Cenovus Energy - Q1 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's first 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 one. 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 Cenovus Energy. I would now like to turn the conference call over to Mr. Jason Abbate, Senior Vice President, Investor Relations. Please go ahead, Mr. Abbate.

Jason Abbate (SVP of Investor Relation)

Thank you, operator. Good morning, everyone, and welcome to Cenovus's 2024 first quarter results conference call. On the call this morning, our CEO, Jon McKenzie, will take you through our results. Then we'll open the line for Jon and members of the Cenovus management team to take your questions. Before getting started, I refer you to our advisories located at the end of today's news release. These describe the forward-looking information, non-GAAP measures, and oil and gas terms referred to today. They also outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus's annual MD&A and our most recent AIF and Form 40-F. All figures are presented in Canadian dollars and before royalties, unless otherwise stated. You can view our results on our website at cenovus.com. I'd ask that you keep the 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. Jon, please go ahead.

Jon McKenzie (CEO)

Great, and thank you very much, Jason, and good morning, everybody. Safety is at the forefront of everything we do at Cenovus, and I'd like to take a moment to acknowledge an important accomplishment in the first quarter. In our Atlantic Region, we safely and successfully took the SeaRose FPSO off station, which is a once in ten year or more activity. A job well done by everybody involved. Now, at our Investor Day, we outlined our strategic objectives, the low-cost organic growth opportunities with our high-quality assets, and how we'll leverage our integrated value chain. We also talked about our disciplined financial framework, which includes growing shareholder returns. Our first quarter results are a reflection of our disciplined approach to managing this business.

We continue to be pleased with the performance of our upstream business, while driving focused improvement in downstream operations and increasing margin capture, with the quarter achieving the highest throughput to date. Our upstream business delivered strong operating results in line with the prior quarter, with production of around 800,000 barrels equivalent per day. This was slightly lower than Q4, with planned maintenance having started at the SeaRose FPSO. I'd like to highlight that the Lloydminster Thermals produced over 414,000 barrels per day, the highest quarterly average in the history of the asset, reflecting higher operating efficiency and improved downhole pump reliability. Our oil sands and thermal assets continued to produce exceptional results. We remain on track to deliver future production growth from Narrows Lake tieback to Christina Lake.

The pipeline is now 67% constructed, with hydro testing in line and planned to be completed by the end of the year. At Foster Creek Optimization Project, this is on schedule for our targeted 2026 startup. We'll also be starting up two additional well pads at Sunrise later this year, supporting the base production and the start of production growth in 2025. We also continue to optimize our turnaround schedule, and as such, we have advanced some of the work out of our planned Q3 turnaround at Christina Lake into Q2. The impact of our planned outages can be found in the maintenance table in the news release. We're also looking forward to the important milestone for our industry with the imminent startup of the TMX pipeline.

With this critical piece of infrastructure now complete, we anticipate light-heavy differentials will remain narrow for years while excess egress capacity exists. In our conventional gas business, production volumes remained relatively consistent, around 121,000 BOE per day. As a reminder, we test all opportunities at the bottom of the pricing cycle, and we continue to progress our capital program with a focus on safe execution and cost reductions. First quarter production in our offshore business segments remained steady at approximately 65,000 BOE per day. The Asia Pacific assets continued to operate reliably, generating about CAD 263 million of operating margin. In the Atlantic region, Terra Nova returned to production and contributed about 7,200 barrels per day in the first quarter.

The SeaRose FPSO is at dry dock, with regulatory maintenance work progressing as planned in preparation for the startup of the West White Rose project in 2026. Now, as we previously communicated, we anticipate the SeaRose will return to production late in the third quarter of 2024. The progression of the White Rose project continues as planned and is now approximately 80% complete. Overall, our capital spend remains on track for this project. In the first quarter, the company spent just over CAD 1 billion in capital, and we expect to be well within our guidance range for total capital spend this year. It was another strong quarter for upstream business, and we look forward to continuing to execute our plans as the year progresses. Now, moving to our downstream segment. In our Canadian refining business, average utilization for the first quarter was about 94%.

Our refining and upgrading assets continued to perform very well with high reliability. That said, the refining margin or the refining margin contribution from the Canadian refining segment was impacted by the decline in synthetic crude prices over the quarter and narrow, heavy oil differentials in March. In the next few weeks, we'll be executing a large-scale turnaround at the Lloydminster Upgrader that is expected to reduce Q2 throughput by about 45,000 barrels per day for the quarter. This has already been reflected in our corporate guidance for the year. In the U.S. refining segment, combined crude utilization across the assets was 87%, an increase from the prior quarter. This was primarily driven by lower levels of planned maintenance at our non-operated refineries and improved operating performance across the refining portfolio.

