Q3 2022 Cenovus Energy Inc Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to Synovus Energy's third 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. You can join the queue at any time by pressing star one.
Members of the investment community will have the opportunity to ask questions first.
At the conclusion of that session members of the media that May May then ask questions. Please be advised this conference call may not be recorded or rebroadcast without the express consent of Synovus energy.
I would now like to turn the conference call over to MS. Sherry Wendt, Vice President Investor Relations. Please go ahead Mr went.
Thank you operator, and welcome everyone to Synovus is 2022 third quarter results conference call.
Please refer to the advisories located at the end of today's news release. These describe the forward looking information non-GAAP measures and oil and gas terms referred to today.
They also outline the risk factors and assumptions relevant to this discussion additional information is available in synovus is 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 questions. Please follow up would be on these directly with our investor relations team after the call.
And we 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 as I do every quarter I am going to start this morning's call with our top priority, which is health and safety in late September there was a tragic fire at our non operated joint venture refinery in Toledo, we were devastated to learn about the fatalities are two workers there and our hearts go out to there.
Your families and colleagues. This is a heartbreaking reminder, that safety must be absolutely fundamental in our business. It is our responsibility as an industry to ensure all our workers who started shift get home safe every day.
Our focus on the Toledo refinery remains two fold, we will continue to support our joint venture partner as well as the staff and everyone at the site in every way to weekend. We will also continue to work closely with our partner to assess the damage.
<unk> gained a better understanding of the path forward investigations into the cause of the fire are ongoing but early indications from aerial drone footage suggests the damage is localized to a small area of the refinery restricted access to the site has limited the operator's ability to fully assess the damage but there.
Our refineries remained shut down in a safe state and we'll provide further updates when we can.
Turning now to the third quarter, we continued to deliver solid operating and financial results, even with increased volatility in commodity prices.
The oil Sands segment led the way with Christina Lake backup from its Q2 turned around and producing over 250000 barrels a day, we safely deferred our turnaround at Foster Creek to Q2 2023. However, there is still some necessary planned maintenance that impacted production in the quarter. There was also an.
Two of the water tank that lowered production in August but production was back up to normal rates in September and continues at that level.
And the Lloyd Mr. Thermal spruce Lake North produced first oil in early August and has since his daily rates well above its nameplate of 10000 barrels per day.
Recall that when we took over the Lloyd thermals those combined assets were producing around 80000 barrels a day by adding spruce Lake north as well as continuing to apply synovus is sag D expertise, we now see the Lloyd thermals run closer to 110000 barrels a day, we also closed the sunrise.
During the quarter, we acquired the remaining 50% working interest in that Sag D facility. We are reporting 100% of Sunrise volumes from August 31 onwards, we have seen strong performance from the re drill and redevelopment program at Sunrise and just drilled two of the longest wells to date at that.
With 1600 meter laterals in the conventional segment, we successfully executed a major turnaround at our El Morro plant without incident.
We started our development rigs coming out of breakup conventional production was running between 125000 to 130000 Boe per day coming into October . The team has also been reactivating some base well production at a very low cost.
The offshore our partners recently brought the M D. A N V H fields online in Indonesia, we expect them to ramp up over the fourth quarter additional new fields will follow to bring total net volumes closer to 20000 Boe per day in 2023, doubling the previous run rate.
U S downstream the throughput was up but the utilization rate of 87% compared to 75% in Q2 as we had most of the Q2 turnarounds behind us. The Synovus operated Lima refinery continues to run well after its major turnaround last year with utilization in Q3.
Coming in at 94%. However, there were outages at the non operated refineries in the quarter with turnaround activity at Wood River in Toledo. In addition, Toledo was taken back offline on September 20. Following the incident I mentioned earlier Lima operations have shown significant improvement through the.
A year and our goal is to continue to demonstrate this level of operating capability across our U S. Refining operations as we restart the superior refinery and take an operator ship of Toledo.
Our priority for the U S refining business is establishing a solid track record of safe and reliable performance. This is one of the company's greatest opportunities in the near term.
Turning to our financial results for the quarters adjusted funds flow was nearly $3 billion, while free funds flow was about 2.1 billion excess free funds flow was about $1 8 billion and this included a cash payment of about 400 million on closing the Sunrise acquisition, which was fully offset.
