Imperial Oil Limited

Good day and thank you for standing by. Welcome to the Imperial Q3 2021 earnings call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Dave Hughes, Vice President of Investor Relations. Sir, please go ahead.

Thank you. Good morning, everybody. Thanks for joining us on our third quarter earnings call. I'm joined today by Brad Corson, Chairman, President, and CEO, and the rest of the management team, including Dan Lyons, Senior Vice President of Finance and Administration, Simon Younger, Senior Vice President of the Upstream, Sherry Evers, Vice President of Commercial and Corporate Development, and John Wetmore, Vice President of the Downstream. I'm going to start by reading the cautionary statement. Today's comments include reference to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in attachment six of our most recent press release and available on our website with the link to this conference call. Today's comments may also contain forward-looking information. Any forward-looking information is not a guarantee of future performance. An actual future financial performance and operating results can differ materially depending on a number of factors and assumptions. Forward-looking information and the risk factors and assumptions are described in further detail in our third quarter earnings press release that we issued this morning, as well as our most recent Form 10-K. And all of these documents are available on CR, EDGAR, and on our website. So I'd ask you to please refer to those. Usual format today, Brad will start with some opening remarks, and then Dan will go over the financial performance, then back to Brad to talk through our operating performance for the quarter. Then we'll follow it up with a Q&A session. So with that, I'll turn it over to Brad.

Thanks Dave. Well good morning everyone and welcome to our third quarter 2021 earnings call. I hope each of you are doing well and had the chance to enjoy some time with friends and family over the summer. What a difference a year makes. The third quarter is now in the books and I'm very much looking forward to taking you through our results today. It was a great quarter by any measure as our strong operational performance continued to allow us to make the most of this very attractive business environment. Our assets performance met or exceeded our expectations. And once again, we have a few records to talk about. And I would note that this was across all of our business lines. Along with very strong operational performance, we continue to benefit from actions we took last year to reduce our overall cost structure and improve reliability. And this combination is so advantageous when commodity prices are continuing to see strength. This is what allows us to capture maximum value today, but also ensures our resiliency in a downturn should that occur in the future. In this quarter, the momentum you have heard me talk about was fully on display. We had very little planned maintenance, and on top of that, high reliability, which allowed us to take maximum advantage of the improving business environment. Over the next few minutes, Dan and I will detail the results of what was, again, a very strong quarter. So now let's turn more specifically to the third quarter results. Earnings for the quarter were $908 million, and our cash from operating activities was over $1.9 billion, both up significantly from the second quarter. Crude prices continued to strengthen through the quarter, and downstream and chemical margins remained robust. Our upstream continues to perform very well, and I'll talk more about each asset in just a few minutes, but would point out that we delivered our highest third quarter upstream production in over 30 years, driven by the second best quarter ever at Curl. And our downstream performed extremely well also. We saw utilization of 94%, and higher product sales as demand continued to recover. We also announced our intention to pursue a renewable diesel project, which at the time of commissioning is projected to be the largest in Canada. This will deliver incremental shareholder value in addition to helping Imperial and Canada with the energy transition and overall reduction in emissions. And I can't say enough about our chemicals results. Wow. Not only did we set a quarterly earnings record, but our year-to-date earnings are already greater than the best-ever full-year earnings for the last 30 years. Obviously, we have one quarter to go for the year, so it's not a direct comparison. It says nothing about the fourth quarter, but gives you a flavor for just how strong our performance has been year-to-date. So in total, Our strong cash flow generation in a period of very strong commodity prices is underpinned by excellent operational performance. We were able to get the most out of very attractive markets for crude, refined products, and chemicals. And once again, our strong cash position has enabled us to continue to deliver on our promise of shareholder returns. In the quarter, we returned over $500 million to our shareholders in the form of dividends and share buybacks. And so far in 2021, we have returned in excess of $2 billion to our shareholders. The last time our shareholder returns were this high three quarters into the year was 2008. And of course, there's more to come. All of this together adds up to a very strong year so far. a year which is being recognized by the market. As of yesterday's close, our share price had risen over 85% since the start of the year, and up 50% since pre-pandemic levels at the beginning of March 2020. So with that, I will now turn it over to Dan to go through our financial performance for the quarter in more detail.

