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 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' 2022 Third Quarter Results Conference Call. Please refer 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. They also 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. Please follow up on these directly with our investor relations team after the call. And please also 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. As I do every quarter I'm going to start this morning's call with our top priority which is health and safety. In late September there was a tragic fire at our non-operated joint venture refinery in Toledo. We were devastated to learn about the fatalities of two workers there and our hearts go out to their families and colleagues. This is a heartbreaking reminder that safety must be absolutely fundamental in our business. It is our responsibility as an industry to ensure all our workers who start a shift get home safe every day. Our focus on the Toledo refinery remains twofold. We'll continue to support our joint venture partner as well as the staff and everyone at site in every way that we can. We'll also continue to work closely with our partner to assess the damage and gain a better understanding of the path forward. Investigations into the cause of the fire are ongoing. but early indications from aerial and drone footage suggest the damage is localized to a small area of the refinery. Restricted access to the site has limited the operator's ability to fully assess the damage, but the refinery remains shut down in a safe state and we'll provide further updates when we can. Turning now to the third quarter, we continue to deliver solid operating and financial results even with increased volatility in commodity prices. The oil sands segment led the way, with Christina Lake back up from its Q2 turnaround and producing over 250,000 barrels a day. We safely deferred our turnaround at Foster Creek to Q2 2023. However, there was still some necessary planned maintenance that impacted production in the quarter. There was also an issue with a water tank that lowered production in August, but production was back up to normal rates in September and continues at that level. In the Lloydminster thermals, Spruce Lake North produced first oil in early August and has since hit daily rates well above its nameplate of 10,000 barrels per day. Recall that when we took over the Lloyd thermals, those combined assets were producing around 80,000 barrels a day. By adding Spruce Lake North as well as continuing to apply Synovus' SAGD expertise, We now see the Lloyd thermals run closer to 110,000 barrels a day. We also closed the Sunrise deal in the quarter where we acquired the remaining 50% working interest in that SAGD facility. We are reporting 100% of Sunrise volumes from August 31st onwards. We have seen strong performance from the re-drill and redevelopment program at Sunrise and just drilled two of the longest wells to date at that site with 1,600-meter laterals. In the conventional segment, we successfully executed a major turnaround at our Elmworth plant without incident and restarted our development rigs coming out of breakup. Conventional production was running between 125,000 to 130,000 BOE per day coming into October. The team has also been reactivating some base well production at a very low cost. In the offshore, our partners recently brought the MDA-MBH fields online in Indonesia. We expect them to ramp up over the fourth quarter. Additional new fields will follow to bring total net volumes closer to 20,000 BOE per day in 2023, doubling the previous run rate. In the U.S. downstream, the throughput was up with a utilization rate of 87% compared to 75% in Q2 last year. as we had most of the Q2 turnarounds behind us. The Synovus operated Lima Refinery continues to run well after its major turnaround last year with utilization in Q3 coming in at 94%. However, there were outages at the non-operated refineries in the quarter with turnaround activity at Wood River and Toledo. In addition, Toledo was taken back offline on September 20 following the incident I mentioned earlier. Lima operations have shown significant improvement through the year, and our goal is to continue to demonstrate this level of operating capability across our U.S. refining operations as we restart the Superior Refinery and take on operatorship of Toledo. Our priority for the U.S. refining business is establishing a solid track record of safe and reliable performance. This is one of the company's greatest opportunities in the near term. Turning to our financial results, the quarter's adjusted funds flow was nearly $3 billion, while free funds flow was about $2.1 billion. Excess free funds flow was about $1.8 billion, and this included a cash payment of about $400 million on closing the Sunrise acquisition, which was fully offset by net proceeds recorded on closing the retail fuels network sale. The volatility in commodity prices in Q3 manifested significantly in two primary ways. First, in oil sands operating margin. And here, the lag on condensate pricing was seen in realized pricing in the oil sands assets where higher-priced condensate purchased in earlier months was blended and included in sale volumes through the quarter. Second, in U.S. manufacturing operating margin. Processing crude oil purchased in prior periods at higher prices and manufactured later in the quarter when pricing decreased had an impact of almost $420 million. Throughput increased and unit costs came down relative to Q2. However, the volatility of commodity prices had a much larger impact on operating margins in the U.S. downstream. We