Q3 2024 Cenovus Energy Inc Earnings Call
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Our third quarter results highlight the strength of our operations. Our continued focus on execution as well as our commitment to shareholder returns and to maintaining our strong balance sheet.
Our upstream business continued to deliver strong operating results with production of approximately 771000 Boe per day, and an operating margin of $2 7 billion.
Even with successful completion of the planned maintenance in both the off shortly one platform and onshore gas plant.
Operating margin from this business was $242 million and we expect to see benefit from strong regional gas demand going forward.
In the Atlantic region, we've completed the asset life extension work on the <unk> DSO at dry dock in Belfast. The vessel is now returning to the field with production from the existing White rose field expected to resume by year end.
Completing this work will extend the life of the vessel to 2038 and is a major milestone for the Atlantic business and a very important step in the delivery of the west White Rose project the.
The entire wild West White Rose project now stands at 85% complete and remains on track for first oil in 2026.
Turning to Canadian refining or <unk>, or upgrader, and refinery ranted combined utilization of 92% for the quarter utilization was impacted by the turnaround activity at the upgrader that was completed in early July.
Since the completion of the turnaround both the upgrader and the refinery have run at or near full rates.
In the U S refining segment crude utilization was 89% in the quarter. Our crude throughput was 544000 barrels per day and was impacted by the major turnaround at the Lima refinery.
The turnaround started in September and was successfully completed on schedule in late October.
The operating margin shortfall of $383 million in the quarter included inventory timing losses of about $210 million and about $100 million of turnaround expenses and related expense projects executed during the alignment turnaround.
And both alignment turnaround in the Lloyd Upgrader turnaround completed early this year, we made targeted investments to address historically historical reliability issues, we've addressed coker integrity issues at both sites and completed equipment renewal work on our fluid catalytic cracker in Lima position.
Both sites for improved operating performance and profitability.
Our ability to capture available margin in the U S. Refining segment was also impacted by the alignment turnaround where the coker and fluid catalytic cracker units were taken offline in September as part of the turnaround scope.
Now with this plan maintenance at Lima behind US all of our refineries are online we are firmly committed and focused on improving the competitiveness of our U S refining business by improving asset reliability, lowering our cost structure and capturing more value from the commercial opportunities across.
<unk> the network.
This work is progressing at pace with an absolute sense of urgency.
I'd now like to highlight our corporate and financial performance.
We generated $2 4 billion and operating margin in the third quarter, approximately $2 billion of adjusted funds flow and about $600 million of free funds flow.
Capital investment in the third quarter was $1 3 billion as planned spending on our growth and optimization project has ramped up in the second half of the year.
Our annual guidance for capital spending.
$4 $5 5 billion remains unchanged.
In the month of July we achieved a net debt target of $4 billion and at the end of the third quarter net debt was approximately $4 2 billion.
We are aiming to return 100% of our excess free funds flow to shareholders over time, while continuing to Stuart's net debt of about $4 billion.
Through our base dividend and share buyback program. We returned approximately $1 1 billion of cash to our shareholders in the quarter far exceeding 100% of our excess free funds flow shareholders benefited from the excess free funds flow as well as the working capital release of approximately $600 million along.
Speaker Change: Boeing has to return more cash to shareholders than anticipated.
In closing, we delivered strong operational results through a heavy maintenance period in the third quarter and continued to make meaningful progress on our growth projects across the portfolio.
With our major projects behind US, we expect to see increased upstream production and increased reliability from our downstream in the fourth quarter.
Speaker Change: We remain focused on maintaining strong operational performance in the upstream improving the competitiveness of our downstream and delivering on our growth projects. We have a clear view and a focus of the work in front of us and we will continue to progress both our short and long term goals for synovus.
And with that we're happy to take your questions.
Thank you if you are on the phone and wish to ask a question. Please press star one.
First question is Dennis Fong from CIBC World markets. Please go ahead.
Hi, good morning, and thanks for taking my question.
The first one is just related.
Dennis Fong: I guess I appreciate your comments just around the work that youre doing on the on the downstream side.
I understand again kind of through the Investor day and through conference calls Keith.
Pieces, maybe highlighted some bad actors and frankly, what you're focusing on and understanding that you are you have already installed <unk> management systems as well as.
