Cenovus Energy Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Synovus Energy's third quarter results conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. You can join the queue at any time by pressing star 1. 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 the express consent of Synovus Energy. I would now like to turn the conference call over to Ms. Sherry Wendt, Director, Investor Relations. Please go ahead, Ms. Wendt.

Thank you, Operator, and welcome everyone to our third quarter 2020 results conference call. Here with me is our President and Chief Executive Officer, Alex Porbet, our Chief Financial Officer, John McKenzie, our Executive Vice President Upstream, Nori Ramsey, and our Executive Vice President, Downstream, Keith Chesson. 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 MD&A and our most recent annual information forum and Forum 40F. 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.com. Alex will provide brief comments, and then we will turn to the Q&A portion of the call. Please go ahead, Alex.

Thanks, Sherry, and good morning, everybody. As you know, on Sunday we announced a strategic combination between Synovus and Husky to create a resilient, integrated energy leader. This transaction optimizes our cost structure, expands our market access, and strengthens our balance sheet. It positions us as a more resilient company with increased and more stable free funds flow. It also gives us opportunities to expand margins across the value chain, lowering our break-even, and accelerating deleveraging and returns to shareholders. You have already seen us drive significant costs out of our business through corporate and operating optimizations. I'm extremely confident that we will achieve the goals we have set with the transaction and realize the potential of the combined company. But today I'm here to talk about our third quarter results. I want to start by giving credit to our staff at Synovus for keeping our operations running safely and reliably and for continuing to adapt to all the additional measures we've put in place in response to this pandemic. I continue to be impressed with the dedication of each and every one of our employees and how they continue to support each other through this time. Through all of this, our teams remain focused on delivering safe and reliable operating performance. We've had zero significant incidents across our operations to date in 2020. Our teams have successfully navigated the health and wellness challenges of the pandemic while increasing production and executing planned turnarounds at our two oil sands facilities as well as in our conventional operations. As well, this quarter we saw some significant health and safety milestones across our operations. At Christina Lake, our drilling operations as well as completions and well services teams achieved one year without a recordable incident, and our conventional operations marked a one-year milestone since recording a significant process safety event. This third quarter once again demonstrated our flexibility and ability to utilize our full suite of assets to maximize the price received for every barrel. It reinforced our commitment to disciplined spending, maintaining our low operating and capital cost structure, and deleveraging our balance sheet. As crude oil prices showed signs of a gradual recovery through the summer, we were able to increase our crude oil production and clear our inventory of stored barrels to capitalize on the significantly improved benchmark price for Western Canadian Select. We continued purchasing low-cost production credits from peers so we could produce above our curtailment limit. That allowed us to produce high quarterly volumes at our Christina Lake facility. This increase was partially offset by planned turnaround and maintenance activities. Our oil sands operation this quarter averaged almost 386,000 barrels a day, up from 373,000 barrels a day in the previous quarter, and a 9% increase from the third quarter of 2019. We recorded adjusted funds flow of $414 million, which was a significant increase from the second quarter of 2020, when the unprecedented drop in oil prices resulted in adjusted funds flow of negative $462 million. And we generated free funds flow of $266 million in the third quarter and made meaningful progress on reducing our net debt. At the end of the third quarter, net debt declined to approximately $7.5 billion from $8.2 billion at the end of the second quarter of 2020. We had an operating loss of $452 million and a net loss of $194 million in the third quarter of 2020. The operating loss was largely due to an impairment charge of $450 million on the border refinery and negative operating margin from the refining and marketing segment. While we are pleased with our performance in this quarter, we expect commodity prices volatility for the foreseeable future. That's why we look forward to the increased cash flow stability and enhanced free funds flow the transaction with Husky will provide. With that, I'm happy to take your questions.

Ladies and gentlemen, as a reminder, you can join the queue to ask a question by pressing star 1. We will now begin the question and answer session and go to the first caller. First question comes from Manon Holsoff with Security.

Good morning, everyone. I have one question, and it's unrelated to the Husky transaction. Maybe you could just give us your thoughts on the outlook for your SAGD operations over the near term, and more specifically, to the extent that WTI continues to trade in the mid-30s in the heavy differential, call it in the $10 range. What can we expect operationally through year-end and maybe even early 2021? I'm assuming dynamic storage becomes a part of the conversation, but any thoughts on that front would be helpful.