Set by net proceeds recorded on closing the retail fuels network sale the volatility in commodity prices in Q3 manifested in two primary ways first in oil sands operating margin and here the lag on condensate pricing was seen in realized pricing in the oil sands assets.
Where higher priced condensate purchased in earlier months was blended in included in sale volumes through the quarter.
Second in U S manufacturing operating margin processing crude oil purchased in prior periods at higher prices and manufactured later in the quarter when pricing decreased had an impact of almost $420 million.
Throughput increased in unit costs came down relative to Q2, however, the volatility of commodity prices had a much larger impact on operating margins in the U S. Downstream. We also began incurring increased expenses for the startup of the superior refinery, which combined with the Toledo outages two at operating.
Expense drag.
Without throughput taking out the inventory in FIFO gains in Q2, along with a FIFO losses in Q3. The U S manufacturing segment performed better this quarter compared to last we also experienced cash flow headwinds related to the cost of higher price feedstock and condensate from earlier periods.
That's included in our products and sales volumes in the quarter or another words FIFO impacts. These dynamics service tail winds on our results in a rising price environment, but serve as a headwind in a falling price environment like we've just experienced in Q3.
In accordance with our shareholder returns framework, we've allocated half of Q3 excess free funds flow to shareholder returns. This is over and above our base dividend. We also continued our opportunistic and disciplined approach to share buybacks through the quarter. This resulted in a return of about 660.
Million dollars to shareholders through the NCI program. In addition, the board of Directors has approved a variable dividend of about 220 million or roughly 11.4 cents per common share with this variable component fulfilling our commitment for 50% of excess free funds flow.
Going back to shareholders. The current NCI B program will expire in early November as we announced earlier. This morning. Our board has approved the application for another N. CIB program. It will provide capacity to repurchase approximately 136 million additional common shares over the next year.
We also completed a tender transaction in the quarter repurchasing about $2 $8 billion of debt, bringing our total of repurchased notes. This year to $4 3 billion. This exercise mitigated refinancing risk for the company until 2027 and it also reduced our weighted average coupon rate.
And we will save about $200 million in annual interest expense going forward.
Our net debt reduction was accelerated this quarter by a working capital release and now sits at about $5 3 billion and to put things in perspective, we started this year with $9 6 billion and net debt. So that is a reduction of $4 3 billion of net debt in just three quarters Q.
Q3 was another Great example of how our financial and shareholder returns framework delivered up to and including Q3, we will have returned nearly $2.9 billion to our shareholders. This year through our base dividend share buybacks and the variable dividend while at the same time also deleveraging.
At the same time as paying down our debt and providing returns to our shareholders. We are also making significant contributions to government when the oil and gas sector does well, Canada does well recent Peters and company analysis shows that oil and gas companies are expected to contribute about $50 billion in <unk>.
Royalties and taxes to the Canadian federal and provincial governments in 2022.
That's money that pays for health care Education Arts, and culture and much more across this country, but this in perspective, our sectors anticipated government contributions. This year are equivalent to more than two thirds of the funding for all of Canada's hospitals last year, that's at a time.
Of heavy demand under the strain of Covid and so all of a sudden our peers are further bolstering the economy by investing our revenues back into our businesses supporting jobs and providing economic benefits for suppliers and manufacturers in every province that St Peters and company analysis shows our sector.
Capital investments of about $40 billion this year alone and it's much more when you add in our spend on annual operating costs. These investments include money for environmental and G. H G reduction initiatives in fact, our sector is the largest spender on environmental services, Inc.
Canada the pathways Alliance Synovus jointly founded with five of our oil sands peers to get to net zero emissions by 2050 recently announced that our decarbonization projects will require investments of more than 24 billion by 'twenty 30 alone. This includes the alliances foundational carb.
<unk> capture and storage pipeline and hubs as well as energy efficiency cogeneration and electrification projects. We are ready to move forward with more advanced investment decisions about these significant decarbonization projects once governments provide assurance that the necessary policy mechanism.
And support our in place Synovus and our peers continue to work with government officials on these details. So we can all continue to achieve this shared goal of emissions reductions.
