Cenovus Energy Inc. (CVE) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen and thank you for standing by. Welcome to Cenovus 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. Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Cenovus Energy.
Sherry Wendt: Thank you, operator, and welcome everyone to Cenovus' 2021 second quarter results conference call. I'll refer you to the advisories located at the end of today's news release. These describe the forward looking information, non-GAAP measures, and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus’ annual MD&A and our most recent annual information form and form 40-F. All figures are presented in Canadian dollars and before royalties unless otherwise stated. You'll find our updated guidance posted on Cenovus.com under Investors. Alex Pourbaix, our President and Chief Executive Officer will provide brief comments, and then we will take your questions. We ask that you please hold off on any detailed modeling questions and instead follow up on those directly with our Investor Relations team after the call. And if you could please keep to one question with a maximum of one follow up. You can rejoin the queue for any other questions. Alex, please go ahead.
Alex Pourbaix: Thanks, Sherry. And good morning everyone. First off, let me say how great it is to see vaccination rates continue to rise in Alberta and across Canada. However, we know that COVID-19 hasn't gone away and I assure you at Cenovus we're not letting our guard down. With restrictions easing I know I'm looking forward to life getting back closer to normal. And the health and well being of our workforce and our communities remains a company's priority. As we modify protocols at our operations will continue to follow public health guidance and to work closely with governments, health authorities, and industry to protect our people. Safety is foundational to how we operate. We're working diligently to finish integrating our safety systems after closing the Husky transaction at the beginning of this year. Our goal is for Cenovus to be a top tier safety performer and to achieve this we prioritize safety above all else. So turning to the second quarter, we continue to build on our first quarter results with strong operations delivering even better financial performance. If you've heard our last conference call, we communicated that if you added back the transaction related costs that impacted adjusted funds flow in the first quarter, our adjusted funds flow would have been nearly 1.5 billion and free funds flow nearly 1 billion.
Operator: Your first question comes from Neil Mehta from Goldman Sachs. Neil, please go ahead.
Neil Mehta: Yes, good morning team. Congrats here on a good quarter. Yes, I want to talk about the cadence of debt reduction. And Alex, maybe you could talk about your confidence interval and achieving the $10 billion level by the end of the year based on what you can see in the business. And talk a little bit about the working capital side of the equation. It was dragged last quarter. A little bit of drag this quarter. How do you see that unwinding here? And can that help you get to that level?
Alex Pourbaix: Yes, Neil, happy to do so. I mean when we think about net debt, and we talk about that 10 billion target being within range, what I would tell you is when we look at this business for the balance of the year, just on our base business once again assuming that the strip remains more or less in place, we are highly confident that we should hit that 10 billion target within the end of the year. And I would say that completely ignores the impact of further asset sales. And I've said it before on these calls, and with investors we are really laser focused on those non-core divestitures and I expect that they will continue to accelerate that pace. So our confidence on the 10 billion is really strong. With respect to the working capital, maybe I'll hand that over to Jeff. And he can give a little bit of color. Jon may want to jump into.
Jeff Hart: Yes. no. Morning Neil. I think the confidence here, and if you look at the working capital build for the Q which is about 400 million and you think primarily, that's largely price related, as we saw the price impacts here and oil rise, WTI kind of permit month average March two month average June by about $10 a barrel. So we saw an investment in inventory. And we also built volumes in and around the U.S. refining which gets to the utilization increases that Alex was talking about as well as building in and around upstream, given the portion that we could build inventories and optimized commercially throughout our infrastructure. I think that reinforces our confidence to get into under 10 billion and get sets up and reinforces the utilizations running up in the refineries, the integration benefits and you can start to see it really in the realization coming through next quarter. And so we're quite confident. I think the inventory build and working capital build reinforces that confidence.
Neil Mehta: All right, thanks, Jeff. And Alex, follow up is just on asset monetization. So two comments there, one how do you think about in the context of it, obviously, that is the biggest nut there, but it's been a really profitable asset. And we would argue that LNG balances was pretty tight . So there is a lot of value in that asset. And then million dollars of smaller singles and doubles. Talk a little bit about what are the logical assets around that and how should we think about the timing then?