Thanks, Brad. Getting into the financial results for the quarter, our net income in the third quarter was $908 million, up $905 million from the second quarter of 2020. This increase was driven primarily by an increase in upstream realizations and volumes, as well as improved margins in our downstream and chemical businesses. Now, if we look sequentially, our third quarter income of $908 million is up $542 million from the second quarter of this year, driven by higher margins in the downstream and higher volumes in the upstream and downstream, driven by substantially lower planned turnaround activity. Looking at each business line, the upstream recorded net income of $524 million, up about $280 million from our second quarter net income of $247 million, driven mainly by higher volumes due to the absence of planned turnaround activity at Coral and Syncrude. In the downstream, downstream's net income was $293 million in the third quarter, up about $230 million from net income of $60 million in the second quarter, reflecting higher margins and the absence of the planned turnaround at our Strathcona refinery. Our chemicals business continued to demonstrate strong performance through the third quarter with net income of $120 million today. I'm sorry, $121 million, up from net income of $109 million in the second quarter, driven by strong polyethylene margins. This is the highest quarterly net income in over 30 years for our chemical business. Moving on to cash flow. In the third quarter, we generated over $1.9 billion in cash flow from operating activities, or just over $1.5 billion, excluding working capital effects. Our free cash flow for the quarter was about $1.7 billion, bringing our free cash flow for the year to over $3.2 billion, an improvement of about $3.5 billion from last year. Even with substantial returns of cash to shareholders, we ended the third quarter with close to $1.9 billion of cash on hand. Moving on to CapEx, capital expenditures in the third quarter totaled $277 million, up almost $140 million from the third quarter of 2020, and up about $20 million from the second quarter of this year. In the downstream, our spending reflects increased spend for the Sarnia Products Pipeline. In the upstream, we continue to progress the Curl In-Pit Tailings projects, as well as spend on mine progression and efficiency projects at Curl, and volume sustainment work at Cold Lake. Based on some great work done by the organization around capital discipline, we were able to revise our capital guidance down for the full year to around $1.1 billion without impacting the key projects that we had planned for the year. Shifting to shareholder distributions, earlier today we announced a fourth quarter dividend of 27 cents per share. We remain fully committed to returning surplus cash to shareholders. We have demonstrated this this year by increasing our dividend 23% as of July 1st and by returning over $2 billion to shareholders year-to-date, including $1.2 billion via an accelerated NCIB program in May and June. Given our strong cash position, we are actively evaluating options to return additional cash to shareholders, including accelerating our NCIB, executing a substantial issuer bid, or paying a special dividend above and beyond our base reliable and growing dividend. Now I'll turn it back to Brad to discuss our operational performance.

