Cenovus Energy Inc

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 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 will now like to turn the conference over to Mr. Jason Abate, Senior Vice President, Investor Relations. Please go ahead, Mr. Abate.

Thank you, Operator, and welcome everyone to Synovus' 2023 Second 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, assumptions relevant to these discussions. Additional information is available in Synovus' annual MD&A and our most recent AIF in Form 40F. All figures are presented in Canadian dollars and before royalties unless otherwise stated. John McKenzie, our President and Chief Executive Officer, will provide brief comments and then we'll take your questions. We ask that you hold off on any detailed modeling questions. You can follow up on those directly with our investor relations team after the call. And then, please keep to one question with a maximum of one follow-up. You are welcome to rejoin the queue for any other follow-up questions you may have. John, please go ahead.

Great, and thank you, Jason, and good morning, everyone. Before we start, you will have seen a few changes to our executive team that we announced this morning. When I succeeded Alex in April, it did create an opportunity for us to move some of the executive group around to really take advantage of their capabilities and versatility. You can read the full details in our news release. However, I'd just like to step you through a few of the changes. Keith Chaisson will become our new chief operating officer, and replacing Keith in the downstream will be Doreen Cole, who's been promoted to the position of executive vice president downstream. Drew Ziegel-Gansberger will become our new chief commercial officer, and Andrew Dullien will replace Drew as the executive vice president of natural gas and technical services. Jeff Hart, who is currently our Chief Financial Officer, will succeed Andrew as the Executive Vice President of Corporate and Operations Services. And finally, Cam Sandar will replace Jeff as our new Chief Financial Officer. I really do feel incredibly fortunate to be surrounded by such a talented group, and we have absolute confidence in their ability to continue stewarding this company. At this time, I'd also like to recognize Canning Falk, who's announced his retirement from our board. I've known Canning for over 10 years and have really benefited from his knowledge and experience. I think further, Canning has played a significant role in the repositioning and success of Synovus over the past two years. We all wish him the very best and really look forward to his continued presence as one of our major shareholders. But now let's move to our results. So as always, I'll start with our top priority, which is health and safety. This quarter posed some unique and significant health and safety challenges, and I couldn't be more proud of the way our people have stood up to the challenge. In this quarter, we focused on the safe and disciplined ramp up of the Superior and Toledo refineries, as well as completing the major turnaround at our Foster Creek asset. I'd like to thank all our people for their continued commitment to safety, and our core values as we completed these tasks. The results were truly exemplary. Similarly in our conventional business, we dealt with a number of wildfires through the quarter. We temporarily shut in 85,000 BOE per day of our natural gas and NGL production through most of May and part of June, and supported our staff and their communities. The company worked tirelessly to keep our people and our assets safe. In addition, We greatly appreciate the actions taken by local authorities and the provincial emergency management teams. Our staff truly demonstrated our core value in protecting what matters. Going above and beyond for each other and our communities is truly something we're all proud of. And with that, I'll take you through our operational results. So starting with our U.S. manufacturing assets, as we mentioned in the first quarter call, our focus has been on bringing the Superior and Toledo assets online. Toledo was fully operational by mid-June, while Superior continues to ramp up with a focus on safely restarting the Catcracker, which is the last of the major units to restart. These assets are incredibly important and meaningful contributors to our integrated heavy oil strategy. Our focus in the third quarter and beyond will be to operate them reliably, efficiently, and profitably. Our limer refinery continued to operate at high rates of utilization through the quarter. while the Wood River Refinery ran well through the quarter following the completion of some planned maintenance. The Borger Refinery is back up to full rates after some planned and unplanned outages over the course of the second quarter. So turning to our Canadian manufacturing, our Lloyd Minster Upgrader and Refinery ran at a combined utilization rate of 86% in the quarter, and they're fully operational as we enter the third quarter. We expect both of these assets to run at high levels of utilization through the remainder of the year. Overall, I'd say we achieved everything we set out to do in the downstream during the second quarter, and we're very confident in our ability to produce reliably and profitably through the remainder of 2023. In the upstream, we revised guidance as a result of the wildfire impacts, which had an annualized impact of approximately 10,000 BOE a day. In our conventional business, And we've also built in a modest decrease of 5,000 barrels a day for our Lloyd thermals, adjusting for the slower than anticipated ramp up in the air. These changes have resulted in overall lowering of our guidance to between 775 and 795,000 BOE per day. At our oil sands assets, we safely completed a large turnaround at Foster Creek early in the quarter. The turnaround was on schedule and on budget, and the asset is now running at pre-turnaround rates. Our focus through the quarter has been on continued execution of projects that support our short and long-term production volumes, with our new well pads progressing as planned. You can see the benefits of our continual effort to optimize these assets with the increased production at Sunrise, and in addition, at Deloitte Thermals, we saw record daily production and quarterly production volumes of approximately 112,700 barrels per day and 106,000 barrels a day respectively. We expect strong production from oil sands in the second half of 2023 with all major maintenance behind us. In Asia Pacific, our volumes over the quarter were lower as a result of planned and unplanned outages. On April 7th, an unauthorized vessel traveling in our dedicated pipeline corridor and struck an umbilical line at the Liwa 29-1 field in China. The line attached is designed, which resulted in immediate and secure shutdown of our subsea wells. Our operating group restored production by the first week of June with no environmental impacts in the surrounding area. And as I mentioned, with the vast majority of our major maintenance behind us and the forecasted continual ramp up of wells across the upstream portfolio, we expect to see elevated and steady production numbers over the remainder of the year. I'd now like to highlight our corporate performance and shareholder returns. We delivered almost $2 billion of adjusted funds flow in the quarter, supported by tighter differentials and increasing oil sands operating margins, partially offset by no recorded sales in our Atlantic region due to timing of liftings and a negative FIFO adjustment of about $170 million, which really impacted our U.S. manufacturing segment. With the dividend increase announced in April and through our base dividend and NCIB, we distributed about $575 million directly to our shareholders in the quarter. As per our June 14th announcement, the warrant repurchase transaction presented us with a unique opportunity to repurchase about 2.4% of our diluted shareholder base at an attractive price, purchasing just over 45 million warrants. I believe we obtained favorable payment terms that provide us with the flexibility to remain within our shareholder returns framework, and we'll continue to dedicate 50% of our excess free funds flow to shareholder returns until we reach our $4 billion net debt target, at which time we'll dedicate 100% of our excess free funds flow to shareholder returns. We continue to focus on running our assets safely and reliably. As we line out our integrated business model, we expect to have strong production and throughput in the second half of 2023, which will continue to move us forward to achieving that $4 billion net debt target. So before we take your questions, I'd also like to update you on our sustainability work. Our 2022 ESG report was released in June. and we announced a new milestone to reduce our methane emissions in upstream operations by 80% by year-end 2028. We see reducing methane as a key near-term action that contributes to our 2035 emissions target. We also continue to advance technologies that will help us address our 2050 net zero ambition. You can read more about those achievements and the progress we've made towards other ESG targets in the ESG report on our website. So in closing, we've succeeded in accomplishing the operating goals we set up for ourselves in the first quarter and are well positioned for a significant improvement in our financial performance in the back half of 2023. And with that, we're happy to take your questions.