Alex Pourbaix: Sure when you talk about Asia-Pac Neil, I think you're quite right to kind of draw attention to the free cash flow generating capability of that asset. It's been performing very well for us. I think it's also fair to say as we get to know that business better we are seeing some opportunities to actually continue to add value. And yes, as I've said in the past, I don't think when you think about your asset divestitures my kind of guidance to the market is as I said, we are really focused on this, but I think people should think about divestitures largely though not entirely, coming out of the conventional business and being North American focused. The Asia-Pac business for us is something that we really want to spend a good amount of time with, really get to know our partners in the situation there. So I don't see it as something where we would be considering in the short term. With respect to the kind of singles and doubles, maybe might want to give a little bit of color on them.
Unidentified Company Representative: Thanks, Alex. So, Neil, I think Alex kind of touched on this already. But we are largely focusing most of our efforts in the conventional space. And I would say it's really about assets that aren't competing for capital inside of our portfolio. Assets that have slightly higher operating costs, and assets just really aren't going to receive the funding. So I think as you go through that portfolio. I think that's probably the way to think about pieces that don't fit. Alex did allude to this, but there are, we are looking at other parts of the portfolio too not necessarily solely focused on the conventional business. So just for good reasons, we won't be giving details around what those specifics are but you shouldn't be surprised to see other areas that we're also focused on and looking at asset divestitures going through 2021.
Neil Mehta: Thanks team.
Operator: Your next question comes from Greg Pardy from RBC Capital Markets. Greg, please go ahead.
Greg Pardy: Yes. Thanks. Good morning. Could you frame maybe the role that you see the Lloyds thermals playing in the years ahead? And I'm also interested in just other areas of either the upstream and the downstream portfolio where there's low hanging fruit that would benefit from just operational improvement.
Jon McKenzie: Good morning, Greg, it's Jon. Your question is a really good one and it's something that we've been actively working on prior to the merger and then in real earnest thereafter. And I think one of the things that we think with Lloydminster thermals is there is still opportunity there for future growth and there's still opportunity there to improve the operating metrics in that area. And what you'll notice, I think, through the rest of the years will spend, a couple 100 million dollars there. But in the background, we've been working on mapping those assets, making sure we fully understand the reservoir and then coming into next year, you'll see a fully made capital plan together with a production forecast that goes with it but we think that those are very economic and highly prospective assets they were one of the things that we had our eye on. We think that long term those assets will produce over 100,000 barrels a day and generate significant free cash flow. The other areas that we have been working on in the background would include Sunrise, Tucker, on the thermal sag D side as well as and then those assets we haven't put any capital into them this year. I think the cumulative capital would be about $5 million between the three assets but we've kept production flat to growing there. But again, in the background, we've been working on mapping those reservoirs and building out our development plans and asset plans around that. And I think what you'll see going into 2022 is those assets as well, are very economic assets at the bottom of the cycle and very perspective in terms of production and operating metrics. So we're really, really pleased with the suite of assets that we've got from Husky and on the Sag D side. Similarly, on the conventional side, we've been working in areas like we think there are opportunities there to improve the operating metrics as well as future prospectivity. And you'll see that again going into 2022, with the budget that were put forward. The other area that I think is kind of interesting for us, we haven't talked a lot about Alex has kind of tweaked on it is Asia-Pacific and we see lots of opportunity there to increase gas supply going into Mainland China, in our China Sea assets there. And we are actively building out the strait in Indonesia as well. We think those are very profitable assets going forward as well. So when we kind of look at sort of the suite of assets that we acquired from Husky we think that a lot of these assets, we would say, are tier one assets, and a lot of these assets are going to be core part of the assets of this company going forward. All cash flow positive at the bottom of the cycle.
Greg Pardy: Okay, that's good rundown. Maybe just as a follow up your downstream is more fractionalized. You've got pieces, bits and pieces all over the place. How are you thinking about maybe streamlining and consolidating some of those areas?
