Cenovus Energy Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Synovus Energy's first quarter results. 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 be broadcast without the express consent of Synovus Energy. I would now like to turn the call over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.

Thank you, Operator, and welcome, everyone, to our 2021 First Quarter Results Conference Call. I'm here this morning with our President and Chief Executive Officer, Alex Porbet, Executive Vice President and Chief Operating Officer, John McKenzie, Executive Vice President and Chief Financial Officer, Jeff Hart, and Executive Vice President, Strategy and Corporate Development, Cam Sandar. Due to COVID-19 physical distancing guidelines, the rest of our leadership team members are in listen-only mode today from other locations. We look forward to having everyone back in the same room once protocols allow. I'll refer you to the advisories located at the end of today's news release. These 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 Synovus' annual MD&A and our most recent annual information form and Form 40F. All figures are presented in Canadian dollars and before royalties unless otherwise stated. You'll find our updated guidance posted on synovus.com under investors. Alex will provide brief comments, and then we'll take your questions. We ask that you please hold off on any detailed modeling questions and instead follow up on those directly with our investor relations team after the call. And if you could please keep to one question with a maximum of one follow-up, you can rejoin the queue for any other questions. Alex, please go ahead.

Thanks, Sherry, and good morning, everybody. Today marks an important milestone for Synovus. We're reporting our inaugural results as a newly combined company after closing our transaction with Husky on January 1st. The entire company has been working diligently to integrate the legacy organizations, and I and the rest of the team are extremely pleased with the progress we've made in such a short time. And I just want to make a really important point that this has come and not come without personal impacts to our staff. Since the closing of this transaction, we've had to make difficult decisions about workforce reductions as we drive to deliver on our plan's synergy targets. I'd like to acknowledge the professionalism and contribution of Synovus' people through this period, including those who have left the company. I've really been impressed by the grit and determination of our staff who have pushed forward our integration with a sense of urgency even with the incredible challenges posed by COVID-19. Through it all, our staff have continued to reinforce that they are the most talented and dedicated team that I've ever worked with, and they continue to drive the exceptional performance of our assets. You may recall that workforce reductions represented the bulk of the plan's $600 million in operational cost reductions included in our initial target of $1.2 billion in annual run rate synergies. In the first quarter, we completed about two-thirds of our planned workforce reductions with the balance to occur later this year and into 2022. Combined with our 2021 capital budget, which set us to deliver the $600 million in capital synergies, we are on track to achieve the combined $1.2 billion annual run rate synergies by the end of this year. And we're already seeing synergies in the operations that were not included in the initial annual run rate. In the quarter, we demonstrated the benefits of applying Synovus' thermal operating expertise on assets brought into the portfolio through the Husky transaction, which resulted in increased production rates at the Lloyd Minster thermals. I'll speak to that in a little more detail shortly. One thing I want to make clear before we get into our results is that safety performance including asset integrity, remains our highest priority. We're harmonizing the two legacy safety programs, which is an important focus of our integration work. And we're driving for continued improvements in our safety performance. With COVID-19 cases rising across Canada, including the areas where we operate, the health and well-being of our workforce remains a critical priority. Our sites are operating safely and efficiently. We're continuing to work closely with governments, health authorities and industry to protect our people and we have the necessary protocols in place to help ensure worker health and safety across the company. Our goal is to make Synovus a top-tier safety performer and to achieve this, we'll continue to prioritize safety above all else. Turning to operational results now, as I mentioned, the combined assets have been performing exceptionally well. Starting with the upstream, production of 770,000 barrels per day in the first quarter was at the higher end of our full-year guidance range. In our oil sands business, Christina Lake and Foster Creek continue to be the foundation of our operations. These two assets were key to our $1.9 billion operating margin for the quarter, contributing the majority of the $1.1 billion of operating margin from the oil sands segment with net backs of $25.60 per barrel at Foster Creek and $27.28 per barrel at Christina Lake. Christina Lake's steady performance continued through the quarter. At Foster Creek, we commissioned the most prolific well pads ever in our oil sands operation and production grew steadily through the quarter with March averaging 171,000 barrels per day. As I mentioned earlier, we're starting to see some of Synovus' operating strategies pay early returns at the Lloyd thermals. Synovus has a long track record of continuous improvement at the Foster Creek and Christina Lake operations, and we're bringing this mindset and experience to the SAGD and thermal assets acquired through the Husky transaction. To put this into context, Synovus has drilled over a third of all SAGD wells in Alberta. And in mid-April this year, the