Speaker Change: Personnel at your refineries, but would you mind highlighting some of the specific we'll call it.
Items that you're changing fixing replacing.
I know between now and into next year that you believe can help drive stronger utilization and help kind of drive more consistent operational uptime from U S manufacturing business.
Speaker Change: Yes, Dennis maybe I'll take the first part of that question and Keith May want to chime in.
We've really attacked the downstream on a lot of different fronts. We've made a lot of changes on personnel.
We've been doggedly going after.
Our reliability issues, both in Canada, and the U S.
I think we're making reasonable progress I think one of the things you'll notice this quarter.
Well the throughput numbers are up the profitability is download and our primary refining units, we're making good progress what we didn't see in the second quarter or third quarter.
Was the same level of reliability and some of our secondary units as we worked through some of these major maintenance outages that we had in Lima, and we'd had in wide manage through this year, we can get at some of the reliability issues inside some of those units that require full plant shutdowns.
But coming out of out of the turnaround and wide Minister we've seen excellent reliability and Lloyd mentioned and we expect to see the same.
Speaker Change: Coming on to the outage in Lima.
And we continue to make good progress, but we're attacking this reliability level, a commercial level and a cost level.
Speaker Change: Key thing for us is to get the reliability to a place where we can execute on our plans and although we made progress we know we're not there yet.
Thank you. The next question is Greg Pardy from RBC capital markets. Please go ahead.
Yes, thanks, good morning, and thanks for the thanks for the rundown John.
Just I guess a couple of things.
Greg Pardy: First one is probably just a basic one but on the cap structure. We are getting some questions right now just on.
Speaker Change: On the press, how they kind of fit in your cap structure is this something you'd look at.
Speaker Change: Redeeming at some point in time I know, it's not in the net debt number.
Speaker Change: Curious how that kind of thinking about those right now.
So that kind of thing.
Speaker Change: Yeah.
Hey, Greg it's Cam.
So a couple of things I would just say on the press I think first off you're right in your characterization of it.
Speaker Change: They are not included as part of our net debt calculation, because we typically just a gross debt plus cash.
We've got a number of I think five series of perhaps outstanding first of which.
Is there a rate reset on December 31 of this year for $250 million. So I think when you think of all of them inclusive of the one in December here, we will look at various aspects of whether it makes sense to hold to continue to extend those or pay the moat and market conditions will really dictate whether we do.
That or not but I think at the end of the day, we're going to make the best decision for the company.
If we do decide to take those out.
There is a 30 day notice period.
Required on any of the Prefs.
They are typically taken out at par. So we've got we've got some time to think about whether we do that but we'll do what's best for the organization in terms of either extending those or.
Acquiring them outright and retiring.
Okay. Okay. Thanks, thanks, very much on that.
Speaker Change: Maybe just.
Speaker Change: To take the question.
Speaker Change: Hum.
And the last one sorry, I'm getting an echo online here, that's what I'm central banks combined related but.
When it comes to the refining.
Speaker Change: Initially we're thinking was.
Speaker Change: The inclusion of the downstream that Dampens your cash flow volatility.
That's just a more stable business and so forth, but obviously with what we've seen particularly with the U S is that it's actually worked in the other direction, that's it's probably amplified volatility.
Some of that is obviously the inventory movements.
I'm, just curious as to whether you're thinking internally around weather.
Whether it's presentation or how you present, it or how you kind of think about the business. I know you gave up hedging in the downstream sometime ago, how does that business segment, even say when it's running operationally as to how you want it how does it start to become a contributor to your valuation as opposed to a detractor.
Speaker Change: Yeah, I think Greg I'll start again, and if if others want to chime in they can remember that our refineries that we have.
Serve a couple of different purposes for the company. The refineries that we own are pipeline connected to western Canada, and they give us egress out of Western Canada. Our wholly owned refineries gives us about 300000 barrels a day.
<unk> through Lloyd administered Toledo.
Lima and superior that's extremely important to this company versus backing up those barrels.
Speaker Change: Inside.
Hardesty and selling it at the prevailing differential of the day.
Speaker Change: Second thing they do is.
