Good morning, and Brad I typically don't do this but my goodness, what an outstanding outstanding quarter.
I wanted to ask you maybe just about.
Generally around shareholder returns looking into 'twenty three.
And then.
Your appetite to do further SIV. So it always comes up as a question right in terms of the acceleration of the <unk> and then it creates fees apparent air pockets in what you might do obviously the dress that very elegantly.
What's the appetite for <unk> into next year.
And then how do we this is the follow up of course, but how do you think about that versus specials versus just grinding away on an NCIC and salon just wanted to.
We kind of dial that in a little bit more than than my understanding permits now.
Yes, thanks, Thanks, Greg.
I'll make a couple of comments and maybe turn it over to Dan.
<unk>.
As you've seen throughout this year.
A very strong commitment to shareholder returns returning cash to our shareholders via a multitude of our vehicles.
And it does start with a long history of <unk>.
A reliable and growing dividend.
And of course, we've reinforced those actions with a record setting dividend increase today.
We've continued our philosophy around share buybacks as an important that structural vehicle.
To return cash to shareholders and as you know we've got this 5% a year limit without and CIB.
And as we.
Accelerated and exhausted that.
For a couple of years running now.
That has caused us to now look at <unk>.
Additional vehicle to supplement those shareholder returns so we're getting ready to embark on our second one for this year.
And I think as we look to 2023.
It's premature to.
To commit on further <unk>, but.
But it's not premature to commit on a long standing.
Philosophy of principal on returning cash to shareholders and so you will continue to see that as we move into 2023 I think the vehicle.
We leverage is kind of yet to be determined.
Again.
It will be something we'll be continuing to focus on and discussed with the board.
I don't know Dan anything you want to add to that.
Yes, just maybe a bit well, Greg by the way congratulating us beginning remarks.
Apologize for that we appreciate it.
But.
Our philosophy of returning surplus cash to shareholders is unchanged right. So.
What we've said.
Beyond the reliable and growing dividend, our first quarter call as the in CIB.
So I think that that's it.
That's almost a given of course will depend on market conditions.
But if the NCA, if our cash generation as such.
Mark current market continued conditions continue will be such that we will have to go to other means to return surplus cash and we will do that we've done <unk>.
So obviously, we see that as an attractive way of returning cash.
You continue to think about specials.
For us, it's really an investor preference thing and as we talk to investors.
Across the spectrum of our investors there seems to be a pretty strong preference of the Si E special dividends.
I Wouldnt rule, a special dividend. So philosophy is the same as cash continues to be strong you'll continue to see the NCI.
And additional returns of cash through the means about us.
And Greg maybe you can just kind of one other if I can make one other supplemental comment around that.
What we're talking about here is our capital allocation philosophy as it result, as it relates to surplus cash now embedded in that decision is also kind of our commitment to reinvesting in the business and as you see us doing that.
With significant investments at Pearl at Cold Lake and our downstream.
With our renewable diesel project.
And looking further down the road with our pathways Elia sand.
And our commitment to net zero by 2050, and all of the the infrastructure investments that will be necessary to achieve that so.
We're striking a very good balance.
Between investing in the sustainability of our company.
And our future, but at the same time doing that in a responsible way that also yields.
Significant surplus cash that we can return to our shareholders.
Okay understood. Thanks, very very thorough rundown.
Just a second question comes back to the 100% utilization in the refining.
Was that was that one or two facilities in particular have you seen any capacity creep.
So your turnaround activity I'm, just trying to get a sense as to how likely this is to get replicated even considerably in the fourth quarter, but just has anything really changed structurally in the downstream that that 100% utilization might happen again.
Yes, it's a good question.
We are super pleased Super proud of the 100% utilization.
And there's really nothing that we're seeing in the fourth quarter.
That suggests.
A fundamental change to that I did as I did mention.
Kind of a contributing factor to our overall high utilization throughout the whole year has been our light.
Kind of level of turnaround activity compared to historical.
Historical levels as we move to next year, we'll be returning to more typical typical levels. So that will have an effect on us as we move to next year, but as we sit here today and looking to the rest of the fourth quarter.
I expect continued very high utilization.
And then again, a big credit to our refined teams to achieve that.
Alright, thanks, guys.
Thank you.
And we can now take our next question from Doug Leggate of Bank of America. Please go ahead.
Hey, Good morning, guys. This is actually clay on for Doug.
