Strathcona Resources Ltd.

Good morning. My name is Ina, and I will be your conference operator today. I would like to welcome everyone to the fourth quarter 2024 conference call of StratConner Resources Limited. All lines have been placed on mute to prevent any buckle noise. After the speaker's remarks, there will be a question and answer session. For attendees on the conference call that would like to ask a question, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. I now introduce Angela, Treasurer of Strathcona, to open the conference and introduce the speakers. Thank you. Please go ahead.

Welcome to the Q4 2024 conference call of Strathcona Resources Limited. Yesterday, Strathcona released its fourth quarter and annual 2024 results. We encourage our investors to visit Strathcona's website and review the disclosure materials in detail. Today's call will be focused on taking questions from analysts. Please note that all commentary made by today's speakers are subject to the same advisories regarding forward-looking information and non-GAAP measures as can be found in yesterday's press release and our other disclosure materials. On today's call, we have from our management team Adam Watrous, Executive Chairman, Connor Watrous, Chief Financial Officer, Connie DiCiancio, Chief Commercial Officer, Dale Babiak, Chief Operating Officer, Kim Chiu, President of Strathcona Cold Lake, Al Gravis, President Strathcona-Motney. Seamus Murphy, President Strathcona-Lloydminster Conventional. Brian Tracy, President Strathcona-Lloydminster Thermal. With that, in keeping with our practice, we will take all our materials as read and we would now like to jump straight to questions.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star four by the one on your telephone keypad. You will hear a prompt that your hand has been raised, and should you wish to cancel your request, please press star four by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. The first question comes from the line of Jenna Ware from TD Commonwealth. Please go ahead.

Hi, good morning, and thanks for taking my question. You alluded to a 50-50 tariff cost split on the U.S. Gulf Coast. Can you elaborate on the mechanics of payments of tariffs on the Gulf Coast, and how is that flowing through the business today?

Why don't we have Connor Watrous take that call? Thanks, Jenna.

So as we said in some of the documents we sent out last night, our view is that the tariff is ultimately going to be a total cost on a combined basis to folks in the upstream and downstream of about $5 a barrel. So far, what we've seen is that since the WCS Houston benchmark has strengthened by about $2.50, meaning in turn that downstream purchasers in the States are having to pay about $2.50 more per barrel for our barrels. Effectively, that means that the consumer in the States is bearing about 50% of the cost. On the flip side, what we've seen is in Canada, the discount for WCS Hardesty has so far moved by about $1.50 to $2 a barrel, which in turn is that cost that costs that folks up here are currently taking out of the tariff. In terms of what that means for Strathcona, of the 115,000 barrels a day of oil that we make, about a total of 85,000 is sold in Canada. And the real way we get hit in turn is just on a slightly lower price in terms of the sell out here. In terms of the 30,000 barrels today that we sell via rail, we will be the payer of that, call it $5 per barrel tariff, effectively at the point at which our trains across the border. But as I said, since the prices that we're getting on the Gulf Coast have strengthened by, I call it two to three bucks, In turn, the net cost is about $2 per barrel. I'd say that on top of that, net-net, since we are so well hedged on both sides of the border in terms of the net effective price, plus the fact that the Canadian dollar is a lot weaker than pre-tariff, all in, we think the net final price post-tariff I call it the same as we were being paid pre-tariff.

Got it. Thank you. That's helpful color. And then just one follow-up, if I may. It feels like there's a growing kind of bearish consensus view on oil prices given tariffs potentially eroding global oil demand and OPEC now talking about adding supply to the market in April. So if we assume that oil prices check back into the $60 range and remain there, what changes in terms of how you allocate capital or even strategically into year-end and beyond?

So this is Adam Watrous speaking. Even if it checks back to $60, we don't see a significant change in our capital allocation. Okay, great. Thank you, and I'll turn it back.

Thank you. And your next question comes from the line of Greg Barty from RBC Capital Market. Please go ahead.