Alex Pourbaix: Yes. Similar to I said before some of the assets that we acquired from Husky like the Lloydminster upgrade and in Lloydminster refiner absolutely jam assets. And then we think that there's a lot of opportunity in the other assets that we've got in the U.S. like Lima. One of the things we've been really clear about is that we think that this acquisition of Husky probably gives us the opportunity to rethink some of our non-operated joint ventures and rethink how we want to consolidate or hold our refining portfolio. We like the assets that we've got. Sometimes you just question whether or not they're held within the right vehicle. But I think all of this activity and this acquisition really gives us the ability to rethink that and address it in near and medium term.
Greg Pardy: Alright, thanks very much.
Alex Pourbaix: Thanks Greg.
Operator: Your next question comes from Phil Gresh from JPMorgan. Phil, please go ahead.
Phil Gresh: Yes, Hey, good morning. As we look ahead, just a little further out, given the oil price environment and the path from the 10 billion of debt to the 8 billion of debt in 2022, how do you think about that balance between quickly getting to 8 billion versus the potential of buy back shares offset some of the effects of to sell down and/or some of these cash back opportunities?
Jeff Hart: Yes. No. It's a good question, Phil. I mean, I think we've said it a million times that we don't want our path down to 10, 100% of free cash flow is going to the balance sheet. But once we hit 10, in with the pace of deleveraging that we see possible over the coming quarters I suspect you're going to see the majority of that cash go to the balance sheet. But as I kind of said in my opening statement we are very alive to the value proposition that share buybacks represent for the company and our shareholders at our present valuation. So I don't think anybody should be surprised to see us be looking very actively at that as we sort of approach the $10 billion level.
Phil Gresh: Got it and then anything on the CapEx side.
Alex Pourbaix: I mean we've talked about this before. One of the great things about doing this Husky deal and Jon sort of alluded to it is we continued to like turn over rocks and find diamonds and I really think that what people should expect I mean I don't see any large scale kind of phase expansions anytime in our near future because we have this really incredible portfolio of kind of what I would describe as kind of brownfield opportunities, organic opportunities just around the edges to add production at very, very attractive returns and at relatively modest capital. And I think that's really where you can expect to see a lot of our capital around those kinds of things that Jon was referring to. The opportunity around getting FCCL connected to the Lloyd complex I would kind of put that in the category once again have a really, really attractive opportunity with quite modest capital. But those are the kinds of things that I think people should be thinking about.
Jon McKenzie: Yes. And maybe I'd add to that, Phil, I think we've been pretty clear through this acquisition of what is required to keep production flat and keep our fixed plants in safe and stable condition and then that number that we've floated quite publicly is around 2.4 billion. And what I would suggest is you shouldn't expect right hand turn from what we've done in the past in terms of capital budgeting going forward. It'll be something that probably looks very similar to what we've done this year when you see the budget for 2020. So I think as Alex said when you get to 10 billion clearly we still want to deliver and we want to address shareholder returns and I think it's a more modest investment in the assets than you might be thinking.
Phil Gresh: Okay, great, that's very helpful. One, kind of one off question. Can you just remind me with respect to superior, the pace of spending versus how the insurance proceeds again? Is there any kind of timing variables to think about there? Thank you.
Jeff Hart: Yes. So it's Jeff here, Phil. Yes, I mean obviously the CapEx, and we've got around half a billion in the guidance this year. And, the insurance, we expect it to be largely covered the CapEx. There is not a simple rule of thumb on cash receipt. I think we sit down and work through basically our invoices with them and go through all that review. So the receipt will be a little bit more lumpy, but no change to where we're at with that and we still expect it to be largely covered. And it's just the timing will be a little bit lumpy. And it's not perfectly even flow with the CapEx.
Alex Pourbaix: And Phil, it's Alex, I might just add my team around this table are regularly subjected to my endeavors to accelerate that recovery on the insurance side. I think it is an obvious, obvious opportunity for us to really accelerate the balance sheet recovery. So we are really focused as a team on seeing those proceeds coming in.
Phil Gresh: Is it fair to say you haven't gotten any of the 500 million yet?