My first question I'd also like to touch on cash returns at the market. It looks like you had like what you've done here. So my follow up is how to causing capital will evolve into 'twenty, three and specifically I'm thinking about capital expenditures and also cash tax. So any color that you can provide there would be helpful.
Yeah. Thanks, Thanks for the question.
Maybe I'll first make a comment around.
Capex and then I'll turn it over to Dan and he can talk more about the other elements.
On Capex as as we shared at our Investor Day earlier this year.
Our guidance for this year is of course is one $4 billion of capital expenditures, we are right on track to achieve that.
Consistent with our full year guidance and as we look to the next few years. What we've said is we expect to average about one $5 billion.
Which is a combination of of maintenance capital.
Some growth capital.
We'll update that outlook when we have our.
Sure.
Next Investor day.
Sometime early next year, but as we sit here today and we're finalizing our near term business plans I think we still feel good about those levels of capital expenditure. So.
For now, though the $1 5 billion.
Over the next few years is still a good average for us and we will provide a bit more detail.
Early next year on that.
So that's kind of the capital story, Capex story, and I'll turn it over to Dan.
Yes, as I've said before.
We expect to be cash tax paying sort of fully cash tax bang.
In 2023 plus.
Especially on the strong market conditions I've talked about.
Really quite low cash tax payments in 2022 of about 400 billion to <unk>.
Projected for the whole year.
And I've talked about in the first quarter, our final payment for catch up payments for 2022, which will make in the first quarter 2023 about $2 5 billion.
Going forward under current conditions, we would expect to be.
Currently tax paying roughly 24%.
Okay.
Got it I appreciate that Dan Mike.
My second question is on the downstream result, so what else what stood out to us beyond the really big headline numbers would not the gross margin with nearly identical to the second quarter in refining benchmark peaked today. So can you help us understand what the drivers are for Q3, and maybe some idea of how retail contributed.
The overall result.
Yes. Thanks, Thanks for that question I mean.
Yeah.
Certainly the margins have stayed quite high.
In the third quarter.
And so that's that's a large driver for us.
That coupled with.
Us.
<unk>.
Being able to achieve these very high utilization rates.
Which were higher in the third quarter than the second quarter that has contributed to us maximizing value through those through those assets and then.
As is always the case, where we're constantly.
Optimizing our crude slates that we run taking advantage of.
Kind of a market.
Availability of crudes and discounted crudes.
And ensuring we're placing our products to the highest markets that are available to us. So you put all that together and we were able to generate just a hugely profitable third quarter in the downstream.
So I'll just kind of paint that picture at the highest level.
John <unk> is here with us.
If he of course runs our downstream I'll just.
Kind of offer to him if he wants to add any further detail.
Yes, good morning, everyone.
Thanks, Brad I think one thing I'll say about the third quarter trend on gross margin is that gasoline softened, but diesel strengthened and so that's maybe the swap if youre trying to look at it versus the second quarter gasoline was very strong in the second quarter and it did soften globally and soften within North America, but diesel was more than offset that and we do.
The diesel trend to be there in the fourth quarter of this year. So very very positive bullish signals on diesel in the fourth quarter and I think thats why Brad it's signaling that we do expect strong crude rates through the fourth quarter as well underpinned by that very good diesel signal.
Got it I appreciate that guys. Thank you.
Thank you.
We can now take our next question from Dennis Fong of CIBC World markets. Please go ahead.
Hi, Good morning, appreciate you, taking my questions and for providing some of that color in your opening comments.
Maybe my first one is just a follow on to the discussion around refined products in the downstream side I was hoping you could highlight from the investments <unk> made recently either improve the flexibility around either marketing or throughput and as well as a reminder, on the kind of the range or limits around the relative to <unk>.
Production you guys can do.
Yeah, just a couple of comments on our investments.
Certainly the most recent.
And material investment we made was in the Sarnia products pipeline that we announced.
Completion will start up early this year.
<unk> allows us.
Good access to.
The high value Toronto market for our products and so we are fully leveraging that asset we're able to deliver those products reliably.
Our pipeline at a lower cost than maybe we had been able to do in the past.
So I think that's that's a key contributor for us.
As we look back a bit longer.
And history over the last couple of years, we've been investing in our in our asphalt manufacturing capability, we've been investing in our ability to run our heavy crudes.
And that just further strengthens our integration as a downstream. So I think I think those are all key contributors for us and of course as we look ahead.
We're we're.
Progressing or are planning an early investments in the strat Kona renewable diesel project, which is just another example of how we're positioning ourselves to capture maximum value out of not just today's market, but our view of the future market.