Thank you. Ladies and gentlemen, as a reminder, you can join the queue to ask a question by pressing star 1. We will now begin the question and answer session and go to the first caller.

question comes from Dennis Fong at CIBC World Markets please go ahead hi good morning and thanks for taking my questions my first question here is just on capital structure. Just with respect to term debt, you guys are showing about a 14-year average maturity. How are you thinking about continuing to take either advantage of the free capital that you're generating to change essentially the structure of what you guys have for term debt?

Morning, Dennis. It's not necessarily the first question that I was anticipating, but Maybe I'll have Jeff answer that for you.

Yeah, no, and I'll just give you some color, Dennis, on where we see the capital structure. And we talked to the $4 billion net debt. You know, we view that as driving towards $7 billion on the gross side. And you're right, we're right around the 14-year average term mark. Look, we'll be balanced through all of this. So I think you have to view as our end goal on this is to have a tower structure that is sustainable and that we like and is balanced through. So We'll target throughout the different towers and be balanced in it. It'll really be dependent on the market and where we see the curve and different factors in there as well. Roundabout answer is that we'll be balanced and end up with the structure that we like as we get through this deleveraging and see us taking to about $7 billion in gross debt.

Great. Great. Thanks. My follow-up to my second question probably aligns more with maybe what you were expecting. In terms of Superior and the kind of ramp-up of the FCC unit there, I was just hoping to get a little bit more context in there. Are you able to sell some version of, we'll call it slightly off-spec product, and how should we be thinking about the timing of, we'll call it the full ramp-up of all units at Superior?

Yeah, I'll let Keith answer that question, but the FCC is really a gasoline-producing unit. And it's more incremental to where we are versus what we're producing today. But Keith, maybe you can provide some color on Superior.

Yeah. Thanks for the question, Dennis. Maybe I'll just step up a little bit. When I think about the whole downstream throughput, we're kind of right at the 690, almost 700,000 barrels a day of throughput. So most of our assets are online with the exception of the FCC at Superior. At Superior, I would say it's been a little bit of a challenge for us, but nothing systemic there. It's just working through normal startup issues. So we're days away from introducing feed into that unit. And as John alluded to, when we go through the crude unit, we do make on-spec products that we can sell, asphalt, gasoline, and diesel. And then we make some intermediate products that would require the FCC to continue to process. So So we have a fair amount of inventory there that we'll be able to run through the FCC once it's up and running and generate cash. And like I said, it's imminent. We're just knocking through the last couple of challenges that the team has seen as they've safely restarted that refinery after being down for five years.