We are committed to both investing in our business, including decarbonization projects and providing strong returns to investors. These two things combined are what will support a strong oil and gas sector in this country and enable us to continue contributing in a significant way to the Canadian economy for a long.
Time to come.
Recapping, what we've achieved at Synovus this quarter and where we're headed our upstream operations continue to build on momentum towards 800000 barrels a day and above and delivering meaningful value and returns on investment are downstream performance is not yet fully shown what it can do in this environment.
And that will be management's focus going into Q4 and 2023 overall, we've posted another solid quarter highlighted by strong operational results and substantial further deleveraging towards our $4 billion net debt floor at current strip, we expect to reach that level around the end of this year.
We look forward to delivering 100% of excess free funds flow to our shareholders for periods. When we're at that level and with that we're happy to take your questions.
Okay.
Ladies and gentlemen, as a reminder, you can join the queue to ask a question by pressing star. One we will now begin the question and answer session and go to the first caller, we'll go to Greg Pardy with RBC capital markets.
Yeah. Thanks, Good morning, Thanks, Alex for the for the run down just a couple of questions for you guys. I guess the first one is you've talked about you know the downstream improvements that you're focused on.
If we just maybe talk about the upstream for a minute do you continue to see sort of a favorable rate of operational change occurring and then if if so where is that happening.
Sure No I'm I'm happy to talk about the upstream and I I'll, probably pass it onto a John and Keith Norrie at at some point, but you know I think Greg how I look at it you know since we've been able to to get the the husky deal done we.
We've had a really good run are finding a lot of what I would call kind of brownfield opportunities to continue to grow production driver operating cost down drive our S O ours down.
And you know we we've picked a we picked a bit of the low hanging fruit, but I think from my perspective, we see that that opportunity continuing I think sunrise, you're you're going to see significant things from sunrise going forward, but maybe I'll pass it onto John and he can give some thoughts.
Yeah. Thanks, Alex So Greg you know one of the things in this industry and this company hasn't really done over the last five or six years through the commodity cycle downturn.
It has put a lot of money or put any money into growing production and harvesting some of the low hanging fruit that Alex has mentioned and that goes for synovus, but it also goes for the assets that were acquired through the Husky acquisition.
When we look at our portfolio, we see lots of opportunity for kind of incremental growth that starts to reiterate your cost base and starts to hum.
Recalibrate not just production, but the cost base that goes with it so Alex mentioned Sunrise. That's a great example, hasn't had a new well pads since 2017.
And we acquired the other half of that this quarter and we see lots of potential growth there for for marginal capital and similar in our conventional business. We see the same thing happening there. So I think what you can expect from US as you know similar to what we just did it spruce Lake North and what we've done in Indonesia, and what we're about to.
With tearing all of us kind of add incremental production through time that comes with relatively modest capital.
Requirements, but does you know Cai.
Provide that 5% rate of growth through time.
Okay terrific, thanks for that and I'll switch gears and so small special dividend.
How should we think about maybe special dividends versus base dividend growth because clearly you've got the financial wherewithal to to go and raise the base dividend.
Yeah.
Greg It's a it's a good question and I I think I would say to you that over the long term.
I I would view that the one of the primary ways that companies like Synovus add value is is growing their base dividend then and to do that ultimately you need to grow both your top at your top line and your bottom line and you heard John we.
We think we can continue to grow at a pretty reasonable pace as described by John just just by kind of keeping to our knitting with those sort of organic N and brownfield opportunities, but I think we do see you know, we we see opportunity over time.
Two to grow.
Both the base dividend, then obviously there'll be opportunities for for variable dividend, but from my perspective.
To the extent, we can afford it at the bottom of the commodity cycle. It. It would certainly be managements goal to continue to grow the base dividend also.
Maybe I'll just add onto that Greg I mean, the two things are kind of synergistic you invest in the business and generate returns at $45 was just gives you more capacity to grow your dividend through time.
You know the incremental investment that you make in the business. Just you know supports that growth that Alex talked about have of the base dividend through time, which which is kind of at the core of this company in terms of returning cash to shareholders.
Okay understood thanks very much.
Yeah, no worries thanks Craig.