Great great.
Great. Thanks, My second question, if you wouldn't mind switching gears is.
At the beginning of this year due to some of some extreme cold weather that was experienced up in northern operations.
<unk> performed a little bit less desirable I was curious as to whether or not you could walk us through some of the learnings or changes you've made to operations to help improve or moderate the risk as we entered it.
<unk> temperature season over the next few months.
Yeah. Thanks, Thanks for that question and Youre right.
We had some disappointing performance.
Late last year and early this year.
Driven by just the extreme cold weather conditions.
And of course.
We're accustomed to operating in cold weather.
But what we saw was a bit unusual for us.
There were several kind of confluence of events that contributed to that downtime.
I'd first say that based on our third quarter performance I think there is there is a strong indication that that is long.
And our.
Kind of rearview mirror now.
We feel.
Very very good that with all of the work we did to mitigate.
Those situations that we're well prepared.
For for this.
For this coming winter.
Probably the biggest learning we had was a raw.
<unk> kind of the operating envelopes that we needed to be.
<unk> four with our new crushers.
<unk>.
That was the new kind of variable for us.
And they experienced some issues in the cold weather, but we've made modifications to that equipment.
We feel quite comfortable but that's the strength of the Av.
The Pearl organization.
As they have demonstrated their resilience they continue to adapt they continue to interrogate.
Any bottleneck the system any lack of reliability.
Continue to learn from that and close the gap.
That is what's put us clearly on this accelerated pathway to 280000 barrels per day by 2024, a year earlier than we had previously indicated.
And the team visit given up there they are going to continue to work towards towards further improvement so.
I just kind of leave you with that that we feel quite positive and optimistic about the future at Pearl.
Great I appreciate that incremental color I'll turn it back thanks.
Thanks Dennis.
Yeah.
As a reminder, please press star one to ask a question.
Thank you. Our next question now from Patrick <unk>.
TB capital. Please go ahead.
Hey, guys. Good morning, Thanks for taking my questions just kind of wondering here in terms of the renewable diesel project you've got the.
The agreement with air products, there, what sort of technical and regulatory milestones remain between now and.
And then in terms of the air products deal does that have any impact on the nature.
Or amount of capital that or timing of those capital spend that.
We'll be necessarily by imperial.
Yes.
Thanks for the question Thanks for the interest in the project.
We're super excited about it.
No.
Concluding the contract with air products is a key enabler for us to bring that project.
And as I.
And we are anticipating that we will bring it down.
Within the coming months.
The other key outstanding either that we're working through as is sub key commercial arrangements around that.
The crop supply.
That will be the feedstock.
For the renewable diesel project.
But those discussions are well advanced and going well at.
Obviously, though that's a key element of the project.
<unk>.
From a capital standpoint.
<unk> indicated that our estimated cost is around.
$500 million investment for that project and that excludes investments.
All of that air products would pay for that.
Crop suppliers, what makes when you look at it in total, it's probably closer to $1 billion, including others invest third party investments.
The regulatory work is well advanced.
That's not an obstacle for us at this point, so again, we're getting down to kind of the final steps we need to take so super excited about about advancing this project that I think it's got great benefit not just for us as a company.
But for what for Canada.
Objectives.
Society here.
Okay I appreciate that color and then just on the on the financial side here you guys have maintained the $1 4 billion capital budget for this year, you're pointing to one 5% next year. This is really in Stark contrast to everything that we've seen in the industry from your peers.
In terms of being able to mitigate effectively inflation here and I know you don't want to give away the entire recipe for the secret sauce, but.
But I'm just curious if you can point to any key factors because as I said this is a <unk>.
Pretty significant departure relative to your peers in terms of capital outlays.
Yes, thanks for recognizing that and it is it is a big credit to our team that is the secret sauce, it's the team at.
And they are working.
Quite diligently.
<unk>.
On managing inflationary pressures, both on the operating cost side and on the capital side.
We've demonstrated our discipline around cost.
Quite dramatically during the depths of Covid when we when we removed almost $1 billion of operating costs and other $1 billion capital cost and with that where a lot of structural improvements that we continue to leverage today.
Now when you talk specifically about our $1 $4 billion of capital budget, and our ability to deliver kind of all of the project activities within that original budget. It does speak to the work the team is doing to offset inflationary pressures continuing to.
Look for further efficiencies in the business, we also benefit from having much of the capital work.
The contracted.
Prior to these extreme inflationary.
Pressures that we're seeing.
And the nature of many of our projects.
