Q2 2023 Cenovus Energy Inc Earnings Call
As one of our major shareholders.
So now let's move to our results.
So as I as always I'll start with our top priority, which is health and safety.
In its core this quarter posed some unique and significant health and safety challenges.
And I couldnt be more proud of the way our people have stood up to the challenge.
And this quarter, we focused on the safe and disciplined ramp up of the superior in Toledo refineries as well as completing the major turnaround at our Foster Creek asset.
I'd like to thank all our people for their continued commitment to safety.
In our core values as we completed these tasks the results were truly exemplary.
Similarly in our conventional business, we dealt with a number of wildfires through the quarter.
We temporary shut in 85000 Boe per day of our natural gas and NGL production through most of May in part of June and supported our staff and their communities. The company worked tirelessly to keep our people and our assets safe.
In addition.
We greatly appreciate the actions taken by local authorities and the provincial emergency management teams, our staff truly demonstrated our core value and protecting what matters.
Going above and beyond for each other and our communities is truly something we're all proud of and with that I'll take you through our operational results.
So starting with our U S manufacturing assets as we mentioned in the first quarter call. Our focus has been on bringing the C superior in Toledo assets online.
Toledo was fully operational by mid June while superior continues to ramp with a focus on safely restarting the cat Cracker, which is the last of the major units to restart.
These assets are incredibly important and meaningful contributors to our integrated heavy oil strategy.
Our focus in the third quarter and beyond will be to operate them reliably efficiently and profitably.
Our Lima refinery continues to operate at high rates of utilization through the quarter, while the wood River refinery ran well through the quarter. Following the completion of some planned maintenance.
The Borger refinery is back up to full rates after some planned and unplanned outages over the course of the second quarter.
So turning to our Canadian manufacturing, our Lloyd Minster, Upgrader and refinery ran at a combined utilization rate of 86% in the quarter and they are fully operational as we enter the third quarter.
We expect both of these assets to run at high levels of utilization through the remainder of the year overall I'd say, we achieved everything we set out to do in the downstream during the second quarter and we're very confident in our ability to produce reliably and profitably through the remainder of 2023.
In the upstream we revised guidance as a result of the wildfire impacts which had an annualized impact of approximately 10000 BOE a day.
In our conventional business and we've also built in a modest decrease of 5000 barrels a day for our Lloyd thermals adjusting for the slower than anticipated ramp up in the air.
These changes have resulted in an overall lowing lowering of our guidance to between 775 and 795000 Boe per day.
At our oil sands assets, we safely completed a large turnaround at Foster Creek early in the quarter. The turnaround was on schedule and on budget and the asset is now running at pre turnaround rates.
Our focus through the quarter has been on continued execution of projects that support our short and long term production volumes with our new well pads progressing as planned.
You can see the benefits of our continual effort to optimize these assets with the increased production at Sunrise.
And in addition at the Lloyd Thermals, we saw record daily production and quarterly production volumes of approximately 112700 barrels per day, and 106000 barrels a day respectively.
We expect strong production from oil sands in the second half of 2023 with all major maintenance behind us.
In Asia Pacific our volumes over the quarter were lower as a result of planned and unplanned outages.
On April seven the non authorized vessel travelling in our dedicated pipeline quarter and striking umbilical line at the <unk> 21, 29, one field in China.
The land attached as designed which resulted in immediate and secure shutdown of our subsea wells are operating group restored production by the first week of June with no environmental impacts from the surrounding area.
And as I mentioned with the vast majority of our major maintenance behind us and the forecasted continual ramp up of wells across the upstream portfolio, we expect to see elevated and steady production numbers over the remainder of the year.
I'd now like to highlight our corporate performance and shareholder returns.
We delivered almost $2 billion of adjusted funds flow in the quarter supported by tighter differentials in increasing oil sands operating margins, particularly our partially offset.
By no recorded sales in our Atlantic region during the due to timing of lifting.
And a negative FIFO adjustment of about $170 million, which really impacted our U S manufacturing segment.
With the dividend increase announced in April and through our base dividend and NCI, we distributed about $575 million.
Directly to our shareholders in the quarter.
As per our June 14th announcement, the warrant repurchase transaction presented us with a unique opportunity to repurchase about two 4% of our diluted shareholder base at an attractive price purchasing just over 45 million warrants.
I believe we obtained favorable payment terms that provide us with the flexibility to remain within our shareholder returns framework and we will continue to dedicate 50% of our excess free.
And slow to shareholder returns until we reach a $4 billion net debt target at which time, we'll dedicate 100% of our excess free funds flow to shareholder returns.
We continue to focus on running our assets safely and reliably as we lined out our integrated business model, we expect to have strong production and throughput in the second half of 'twenty through 'twenty three.
