Cenovus Energy Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Synovus Energy's third 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 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 Third 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 40F. All figures are presented in Canadian dollars and before royalties, unless otherwise stated. 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, everybody. First, let me update everyone on our current response to COVID-19, which remains a challenge in all of the jurisdictions where we operate. We continue to encourage full vaccination for all of our staff, and we're following the latest advice from public health officials, government, and our own health and safety experts. That includes continued rapid testing at a number of our field locations and mandatory work from home for office and other staff who are able to do so where required by local health officials. In addition, in alignment with recent direction from the Canadian government, we are now requiring proof of full vaccination as of October 30, for travel and also Nova scheduled and ad hoc flights to and from our sites, including charter company owned aircraft and helicopter flights. As we modify protocols that our operations will continue to follow public health guidance and work closely with government's health authorities and industries to protect our people. Safety is foundational to how we operate. I was disappointed by our safety performance and particularly our process safety performance immediately after closing the Husky deal. We learned from these events and took rapid actions to strengthen our combined safety culture. Since then and throughout the second and third quarters, we've seen significant improvement in our safety performance. For example, we cut in half the frequency of process safety incidents in these periods compared to the first quarter. As another example, our conventional business did not have a single recordable occupational injury in the first nine months of this year. However, despite these improvements, we've had a couple of concerning safety incidents very recently. These serve as important reinforcement that we must be unrelenting in our top tier safety journey. At Synovus, there is no priority more important than safety and continuing to do everything we can to make sure everyone goes home safely every day. Turning now to our third quarter results, by now you've all seen our plans to increase shareholder returns, and I'm sure everybody is keen to talk a little more about that. Before we turn to that though, why don't we start with the operating results that drove this quarter's financial results and led to that shareholder returns announcement. I'm incredibly proud of the accomplishment of our operations teams. and assets this quarter and year to date. In the upstream segment, we continue to deliver consistent and strong operating performance with total production of nearly 805,000 BOE per day in the third quarter, an increase of 5% over the second quarter. This production increase was led by record single-day and quarterly average production rates at both Foster Creek and Christina Lake, Production at Christina Lake averages about 243,000 barrels per day in the third quarter, a 5% increase over the prior record set in the second quarter. This reflected redevelopment and regrill wells coming online in the quarter. These redevelopment wells are high-return, short-cycle projects we've included in the capital budget this year and reflect the kind of opportunities that exist for Christina Lake. Moving to Foster Creek now, you might remember that on our second quarter conference call, I talked about some emulsion treating issues we had coming out of the turnaround, which impacted production into July. As we discussed in the Q2 call, the teams quickly incorporated learnings and returned Foster Creek to full rates as of mid-July. With our Q3 results, we're pleased to report that the teams not only recovered Foster to full rates, but went on to deliver production of over 200,000 barrels per day from the asset in each of August and September. For perspective, remember that Foster Creek is an asset with a nameplate capacity of 180,000 barrels per day. This is just another demonstration of our industry-leading asset quality and operating expertise in the oil sands. Turning to the Lloyd Minster thermal projects, the benefits of applying Synovus' operating techniques continued to be demonstrated and the assets delivered an average of about 98,000 barrels per day in the third quarter. Oilsand's operating performance combined with strong realized pricing to deliver segment operating margin of nearly $2 billion, driving the company's total operating margin of 2.7 billion for the quarter. Oilsand's unit operating costs decreased relative to the second quarter mainly due to increased production from the well pads we brought online and the turnaround activity in the second quarter. Looking at our conventional business, production was down about 7% relative to the second quarter, primarily due to the impact of asset sales as well as the unplanned third-party processing plant outage. Even with lower production volumes, unit operating costs for conventional held flat relative to the second quarter, as the business delivered nearly $200 million of operating margin. This was 35% higher than the second quarter operating margin, with the increase driven by increased realized prices and high production on time. Our offshore operations continue to be a strong contributor to free funds flow, delivering operating margin of nearly $330 million in the quarter and operating margin totaling over $1 billion so far this year. Asia-Pacific operations continued performing well, with daily production of 60,000 BOE per day in the third quarter, which was in line with the second quarter. Production rose in Indonesia in response to strong demand, offsetting production impacts of planned maintenance and assets in China during the quarter. And as previously announced in respect of our Atlantic business, we received about $75 million during the quarter from exiting partners in as a contribution towards future decommissioning liabilities with the restructuring of working interests in the Terranova field. Moving to the downstream segments. In Canadian manufacturing, reliable operating