Thank you we'll take our next question from Neil Mehta with Goldman Sachs.
Hey, this is a nickel that foster on for Neil Mehta. Thanks for taking the time, so just kind of a follow up on the capital allocation side can you provide any insight around the timing and reaching the CAD 4 billion net debt target at the curve.
And then any sort of carryforward implications, we should be thinking about after the announced variable.
I mean, I think I mentioned it in my in my my call notes, but we see us hitting the 4 billion all things being equal probably right around the end of the year.
And you know we are yeah. If there's one thing we strive to demonstrate its disciplined we've committed that once we hit that 4 billion were moving to 100%.
The payout.
And that is still our intention no changes there.
Great. Thank you and then as a follow up just curious how youre thinking about next year's spend outlook and also if we should be thinking about any sort of updated maintenance capital range on on the back of elevated costs.
Do you want to talk about that Sean.
Yeah, I think we've been pretty clear and we'll come out with a more formal.
Budget set of guidance later next month, but I think we've been pretty clear that you know the strategy is pretty much set and and we are in a world where you may see some some incremental dollars go towards growth, but it will be exactly that it'll be marginal.
And Incrementals. So don't think about next year's budget as being much different than this year. So you know I think there will be some some monies to get after some of that lag low hanging fruit that we talked about that allows us to maintain sort of that 5% growth rate.
Right across the business upstream downstream.
And conventional so you know I think that you know, we'll flesh that out more so.
In the next months and sorry, I forgot the second part of your question.
Just on the maintenance capital range, if theres any sort of update we should be thinking there.
Yeah, Okay on the maintenance capital you will remember that when we acquired Husky, we came out with a number of $2 4 billion Canadian as being the number that's required to keep production flat and keep our fixed plants in the in a safe and stable condition. What we have done over the course of this year. If you think about the assets that we've acquired.
Wired the.
The other half of Sunrise, our anticipated acquisition of Toledo, and then some allowance for for inflation, we kind of expect that number to move up in sort of the two 7% to nine range.
But I think that's a good number moving forward will provide even more color on that once we get through the budget, but that's that's kind of a run rate number that you should be thinking about for the next five years.
Okay, great. Thanks for the clarification there.
Thank you we'll take our next question from Menno <unk> with TD Securities.
Thanks, everybody.
Good morning, just maybe I'll start with pathways in the release you talked about Ken.
Canada facing intense pressure on Ccs from the U S, Norway and the Netherlands. So maybe you could just give us a refresh on how Canada currently stacks up and I think everybody on the call is a good sense of what that looks like for the U S, but where do we stand relative to Europe and then you also mentioned that our government discussions are on.
Boeing but just in terms of the the track to resolution is it possible that we see something before the end of the year or is 2023 more more realistic.
Yeah, no. It's a it's a good question Menno I'll I'll give you my thoughts and Rona.
May jump in with some color on it but.
Look I mean, we're where we are now you know we've had ongoing discussions.
With the federal government and the provincial government now you know for for many many months earlier this year that kind of a one on one of the initial outcomes of that was the investment tax credit.
The federal government put forward for Cc U S and I you know I think we really viewed that as a strong commitment from the federal government.
And that was something that you know was a you know more more reasonably equivalent to the U S 45 Q.
The support that that they were giving to our carbon capture you know since that time, the the U S. Government has come out with the inflation reduction Act, which added significant support.
For our industrial decarbonization through including Cc U S sudden.
And that right now in the U S. They're they're getting producers in the U S are getting support both for capital investment and for operating costs.
I think our perspective you know.
This this this this goal of Decarbonising not.
Not just the oil and gas industry, but but every major heavy industrial into industry in Canada is a massive task. It is a huge lift.
Industry is going to spend many billions of dollars on.
On it ourselves.
But pretty much every jurisdiction in the world that is proceeding on carbon capture and storage is really doing that with significant involvement of multiple levels of government and you've heard me talk about the U S. Norway is in a is in a similar position so I mean.
I think Canada needs to be focused on competitiveness. This is an incredibly important business for the Canadian economy, and Canadians and as I said, we're going to do we're going to do our part.
