Cenovus Energy Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Synovus Energy's fourth quarter and year-end 2021 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 call over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.

Thank you, Operator, and welcome everyone to Synovus' 2021 Fourth Quarter and Year-End 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 AIF 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'll take your questions. We ask that you please hold off on any detailed modeling questions today, 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. Before we get to our operating and financial results, I thought I would update you on our ongoing response to COVID-19. We're closely monitoring the Omicron variant and maintaining safe and reliable operations at all of our field sites. And I'd say over the last two years, we've learned a lot about how to maintain the health and safety of our people and communities and and to ensure business continuity. We have robust protocols in place and adjustment is needed. The pandemic underscores for me how foundational safety is to the way we operate and how focused we must be on continuous improvement in our performance. Meanwhile, the natural disasters in British Columbia this year presented an example of how our teams work together to not only ensure business continuity, but also meet the needs of the local community. It was a challenging year for British Columbia with widespread forest fires followed by severe flooding, which caused significant interruption to the supply of refined products to impacted areas. In both situations, our teams worked tirelessly to keep this product supply moving safely and our sites and impacted areas operational where it was safe to do so in order to continue meeting the needs of the communities and customers we serve. And I think this really reflects the way we do business at Synovus, including how seriously we take our role in the local communities where we operate. And as we complete our first year as a combined company, we have harmonized our safety programs and are continuing to roll out our Synovus operations integrity management system, outlining how we manage health, safety, operational integrity, and environmental risk. Despite the challenges related to the integration in COVID-19, we have had solid overall health and safety performance in 2021. The year was not without recordable injuries though, and this further underscores how focused we must be on continuous improvement in our top tier safety journey. Above all, our focus is doing everything possible to make sure everyone goes home safe every day. Turning now to our fourth quarter and annual results. Our first year as a combined company has been a really good one for Synovus. We accomplished everything we set out to do in 2021 and more. That's not to say that there weren't a few bumps along the way, but when I look what we've accomplished overall this year, I really want to commend our employees and leadership team on a job very well done. I'll start with the upstream segment. We continue to deliver very strong upstream operating performance. Our total production was 825,000 BOE per day in the fourth quarter, an increase of 20,000 BOE per day over the third quarter. Despite experiencing some extremely cold weather in Alberta and Saskatchewan in December, the production increase was led by record quarterly average production rates at our three largest oil sands assets, Foster Creek, Christina Lake, and the Lloydminster Thermals. Foster Creek production for the fourth quarter was nearly 212,000 barrels per day, an increase of about 25,000 barrels per day over the third quarter. We spoke on our last quarterly call and at our investor day about the performance of the new well pads at the west arm of the reservoir, and these pads continue to deliver some of the highest rates we've ever seen at Synovus. Production guidance for Foster in 2022 is in the range of $185 to 205,000 barrels per day, which includes the impact of a planned turnaround in the year. Production at Christina averaged 251,000 barrels per day in the quarter, reflecting additional production volumes from redevelopment and redrill wells that we spoke to you about at our investor day. Production guidance for Christina in 2022 is in the range of 230,000 to 250,000 barrels per day. which also includes the impact of a planned turnaround later this year. And at the Lloyd Thermals, we continue to see the benefits of applying Synovus' operating techniques. These assets delivered an average of nearly 100,000 barrels per day in the quarter. Our realized pricing across the oil sands segment reflected the volatility in WTI and WCS prices that we saw between October and November. results also reflected higher condensate pricing and our normal additional seasonal blending requirements for diluent in the winter months. In addition, an increase in natural gas prices contributed to higher oil sands operating costs over quarter to about $11.76 per barrel. Turning to conventional, as a result of higher commodity prices and reliable operations, the conventional business delivered nearly $260 million of operating margin in the fourth quarter. Production was about 5% lower than the third quarter due to asset sales, but unit operating costs still held relatively flat with the third quarter. Our offshore operations continue to be a strong contributor to our business, delivering operating margin of over $400 million in the quarter and contributing over $1.4 billion of operating margin in 2021. Asia-Pac operations continued performing well with daily production of over 62,000 BOE per day in the fourth quarter, which was slightly above the previous quarter. However, we saw increased realized prices and netbacks. We continue to see strong gas demand in Asia, and as we said at Investor Day, we continue to explore with our partners opportunities to add additional value there. In Indonesia, a production sharing contract was signed for the Lehman contract region in East Java, and in December we drilled a development well in the MBH field, which was completed in January. In the Atlantic, lower production volumes reflected some turnaround activity in the region, but we were able