Q2 2019 Earnings Call

At this time, all participants are in 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 May then ask questions.

Please be advised that this conference call may not be recorded or rebroadcast without express consent of Cenovus energy.

I'd now like to turn the conference call over to Ms. Sherri month Director Investor Relations. Please go ahead as well.

Thank you operator, and welcome everyone to our second quarter 2019 results conference call.

I refer you to the advisories located at the end of today's news release.

These advisories describe the forward looking information non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion.

Additional information is available in our annual Mdna and our most recent annual information form and form 40 F.

The quarterly results have been presented in Canadian dollars and on a before royalties basis.

We have also posted our results on our website at Synovus Dot Com, Alex Pourbaix, our President and Chief Executive Officer will provide brief comments and then we will turn to the Q and a portion of the call was to know what's his leadership team, we would ask that analysts to hold off on any detailed modeling questions and follow up directly with our Investor Relations team following the call.

We would also ask that you keep to one question with a maximum of one follow up for question and then rejoin the queue. If you have any other questions. Please go ahead Alex.

Thanks, Gerry and good morning, everyone.

As you've seen from our news release today Synovus delivered exceptional results in the second quarter of 2019.

We generated $830 million in free funds flow and as promised we put that cash towards debt, reducing our net debt to just about 7 billion at the end of the quarter.

This is a key milestone for our company.

We have now essentially achieved our near term target for net debt and materially improve cenovus is balance sheet.

This leaves us well positioned to begin considering opportunities for increasing shareholder returns and considering incremental investments in our business.

But let me be clear, we remain committed to maintaining and further strengthening our balance sheet.

We are closing in on a ratio of two times net debt to adjusted EBITDA in the current commodity price environment.

We will continue to be relentless in our drive to reduce net debt towards our longer term target of $5 billion at that level, we expect to be in a position to achieve and maintain a target ratio of less than two times net debt to adjusted EBITDA, even at the bottom of the cycle commodity prices.

Our excellent second quarter results and strengthened balance sheet should demonstrate to investors at synovus continues to have positive momentum in the first six months of the year, we generated almost $1.6 billion in free funds flow approximately 2.1 billion in adjusted funds flow and $1.7 billion in cash from operating activities and we've been positioning ourselves to continue generating significant free funds flow and almost any commodity price environment. These results are a reflection of our persistent focus on safe and reliable operations capital discipline and cost leadership.

At Synovus safety comes first I'd like to congratulate our teams for completing a safe winter drilling program. This year as well as a nearly month long planned turnaround at Christina Lake in the second quarter with no significant injury incidents and no process safety events companywide, our safety record is moving in the right direction, but we must always remain vigilant to ensure that we continue to protect the health and safety of our workers and the environment.

Our strong financial results. So far this year are supported by the continued outstanding performance of our operations.

Our plants have continued to run very efficiently, even with oil sands production lower year over year due to the Christina Lake turnaround and mandatory curtailment as well as increased royalties, we more than doubled our oil sands operating margin compared with the second quarter of 2018, and the deep basin. We made the decision to shut in some volumes during the quarter due to low natural gas prices and the vast majority majority of those wells have now returned to production. We also continue work to optimize our deep basin operating model to reduce costs improve efficiency and drive value.

Refined product movements from our Wood River refinery were partially impacted by pipeline outages and significant flooding on the Mississippi River during the quarter. However, the combined utilization rate for both our refineries was nearly 100%.

To comply with Alberta is mandatory curtailment program, our oil sands team are doing a great job of managing production at lower volumes, while maintaining normal steam injection levels to continue mobilizing oil in the reservoir for production later once curtailment is lifted.

Well curtailment has resulted in a temporary increase in per unit operating costs and steam to oil ratios I firmly believe that the benefit of temporary curtailment for synovus, the provincial treasury and for our entire industry is undeniable.

By balancing production with takeaway capacity curtailment has successfully prevented more blowouts.