Thanks, Dan. I'll now take a few minutes to talk about operational performance in the third quarter, which, as I noted earlier, was very strong across the entire company. That is to say, across all business units. Starting with the upstream, production averaged 435,000 oil equivalent barrels a day in the third quarter, which represents an increase of 34,000 barrels per day versus the second quarter of this year, and an increase of 70,000 barrels per day versus the third quarter of 2020. It also represents our highest third quarter production in over 30 years, and is the first time we've seen four consecutive quarters with upstream production exceeding 400,000 oil equivalent barrels per day since 1990. The increase was a result of continued strong operating performance driven in large part by our focus on reliability and by the absence of the planned turnaround activity we saw in the third quarter of 2020, notably at Curl. I'll now talk in more detail about each asset starting with Curl. And by now, you must be getting used to hearing me talk about Curl continuing to deliver more and more impressive results. Well, here we go again, and I'm pleased to be able to report that that trend continued in the third quarter. Curl production averaged 274,000 barrels per day gross in the third quarter, which is the second best quarter in the asset's history. Recall that in the fourth quarter of 2020, CURL's production was 284,000 barrels per day. Now this quarter's production of 274,000 barrels per day was up 19,000 barrels per day versus the second quarter, due in part to the elimination of the planned turnaround, which has historically started in September. And as we discussed on the second quarter earnings call, we eliminated this second turnaround a full year ahead of our original schedule and began our strategy of only one turnaround each year versus two each year. The third quarter's production also represents an increase of 85,000 barrels per day versus the third quarter of 2020. Again, the increase due in part due to the absence of similar turnaround activities and the absence of a third-party pipeline outage. Now as of yesterday, curled production for the month of October has averaged 289,000 barrels per day. So with our third quarter performance and the strong production and reliability we have seen so far in the fourth quarter, we are confident that we will achieve our increased production guidance for curled of 265,000 barrels per day, which we communicated in July. I want to take just a minute to talk about unit cash costs at Curl and our target of US$20 per barrel. We highlighted that we were close to reaching this target late last year, and we continue to focus on reducing our operating costs and are making great progress. In fact, Curl's unit costs are down year-to-date almost $3.75 Canadian. on a unit basis versus 2020, despite continued pressure from energy prices. And in fact, we reached just under U.S. $19 per barrel in the third quarter of this year. These strong energy prices, along with the strong Canadian dollar, are creating real pressure on the U.S. dollar equivalent cost. But despite these challenges, we continue to focus our efforts on achieving this target of US $20 per barrel unit cost at Curl. Now moving to Cold Lake. We had another strong quarter at this asset as well. Production averaged 135,000 barrels per day, which was down 7,000 barrels per day versus the second quarter, due in part to planned maintenance, but was up from 131,000 barrels per day versus the same quarter in 2020. And the key driver is we continue to see improved well performance driven by our continued focus on reliability and optimization at the site. Now the minor plan maintenance at the Mahican plant in the third quarter, which I talked about on the second quarter call, was completed per plan. And as with Curl, Our third quarter results and continued strong reliability position us well to achieve and potentially exceed our increased annual guidance for Cold Lake of 135,000 barrels per day. Now moving to Syncrude, imperial share of Syncrude's average production was 78,000 barrels per day in the third quarter, which was up 31,000 barrels per day versus the second quarter, and up 11,000 barrels per day versus the third quarter of 2020. A major turnaround on one of the cokers at Syncrude was executed during the second quarter of 2021. The absence of this turnaround activity drove the significant increase in production for the third quarter. There was also a turnaround in the third quarter of 2020 at the asset. This asset has performed well post-turnaround. although there were some relatively minor challenges late in the quarter which have since been resolved. The original plan was also for a second turnaround at Syncrude in the fall of this year. However, this plan was optimized earlier this year, and by slightly increasing the scope of the spring turnaround, as well as deferring some less urgent work into next year's turnaround, Syncrude was able to eliminate the fall turnaround this year. This optimization helps to reduce overall costs at the asset and maximize production, which is particularly beneficial in today's commodity price environment. Also of note was the transition of the operatorship from Syncrude Canada Limited to Suncor, which happened at the end of the quarter. The owners are completely focused on improving the asset's performance and delivering meaningful synergies over the next few years. Now let's move to the downstream. We refined an average of 404,000 barrels per day in the second quarter, which was up 72,000 barrels a day versus the second quarter of 2021. Recall we had a major turnaround at our Strathcona refinery in the second quarter, which primarily accounts for the significant increase in throughput in the third quarter. Throughput was also up 63,000 barrels per day from the third quarter of 2020, reflective of the demand recovery we have seen since last year. Our throughput of 404,000 barrels per day equates to a utilization of 94% versus the 78% we reported in the second quarter and represents the highest quarterly utilization since the fourth quarter of 2018, well before the pandemic. I would also remind you that on the second quarter call, I mentioned we exited June at 93% utilization. So as you can see, the strong performance and reliability continued throughout the third quarter, positioning us well to meet our full-year guidance of 89%. As I mentioned on the second quarter call, we did have some planned maintenance activity in the quarter, specifically a smaller turnaround at our Nanocoque refinery, which started mid-September and was completed in October ahead of schedule. At the time, I mentioned this was not expected to have a material impact on utilization or margins in the quarter. And I can confirm that that work was completed as planned and, as I mentioned, actually ahead of schedule. Looking at cash operating costs, our downstream business continues to do an excellent job in managing its spending. Year-to-date cash operating costs in the downstream were $1,455,000,000, which is actually down $87 million compared to 2020 and down even more when normalizing for the high energy prices we see this year. This is especially notable because our refining throughput has increased by 33,000 barrels per day and our petroleum product sales have increased by 19,000 barrels per day. So not only are we refining more barrels and selling more product, we are doing it at a lower absolute cost. In August, we also announced plans to construct a renewable diesel manufacturing facility at our Strathcona refinery. This facility will be world-class with the capability to produce 20,000 barrels per day of renewable diesel from locally sourced feedstocks. We are really excited about this opportunity, not just because of its potential to reduce greenhouse gas emissions by up to 3 million tons per year, but also because of its potential to deliver shareholder value at the same time. So stay tuned. More to come on this as we continue to progress towards a final investment decision. Now, petroleum product sales in the third quarter were 485,000 barrels per day, up 56,000 barrels per day from the second quarter. This was largely driven by the increased demand during the summer driving season. Sales were also up 36,000 barrels per day versus the third quarter of 2020, as we continue to see demands recover from the pandemic-related softness of 2020. As of September, we were seeing industry demands pretty consistent with what we saw in the second quarter, with gasoline demands nearing 95% of normal and diesel remaining close to historical levels, and jet pushing above 55%, benefiting from further easing of travel restrictions. I would add that if we look specifically at Imperial sales, our jet volume is actually about 10% better than broader industry levels, around 65% of historical, predominantly related to competitive gains we've been able to capture this year, increasing our overall market share. And with respect to downstream margins, unlike crude prices, our third quarter crack spreads were hovering around the middle of the five-year band, which reflects fairly steady improvement over early 2020 at the onset of the pandemic. Despite ongoing demand volatility, our continued focus on reliable and efficient operations ensures we are capturing as much value as possible in the current downstream environment. I'll wrap up our operating results with chemicals. 2021 has been an incredible year for our chemicals business. and we continue to see outstanding results in the third quarter. Continued strong production, reliability, and margins supported chemical earnings for the quarter of $121 million, which represents the highest quarterly earnings in over 30 years. This also represents an increase of $12 million versus the second quarter of 2021, and $94 million higher than the third quarter of last year. I would also point out that year-to-date chemical earnings are $297 million, which is higher than the previous third quarter year-to-date record of $220 million set in 2018. And we have continued to see volume and margin strength so far in the fourth quarter. And as I mentioned in my opening remarks, our best full-year earnings for the chemicals business was $287 million set in 2015. We still have the fourth quarter in front of us, so this is not a direct comparison. But again, this gives you a flavor of just how strong our performance has been year to date. So in closing, an excellent quarter on all fronts. We have talked over the past few quarters about our commitment to put the company in the best possible place to maximize value, and we are seeing those benefits now. The decisions we have made and the work the organization has done over the past several quarters is exceptional and is allowing us to take maximum advantage of the prevailing market conditions. I am sure you will agree that our third quarter results highlight this. Having our operations firing in all cylinders, when commodity prices are as strong as they are, allows us to really deliver on our value proposition, a large part of which is a focus on shareholder returns. And looking forward to the fourth quarter, as you have seen, commodity prices have so far remained strong, and we continue to focus our commitment to you to deliver maximum value. We are carrying a lot of momentum into the fourth quarter. And just to reiterate, we remain committed to returning surplus cash to shareholders. First, via a reliable and growing dividend, and second, through other means like an accelerated NCIB share buyback program, a substantial issuer bid, or a special dividend. Given our very strong cash position, we are actively evaluating those steps, so stay tuned. With that, I'll turn it over to Dave for the Q&A session.