Great.

Great. Thanks for answering my questions. I'll turn it back. Great. Thanks, Dennis.

Thank you. The next question comes from Greg Party at RBC Capital Markets. Please go ahead.

Yeah, thanks. Good morning. Thanks for the rundown. Yeah, maybe just to stick with the U.S. manufacturing for a bit. Like, your utilization rates actually looked okay from, you know, what we were expecting. But it's cost, obviously. And I guess the question there is, is the cost effectively, are they inflecting now into margins? And then I guess the question for Keith, but as you ramp up fully at Superior and now with Toledo, then could we look forward to potentially working capital releases as we go through the back half of the year?

Hey, Greg, thanks for the question. You know, what I would offer up on just the cost basis, as you can imagine, you know, through startup, you're incurring some additional costs. maintenance costs and repair costs. So we do expect those to normalize at the back end of the third quarter and into the fourth quarter. And so we should see some of our cost structure come down as we get to normal operations through this quarter. With regards to revenues and profitability, I would say things are looking good. We're producing products We're going to be able to, you know, we're marketing those products and sales. So, you know, we're going to see the normal cash cycle associated with the refineries. But all's looking good kind of coming out of the second quarter into the third quarter across those assets. And like you said, you know, utilization, and I alluded to this in the previous question, utilization is, you know, into the low 90% now, you know, across all of our assets. And the FCC just is the last unit to start up. you know, across our fleet, and that one's coming up imminently.

Hey, Greg, just on the working capital question as well, I think one of the things that you will see is, and Keith kind of mentioned this, is we do have a reasonably significant inventory of intermediates that we will work through through the refineries, you know, through time as they, you know, continue to produce on-spec product. But, you know, when we kind of guide you to where you should be thinking about inventory levels in particular, you should be kind of in that 45 to 50 million barrel range. So with these refineries coming up, there is additional inventory that we will carry both on the front end and the back end of those refineries going forward. So while you may see some short-term working capital releases as we chew through the inventory that we've built up, I think that's a reasonable number for you to be building into your models.

Okay. Thanks for that. And then You know, sort of all of this then rolls up into the question everybody's asking, right, which is, you know, should we sort of be thinking around $4 billion as around year end? Is that November? Is that December? Is that the early part of next year? You know, what you're thinking there, and frankly, does it matter that much?

Well, the way we think about it, Greg, is we've now got our assets into the condition that we wanted them to be in. You know, getting Superior and Toledo up were really kind of the last assets that we wanted to bring forward that kind of completed our vision of the assets that we acquired from Hoski. So getting those value chains in order was really important to us. Now, one thing I would say is don't expect us to do anything different other than run these assets well over the coming quarter. So we are focused on getting our debt down to $4 billion. Whether that happens in November, December, January, or February is really a function of the pricing and the commodity strip that you want to use. Over the course of the quarter, we've seen crude be as high as $80 and as low as $65, and today it looks like it's back to $80. Cracks have been volatile. We saw actually negative diesel cracks for a couple of days this month. I think the important thing is to understand that this is the trajectory that we're on. All the assets are up and running. We're going to dedicate 50% of our free cash flow to debt reduction, 50% to shareholder returns, and then when we get to $4 billion, we'll flip over to $100. But there's nothing that's going to change the operating strategy of this company between now and then.

Understood. Thanks very much. Thanks, Greg.

Thank you.

The next question comes from Neil Mehta at Goldman Sachs. Please go ahead.

Yeah, thank you, and congrats to everyone on some of the leadership changes here. My first question was just on the offshore. The tactical question is, can you spend a little more time talking about the softer results there? It sounds like it's just a timing effect, and if that was an underlift, do you get it back in the back half, and then The bigger picture question related to offshore is how do you see this business evolving over the next couple of years and getting into the broader portfolio?

Okay. Sorry, Neil. You cut out a little bit. I assume you're talking about the underlift on the East Coast?

Yes, the underlift on the East Coast, and then do you get it back in the back half?

Yeah. Hi. Norah Ramsey here from the upstream. We obviously took, as we mentioned, a timely opportunity to take a tar earlier in the year that we were going to take in August. So we're going to have flat production going forward. We're fully operational and up. And it's purely timing. There's two things. The FPA, so we actually offloaded and take it to storage tanks. So those continue to take place. But our lifting just happened to be a few days after the second quarter finished. So we've actually had a lifting in very early July, which you'll see kind of coming through in the three Q results. But we expect to see steady production from our base heroes operations in the east area there. And as we've mentioned before, Terra Nova continues to be at the harbour side continuously. just finishing some maintenance to allow it to go back offshore. And we're collectively supporting the operator and gaining a lot of confidence to be able to see line of sight to that going offshore and then establishing safe production from the Terra Nova asset as well later on the end of this year, beginning of next year.