In light heavy price differentials, and it's helping Canada receive fair value for its oil and the absence of new pipelines getting built and to give you. An example of what this means for the people of Alberta provincial government royalties on synovus as production for the first six months of the year amount to more than half a billion dollars. As a reminder, when differentials reached record highs in the fourth quarter of last year, we were actually in a royalty credit position with the province as long as takeaway capacity out of Alberta remains constrained. We believe the government will continue to use curtailment as a temporary tool to ensure that Canada and Canadian taxpayers receive fair value for our oil.

On that note, we're seeing some encouraging news on the rail front.

It's still early days for crude by rail transportation capacity out of Alberta is growing during the second quarter Synovus made good progress advancing its crude by rail strategy in June we shipped an average of nearly 36000 barrels per day of our oil to the us Gulf coast up from about 16000 barrels per day of our oil shipped by rail in the first quarter and we remain on track to ramp up our rail capacity to approximately 100000 barrels per day by the end of the year.

As I've said before we consider rail to be an important structural component of our diversified transportation strategy. It allows us to get our oil to markets on the us Gulf Coast, where we have the opportunity to achieve higher prices than we can get here in Alberta, and it gives us optionality during times of pipeline constraint as other producers look to expand rail capacity, we see an opportunity for the Alberta government to encourage increased movement of crude by rail by allowing ship producers to ship barrels in excess of mandated curtailment levels. If those barrels are transported by rail. We're also supportive of the provincial government divesting its contracted crude by rail capacity to industry.

It's important to note here that while expanding rail capacity is critical to resolve in Alberta is near term market access issues, we still need new pipelines and I can't stress that enough and we cannot take our eyes off the ball unfounded attacks on Canada's oil and gas industry have repeatedly stalled the construction of sensible pipeline projects that are in the best interest of all Canadians and society as a whole our critics will not let up and neither can we Canadians have every reason to be confident that Canadian oil is among the most responsibly produced in the world We provide economic opportunity for indigenous communities. We are subject to some of the most rigorous regulatory standards in the world and operate in a jurisdiction boasting some of the best environmental social and government standards globally.

Meanwhile, we have significantly improved our environmental performance and reduce the intensity of our greenhouse gas emissions as noted in our 2018 environmental social and governance report published just yesterday the emissions intensity at Synovus is oil sands operation is lower than the global average and about the same as the average barrel of oil refined in the US we work to continue to improve our environmental performance every day and we'll continue to make it part of our commitment to delivering safe and reliable operations. It makes no sense whatsoever to stop Canadian oil from reaching customers, who needed and wanted that will not address the global climate change challenge if Canadian oil cannot get to international markets Global demand for oil will continue and be satisfied with higher emissions barrels from other jurisdictions within ferrier environmental social and go.

Governance standards limiting market access for Canadian oil will only harman industry that contributes billions of dollars to the Canadian economy dollars that are spent building roads hospitals schools and supporting services used by all Canadians.

With that let me close by saying, how proud and excited I am and what this company has achieved in such a short time when I began as CEO in late 2017, we set a clear plan, we said, we'd focus on reducing debt lowering our cost structure and maintaining capital discipline, while continuing to deliver safe and reliable operations and while that job is never truly complete I feel confident in saying that so far we've done what we said we would do we have delivered on all of our key commitments to our shareholders and we will not deviate from that path. Our results in the first half of this year demonstrate our commitment to add our passion and we'll work to deliver even more value to our shareholders in the months ahead.

Finally, I'd like to remind you that we expect to update the market on our strategy and five year business plan at our Investor Day in Toronto on October 2nd 2019.

And with that let's get straight to your questions.

Ladies and gentlemen, as a reminder, you can join the queue to ask your question the pressing star one.

You May now begin the question and answer session and go to the first caller.

Your first question is from Phil Gresh with Jpmorgan. Your line is open.

Yes, hi, good morning.

Just first question here your capital spending.