Yeah, thanks. Thanks. Good morning. I've got a couple of questions, but maybe the first is just a bit broader. I mean, you know, you've just completed your first year as a public company. I'm interested in, I don't know, maybe for you what the main learnings were, but also how you're thinking about 2025 in terms of priorities and objectives.

Sure, Greg.

This is Adam Watrous. Maybe I'll take that in terms of learnings as a public company. Greg, there's not as many as you might think, and the reason being is in terms of our financial reporting, we had bonds outstanding. So while we were previously a private company, the amount of reporting that we did, it's not dramatically different. Sometimes we have a private company that isn't used to the rigor of public reporting. So that hasn't been too much of an adjustment for us. In terms of 2025, we're very focused on operational excellence and meeting the guidance that we've provided. We can talk about each and every one of our business units on that, but I would focus that we are primarily focused on operational excellence.

I think perhaps a further thing to add to that, Greg, is while we've been public for about as a public company is think about the business very much in the same way as when the business was private in that while there's always going to be changes in sentiment each week and each month, really what we're trying to do is run the business for the long term, which is the benefit we had when we were private.

By the way, maybe some application on that is I think we tried to give as much information in our investor day in November. We are focusing on compounding per share NAV, maximizing return on equity. So that's essentially the lens that we're looking for in making capital allocation decisions.

Okay, that's helpful. And then maybe just shifting gears a little bit, so you acquired Tucker a few years ago and you've had some pretty material success, I would say, just in terms of production rates and so on. Could you walk through perhaps how that has been achieved technically and then what your outlook for Tucker is this coming year, please?

Sure. Greg, I'm going to turn that over to Kim Chiu, who's responsible for our Cold Lake business unit.

Yeah, thanks, Adam. Yeah, Tucker has been a source of pride and excitement for the team here at Strathcona and specifically my business unit. If you think back to when we had the investor day back in November, we talked about that laser focus around optimizing what we already had in the ground. So we went through that, restarted a bunch of wells, optimized and became more aggressive on the operating strategy and getting more oil out of the existing steel. And then now we're kind of into that second phase where we went through that low hanging fruit. We still have some more left, but it was about adding capital and adding development to the asset. And as we put out in our press release, There's two major reasons we are so far exceeding our initial expectations on Tucker on the development side. Those LDW wells, which we had dipped our toe and started a commercial execution on the Orion side, and we had learnings from there. And then also just kind of what I would call bread and butter SAGD, where we had our C-South pad development, which is your typical standard well pair design. The LDWs have far exceeded initial expectations on the ramp up profile. In fact, we applied somewhat newer drilling technology in the form of fish bones, where I know the conventional space has been operating that over the last few years. We got into that action. We thought that that would be applicable for what we had in the Clearwater, as I mentioned in November. And those two fish bones right now are actually currently being... execute on the pump-up size, because through analysis, through adding four times the reservoir contact area, we thought that they should be significantly better. And so we saw that they had more fluid to give, so we're putting ESPs in the ground as we speak. We should get one both back sometime by the end of this week and turn them on. But even the initial, kind of the normal 800-meter-long laterals, Those are also coming on at a much better water cut than we would have anticipated in what we saw at Orion. And the team's working through that and trying to understand why the results at Tucker are so much better than even what we saw at Orion. Both are great projects. This one's significantly better than even the Orion project. And then SeaSouth. You know, there's always, you know, if you took a look at Tucker's history in the last few developments, even prior to us, you know, there seems paths have done very well. Our C-South, we thought it would be good, but we hedged our bets a little bit in terms of what we want to commit and promise, both internally and publicly. And so this is actually meeting expectations bang on with our previous development in H-East And so the peak rates, all that, it's hitting what was expected. It's just getting there significantly faster. And I think the team thought that could be a possibility because it's contained. It's already preheated on the edges, and we're seeing lower cert times, and we're seeing the faster ramp-up, which kind of aligns with a mildly preheated reservoir.