They give us insulation against the heavy oil differential and convert that heavy oil into transportation products.
That gives us some margin over and above on heavy oil prices in pad two.
Those two things are incredibly important to this company and it's incredibly important to the integrated value chain.
So what we've always said is we will capture more of the value chain, having the integration with the refineries.
Speaker Change: There will always be volatility in the U S refining business, we're always going to be subject to.
Differentials in widening in <unk>.
Speaker Change: Contracting of cracks.
Crack spreads.
The real key to making it predictable, which I think is at the root of your question was getting our Cadiz reliability issues. If we can run with reliability that we think we can.
Going to see much.
Speaker Change: More predictable cat crackers crack capture.
Speaker Change: And you're also going to see lower costs. So getting after the reliability is when we've really been focusing on to demonstrate the value of the value change that we've built but these refineries are incredibly important in this business model and nothing can be higher priority than getting the reliability to a place where you can see that value.
Understood. Thanks, a lot guys.
Yeah. Thanks, Craig.
Speaker Change: Thank you. The next question is John <unk> from JP Morgan. Please go ahead.
Hi, good morning, Thanks for taking my question.
John: So my first question is on the sea Rose if you.
So just maybe a little more detail on.
John <unk>: The timing and some of the milestones between here and getting to startup by year end when.
Speaker Change: When do you expect it to actually be on site and then what are the steps to getting to startup premier and maybe any view on how production will ramp and when it could get.
Speaker Change: Hey, John keep there.
Speaker Change: Thanks for the question pretty significant milestone for us, finishing the life extension project and in Ireland.
Currently the C Roses on route to the site and we expect it to arrive in the next.
A couple of days.
Speaker Change: From there, it's really just reconnecting to the production system and that can take 30 to 45 days.
Kind of aligns to John indicating ramping up production.
Speaker Change: The back end of this year and into the new year.
Speaker Change: Two things, obviously with the sea Ray with life extension, one is going to be the 2025 production that comes with it.
But as importantly is the fact that we now have the vessel ready for the West White Rose project, which.
Basically enables this this vessel to produce and received production for an additional 2014 to 15 years from today, so pretty excited about having this.
Speaker Change: This completed its another big checkmark.
Milestone on the overall west White Rose project as well as.
Anticipating some production in 2025, which will outline as we come out with our budget here in the back end of this year.
Speaker Change: Great. Thanks, Keith and then.
And my follow up is on Christina Lake and.
Greg Pardy: Just operationally there kind of whats going right. It seems like the turnaround came back a little bit early.
Greg Pardy: And you also had really strong production I think going into the turnaround. So maybe just any commentary on kind of the early completion of the turnaround and just generally.
What's going right with Christina Lake operations.
Yes, John Thanks for the question really really good performance from the team on two fronts.
And John's opening remarks, he talked about the overall turnaround being done eight days ahead of.
What we had planned which is a pretty significant achievement, but also the team was able to optimize through the turnaround and bring production on earlier through one of the phases that was able to complete earlier than than we originally planned and we were able to optimize production through that phase.
Greg Pardy: To get a lot of volume back in a time period. The other key thing for us.
Greg Pardy: In that turnaround was the tie in to the to the narrow with like a pipeline. So we were able to complete that tie in which sets us up for that growth project, which we would anticipate.
Starting to steam in the first half of 2025 and starting to see production in mid 2025. So a couple of really big milestones through the Christina Lake.
Speaker Change: As you indicated the performance at that asset continues to two.
It will perform and to the upside which is obviously good news.
Speaker Change: Thank you.
Thank you. The next question is and then I'll hold off from TD Securities. Please go ahead.
Thanks, and good morning, everyone I'll start with a high level question on securing new takeaway capacity how much of a priority is that given your growth aspirations and maybe we can also get a refresh on where you are currently focusing your efforts, including any thoughts on improved refined products outside of.
Speaker Change: Thank you.
Speaker Change: Yes.
I'll start that and I know, Jeff or is going to want to chime in on this.
As it relates to heavy oil production Menno, we produce somewhere around 800 to 850000 barrels a day of blend.
And today, we've got takeaway capacity for about 600000 barrels a day and that would include the amount that we process.