Alex Pourbaix: No. If you think about the CapEx and what we've received, we've received an order of magnitude let's say, a few 100 million on the property damage and then obviously, business interruptions separate and well on our way on that over time. So it's not perfectly weighted to year by year or anything Phil but we're well on our way on non-collecting those.
Phil Gresh: Yes. Okay. Okay. Thank you.
Alex Pourbaix: Thanks Phil.
Operator: Your next question comes from Manav Gupta from Credit Suisse. Please go ahead.
Manav Gupta: Hi, I just wanted to focus a little bit on Canadian manufacturing. The results were stronger than expectations. If you please help us understand what drove that so we can model the segment more accurately going ahead?
Alex Pourbaix: Sure.
Jon McKenzie: Yes. Obviously we saw really strong operating margins at our upstream, sorry, at our manufacturing facilities in the Lloydminster area. That was also included in that was a receipt of a payment from a contract for a customer that wanted to buy out of their contract at our Brooder Home Rail facility. So that's kind of more of a one off event and that was about $55 million. So that might have been a bit of the lumpiness that you weren't able to model in the quarter.
Manav Gupta: Okay. But even then I mean, the earnings are pretty strong. So like in terms of margins, are you seeing those margins continue into the third quarter even if you take out the lumpiness of that one time contract?
Jeff Hart: Yes Manav we had really strong operating performance at both of those assets. Throughput at the assets was high and margins were strong, were really well connected. Alex and Jon alluded to how that industrial complex is very close on the value chain to our upstream production. So we're really happy with the assets. And actually we're now heading into the, to the paving season. So things are lining up well for the third quarter.
Manav Gupta: Okay. Quick follow up on the superior refinery. What you're seeing here is your upstream assets are doing really well. But the U.S. refining margins have generally struggled a little. There is a little bit of rain exposure. So just wanted to understand if was still fully committed to the superior refinery rebuild and if you could remind us what's the value proposition of superior please?
Alex Pourbaix: Well, we're very much committed to superior and maybe I'll let, the first thing I would say is in terms of the project itself, we're very pleased with how the project is doing it. It is a challenging project on a constrained site and everything. We are well advanced in the construction and everything is looking very good. I'm really pleased with progress today. But maybe I'll let Jon talk about sort of a little bit about where it fits in our strategy.
Jon McKenzie: So Manav this won't surprise you. But ever since Alex and I got here and Keith took over the downstream one of the things we've been talking about is market access and needing to get a global price for our heavy oil resource. And more recently we would translate that into the industrial logic of buying Husky where we've actually bolted on a downstream business that consumes the molecules that we produce and protects us from location and heavy oil differential. So the value proposition of superior is really quite clear. This is a refinery that's going to consume about 47,000 barrels a day. 35,000 barrels of that is heavy. So this is a refinery it's going to eat the barrels that we consume. And on the back end, it produces full slate of transportation products, as well as Asphalt and as , we are major Asphalt producer in Western Canada. And this gives us exposure into the Minnesota and Wisconsin market. So there is strong conductivity in terms of the industrial and company logic and strategy. The other thing I would say is this refinery is the first stop off Enbridge and because of that it allows us to nominate barrels onto the Enbridge system which gives us more takeaway capacity. So we think this is not only going to be a highly profitable refinery but it's absolutely on strategy with us and it's got a really nice marketplace to deposit the products that it produces into and as I mentioned before is molecularly integrated to our feed slate.
Manav Gupta: Great. My last question is can you comment a little bit on market digress? When do you think Enbridge realistically could be in a position to start the line fell and do you still see the line coming on somewhere late ‘21, early 2022 and I will leave with that. Thank you.
Alex Pourbaix: Yes, thanks Manav. Yes. Everything that we're seeing is lining up pretty constructively for the WTI differentials pricing. Line three is forecasted and we agree with this that we'll see that happen in the fourth quarter, later in the fourth quarter. Coupled with that we actually think there will be a DRU startup in imminent future which is another 50,000 barrels a day that will get consumed. Those two things and kind of current status of where inventory levels are in Western Canada kind of all is constructive for relatively positive differentials through the back half of this year.