Which will continue to move us forward to achieving that $4 billion net debt target.
So before we take your questions.
I'd also like to update you on our sustainability work our 'twenty 'twenty. Two ESG report was released in June and we announced a new milestone to reduce our methane emissions in upstream operations by 80% by year end 2028.
We see reducing methane is a key near term action that contributes to our 2035 emissions target. We also continued to advanced technologies that will help us address our 2015 net zero ambition.
You can read more about those achievements and the progress we've made towards other ESG targets and the ESG report on our website.
So in closing we've succeeded in accomplishing the operating goals, we set out for ourselves in the first quarter and are well positioned for a significant improvement in our financial performance in the back half of 2023 and with that we're happy to take your questions.
Thank you.
Ladies and gentlemen.
The key to ask a question by pressing star one.
We will now begin the question and answer session I'm going to the first caller.
Next question comes from Dennis Fong at CIBC World markets. Please go ahead.
Hi, good morning, and thanks for taking my questions.
My first question here is just on.
Capital structure, just with respect to term that you guys are showing about a 14 year average maturity.
How are you thinking about continuing to take.
The advantage of the free cash flow that you're generating to change essentially the structure of what you guys have for term debt.
Good morning, Dennis it's not necessarily the first question that I was anticipating but maybe Jeff.
Jeff to answer that for you, yes, no and I will just give you some color Dennis on where we see the capital structure and we talked to the $4 billion net debt.
We view that as driving towards $7 billion on the growth side and you're right. We're right around the 14 year average term Mark look will be balance through all of this so I think you have to view as are our our Angola misses to have a tower structure that that is sustainable and that we like and it's balanced through so we'll target throughout the throughout the different tower.
And be balanced in it so and it will really be dependent on the market and where we see.
Where we see the curve and different factors in there as well so.
Roundabout answers that will be balanced and we end up with the structure that we like as we get through this deleveraging in <unk> is taking to about 7 billion in gross debt.
Okay, great. Thanks.
And my follow up my second question is probably in line more or less with maybe what you were expecting.
In terms of superior in the kind of ramp up of the FCC unit there.
I was just hoping to get a little bit more context, and there are you able to sell some version of we'll call it slightly offset product and how should we be thinking about the timing of we'll call. It a full ramp up of all units at superior.
I will let Keith answer that question with the FCC is really a gasoline producing units and it's more incremental to where we are versus what we're producing today, but Keith maybe you can provide some color on on superior.
Yes.
Thanks for the question Dennis maybe I'll, just step up a little bit when I think about the whole downstream throughput, we're kind of right at the 690, almost 700000 barrels a day of throughput. So most of our assets are online with the exception of the FCC at at superior at Superior.
I would say it's been a.
A little bit of a challenge for us.
But nothing nothing systemic there it's just working through.
On a normal startup issues. So we're days away from introducing feed into that unit and as John alluded to when we go through the crude unit, we do make on spec products that we can sell asphalt gasoline and diesel.
And then we make some intermediate products that would require the FCC to continued process. So so we have a fair amount of inventory there that we'll be able to run through the FCC once it's up and running and generate cash.
Like I said, it's eminent we're just.
Knocking through the last couple of challenges that the team is seen as they safely restarted that refinery after being down for five years.
Okay great.
Thanks for asking the questions I'll turn it back.
Great. Thanks, Dennis.
Thank you. The next question comes from Greg Pardy at RBC capital markets. Please go ahead.
Hey, Thanks, good morning, Thanks for the rundown, yes, maybe.
Nick with with the U S manufacturing for like your utilization rates actually looks okay from from what we were expecting.
It's cost obviously and I guess the question. There is is the cost effect will be are they in collecting now into margin.
And then I guess a question for Keith, but as you ramp up fully at superior and now with Toledo, then could we look forward to potentially working capital releases as we go through the back half of the year.
Hey, Greg Thanks for the question.
What I would offer up on just the cost basis as you can imagine through startup youre incurring some additional maintenance costs and repair costs. So we do expect those to normalize at the back end of the third quarter and into the fourth quarter and so we should see.
Some of our cost structure come down as we get to normal operations through this quarter.
With regards to revenues and profitability I would say.
Things are looking good we are producing products, we're going to be able that we are marketing those products in sales. So we're going to see the normal cash cycle associated with the refineries.
But all in all looking good.
Kind of coming out of coming out of the second quarter into the third quarter across those assets and like you said utilization and I alluded to this in the previous question utilization is into the low 90% now across all of our assets and the FCC just as the last unit to start up across our fleet.
And that one is coming up imminently.