A lot of Earth moving.
Not so much steel, which has been subject to significant cost pressures.
But again it comes down to.
This relentless focus on managing costs.
And a big credit to our team.
We expect to maintain that discipline as we look to next year and the years beyond when this average of one 5 billion.
So thanks for that question.
Okay. Thank you very much.
I will now take our next question from Neil Mehta of Goldman Sachs. Please go ahead.
Yeah, good morning team and congrats on a great set of results here.
The first question is around the widening of the WCS differential and typically we think of your upstream business is a little bit more WCS levered in your downstream business.
More levered to light sweet crude, but I'd be curious, how youre thinking about that widening of the desk.
And how it impacts the way we should think about.
Near term profitability.
Yes, thanks for the question Neil and.
I think you've characterized that right.
The upstream business.
At least curl in cold Lake or are tied to WCS differentials. I contrast that to Syncrude of course, which which sells a synthetic product which is trading at a premium to <unk> right now.
But for for.
For Kearl and Cold Lake, we are directly tied to the WCS differential.
And that has been under pressure.
What's driving that widening of the differential is as I think we've talked about in the past.
As a combination of.
Bulk of poll.
Vance bolt on the supply and demand side.
Broadly speaking over over the last quarter and earlier this year a significant release of.
Of SPR barrels in the U S, which.
We have been providing some level of competition and offsetting demand for Canadian heavies.
Of that.
With high energy costs, especially natural gas, we're seeing some refiners.
That are favoring a wider.
Crude slate.
To produce their products.
And then theres been some piano.
Kind of near term disruptions in refinery operations in the U S. That is also for short periods of time have have depressed the demand.
The heavy so lots of factors in play.
We think that many of those factors are <unk>.
Resolving themselves.
As we move into the next year.
So we expect that differential to to start tightening easing back.
Back towards more normal levels, but it's going to take a while to rebalance I think.
Sure.
And then on the downstream side I mean, youre exactly right, we run more light crudes that heavy but but we do run.
Some of our heavy crudes in our own refineries.
Probably about.
A quarter of heavy grades and so we're able to take full advantage of that wider differential on the downstream, but as I mentioned earlier John mentioned.
The diesel crack spreads are extremely high right now so having an integrated system like we do with both upstream and downstream assets.
<unk> allows us to.
Yes.
Kind of mitigate the effect of those those wide heavy differentials on our on our earnings and cash flow.
Yeah.
Thanks for that perspective, and then.
I just wanted to go back to Carl.
Here, you're right to say that you got up to 357000 barrels a day at one point in October and just how do you think about the sustainability.
Running above nameplate in Q4 and then.
And then tie that to your opex per barrel when youre going to run.
I run this hard I would imagine.
The $20 a barrel is insight so just any thoughts there too.
Yes, you did hear it correct.
357000 barrels a day, that's our new daily record Theres lots of things that impact.
Daily performance.
And it's not necessarily a reflection of a sustainable level for a whole a whole week or a whole block, but obviously, having record production days contribute to an overall.
Kind of.
High volume or high volume.
That's what we're seeing that apparel.
No.
We saw a convergence of.
Great run time in it.
In our in our crushers right rough times in our processing facilities, but coupled with just great efficiency in our mining operation and high quality or all of those things come together.
What day.
US the sort of record results and of course, our objective is to string together.
Multiple record dates.
But over the course of BMO.
But third quarter, we expect there will be some planned downtime.
And maybe some unplanned downtime, but those things will.
Dilute the benefit there.
But fundamentally.
We have.
<unk> continued to raise the bar hurdle.
And that gives me great optimism in our ability to achieve this 280000 barrels a day.
And Youre exactly right when we look at our target of 20 dollar U S barrel unit cost.
Uh huh.
Having a strong the denominator in that calculation is really important and so the more volumes, we can put through the facility.
With with high fixed costs that we can dilute across.
Distribute across a number of barrels that brings our unit operating cost down and it lowers our breakeven. It makes every barrel more profitable. So that's what we're striving to and we continue to feel good about our ability to get to $20 a barrel.
Thanks, Brad.
This concludes.
A question and answer session I would now like to hand, the call back to Dave Hughes for closing remarks.
Okay. Thank you.
On behalf of the management team I would like to thank everybody for joining us this morning.
But also welcome you here if you have any further questions. Please don't hesitate to reach out to anybody in the IR team here.
We're always happy to follow up so thank you very much.
This concludes today's call. Thank you for your participation you may now disconnect.
Okay.