Certainly in the second quarter is trending at a pretty low run rate. Despite the fact that you do it do you still have some spending on Christina Lake G.

Statements like that so just curious how you're thinking about the run rate for the rest of the year.

To talk to long term about this again say that for the analyst day, but just maybe any initial read about how this might bridge to 2020.

With Christina Lake Rolling off are there other things in the short term given the market access.

Market access issues that you'd be thinking about or is it more of a wait and see.

Hi, Good morning, Phil It's drew.

So yes, if you look at our capital spend particularly in the oil sands, we are trending to the low end and the teams continue to do some really great work.

Just really looking at our sustaining capital is as you referenced with Christina G.

Essentially that project is complete including the pads. So our spending on that project is done as you probably are aware. The project came in ahead of schedule so relative to our budget, we actually came in quite good shape after Q1.

With curtailment still going through Q2 here in coming and staying here in Q3, it's allowed us to re look at when we have to bring sustaining pads on and it's allowed us to defer some capital spend that was going to be budgeted.

This year that we think we can push out a bit into 2020. So I think we're doing the right things as far as managing the capital level with the current level of production and considering the curtailment that were under.

But I wouldn't be thinking about Christina G or any further capital required for that because that's essentially all been spent no and the second thing around your comment around 2020.

Don't be surprised if you see us stay in a similar guidance range that.

What we saw here in 2019.

You know with the project being done at Christina in particular, it's really a sustaining maintenance capital program for us heading into next year. So it's not essentially going to be that different relative to the spend levels. We're seeing here.

Phil its John Im just going to build on it and a couple of things that drew said, so if youre going to read anything into 2020.

You're quite right, we'll lay this out for you.

At our Investor Day in October and then more broadly will give you a view of how we allocate capital across shareholder returns.

The balance sheet and in the business, but.

What I would suggest to you.

Jurors quite right don't think of the guidance for 2020 is being materially different from what you are seeing.

In 2019, and what you should read into that.

Is that the balance sheet is still going to be the priority and then there will be some incremental room for shareholder returns, but everything that we're doing.

Within that capital allocation framework is really designed to give us.

Free cash flow.

And our view is that.

Everything needs to make this company more sustainable and more resilient over the long term and at the bottom of the cycle. So core in that we'll be keeping our opex.

Low.

At the bottom of where I think.

The industry is we're going to keep our capital low and our efficiencies high.

We've done a lot of work on DNA, we're not going to backtrack on that and it would be our view as well that we need to run that under Levered balance sheet. So if you're going to read anything into 2020.

Based on the results that you've seen in 2019.

Think of it as a continuation of this company, making itself more resilient and more sustainable at the bottom of the cycle.

Thanks, Phil Okay very clear.

Thank you.

Just a follow up.

On.

You've talked about.

Pension considering that failure it recover unit at some point, perhaps you could just elaborate on your thoughts around that cost and benefits and.

I guess, what it would take to actually really move forward with it. Thanks.

Sure Phil I'll, maybe what I'll do is I'll give a little bit of my thoughts on sort of the greater strategy behind that and then I'll, let Keith talk about some of the some of the specifics and.

I want to take a second and bring people back to where our strategy has been over the past 20 months and as John just said everything we have done to this point has been about increasing resiliency and stability of the company long term men.

In in that time period, just in the time that I've been here, we've cut our net debt from $14 billion to 7 billion, we've reduced our cost structure to industry, leading levels, John already referred to that and I have to say that after all of that I believe that the greatest headwind that affects our value.

As market concern over our ability to get our oil to market.

To resolve that concern reduce volatility increase resilience, we and we've talked a lot about this but we're executing a comprehensive market access strategy and that includes you heard us talk about incremental pipeline commitments, both on existing and proposed pipelines. The rail contracts and in addition, our likely intention to participate in the upcoming Enbridge open season, and I would what I would say is that the dealer you is potentially part of that strategy. It has a number of really attractive characteristics and all I'll, let Keith talk a little bit about that but I want to make something really clear here. We have no immediate plans to approve a deal are you and we will wait until we have much more clarity on the likelihood of the expansion pipelines proceeding.