Yeah, so, you know, I think, Neil, just, you know, to expand on that a little bit is we see... you know, West or White Rose, you know, having a good clean run through the rest of the year. I think we've got a line of sight now on Terra Nova to potential production before the end of the year, although we're not calling anything into our forecast and we continue to make really good progress on West White Rose, you know, through the quarter as well. We did achieve a couple of major milestones there, but maybe Drew, you might want to talk a little bit about the other offshore business in Asia and where we are with that.

Yeah, sure thing, John. So As you would have seen in the news release and then John's comments this morning, we had an unplanned event in China and we dealt with that in April and May and the teams did an extraordinary job getting that back online. And as you guys may recall, we had a very strong first quarter and, you know, the demand for gas and our production was actually over kind of our budget at the time and happy to say that that now continues now that we're back up and fully operational in June. So as we see the back half of this year, we expect to have still strong demand for our production in the Asia-Pacific business and happy to report that things are running very well and we are still trending on the high end of our guidance relative to what we thought the demand was going to be.

Thank you. That's great, Collar. And the follow-up is just on the Pathways project. John, it's hard for us. often to get visibility on where we are in those negotiations. But I guess the working assumption for a lot of investors is that it gets to FID next year. Just any of your thoughts on timing and what are the gating factors to get this thing to FID?

Sure. I'm actually going to turn that question over to Rona Del Freire. Rona's not usually here. She's usually on the road. speaking to the virtues of our industry. But Rona's here with us today, and she's knee-deep in this. And you've probably got the most up-to-date and relevant information on this, Rona.

Yeah, Neil, I mean, I can tell you we are still full steam ahead with the Pathways work, all six of our companies, but as well the federal and now the provincial government. There was kind of a bit of a waiting period when the Alberta government was in the election campaigning. But, you know, you would have heard that there's been bilateral talks announced between the feds and the Alberta government. So that's all positive. And the Pathways companies are right there. We're meeting, you know, every week with our government counterparts to talk about how we progress the policy and the fiscal frameworks that are needed to push forward with the Pathways foundational project, which is the 400 plus kilometer CO2 pipeline and the hub. But there's also, you know, there's still 70 other technologies that the Pathways companies are working on that will progress us towards our net zero 2050 target. But I think, you know, we're still pleased with the amount of attention that the federal and the provincial governments are putting towards this. I would say that it's unprecedented level of attention in Ottawa with multiple departments working together. They're taking this really seriously and the governments understand how important the CCS project is for not just for our sector, but for the entire country. So, you know, I remain very optimistic that we're going to get going on this. We've been really clear, you know, the next big spend would be for the pathways companies would be the purchase of pipeline for that CO2 pipe project. And so governments understand that, and they understand that they need to clarify things like the investment tax credit and give us more details on that and things such as contracts for difference that they've already announced. But I'm very positive this is still progressing at the right pace.

Thank you so much.

Great. Thanks, Neil.

Thank you. The next question comes from Mano Halsalt at TD Securities. Please go ahead.

Thanks, and good morning, everyone. Maybe I'll just follow up on Neil's question with a higher-level government-related question as well. What do you think of this week's government announcement related to the potential phasing out of what they're calling inefficient subsidies? I know it's pretty fresh, but when do you think we'll have a better sense of what that means in practical terms, and is it fair to say that ongoing negotiations on CCUS incentives are a separate conversation?

Mano, it's John. Sometimes I don't know how they name these pieces of legislation or how they end up positioning them, but if it is what it purports to be, it probably should be a fairly short piece of legislation. One of the things I'd say is I'm not really aware of any subsidies that are direct and unique. to the oil and gas industry. I've been in this industry for a lot of years and many of those years I've been spent in finance. And I certainly remember writing a lot of checks to the provincial and federal government that don't remember receiving a lot of checks in return. You know, a couple of things I would say is, you know, in 2022, we spent almost four and a half billion dollars on royalties and taxes. And that is, you know, that exceeds the amount of money we spent in capital, exceeds the amount of money that we return to shareholders. That is our single largest expense, and we expect that number to be even higher in 2023. We're kind of like you. We're waiting to hear what this is all about. We certainly hear political rhetoric with regard to oil and gas subsidies. We're just really not sure what it means because, again, we're not really aware of any oil and gas subsidies for the industry.

Okay. Yeah. Thanks for that, John. And maybe I'll just follow up with a question on shareholder capital returns. You've made it clear on many occasions that the relative economics of buybacks are tested at mid-cycle $60 WTI. But today we're sitting at about $80. The stock is off of its lows. So my question is, how are you thinking about buybacks versus a variable dividends? And I'm asking that with the understanding that we've only seen one variable dividend since the return framework was formalized.