The weak Chicago crack environment in the fourth quarter of 2023 was a challenge for our U.S. business that carried into January of 2024. With product inventories rebalancing in the PADD 2 market, we've seen a strong rebound in the Chicago crack spread, which we were able to take advantage with all of our refineries operationally available and running well. This resulted in a meaningful improvement to our U.S. refining margins exiting the first quarter. We anticipate the Chicago crack environment to remain relatively strong, with heavy industry turnaround schedule underway and seasonal demand strengthening. Overall, we had the highest quarterly throughput for our downstream business since the acquisition of our operated refining assets in 2021, demonstrating the continued progress of our plans to improve the reliability, profitability and utilization of the business. Now to our corporate and financial performance.

Cenovus generated CAD 3.2 billion of operating margin in the first quarter, approximately CAD 2.2 billion of adjusted funds flow and CAD 1.2 billion of free funds flow, which reflects higher refining benchmark prices and about CAD 195 million FIFO gain in the U.S. refining segment. That was offset by about CAD 250 million for share-based compensation paid in the first quarter. Through our base dividend, we returned CAD 262 million to shareholders, and the board of directors also approved an increase to the quarterly base dividend of 29% to CAD 0.72 per share annually, consistent with the company's commitment to grow shareholder returns.

In alignment with our shareholder returns framework, we returned CAD 165 million to shareholders through our share buyback program in Q1, and the board of directors declared a variable dividend of CAD 251 million, fulfilling our commitment of 50% of excess free funds flow returned to shareholders. Now, subsequent to the end of the quarter, from April first to April twenty-sixth, the company repurchased approximately CAD 250 million worth of shares through our NCIB, or about 8.6 million shares. The company's net debt was approximately CAD 4.8 billion at the end of the first quarter, a reduction of CAD 233 million from year-end, and included CAD 370 million build in non-cash working capital. This was largely a function of benchmark pricing improvements and steady operations across the value chains.

Since we set our 2024 budget in December, commodity prices have exceeded our expectations, and based on the current commodity price complex and our operating plan, we expect to achieve our net debt target at some point in the summer of 2024. As we described in the first quarter news release, we're also introducing some minor changes to our shareholder returns framework. Once we achieve our net debt threshold, we'll target allocating 100% of each subsequent quarter's excess free funds flow to shareholder returns. This remains unchanged from our current approach. In the event that net debt exceeds CAD 4 billion at a given quarter's end, we will reduce the 100% target allocation of excess free funds flow by the amount that net debt exceeded CAD 4 billion.

In order to efficiently manage working capital and cash, the allocation of excess free funds flow to shareholder returns may be accelerated, deferred, or reallocated between quarters while maintaining our target to allocate 100% of excess free funds flow over time to shareholder returns and sustain net debt at CAD 4 billion. This new framework will become effective once we reach CAD 4 billion net debt target, and until then, there will be no change to the current target allocation of 50% of excess free funds flow to shareholder returns and 50% of excess free funds flow to deleveraging the balance sheet. Ultimately, the goal of the revised framework is to improve flexibility while continuing to strive towards paying 100% shareholder returns over time and sustain net debt at CAD 4 billion.

Now, before closing, I'm pleased to share that during the first quarter of 2024, the company received a credit rating upgrade from S&P Global to BBB with a stable outlook. With this target achieved, we have received mid-BBB ratings from all rating agencies. As we said at our investor day, we're focused on achieving our CAD 4 billion net debt target, progressing our high return growth projects in the upstream, and continuing to run the downstream business reliably, profitably, and safely, showing improvements quarter-over-quarter. And with that, I think we're all ready to answer your questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press star followed by the two. I would like to advise everyone to please limit their questions to one question and one follow-up. Your first question comes from the line of Greg Pardy from RBC Capital Markets. Please go ahead.

Greg Pardy (Managing Director and Head of Global Energy Research)

Yeah, thanks. Good morning, John and team, thanks very much for the rundown.

Jon McKenzie (CEO)

Great. Thanks, Greg.