But and I really want to be clear on this I do not intend to wake up 18 months from now defined that we need a D. R. U and have 18 months of due diligence engineering and project set up ahead of us because we sat on our hands in the interim so once again. This is all about increasing resiliency, reducing volatility if there aren't clear and compelling advantages to building a D.R. you, we're not going to do it but with that why don't I pass it over to Keith and he can give a little more detail.

Thanks, Alex Phil.

Really we see a four things that that could make the deal are you compelling and I do want to reiterate its early days and we're kind of doing our due diligence.

To build these out but when you can reduce the amount of diluent that you have to import from the us Gulf Coast and short circuited inside Alberta.

You do two things when you reduce your overall costs for oil sands production, but you also increased capacity on existing export pipelines.

When you go to a neat bitumen on rail you you get your unit cost of that rail transport a lot closer to pipeline economics and the other thing that we are finding is that with with the growth in Permian production in the us Gulf Coast refineries are actually looking for a neat bitumen product to help fill out the back end of the refinery so we actually.

I think there could be a value uplift for for a niche bitumen product and.

The last one would just be from a safety perspective.

Bitumen is not considered a dangerous good by the railroad. So so we see.

For things that really could be compelling, but like I said, Alex said, it's early days and we're doing our due diligence over the next year to 18 months, it's actually Keith just one other thing I would add in terms of the advantages.

If if we were to move to a deal are you I my expectation is that the rail companies would look at that as a lot more stable predictable and attractive.

Commitment and I think theres, even potentially some opportunities to get better freight rates. If we can turn this into a very long term sustainable business.

Yes, and Thats, correct, and and you can expect more from us.

At the Investor day to continue our evaluation of this opportunity.

Your next question is from Greg Pardy with RBC capital markets. Your line is open.

Thanks.

Good morning.

Narrows Lake.

It is a project that was commenced and then kind of put on the shelf and obviously just given the egress constraints. We don't expect you to resurrect it right away, but how are you. How are you thinking about that project in todays world and our other creative ways IEC gold, though to just reduce your capital exposure to it.

Yes, Hi, Greg It's drew here so.

Yeah, we alluded to this year, a little while ago that we've.

We've re looked at narrows Lake.

And the option right now that is pretty compelling is to actually make Christina lake a little bit more of a regional assets and basically bringing the narrows Lake resource back into the main Christina Lake area into that facility.

It does actually allow us to materially change the capital required to probably.

Tap into that resource and kind of add some modest growth later in the future to your point, though I mean, it's not something that you would expect from US here in the very short term consider ers, but.

The teams have and we have been working on it internally here to Relook at it. It also allows us to still maintain and have the option around SAP and solvents in the future as well and some other kind of things were looking at for that project to help.

With the bigger kind of environmental footprint story so.

There is a pretty compelling case that does reduce our capital for narrows Lake and we're looking at it now to bring it back into pristine area.

Okay terrific and just technically I mean, we flew over that recently and there was a late call Christina Lake, which is not insignificant does that provide does that does that create any.

Just major roadblocks for you or just constraints in terms of being able to move steam that far.

No it doesn't Greg we if we think about the actual distance itself. It's it's within the same distance we're already distributing steam at Foster Creek as an example from a pure kilometer distance from the facility.

So the teams are taking that into account and you know from a technical standpoint, where looking at doing some potential steam boost to ensure quality and pressure continuity relative to the reservoir, we're going to go into and just to balance the pressure. So it is really not a significant technical risk or change relative to what we're already experiencing at Foster Creek as an example, so.

Your next question is from Neil Mehta with Goldman Sachs. Your line is open.

Hi, This is Emily Chang on behalf of Neil.

