Imperial Oil - Q3 2023

Transcript

Brad Corson (Chairman, President and CEO)

which we will be talking about this morning. We remain committed to delivering reliable, affordable, and lower emission energy to Canadians. Now let's talk about our third quarter performance. The results we will review over the next several minutes are reflective of a quarter that saw lower planned maintenance relative to the second quarter. We completed a turnaround at Cold Lake safely and consistent with our plans. We also began planned turnaround work at Syncrude and also at Sarnia that continued into the fourth quarter. As of today, the turnaround at Sarnia is mechanically complete, and the facility is in the process of starting up, and Syncrude is expected to complete in the coming weeks. The third quarter also saw continued strength in the commodity price environment, with benchmark oil prices such as Brent, WTI, and WCS all improving versus last quarter.

While we saw lower motor gasoline cracks toward the end of the quarter, diesel cracks strengthened throughout, and overall, refining margins remained solid. Over the next few minutes, Dan and I will detail the results of this very strong third quarter. So now let's review those third quarter results specifically. Earnings for the quarter were CAD 1.601 billion, with cash from operating activities of CAD 1.946 billion when excluding working capital impacts. These results reflect continued strong operational performance and lower levels of planned maintenance across the upstream and downstream. We achieved total upstream production of 423,000 gross oil equivalent barrels per day. The quarter was highlighted by the highest-ever quarterly production at Kearl of 295,000 total gross oil barrels per day.

In late September, Syncrude began work on its planned hydrotreater turnaround, which is expected to complete in the middle of the fourth quarter. This turnaround will have a smaller impact on volumes and costs in comparison to the much larger coker turnaround completed earlier this year. I'll talk about each asset in more detail in a few minutes. In the downstream, we continue to see very strong operating performance. Refining throughput averaged 416,000 barrels per day, which equates to a refinery utilization in the quarter of 96%, which includes the Sarnia site turnaround, which began in mid-September. As a reminder, the Sarnia turnaround included maintenance at our chemical facility as well. We ended the third quarter with year-to-date refining utilization of 94%, which is consistent with our guidance for our refining business.

On share buybacks, I'm very pleased to report that by mid-October, we had fully executed our accelerated normal course issuer bid. These buybacks represented an additional CAD 1,342 million of cash returned to our shareholders during the quarter and another CAD 958 million in October, for a total return of CAD 2.3 billion, representing 5% of our shares. Earlier today, we announced our intention to initiate another substantial issuer bid to return an additional CAD 1.5 billion to our shareholders in the fourth quarter. With that, I'll pass things over to Dan.

Dan Lyons (SVP of Finance and Administration)

Thanks, Brad. Getting into the financial results for the third quarter, we reported net income of CAD 1,601 million, down about CAD 400 million from the third quarter of 2022, or down about CAD 200 million when we exclude the impact of the XTO Canada sale in the prior year. The decrease is primarily driven by lower refining margins in our downstream business. Looking sequentially, our third quarter net income of CAD 1,601 million is up over CAD 900 million from the second quarter, reflecting stronger realizations and improved volumes, along with the absence of significant second quarter turnaround activity in both the upstream and downstream.

Looking at each business line, the upstream reported net income of CAD 1.028 billion, up CAD 644 million from the second quarter, reflecting higher realizations and improved volumes post-planned turnaround activity at Kearl and Syncrude. The downstream net income was CAD 586 million, up CAD 336 million from the second quarter, reflecting the absence of planned turnaround activities at the Strathcona refinery and stronger refinery margins. Finally, our chemicals business generated net income of CAD 23 million, down CAD 48 million from the second quarter, reflecting weaker margins as well as impacts from the gas cracker turnaround that commenced in September. Moving on to cash flow. We ended the quarter with more than CAD 2.7 billion of cash on hand.