Greg Pardy (Managing Director and Head of Global Energy Research)

I guess. Yeah, well, hey, that's a compliment. It's a good way to start a call off. So, let's start maybe just with the share price range you guys have talked about in the past. I believe the upper bound was around 30, where variables became more attractive and buybacks were less attractive. Could you revisit that? I'm just curious maybe what that range looks like, and then presumably, that upward bound number is gonna rise with time.

Kam Sandhar (EVP, Strategy and Corporate Development)

Morning, Greg, it's Kam. You know, first off, I'm just gonna say that the number that you're referencing, I would say was purely used as an illustrative measure to describe what our framework is. It is not a ceiling. In fact, I would say, you know, as Jon pointed out on the call, we bought back 250 million shares a year over the last month. So we still see a lot of attractive return to continue to buy back shares, and you'll continue to see us active in the market as I mentioned in April. So the principles around that framework has not changed. I would say we still have lots of room to continue on the plan that we have.

You know, the variable payment that we made through Q1 is really a reflection of the very formulaic approach that we took to our framework that we've outlined previously, and that if we under allocate, that we would pay out the remainder through a variable. So it is not a reflection of any kind of ceiling on the share price. I would say it's a reflection of us sticking to the commitment that we made on the framework. And as Jon described, going forward, we are gonna give ourselves some flexibility if we do end up over, under allocating, that we will look at either buying shares or looking at a variable dividend, but today, still lots of opportunity to continue to repurchase shares.

Jon McKenzie (CEO)

Yeah, Greg, and I would just add on to that, please don't read into the fact that we've got a variable dividend as any kind of view that we take internally on the intrinsic value of the stock. One of the things that we have to do on a quarter-over-quarter basis is allocate excess free cash flow as it arrives to shareholder returns. And you'll note in the quarter that cracks in Chicago were actually quite depressed. And in fact, gasoline cracks were negative in January. All of that changed in February and March, and you're kind of in a window where, you know, you have to make some estimates about how much excess free cash flow you're gonna have in a very volatile commodity market.

In Q4 of 2023, we underestimated or we overestimated the amount of excess free cash flow we were gonna have, and I think in this quarter, we're probably on the other end of it. But that shouldn't be, or nobody should take that as a reflection about how we feel about the intrinsic value of the shares.

Greg Pardy (Managing Director and Head of Global Energy Research)

Okay. That's actually really helpful to clarify. So I'm gonna completely shift gears, maybe onto TMX. Just curious, could you bring us up to speed, maybe with where you stand in the marketing process? So have you fulfilled your line fill? Have you got tankers, you know, kind of set to go? Do you expect to make sales, or record sales in the second quarter? And that's it for me. Thanks.

Drew Zieglgansberger (EVP of Natural Gas and Technical Services)

Yeah. Good morning, Greg. It's Drew. Simple answer is yes to all your questions. So, you know, this is a really good day for Canada. TMX came out this morning, and they are, you know, officially on commencement. So, I think this has been a long-awaited day for everybody, so we're pretty excited on behalf of the industry and Canada to have another great asset available to us. So, to your question, you know, we have been preparing for this for quite some time. You know, our last component of the very small volume of final line fill is going here now this month, and, you know, it's about 1.3 million barrels our share.

And so over the last quarter and then finishing this quarter, that full fill from our share is gonna be in place. Our teams have been working with buyers. There's a pretty vast market out there, which is exciting. And yes, we are preparing to start to ship, and we expect the operation to commence here in May. And as we've talked about the last few quarters, you know, we are expecting it to be a bit bumpy as things get up to good, stable state. So we are anticipating a little bit of bumpiness, but the teams are taking that into account. But it's a great day to start using the asset.

Greg Pardy (Managing Director and Head of Global Energy Research)

Terrific. Thanks very much.

Drew Zieglgansberger (EVP of Natural Gas and Technical Services)

Well, thanks, Greg.

Operator (participant)

Thank you. And your next question comes from the line of Dennis Fong from CIBC. Please go ahead.

Dennis Fong (Equity Research Analyst)

Hi, good morning, and thanks for taking my questions. Maybe the first one here is just related to Superior.... Can we get maybe an update in terms of the ramp-up of the facility, as well as, how you guys are thinking about the cadence of the de-inventory event, at Superior as well?