And we are doing our part, but there you know there's more discussions needed with with both levels of government I don't know Ron if you have anything to add on that.
And I think the important stuff like you said Alex is that the focus has to be on both the capital cost and the operating cost and that's what we've seen in examples around the world. We're significantly large ccs projects have gone forward theres been anywhere from two thirds to getting to close to full support.
Governments across the projects. These are multi decade projects and so the capital is great. That's the first thing that you talk about but you also have to look at balancing the operating cost over the life of life of these projects because that's the most significant part of them.
But you know Ccs is the focus right now because that's a proven technology and anywhere in the world right now there's ccs everywhere our companies have experienced the Ccs when it's linked to enhanced oil recovery. Because then it makes sense to go ahead without without having to partner with governments, but that's truly we were looking at the Ccs.
That we're talking about where they they are not in the oil sands partnered up with enhanced oil recovery. These are these are joint projects that we want to do with the government. This is infrastructure that is for the Canadian good and its infrastructure that is going to resolve and tens of thousands of jobs that will be.
A real next construction boom in Alberta, so that there are so many levels of benefit to these projects going ahead.
Thanks.
Thanks, Rona and Menno, just one just to be responsive to your last question about timing.
My my kind of guess on this is there. There is there is a lot of discussion that is ongoing with government and just given the complexity of this issue and the need to make sure. It is done right.
And and we deliver.
What what is needed I would suspect that this will ultimately extend into the new year.
Okay. Thanks to you both that's that's very helpful. I'm, just going to flip over to the superior rebuild.
Rebuild project Youre still targeting Q1 restart.
Where do you see the risk and the ramp up process, if at all and what should we be modeling for utilization for the first half of 2023.
And then how it keeps us on yeah, you know, we're really happy with the progress on the project. We've always been forecasting you know ramping up through Q1, 2023, and we're still on that track them. We're actually in the process of transitioning from construction into commissioning and we brought.
Our first set of crude into our into the tanks at superior and have floated the roofs of at those tanks and filled up our inventory.
So you know, we're eminently getting ready to to commission the crude unit in and start that up and so really still on track to ramp up through our through Q1 2023, as we've been saying for for the past several quarters.
Thanks, Steve.
Thank you as a reminder, star one if you would like to ask a question. We'll go next to John <unk> with J P. Morgan.
Hey, good morning, guys. Thanks for taking my question.
So on downstream if I heard this right I think you mentioned the results were better than two Q3, Q when you strip out FIFO and in inventory impacts.
Can you talk about the drivers there and I know you had west downtime and better throughput overall, but anything you're seeing on the cost or the margin sorry, the that improved into a three tier.
Okay.
Yeah, Hi, John it's Keith chef on them.
We saw really strong throughput at our at our Lima refinery, we actually set a throughput record in the quarter at Lima.
Obviously the.
Cracks are very supportive.
In the quarter as well as we as we think about kind of what's a with the forward view looks like.
We are we're really excited about this set of assets because right. Now you know, we're still incurring a lot of cost without any throughput at superior.
As you know with the tragic fire at Toledo, we were down for most of the quarter at that joint venture operated assets. So you know as as.
As those assets come on stream, where we're even more encouraged about a about a you know what what the U S store.
Structure can can perform at as you know with with WCS differentials kind of where they are these refineries are well set up to consume Canadian heavy both superior Toledo are our joint venture at <unk> as well as Lima, So really constructive.
Heading into this as well as kind of the very constructive crack so pretty pretty pretty exciting.
Exciting time for the U S manufacturing as those assets come back on stream in and continue to perform.
Okay. Thank you that's helpful and then just flipping to upstream.
When I look at royalties.
For foster or Christina on Sunrise, I mean, it looks like all three went up in terms of the rate.
In <unk> versus <unk>, despite price going down.
I'm, assuming I'm doing my my calculation right anything you would.
Point to that's driving those rates higher.
<unk> versus <unk>.
Yeah.
No. It's it's Jeff here no theres nothing structural I'll, just remind you of the framework. It's those are at Foster Creek and Christina Lake are postpaid so they'll range on.
From 25 to <unk>, 40%.