Sure. Hey, Mano, it's Keith Chesson. You know, I'll start and maybe Nori can talk about the operational side of things. But when we look at kind of the economics, you know, even in the mid $30 WTI range and the tight differential that we see, we still see ourselves as variable cost net back positive. So, we would anticipate to produce through this time at full rates. As we look forward, obviously, with curtailment ending in December, we are unconstrained and no longer have to acquire production credits to be able to do so. So it's something that we watch really closely and monitor, and because of the low-cost nature of our production, we're able to produce and generate production. positive variable cost net back.

And just to add to that, it's Nori Ramsey from our upstream business. If you remember, in the second quarter, we actually curtailed our production in our all sands business by month on month about 60,000 barrels a day. And in some days, it was actually down 80,000 barrels a day. We brought that all back on, as you can see, in our third quarter. It's 9% higher than our second quarter production. overall average production. And we have full flexibility to increase that up to our higher levels. And again, curtailment was obviously limiting what we could do. And once we're from December onwards, we'll have a lot more flexibility. But it's always going to be a value conversation. It's the value rather than the actual volume of production that we're most interested in.

Thanks, Merrill.

Thank you.

Next question comes from Greg Party with RBC Capital Markets.

Thanks. Good morning. A couple for you. Maybe, Alex, just to pick up on the safety theme, just wondering if there are specific actions or thoughts you have that, you know, will be taken to ensure that the combined entity here proposed is going to have similar, you know, safety and reliability as Synovus. Is there anything you can add around that?

Yeah, I know, Greg, I'm happy to talk about that. And I think, as you guys can tell, every quarter I usually start out by talking about our safety performance. And it is the number one focus of this company. Commodity prices can come and go, but our commitment to human safety and process safety is our number one focus. criteria at all times. So, you know, as we get through this deal and the deal closes, everybody can expect that the exact same focus on human and process safety that you've seen from us over our entire history is going to continue. And we're going to ensure that we put the resources towards it to ensure that we can deliver that exact same track record.

Okay, great. And the second one really comes back to how we should be thinking about hedging policy. Again, you know, in the context of the new organization, very different integration prospects, but also kind of, you know, tied to that question will be is if you were to continue hedging, would it remain connected with storage optimization? I'm just wondering if you can dig into that.

Sure, maybe Keith can start that and then John may want to weigh in.

Yeah, thanks for the question. When we look at hedging, there's kind of really two different components. One is around kind of the optimization side of the business where we're really trying to capture value from our storage and our transportation assets. When we think about that, really we're seeing a value opportunity over a period of time or in different locations. And to capture that opportunity, we lock up both sides of that transaction. So from a financial side, we may lock it up. And then as that price settles, there could show plus or minuses. But when we actually physically sell the barrels, we realize that on the net back side of things. So we actually see an uptick. And maybe just a key example of that was kind of in April where You know, our barrels were selling for about $4 a barrel. You know, we could have produced and sold and harvested for that price. We chose not to do that. We stored those barrels or transported those barrels down to the Gulf Coast and stored them there. And then, you know, come June or July, we sold those barrels and realized an uplift of almost $25, $30. In that transaction, though, we would have locked in the WTI components as well as the physical sale. And because of that, you know, if WTI settled at 35, we may have shown a realized loss, even though our netbacks were materially higher than what they would have been in April. So, you know, when we think going forward, obviously the combined entity has a lot less exposure to the WCS, WTI differential and hardesty. So that becomes less of a concern for us, but the combined entity still has, you know, exposure to WTI. So maybe with that, John, if you want to pick up on kind of our corporate hedging.