Hey, Greg just on the working capital question as well I think one of the things that you will see us and Keith you kind of mentioned this is we do have a reasonably significant inventory of intermediates.
We'll work through through the refineries is through time as they.
Continue to produce on spec project product, but when when we kind of guide you to where you should be thinking about.
Inventory levels in particular, you should be kind of in that 45 to 50 million barrel range. So with these refineries coming up there is additional inventory that we will carry both on the front end and the back end of those refineries going forward. So while you may see some short term working capital releases as we chew through the inventory that we built up.
I think thats, a reasonable number for you to be building into your models.
Okay. Thanks for that and then.
Third of all of this then rolls up into into the question everybody's asking right, which is D C.
Are we sort of be thinking around $4 billion is around year end is that November and December is that the early part of next year.
What's your thinking there and frankly, it doesn't matter that much.
Well the way, we think about it Greg is we've now got our assets into the condition that we wanted them to be in.
Getting superior and Toledo up.
Kind of the last assets that we wanted to bring forward the kind of completed our vision of the assets that we acquired from Haas case, so getting those value chains.
And order as it was really important to us and one thing I would say is don't expect us to do anything different other than run these assets well over the coming quarters. So we are we are focused on getting our debt down to $4 billion.
Whether that happens in November December January February is really a function of the pricing.
The commodity strip that you want to use over the course of the quarter, we've seen could be as high as $80 are as low as 65 and it's today, it's back it looks like it's back to 80.
Cracks have been volatile we saw actually negative diesel cracks for a couple of days this month so.
I think the important thing is to understand that this is the trajectory that we're on all the assets are up and running we're going to dedicate 50% of our free cash flow to debt reduction of 50%.
<unk>.
To shareholder returns and then when we get to $4 billion will flip over to a 100, but theres nothing thats going to change the operating strategy of this company between now and then.
Understood Thanks very much.
Thanks, Greg.
Thank you. The next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Yes, Thank you and congrats to everyone on the leadership changes year. My first question was just on the offshore. The tactical question is can you spend a little more time talking about.
Okay.
Softer result, there it sounds like it's just a timing effect.
If that was an under lift you get it back in the back half.
The bigger picture question related to offshore is how do you how do you see this business evolving over the next couple of years getting into the big into the broader portfolio.
Okay. So sorry, you cut out a little bit I assume youre talking about the under lift on the east coast.
Yes, Zander lift in the East Coast, and then you get it back in the back half.
Yes, hi.
Rumsey here from the upstream.
We obviously too.
As we mentioned.
Timely opportunity to to Qatar and late in the year.
I'm going to take in August what kind of how flat production going forward, we are fully operational and up on.
On a purely timing there's two things.
We the FPA, so we actually offloaded and take it to.
Storage tanks. So those continue to take place, but are lifting was just happened to be a few days after that.
The second quarter finished so we have actually lifting that Italy at July , which Which'll youll see kind of coming through in the <unk> results that we expect to see.
Steady production from our base heroes operations in the East area, there and as will mentioned before Terra Nova and continues to be the harbor site.
Just finishing some maintenance that <unk>.
I love it to go back offshore.
Collectively supporting the operator, I'm, gaining a lot of confidence to be able to.
Your line of sight to that going offshore and then establishing safe production from the Terra Nova asset as well later later the remainder of this year beginning of next year. So.
I think Neil just.
To expand on that a little bit as we see.
West White rose, having a good clean run through the rest of the year I think we've got a line of sight now on Terra Nova to potential production before the end of the year, although we're not calling anything into our.
Our forecast and we continue to make really good progress on Westway rose.
Through the quarter as well, we did achieve a couple of major milestones there, but maybe drew you might want to talk a little bit about the other offshore business in Asia, and where we are with that.
Yes sure thing John So.
As you would have seen in the news release, and then to John's comments. This morning, we had an unplanned event in China and we.
We dealt with that in April and May and the teams did an extraordinary job getting that back online as you guys may recall, we had a very strong first quarter.
And the demand for gas in our production was actually over kind of our budget at the time and happy to say that that now continues now that we're back up and fully operational in June .
So as we see the back half of this year, we expect to have still strong demand for our production in the Asia Pacific business and happy to report that things are running very well and we are still trending on the high end of our guidance relative to what we thought the demand was going to be.
Thank you that's great color and the follow up is just on the pathways project John its hard for us.
Often to get visibility on where we are in those negotiations, but I guess the working assumption for a lot of investors is that it gets that <unk> next year just any of your your thoughts on timing and what are the gating factors to get this thing to death.
Sure I am actually going to turn that question over to Ron <unk> for Aerie Rona is not usually our she is usually on the road.