Keith Chiasson (EVP, Downstream)

Hey, Dennis, Keith here. Things are progressing as per our plan. We talked about last quarter, you know, taking kind of the first six months to de-inventory from kind of up-and-down starts in 2023 and the inventory that we built up. All the kit is running well, and we're progressing on that de-inventory plan. So kind of around midyear, we will then. The only last remaining item to restart is the HF Alky at Superior, which will start in early Q3, and that'll have all of the asset running. But even before that, you know, we should see our crude rate through that asset increase to near full capacity. So things are progressing as per plan.

You know, the market's constructive to de-inventory, and mechanically, the refinery is running all the units with the exception of the HF Alky at this point.

Dennis Fong (Equity Research Analyst)

Great. I appreciate that, that color and context. Maybe staying with the downstream and maybe a little bit of a follow-on to the entire TMX situation. Obviously, as diffs narrow, some of the feedstock costs do increase with respect to, the refining operations. Can you talk towards some of the initiatives, that you touched on a little bit at the Investor Day, and maybe where that could go, looking forward in terms of improving realizations on refined product and strengthening margin, just again, now that you're operating all three of those refineries?

Jon McKenzie (CEO)

Sure. Well, maybe I'll start there, Dennis. I mean, there's three real levers to you know, refining economics, and the first and the biggest is getting the best and the right and the cheapest feedstock into your refinery. So as you know, the refineries that we own and operate are typically heavy oil refineries. And those heavy oil differentials narrowing will be a negative for the refineries by and large. The offset obviously comes in our upstream, sorry, where we realize the value of that, and that was always part of the integrated model. So for example, when we take the upgrader down for turnaround this quarter, it's. We're doing that at a time of very low differentials.

So the economic impact of that is actually quite muted as we take most of that, diluted bitumen to market. The other big area that we continue to work on is the placement of products. And we continue to push farther and farther into the eastern block of PADD 2. We see that as a highly prospective area. And then ultimately, you know, as we've talked about, getting product into PADD 1 and into Canada is something that we are actively looking to explore and do through time. Third area that we're looking at is our cost control, and making sure that we have minimized our capital and operating costs in the refineries.

Reliability today takes precedent over really trying to grind out the last nickel of our operating costs, but it's something that we continue to look at, you know, on a day-to-day basis. So as we kind of go forward, what you should see from us are increasingly better levels of reliability across our refining fleet through time, and better profitability that comes with that as we optimize the commercial part of the operation over the top of that. The key for us really is the reliability that allows that commercial optimization to happen through time, and I think Q1 is probably the start of something that we see a, you know, strong continuing trend going forward.

Dennis Fong (Equity Research Analyst)

Great. Appreciate that color there. I can, I can turn it back. Thanks.

Operator (participant)

Thank you. Once again, should you have a question, please press star and one on your telephone keypad. Your next question comes on the line of Menno Hulshof from TD Cowen. Please go ahead.

Menno Hulshof (Managing Director of Institutional Equity Research)

Thanks, and good morning, everyone. I'll start with a follow-up question to Greg's question on TMX. Where do things stand in terms of ongoing toll discussions, and what is your best guess in terms of when all of this gets resolved and potential outcomes? Thank you.

Drew Zieglgansberger (EVP of Natural Gas and Technical Services)

Hey, Menno, it's Drew. Thanks for that question. Yeah, it's an ongoing conversation. You know, I think it's gonna carry through the balance of this year, probably into Q1, from a timing perspective. So I think it's gonna still take some time. So, you know, coming back to, you know, I think everybody's kind of pleased to see the asset come available for everyone. That work to ultimately get to the final commercial construct, I would expect that to carry out the remainder of this year and, you know, potentially drift into the first quarter, even to the first half of next year, probably before we finally get to closure on that.

Menno Hulshof (Managing Director of Institutional Equity Research)

Terrific. Thanks, Drew. Then the follow-up is on the... I think I know the answer to this, but so I'm just looking for confirmation. Just on the composition of the current asset portfolio, my understanding is that the portfolio is fairly cored up, but is there any potential for smaller divestitures over the coming quarters, or is that still not a priority for the moment?

Jon McKenzie (CEO)

Yeah, I think, Menno, we've been really clear that we are really focused on our base business over the next while. You're quite right. We quite like the asset base that we've got, and we are focused on, you know, the improvements we're making in the downstream together with the growth in the upstream with the projects that we laid out at Investor Day. So, you know, we've got our plates full over the next few months, and we're just looking forward to executing on what we think is a pretty robust suite of activities.

Menno Hulshof (Managing Director of Institutional Equity Research)

... Thanks, Jon. I'll turn it back.