Manav Gupta: Thank you.
Alex Pourbaix: Thanks Manav.
Operator: Your next question comes from Menno Hulshof from TD Securities. Please go ahead.
Menno Hulshof: Thanks and good morning everyone. Alex you just mentioned getting Foster Creek, Christina Lake connected to the Lloyd complex is a relatively attractive future opportunity and this is something that you've talked about on a number of occasions in the past and so my question is are you in a position to elaborate on what that's going to look like in terms of scope of work, cost and capital efficiencies and if not when do you think you will be?
Alex Pourbaix: I mean I think we're pretty, we've done a huge amount of work on it and we actually there are a series of capital projects and I would really put it in the category of very modest capital probably kind of in the 200 million-ish dollar range over a few years and really we think those projects are going to vary that high return projects connecting FCCL production volumes to the complex and I'm just I'm probably a little early to go into too much detail but it kind of in that magnitude and maybe one thing I mean Keith maybe you can talk a little bit about what we hope to achieve by those projects.
Unidentified Company Representative: Yes Menno, when we think about this we have a world-class upstream resources sitting within 50-mile radius of a very large industrial complex and historically those assets have consumed LLB which typically fetch a higher price in the global markets. So by converting both the upgrade and the refinery to other feed slates from Foster Creek or Christina Lake we think we will get margin expansion on the upstream barrels. We also think that we'll be able to recycle more condensate back into the province and we're very large consumer of condensate. So those two things coming together we also are our partners in the HMGP midstream business. So the connectivity is there. So as Alex alluded to we think for a modest amount of capital. We can over the next few years we can integrate those Oil Sands assets into those two industrial conversion assets and really generate more margin and recycle a lot more condensate in the province eliminating the need to import it from the gulf coast.
Alex Pourbaix: Yes. And think about that as Keith said over the kind of next one to three year period.
Keith Chiasson: Perfect. That's all I had. Thank you.
Alex Pourbaix: Thanks.
Operator: Your next question comes from Harry Mateer from Barclays. Harry please go ahead.
Harry Mateer: Hi good morning. So first question is I mean you've been very clear about the 10 billion net debt target and then a little bit more open-ended about the timing of 8 billion but there is also an lower that's been attached to the 8 billion target. Can you just talk about what you mean there and then what might drive you to delever even further.
Alex Pourbaix: Yes. No, I'm I mean I think I would say and it's probably best to think of that almost from a philosophical perspective and we -- I think the events over the sort of four or so years I've been at Cenovus have really hammered home to me the benefits in this industry of operating with an under levered balance sheet. We very much want to have a debt level that puts us in the mid triple B range in terms of credit rating and I think that over time that probably would have us tending towards lower debt all things being considered than 8 billion but at this time we think 8 billion is a pretty ambitious target that we think we can get to quite quickly and on over time we'll certainly be thinking hard about taking it lower but for now the public target is 8 billion.
Harry Mateer: Okay. Thanks for that and then credit markets and I suspect credit markets tend to reward gross debt reduction a bit more than net debt reduction. So can you just remind us how you're thinking about the balance between those and then whether liability management which I know something Cenovus did in the past might that again be part of the toolkit to help crystallize some gross debt production rather than just running with some extra cash on the balance sheet?
Jeff Hart: Yes. It's Jeff here and absolutely we'll look at gross deleveraging. I think we have historically and I think we'll balance that and make sure that we probably hold a little bit more cash and it's not lost on us that I think there's credit markets are attractive but we'll look and balance everything out and make sure that we've got the balance in that we balance our liquidity and look to manage down over time the gross debt but will we balance through all of that.
Harry Mateer: Okay. Thank you.
Alex Pourbaix: Thanks Harry.
Operator: There are no further questions at this time. I'll now turn it back to Mr. Pourbaix for closing remarks.
Alex Pourbaix: Well, everybody I know we're looking at the start of a long weekend in the middle of summer and we very much appreciate your interest in the company and taking the time this morning. So with that we'll sign off and thank everybody for participating. Take care.
Operator: Ladies and gentlemen this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