So, Greg, I think there's three, you know, answers to your question that I would give you. And I think Keith really touched on the first is part of this transaction is about us acquiring a number of other assets that give us many, many more options to take our molecules to market to optimize the value that we get for them. So you should absolutely believe that we're going to continue with the type of optimization hedging that Keith has just described. And, for example, you know, today we would have about 10 million barrels of storage. You know, going forward, we're going to have closer to 16 as well as incremental pipes. So those opportunities, you know, are going to present themselves in increased ways for us, and we intend to take full advantage of that. Secondly, I would say that, you know, one of the major reasons for doing this is to reduce the volatility in our cash flow. So sort of at a corporate level, you know, that becomes an inherent hedge, or this transaction will become an inherent hedge in how we manifest our cash flow streams. But finally, you know, I would come back to, you know, something that Alex and I have said, you know, time and time again is the underlevered balance sheet. is the best way to hedge at a corporate level to ride through these commodity price fluctuations. And we've been really clear since we started talking about this transaction that balance sheet deleveraging is our number one commitment, and you can expect us going forward, you know, to continue to prioritize the balance sheet on a free cash flow basis until we've reached a point that we're comfortable with our debt levels.

Okay, terrific. Thanks, all.

Thanks, Greg.

Excellent. Next question comes from Prashant Rao with Citigroup.

Good morning. Thanks for taking the question. I just wanted to talk about the hedges just a little bit more. I appreciate all the color they do. And on the current program, though, and I think, you know, communications in the IR staff, it's noticed that a good job of communicating this to all of us in the MDN and the MDN Native Schools. You're highlighting that from TQ. But the current program, you know, how should we be thinking about, you know, how much volatility that might cause in FFO per share next quarter, or I guess this quarter and next quarter. And I guess related to that question, if we adjust for those impacts this quarter, it seems that the core sort of FFO per share was really mid-40 cents per share, which I think speaks to the underlying quality of the asset base to perform in this environment. So just curious about that, you know, sort of thinking about how we should think about the remainder of this hedging program you entered into going forward over the next sort of four to six months, and also sort of, you know, if that's the right takeaway there about the core reliability and performance of the assets.

Yeah, Prashant, it's John McKenzie. I think you're thinking about the hedge program the wrong way. Yeah. The hedge program that we've put in place locks in additional profitability. And my suspicion is you're confusing accounting treatment with straight-up economics. And you'll notice in this quarter we sold many more barrels than we produced. And we took the opportunity in Q2 to start storing barrels rather than sell them into the front market. And what we do is we lock in that contango along the curve. so that we're locking in sort of a $4 or $5 per barrel margin by selling in Q3 versus selling in Q2. Now, if WTI rises by more than that $4 or $5 increment that the curve was showing us back in Q2, we'll show a hedging loss. But the reality is we're not speculating in the market. What we're doing is locking in incremental margin by selling in one period versus another. So don't get confused by the hedging gains and losses. They really are a function of how WTI is moving in the marketplace, whether it goes up through one period or down through one period. But our hedging program is designed not to speculate, but to lock in incremental margin.

Okay. Thanks for that clarification. I had another question I had was returning to the transactions. I appreciate that you probably can't give too much color around this right now, but when you look through asset monetization opportunities or sort of, I guess, you know, optimizing the portfolio, you know, post-transaction, post-merger, could you maybe help us to think about how you evaluate that, just sort of what's the construct by which you go through and, you know, balancing – profitability versus synergies with the overall portfolio. Specifically, I was thinking outside of black oil production, that portfolio that you'll have on a consolidated basis. Any color there would be helpful.

Sure. Anytime you put two companies of this kind of scale and scope together, you're going to go through a process and we have and are continuing to go through a process of determining what is core to this business and what is non-core. And as you can imagine, there are a lot of criteria that kind of go into those decisions, but really at the base of them, it is about the value those assets can generate. and their strategic importance to the company. So, you know, we will, I think people can take it as a given that we are going to proceed to look at monetizing, you know, non-core assets that are falling out of this combination. And From my own perspective, I don't know that I'm willing to share it right now, but I think we already have a pretty good understanding of the kind of assets that we're going to take a really hard look at in that regard. And we're also going to be cognizant of are they worth more to other people. And I think the other issue is going to be is the time right And can we actually transact at values that are value creating for our shareholders? So, you know, expect more from us on this. I think we're going to act fairly quickly. And just, yeah, I mean, it's just going to take us a little bit of time until we're at a point where we can talk a little more freely about it.

Okay. I appreciate that. Thank you very much.

Yeah, no worries.