Jon McKenzie (CEO)

Thanks, Menno.

Operator (participant)

Thank you. Your next question comes from the line of John Royall from JPMorgan. Please go ahead.

John Royall (Executive Director)

Hi, good morning. Thanks for taking my question. So, you gave some color on Superior, but in terms of your other two operated refineries, can you talk about utilizations? I think you're a bit below your target ranges for the year at both Toledo and Lima. And I know there's a little maintenance in the quarter, but anything to call out there in general, just in terms of getting to those targets near term?

Keith Chiasson (EVP, Downstream)

Hey, John, Keith here. You know, it was a really interesting quarter as Jon talked about in his opening remarks. You know, the low crack spread persisted into January, and so we actually reduced run rates at the start of the quarter. Then, you know, obviously as the market balanced in February, February first, you know, we were really happy with the performance at the refineries as they ramped up to max capacity and captured that crack spread. So, you know, I wouldn't read too much into it in the first quarter. We do have some maintenance coming in the back end of the year at Lima, but overall, we're pretty happy with the performance and the assets.

As Jon indicated on a previous question, you know, our sole focus is on continuing the reliability and the margin capture and the profitability of these assets and running them safely and reliably. And we're seeing, you know, quarter-over-quarter improvement there, manifesting itself in the best throughput the company has had since kind of the merger back in 2021 and Q1 2024. So, pretty happy with the progress. Starting to see the progress, and we should expect that that'll just continue quarter-over-quarter.

John Royall (Executive Director)

Great. Thanks, Keith. And then, on the base dividend, this is a pretty chunky hike you took today, and, well ahead of the pace that I think you would need to hit that high 20s per quarter level that you show on your slides by 2028. Was the idea to kind of front load the bigger increases and slow it to kind of a low double-digit annual rate from here? Just trying to think about how you're thinking about the base dividend from here.

Kam Sandhar (EVP, Strategy and Corporate Development)

Hey, John, it's Kam. So, you know, I think the principles around what we discussed at Investor Day haven't changed. You know, we've got, you know, obviously high confidence in achieving our debt target, you know, in the foreseeable future. I think we laid out our five-year business plan at Investor Day that has a substantial amount of growth starting in 2025 in earnest and moving up towards 2028. But that. You know, the way you should think about the base dividend is, number one, it is absolutely anchored to low commodity prices in that sort of $45 WTI range. It's a level of dividend we view as a commitment.

And, you know, I'd say we've left ourselves lots of room to continue to grow that dividend, I'd say, comfortably in double digits, going into the future year. So, you know, the increase this year is... I think it's a reflection of the confidence in our plan. It's a reflection of where the balance sheet is and continued anchored to bottom of the cycle.

John Royall (Executive Director)

Thank you.

Jon McKenzie (CEO)

Thanks, John.

Operator (participant)

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

Patrick O'Rourke (Managing Director of Institutional Equity Research)

Oh, hey, good morning, guys, and thanks for taking my question. Just first, sort of on the oil sands unit, I think you touched on shifting some of the maintenance into Q2 for Christina Lake there. When I look at the schedule, looks like a little shifted into Q4. Maybe if you could sort of unpack the changes in the maintenance schedule for the oil sands. Give us a little bit of color on that here.

Keith Chiasson (EVP, Downstream)

Yeah, Patrick, it's Keith here. No real overall change in the annual impact from the outage. We're just able to break up the outage into two different chunks. So we're gonna take a little bit of a slowdown here in Q2 at Christina Lake, and then finish the turnaround in Q3. And some of that turnaround carries into the first part of Q4. So all you're seeing is a little bit different phasing than we originally thought, but overall impacts are the same as we originally put in our guidance. So, and that's really it for the oil sands. We have some small outages in Lloydminster Thermals, but in general, the rest of the oil sands are running full out for the rest of the year.

Patrick O'Rourke (Managing Director of Institutional Equity Research)

Okay, thanks. I know you've sort of had a lot of questions on the return of capital framework, thinking on the dividend, et cetera, here. You've put sort of the slide in the deck on the change that you've made here. In scenario 2, where the net debt's below CAD 4 billion, you still return the CAD 900 million just using the scenario here. Just wondering, what would drive this? 'Cause I think working capital build and release kind of equals zero over time. Would there be a scenario where you would have to actually return excess free funds the target return in excess of that, to kind of level set to CAD 4 billion?