My first question is just around capital returns and I'm sure you guys will give more detail at the analyst day, but I just wanted to get early sense of how you view the different forms of capital returns whether that be dividend increases special divi buyback disconnect have a preference for any one of these methods to demonstrate its commitment to shareholders.

Yes, Hi family, it's John .

As I mentioned previously we are going to layout.

Complete.

Capital framework for you.

At our Investor day.

But what what I would say.

In the short term as we are still focused obviously on getting our balance sheet down to that $5 billion, Mark we think that gives us.

The resilience over the long term.

To consider more broadly.

How we want to approach.

Shareholder returns of dividends and share buybacks.

And probably to a lesser degree special dividends, but they're ordering and priority will probably move around as we get the balance sheet down into the the range that we're talking about and obviously, that's that's contingent on where the share price is as well.

But we'll lay all that out for you in some detail in October .

Great. Thanks, and just one follow up.

Just be interested to hear your views on address.

Out of Canada for the next 12 to 24 months given.

Rallies ramping there might be some additional capacity mainline given.

HM depending mainline open season, how do you see the macro outlook shape for the next.

Next year also.

Hi, Emily it's Keith.

Yes, there are a few.

The pipeline companies are getting pretty creative on how they are expanding some capacity.

Out of the country, what I would bring you back to though is the effectiveness that curtailment has had on on the differential in balancing market takeaway capacity to internal production capacity, we have seen rail continue to ramp and and ideally continue to ramp through the back end of 2019, which could add an additional 150 to 200000 barrels of takeaway capacity. So we're seeing some some promising things on existing pipelines, obviously, the new projects are going to be delayed beyond that timeframe that you discussed.

Your next question is from Benny Wong with Morgan Stanley . Your line is open.

Thanks, guys.

Questions a lot of my questions have been asked but I wanted to clarify one point on that doesn't recover unit I think you mentioned.

It might be contingent on line three moving forward.

Just want to clarify if you see clarity of that line expansion going forward. It means you would not pursue diluent recovery strategy and I guess for the debt.

I'm, sorry was that was that everything binney.

No. It does second part was really just at a high level do you have an economic sense in terms of does rail bit compete with pipeline like if tomorrow, you guys Presalt would rail bit still compete with pipeline delivery.

I had a competitive level.

Sure what I'd like to talk about the.

The your but sorry remind me your the first the first part of the question three lines.

Yes, no I got it I got it the.

Your ears.

I think it's not quite as simple as as whether one pipeline goes ahead and.

As we've talked about a lot.

We have pretty significant.

Pipeline capacity on on all on all of the proposed pipelines and so for US it's really a situation of looking at our entire portfolio of takeaway options. So I don't I think it's an oversimplification to say that of line three where to go ahead, we wouldn't do the the D.R. you were were looking.

To solve our market access problem.

Substantially and so we'll take a look at.

At the situation and our view of the likelihood of each of those projects going ahead, but I think the VA and the other thing that I think is really important to understand.

Enbridges is obviously in an open season process.

Related to their conversion of their pipeline system from a common carrier to a contract carrier that is potentially another option.

For our company to get.

To solve for a long term our market access issues. So we're going to we're going to balance all of those but I would.

In the meantime, as Keith said, we're doing the due diligence right now to be in a position that if we decide that the are you is warranted.

That that we would be in a position in relatively short order.

Tim to make an f. I'd decision on that and maybe Keith you can talk about the second.

Yeah, and I'd, just build on a little bit of what Alex said.

John articulated that we're really focused on our cost structure over the past couple of years getting our capex Opex and line DNA in line.

Fixing up our balance sheet and market access was also part of taking away that topline volatility in our in our revenue line. So we've been focused on market access. We're we're committed shipper on capex. So we're committed shipper on TMX, we're going to take a hard look at the Enbridge open season here coming up.

But what I would say on the D.R. you it is another.

Our ability to gain access to market and it will have to compete on a on an economic basis and from a capital prioritization basis, and so thats. The due diligence. We are doing now been is is can we actually get it competitive with pipeline economics, and and we're early days, but but because of the four things that I articulated.

