Cenovus Energy Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Synovus Energy's fourth quarter and year-end 2023 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 be broadcast without the express consent of Synovus Energy. I would now like to turn the conference call over to Mr. Jason Abate, Senior Vice President, Investor Relations. Go ahead, Mr. Abate.

Thank you, Operator. Good morning, everyone, and welcome to Synovus' 2023 year-end and fourth quarter results conference call. On the call this morning, our CEO, John McKenzie, joined by Synovus' management team, will take you through our results. Then, we'll open the line to take your questions. Prior to passing it over to John, I refer you to our revisories 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 risk factors and assumptions relevant to this discussion. 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. You can view results on our website at synovus.com. I'd ask that you keep to one question with a maximum of one follow-up. You're welcome to rejoin the queue for any other follow-up questions you may have. John, please go ahead. Great Thank you Jason and good morning everybody.

I'm going to highlight some important safety milestones that we achieved in the fourth quarter of 2023 and in the full year. We achieved a total recordable injury frequency of 0.31 in 2023. And importantly, we noted a marked decrease in the potential severity of our safety incidents, a trend we are very focused on continuously improving. 2023 was an important year, which included the restart of two refineries and the progression of the West White Rose project, which today stands at 75% complete. And we did this as we would expect without a significant incident. I'm proud of the team for their continued focus on safety and what they've accomplished over the year. Early in 2023, we signaled that the first two quarters of the year would be impacted by the startup of Superior and the delayed closing and startup of Toledo. We also signaled that we expected to have our full suite of assets operationally available to us in the third and fourth quarters. Our fourth quarter reflects the results of the second consecutive quarter of operating our integrated value chain. Our upstream business continued at to build on operating momentum. We increased production to nearly 810,000 barrels of oil per day, our highest quarterly number for this year and the second highest in the company's history. This is something we are extraordinarily proud of. We saw particularly strong performance at our oil sands assets, most notably at Foster Creek. The ramp up of new sustaining pads added about 10,000 barrels a day of increased production relative to the third quarter, taking this asset to nearly 200,000 barrels per day. We also started steaming our first sustaining well pad at Sunrise, and we have two more well pads to bring on in 2024. This is the first step in our multi-year development of this asset that will see us push production volumes to or through nameplate capacity. Our upstream business generated an operating margin of about $2.5 billion in the fourth quarter, and this reflects higher production, lower unit OPEX, but also lower crude prices and wider heavy oil differentials. Now, with the startup of the TMX pipeline, we anticipate light-heavy differentials to narrow. This is an important piece of infrastructure and creates additional egress in the western Canadian basin, and Synovus is an anchor shipper. Our oil sands and thermal assets continue to perform exceptionally well as we enter 2024. We are focused on executing our capital plans at Christina Lake, Foster Creek, Sunrise in support of the organic growth of this business over the next two years. In our conventional business, fourth quarter production volumes remain steady around 124,000 BOE per day. And the business was consistent and stable after dealing with wildfires through much of the summer. Offshore production reached about 70,000 barrels a day in the fourth quarter, a 6% increase quarter over quarter. And in Asia Pacific, gas volumes were up by about 20% in Indonesia as we brought on the MAC field in September. Our Asia-Pacific business continues to generate with great predictability, generating about a billion dollars of operating margin for the year. In the Atlantic region, the Terra Nova FPSO returned to production in late November, contributing about 4,000 barrels a day to Synovus in the month of December. The operator has since seen a ramp-up of production in the field and is working towards the asset being increased to full rates. We also advanced work for the regulatory dry dock of the Sea Rose FPSO. In late December, the vessel was taken off station. The vessel has now arrived in Belfast and maintenance work has begun. We anticipate the Sea Rose to return in the third quarter of 2024. The investments we are making today ensure the vessel will be ready well in advance of the startup of the West White Rose project, supporting production from that field well into the late 2030s. Overall, it's been a very strong quarter and a very strong start to 2024 for upstream businesses. Consistent with our guidance, planned turnaround activity will occur in the third quarter, and we expect to grow production exiting the year at higher production rates. Turning to the downstream, the fourth quarter was another good step forward for our operated refining businesses. In Canadian, refining crude utilization was 91% in the fourth quarter. The Lloyd Minster Upgrader and Refinery demonstrated consistent and strong performance. This performance has continued in the first quarter as we prepare for a major turnaround of the Lloyd Minster Upgrader beginning in the second quarter. We anticipate the quarterly throughput impact to be about 42,000 to 46,000 barrels a day, consistent with guidance. And coming out of the turnaround, we expect the Lloyd Complex to continue to run reliably with high rates of utilization for the foreseeable future. In