Of a payout there so basically your revenue less your op costs less your capex they've been running in at around 30%, but theres nothing structural thats just a factor in it and when we're in postpaid out it's an annual calculation. So theres always just true ups in different pieces, but that's our that's how you should be thinking about it.
Understood. Thank you.
Thanks, Joe.
We will take our next question from Dennis Fong with CIBC World market.
Hi, good morning, and thanks for taking my questions. The first one for me is just really around the share repurchase program I know previously you've discussed okay.
Focusing on intrinsic value at mid cycle pricing and I was just curious just given what we've seen most recently from macro.
In general.
Has that maybe driving you to revise or update your view on what mid cycle quote unquote is.
And how you guys would like to think about repurchasing shares.
You know I.
Once again I kind of just go back to this concept of are remaining disciplined in.
Conservative of how we think about things, we still think about mid cycle is kind of in around $60 W. T I and II.
I think at this point I'm not convinced that the world is not going to go back.
To where it's been over the last 50 years, So we're going to we're going to stick.
With 60 is kind of representative of mid cycle commodity prices and I I would remind everybody that from our perspective, we do prefer buybacks all things being equal over variable dividends, when we're trading below intrinsic value and.
If you know as people think about you know even like until we hit 4 billion and after we hit 4 billion.
Like.
Think about the share price, if if that share prices looking like 30 Bucks.
Should expect a lot of variable dividends and Conversely, if that share price is trending below $20. They should expect.
Share buybacks that that's that's really directionally, how we how we think about it.
Great Great. Thanks, and my follow up here is there anything just tailing on Greg's question earlier, I know you've made pretty good progress on some of the.
Optimization.
Your existing assets both.
Historical Synovus and Husky, just curious as to whether or not you can provide us a bit of an update on.
Further down the line projects like say connecting Narrows Lake and Christina Lake, where that actually happens to be at or where the next leg of upstream optimization could cause them problems Exxon right.
Yes, Hi, there Dennis noted rumsey here.
Yes, we are progressing at Christina Lake.
The pipeline that connects up.
Over the next three years will connect up not always lag <unk> Christina Lake. So you should expect to see production come from the North area. There. Similarly in Sunrise, John can I mentioned earlier.
No that was a 100% owner with a lot of flexibility and havent been pads drilled there since 2017, so we're making really good progress on the next three well pads there and you would expect goes over the next 24 months to kind of show up and at the same time, we're doing a lot of regional re Dev and areas.
In Sunrise. So if you haven't done it for a number of years. So we have that I mean, the other side of it we have a tad of Nova Evan Atlantic coming back from from an asset life extension, which we're looking forward to the end of the year that would be another 10000 Boes a day and I think I mean over to drews area in Indonesia, we have.
<unk> done a dru if you want to mention it.
Yes, sure Yeah, so dentist we've got.
The M B a R. M D M. B H project is just coming on now we've got the MHC field that will come into that same flotation production unit here mid year next year, so youre going to see Indonesia production double.
You know very low capital for those types of investments is the F. P was leased so.
We've got lots of good to John's point earlier around brownfield vary.
Efficient use of capital to have continued growth here for the next little while where we know it makes sense that.
Even in the conventional world.
Don't be surprised if you see us probably add an incremental 100 million or so into next year to keep kind of driving the performance of that business, where as we feel more and utilize a lot of our infrastructure that.
Has not been invested in over the last five six years.
It's not only just your unit opex that really improves your capital efficiencies that improve and so your underlying net backs and affordability to keep.
No.
As you know with small growth, but you know basically keep the underlying ability of these assets to generate future free cash flow.
Is just really good visit and then we've got lots of those opportunities across just about every aspect of our upstream.
Great. Thanks.
I'll turn it back.
Thanks Dennis.
Thank you that will conclude the analyst portion of the Q&A portion.
Well if you we will now take questions from members of the media once again star one for questions from media callers.
We will take our first question from Chris <unk> with Calgary Herald.
Hi. This is a question for Alex Alex in the past week, we've seen the federal buyer administered depo callout, the Canadian oil industry to start spending more money on clean energy instead of share buybacks. Those are his words.
Meanwhile, down in the United States, we've seen president Biden call for more production from the industry and hinting at a windfall.
Potentially if they don't do so how do you view these kind of comments on the criticism of the sector.