To the first question. We are we are very optimistic that we can kind of get those economics competitive with pipe.

Okay, great color guys. Thank you.

Your next question is from Manav Gupta with credit Suisse. Your line is open.

Hi, guys congrats on loading.

7 billion.

You got it.

Expectations that's positive.

I also want to welcome.

Hi.

The next expansion approved.

Do you see that.

Stocking up.

Thanks Scott.

Really.

What kind of delay.

Yes, thanks spun out of its key.

Talking.

You know obviously the recent announcement by the National Energy Board was was very positive.

Sounds like they will be back to construction.

Kind of rates here in in the third quarter, which is extremely positive. So so your time frame on that pipeline is kind of aligned to what we are thinking in that 2022.

Later in the year timeframe.

Obviously.

We're highly optimistic that these pipelines will get built but we're not.

Naive enough to think that there wont be further opposition to to continue progressing them with regards to.

Line, three we're continuing to evaluate kind of what's happening.

Down in the us with regards to opposition to that expansion and staying actively engaged with enbridge on kind of progress through that regulatory process.

But we do think that.

The end of 2020 is obviously highly optimistic and we think there will be further delays to that timing.

Okay.

During the quarter.

Foster Creek.

At this time.

Hi.

Despite.

Yes, Amitabh, it's drew here.

You are right actually we had.

Coming into April .

We knew that the back half of that month, we were going to go and start to turnaround at Christina Lake. So we actually ramped up both foster and Christina Lake and we utilized actual phase G equipment as well at Christina.

To start producing well ahead of.

Ramping down into that turnaround so.

As April and then the first part of May came were the Christina Lake was in turnaround.

Obviously, we were really.

Really leveraged foster creek to kind of produce barrels into our curtailment allowance as best we could.

And I have to see both assets perform extremely well so.

We basically loaded on the front end of April production at both facilities and then kept Foster Creek basically fairly full out through April and May to help offset.

No substantial turnaround at Christina Lake.

Your next question is from person to run with Citigroup. Your line is open.

Good morning, Thanks for taking my question.

Wanted to ask I think you touched upon this before but the value.

To the Gulf Gulf Coast refiners.

Oliver that heavy barrel, particularly as Permian production ramps.

Given the refine and get down there.

As it relates to price realizations.

More rail ramping up here in more product moving out of Canada into the U.S.

Yes.

Great job of.

Meeting our expectations on upstream.

Realizations maybe.

To answer the question terms a netback.

As things like as things start moving.

That's a little bit of widening out in differentials.

Ill person, maybe think about maybe what we could be missing and how you protect upstream price realization or maybe total netback.

It seems like you guys are doing a great job there.

I just wanted to get a sense of how to think about the cadence there.

In the next quarter and as you kind of get more and more rail ramping it sounds like you could get 300000 barrels or more per day on rail over the next six to 12 months.

Hey, Parishad, it's Alex all.

I'll just jump in sort of with a high level comment and then I am sure. Keith we'll we'll have some more thoughts, but one of the points that I think is that I think people really need to keep in mind is.

Ultimately curtailment is a temporary tool and I think we would acknowledge that as as permanent or long term forms of egress emerge. It is the right thing to ramp it down but I think if there is one positive that has come out of this curtailment discussion and implementation in Alberta. It is that the government I think they understand that they have a tool that can that can allow the industry in the province to avoid the massive wealth and value destruction of punitive Lee large differential so I guess our view has been.

Similar kind of from the start that we do expect overtime economics are going to or differentials are going to move.

More in line with rail economics, but at the same time.

I see a really significantly reduced risk of differentials going much wider than that I think that has become a preventable.

The situation in the province, but with that why don't I, let let Keith talk a little bit more in detail.

Hi for Sean.

Kind of builds on our rail strategy. So we don't just look at the economics of the rail barrels that were moving but all barrels that we produce.