Christina Lake integrated team completed the longest SAGD lateral well in history at 2,234 meters. With that well, Synovus now holds all of the top 16 spots for longest SAGD wells drilled in the industry. And this latest well is 23% longer than our previous record. With the expertise and data that comes from the company's collective experience, Synovus has established leading operating practices, including improved conformance, sub-cool strategy, and bottom water management. Now, Synovus' operating strategies are being implemented at the assets acquired through the Husky transaction. And these shifts were beginning to show early results in the first quarter, including supporting increased production rates at the Lloyd thermals. Production was up to an average of 96,000 barrels per day in the quarter, including a few days where we actually achieved over the 100,000 barrels per day mark. Overall, that strong performance saw the Lloyd thermals contribute about a quarter of the total oil sands operating margin in Q1. Conventional operations continued to provide strong operating margins. We benefited from our Q4 winter drilling program coming into production, coupled with marketing activities, allowing us to take additional advantage of higher ACO prices. Meanwhile, our assets in the Asia-Pacific region continue to demonstrate stable production and strong netbacks of $58.53 per barrel, which contributed to operating margin of more than $344 million from the offshore business. In downstream, recovery of refined product demand lagged the recovery of crude oil pricing in the quarter. there were also some significant weather impacts to U.S. operations. Moving to the downstream segments, in Canadian manufacturing, the upgrader in Lloydminster Asphalt Refinery continues to deliver reliable operating performance running near capacity through the quarter and with an average utilization of 96%. In U.S. manufacturing, economic run cuts to balance throughput with lower demand early in the quarter as well as winter storms, resulted in overall lower utilization rates, hindering financial results. Escalation of the cost of RINs also ate into what we captured on the crack spread. While refining margins were challenged in the quarter, we're now seeing pretty clear signs that the demand recovery for refined products will happen at an accelerated pace through the rest of the year, especially in the United States. As a result, we expect stronger results from U.S. manufacturing for the remainder of 2021. Rounding out the operational discussion, the Superior Refinery rebuild is progressing well on track to meet our schedule and budgeted capital before insurance proceeds. Turning to our financial results, we reported adjusted funds flow of just over 1.1 billion or 56 cents per share with free funds flow of just about 600 million But I'd ask everyone to keep in mind if you added back the transaction-related costs that hit adjusted funds flow for the quarter, our adjusted funds flow for the period would have been nearly $1.5 billion, which would have equated to about $0.75 per share. And similarly, free funds flow would have been about $950 million. Turning to our net debt position, I'll reiterate that deleveraging remains a top priority for Synovus. You might recall that when we put out our fourth quarter results in early February, we talked about an opening combined net debt position of about $13.1 billion on January 1st. Net debt rose slightly quarter over quarter, driven by a working capital build of almost $900 million, driven mainly by the rise in commodity prices over the period. In addition, we had the transaction-related costs that I just mentioned. With current commodity prices and having a significant portion of the transaction related costs behind us, we expect to make substantial progress on our deleveraging through the rest of the year. Meanwhile, we have already seen net debt come down below 13 billion since the end of the first quarter. And assuming the forward curves play out, we have line of sight towards our interim net debt target of 10 billion by the end of the year, opening the door to consider other forms of capital allocation, including increasing shareholder returns. That said, the bulk of free funds flow will continue to be applied to the balance sheet until we have achieved our longer-term target net debt level at or below $8 billion. Switching gears to ESG, we're encouraged by the potential for government support for GHG reduction opportunities that will benefit our industry. We've been vocal in our position that government involvement at all levels working with partners in industry will be critical to finding solutions to allow our industry to play an important role in helping Canada meet its climate goals. As we work through the refreshed business plan for the newly combined company, we've conducted a thorough assessment of our significant ESG areas, safety and asset integrity, along with a robust government framework, remain the foundation of our ESG strategy and underpin the five ESG focus areas we've identified for the combined company. These are climate and GHG emissions, indigenous reconciliation, water stewardship, biodiversity, and inclusion and diversity. We're working to establish meaningful ESG targets for each of the five focus areas embedded as part of our business plan for the expanded company, and we expect to announce them later this year. Looking forward, we remain well on track to achieve our budget commitments and production targets. With the strength of our upstream operating margin in the first quarter and the outlook for accelerated refined product demand recovery over the rest of the year, we have a runway for meeting our first net debt target of $10 billion sooner than we originally expected. We're very confident that we will achieve our initial target run rate synergies, and we have already started assessing opportunities that could create additional efficiencies in 2022 and beyond. And with that, we're happy to take anyone's questions.