Okay. Thanks, Brad. We did have a number of questions pre-submitted, so why don't we open up the Q&A with a couple of those, and then we'll go over to the live Q&A line. The first question comes from Phil Gresh, J.P. Morgan. How should we think about the production progression over the next few years at Curl as you aim to ramp to 280-plus?

Thanks for the question, Phil. You know, we continue to see record performance out of Curl. based on our supplemental crushing capacity that we have discussed in the past, and other enhancements in reliability. And so that gives us great confidence in ASSET's productive capability. And moreover, as we've announced last quarter, we moved to one turnaround starting this year from two previously, which is a key driver for us increasing our 2021 guidance to 265,000 barrels a day. A target, as I just mentioned, we remain very confident in achieving, given the continued strong performance through the third quarter and now into the fourth quarter. So beyond the 265,000 barrel a day level, we've got other low-cost projects to get to the 280,000 barrel a day level over the next couple of years, including plant de-bottlenecking, enhanced mine planning, the bitumen recovery, as well as some digital initiatives. You may recall at our previous Investor Day, we outlined that path to 280,000 barrels a day, with Curl reaching 270,000 barrels a day in the 2023 to 2024 timeframe, and ultimately to 280,000 barrels a day by 2025. We still see a progression path, but as evidenced by our recent performance and our track record of continued improvements, I fully expect that we will do better than that 2025 timeline. At our upcoming investor day in March, we'll give more information on that, but again, I expect that we'll be well ahead of that earlier timeline. And I'd also note that as we continue to de-bottleneck curl and really put more barrels over a relatively high fixed cost asset base, we also expect to continue to drive down our overall unit costs. We are only partway through the ramp-up of our autonomous haul truck program, and we talked about realizing a U.S. $1 per barrel saving from the full rollout, which we expect to achieve over the next two years. So in addition, we see a number of opportunities to apply digital solutions more broadly at Curl, which include drones, other optimization technologies, with an overall objective to continue to drive that cost not only to $20 per barrel, but even lower than that. Thanks for that question, Phil.

And Phil had a follow-up. Since you pushed back the timing of Investor Day, could you give us some updated thoughts on CapEx in 2022 and beyond? Does the framework from the last Investor Day still hold, or could there be increases in spending from project activity like renewable diesel and or inflation?

Yeah, thanks for the second question, Phil. You know, we were really looking forward to – to getting back together in person at the end of this year for what would have been Investor Day in November. We see a lot of value to that event being in person, as I know you and other analysts and investors do as well. As we reflected on the situation with COVID across Canada, and some of the travel restrictions that are still underway. We concluded it was still just a bit too soon for an in-person event like that. And so consequently, we decided to adjust the timing of our investor day, moving it one quarter, and so now planning to host that event in March of next year. And soon, I would anticipate you'll get a save-the-date notice from from our investor relations team. But insofar as 2022 guidance goes, we're planning to share that with you within the next month or so so that you will have our latest numbers in a timely fashion, you know, more along the lines of what you would have received, you know, in prior investor days. So we'll give you that guidance, but then at our investor day early next year, we'll go through our longer-term outlook, which will include an update on the Strathcona Renewable Diesel Project, other capital investment plans. And what you'll see is a story that looks very similar to what we laid out last year with CapEx growing from kind of this year's levels to which we now have updated at $1.1 billion, and we previously projected over the next few years we'd be averaging around $1.5, $1.6 billion, and really we see that general magnitude of expenditure continuing, especially with the Strathcona Renewable Diesel Project. We believe we'll mostly be able to include that in those same levels of spending. So, you know, that's just kind of a high-level characterization, but more to come, you know, with our updated guidance and then Investor Day in March. I guess also specific to your question on inflationary pressure, we do see some cost pressure in our business, but we don't expect it to materially impact our capital spending levels, you know, given our ability to find offsets and efficiencies. Thanks again, Phil.