Speaking of the virtues of our industry, but Ron is here with us today and she is knee deep in this and you've probably got the most up to date and relevant information on this rule, yes, Neil I mean I can tell you. We are still full steam ahead with with the pathways work all six of our companies, but as well the federal and now the provincial government.
There was kind of a bit of a <unk>.
Waiting period, when when the Alberta government within the election campaigning but.
You would have heard that there has been in bilateral talks announced between the fads and the Alberta government. So thats all positive.
And the pathways companies are right. There we're meeting every week with our government counterparts to talk about how we progressed the policy and the physical frameworks that are needed to push forward with the pathways foundational project, which is the 400 plus kilometer <unk> pipeline in the hub, but there is also there is still.
70 other technologies at the pathways companies are working on that we'll progress towards our net zero 2050 target, but I think we are.
So pleased with the amount of attention that the federal and the provincial governments are putting towards this.
I would say that it's unprecedented level of attention and Ottawa with multiple departments working together theyre, taking this really seriously and the governments understand how important the Ccs project against for not just for our sector, but for the entire country. So I remain very optimistic that we're going to get going.
On this.
We've been really clear the next big spend would be part of the pathway as companies would be the purchase of pipeline for that too.
Project, and so governments understand that and they understand that they need to to clarify things like the investment tax credit and give us more details on that in things such as contracts for difference that they've already announced but but I'm very positive. This is still progressing at the right pace.
Thank you so much.
Great. Thanks, Neil.
Thank you. The next question comes from mono.
TD Securities. Please go ahead.
Thanks, and good morning, everyone, maybe I'll just follow up on Neil's question with a higher level of government related question as well like what do you think of this week.
Government announcement related to the potential phasing out of what they are calling inefficient subsidies I know, it's pretty fresh but when do you think we'll have a better sense of what that means in practical terms and is it fair to say that ongoing negotiations on <unk> incentives.
A separate conversation.
Yes.
Menno, it's John <unk>.
I don't know how they name these pieces of legislation.
End up positioning them, but if it is what it what it purports to be it probably should be a fairly short piece of legislation.
One of the things I would say is I'm not really aware of any subsidies that are direct and unique.
To the oil and gas industry I've been in this industry for a lot of years and many of those years have been spent in finance.
And I, certainly remember writing a lot of checks to the provincial and federal governments don't remember receiving a lot of checks.
In return.
A couple of things I would say is.
In 2022, we spent almost $4 $5 billion on royalties and taxes.
And that is.
That exceeds the amount of money, we spent in capital exceeds the amount of money.
We returned to shareholders that is our single largest.
<unk> expense and we expect that number to be even higher in 2023. So.
We're kind of like you were waiting to hear what this is all about we certainly hear political rhetoric with regard to oil and gas subsidies were just really not sure what it means because again, we're not really aware of any oil and gas subsidies for the industry.
Okay, yes, thanks for that John and maybe I'll just follow up with a question on shareholder capital returns.
You've made it clear on many occasions that.
The relative economics of buybacks are tested that mid cycle $60 wty, but today, we're sitting at about $80 stock is often slow. So my question is how are you thinking about buybacks versus <unk>.
Variable dividends and I'm asking that with the understanding that we've only seen one variable dividends since the return framework was formalized.
Yes.
Nothing changes in our framework Menno, we screen all our capital at 45, we screen our buybacks at 60, we still think those are sort of the right low cycle in mid cycle.
Prices I think I'm looking at Cam and he is nodding his head I'm looking at Jeff and he is nodding his head, but I think with where our share price is today, we're still more inclined.
To return capital to shareholders in the form of buybacks and that the share price today.
In our view doesn't reflect the net asset value. It at $60. So I think youre going to continue to see that until <unk> continued to see shareholder returns come back in the form of largely buybacks until we get there, but we've been pretty clear on the framework. If we get to the point, where we think it's in excess of mid cycle pricing or the discount.
The value of the shares are in excess of mid cycle pricing I think youll see a greater majority.
Of the returns come back in the form of special dividends, but Cam I don't know if you have anything else to add on that.
Hey, Matt its Kevin the only thing maybe I would just add is keep in mind, we're going to keep continuing to be disciplined. So 50% is going to go back to shareholders until we get to that debt target of $4 billion and as John said I think right now the bias continues to be towards buybacks.
I think the other thing you should be thinking about as we obviously did the warrant transaction back in their middle of June .
And we've made it clear that thats something were going to manage inside of that framework through the balance of this year and sort of at the latest next January when that payment has to be made by so.
The focus hasnt changed the discipline hasnt changed around the framework and we will.
We'll continue on the path we're on.
I appreciate the color I'll turn it back.
Thanks Menno.