Next question comes from Phil Gresh with J.P. Morgan.

Yes, hi, good morning. I was just thinking about the rail contract that you have that you signed up a little while ago. I think it goes maybe until the end of 2022. And I apologize if you addressed this on the last call, but what happens with that once we get to the end of the period and now that you have the take-away contract? you know, the excess takeaway that Husky would provide.

Hey, Phil, it's Keith Chesson. Yeah, you're right that some of those contracts fall off kind of at the back end of 2022, so we'll evaluate that at that time. You know, what I would tell you is, you know, we quickly ramped down the program in the first part of this year when commodity prices collapsed, but we didn't sit on our hands through that time. We actually – continued to negotiate around those contracts and have been able to further reduce our variable costs on those contracts. And because of some small investment that we made in the Bruderheim facility last year, we're actually able to store a bunch of unit trains at the facility, which allows us to ramp up the program relatively quickly. So I think in the past we've talked about this overall program not lending itself to kind of quick ramp up and ramp down in the span of kind of less than six months. But what we've been able to do is take a portion of the program and really have agility and flexibility to ramp it up and ramp it down over the period of a couple of months now. So we will look at kind of market opportunities to be able to do that at those reduced costs for transport to the Gulf Coast kind of over the next couple of years. And then coming at the end of the contracts, you know, we'll kind of look at egress and how it's all shaken out, whether or not we would want to extend those or not.

Right. Okay. Yeah, I guess my thoughts to that would just be with your comments about having lowered the cost, does this mean that the new transport costs that we've seen this quarter, which are lower than prior quarters, is a function of that cost reduction given – rail not being utilized? And then is this the right way to think about the go forward? And if we go into, you know, for coming out of curtailment, do you think you'd actually maybe start using that rail as we move into 2021?

Yes. So, Phil, you shouldn't be surprised to see us use the rail kind of in the fourth quarter here. We are looking at starting up a portion of the program in November. It's still enables us to accumulate additional production credits versus having to acquire them in the market through the supplemental production allowance. And then in December, you know, it really comes down to a cost-benefit analysis. And with the cost reductions we've been able to achieve on the variable costs, you know, we can actually make this program economic to run barrels down to the Gulf Coast and realize higher netbacks. So you shouldn't be surprised to see us move some volume, obviously not the full program through the fourth quarter, but some volume through the fourth quarter, which will help improve our overall netbacks.

Yeah, Phil, it's Alex. Just maybe one thing I'd add to that. You know, this improvement in pricing we've been able to achieve is is really significant, and it's a tribute to Keith's team, but also our freight partners. They have been really good to work with in making this a much more compelling opportunity going forward.

Alex, from a macro perspective, with the removal of the curtailment, do you think the broader industry is going to need rail? I know that the commentary suggested not until mid-2021. as the decision point for why to remove the curtailment, but what's your view?

Yeah, I mean, I suspect, I mean, I think I've been pretty consistent about this, but, you know, I think one of the very clear features of our industry is, you know, I think all of us have been very successful in driving costs out of our operation, and I suspect with curtailment going away, those barrels on the sidelines, be they 200,000 to 400,000 barrels a day, I do expect them to come back, and I would not be terribly surprised. at all to see rail. You know, I don't think we're going to see it where it was a year and a bit ago, but as Keith said, you know, it looks like it's making economic sense for us, and I wouldn't be at all surprised to see rail volumes moving up here over the next few months. Great. Thank you.

Next question comes from Manav Victor with Credit Suisse.

Hi, guys. Corker over Corker. There was a lot of improvement in the netback. Obviously, the benchmarks were more supportive. But just trying to understand what was condensate pricing a big advent for you in 2Q, and as that kind of lag went away, you started closing the gap to the benchmark, and that led to improvement in netbacks. If you could comment a little on the condensate pricing lag and how it helped you or hurt you in 2Q versus 3Q.

It's Keith. You know, I think this is kind of a build on what John had talked about earlier and kind of how we are trying to improve our netbacks by moving barrels out of one period into another. You know, so in the second quarter, we were able to store a lot of barrels. Obviously, the pricing, if we had sold them in that quarter, would have been at very low pricing. We stored those and moved those into Q3 quarter and realized much higher realizations for those. So I think if you look at our sales relative to production, you can see, you know, an increase in sales in the third quarter relative to production. And that's really putting those barrels in the market in a higher price environment. And that obviously all flows back into an improved net back for us.