Yeah. You know, nothing changes in our framework, Mena. You know, we screen all our capital at 45. We screen our buybacks at 60. We still think those are sort of the right low cycle and mid-cycle prices. I think, you know, I'm looking at Cam and he's nodding his head. I'm looking at Jeff and he's nodding his head. But I think with where our share price is today, we're still more inclined to return capital to shareholders in the form of buybacks in the share price today. in our view, doesn't reflect the net asset value at $60. So I think you're going to continue to see that until or continue to see shareholder returns come back in the form of largely buybacks until we get there. But we've been pretty clear on the framework. If we get to the point where we think it's in excess of mid-cycle pricing or the discounted value of the shares are in the excess of mid-cycle pricing, I think you'll see a greater majority of the returns come back in the form of special dividends. But, Cam, I don't know if you have anything else to add on that.

Hey, Mano, it's Cam. The only thing maybe I would just add is, like, I think keep in mind we're going to continue to be disciplined. So 50% is going to go back to shareholders until we get to that debt target of $4 billion. And as John said, I think right now the bias continues to be towards buybacks. I think the other thing you should be thinking about is we obviously did the warrant transaction back in the middle of June, and we made it clear that that's something we're going to manage inside of that framework through the balance of this year and sort of at the latest next January when that payment has to be made by. So the focus hasn't changed, the discipline hasn't changed around the framework, and we'll continue on the path we're on.

Appreciate the color. I'll turn it back.

Thanks, Mano.

Thank you.

The next question comes from John Royal at J.P. Morgan. Please go ahead.

Hi. Good morning. Thanks for taking my question. So first one's in refining. You've talked about the run rates. Just wondering on profitability and cash flows. On the prior call, you guided to Toledo and Superior being free cash flow positive by July. Is that the case now, or is the FCC impacting the ability to generate positive cash flows?

Hey, John, it's Keith. Yeah, good question. You know, I would say Toledo's been up and running since early June, making products and selling products. So, you know, we're highly confident on kind of cash flows there. Superior has been able to sell products as well, but, you know, until we actually get to full gasoline making, coming out of the FCC, you know, it's kind of going to be, you know, kind of right at that kind of cash flow break even. You know, I would say we're seeing that trend of improvement, though, through the quarter. I think the other thing to look at, though, is kind of where cracks have been. And I think John alluded to it in one of his answers. You know, they've kind of been pretty wide and then very narrow and more recently have come back to kind of matching the various regions around the U.S. So cracks are pretty supportive now. Differentials have tightened in. So obviously the refiners that run heavy crude lose a little bit of that crude advance, but anything that we lose in our downstream, we actually get in our upstream. So I think In general, it's setting up for a great third quarter like we anticipated. And as we've talked about, the last unit to come up is Superior, which is a relatively small unit in the grand scheme of things.

Okay, thank you. And then in terms of the wildfire impacts on the upstream, I know it's a very fluid situation generally, and it's tough for us who aren't on the ground to really understand the impact. How confident are you that you're on the other side of the major impacts and that the five to seven barrels per day, a thousand barrels per day offline. Couldn't go the other way and grow in scope there. Just trying to understand the risks that the fire has posed as we stand today.

Yeah. Hey, John, it's Drew. Yeah, great question. As you alluded to, it was a very wild quarter. No pun intended. You know, I think one of the things I would start with is that our team does an outstanding job considering that we actually had the town of Edson and a lot of our staff there actually evacuated three times two by wildfires and once by an actual flood, to be honest. So just to give you a little perspective on kind of the five to seven that's still left to be brought on, you know, the vast majority of that, almost all of it is still up in our Rainbow Lake asset, just inside the BC border in our bivouac dry gas play. And the reason that we can't bring that back on yet is we just are waiting for some more secondary power lines to still be reactivated by third-party providers. There are some wildfires in northeast BC, nothing around our actual assets. As you can imagine, you know, with the amount of impact we had, you know, that fuel is now all gone. And so the risk to your question about, you know, could it go the other way? There's not a lot left to kind of burn and reactivate that risk for us. And thankfully, we've had very little and almost no direct asset damage or concern around the ability to safely produce. So the remaining that's offline now is still just waiting for power, and it's third-party kind of activation from power poles and whatnot, and it's on a dry gas play. The remainder are just some other remote sites, more in central Alberta that's waiting for the same thing. It's just some power. So I think the risk has been reduced significantly, and it's just the realities of how forest fires burn and where they've now been burnt. It's very low risk that something in those areas could be reactivated. The fuel has been used.

Thank you. Thanks, John.

Thank you. The next question comes from Manav Gupta at UBS. Please go ahead.

Hey, guys. I just quickly wanted to touch base on Lloyd Thermal Volumes. Looks like this was one of the stronger quarters, if not the strongest, since you got these assets. So help us understand some of the changes that you have made at this asset, which is allowing you to get a higher volume versus when you acquired them.