Thank you. The next question comes from John Rajala at J P. Morgan. Please go ahead.
Hi, good morning, Thanks for taking my question.
So first one is on refining you've talked about the run rates.
Wondering on profitability and cash flows on the prior call you guided to Toledo and superior being free cash flow positive by July .
Is that the case now or is the FCC impacting the ability to generate positive cash flows.
Hey, John .
It's Keith Yeah. Good question I would say Toledo has been up and running since early June .
<unk> products and selling products. So we're highly confident on kind of cash flows there superior has been able to sell a cell products as well, but until we actually get to full gasoline make coming out of the FCC.
It's going to be.
Kind of right at that kind of cash flow breakeven.
I would say, we're seeing that trend of improvement, though through the quarter I think the other thing too to look at though is kind of where cracks had been and I think John alluded to it in one of his answers they've kind of been.
Pretty wide and then very narrow and and more recently have come back to.
Matching the various regions around the U S. So cracks were pretty supportive now.
Differentials have tightened in so obviously, the refiners that run heavy crude lose a little bit of that crude advanced but anything.
Anything that we lose in our downstream, we actually getting our upstream so.
I think in general it's setting up for.
Great third quarter like we anticipated and as we've talked about the last unit to come up with superior, which is a relatively small unit in the Grand scheme of things.
Okay. Thank you and then.
In terms of the wildfire impacts on the upstream.
No. It's a very fluid situation generally and it's tough for us who aren't on the ground to really understand the impact.
How confident are you that youre on the other side of the major impacts in that five to seven barrels per day 1000 barrels per day offline Couldnt go the other way growing scope. There just just trying to understand the risk that the fire as close as we stand today.
Yeah, Hey, John It's drew.
Yes, great question as you alluded to it was a very wild quarter no pun intended.
I think one of the things I would start with is that.
Our teams did an outstanding job considering that we actually had the town of Ed and then a lot of our staff there actually evacuated three times two by wildfires and once by an actual flood to be honest so.
Just to give you a little perspective on kind of the five to seven and that's still left to be brought on.
The <unk> fast majority of that almost all of it is still up on a Rainbow Lake asset just on the on there just inside the BC border and our bivouac dry gas play and the reason that we can't bring that back on yet is we just are waiting for some more secondary power lines to still be reactivated by third party providers. There are some wildfires in northeast BC.
Nothing around our actual assets as you can imagine.
With the amount of impact we had that fuel is now all gone and so the risk to your question about could it go the other way there's not a lot left to kind of burn and reactivate that risk for us.
Thankfully, we've had very little almost no direct.
Asset damage or concerned around.
The ability to safely produce so the remaining that's offline now is still just waiting for power and its third party kind of activation from power Poles and whatnot and it's it's on a dry gas play.
The remainder or just some other remote sites more in central Alberta that is waiting for the same thing is just some power. So I think the risk has been reduced significantly.
And it's just the realities of how forest fires burn and where they've now been burnt it's very low risk that something in those areas can be reactivated the fuels has been used.
Thank you.
Thanks, John .
Thank you. The next question comes from Manav Gupta at UBS. Please go ahead.
Hey, guys I just quickly wanted to touch base on light Cardinal volume.
Looks like this was one of the stronger quarters, if not the strongest since you got these assets. So help us understand some of the changes that you have made that this asset because allowing you to get a higher volume versus when you acquired them.
Hi, Manav, it's noted here.
Yeah, we've talked about it in the previous quarter as well I mean fundamentally we will be applying our sub surface technologies and methodologies from our Foster Creek, Christina Lake assets over to Lloyd thermal assets.
Assets are really really good assets and we have we have lots of opportunities around the central processing facilities. So what we have been doing is basically drilling longer wells that have what we call higher conformance, so that should produce a higher rate.
Also been.
Utilizing our.
Zero based design facilities, and using submersible pumps to actually increase the rate of production.
So well basically the philosophy is trying to fill all of our plants that we have and keep them fool as we kind of go forward. So it's been very successful.
We continue to build our build out new pods to sustain this level of production and at the same time, we can take advantage of opportunities as we understand them. So.
Production currently is very very strong.
That's the plan kind of going forward.
Perfect and if I could just speak a brain around I mean, you had some downtime in <unk>. Some of your peers that downtime in <unk> now all you guys are ramping up so last last few months that a portion of <unk> zero, but like what's the outlook for near term Bushman apportionment until you expect them to rise and then eventually what are you hearing on the <unk>.
It makes expanded pipeline startup thank you.
Emily it's Keith.
You're bang on apportionment on Enbridge has been zero for the past several months, which.
I was just pointing to the fact that.