Speaker Change: In the province of Alberta, we're reasonably happy.
With that number with the expansion projects, we've got that 800 should grow to something north of 900.
So about two thirds of our production is ability to get outside the province for processed in the province.
With the existing egress, we've got you'll also remember that we have rail capacity.
Speaker Change: <unk> will always have an option to move up to two unit trains a day.
<unk> capacity should we see.
Differentials widen and we're always watching the market.
Terms of additional egress that may come available for us, but suffice it to say, we're reasonably happy being somewhere between.
75, and <unk>, 66% covered.
With egress with the idea that we have the ability.
Our option to move another 120 by rail.
In terms of pad to I'll.
I'll, let Jeff talk about that because there have been some developments around Broadway, but we are looking to push product beyond pad too we've talked openly about.
Speaker Change: The need to get into pad, one and potentially Canada as well, but expanding our.
Speaker Change: Area for product placement beyond the immediate Ohio Valley has always been a priority for us as well.
Thanks, John and then I'll ask Jeff Murray I just.
John indicated you've been looking at ways to move volume from our refined products out of our existing Orbitz generally heading east.
Broadway three is a project we've worked on with partner and recently signed into a commitment there, which we anticipate will turn into volume flowing east.
By by late next year, and that's going to work both for us and for other industry partners in the area as well. We also have other opportunities, which we are continuing to progress looking both north and south possibly with refined products on the water.
Speaker Change: <unk> opportunity.
Facility to be able to load barges and products out of Europe, as well and I think that's going to be pretty front and center for us through the balance next year.
Thanks for that guys.
Thank you next question is Neil Mehta from Goldman Sachs. Please.
Speaker Change: Please go ahead.
Neil Mehta: Good morning, John and team first question is just on early flavor for 2025 cap at all recognizing your guess again through the heart of West White Rose here and so the capital improvement should be in the viewfinder, but just your perspective on.
Neil Mehta: How how twenty-five capital to check out.
Jon: Yes, Neil it's Jon and thanks for the question nothing has really changed on capital expectations going into 2025.
We laid out our capital program, a five year program at our Investor Day earlier, this year, where we talked about the growth projects that we've got.
Speaker Change: Under development.
Now being largely completed in 2025, and I think we steered you towards four $5 billion to $5 billion for 2025 is being a good number.
Speaker Change: We'll come out with a formal budget in December but that's a good number to put into your models for 2025.
Speaker Change: And then we see our capital ramp down following that with the growth projects.
Speaker Change: Coming.
Coming on to production.
Yeah, that's kind of a follow up if you can talk about west White rose and you spend a little bit of time talking about offshore but that's.
Speaker Change: That's going to be such a big contributor to the uplift in free cash flows capital Rolls off and then that project contribute to cash flow.
Speaker Change: And a couple of years what are the biggest risks that you need to de risk as we go into next year and I'm thinking of the topside being part of it but just your perspective on a couple of those moving pieces.
Speaker Change: Yeah, I'll, let Keith answered that question would be you you're absolutely right. This is a project today is consuming $7 million to $800 million per year and Thats a good number for next year.
But then that quickly flip silver with production to generating.
Speaker Change: Free cash flow and immaterial quantities for this company in sort of mid cycle pricing, we anticipate cash flow from from the field being well in excess of $1 billion a year. So a huge inflection point from consuming something close to $1 billion, a year to producing something close to $1 billion a year.
But we should start seeing in the 2027 timeframe.
Keith maybe you can talk a little bit about where we are and the projects and some of the risks that you see bringing this sean from first oil.
Keith: Yeah. Thanks, Thanks, John.
Speaker Change: Really.
Keith: We look at this.
Keith: Several components and a couple of them were completed this.
This quarter, so pretty pretty excited about that we talked about the asset life extension work, finishing up in <unk>.
Ireland the vote is on its way back and what that does is make sure that that we have a peso that will last us for the next 14 to 15 years.
As we bring out west White rose production. The other thing that we we have completed in the quarter is our concrete gravity structure.
We're starting to flood the graving dock and our gents yeah.
In anticipation of towing that out.
And kind of the.
The second quarter of 2025, so really good progress on the gravity based structure.
Third component.