We think that getting some of those additional barrels out on rail is helping kind of the netback on on all the barrels.

And then when you actually get the barrels into the Gulf Coast with Venezuela in production coming off Mexico production coming off.

Recent reports out on kind of asphalt prices going through through the roof.

There is a significant demand for the heavy barrel and through the quarter, we saw WCS pricing in the Gulf coast exceed WT pricing so.

So it truly is a matter of getting it there and then we're obviously active on on the cost side when it comes to.

Getting very efficient in in our rail economics and cycle times as well as kind of our condensate strategy and how we procure and acquire that condensate to to keep our overall costs.

Low.

Thank you.

That's helpful.

But the path towards differentials widening seems a lot less volatile than last month.

Drastic.

Yes.

Our government plans and understanding what the industry I guess my next question sort of related to that.

It is.

If we look at the.

The understanding that in your conversations with.

As I look out to 2020.

In rail ramping out of the industry.

More capacity being added maybe curtailments come off is it fair to say that we could we could get to.

Sort of.

Sure, Yes modest.

Total upstream production out of Alberta, and maybe a follow on to that.

Given.

Were you position.

Could be maybe a little bit ahead of our expectations. It seems like we don't.

We need a line in the next.

But obviously, we'll even later, but we could get some upstream.

How it for a period of time.

Is that a fair assessment or is there something that would be missing in that analysis.

Yes, I think Thats generally fair I would hate to ever make a statement that we don't need pipelines because as I said in my prepared comments I think it's very clear, we'll welcome any incremental pipeline capacity, but I think one thing that is worth maybe highlighting again as this idea.

This this this concept of a rail above curtailment that I alluded to in my prepared comments.

There is a lot of discussion going on right now amongst industry, including the government and this is the idea of of.

Amending the the plan around curtailment to allow producers in the province to exceed their monthly curtailment allocation. If they can demonstrate that that increased production moved on incremental rail Len.

I truly refer to this as sort of a win win win situation.

It it it would it would allow the production out of the province to increase.

It would lead to significant benefits to the upstream industry.

But on top of that you have the benefits to government royalties youre going to get royalties on barrels that otherwise, we're not going to be produced.

And it gives a clear he aggress option.

Above curtailment, but on top of that is really strong incentive to the upstream community to get those barrels on to rail. So I you know that we're relatively early days, but.

From my perspective that the I can't think of a.

Have a negative from from that strategy being implemented and I think that could be a real catalyst.

To getting more even more.

Oil moving by rail in the relatively short term.

Yeah, and the only thing I would add to that is.

Obviously, the government has been very clear on trying to move the rail contracts back to industry and and this is a win win there too because obviously if people are allowed to move rail above curtailment theres theres, a huge incentive to take over the long term contracts.

Ladies and gentlemen, we now take questions from the media as well for both of your questions on Investor. Please press star one on your telephone keypad.

Your next question comes from assets and with Bank of America Merrill Lynch. Your line is open.

Thanks, Good morning.

Hey.

Just digging a little bit into the real strategy into Mdna. It was mentioned that you have secured additional storage capacity in the us Gulf coast.

Support rail could you talk about how big that is and the thought process behind it.

And then you're also increasing reloading activity in.

And wasn't sure whether is there any way to quantify capital spending associated with crude by rail.

And our innovative market strategy and Keith if you have any thoughts early thoughts on cost of a.

Capex associated with the deal.

Thanks, Yeah.

Obviously, we're always continuing to evaluate our marketing strategies and storage positions in the Gulf Coast.

Obviously, the amount of storage capacity that we've taken orders is commercially sensitive, but you should you should understand that as we grow our volumes towards the 100000 barrels a day.

We're looking at a diverse approach to place those barrels into the market including storage.

In the Gulf Coast as well as direct delivered to to some of our refinery partners.

With regards to Bruderheim, we're investing.

I think.

$10 million to $20 million type range.