Egress out of the country is matching production I think you are you're also bang on that some of the upstream has been taking turnaround through this period.
With regards to tier mix.
It's scheduled to come on in Q1 2024.
Obviously, there is pre startup activities in line fill that happens into the fourth quarter of this year.
With all of that kind of happening we actually anticipate for the first time in a long time that it would be sufficient egress.
From the province, even as we head into the into the winter months, where all of the upstream producers are back on and Youre at that higher concentration of diluent in your bitumen blend.
There probably will be a little bit of widening on that just as the system normalizes, but.
I think we're looking at tighter deaths.
With <unk> coming on that should sustain itself for for a longer period of time.
Thank you so much for the detailed responses.
Great. Thanks Manav.
Thank you. The next question comes from Harry Mateer.
With Barclays. Please go ahead.
Thank you good morning.
I guess first circling back on the debt reduction question at the start of the call. Your 7 billion gross debt landing zone implies about wanted to explain a debt reduction.
Rates markets have been tough to call here, but for the time being you've got no shortage of options on a curve that are below par so yes.
How are you thinking about prioritizing is the maturity ladder coupon ability to buyback below par CAD versus USD, and then open market versus doing something a little bit more accelerated like a tender or to get it done more quickly.
Yes, so it's Jeff here and the answer is yes to all of it. So we will be thoughts on that is we'll look at.
Relative interest cost, where we see.
You'd say.
Discounts relative to premiums and in the end tower structure, and so and then as far as execution goes is.
Again, it will be yes, we will look at both.
What does it look like on a tender and open market purchases. So we'll be we'll spread it around and all of that and take a balanced approach in all of it Harry we don't mean to be coy on that but obviously, we can't answer that question literally.
Yes.
Got it.
Second one is.
Going back to something that came up last year a couple of times on calls is just around your JV and your strategy going forward and at the time you indicated.
And you've taken some steps towards us on some of your assets, but the strategy is to be an operator, and a 100% owner of your refineries where possible.
Just curious is that still the case is that still the vision and.
Are there any discussions you've had on that front that might have advanced beyond a preliminary stage.
Yes Harry.
One of the things we've been successful and is unwinding. The JV as we've had we've had with BP and we purchased the 50% of the interest in Sunrise that we didn't own in.
More recently, we bought 50% of <unk>.
<unk> assumed operation operator ship with that refinery.
The way we think about.
The refineries, where we have an ownership interest as those are core assets for us and core assets you want to have both operating and strategic control. We think that is that is important. So we have always signaled to the market, we have a desire to own and operate.
Those assets that we have an interest in that we believe are core to the future of this company. So nothing has really changed there.
Certainly.
No update on any kind of discussions that may or may not be happening with.
In and around that JV, where we're happy to own those assets in the form that they are in.
Understanding the longer term.
Want to own and operate the assets that we would consider corridor portfolio.
Okay. Thanks very much.
Thank you, ladies and gentlemen, Anthony Minder should you have any questions. Please press star one.
Next question comes from Dennis Fong CIBC World markets. Please go ahead.
Hi, Dan good morning.
Hey, Thanks for taking my follow up just to on the one on the upstream side I know you provided a brief update on narrows Lake.
Christina Lake connected and development can you provide a little bit more detail in terms of what the next steps happened to be I know there is some capex. This year, but also maybe an update on timing and how we could see that kind of ramp up through time.
Yes, Hi noted Ranjit here.
We continue to make good progress.
Context is obviously.
<unk> Lake is an extension from our Christina Lake operations.
17 kilometer pipeline that takes us up to another very rich area for development.
The pipelines.
Two thirds kind of complete.
We we expect to actually be starting to steam up our first pods, which we've actually started to drill already in early 2025. So by about midyear 2025, we should expect to see impact production coming from that asset area and the first the first.
Phase of development or for rich.
Rich pods up in that area.
Tie back to Christina Lake.
That really reflects some of.
Our long term business plan and then we'll start building out from there into the second and third phase of drilling opportunities.
So it's all on track.
It's going to.
Very exciting opportunity.
The rock there is very is very clean and very sick.
So, it's a great opportunity and quite innovative rather than building a central processing facility are way up at the site <unk> been able to tie it back to an existing plant.
It's a very accretive approach.
Great Great. Thanks, and my next question is just.
More on carbon capture and <unk> emission reduction plans.
The list of projects for Ccs you have both the Lloyd against the upgrader as well as Christina Lake Phase one.
I was hoping to get a little bit of an update on the progress potentially and in identifying opportunities at this kind of phase one Christina Lake a carbon capture project and then secondarily just put the Lloyd upgrader carbon capture is that contingent on the pathway is.
<unk> project moving forward or are there other opportunities too.