Kam Sandhar (EVP, Strategy and Corporate Development)

Yes, it's a good question, Patrick. So, you know, I think number one, I guess what hasn't changed is we will do everything we need to do to protect the balance sheet at that CAD 4 billion level. You're right, you know, the fluctuations you see quarter by quarter around CAD 4 billion will largely be influenced by, you know, working capital, foreign exchange, you know, and other minor things. You're right that the way that we've outlined it is, you know, above CAD 4 billion, you know, we'll hold back the portion that we're above and put it back on the balance sheet. Below CAD 4 billion-

We would pay out 100%. But I think, you know, as we move forward, you know, depending on what those fluctuations are in working capital, I would say we do have the discretion to adjust accordingly, and that, that could mean going slightly above 100%. It could be meaning being below, but I would say that the key for us is, and which is different than today, is we've got a lot of rigidity in our, in our, structure today around returns. This gives us flexibility to manage both the debt and, you know, if we see opportunity to go slightly above a hundred, I wouldn't rule it out. It's just, you know, I'd say the minimum level would be 100% once we're below CAD 4 billion.

Patrick O'Rourke (Managing Director of Institutional Equity Research)

Okay, great. Thank you very much.

Jon McKenzie (CEO)

Thanks, Patrick.

Operator (participant)

Thank you. As a reminder, press star and one to ask a question. Your next question comes from the line of Manav Gupta from UBS. Please go ahead.

Manav Gupta (Executive Director)

Hi. So if you look at last year, you were off to slightly tougher start on their upstream, and that resulted in, you know, you coming in slightly below the midpoint of the guidance in the upstream segment. And knowing you guys, you always strive for mid-midpoint or above the midpoint, in fact, towards the top end. So this year you are off to a much stronger start. So should we assume that for 2024, at this point, things are looking where you could actually go and hit the top end of your guidance in upstream?

Jon McKenzie (CEO)

Yeah. Yeah, I'm not sure we're gonna pinpoint where we are within the range that we've already given you for guidance, but we, we feel very comfortable in the guidance that we've given you, Manav. And you're quite right, the upstream has, has operated really, really well over the last three or four quarters. The, the downtick that you saw in Q1 of 2023 was really due to the pacing and staging of our capital program. But we won't see that kind of gap this year. So Keith mentioned we've got a, you know, a turnaround of Christina that we've scheduled for the third quarter, and we need to do a good job of that. But, you know, we are very pleased with the production that we've seen from the upstream.

It's been very strong, and as everybody knows, that's really the backbone of this company. So, having it perform at those levels is something that we're very pleased with, but I'm not sure we're ready to tighten that guidance quite yet. I think it's still pretty early days, but you know, we're very pleased with where we are.

Manav Gupta (Executive Director)

Perfect. My quick follow-up on the downstream is, you know, your per unit operating cost in the US is now trending down. It, it's like almost $12. And I'm trying to wonder, as you start pushing towards 90%+ utilization, right, how much lower can you bring this? Can you push this towards closer to, you know, $10 or $11 on a per unit basis, the operating cost?

Keith Chiasson (EVP, Downstream)

Hey, Manav, you know, I think we talked a little bit about our focus on reliability, and with improved reliability, you do see, you know, two things. Obviously, your denominator increases with higher throughput, but also your unplanned, unscheduled and reactive maintenance goes down. So, you know, those two things we do think will help us start moving to the range that you've alluded to. We made big steps between 2023 and 2024 to get there. You know, we do have to do some of this maintenance activity in the turnaround cycles in order to drive that further improvement reliability, but that is our focus. That coupled with improving margin capture and the commercial profitability of the asset. So, we are focused on that.

We have plans, and the plans are underway and starting to show fruition, so pretty excited.

Manav Gupta (Executive Director)

Thank you.

Operator (participant)

Thank you. As a reminder, members of media may press star and one to ask a question. Your next question comes from the line of Neil Mehta from Goldman Sachs. Please go ahead.

Nicolette Slusser (Equity Research Associate)

Hi, good morning, and thanks for taking the time. This is Nicolette Slusser on for Neil Mehta. So just the first question on the upstream. Wanted to ask about some of the growth and optimization projects in the business. Can you just talk about the factors underway this year for Christina Lake and then, as well, the Foster Creek optimization and factors over the next few years we should be on the lookout for, ahead of that fully rigged production by the end of 2027?