Hi there, Manav. It's Nori here. Yeah, we've talked about it in the previous quarter as well. I mean, fundamentally, we've been applying our subsurface technologies and methodologies from our Foster Creek and Christina Lake assets over to our Lloyd Thermal assets. The assets are really, really good assets and we have lots of opportunities around the central processing facilities. So what we have been doing is basically drilling longer wells that have what we call higher conformance so that they actually produce at a higher rate. We've also been utilising our zero based design facilities and using submersible pumps to actually increase the rate of production. So we're basically, the philosophy is trying to fill all of our plants that we have and keep them full as we can go forward. So it's been very successful. We continue to build out new pads to sustain this level of production. And at the same time, we take advantage of opportunities as we understand them. So our production currently is very, very strong. And that's the kind of plan kind of going forward.

Perfect. And if I could just speak your brain around, I mean, you had some downtime in 2Q. Some of your peers had downtime in 2Q. Now all you guys are ramping up. So last few months, the apportionments were zero. But what's your outlook for near-term apportionments? Do you expect them to rise? And then eventually, what are you hearing on the TMX expanded pipeline startup? Thank you.

It's Keith. Your bang on apportionment on Enbridge has been zero for the past several months, which is just pointing to the fact that egress out of the country is matching production. I think you're also bang on that some of the upstream has been taking turnarounds through this period. With regards to TMX, it's scheduled to come on in Q1 2024. Obviously, there's pre-startup activities in the landfill that happens into the fourth quarter of this year. With all of that kind of happening, we actually anticipate for the first time in a long time that it would be sufficient egress from the province, even as we head into the winter months where all the upstream producers are back on and you're at that higher concentration of diluent in your bitumen blend. There probably will be a little bit of widening on that just as the system normalizes, but I think we're looking at tighter diffs, and with TMX coming on, that should sustain itself for a longer period of time.

Thank you so much for the detailed responses.

Great. Thanks, Manav.

Thank you. The next question comes from Harry Matier at Barclays. Please go ahead.

Thank you. Good morning. I guess first circling back on the debt reduction question at the start of the call, your $7 billion gross debt landing zone implies about $1.5 billion of debt reduction. You know, rates markets have been tough to call here, but for the time being, you've got no shortage of options on your curve that are below par. How are you thinking about prioritizing? Is it maturity ladder, coupon, ability to buy back below par, CAD versus USD, and then open market versus doing something a little bit more accelerated like a tender to get it done more quickly?

Yeah, so it's Jeff here, and the answer is yes to all of it. So we'll be balanced on that as we'll look at relative interest costs, where we see, you'd say, discounts relative to premiums and then the end tower structure and so and then as far as execution goes is you know again it'll be yes we'll look at both uh you know what does it look like on a tender and open market purchases so we'll be we'll we'll spread it around in all of that and take a balanced approach in all of it yeah harry we don't mean to be coy on that but obviously we can't ask you that question literally yeah no i uh i i get it um

Second one is, you know, going back to something that came up last year a couple times on calls is just around your JV and your strategy going forward. And, you know, at the time you indicated that you've taken some steps towards this in some of your assets. But, you know, the strategy is to be an operator and 100% owner of, you know, your refineries where possible. Just curious, you know, is that still the case? Is that still the vision? And, you know, are there any discussions you've had on that front that might have advanced beyond a preliminary stage?

Yeah, you know, Harry, one of the things we've been successful in is unwinding the JVs we've had with BP. And we've purchased the 50% of the interest in Sunrise that we didn't own. And more recently, we've bought the 50% of Toledo and assumed operatorship of that refinery. You know, the way we think about the refineries where we have an ownership interest is those are core assets for us. and core assets you want to have both operating and strategic control. We think that is important. So we have always signaled to the market that we have a desire to own and operate those assets that we have an interest in that we believe are core to the future of this company. So nothing has really changed there. There's certainly no update on any kind of discussions that may or may not be happening with – in and around that JV, we're happy to own those assets in the form that they're in, understanding that longer term, you know, we want to own and operate the assets that we would consider core to our portfolio.

Okay. Thanks very much.

Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star 1.

The question comes from Dennis Fong at CIBC World Markets. Please go ahead.

Hey, good morning. Thanks for taking my follow-up. Just two on the, one on the upstream side. I know you provided a brief update on the Narrows Lake to Christina Lake connection and development. Can you provide a little bit more details in terms of what the next steps happen to be? I know there's some CapEx this year, but also maybe an update on timing and how we could see that kind of ramp up through time.

Yep, hi, Nori Ramsey here. We continue to make good progress The context is obviously Narrows Lake is an extension from our Christina Lake operations, and it's a 17 kilometer pipeline that takes us up to another very rich area for development. The pipeline's two thirds kind of complete. We expect to actually be starting to steam up our first pads, which we've actually started to drill already in early 2025. So by about mid-year 2025, we should expect to see impact production coming from that asset area. And the first phase of development are four rich pads up in that area that will tie back to Christina Lake. And that really reflects our long-term business plan. And then we'll start building out from there into the second and third phase of drilling opportunities. So it's all on track. It's a very exciting opportunity. We like the rock there. It's very clean and very thick. So it's a great opportunity and quite innovative rather than building a central processing facility away up at the site. Being able to tie it back to our existing plant is a very accretive approach.