[laughter].
I think Chris you.
You probably heard my opening comments, where I talked about the contribution there.
The Canadian oil and gas industry is already making as I sit in those those initial remarks. We are you know Peters and company estimates that the Canadian upstream industry is going to contribute $50 billion in royalties and taxes.
And all levels of government in Canada. So I think we have a very.
We have a very progressive.
System in Canada, which is quite a bit different than the U S where as you know is the cash flow in the industry goes up you know the contribution to government coffers goes up so I I think any characterization that the Canadian industry is not.
Contributing as is is just fundamentally inaccurate.
That that that being said the I think our industry has shown that we're very serious about decarbonization, we support the federal government's effort for our country to make significant.
Emission reductions on on a path to net zero by 2050, we have that same goal is synovus and with our pathways alliance peers, but I think really getting there requires a practical and realistic approach to emissions reduction.
In order to protect jobs investment in Canada, and help provide global energy energy security. So I just I would just have you have you look at those things.
Yes, I think I'll turn it back to you.
Sure just to follow up on that that the federal government is expected to release their fall fiscal updates.
I think later this week.
What are you expecting or what are you, hoping to see from Ottawa as it relates to their investment tax credit on the U S.
<unk>.
Chris we are still very much in the discussion and consultation phase with the federal government in.
I think there is theres more work to be done on the investment tax credit and I think we've seen our own federal government acknowledged that with the moves that the U S. Government has done in their inflation reduction act that that that's something that Canada is going to have to look at and in turn.
Ms of having a program that is competitive with the U S program, but I'm not I'm not expecting.
Any anything Earth shattering coming out of the.
The fall a false statement here tomorrow.
And just to I guess ask you one last question as it relates to upfront do you need to see changes from the federal government and the provincial government.
For the pathways group to give the green light to those projects is it are we sort of had a steel made here right now.
No I don't think were at a stalemate at all.
I think as I said, we're having we're having quite productive discussions we've.
I mean as I said, you've heard me talk about I think it's important that the the the contribution of government is is has equivalents with what is going on in the U S and at the same time, we are absolutely committed.
That we are moving down this path of decarbonization, we just require some certainty.
And all of the in terms of the various government programs and when I say that I mean, I'm not just referring to the federal government and I'll give you. An example would be poor space in order to proceed in RCC U S. Foundational project for pathways, we actually have to have absolute certainty.
That we have that poor space.
We need to understand this this would be a joint federal provincial issue, but we need to understand for example.
The environmental permits that are required are we going down a federal path or a provincial path. You know these are decisions that need to be made before the industry. We're not in a in a position to execute on those projects until we have more certainty on on those kind of issues, but.
I think the discussions are going very well I think everybody ultimately shares with the goal of of emissions reduction coming out of out of the the industry and I think we're having I think so far it's been going productively and I ultimately see a path.
That I that I think if everybody is reasonable I think there's a path to a resolution that works both for governments and for the industry and for the province.
Thank you.
Thanks, Chris.
We'll take our next question from Rod nickel with Reuters.
Hi, Alex So just wondering if you can elaborate a bit on your keeping $60 is kind of a mid cycle price.
Futures price strip would seem to indicate that the street doesn't expect the price like that for several years at least.
Can you explain maybe why youre taking.
<unk>.
More cautious view of prices down the road.
You know rod like four years ago. The forward strip wasn't expecting a price over 60 Bucks. So I you know I I, it's interesting to me what what the futures market is speculating about where prices going but.
If there's one thing that we have been focused on beyond anything other than safety at this company. It is on discipline and that is that as investment discipline financial discipline and delivering what the company has promised to deliver for its for its stakeholders and.
If you look back I, you know I haven't run the numbers recently, but if you look at the average price over the past 10 years I'm sure. It is well below $60 a barrel. So we you know we can hope for the best but we got a we got a plan for a reality and I think at this point. It is the right thing to do for our company at this.
Time to still think about $60 is a sort of a mid market price.
And I assume that's the reason that you would be looking at just a very similar modest increase if anything to your capital budget next year that you are keeping sort of a cautious approach to where prices might go in the next 12 months.
Yeah.