Perfect. A quick follow-up here is we're seeing a very positive trend in transport and blending costs going down at foster. Obviously, rail is a part of it, but If you look at from 1Q where it was $14.37 now all the way down to $8.60, is there anything else that you're doing at Foster Creek to push the cost down in transport and lending besides rail, which is helping you out?

You know, Manav, I think you'll see a lot of variability, you know, quarter to quarter. It all depends on, you know, barrels that we move by rail, as you indicated, but also barrels that we move on pipeline and which – which production we choose to move down the pipeline. So some months and quarters it may be Foster, some months and quarters it may be Christina Lake. It all depends on how we can get the maximum value for our barrel, and that will drive some of that variability in transport costs. But, you know, we are going to utilize, obviously, our assets to maximize that value. You're right that with rail off through the third quarter, our transportation costs are down significantly. because of that, but, you know, we will use those assets to capture incremental value for the company. So you will see a bit of variability quarter-to-quarter, asset-to-asset.

And last question is, Enbridge line-free replacement, any color, anything you are hearing out there, do you think this could be a 2021 event? Thank you.

You know, everything that we're hearing about is that they are marching towards, you know, a 2021 startup. Obviously, some critical decisions coming here in the November time period around some permits, and that will then drive construction, you know, of that project. So we'll be watching kind of through the fourth quarter intently, and if they get their permits and start construction, then, you know, we do think a 2021 startup is realistic. Thank you for taking my questions.

Next question comes from Chris Cox with Raymond James.

Thanks, guys, and thanks for taking my question. Maybe just the first one, really, in the quarter, just any comments on why you didn't also record any impairment at Wood River and just anything that maybe differentiated that asset test versus what you conducted at Forger?

Yeah, thanks, Chris. It's John McKenzie. One of the things we do with all our assets every quarter is assess for indicators of impairment. And obviously with, you know, refining cracks dropping as precipitously as they have been and not recovering as quickly as they have, you know, we took that as an indicator of impairment in our downstream. So we evaluate both of those assets. Now one thing I would say is that Wood River is a more complex refinery with much greater scale efficiency than we have at Borger. So You know, the reality is when we looked at that one versus the net book value and we kind of ran it out on the discounted cash flow basis, we got to the answer that we did get to. But relative to the carrying value of Wood River, we did not have an impairment.

Okay, thanks for that. And then maybe circling back to the transaction here, I just wanted to dig a bit deeper into some of the talk about kind of physical integration between FCCL and Lloyd Complex and I'm curious how much of your resilient value chain you think you could integrate there. And, you know, I believe your current zone supplies also tie some long-term contracts on, you know, Coal Lake and Polaris. And how do you think those contracts on those pipelines might play into those plans or even some of your other contracts for the downstream?

Yeah, we're right on the front end of this question. And when we did our synergies and put out our targets, we were really clear that we didn't want to include any of that in our synergies, the $1.2 billion that we put out as capital in operating synergies are really those synergies that we have a really high confidence that we're going to be able to get in a very short period of time. So when you talk about the broader physical integration between FCCL and Lloyd through time, you know, that's an exciting opportunity for us. You know, we think that, you know, through time Lloyd is going to be a very strategic asset. and how we integrate that and work through the molecular integration, not just on FCCL molecules going into Lloyd, but condensate coming back, is something that we are working through today. But it's too early in our minds to be talking about future values and things. you know, magnitude of integration that's possible there. But it's really clear to us that that is a legacy asset at Lloyd Minster, and it's going to give us a lot of optionality on the integration going forward.

Maybe just I'll ask in a slightly different way. To achieve that physical integration, will it require negotiations with other parties other than just you and Husky?

Yeah, it will.

Okay. Thank you.

Next question comes from Matt Murphy with Tudor Pickering Holt.