Great. Great. Thanks. And my next question is just more on carbon capture and GHG emission reduction plans. Under the list of projects for CCS, you have both the Lloyd Minster Upgrader as well as Christina Lake Phase 1. I was hoping to get a little bit of an update on the progress potentially in identifying opportunities at this kind of Phase 1 Christina Lake carbon capture project. And then secondarily, just with the Lloyd Upgrader carbon capture project, Is that contingent on the pathways pipeline project moving forward, or are there other opportunities to store and sequester carbon that's captured from that facility? Thanks.

Maybe I'll take the second part first, Dennis. It's Keith. And just around Lloyd Upgrader, and then I can hand it over to someone else to talk about Christina Lake Phase I. But, you know, the interesting thing with the Lloyd upgrader is, you know, we have a steam methane reformer there, relatively high concentration carbon dioxide source, relatively straightforward to capture. And the other interesting part is obviously we have a very large resource in a close proximity to the upgrader that we can actually use for enhanced oil recovery. So I would say it's not dependent on pathways. We can build the infrastructure and have an economic project at that asset. So hence why we're advancing today through our standard project development process and looking at ways to integrate that with our upstream business for enhanced oil recovery. And maybe I'll hand it off for the upstream.

Norah here, since it's a Christina Lake question. As we've kind of explained in our public documents, our first phase of our carbon capture is at Christina Lake. There's the ability to have a number of phases there, and it's core to our commitment and our pathways. The pipeline will run adjacently to our operations there. So we've actually started preliminary engineering to understand the size and scale of this complex project, which is by its scale, almost a world's first. But again, it's in the plan. It's consistent with our pathways commitments. And we're just continuing to de-risk it and understand how we'd operate something like this going forward.

And Dennis, it's Rona. And just to add on to that, just to make it even more confusing, while everything that Keith was explaining and Nori is absolutely correct, When you look at the numbers overall, when you're talking about pathways target of 22 megatons by 2030 of a reduction, Lloyd Upgrader is part of that because the federal government includes the Lloyd Upgrader in its oil sands emissions numbers.

Okay, perfect. Thank you all for that context.

I'll turn it back now. Great. Thanks, Dennis.

Thank you. At this time, if any members of the media would like to ask a question, please press star 1.

First question from Chris Varcoe at Calgary Herald.

Please go ahead. Hi, John. This is a question about differentials. What impact have the narrow differentials had on you in the first half? Maybe more importantly, where do you see heavy light differentials going in the second half of this year?

Yes, maybe I'll take the first piece of this and then I'll turn it over to Keith because he lives and breathes this every day. But we saw a real narrowing of the differential from the first quarter to the second quarter. And for this company, it's more beneficial for us to have a narrow differential than a wider differential. With the processing assets that we've got in the takeaway capacity that we have inside the company, we can mitigate roughly 75% of the location differential and about half of our heavy oil differential. So having those narrow differentials certainly helps us, and you saw that in the second quarter. Where we go from here, Keith's got some views on it. I'll just turn it over to him.

Hey, Chris. You know, we kind of look at this in two parts, kind of in Western Canada and also in the Gulf Coast where heavy differentials kind of get set. You know, on a global basis, you know, we're seeing pretty good strength in the differential, driven mostly by kind of the heavy refinery utilization and some additional refineries coming on in Asia that consume heavy barrels. You know, that coupled with the OPEC cuts being predominantly heavy barrels, and then the U.S. Strategic Petroleum Reserve starting to refill, all drives a pretty healthy demand for Western Canadian heavy production. In kind of Western Canada, with TMX forecast to come online in Q1 and start line filling in the fourth quarter, we actually see an opportunity for differentials in Alberta to stay relatively tight as well. setting up for a pretty good fall, winter, and into next year.

And just to follow up on something that you referenced earlier, John, I want to ask you about what impact does the talk from the federal government of phasing out these fossil fuel subsidies and their plans for an incoming emissions gap have on the Pathways projects moving forward? Does it have any impact at all?

The second part of your question, I don't believe it does have any impact on pathways at all. First part of your question, I think I was relatively clear. I really don't know what they mean by subsidies to the oil and gas industry. I'm genuinely not aware of any subsidies that are direct to the oil and gas industry that they may or may not be speaking of. So You know, like you, we're waiting for more detail on this, similar to waiting for more detail on the emissions cap and how that's going to play in, but we don't necessarily see how this all comes together quite today.

Thank you. Thank you.

Thank you.

The next question comes from Alex Bell at All Newfoundland Labrador. Please go ahead.

Good afternoon, morning, where you are. John, I was wondering if you guys could provide any comment or color on the Irving assets that are on the market right now and, you know, assets I would imagine you're pretty familiar with. And you may have answered part of this earlier with some of the comment on debt, but is there any appetite for M&A at all right now?