also began incurring increased expenses for the startup of the Superior Refinery, which combined with the Toledo outages to add operating expense drag without throughput. Taking out the inventory and FIFO gains in Q2, along with the FIFO losses in Q3, the U.S. manufacturing segment performed better this quarter compared to last. We also experienced cash flow headwinds related to the cost of higher price feedstock and condensate from earlier periods included in our products and sales volumes in the quarter, or in other words, FIFO impacts. These dynamics serve as tailwinds on our results in a rising price environment but serve as a headwind in a falling price environment like we've just experienced in Q3. In accordance with our shareholder returns framework, we've allocated half of Q3 excess free funds flow to shareholder returns. This is over and above our base dividend. We also continued our opportunistic and disciplined approach to share buybacks through the quarter. This resulted in a return of about $660 million to shareholders through the NCIB program. In addition, the board of directors has approved a variable dividend of about 220 million or roughly 11.4 cents per common share with this variable component fulfilling our commitment for 50% of excess free funds flow going back to shareholders. The current NCIB program will expire in early November. As we announced earlier this morning, our board has approved the application for another NCIB program. it will provide capacity to repurchase approximately 136 million additional common shares over the next year. We also completed a tender transaction in the quarter, repurchasing about $2.8 billion of debt, bringing our total of repurchased notes this year to $4.3 billion. This exercise mitigated refinancing risk for the company until 2027. It also reduced our weighted average coupon rate And we'll save about $200 million in annual interest expense going forward. Our net debt reduction was accelerated this quarter by a working capital release and now sits at about $5.3 billion. And to put things in perspective, we started this year with $9.6 billion in net debt. So that is a reduction of $4.3 billion of net debt in just three quarters. Q3 was another great example of how our financial and shareholder returns framework delivered. Up to and including Q3, we will have returned nearly $2.9 billion to our shareholders this year through our base dividend, share buybacks, and the variable dividend, while at the same time also deleveraging. At the same time as paying down our debt and providing returns to our shareholders, we're also making significant contributions to government. When the oil and gas sector does well, Canada does well. Recent Peters and Company analysis shows that oil and gas companies are expected to contribute about $50 billion in royalties and taxes to the Canadian federal and provincial governments in 2022. That's money that pays for health care, education, arts and culture, and much more across this country. To put this in perspective, Our sector's anticipated government contributions this year are equivalent to more than two-thirds of the funding for all of Canada's hospitals last year. That's at a time of heavy demand under the strain of COVID. And Synovus and our peers are further bolstering the economy by investing our revenues back into our businesses, supporting jobs and providing economic benefits for suppliers and manufacturers in every province. That same Peters & Company analysis shows our sector making capital investments of about $40 billion this year alone. And it's much more when you add in our spend on annual operating costs. These investments include money for environmental and GHG reduction initiatives. In fact, our sector is the largest spender on environmental services in Canada. The Pathways Alliance, Synovus jointly founded with five of our oil sands peers to get to net zero emissions by 2050, recently announced that our decarbonization projects will require investments of more than $24 billion by 2030 alone. This includes the Alliance's foundational carbon capture and storage pipeline and hubs, as well as energy efficiency, cogeneration, and electrification projects. We are ready to move forward with more advanced investment decisions about the significant decarbonization projects once governments provide assurance that the necessary policy mechanisms and support are in place. Synovus and our peers continue to work with government officials on these details so we can all continue to achieve the shared goal of emissions reductions. We are committed to both investing in our business including decarbonization projects and providing strong returns to investors. These two things combined are what will support a strong oil and gas sector in this country and enable us to continue contributing in a significant way to the Canadian economy for a long time to come. Recapping what we've achieved at Synovus' quarter and where we're headed. Our upstream operations continue to build on momentum towards 800,000 barrels a day and above, and delivering meaningful value and returns on investment. Our downstream performance has not yet fully shown what it can do in this environment, and that will be management's focus going into Q4 and 2023. Overall, we've posted another solid quarter highlighted by strong operational results and substantial further deleveraging towards our $4 billion net debt floor. A current strip, we expect to reach that level around the end of this year. We look forward to delivering 100% of excess refunds flow to our shareholders for periods when we're at that level. And with that, we're happy to take your questions.