Hi, thanks, guys. I appreciate with the acquisition release laying out your carbon emissions over the long term and that it'll take some time to work through firming up plans there. But I guess given the perception of oil sands as being more emissions-intensive than other barrels around the world, and certainly appreciate that all oil sands isn't quite the same, but given those ambitions, just wondering if you guys could provide a bit of a teaser on some of the things you're thinking about and meeting those ambitions, whether we're talking solvents, carbon sinks, or otherwise. Thanks.

Yeah. Thanks, Matt. I mean, when we came out with our targets and our ESG targets in the spring, I mean, I think we gave a little bit of color around that. And what I would tell you is, you know, we didn't come out with those targets until we had done a comprehensive economic and and engineering analysis of sort of what options, not just what were possible, but what options were actually achievable within our business plan. It would be pointless to come out with an ESG target that weren't grounded in the business plan. And so that was what we did. And if you think about it, you know, I would kind of say it's a little bit all of the above at ESG, You know, we've obviously been a leader in solvent technology. I expect that solvent technology will be a part of it. Carbon sinks is something we are, you know, we're looking at carbon capture and sequestration. But, you know, one of the things I, and, you know, there may be, you know, there could be an element of of acquiring carbon offsets. But the one thing I would say that I think a lot of people don't appreciate, although there are a lot of projects that require capital, whether it's cogen, whether it is solvent technology, carbon capture, there's actually, we believe there are a great deal of benefits that we can reduce our GHG intensity by changing how we operate the assets. And so there's actually a whole suite of things. And now with Husky coming on, there's not only how we operate assets, but what assets on a go-forward basis get capital and what assets don't get capital. And all of those have the ability to meaningfully improve the GHG intensity.

Yeah, I appreciate the thoughts there. If I may, and follow up on a completely unrelated note, just on the approach to integration with the Husky transaction, if I go back to the 2019 investor day, excuse me, for example, which I appreciate is a world away at this point. But I think the strategy at the time was to take advantage of accessing a healthy amount of refining capacity in the US market, rather than owning it yourselves for from a sort of integration. I guess, can you talk about what's changed there in the thinking? Was it just an opportunity with Husky that was just really hard to pass up? Or did something, I guess, change in how you're thinking about the value of integration, whether a reach or in how you're thinking about pipeline progression from Canada?

Yeah. Yeah, I mean, it's a whole lot of things. But, you know, I'd maybe go back to where my comments have been on integration from the start, Matt. And, you know, I think what I've been very consistent on, I've always said, Look, I love the integrated business model. I looked at our competitors and said it would be fantastic to have that kind of business model and take the volatility out of our cash flow and earnings related to our exposure to Alberta heavy oil pricing. But when we looked at that very in-depthly a couple of years ago, At the time, crack spreads were $18, $20, and every refining or processing, upgrading business or asset we looked at was just extraordinarily highly valued, and I'm just not very interested in picking off assets at the peak of the market. And that's why we came to a strategy at that time of focusing on rather than on processing, of actually looking at opportunities to get our barrels to market via logistics, whether it was pipe or rail, where we could achieve a global price for our heavy barrels. And the obvious differences is since the pandemic, You've seen a situation where everybody's values have come down, but if you look at the valuation metrics of the Husky merger, you would see if you kind of break that business up into an upstream and downstream situation, business, however you do it, that downstream 400,000 barrels a day of molecularly integrated upgrading and refining to our barrels, I mean, the valuation was absolutely compelling.

Yeah, I would just add to that, Matt. I think Alex used a really important phrase there called molecular integration. And that's what this opportunity really presents for Synovus going forward is the ability to have processing units that are tied to our molecules, you know, that consume the molecules that we produce. And I think that gives a whole different level of optionality as well as a whole different reduction of volatility going forward. So this isn't just about integration. It's about molecular integration going forward and tightening up our value chains and shortening up them to the extent that we can.

Next question comes from Chris Tillett with Barclays.

Hey, guys. Good morning. Thanks for taking my question. Just a quick one for me. On the conventional side, it looks like you're resuming some activity there in the fourth quarter. And then Mike, My read is that it's just tied to sort of stronger seasonal pricing. But just wanted to confirm that or see if maybe, you know, this was a sign of interest to pursue some incremental opportunities on the conventional side in 2021.