Store and sequester.
Carbon thats captured from that facility.
Yeah.
Maybe I'll, maybe I'll take the second part first Dennis it's Keith and just around the Lloyd Upgrader, and then I can hand, it over to someone else to talk about Christina Lake Phase one.
But the interesting thing about the Lloyd Upgrader is we have a steam methane reformer there relatively high concentration carbon.
Dioxide source.
Relatively straightforward to capture.
And the other interesting part is obviously we have a.
A very large resource and a close proximity to the upgrader that we can actually used for enhanced oil recovery.
So I would say, it's not dependent on pathways, we can build the infrastructure.
And have an economic project.
At that asset so hence why we're we're advancing today through our standard project development process.
And looking at ways to integrate that with our upstream business for for enhanced oil recovery.
And maybe I'll hand, it off for okay.
Nora here since this at Christina Lake question.
As we've kind of explained in a public deal.
Documents.
First phase of carbon capture is at Christina Lake.
There is the ability to have a number of phases, there and it's core to our commitment in <unk> the <unk>.
<unk> will run adjacent Lee to our operations. There. So we've actually started preliminary engineering to understand the size and scale of this complex.
Quickly, which is which is.
By at scale, almost going to our <unk> first.
But again, it's in the plan.
<unk> with a pathway as commitments and we're just continuing to derisk it and understand how we would operate something like this going forward.
And Dennis it Rona and just to add onto that just to make it even more confusing.
While everything that Keith was explaining and Orient is absolutely correct. When you look at the numbers overall, when you're talking about pathways target of 22 Mega tons by 2030 of our reduction Lloyd Upgrader is part of that because the federal government includes the light upgrader and its oil sands emissions numbers.
Okay perfect. Thank you all for context, I'll turn it back to us.
Great. Thanks, Dennis.
Thank you at this time.
Any members of media would like to ask a question. Please press star one.
Our next question from Christopher <unk> at Calgary Herald. Please go ahead.
Good morning, Hi. This is a question hi, John This is a question about differentials what impact.
What impact of the narrow differentials had any in the first half, but maybe more importantly, where do you see heavy and light differentials going in the second half of this year.
Yes, maybe I'll take the first piece of this and then I'll turn it over to Keith because he lives and breathes. This.
Every day, but we saw a real narrowing of the differential from the first quarter to the second quarter.
And for this company.
It's more beneficial for us to have a narrow differential than a wider differential.
With the processing assets that we've got and the takeaway capacity that we have inside the company we can mitigate.
Roughly 75% of the location differential and about half of our heavy oil differential.
So having those narrow differential certainly helps us and you saw that in the second quarter, where we go from here.
<unk> got some views on just turn it over to him.
Chris.
Look at this in two parts kind of in Western Canada, and also in the Gulf Coast, where heavy differentials kind of gets set.
On a global basis, we're seeing pretty good strength in the differential driven mostly by kind of the heavy refinery utilization and some additional refineries coming on in Asia that consume heavy barrels that coupled with the OPEC cuts being predominantly heavy barrels and then the U S strategic petroleum.
Try and reserve starting to refill all drives a pretty healthy demand for four.
Western Canadian heavy production.
And kind of Western Canada, with Tms forecasted to come online in Q1 and start line filling in that fourth quarter, and we actually see an opportunity for differentials in Alberta to stay relatively tight as well so setting up for a pretty good fall winter and into next year.
And just to follow up on something that you referenced earlier, John I wanted to ask you about what impact does the talk from the federal government of phasing of these sorts of fuel subsidies.
And their plan for NIM coming emission cap have on the pathways projects moving forward does it have any impact at all.
The second part of your question I don't believe it does have any impact on pathways.
First part of your question I think is relatively clear.
I really don't know what they mean by subsidies to the oil and gas industry.
And generally not aware.
Of any subsidies that are direct to the oil and gas industry that they may or may not be speaking of so like you we're waiting for more detail on this.
Similar to waiting for more detail on the emissions cap and how thats going to play in but we don't necessarily see.
How this all comes together quite today.
Thank you.
Thank you.
Thank you. The next question comes from Alex Barron.
Mr. Lin. Please go ahead.
Afternoon morning, where you are.
I was wondering if you guys could provide any comment or color on the earning assets that are on the market right now.
I would imagine you're pretty familiar with and you may have answered part of this earlier with some of the comment.
Got that but is there any appetite for M&A at all right now.
I think Alex we are really focused on staying close to our knitting right. Now this organization has been through a lot of change and growth.
Over the past number of years and as I mentioned in some of my comments, we've really got the assets configured and built in a way that we are really happy with.
Hum.