In the third quarter, we generated almost CAD 2.4 billion in cash flows from operating activities, an improvement of almost CAD 1.5 billion over the second quarter, reflecting stronger earnings and favorable working capital impacts. Excluding favorable working capital impacts of CAD 413 million, cash flow from operating activities for the third quarter was CAD 1.946 billion, up about CAD 800 million from the second quarter. Cash flows from operating activities were also impacted by unfavorable LIFO WAC deferred tax impacts, driven by higher commodity prices in the third quarter as compared to the second quarter. As a U.S. GAAP LIFO reporter, we tend to see negative inventory-driven deferred tax impacts when prices rise and positive impacts when prices fall. Now we'll discuss CapEx.

Capital expenditures totaled $387 million in the third quarter, down slightly from $392 million in the third quarter of 2022, but remain in line with our current year plans and full year guidance of $1.7 billion. In the upstream, third quarter spending focused on smaller projects to sustain and grow production at Kearl, Cold Lake, and Syncrude, as well as progressing the in-pit tailings project at Kearl and the SA-SAGD Grand Rapids project at Cold Lake. In the downstream, third quarter spending mainly included progressing our renewable diesel project at Strathcona. Facility construction continues, with project startup planned for 2025. Shifting to shareholder distributions. In the third quarter of 2023, we paid $292 million in dividends.

Beyond base dividends, we continue to demonstrate our longstanding commitment to return surplus cash to shareholders. As Brad noted, we completed our most recent accelerated NCIB program on October 19, returning a total of CAD 2.3 billion to shareholders over the last four months. As Brad also noted, given our robust free cash flow generation, we intend to launch a substantial issuer bid, returning up to an additional CAD 1.5 billion to shareholders in the fourth quarter of 2023. The terms and pricing will be determined, and the bid is expected to commence within the next two weeks. Lastly, this morning, we announced a fourth quarter dividend of CAD 0.50 per share, consistent with our third quarter dividend. Now I'll turn it back to Brad to discuss our operational performance.

Brad Corson (Chairman, President and CEO)

All right, thanks, Dan. So now let's talk about our operating results for the quarter. Upstream production for the quarter averaged 423,000 oil equivalent barrels per day, which is up 60,000 barrels per day versus the second quarter of 2023, and down 7,000 barrels per day versus the third quarter of last year. When adjusting for the sale of XTO that closed in the third quarter last year, we are actually up around 5,000 barrels per day year-on-year. This higher production was driven primarily by strong performance at Kearl and the absence of the second quarter turnaround work at both Kearl and Syncrude. This was partly offset by planned maintenance at Cold Lake and the commencement of Syncrude's hydrotreater turnaround in late September.

In the quarter, we saw WTI and WCS prices rise to the highest level in a year, leading to substantial strengthening of bitumen realizations. Going into the fourth quarter, we have seen a recent widening of the WTI, WCS differential, but the overall commodity environment remains strong and the industry outlook for egress is positive. So now let's move on and talk specifically about Kearl. Kearl's production in the third quarter averaged 295,000 barrels per day gross, which was up 78,000 barrels per day versus the second quarter and up 24,000 barrels per day from the third quarter of last year. I'm excited to highlight that this represents another production record and the best ever quarterly performance at Kearl, surpassing the previous record, which was set in the fourth quarter of 2020, by 11,000 barrels per day gross. And there's more.

Kearl has also set a number of other production records in the quarter, including the highest ever single month production of 322,000 barrels per day in September. Also, the highest ever August production of 283,000 barrels per day, and a new daily production record of 360,000 barrels a day, which was set on September fifth. With a record performance at Kearl in the third quarter, we remain positioned to meet our full year guidance of 265,000-275,000 barrels per day. Turning now to cash operating costs for Kearl, which is another positive achievement.

Unit cash operating costs in the quarter were just over $20 per barrel, a decrease of over $7 per barrel versus the second quarter, due primarily to the absence of the planned turnaround and the higher volumes. We also saw a decrease of almost $5 per barrel versus the third quarter of last year. Year-to-date, cash operating costs at Kearl are just below $24 per barrel, which is about $5.75 per barrel lower than the same period in last year. This is the trending cost we are expecting to see as we continue to work towards our target of sustainable unit cash operating costs at, at, or below $20 per barrel at Kearl.... I'm very pleased to see these results, and congratulations to the Kearl team.