I'm going to add another one here that a few folks have asked about this, so I'm going to pull it together into one question, but it sort of follows up from the question about inflation in general a bit more specifically, and that's what's the impact of the much higher natural gas prices on our refinery profitability. And, you know, our fuel cost advantage that we've talked about before, our refinery's energy efficiency, is that still – Is that still an advantage? And then kind of finally, does it have any implications for potential stepping up development of our unconventional assets?

Yeah, I mean, that's a really good question. Obviously, energy costs are an important driver for us, and so we're watching that very carefully and doing everything we can to offset those costs. those upward pressures, as I mentioned in my comments on curl and generally the downstream. But speaking more broadly about kind of the impact of higher natural gas prices, what we've indicated in our 10-K filing and still is very accurate and representative is Really a modest impact overall. We see for every $1 change in gas price, Canadian $1 change in gas price, we would estimate about a $90 million net income impact for that $1 change. Now, we also produce about $110, $115 million cubic feet per day of gas, mostly from our unconventional assets. So that provides some internal offset versus our gas input costs, energy costs across upstream and downstream. And that's why that $1 impact to gas prices is pretty modest. I'd also point out that our gas feedstock costs remain advantaged globally. and are moving higher in the context of a stronger overall commodity price environment. So on a net basis, we're really benefiting from higher commodity prices, including for crude and refined products, as you can see in the strong cash flow that we generated for the quarter. I'd also note that our refineries are at or near industry best in class when it comes to energy efficiency, according to our Solomon surveys, and that trend has continued for many years now, so we have an advantage over Canadian competitors in the current high price environment for gas and energy. So all that said, we don't take rising costs for granted and we're always looking for offsets. A good example in our downstream is our recent investment in the 41 megawatt cogeneration unit at our Strathcona refinery, which reduces our electricity price exposure and overall energy costs. And so with the Strathcona Cogen project, I would just mention we now have almost 600 megawatts of cogeneration capacity across all of our portfolio. And as for whether, you know, we'd step up investment on our unconventional acreage to produce more gas, I'd say, you know, we're never sitting idle. and we're always considering our investment choices. But at the moment, you know, we're continuing to focus on our core oil sands operations where we haven't yet exhausted all of the highly economic value creation opportunities that we see. That answers your question. Thanks.

Okay, operator, I think we'll move over to the live Q&A line now, please.

Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. Again, that is star and then the number one. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your next question will come from Neil Mita with Golden Facts. Your line is open.

Good morning, team. Brad, you laid out a little teaser there around capital returns. And as I think about part of the stock reaction today, I think there was maybe some expectation for some incremental updates there. But it sounds like those could be coming. And just talk through how you're thinking about a buyback relative to a tender, relative to continued dividend growth, and help us to frame out the timeline around any such decisions.

Yeah, thanks for your question, Neil. Yeah, I did want to, you know, really reinforce our commitment to returning excess cash to our shareholders. You know, we've made that a priority for a long time. We've demonstrated with our actions throughout this year that that was a high priority for us. I know you know, there is a focus on dividend and share buybacks. And I would just remind you and others that, you know, due to the strength of our company and the actions we took through the pandemic, we did not have to cut our dividend. And in fact, you know, we maintained it through last year. And then earlier this year, we announced a very significant increase in the dividend, $0.05 per share of on top of the prior $0.22. So, you know, almost 25% increase. A little bit later, you know, approaching the summer, we did reinstate our share buybacks with a very accelerated 4% program over two months. And then most recently, we reinstated, you know, the kind of a full year 5%. share buyback programs. So again, we've been very active and committed in returning cash to our shareholders. And so as we look to the rest of this year and into next year, you know, the momentum is building for us as a company. We are generating significant cash. We are seeing our cash balances grow. And so, you know, we're committed to returning that excess cash to our shareholders, and that's why I mentioned that we are actively evaluating some very important steps over the coming months that could include an acceleration of our NCIB program, could also include a substantial issuer bid, or perhaps a special dividend. We haven't made any final decisions yet, and it's It is subject to board approval, but those discussions are actively underway. And I might also ask Dan to comment a little bit on our views on substantial issuer bid versus special dividend, because we have been discussing that with our shareholders, and that's influencing us.