You know, I think, Alex, we are really focused on staying close to our netting right now. This organization has been through a lot of change and growth. over the past number of years. As I mentioned in some of my comments, we've really got the assets configured and built in a way that we are really happy with where we are today. So I think for us, over the next few quarters, it's really about demonstrating the earnings and cash flow capability of these assets, running them in a safe and reliable condition, and demonstrating the profitability of what we've built. So You know, that is priority one and job one. You know, in terms of Irving, you know, we're aware that, you know, just like you of the announcement that they put out. But, you know, I haven't worked there in almost 10 years. So, you know, we don't have any unique insight into that. But we as a company will stick with our knitting for or stick to our knitting over the short to medium term.

Okay, thanks for that. And as my follow, I'm wondering if you can provide any color on the asset life extension for the Sea Rose, and specifically if a shipyard has been picked for that and where that stands parallel to West White Rose.

Sure. I'll turn that over to Nori. Nori's been the one who's been leading that effort on our side.

Hi there. Nori here. Yeah, just to confirm, The asset life extension is a statutory requirement to, in simple terms, recertify the CROs FPSO and make sure it can stay out for the duration of the period we wish to develop the West White Rose project. It's obviously commercial what we're kind of doing, so I'm not in a position to talk about any details of the supply chain. But the principle is we will take the FPSO There's two pieces of work. There's offshore work in the subsea components that are offshore in the Boye area. So, again, that uses local subsea expertise within the province. And we will be taking the FPSO early next year to an appropriate yard. But as I said, we're just not in a position to disclose that until we've completed all our commercial processes.

Great. Thanks, everyone. Great. Thanks, Alex.

Thank you. And the next question comes from Robert Tuttle at Bloomberg News. Please go ahead.

Yeah. Hi. Good morning. Thanks. I just want to get your insight on where the tolls on the Trans Mountain have come out. There's been a lot of unhappiness by some producers with those tolls as being too expensive. I'm just wondering how this will play out in terms of oil exports. How competitive will this pipeline be when it comes to reaching Asia, or will the oil end up mostly going down to the US West Coast? How competitive will it be to reach, say, China versus going down to the Gulf Coast? Just want your insight.

Hey, Robert. Suffice it to say, obviously, the commercial arrangements are sensitive, but in general, you know, there's components of our toll structure that are fixed and components that can fluctuate with increased costs. And, you know, you would have seen a few letters going into the CER, you know, just making sure the allocation of those costs was done appropriately. So that's kind of the work that you're seeing around that avenue. From a competitiveness, you know, this is one of the the first pipelines that have been built and providing egress out of Canada in a long period of time. First one that kind of goes to the West Coast and doesn't go through the U.S. So we think it will provide a very attractive alternative for Canadian producers to move their barrels to market in a different fashion and potentially even access different markets. So, you know, our view would be that this pipeline, when up and running, will run full. and provide pretty good economics not only to the producers but to the country to move those excess barrels outside of Canada.

I'd just like to pile on with what Keith is saying. The tolls get a lot of attention right now, and justifiably so, but we will work through that with TMX. The reality is this is an absolutely necessary piece of infrastructure. not only for Synovus but also for the oil and gas industry in Canada at large. This is going to take another 590,000 barrels of Canadian oil to market at a time when the world is really needing more energy and the demand for oil and gas is growing. Those barrels should come from Canada. Beyond the tolls, you do have to realize as well that this is an asset that's going to be in service for decades. It's going to provide jobs, it's going to provide tax dollars, and it's going to provide royalties for Canadians going forward. So we think this is a very good news story for Canada, understanding that there are cost overruns and implications for tolls in the short term, but something that is very, very important for this country.

Thanks. I'm wondering the... The reality is there will be more capacity than there will be production, at least initially. I mean, which lines are going to, you see, lose the spot? Will that come off Enbridge? If you've got TMX full, will that come off Enbridge, or will TMX not actually run full? At least some of those spot barrels will go down to Enbridge. Where do you think that will happen there?

Well, you know, one of the things, Robert, I'd tell you is this industry has a great habit of expanding to fill pipeline capacity. And I talked about the 590,000 barrels a day of incremental takeaway capacity that this pipeline will be able to take away. That will be filled, I think, in relatively short order over the coming years. The reality is this industry has grown by almost 800,000 barrels a day since 2015. And those kind of infrastructure projects that increase our ability to get to market tend to get filled fairly quickly with the amount of resource we have in Canada. So you're quite right, there'll be some short-term rebalancing, but longer term we'll fill this pipeline, and I think probably sooner than most people think.

I do.

Thank you.

There are no further questions at this time. I will now turn the call back over to Mr. McKenzie for closing comments.

Great. Well, listen, thanks, everybody, for joining us today. We always appreciate the interest in this company and the questions that come with it. So I'll just end this call by saying I hope everybody has a great day and stay safe.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your