During the third quarter, we also completed the autonomous haul program, with all 81 of our Caterpillar 797F heavy haul trucks now fully converted to autonomous operation. With this, we now operate the largest autonomous fleet in our industry and one of the largest autonomous mining fleets in the world, which enables us to capture improvements in truck productivity, further enhance our safe operating environment, and also reduce operating costs. I'm very proud of what we have achieved to date with this program, and we continue to look at other potential opportunities to expand our autonomous concept to other areas of our mine fleet. This program reflects our commitment to safety, technology, and innovation, and becoming the lowest cost operator.

In addition to completing the conversion of our haul trucks to autonomous operation, we also started up the sixth and final boiler flue gas waste heat recovery unit at Kearl. This technology recovers waste heat from a boiler's exhaust to preheat process water, resulting in less steam usage and lower greenhouse gas emissions, and is one of the key initiatives underpinning our 30% greenhouse gas intensity reduction target by 2030. The six units are expected to eliminate a total of 220,000 tons of CO2 per year and also capture significant cost savings of approximately CAD 40 million per year. Wrapping up Kearl, I wanted to provide an update on the Environmental Protection Order.

With respect to the work at our site, as we have previously shared, key construction work was completed in June, and we continue to assess and conduct monitoring to determine if any further mitigations are required. Our initial data shows that the mitigations are working as intended and preventing further offsite migration of impacted water. We continue to engage with the Indigenous communities to ensure they are aware of the progress and to address any questions or concerns. And to date, there is no indication of adverse impacts to wildlife or fish populations or risks to drinking water for local communities. With that, let's shift now to Cold Lake.

Cold Lake production for the second quarter averaged 128,000 barrels per day, which was 4,000 barrels per day lower than the second quarter and 22,000 barrels per day lower than the third quarter of last year. The lower third quarter production was primarily the result of steam cycle timing and the plant turnaround at the Nabiye plant, which was completed last month. With the maintenance work behind us, we expect Cold Lake to trend higher on volumes and are reiterating our guidance and expect to deliver full year production in the range of 135,000-140,000 barrels per day. Moving to the Grand Rapids Phase One project, I'm pleased to share that the critical equipment tie-ins were completed during the recent Cold Lake turnaround.

The project is nearing completion and remains on track to achieve the accelerated startup timing, with steam injection expected prior to year-end. Once fully up and running, phase one of this project is expected to deliver profitable production volumes of 15,000 barrels per day and support our emissions reduction strategy. Now a few comments on Syncrude. Imperial share of Syncrude production for the quarter averaged 75,000 barrels per day, which was up 9,000 barrels per day versus the second quarter and up 13,000 barrels per day versus the third quarter of 2022. Higher production in the third quarter was primarily due to timing of the annual planned coker turnarounds. In 2022, Syncrude's coker turnaround began in the third quarter, and in 2023, work was primarily completed in the second quarter.

In late September, work began on Syncrude's planned hydrotreater turnaround, which is expected to be complete by mid-November. The impact in the fourth quarter is expected to be around 4,000 barrels per day and around CAD 12 million in operating costs. Lastly, the interconnect pipeline continued to add value, enabling 9,000 barrels per day of Syncrude Sweet Premium production, which was imported over the quarter, helping to maintain high upgrader utilization when bitumen production experienced reliability and ore blend challenges throughout the quarter. Now, let's move on and talk about the downstream. In the third quarter, we refined an average of 416,000 barrels per day, which was up 28,000 barrels per day versus the second quarter and down 10,000 barrels per day versus the third quarter of 2022, reflecting a utilization of 96%.

Coming off a second quarter that was impacted by the major turnaround at Strathcona, the third quarter has seen lower planned maintenance, with a major turnaround at Sarnia only impacting the final few weeks of the quarter. The turnaround in our Sarnia refinery and chemical plant began in mid-September, and as I mentioned, is now mechanically complete, with the facility's start-up underway. The costs are expected to be in line with guidance of CAD 165 million. Year-to-date, utilization of our refinery sits at 94%, so we are right on track to deliver our full year guidance of 92%-94%, with the Sarnia turnaround being completed per our plans in the fourth quarter.