Yeah, thanks, Brad. Yeah, regarding, you know, an SIV versus a special dividend, I talked to a number of you on the line. You know, we like to get folks' views, analysts and investors. You know, we're a bit agnostic, but I think the feedback we're getting is pretty significantly in favor of a substantial issuer bid buyback over a special dividend. And there's some research that came out recently that said some of that, too. But mainly that's really from just talking to investors. So, I mean, there's different reasons for that, you know, tax, and you have a choice, and more structural maybe with an SIV is what folks tell us. So, you know, as we weigh those options, we certainly take investor input into account in a very significant way.

And, Dan, is the logical timing to think about an update around this, the fourth quarter call, that's when you made a big decision around the dividend bump, earlier this year, is that what we should base case as, as, as the, the clearing point for this decision?

Yeah. Yeah. I wouldn't get into timing. As Brad said, we're actively evaluating all this stuff and, you know, look, I think we, as Brad said, we're actually committed to returning surplus cash. I think we've demonstrated that. So, um, just, uh, you know, we're, we're working through that. Okay.

All right. And the followup question is just, uh, your thoughts on the Canadian, um, oil markets here. WCS has widened out a little bit in terms of the differentials, but Line 3 is now online. Just how do you think about spreads from here? And as oil has stayed firm, do you think that differentials could stay more contained now that you have pipeline takeaway?

Yeah, there's no doubt, you know, we're very encouraged by by the additional takeaway capacity here in Canada. It's been a long time coming to get some more egress capacity, and so now with the Line 3 expansion being up and running, I think that's very positive. And of course, longer term, we're still encouraged by the plans for the TMX completion as well. you know, all of that provides more access for our barrels to get to the higher cost markets, you know, in the U.S. And I think, you know, having more stability and flexibility in that regard, you know, should help keep These differentials are fairly narrow. We've seen pretty good stability throughout the year in those differentials, pretty much in the $13, $14, $15 barrel of range. That differential coupled with some very strong WTI pricing puts us in a very strong position. I think we will continue to see... some fairly tight differentials. There's always some volatility that could occur depending on unique situations in the marketplace and if there are any pipeline disruptions that might occur with unplanned outages. But we're feeling quite encouraged. Thank you.

And your next question will come from Dennis Fong with CIBC World Markets. Your line is open.

Hi, good morning. Thanks for taking my question. The first one really relates to capital spending somewhat to this year. So there was a modest decrease in guidance from 1.2 to 1.1, which is what we understand, obviously, in light of the stronger production that you're seeing both from Curl and Cold Lake. Has that influenced any of your, we'll call it pace of development for other assets like Grand Rapids and so forth? And how do you think about balancing some degree of obviously optimizing the base production levels versus tackling potentially, we'll call it ESG slash expansion related focus projects? And I've got a separate question for the renewable diesel facility, but really more on the upstream side there.

Yeah, thanks for that question. You know, first on capital spending, I would just reiterate the comments we made earlier on the call that, you know, despite our reduced guidance on capital spending, you know, that in no way reflects a change in focus of our program. It really is just reflecting that as the years progressed and as we continue to lock in efficiencies and achieve capital discipline objectives, we have been able to complete the same amount of work we had planned, but at a lower cost. So that's a really good outcome. As we look to the future, and we will talk much more about this at Investor Day in March, we continue to evaluate all of our Efficiency projects are kind of growth opportunities with de-bottlenecking and other kind of low-cost, high-efficiency use of capital. And, you know, we are positioning all of those, you know, in the best time slot that makes sense for us to maximize earnings, maximize value. And, of course, you know, capture... the market as best we can. Think about an asset like Cold Lake. One of the reasons we have been so successful with our volumes performance there is because we have consciously deployed additional rigs to do workovers and other well optimization activities to increase production there. And that's low cost and high return use of our capital. So we're going to continue to do that. You know, obviously this price environment encourages that. For bigger investments, you know, we're taking a look at a much longer view of the price environment and certainly need to be cognizant of other risks that we may see long term. When it comes to ESG, and again, you'll hear us talk more about this at Investor Day, but a significant part of our capital strategy is to reduce our overall emissions. You heard us talk at last quarter's call about the startup of one of our boiler flue gas Efficiency projects at Curl on just one boiler. We have plans to expand that to five other boilers. We're also deploying new solvent technologies at Cold Lake, which also reduce our emissions. So ESG and lower emissions spending is very important to us. It's very prominent. in our capital spending plans, but also creates economic value, you know, at, at each of the assets where we're, we're making those investment choices. So, so, so more to come on that in, in March.

Great. Great. And then my, my follow-up question here is just on the renewable diesel facility there, just from the language of the initial announcement, as well as, the potential significance, again, balancing components of a strong economic return as well as ESG-focused projects. It seems like, I don't want to say it's a slam dunk per se, but it seems like a very attractive project to move forward on. So with kind of FID potentially in sight, what are some of the last items that you're looking to gain incremental clarity on? It sounded like you were continuing to pursue, we'll call it negotiations and discussions with various government and regulatory bodies, how is that potentially progressing? So, I just wanted to get a quick update as to where you're at with the renewable diesel project. Thank you.