Keith Chiasson (EVP, Downstream)

Oh, yeah. Thanks, thanks for the question. You know, maybe I'll, I'll just step back to our Investor Day, where we laid out plans for upstream growth of about 150,000 barrels a day over the next, you know, three-four years. So, you know, narrowing in, specifically on Christina Lake, you know, the, the 20,000, the 25,000 barrels a day comes from, tying in our Narrows Lake, resource back into the Christina Lake asset. And, and to do that, you know, we're gonna be putting in new, new pads, which are well underway, and putting in a pipeline that ties, that resource back. And, and that pipeline, is, is nearing, mechanical completion.

By end of this year, we should be hydro-testing the line and putting it into service early next year, which will allow us to bring steam up to that resource and start steaming those pads for the production that will come on in the back end of 2025. So things are progressing as expected, you know, on plan and on schedule. With regards to Foster Creek, it's a little later in time in the fact that both projects, the Foster Creek debottleneck, which will add steam capacity to Foster, is scheduled to come on in the mid-2026 timeframe. In addition, we're also adding an amine Claus unit to that asset, which will help drive down our unit OpEx almost CAD 0.75 a barrel.

So those projects are progressing well. They're underway. A lot of activity will happen through this year in 2025 for startup in 2026. Sunrise is another growth opportunity for us. We have our first new pad since 2020 online and producing. We have a couple of additional pads coming on stream at the back end of the year. That really sustains our production. And then we have new pads coming on in 2025 as well. That allows us to start growing production. The steam capacity is there. It's a matter of fully utilizing our capacity to generate that incremental 20,000 barrels a day of production. And then on the East Coast, we have our West White Rose project. So the SeaRose is off station, going through its asset life extension.

Expect that back in the July time period. And West White Rose project, you know, we finished our last pour on the gravity-based structure in the first quarter, so that part of the project is complete. We're working towards mechanical completion and commissioning on the top sides. All that gets mated up in 2025, and we commence drilling and start seeing production in 2026, ramping to peak production 45,000 barrels a day in 2028. So all those projects are progressing well.

Then I guess the last one I would talk about is our conventional heavy oil, where we've ramped up our rig activity and are drilling incremental wells, and are starting to see the fruits of that labor with production growing from current base of around 20,000 barrels a day, up to 40,000 barrels a day over the next two-three years.

Nicolette Slusser (Equity Research Associate)

Okay, great. Very helpful context. Thank you. And then the quick follow-up is just on offshore. So understand from the release that production from White Rose in the Terra Nova fields is stored at a terminal prior to shipment, which can then result in a timing difference between production and sales. So just wondering if there's any additional commentary on this, you know, phenomenon and how we should expect the phasing of the sales timing impacts as White Rose and Terra Nova production influx?

Jon McKenzie (CEO)

Yeah, I don't know that there's anything, you know, magical in that. What we, or what can happen when you have relatively low levels of production like we did in the first quarter with the SeaRose being off station and production at Terra Nova, averaging about 7,000 barrels a day, is the difference between the timing, you know, that the oil is produced and moved to Whiffen Head before it's ultimately sold. So you do need to put yourself in a position where you've built enough volume for a cargo, and once you sell that cargo, you realize obviously the funds from it. So it's just a timing difference. It's nothing that's unique.

But as we get more and more production on the East Coast with the West White Rose project coming on, that will become increasingly more ratable through time. But it's just a timing difference, and there's really nothing to see there.

Nicolette Slusser (Equity Research Associate)

Okay, very clear. Thanks so much.

Operator (participant)

Thank you. Your next question comes from the line of Dennis Fong from CIBC. Please go ahead.

Dennis Fong (Equity Research Analyst)

Hey, sorry, apologies for greedily getting back in the question queue. Just as Keith was answering the previous question there, at Sunrise, I was just hoping for a little bit more clarification there. With the 2025 wells, is that enough to fully utilize the, like, the 50,000-60,000 barrels a day of excess steam capacity at the facility? Or are there other kind of optimizations that you can do to improve production, potentially beyond the 20,000 barrels a day?

Keith Chiasson (EVP, Downstream)

Hey, Dennis, yeah, thanks for the question. You know, right now we're focused on kind of fully utilizing the steam capacity and installed capacity is around 210,000 barrels a day of steam capacity, and we're currently using kind of 160,000. So that's where that incremental production comes from. But we are actually using the new techniques as we put in these wells, and we will evaluate kind of the SOR performance on utilizing that technique over time. And you know, there is a potential that we could start seeing even more improved SOR relative to historical performance. And if that happens, then there might be some upside potential.