I recently visited our Strathcona Refinery and am pleased to share that the renewable diesel project team is making great progress, with construction currently focused on completing below ground infrastructure and above ground tankage. Overall, the project continues to progress on plan, with startup targeted for 2025, in line with the outlook we provided at our Investor Day. Also, at Strathcona, we have successfully completed a co-processing trial and have now completed similar trials at all of our refineries. This technology has the potential to reduce carbon intensity of fuel, as well as plastic products, by co-processing vegetable oil and ethanol alongside conventional crude feedstocks. Petroleum product sales in the quarter were 478,000 barrels per day, which is up 3,000 barrels per day versus the second quarter and down 6,000 barrels per day versus the third quarter of 2022.

We continue to see gasoline demand around 90%-95% of historical levels and jet at about 110% of historical levels. On diesel, demand in the quarter was between 80%-85% of normal, as we saw some impacts from the BC port worker strikes. On crack spreads, diesel margins strengthened quarter-over-quarter and remained on the high end of the five-year band. Motor gasoline cracks softened toward the end of the quarter as we ended the summer driving season, with cracks now sitting around the low end of the five-year band. That brings us to chemicals. The business delivered CAD 23 million in earnings in the third quarter, which was down CAD 48 million versus the second quarter and down CAD 31 million versus the third quarter of 2022.

The lower earnings were driven by the gas cracker turnaround that began in mid-September, which is now mechanically complete, as well as was impacted by a softer margin environment. There are a couple of additional accomplishments from the quarter that I'd like to highlight. First, we released our annual Advancing Climate Solutions report, a progress report highlighting our efforts to grow shareholder value and play a key role in the transformation to a lower emission future. The need for effective strategies and solutions to supply affordable, accessible, reliable energy while reducing emissions in support of a net zero future is paramount. We also established a low carbon solution organization during the quarter. This team is focused on leveraging Imperial and ExxonMobil's unique capabilities to bring lower emission technologies like renewable fuels, hydrogen, and carbon capture and storage to markets, helping customers meet their sustainability goals.

Next, I would like to highlight a long-standing partnership focused on Indigenous education. We're excited to share that this year marks 20 years of partnership between Imperial and Indspire, an Indigenous national charity that invests in the education of First Nations, Inuit, and Métis people for the long-term benefit of these individuals, their families, and communities across Canada. Since 2003, we have provided more than CAD 1.8 million in funding to Indspire, most of which has supported their Building Brighter Futures, the bursaries, scholarships, and awards program. Through this program, Imperial has provided more than 500 Indigenous students with scholarships or bursaries. We are very proud to play a role in helping break down barriers for Indigenous youth as they pursue education to achieve their highest potential.

I also want to thank Indspire for being a great partner and for all they do for Indigenous youth in Canada. So to quickly wrap up, this was a strong quarter, underpinned by reliable operations and a favorable commodity price environment. With a major turnaround at Sarnia wrapping up, our focus is on a strong finish to the year. We remain confident in our overall guidance for the year across all of our assets. And as you can see from the accelerated completion of the NCIB and the announcement today of the CAD 1.5 billion substantial issuer bid, our commitment to shareholder returns remains a priority. We're also committed to delivering our plans to reduce emissions and generate value.

I'm pleased to have shared our progress on Grand Rapids, the Kearl boiler flue gas, and our Strathcona renewable diesel projects, and would also note our ongoing work with the Pathways Alliance. I look forward to continuing to bring you updates on these attractive opportunities as we continue to focus on maximizing the value of our existing businesses, while at the same time responding to the changing needs of our customers and communities. I would also like to take a moment to thank Dave Hughes, our Vice President of Investor Relations, for all of his contributions to Imperial over his 34-year career, and wish him and his wife, Denise, all the best with his upcoming retirement. Of course, welcome Peter to his new role. As always, I'd like to thank you once again for your continued interest and support in Imperial.

Now we'll move to the Q&A session, so I'll pass it back to Peter.