U.S. refining, our operated assets continue to run safely and reliably, performing mostly as expected. I'm very pleased with the improvements we continue to make in this business. The Toledo refinery ran steadily over the quarter and was able to take advantage of the wider light heavy crude differentials. We also completed planned maintenance of the distillate hydrotreater at the Lima Refinery in the quarter. We expect this asset to run at high levels of utilization through the first three quarters of this year going into the fourth quarter turnaround. Now, we continue to have some challenges in the Superior Refinery. You'll see the throughput was in line with the prior quarter. We're working to improve reliability, which will allow us to increase crude throughput in the second quarter of 2024. Our non-operated Borger refinery underwent significant planned maintenance in the fourth quarter, and the operator experienced significant delays bringing the facility back up, which impacted utilization and profitability in the quarter. This refinery is now operating at full rates. The most notable item in the fourth quarter results was the weak Chicago crack price environment and volatility quarter over quarter. The Chicago 321 crack spread averaged $13.24 US per barrel, a decline of over 50% compared to the third quarter. The December crack averaged $7.65 US per barrel, and at times gasoline cracks were negative, which caused us to respond by economically optimizing throughput. This not only drove lower US refining operating margin in the fourth quarter, but also lower throughput, and contributed to a significant FIFO headwind in the U.S. refining of about $450 million as we processed higher-priced crudes that were purchased in prior periods. Now, the wheat crack environment has persisted through the month of January with an average Chicago 3-2-1 benchmark of about $5.50 U.S. per barrel. But recently, the Chicago refining crack environment has improved. Cracks have risen into the low teens and the high 20s. and with seasonal impacts easing and product inventories rebalancing, as well as refineries entering the turnaround season, we anticipate seeing more normalized cracks going forward. We expect to continuously improve our operating and financial performance in this business as we produce refined products into this pricing tailwind. Now to our corporate and financial performance. In the fourth quarter, Synovus delivered approximately $2.1 billion of adjusted funds flow. As mentioned, the upstream business was impacted by lower realized prices with wider WTI and WCS differentials, and the downstream was impacted by lower refined product pricing in the U.S. and a negative FIFO impact. Through our base dividends, share buybacks, and final payment of the common share warrant obligation, we distributed over $700 million directly to our shareholders in the fourth quarter. In addition, the company's net debt was approximately $5.1 billion at the end of the fourth quarter, a reduction of more than $900 million from the third quarter, which reflects a working capital release as well as the application of free cash flow. We remain focused on achieving our $4 billion net debt target and delivering 100% of excess free funds flow to our shareholders once this milestone is met. So looking back at 2023, there's some important achievements I'd like to highlight. We delivered safe and reliable upstream performance throughout the year while responding to the significant wildfire activity in our conventional areas in the spring and summer and safely executed a major turnaround at Foster Creek in the second quarter. We successfully delivered our capital spending guidance in 2023 with total investments of $4.3 billion and achieved several key project milestones as planned. We materially progressed construction of the West White Rose project, which, as I mentioned, is now about 75% complete, and reached a major milestone in the second quarter with the completion of the conical slip form on the gravity base structure. At Christina Lake, we achieved approximately 45% completion of our Narrows Lake tieback pipeline on time and on budget. This will allow us to produce our high quality low SOR resource back to the Christina Lake processing facility. We further integrated our heavy oil production and refining capabilities through the acquisition of the remaining 50% of the Toledo refinery and we safely returned that refinery to full operations in June. We brought Superior online and combined with Toledo, we added approximately 130,000 barrels a day of refining capacity, much of that heavy oil refining capacity. We reduced our long-term debt by almost $1.6 billion, with $1 billion U.S. of that being repurchased debt. We also strengthened our credit ratings. during the year, with a credit rating upgrade from Fitch ratings to BBB stable, and a change in our Moody's outlook from stable to positive. We generated nearly $9 billion of adjusted funds flow in the year. This enabled us to deliver around $2.8 billion to shareholders through our base dividend, the purchase of common shares, and the purchase and cancellation of about 46 million Synovus warrants. We end 2023 on a strong note operationally and will continue to build on this through the year. 2024 will be focused on achieving our 4 billion net debt target, progressing our high return growth projects in the upstream, and continuing to improve the profitability of the downstream business while running it safely and reliably. Ultimately, as part of our capital allocation framework, we look forward to shifting to 100% of excess free funds flow going back to shareholders. We are well positioned as a company. The achievements I just spoke to set us up well for 2024 and will continue to generate value for years to come. On March 5th, we'll be hosting an investor day and I welcome you to attend to hear more about our strategy and detailed five-year plans at that time. And with that, I'll stop and we're happy to take your questions.