Where we are today, so I think for us over the next few quarters, its really about demonstrating the earnings.
And cash flow capabilities these assets running them in a safe and reliable condition and demonstrating the profitability of what we've built so that is priority one and job one.
In terms of our Irving.
We're aware of that.
Just like you have the.
Announcements as they put out.
But I haven't worked there in almost 10 years so.
We don't have any unique insight into that but we as a company we will stick with our netting for stick to our knitting over the short to medium term.
Okay. Thanks for that.
My follow up I'm wondering if you can provide any color on the asset life extension for the tea Rose and specifically at the shipyard has been paid for that and where that stands parallel to west White rose.
Throughout two I'll turn that over to Nora <unk> spend the one who has been leading that effort on our side.
Hi, Jeff.
<unk> here.
Yes, just to confirm.
The asset life extension is a statutory requirement to.
In simple terms recertify.
<unk> and make sure it can stay out.
For the duration of the period, we wish to develop the west White Rose project.
It's obviously commercial.
We're kind of doing so I'm not in a position to talk about.
Details of the supply chain, but the principle is we will take the FPA. So there's two pieces of work offshore work.
Subsea components that are that are offshore.
In the <unk> area. So again not uses local sub.
Subsea expertise within the province, and we will be taking the FPA. So.
Early next year to an appropriate.
But as I said, we're just not in a position to to disclose that until we have completed all of our commercial processes.
Okay. Thanks, everyone.
Great. Thanks, Alex.
Thank you and the next question comes from Robert Tuttle at Bloomberg News. Please go ahead.
Yes, hi, good morning, Thanks, I just wanted to get your insight on where you are.
The polls on the Trans mountain have come out.
There's been a lot of.
Happiness, probably some producers are opposed hauls as being too expensive.
Wondering how this will play out in terms of.
Oil exports.
How competitive will this pipeline be when it comes to reaching Asia. When we all end up.
So going down to the U S West coast, how competitive it will be to reach say, China versus going down to the Gulf coast.
Higher inside.
Hey, Robert Suffice it to say, obviously, the commercial arrangements are sensitive but in general there is.
Components of our toll structure that are fixed components.
Components that can fluctuate with increased costs in and you would have seen a few letters going into the CER, just making sure the allocation of those costs was done done appropriately. So that's kind of the work that youre seeing.
That Avenue.
From a competitiveness. This is one of the the first pipelines that have been built in and providing egress out of Canada and a long period of time first one that kind of goes to the west coast and doesn't go through the U S. So we think it will provide a very attractive alternative for Canadian producers to <unk>.
Move their barrels to market in a different fashion and potentially even access different markets. So.
Our view would be that this pipeline went up and running we will run full and provide provide pretty good economics, not only to the producers but to the to the country to move those barrels.
Excess barrels outside of Canada.
And I'd.
I'd, just like to kind of pile on with what Keith is saying the tolls get a lot of attention right now and justifiably. So.
But we will work through that.
With <unk>, but the reality is this is an absolutely necessary piece of infrastructure not only for synovus, but also for the oil and gas industry in Canada. At large this is going to take another 590000 barrels of Canadian oil to market.
At a time when the world is really needing more energy and the demand for oil and gas is growing in those barrels should come from Canada.
Beyond the tools you do have to realize as well that this is an asset that's going to be in service for decades, it's going to provide jobs, it's going to provide tax dollars is going to provide royalties.
For Canadians going forward. So we think this is a very good news story for Canada.
Understanding that there are cost overruns and implications for tools in the short term but.
Something that is very very important for this country.
Thanks I'm wondering.
The reality is there'll be more capacity than there will be production at least initially I mean, which lines are going to lose the spot.
Come off Enbridge, if you're if you've got <unk> hole.
Come off average or or or will <unk> not actually run for at least some of those spot barrels will go down that road.
Where do you think that will happen.
Well.
One of the things Robert I would tell you is this industry is a great habit of expanding to fill pipeline capacity.
Talked about the 590000 barrels a day of incremental takeaway capacity.
This pipeline will be able to take away that that will be filled I think in relatively short order over the coming years. The reality is this this industry has grown by almost 800000 barrels a day since 2015.
And those kind of infrastructure projects that increase our ability to get to market.
Tend to get filled fairly quickly with the amount of resource we have in Canada. So youre quite right there'll be some short term rebalancing.
But longer term, we will fill this pipeline and I think probably sooner than most people think.
Thank you.
Thank you there are no further questions at this time I will now turn the call back over to Mr. Mckenzie for closing comments.
Great well listen thanks, everybody for joining us today, we always appreciate the interest in this company and the questions that come with it.
So I would just end this call by saying I hope everybody has a great day and stay safe.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your line.