Hey, Chris, it's Alex. No, I mean, you look at – we've obviously been very disciplined over the last few years with the deep base and then You know, given gas prices where we found them over the last two or three years, the right decision was not to put material capital to that asset. And, you know, this is an opportunity, you know, with gas prices, as you've mentioned. You know, we can lock up gas prices for a few years at very attractive levels. It's a short cycle. These are very, very high. IRR kind of drill-to-fill opportunities, and it allows us to take that asset from a decline to basically keeping it at least flat to modestly growing.

Understood. Thanks for that. And then maybe just as a follow-up, anything you can offer in terms of the role that those assets might play in the pro forma company?

Yeah, I mean, I had responded to that question earlier about asset sales, and I think as everybody knows, we took a really hard look a couple of years ago at whether there was an opportunity to monetize a portion of that conventional business for Synovus. And I think you can kind of assume if you put Synovus' conventional business together with Huskies in a higher price environment. We're going to take a really hard look at that. I think my observation today is even though the prices have come up, it's still a pretty tough market for value, but I expect that will likely improve over the next little while, especially if prices stay where they are. So we're going to take a very hard look at that.

Okay, great. That's helpful. Thank you. No worries.

Next question comes from Neil Mehta with Goldman Sachs.

Thanks, guys. Twice in a week. So I guess the first question here is maybe it's for you, John, given you know the Husky assets really well, but as you looked at the last couple of years of Husky, one of the challenges has been operational execution and excellence, and is that showing up in different ways and in both upstream and downstream in terms of performance. As you look at those assets, do you think there are things Synovus can bring to the table to kind of get them up to speed? And how do you, as you went through the process of valuing these assets, how did you take that into consideration?

Yeah. It's John, not Jeff.

I thought you said Jeff.

I think you might be 20 minutes ahead of yourself. Oh, I see. I'm sorry. But I tell you, this was an absolute number one concern for us. Alex has mentioned right off the top of this call that safety is, always has been, and always will be our number one concern going forward. So when we looked at this asset base, I would tell you that we had unfettered access to do our due diligence, and we have been at this for nearly six months. And I would say the diligence that was done on all aspects of these assets is really unprecedented in terms of my experience with the M&A market, particularly on the E&P side. When we look at the asset base that we acquired, you know, Everything on the upstream that is operated is really right in our wheelhouse, and it's right inside what we really do well as a company, and we are very comfortable with the reservoirs, the conditions of the assets, the conditions of the commercial arrangements over the top, and we think we can add value there, and we think that that value can be realized in a fairly short period of time. As it relates to the downstream, we took a lot of time to look at some of the improvements and some of the changes that Husky has been making through time, all the way from new personnel coming into their operation, all the way through their safety process, safety systems, as well as their asset condition reports, as well as reliability and safety practices. And I remind you, we have two directors on our board who are very, very deep in terms of refining assets and the operations thereof. So it's something we took our time on. It's something that was absolutely top of mind for ourselves and the board. I think we've done a thorough job of ferreting out our level of comfort in this, and we're comfortable that on a go-forward basis, you know, we're on the right path and that we've – satisfied ourselves that we are not going to have these kind of incidents going forward.

Great. And the follow-up here is I had asked about this over the weekend, but I don't know if there's been a subsequent update to any conversations with either the ratings agencies or credit investors about how they view this transaction or pro forma way and whether This gets us the breadcrumbs to getting back to investment grade.

You know, I can't speak for the rating agencies. They've all put out their comments now. And, you know, you can read into those what you will. But, you know, it's our expectation that we are sowing the seeds for a return to investment grade in short order. That would be something that's very important to us.

Thank you, John.

Thanks, Alex.

Next question.

Next question comes from Mike Dunn with Default First Energy.

Thanks. Good morning, everyone. Not to beat it to death, but I did have another question on the, I guess, the hedging strategy around timing of your sales versus your production. You know, maybe naively, I had thought that this was something that generally maybe some of the oil sands big players would consider. would do based on their outlooks for maybe seasonal turnarounds for them and others. So just wondering, John or Alex, if timing of sales versus production was something that was strategically done in the past without hedging? And then a second part to that is, how did you weigh the cost benefits of delaying the sales of your own equity barrels versus you know, locking in that contango by buying third-party barrels and delivering them later.

