Cenovus Energy Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Synovus Energy's second 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'll 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 over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.

Thank you, Operator, and welcome everyone to Synovus' 2021 Second Quarter Results Conference Call. 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 40S. 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 Porbet, our president and chief executive officer, will provide brief comments, and then we will 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, everyone. First off, let me say how great it is to see vaccination rates continue to rise in Alberta and across Canada. However, we know that COVID-19 hasn't gone away, and I assure you, at Synovus, we're not letting our guard down. With restrictions easing, I know I'm looking forward to life getting back closer to normal, and the health and well-being of our workforce and our communities remain to companies' priority. As we modify protocols at our operations, we'll continue to follow public health guidance and to work closely with governments, health authorities, and industry to protect our people. Safety is foundational to how we operate. We're working diligently to finish integrating our safety systems after closing the Husky transaction at the beginning of this year. Our goal is for Synovus to be a top-tier safety performer, and to achieve this, we prioritize safety above all else. So turning to the second quarter, we continue to build on our first quarter results with strong operations delivering even better financial performance. If you heard our last conference call, we communicated that if you added back the transaction-related costs that impacted adjusted funds flow in the first quarter, our adjusted funds flow would have been nearly $1.5 billion and free funds flow nearly $1 billion. In the second quarter, that performance has more than played out, with our adjusted funds flow hitting $1.8 billion and free funds flow of $1.3 billion. Establishing this cash-generating power of the combined company in only our second combined reporting period, I think, reinforces the strength of the combined portfolio, and we expect this to continue in the second half of the year, assuming forward curves hold. Looking at net debt and deleveraging, we reduced net debt by almost $1 billion in the quarter, and we expect an accelerated pace of deleveraging in the third quarter and through the back half of the year, again, assuming commodity prices and foreign exchange rates continue to hold. The $1.3 billion in free funds flow went towards a balance sheet, and we also had the benefit of an unrealized foreign exchange gain on U.S.-denominated debt. However, this was partially offset by a change in working capital of about $389 million. The working capital build was driven mainly by the impact of higher commodity and refined product prices on inventory and accounts receivable, as well as increased inventory volumes. The accounts receivable at the end of June will benefit July cash flow, which should help accelerate the leveraging in Q3. Speaking to the inventory build now, as U.S. refinery utilization ramped up in the second quarter based on higher refined product demand in the third quarter, downstream inventory volumes increased. We also utilized our midstream storage capacity in the quarter to capture higher prices in the third quarter rather than take discounted pricing resulting from apportionment on the Enbridge mainline in June. We've ramped up our rail program in Q3 to capture more attractive pricing in the U.S. Gulf Coast. Asset sales will also accelerate, reaching $10 billion in net debt. During the second quarter, we closed our sale of the Martin Hills Gore for $100 million. In June and July, we reached two other agreements to sell asset packages and conventional for additional proceeds of $110 million, which will appear in the third quarter. We also have a number of other potential asset sales we're working in earnest. We continue to expect cumulative asset sales proceeds in the many hundreds of millions of dollars in 2021. Assuming the forward curves play out, we have our net debt target of 10 billion or under 10 billion well within sight in 2021. And once we're in range of that 10 billion mark, there will be room to consider other forms of capital allocation including increasing shareholder returns. And I just want to make the point that we very much recognize that our share price is in a range that would represent compelling value for potential share repurchases. I'll turn now to the operating results this quarter. In the upstream segment, we continued the production strength established in the first quarter. Overall production was about 766,000 VOE per day, nearly in line with Q1. And that's even with turnarounds at Foster Creek, Sunrise, eight of the 11 Lloyd Minster thermal projects, and three of our conventional natural gas processing plants in the quarter. Foster Creek production was down in Q2 due to the turnaround already mentioned and unplanned operational events as a result of some treating issues at the plants. This impacted production into July. However, the teams quickly incorporated learnings to adjust, and Foster Creek has been back to running at full rates since mid-July. And I think it's really worth pointing out that this production includes four new well pads with some of the highest production rates we've ever seen at Foster Creek. And basically, if you think about that treating issue we had, we basically had to adjust for bringing in larger volumes than we've ever had before at Foster Creek. which I think is actually a pretty nice issue to have. Christina Lake exceeded its own solid and steady operating performance, delivering over 230,000 barrels per day of production. That's almost 3.5% higher than its already strong first quarter production, with the increase reflecting new wells coming online in the quarter. Turning to the Lloyd Minster thermal projects, not only were the turnarounds there well executed, We also beat the record quarterly average production rate we achieved in the first quarter, averaging overall almost 98,000 barrels per day. And I would just make the point that overall, coming out of the turnarounds, we're seeing upstream production now consistently exceeding 800,000 barrels of oil equivalent per day. And I think that's a pretty good testament to how the assets are operating. Driving the company's $2.1 billion total operating margin for the quarter was a $1.4 billion contribution from oil sands, reflecting strong realized pricing. Oil sands operating costs increased somewhat relative to the first quarter, mainly due to the turnarounds I mentioned and increases in ACO pricing and other commodity-linked costs. Looking at conventional, production was also up about 3.5%, relative to the first quarter. This reflected the addition of new wells coming online in the second quarter and included production impacts of the three turnarounds mentioned earlier. Our offshore operations were a really strong contributor to free funds flow, delivering operating margins of $340 million in