You alluded to it as our top sides, we need to be ready to be able to transport those up to the region.
In the second quarter of 2025 currently they are sitting around 95% mechanically complete in addition to that we've already commenced commissioning on the top side. So the construction work is nearing an end.
And we will be getting that ready for transport and see fastening in the first quarter of 2025, so things are progressing well there. The last two components are toeing, the top sides up and meeting with the gravity based structure and then commencing of drilling in the back end of 2025 for the production.
In 2026 so.
Excited about kind of the rate of change going from spending the 700 $800 million a year for the past.
Keith: Year end into 2025 producing.
<unk> free funds flow in 2026 and beyond.
Thanks, Keith Thanks, Tom.
Keith: Yeah.
Speaker Change: Thank you next question is Manav Gupta from UBS. Please go ahead.
Good morning, guys.
Wanted to ask you because this is a question we always get to include stops number Lisa.
First what's your break even without growth Capex in terms of portability price would allow you to pay a dividend.
The growth Capex, and then again, what's the Wpa price with the growth Capex and the reason I'm asking is my my hand to the second number with the growth Capex is around 50 or maybe slightly lower so even if crude is that 65, you should still be able to.
They've done gaslog shareholders through buybacks. So if you could give us some idea on those numbers.
Keith: Yeah.
Speaker Change: Yes, manav its cam here. So you are actually Directionally correct numbers you just quoted so if you look at.
How we look at our sustaining capital and our base dividend. We've typically have said, we really want to make sure that thats fully funded and a $45 <unk> environment and I would say that is absolutely. The case today. So when you look at our base dividend, which we would say it continues to have room for growth as you as you execute on the growth plan, Keith and John.
Talk to vote.
Speaker Change: Should be able to continue to show base dividend growth and maintain that sustaining capital in and around that three to $3 $5 billion range. When you do factoring the growth capital that we've got planned this year and talk you know at a high level directionally not four $5 billion to $5 billion in aggregate spend on an annual basis for 2020.
Four and 2025.
You do triangulate to around the sort of a low $50 <unk> price from a total breakeven point of view. So I think what's important there is we're continuing to manage our capital in a world that's significantly lower than today and so I think what that should point you towards is we.
Speaker Change: Want to be making minimal changes in stopping and starting these projects, which John Keith alluded to in the program. We have highlighted for you.
Speaker Change: Back at Investor day, there shouldn't be any material deviations from the projects that are part of that plan going into 2025.
I'll take my quick follow up with a little bit on the.
Speaker Change: Looking at drilling multi laterals in manville versus traditional levels and this could allow you to me it's like a heavy oil production on the conventional side can you talk about that opportunity set.
Yes, sure pretty exciting opportunity for us in our Investor day back we talked about.
Speaker Change: Growth that we should see from our conventional heavy oil business.
Speaker Change: We are very active in the region as we speak with with numerous drilling rigs are executing those multilateral wells.
Speaker Change: Really opens up the resource for us and as you may know were.
Speaker Change: One of the largest landowners in the region.
Speaker Change: In addition to that.
<unk> also connected through our midstream business into our downstream upgrader and refinery. So we actually have a pretty integrated value chain all contained within a very tight geographical region. So pretty excited about what's happening in our conventional heavy oil.
We're active in drilling you should start seeing production ramping from from that region in the back half of this year and into 2025 as per one of the opportunities that we laid out for growth across our portfolio.
Speaker Change: Thank you so much for taking my questions.
Thank you thank.
Thank you next question is Travis Wood from National Bank Financial Please go ahead.
Yeah. Thanks for taking my question I, just wanted to get a sense of what's left for the narrows tieback youre more than 90% complete I think it said and is it more weather dependent just as we head into.
The winter timeframe or are there other kind of supply chain issues in front of you.
Speaker Change: Yes Travis.
Speaker Change: Sure.
Speaker Change: Essentially mechanically complete on the pipeline and your Euro assumption is <unk>.
Speaker Change: <unk> correct.
Speaker Change: We're trying to optimize on top of it but in and in fact, we will need to wait for warmer weather following the winter.
For the initial startup of the steam line. So that's what's really driving that.