At this point, what's built into our numbers is really just fully utilizing the installed capacity and using that on the new wells that we're putting into place.

Dennis Fong (Equity Research Analyst)

Great. Thanks, Keith. And then on Lloyd, appreciate the comment at the very beginning there, Jon, talking about stronger pump utilization and uptime there. I'm just curious as to how sustainable you view this current level of production. Obviously, there's a good uptick on a quarter-over-quarter basis. I know there's kind of a focus on reaching further from central processing facilities, accessing kind of new areas of reservoir. I just wanted to see what maybe the production level could be on a go-forward basis from Lloyd.

Jon McKenzie (CEO)

Yeah, and-

Dennis Fong (Equity Research Analyst)

Lloyd Thermal, sorry.

Jon McKenzie (CEO)

Yeah. I'm not gonna write a check on Keith's behalf. He's looking at me. What I would tell you is this, is Lloyd is a different reservoir than what we have at Foster and Christina. And over the last three years, we've learned a lot about producing at Lloydminster, and we continue to find opportunities to grow production at Lloyd. So I think we've taken a relatively conservative view, sort of a P50 view of as you or if you will, as to where we think the production is gonna be. It's currently producing at a rate that would be higher than where we would have budgeted this year, but it's been there for some period of time.

And the subsurface people, together with the operating people, just continue to find opportunities to debottleneck, to drill wells differently, to operate the reservoirs differently, and it continues just kind of to surprise to the upside. So I wouldn't want to be in a position where I'd be telling you this is gonna outperform the way it has over the course of the last few quarters. But what I would say is we just continue to find opportunities here that provide that kind of upside for us.

Dennis Fong (Equity Research Analyst)

Great. Great. Appreciate the color. I'll, I'll turn it back.

Jon McKenzie (CEO)

Great. Thanks, Dennis.

Operator (participant)

Thank you. And our last question comes from the line of Chris Varcoe from Calgary Herald. Please go ahead.

Chris Varcoe (Business Columnist)

Hi, this is a question for Jon. Jon, just talking about Trans Mountain. Given that it took 13 years to get that project from its inception to completion, what does that tell you about Canada's ability to get major energy projects built, like the Pathways development?

Jon McKenzie (CEO)

You know, what I would say, Chris, you know, first of all, is that, you know, I think Drew mentioned this, and I wouldn't want to taint today with a discussion about the difficulty of getting projects built, because this is a great day for Canada to get this pipeline up and running, get it producing, and the people of Canada are gonna see the benefit for a long period of time in terms of increased taxes and royalties and the like. I think as a nation, we suffer, and I don't think I'm saying anything that people don't already know from lower and decreasing productivity, and we need to find ways to get major projects built, to get infrastructure built to the benefit of all Canadians.

I think we would all realize that 13 years is far too long for a project of this national importance to get built. I think that's something that everybody understands.

Chris Varcoe (Business Columnist)

Given your own company's expectations for growth and other growth estimates out of the Western Canadian Basin, do you think Western Canada is gonna need more pipeline capacity? And when do you think that might be? Or given the challenges that you just talked about, do you think this is the last export pipeline of a major site that gets built?

Jon McKenzie (CEO)

Yeah, I think, you know, as an industry, we have a history of filling up excess egress, and I think that will happen through time. You know, I've seen various estimates of when that's gonna happen. You know, some suggest within two years, others within five. I think we would be closer to the upper range of that in terms of our thinking. It is increasingly difficult to build pipelines in this country, and it wouldn't surprise me if this was the last pipeline. But the reality is, we have a tremendous resource here in Canada, and we produce our oil, in my view, more sustainably than probably anywhere else in the world.

If we were in a position where, you know, as a nation, we decided to take that to market, we should be building more pipelines.

Chris Varcoe (Business Columnist)

Thank you.

Jon McKenzie (CEO)

Thanks, Chris.

Operator (participant)

Thank you. That concludes our question and answer session. I'd like to turn the conference back to Mr. Jon McKenzie for closing remarks.

Jon McKenzie (CEO)

Yeah, listen, thank you very much for your interest in the company today. On behalf of the management team, the board of directors, and the staff here at Cenovus, we really appreciate your interest in supporting the company. So have a terrific day, and thank you again.

Operator (participant)

Thank you. That concludes our conference for today. Thank you all for participating. You may all disconnect.