Thanks. Yeah, Mike, it's John. This is something we've always done. But what I would tell you, you know, going forward is what is really important to us is maximizing the free cash flow to the organizations. So what we look at is can we sell into the future using the assets that we have, and we have pipelines and about 10 million barrels of storage available to us to increase the free cash flow in any future period. Now, we do attach a cost to that. There is an internal cost of doing that, and that kind of approximates a few hundred basis points beyond our cost of capital. But we, you know, we do that on a diligent and rigorous basis to make sure that, you know, we're maximizing free cash flow, maximizing returns to shareholders.

Okay, thanks, John. That's it for me.

Yeah, the other thing I would say, Mike, is, you know, this is not something we're speculating on. You know, what we're doing is taking what the market gives us in terms of the shape of the futures curves. And all we're doing is using our assets and playing along the length of that curve to maximize future cash flows for the company.

Right. And, John, forgive me, there's been a lot of quarterly press releases out. So if I missed it in the body of your MD&A, did you guys quantify like all in, including the financial WTI hedging losses, you know, the net gain? from that strategy versus, I guess, timing your sales to be, you know, in line with your production volumes?

Yeah, what we haven't given you is the net gain, but what you see is the accounting and the MD&A, and I think that's what's causing the confusion is the mark-to-market on the financial components of this versus what the underlying physical business is doing.

Okay, so you're keeping that number? Close to your chest. Okay. Okay, thanks.

Next question comes from Harry Mateer with Barclays.

Hi, good morning. You know, first question, can you maybe talk about your intentions with the pro forma death structure and if you plan to have parry pursuit treatment for the synovus and husky bones after closing and, you know, perhaps if so, how are you going to go about doing that?

Yeah, Perry, it's John again. We're looking at all the options as around to your question around Perry Pursue, and, you know, that's something we're going to have to get back to you, and I'm not going to talk about that this morning. What I would say, though, is, you know, we are of the view that investment grade is, you know, very important of this new company. It's one of the, you know – synergies that we believe haven't taken any value for, but we think it's really important going forward. So you can expect us to do everything required to get us back into that space. What we've also committed to do, and we'll do this in a reasonably short term, is we'll come back to you with a complete financial framework. that would not only talk about capital structure and how we see debt playing into that, but it will also talk about capital allocation and the screens that we intend to run on that together with shareholder returns. But we want to do that in a comprehensive way rather than give you one piece of the framework or do it incrementally through time.

Okay, great. Certainly that will be helpful. Apologies if I missed this question. you know, either on the call last weekend or earlier today, but have you guys talked about upfront costs to realize your synergy targets? Clearly, they're a major driver of the deal, but I'm just wondering sort of how much cash you think goes out the door initially to actually capture those.

Hey, Harry, it's Alex. You know, I think that if you want to think about sort of the costs of putting the two companies together, think about a one-time cost of just over about $500 million, and you know, that compares to the $1.2 billion a year of annual run rate synergies that we, you know, expect to largely get in 2021 and get the entirety of them in 2022. Thank you.

That's helpful.

Okay. Our last question comes from the media with Robert Tuttle with Bloomberg News.

Yeah, hi. I noticed there was a permit or something filed with the AER about a DRU that's going to be built near your rail terminal, and you guys were looking at DRUs. What's your outlook on that? I mean, is there a plan to perhaps have one there at the – a bigger operating one at your rail terminal?

Hey, Robert. It's Keith Chasson. You know, we filed that regulatory application just to give us the flexibility around that project. Obviously, with the transaction that's underway, obviously, we're taking another look at, obviously, the DRU and the location of the DRU. So, you know, that was just a step in the process to make sure that we had flexibility.

Yeah, Robert, it's Alex. Just to be really crystal clear on that, we kind of said when we were looking at the DRU that we were going to do the engineering and permitting to give us the ability to have the option to go forward on a DRU, and no one should think about that filing as anything more than just carrying through on that direction.

Okay, thank you.

No worries.

And at this time, I'll turn the call over to Mr. Perbet.

I think that's the end of our questions. So thanks, everybody, for taking the time and enjoy the rest of your day.

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