Yeah, thanks for the question, and thanks for the interest. I mean, I think you characterized it well. We do see it as a high-priority, value-accreted project for us, and it does deliver significant environmental benefits. So we are progressing it as quickly, as efficiently as we can. We are still in the middle of several commercial negotiations, you know, around sourcing the feedstock, around hydrogen production. You know, we're also optimizing our own design to make sure we're leveraging best available technologies. And so all of that is kind of work in progress that will bring us to an FID probably sometime next year, but more work to do there. You also mentioned our discussions with government entities. Yes, those are very important to us. We've had very constructive discussions both at the provincial level and the federal level. I think there is a shared view that this project is very important in the overall kind of Canada's objectives around net zero and individual provinces like British Columbia see it also as very strategic for their their fuel sources. And so, you know, we're just working with all those entities to kind of align on a plan and a strategy, you know, their participation and support. But it's all going extremely well. And that's the key message I want to leave with you is, you know, we are very encouraged, very optimistic, and certainly more to come. And we would expect to have you know, much more detail available in March at, at investor day.

Okay. Thanks. I appreciate the color.

Thank you.

Your next question will come from Greg party with RBC capital markets. Your line is open.

Thanks. Uh, thanks. Good morning. Good, good rundown and good questions. Um, The first one is almost like a modeling question. Brad, it's probably for Dan, but it's really just around tax horizon and cash taxability. Obviously, a high-class problem in the world we're living in now, oil price-wise. But how should we think about that in 2022?

Do you want me to grab that, Brad? Yeah, go ahead. Yeah, Greg, obviously, yeah, it is a high-class problem. If you asked me a few months ago, I would say we'd have sort of very, very minimal problems. cash tax payments in 22. And I think that's still the case. I don't think we'll have, you know, really what I'd call significant cash tax payments in 22. But, you know, on current trends, we will become cash tax paying in 23. That's probably as good as I can give you at this point. Obviously, it's sensitive to prices, right? We want them higher. So if that drives us to pay tax, that's just fine. But, yeah, we're getting to the point where, you know, you know, losses and depreciation and stuff like that, which have really been very, very low taxes for quite a while. We're getting past that point. But I think 22, you'll see minimal, you know, relatively small amount of cash taxes and much more significant in 23. Okay.

Terrific. And maybe just shifting over to maybe just the Pathways Initiative. Like, I know you're in the middle of negotiations still with governments and so on, but Brad, is there anything you can say in terms of the direction that that is heading? And obviously there's been some appointments with the change-up in terms of the federal cabinet and so forth, but how should we sort of read maybe the progress on Pathways in terms of what you can say?

Yeah, thanks for the question, Greg. And, you know, I'm really excited about the Pathways initiative. I think we're making great progress. The consortium of five companies are all very engaged. They're working very closely together. Myself and the other CEOs, we're meeting on a very regular basis to kind of review our plans and kind of next steps and progress and and again, all very positive. We just issued some new information to the market, I guess, early last week to give some more updates on our plans, talk about the phasing that we see with our emissions reduction initiatives, and all of that is illustrative of kind of our commitment to achieve net zero by 2050 for the oil sands. And what you would see in those announcements is a significant reduction by 2030. A lot of work underway right now around kind of feasibility studies for the main pipeline from up north in Alberta. down to Coal Lake. Getting the design on that. Also looking at all of the potential sources of carbon that we would want to capture and what the timeline looks like to complete those capture investments. And then equally important is working with the Alberta government around poor space. And so we've recently submitted our application for access to poor space in the Cold Lake region. And then in parallel, we're in conversations with the federal government around the investment tax credit and the consultation that they've had underway. And I would just say that all of those conversations continue to be very constructive. There is a strong support for this project. There's a strong recognition that it is kind of fundamental to the country achieving their net zero aspirations by 2050. With respect to some of the new ministerial announcements, obviously we follow that very closely. You know, Minister Wilkinson has been a key contact for us on broad environmental issues. He's now, you know, staying in the cabinet, moving over to NRCan, which is another very key ministerial position for our engagements. You know, we don't have, you know, a lot of experience experience with the new environmental minister, but we very much look forward to engaging him and talking about our project and next steps and hopefully achieving a shared vision of net zero by 2050. We have a long history of working with many ministers and many governments And our objective is always to make those engagements as constructive as possible and look for ways that we can contribute to Canada's overall goals. So, again, you know, things progressing well and more to come, but I'm extremely pleased with the progress we're making.

Terrific. Thanks very much.

Thanks, Greg.

Okay. So we have a few more that were pre-submitted. So we'll start. The first one comes from a NAV group that credits with. Neil Mehta had asked a bit about kind of our forward view of the heavy differentials. This one's a bit more specific in that we are seeing some widening of the heavy light spread today, and can you talk about what may be driving that?