Understood. That's a good rundown. Thanks very much.

Thank you. And your next question comes from the line of Patrick O'Rourke from ATB Capital. Please go ahead.

Hey, guys. Good morning, and thanks for the update so far. Just wanted to ask, first, with respect to the reserves, you know, something that stood out to us was strong positive technical revisions. I'm wondering if you could sort of delineate those throughout the portfolio, and then are these sort of a one-time event, or is this sort of a trend that you see as durable throughout time?

Sure. Patrick, thanks for the question. I think we're going to first of all turn it over to Kim Chiu and then perhaps a follow-up with Dale Babiak.

Sure. So I'll speak primarily, obviously, to the Cold Lake side of things, and then I'll turn it over to Dale. I think one of the major contributors to the reserve uplift was just a technical rework on the Lindbergh asset specifically. The team actually has been talking about it for quite some time, but we were finally able to do some petrophysical work to tie real-life data. And through that conversation with our third-party evaluator, and showing them the real-life data, they were actually able to increase the oil saturations that we were using. It was always there. There was just a safety margin that I believe that the value we were putting on there for the sake of higher certainty, but now that we've tied it with this, you know, the more detailed technical work, they were satisfied and they brought up our overall volume. So, that had an overarching impact across the entire Limburg Island.

Yeah, and I would say in addition to that, you know, in our Lloyd thermal asset, we actually had some updated mapping that was completed in the Miota West 2 area in the GP, Miota Central for the Waseca, and then in our Pulver asset as well. So, Additionally, there was recovery factors that improved because of the tight curving, so definitely made a significant difference. So again, the thermal assets definitely boasting a good portion of the ads that occurred in 2024.

Yeah, and then I think a further thing I would say on top of that, Patrick, is while Kim and Dale spoke to some of the big ads we're going to have over the next couple you know, over the future on the 1p and 2p basis. I think what we're particularly excited about this year is just on a, you know, on a pure PDP basis, we've had, you know, a positive add of about 24 million barrels, you know, outside of the transfers from, you know, really what those $24 million of gains are is just a real credit to the team and really all four of Strathcona's business units to do a great job managing day-to-day production to effectively prove that the base decline is a lot flatter than had previously been thought. by the third party. And in turn, what that translates into for us is a lot lower stay flat capital profile going forward.

Okay, great.

And then just sort of shifting gears over here to the capital structure, the net debt target that you guys have out there, can you just sort of remind us what frames that, and then if there are any signposts out there in the market that would cause you to deviate from the current strategy there.

Patrick, so the $2.5 billion target was set on being about one-times that deep at a flat $70 price deck. And we've effectively been at that spot over the past couple of quarters. That $2.5 billion mark is a place that we are certainly comfortable at and I think we will stick with for some time. and or lower what the full cycle breakeven cost is. We think in turn, there's going to be an opportunity to grow the pro forma debt profile of the business. But for now, we are certainly fine at that $2.5 billion level. We are... conscious that everyone has a slightly different debt target out there. And this is one that really fits with the view that we had as a prudent quantum of that when Strathcona was a fully private company and still makes sense

Still makes sense now that we're public. Okay, thank you very much.

Thank you. Once again, should you have a question, please press star, followed by the one on your telephone keypad. And your next question comes from the line of Dennis Fong from TIBC World Markets. Please go ahead.

Hi, good morning, and thanks for taking my question. The first one is maybe a bit of a follow-on to Tucker. Obviously, that's a really strong result with 28,000 barrels a day in February. Maybe expanding on it and just in operations in general, can you discuss cost savings, namely with lower energy op-ex and or carbon costs associated with this optimization, and where else do you see opportunities here to kind of see that going forward?

Sure.