to capture a higher net back overall as the business realized the benefit of strong Brent pricing. So moving to the downstream business, in the U.S. manufacturing segment, Refinery utilization averaged 72% in the quarter. This reflects the impacts of a planned turnaround at the Lima Refinery. The Lima turnaround was a major one in every five year event involving planned outages at the crude unit and the catcracker units with a total cost of around $145 million. Following the turnaround, we encountered some challenges with secondary processing units which impacted run rates beyond the initial six to eight week plan timeline extending through December and into January. Due to the reduced rates, turnaround related expenses and repairs associated with the outage, unit operating costs for U.S. manufacturing in the fourth quarter increased to $16.88 per barrel. We also expect throughput and operating expenses in the first quarter to be modestly impacted due to the continued reduced throughputs in January. The repairs at Lima are now complete, and I'm pleased to report that operations are back to normal. The operations team is confident that this was a one-time issue and has been resolved. In the Canadian manufacturing segment, we continue to see very steady and reliable operating performance at the Lloyd Upgrader and Asphalt Refinery, with an average utilization of 98% in the fourth quarter. This finished out a strong performance year for the Lloyd complex, with 96% average utilization for the full year. Fourth quarter utilization and unit refining margins in this segment were similar to the third quarter, generating an operating margin of $131 million, reflecting the strong reliability of these assets, as well as capture of wider price differentials at the upgrader. For those of you who joined us at Investor Day in December, you know we've announced ambitious targets for our five environmental, social and governance focus areas. These are all available on our website. However, I wanted to remind you of a couple this morning. We are committed to spending at least $1.2 billion with Indigenous businesses between 2019 and year-end 2025. Working with Indigenous business partners has always been an important part of our approach to supporting Indigenous reconciliation. And as part of our efforts to address climate change and greenhouse gas emissions, we have set a target to reduce our absolute scope one and two emissions by 35% by year 2035 from 2019 levels. We're also maintaining our ambition of net zero emissions from our operations by 2050, which includes our work with the Oil Sands Pathways to Net Zero Initiative. Turning now to our financial results, in the fourth quarter, We generated cash flow from operating activities of nearly 2.2 billion, adjusted funds flow close to 2 billion, and free funds flow of more than 1.1 billion. Capital spending was $835 million in the quarter, which placed us well within our guidance range for the full year. We recorded a $1.9 billion impairment in the U.S. manufacturing segment this quarter. The impairment related to the carrying value of our assets in U.S. refining and changes in current independently derived commodity price outlooks, specifically around crack spreads, RINs, and the WCS differential. We also booked a reversal of prior impairments in Q4 related to our conventional business. This does not reflect any change in the way we think about the downstream business. We continue to see long-term value in our integrated model in the reduced cash flow volatility that comes with a more diverse portfolio of upstream and downstream assets. On the corporate side, we saw an increase in our general and administrative expenses in the fourth quarter, which impacted adjusted funds flow. This mainly related to a non-cash accrual for a synergy incentive plan that was implemented at the time of the Husky transaction. This one-time incentive program was clearly very effective in motivating our employees to pursue those synergies for our shareholders. We generated $7.2 billion in adjusted funds flow and free funds flow of nearly $4.7 billion in 2021, with total capital for the year coming in at about $2.6 billion. These results really speak to the free funds flow generating ability of the company and especially when you consider that free funds flow reflected one-time costs associated with the Husky transaction and capital for the Superior Refinery rebuild, on which we're still collecting related insurance proceeds in 2022. This financial performance, including asset sale proceeds received in the fourth quarter, enabled us to reduce our net debt by another $1.4 billion over the quarter closing 2021 with net debt below $9.6 billion. That's a reduction of $3.5 billion since January 1st, 2021. In the fourth quarter, we also announced the sale of Wembley assets in the conventional business, the Tucker Oil Sands Project, and the disposition of two-thirds of our retail stations. The three transactions together represent additional proceeds of nearly $1.5 billion. Tucker closed in January and Wembley is also expected to close in Q1. Retail is still expected to close in mid 2022. I'll also take this opportunity to provide an update on our NCIB program, which we announced in the fourth quarter and began executing in November. As of February 7th, we have repurchased approximately 26 million shares at a weighted average price of $16.31 per share. Looking back over the past year, we have created a better and more resilient Synovus. We've delivered on everything we've set out to do, including successful integration of the Husky business, delivering over and above our targets for upstream operations, Canadian downstream, transaction synergies, asset sales, net debt reduction, and increasing shareholder returns. Now, assuming commodity prices continue to hold, we will rapidly hit Our net debt target of 8 billion implying we could be looking at even more free funds flow to allocate in 2022 I assure you, we will continue the capital discipline you've come to expect from us. And above all opportunities for adding value for our shareholders and increasing shareholder returns will be top of mind for this management team so with that we're happy to take your questions.