Speaker Change: Timing now for narrows, the key component that we just executed in a turnaround wasn't tie in but that's now behind us and so.
We have a little bit of installation to complete a little bit of heat tracing, but but in general.
Speaker Change: The pipeline and the pads are ready.
Just waiting for the weather window to commence startup of the <unk> system.
Speaker Change: Okay, perfect and is that is there a chance that.
Speaker Change: Or I guess another way is it budgeted on a normal winter.
Yes, we're looking at it kind of starting that system up in the April time period, and we should be well into weather window, there that will allow us to do that.
Okay. Thanks, that's all for me.
Speaker Change: Great. Thanks, Josh.
Thank you. Our next question is Patrick O'rourke from <unk> capital markets. Please go ahead.
Oh, Hey, good morning, guys and thank you for taking my question I guess just to go back to the strategic nature of the downstream assets I think one of the things in the past it's worth to advantage.
Is the nomination process and I think you've kind of alluded to that as well.
Speaker Change: Just wondering based on your views now you guys are pretty sophisticated in view of the basin marketing egress all of that when you really see that.
From a timeframe kicking in at this point.
Speaker Change: As an advantage for you again.
Speaker Change: Just in terms of the differential is that that's the question you're asking.
Speaker Change: And.
In terms of your ability to nominate in the mainline system.
Yeah. So we can nominate today, Patrick and we can move barrels to superior.
Speaker Change: For somewhere around three to $4 U S and further down the line to Toledo for the five to $6 range.
So we take advantage of that today.
Speaker Change: We think that at some point over the next two to three years differentials will widen.
That will become more and more pronounced.
In terms of the advantage that it gives us, but having access to the enbridge line and being able to nominate and not have to pay for take or pay capacity and not have to make those large financial commitments they'd be able to move barrels if and when we choose at those kind of rates, we see as being a real strategic advantage.
So having refineries along the mainline that have short supply chains back to western Canada, and produce project or products into strategically advance advantaged markets like superior until it will do.
It gives us I think.
Speaker Change: African advantage on those value chains.
Speaker Change: Okay.
Okay. Thank you and then you know maybe I asked this last quarter, but now that you've got.
Speaker Change: Sort of a full quarter run rate on your belt with.
Speaker Change: T M X here.
How the net backs look and what the marketing opportunities have been there for you.
Patrick It's Jeff Great question.
Patrick: As you mentioned, we have had a good run rate here, we've seen really solid operational performance.
With Trans Mountain I would say, we continue to see really robust.
Patrick: Competition at the dock.
Speaker Change: <unk> to see through into <unk>.
Speaker Change: Some other.
Speaker Change: Raceman.
Product, that's a little further afield and.
Speaker Change: Demonstrate to ourselves that pricing is reflective of global value.
Speaker Change: What we're finding is looking a little bit forward here is that the.
The net balance associated with that line I guess I would say the <unk> associated with that line is getting to the place where it's covering full cost of investments both fixed cost as well as the variable and we think that that's an important day as we look forward and.
Speaker Change: That means that we're seeing things that are covering our cost pool of investment in the very near future.
Speaker Change: Okay. Thank you.
Thanks, Patrick thank.
Speaker Change: As a reminder, if you are on the phone and wish to ask a question. Please press star one to join the queue. The next question is Mineau wholesale from TD Securities. Please go ahead.
Thank you I just had a really quick one what do you what is the status of toll negotiation negotiations for the uncapped portion of the Tms overrun.
And what is your best guess in terms of resolution I think last time. This came up on the call I think it was suggested that it was sometime in the spring, but any thoughts there would be would be helpful.
Speaker Change: Okay.
Jeff Murray: Benno, Jeff Murray.
I think you've got it there's no particular update from from last time, we are following through the regulatory process I think it would.
Be remiss, if anybody to attempt to predict necessarily the outcome of that Theres. Obviously, a lot of work ahead of all sites to get there on it and looking for resolution into the spring.
Speaker Change: Thank you.
Speaker Change: At this time, we have no questions in the queue. So we will wait a minute to give you the chance to connect with US. If you do have a question I would like to remind you that if you are on the phone and wish to ask a question. Please press star one.
Speaker Change: Okay.
Speaker Change: Okay.
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