the quarter, with operating margin totaling almost $700 million so far this year. That roughly translates to about $600 million in free funds flow from the offshore business so far this year, a really significant contributor to our deleveraging efforts from that high net back production. Moving to downstream segments, in Canadian manufacturing, the Lloydminster Upgrader and Asphalt Refinery continue to deliver reliable operating performance with an average utilization of 94%. Canadian manufacturing operating margin of $189 million in the quarter was more than twice the segment's operating margin in the first quarter. This reflected a much stronger average refining margin of nearly $30 per barrel in the second quarter, with asphalt refinery sales increasing alongside the start of paving season. The increased operating margin also included $55 million in revenue for settlement of a customer contract at the Bruderheim crude by rail terminal. In U.S. manufacturing, demand for refined products continued to rebound and so too utilization, averaging 87% in the quarter, recovering another 15% from the first quarter. This increased utilization included turnarounds and other outages at a few of our U.S. refineries during the quarter. While throughputs were stronger and market crack spreads were higher, operating margin of $96 million in the second quarter increased was only slightly higher than the first quarter of this year. This was mainly due to the average cost of RINs increasing about 45% to over $8 per barrel, quarter over quarter, hindering net crack capture and higher feedstock costs due to the increased WTI benchmark price. We expect stronger results from U.S. manufacturing in the second half of the year as the demand recovery for refined products continues and utilizations continue to increase. Building on the strength of upstream production in the first half of the year, we've updated our 2021 guidance, increasing total production guidance by about 2% at the midpoint, while holding our total capital budget to the $2.3 billion to $2.7 billion range announced in January. Since coming out of the turnarounds at the oil sands assets, as I said earlier, we've seen many days where company-wide production has been over 800,000 BOE per day. We expect production performance for the second half of the year to be stronger than the first half, and this is reflected in our updated guidance range of 750,000 to 790,000 barrels per day. And reflecting our confidence in the value we've been able to add at the Lloydminster thermal project so far this year, we've included an additional 10,000 barrels per day of expected production from the Lloydminster thermals for the year. Our updated capital guidance includes an additional $100 million of capital allocated to the oil sands, primarily for accelerating some of the work we've been doing at the Lloyd Minster thermals, including capital allocated towards a completion of Spruce Lake North, as well as carrying out some redevelopment wells at Christina Lake. We've made an offsetting capital reduction in the downstream segment, which reflects efficiencies identified across the portfolio. We've slightly increased our guidance ranges for operating costs at oil sands assets this year, including Foster Creek and Christina Lake. These changes reflect increases in ACO pricing and other commodity-linked costs with our non-fuel OPEX remaining on track to our original guidance. While operating costs for the Lloyd thermal projects will have these same impacts, they have been more than offset by the efficiencies we've achieved there through application of Synovus' operating strategies and related SOR reductions. As a result, we've brought operating cost guidance down for the Lloyd Minster thermals. We've also reduced our operating cost range for conventional, reflecting some efficiencies we've been able to achieve there and asset sales. I'll take the opportunity to note today that we have a major turnaround planned at the Limer Refinery this fall. This is a once in every five years event that we've planned for and was always included in our full year guidance. But something to keep in mind is it will impact Lima in late Q3 and into Q4. Returning to the guidance updates, we've also reduced our integration cost guidance by $100 million for 2021. While we still expect total integration costs related to the Husky transaction in the range of $500 million to $550 million over 2021 and 2022, we've adjusted timing such that the remainder is now expected to be spent in early 2022. This doesn't impact our forecast pace of synergies capture. We remain on track to realize at least 1 billion of synergies in 2021 and to reach the annual run rate target of 1.2 billion by the end of 2021. The only change is that we're just spending a little less than we expected this year to do it. On the ESG front, we're continuing to take bold action to address emissions. Last week, we announced we'll be buying solar power-produced electricity and the associated emissions offsets from a partnership between the Cold Lake First Nations and Elemental Energy. This power purchase agreement will put 150 megawatts into Alberta's electricity grid in southern Alberta and help mitigate our scope to emissions. It also reinforces our longstanding business relationship with the Cold Lake First Nations. And last month, we were one of five oil sands companies that launched the Oil Sands Pathways to Net Zero initiative. Our goal is achieving net zero emissions from our operations by 2050, while supporting Canada's efforts to meet its Paris Agreement commitments and net zero aspirations. We continue to work with the federal and provincial governments to advance the funding and policy support needed to implement the emerging technologies that will enable zero-emission oil sands production. As a company, we're committed to global climate leadership. Later this year, we'll be reducing the new targets for our combined companies' focus areas, climate and GHG emissions, water stewardship, biodiversity, indigenous reconciliation, and inclusion and diversity. I look forward to sharing those with you. So in closing, I think this quarter has again demonstrated the operating strength of the combined portfolio and the free funds flow capacity of this business moving through the year at current strip. As these results reinforce, we have the benefit of best-in-class assets, and we're building on our track record of asset reliability and low-cost structure. With the first half of 2021 behind us, we're even more confident that we will deliver at least $1 billion in in synergies this year and reach our targeted $1.2 billion in annual run rate synergies by the end of this year. We're running a lot more balanced business since the Husky transaction along with expanded market access. We have greater stability of cash flows through the cycle, lower break-evens, and less risk on our deleveraging track and on the path to enhanced shareholder returns. We're within range of our interim net debt target within 2021, and we expect to increase our pace at deleveraging in the third quarter, and we believe there are clear opportunities to do so. So with that, I'm happy to take your questions.