In growing the capacity that the asset had.

Right around 100000 barrel a day capacity and we're taking it up to two unit trains and we're on target to do that by the end of end of the year and it still is early days on on the deal for you, but we're in the we're looking at a facility that would handle.

180000 barrels a day of Dilbit on the inlet, which would drive you to two unit trains of of neat bitumen on the outlet and we think that that's in and around the $800 billion to $1 billion capital range.

But obviously, it's very early days and we think that that capital if we ever sanction that project would be spread over several years.

Great and Alex just shifting gears a big picture question for you I think you have been.

Very clear in your strategic Friday.

In terms of focus in the balance sheet and shareholder returns.

My question to you is the big picture growth plans, both the de leveraging fees.

Is the growth CAGR going to be an output of other decisions or you have a specific target on growth.

You know I.

I don't know it would be fair to say, we have a specific target on growth as John said I think earlier in one of his comments it.

It.

I think where our relative focuses on those three buckets of debt reduction share return of value to each of cash to shareholders and disciplined growth opportunities is actually going to vary a bit as we kind of continue on this path from 7 billion of net debt to to five.

What I what I can say is we are absolutely committed.

That we are we are every time, we make a material capital decision, we're going to balance among those three options and do what we believe is in the best interest of our shareholders in terms of shareholder value and I would say that.

I would say no I would just observe that we have had some very patient shareholders.

And as we're on this path of strengthening our balance sheet, it's not lost on any of us.

The importance of shareholders are replacing.

On returning capital to them and.

And thats going to be an important part of our thought processes as we move as we kind of get through seven towards five.

Your next question comes from Kevin or event with Bloomberg News. Your line is open.

Hi.

Wanted to check on.

When you expected timing for the government rail deal.

Mike.

By that I mean, the decision on from the government on the plan to allow incremental production as long as it's moving by rail.

Hey, Kevin its Alex.

I can't give any guidance I mean, as I said we.

We as you know we've had discussions as an industry.

Both with and without government and I know there, they're looking at it and I don't I don't yet have have at times have a timeframe.

All right and then just a quick follow up.

The major gas producer too we know that there has been some producers asking the government for basically sort of a royalty credit plan for when they hold back production pipeline capacity is constrained.

The plan and if you've been involved in that.

Yeah, Kevin or as a company, we're quite supportive of innovative ways.

To improve netbacks for for oil and gas or gas and oil producers, but I would say my my my my involvement in this issue today. It is a pretty complex issue.

Im confident that you will all the right people are at the table and.

There is I know theres ongoing discussions with a lot of interested parties. So we're very supportive of that but as I said its quite a complex issue on the gas side and you really want to make sure at the end of the day that you make the correct decision and you really make sure that you don't create any unintended consequences that in my view. It. It is a more complex situation than the oil situation.

Your next question comes from Dan Healing with Canadian Press your line is open.

Good morning, Thanks for taking my question I, just wanted to ask about the.

The government of Alberta, corporate tax rate changes.

Aside from making the second quarter net income look really good.

Does it change the way you look at growing production and.

For the company going forward like does it make.

Substantial change as far as that we look at things going forward. The next couple of years.

Yes, I mean to me. This is this is all part and parcel of competitiveness and and.

Tax policy is obviously, a very important part of competitiveness and.

To to the it as you alluded to.

Theres, obviously been been.

An already material impact on the Companys on the company's earnings as a result of this but but no I mean, as we think about where to invest capital.

I think it is clear that companies like synovus are going to be considering the the tax regime in which they make investments. So I think it is so positive for industry and I think it will be helpful for the long term health of the industry.

Okay. Thanks.

Thanks, Dan.

This concludes the Q and a period I'll turn it back to Mr. Jorge for any closing remarks.

Well I think that that's a that's everything from us and I just want to thank everybody for taking the time today and.

We'll we'll get back to business. Thanks, everyone.

This concludes today's conference call you may now disconnect.

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