Obviously, with the benchmarks that were set, the more oil we can put through at OSR, we're going to see cost savings. I don't know that I have the specific numbers that I can share with you today, but maybe Connor will in a second here. In terms of the follow-up, we are looking through all the mature paths, looking for other effectively infill opportunities at a lower bench. And we think that this technology can be applied right across the asset. We actually are already in execution planning for our next pad later on this year in C-East. And we are looking at how far do we deploy this technology across the next seven infill wells that we have for C-East. The one thing, and I'm pretty sure I mentioned it back in November as well, is that the real prize here in the competitive advantage on the Clearwater is because it consolidates through these fishbone designs and if we can convince ourselves that we are effectively draining across more than one parent welfare spacing, the prize is that we could actually extend these ribs and eliminate additional well locations while capturing the same amount either on a two or three well original spacing with a single well bore. So that's the, not only is there a carbon prize from a carbon cost perspective, but there's an F&D prize that we are very actively looking after as well.

Yeah, I think just on the carbon tax side of things, you know, per year. And, you know, based on the steam oils that we're seeing now, we think we could, you know, get back, call it 25 of that. So, you know, a real step change there.

Great. Thanks. Appreciate that color there. The second question that I have is you do have a few kind of, we'll call it more major projects in flight right now. Can you discuss opportunities that you have focused on, especially surrounding supply chain management and so forth, that helps you moderate, A, the impact of tariffs or counter tariffs, as well as keeping kind of cost control, especially as you build out some of the expansions or new processing facilities?

Sure. We're going to have Ryan Tracy answer that.

Yeah, Ryan Tracy here. I'm on the Lloyd Thermal Group. So we're responsible for building the Neota Central facility. That's one of our larger projects that we're doing right now. We've signed a contract with one of our major EPCs in town or just outside of town here, PROPAC that we're working with. And with that contract that we have in place with them, it's a lump sum turnkey project that we're using for the major facility equipment with them. And on that, on the supply chain side in their world, They've been actively working to contract and get all their long needs back starting in November, December when we signed that original contract. So a lot of that risk is kind of behind us at this point. There are some smaller materials that obviously we could be exposed to depending on the counter tariffs, which would be me speculating right now, but on things like some of our drilling costs, our casing and our mud costs, Those costs are something that we are exposed to, but a much smaller extent of the project cost. And those aren't part of the tariffs as far as I know, as this morning anyways. So that's basically the way we've managed that cost structure. And it is the same way we've done all these facilities in the past to help guarantee our pricing and our schedule with the same contractors built all four of our other major facilities in that space. Lloyd Thermal Business Unit, and we've successfully managed these projects in that same way in the past.

Great. I appreciate that, Collar. And if you'll afford me one last one, maybe following along, I think, with Patrick's question just around PEP technical revisions, can you also talk towards some of the work that you're doing in terms of base maintenance, moderating your base decline and so forth, and how that's potentially bearing fruit as well? Thanks.

Sure. We're going to have Seamus Murphy answer that question.

We continue to optimize our equipment, optimize reliability, run time, just optimize our base and limit those base declines as best we can and manage those base declines across our asset base, primarily in the conventional division.

And I'd say while we had a lot of gains on on PEP this year. One of the big things we're most proud of is on flattening out that base decline, particularly at Bodo and Cactus, which are the big polymer floods that we have out in Sask. Even those assets have been around for a long, long time now. We continue to find ways to get a little more oil out of each well, which in turn led to about, call it, 7 or 8 million barrels of gain outside of just the drilling program this year on a pure PDP basis there.

Great. Really appreciate the incremental call and I'll turn it back. Thank you.

Thank you. If there are no further questions at this time, I will now hand the call back to Mr. Adam Waters for any closing remarks.

Thank you. First of all, I'd just like to thank the Strathcona senior management team and all the employees of the company for delivering another strong order. Really appreciate it. And we appreciate everyone on the line for your interest in learning more about our operations. And we look forward to the next call. Thank you very much.

Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.