performance continued at the Lloyd Upgrader and Asphalt Refinery with an average utilization of 98%, while utilization and unit refining margins at the Upgrader and Lloyd Refinery were slightly higher than the second quarter total operating margin of $130 million was about $60 million lower than in Q2 for Canadian manufacturing. The difference was about the amount of a settlement recorded in the second quarter on a customer contract at Bruderheim crude by rail terminal. In U.S. manufacturing, refinery utilization averaged 89% in the quarter, which was 2% higher than the second quarter. This included the impact of some turnaround activity in and other minor unplanned outages at some of our partner-operated joint venture refineries during the quarter. Unit operating costs held about flat relative to the second quarter, while unit refining margin increased about 7% to $13.45 per barrel. This included the average unit cost of RINs decreasing by about 10% from the second quarter to about $7.30 per barrel, And just I'd remind everybody to keep in mind that's still nearly three times the average unit cost for RINs in the third quarter a year ago. I'll take a moment to discuss in a little more detail our U.S. refining assets where we are operator. At the Lima Refinery, recall the throughput rates began ramping up in the second quarter following unplanned outages earlier in the year. In the third quarter, we achieved crude utilization of 93%. at the limer refinery. We've been pleased to see performance stabilizing at the refinery, which reflects the limers team focus on base operations. We slowed production at the limer refinery at the end of September, in preparation for a plan turnaround we're completing in the fourth quarter. As we've said previously, this is a large turnaround. So it's fair to expect that throughputs will be lower in q4 as a result. Closing up the discussion of U.S. refining, I'm pleased to report that the Superior Refinery rebuild construction continues to proceed well. Capital spend remains on track, and we still expect rebuild costs to be largely offset by insurance. There's no change to our expectations for the refinery to be ramped back up in early 2023. Focusing on sustainability, we continue critical work on emissions reduction for our company, and the broader industry through the Oil Sands Pathways to Net Zero initiative co-founded by Synovus. Pathways is currently advancing its foundational carbon capture utilization and storage project, which will have phased capacity to transport carbon from more than 20 oil sands operations to a safe storage hub. In addition, the Pathways teams are analyzing other technology opportunities to address GHG emissions in the oil sands. Meanwhile, we're working with both levels of government to ensure the necessary policy and financial support is in place to achieve the Pathways vision and help Canada achieve its climate and economic recovery goals. We look forward to sharing more on this and our updated targets for our ESG focus areas at our virtual Investor Day to be held on December 8th. Turning now to our financial results for the quarter. Our strong operating performance combined with rising commodity prices to drive solid financial outcomes. And while it's true that a rising tide lifts all boats, Synovus maximized the opportunity by increasing oil sands production and optimizing our pipeline capacity to make the most of higher prices. This supported the generation of cash from operating activities of $2.1 billion, adjusted funds flow of $2.3 billion, and free funds flow of $1.7 billion during the quarter. We also took the opportunity to deleverage as quickly as possible. As promised, we applied free funds flow to the balance sheet, and we completed strategic financing transactions in the quarter aimed at deleveraging. These transactions extended the overall maturities profile as we executed public offerings of 10- and 30-year notes at attractive rates while repurchasing a portion of our near-term maturity notes. These transactions supported deleveraging and helped reduce financing risk in the near term. In addition, we leveraged the strong market to progress several asset sales during the quarter. This included the sale of our shares of Headwater Exploration for net proceeds of nearly $220 million announced in the quarter with proceeds received shortly after quarter end. We also closed previously announced asset sales in the East Clearwater and KBOB areas for combined gross proceeds of about $110 million. All of this has led to Synovus deleveraging faster than anyone could have imagined a year ago. We finished the third quarter with net debt of about $11 billion, a reduction of $1.4 billion since the end of the second quarter. And today, we are very close to achieving our interim net debt target of below $10 billion. which takes me to our shareholder returns announcement. We've been clear that increase in shareholder returns would be our first priority upon reaching our interim net debt target. Delivering on that commitment, our board has approved doubling the dividend on our common shares effective for the fourth quarter dividend to 14 cents per share. In addition, the board has approved filing of an NCIB application with the TSX for a share buyback program of up to about 150 million common shares, which we expect to commence following achievement of net debt below 10 billion. We'll provide more context on how we think about capital allocation at our virtual investor day on December 8th. However, as we've said previously, when we're below 10 billion net debt, you should expect to see a more balanced approach to free funds flow application between further deleveraging and shareholder returns. And at current commodity prices, we would expect to be able to execute our buyback plan in 2022 while achieving net debt under $8 billion around mid-year. This disciplined approach will also support our commitment to achieving mid-BBB investment grade ratings over time. In closing, this quarter has once again reinforced the strength of our business, including the benefits of our best-in-class assets, and reliable operating performance, as well as the financial results driven by those operations. I think it has also, once again, demonstrated this company's discipline to delivering on our goals. So with that, we're happy to take your questions.