We're probably if anything we're a little more disciplined on our investment decisions and.
It is when we look at all major investment decisions those investments have to return their cost of capital and what we would call a bottom of the price cycle or a resilience our resiliency price deck and that that's more of a $45 a W. Ti and I would tell you.
The good news is is that all of those projects that you heard John and Norrie talked about on this call everything that we have been continuing to invest in meats that hurdle and and so we are blessed with a great deal of continued opportunities to grow production.
That have high returns and are resilient even at the lowest.
Commodity prices.
Thanks, Alex.
Thanks, Rob.
We will take our next question from Robert Tuttle with Bloomberg News.
Yeah, Hi, good morning.
One Greg.
Okay.
The price for Canadian heavy oil I mean, we got all of the pipelines and now pipeline space, there's been very little apportionment and yet here, we are near $30 a barrel.
Differentials.
Yes.
Yes.
It's been very weak for a long time, now I mean more than $20 at least.
Or do you see this continuing and what what factors would bring the price down to a more normal or the differential down to a more normal level.
Yes, no I'm happy to give some thoughts on that Robert I mean.
I think the first thing I would say and this is this is kind of different from our historical experience, but right now I.
My observation would be that these really relatively wide light heavy differentials are being driven more by global issues, which is a lot different than previous years in Alberta, where a lot of those wide differentials were actually being driven by pipeline constraints out of Alberta and just to.
Kind of I'll give you just a couple of thoughts on what is kind of creating a supply imbalance in the in the heavy market, but if you look globally.
Right now the high cost of refining heavy sour grades in Asia and Europe .
You know that that is that is due to spiking natural gas prices in those markets, obviously gas being being a significant input into processing of heavy.
On top of that you do have some limited heavy processing capacity driven by you know a number of both planned and unplanned maintenance.
At refineries and in both globally, but in North America, and then I guess the final point I would focus on would be the strategic petroleum reserve and I think everybody is aware that the U S government has been significantly bringing.
Volumes to the tune of a million barrels a day of come.
Coming out of the strategic Petroleum reserve.
Those are the.
The majority I think about two thirds of those crudes that are coming out of the SPR are.
Medium heavy sours, and so that's putting more temporary.
Pressure site.
Don't think this is a I think this is ultimately something that is resolved I would view it as a temporary issue that could persist into 2023, but I think ultimately it.
Gets resolved as those issues I referred to get resolved.
Okay, Great just one more thing.
Youre right.
All of these <unk> projects.
Plan and Theyre, all going to be about the same time.
Hum.
Yes.
Major construction projects.
How are you going to manage that with everything labor.
Resources.
How is that going to happen when you have all of this stuff being built.
I mean, it looks like <unk>.
4 billion or something like that.
Yeah Yeah.
It's a good question and in the the one thing I would tell you Robert as you know this industry has learned a lot over the past 20 years of.
Of of you know.
<unk> of constructing projects and managing construction projects in an overheated environments and I think one of the lead it is very much one of the reasons why we give advice to the government.
That.
Everybody understands the ambitions to reduce emissions coming out of the upstream sector.
But we also have to think of other issues that you may exacerbate other issues. If if you move to quick on that and one of them would be.
If there was a mad rush to the gate on Cc U S projects you could vary significantly.
Both the capital cost escalation, but also project delays, there's only a finite.
Amount of craft labor.
And trades.
And frankly procurement and other issues. So I mean, I think we are very acutely aware of this challenge historically I think one of the great things about the pathways partners coming together is it gives us a forum where you know.
We can actually work together for example on the.
On that foundational.
Cc U S and capture project in the Cold Lake area. It gives us the ability to do some coordination hopefully and.
And make sure we minimize that but the key is that we have we have a reasonable time timeline in which to decarbonize.
Thank you.
Yeah, no worries thanks Robert.
And as it appears there are no further questions I would like to turn the conference back over to Mr. <unk> for closing comments.
Well I think I would just as I always do.
I think the investment community and our shareholders for their continued interest in in the company and your time today to listen to US talk about the quarter and our plans so with that I wish everybody. A good morning, then we'll sign off.
Once again that does conclude today's conference. We thank you for your participation you may now disconnect.
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