Yeah, thanks for that question, Manal, you know. Obviously, there's always a lot of moving parts in the market and especially right now You know, I think a key factor in in that spread and again It's it's generally been pretty tight. Although it has widened a little bit in the last month And I think a contributor to that is we did see some inventory builds here in Western Canada and over the last month or so, kind of in parallel to the commissioning of Line 3 and some, if you will, temporary impacts that had on pipeline egress. And I think there was also some very short-term pipeline outages that also impacted egress, all very temporary in nature. But it did cause a build in inventory. And so I think that probably had an effect on some of these differentials. So I think that's the key beyond what I've already said.

Manav had a follow-up question related to renewable diesel. Can you talk about the feedstock you plan to use for the renewable diesel facility? Will it be vegetable oil primarily, or will you use some tallow?

Yeah, kind of maybe building on my earlier comments about this project and and our optimism about it. You know, with respect to feedstock, we are very much planning to use vegetable oils, not a waste or tallow product. And one of the reasons we chose our Strathcona Refinery is because of its location. And it's, you know, it's in close proximity to abundant local agricultural feedstocks. And so, you know, as we think about that supply chain you know, we view most of those crop sources being within a day's transit by rail. And so, you know, that provides, I think, some natural synergies. You know, co-locating it with Strathcona Refinery also provides further strategic advantages, cost efficiencies, you know, and also in close proximity to kind of a low carbon fuel market in BC. So all those things were factors for us to choose the location. But, you know, specific to your question on feedstock, you know, being close proximity to that crop base is really important.

From Prashant Rao at Citi, it's related as well to renewable diesel, but a bit maybe more in a strategic nature. Can you talk about where Strathcona Renewable Diesel fits in the overall goal for longer-term net decarbonization goals, both at Imperial but also as Imperial fits into ExxonMobil's recent updates on this front? And then is there potential to include the remainder of the downstream asset base in the strategy?

Yeah, thanks for the question. And obviously a lot of interest in our Strathcona Renewable Diesel project, so I very much look forward to... you know, talking more about that in the coming months as we progress towards an FID. And I know, you know, John Wetmore here, who runs, you know, our downstream business, you know, he's actively engaged in progressing that project, and I'm sure he'll be sharing more details as well. But specific to your question, you know, we've been examining potential solutions in support of a net zero future for some time now. And as we approach it, we bucket those solutions into short-term, medium-term, long-term opportunities. And this specific renewable project fits into our short-term bucket for Strathcona, but its use could certainly be expanded over a longer-term horizon with other refinery applications for us here in Canada. You know, we're already manufacturing advanced fuels, lubricants, and we've been growing our biofuels blending capability as well for some time. So, you know, this Strathcona renewable diesel project really builds on that foundation and allows us to participate in the growing renewable fuels market in a very efficient way, very economic way. And you saw ExxonMobil announce the Strathcona Renewable Diesel Project alongside our announcement, which I believe really showcases the importance of this project within their portfolio as well, and also just reinforces the alignment between Imperial and ExxonMobil on this key project initiative. And so as I mentioned, we've started with Strathcona with Strathconic given its proximity to the feedstocks and the fuels market. But I very much suspect that there will be other opportunities to progress our lower carbon strategy within our downstream business in other ways over time.

Okay, and we have one final question, also from Prashant Rao at Citi. Investors are broadly expecting industry chemicals margins to recede as 2022 unfolds. If you would, could you please talk about Imperial's chemical business within the global context as this happens? Anything we should keep in mind which might differentiate your operations from the global trend?

Yeah, thanks for the question, Prashant. You know, you heard me talk quite... quite positively about our chemicals business, and I think the outlook for that business continues to be very strong. We've got a very low-cost chemical business that benefits from a number of structural advantages, maybe first and foremost being the integration with our Sarnia Refinery, which really lets us optimize our product mix to extract the most value from shared feedstocks, and also our facility is in close proximity to our customer base, which is another strength for our chemicals business. And these advantages are certainly what underpins the record profitability we've seen this year, but we've also benefited, you know, from some supply shortages and and storm-related outages in the Gulf Coast, which admittedly are temporary. But as we look ahead, there will be some additional capacity coming online that will lead to lower industry margins. But most of that capacity is expected to supply export markets and not directly impact the markets we sell into. So we continue to be very optimistic over the long term and And I would just add that we saw our chemical business earn around $50 million per year. Last time, we had bottom of cycle pricing conditions, which just goes to show how resilient and advantaged our specific chemical business is with all those synergies I spoke to. So again, looking ahead, we do see a strong market and potential for us.

Okay, and that's the end of our questions. So I guess I would close by saying thank you very much for joining us and for your continued interest. If you have any further questions or want to have any further discussions, don't hesitate to reach out to the Investor Relations team. And with that, have a great afternoon and a great weekend. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.