Peter Shaw (VP of Investor Relations)

Thank you, Brad, and as Brad said, we'll move into the Q&A session. As always, we'd appreciate it if you could limit yourself to one question plus a follow-up, so that we can get to as many questions as possible. With that, operator, could you please open up the phone line for questions?

Operator (participant)

Yes, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star one to ask a question. We'll pause for just a moment. We'll go to our first question from Greg Pardy with RBC Capital Markets.

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

Hey, thanks. Good morning, and Brad, thanks very much for the rundown. I guess you're letting Mr. Hughes go, but Dave, listen, all the very best, and don't be a stranger when you come into Toronto, and welcome, Peter. There was really just one area I wanted to dig in, 'cause obviously, it's a pretty strong quarter. Well, actually two areas. I guess the first is: How much of an inventory impact did you feel in the downstream as a result of just the inventory changes that you referred to earlier? And then completely shifting gears as it relates to Kearl, how is that working mechanically now that you've moved to autonomous haul? Does that mean that you're redeploying drivers, or have you been redeploying drivers, or how does it work on different shifts?

Or are you actually reducing headcount there? So a lot of questions, but, any color would be great.

Brad Corson (Chairman, President and CEO)

Yeah. Thanks, Greg. And first, you know, I appreciate you acknowledging the strong quarter we had. You know, in terms of your specific questions, you know, on inventory, you know, that's been an ongoing factor now for several quarters, with regard to diesel margins and spreads. And, you know, I don't know that we have an explicit quantification on that, but it's clearly a factor as we've seen reducing, you know, inventory levels globally.

Dan Lyons (SVP of Finance and Administration)

Yeah, yeah, yeah.

Brad Corson (Chairman, President and CEO)

You want to say something?

Dan Lyons (SVP of Finance and Administration)

And maybe, Greg, I think you're referring to kind of the deferred tax impact. Is that right?

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

I think so. Yeah, exactly.

Dan Lyons (SVP of Finance and Administration)

I think that's right. Yeah, yeah.

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

Sorry.

Dan Lyons (SVP of Finance and Administration)

It's a pretty big number, $168 million. You know, I would characterize it as noise. You know, if you look at, you know, we report on a LIFO basis, sort of historical inventory in our earnings, but we pay tax on a weighted average cost basis, and the tax value of inventory will go up and down with prices, right? If you look at, you know, not to get too technical, you look at the price increase quarter to quarter, maybe $10. But you look at the last month of each quarter, which more matters for inventory valuations, about $20. There's a pretty big price movement in the inventory valuation, and inventory levels increased somewhat due to turnaround activity. You see this kind of big factor, driven by those increases.

Primarily, I mean, you know, we only do deferred taxes for Imperial as a whole, but it's primarily driven by impacts in the downstream because they hold most of the inventory. But it really is the price increase from June versus September, as well as some temporarily higher inventory levels. So, you know, at today's prices, you'd expect to see that reverse out. So that's so that CAD 168 million, that's where that comes from. It's a deferred tax impact. There's other things in there, but primarily this, you know, tax valuation inventory at weighted average cost and our normal LIFO that we use for earnings. I hope that answers your question.

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

Yeah, it did. That's great. Thanks a lot.

Brad Corson (Chairman, President and CEO)

Yeah, thanks. Thanks for stepping in on that one, Dan. I was clearly on the wrong track, thinking more broadly about global market factors impacting diesel. So thanks for that.

Dan Lyons (SVP of Finance and Administration)

And, you know, we gotta just say, well, it doesn't reflect an actual cash payment. It's sort of the accrual of what our cash taxes would be at those closing prices. So it's a little bit flaky, but, you know, it's obvious the number is correct, but we'd expect that to bounce around. This is quite high, and we expect, you know, at current prices, you'd see a reversal, but, but we'll see. Sorry, Brad.

Brad Corson (Chairman, President and CEO)

Yeah. No, no worries at all. And on your second question regarding the autonomous haul program at Kearl, you know, we are super excited about that. We've been working on this now for several years, and to finally complete all of the conversion of the trucks allows us to really make a step change in all of those kind of beneficiary components that have been driving us, you know? I mean, things around truck productivity, things around unit operating costs, and of course, there is this broader safety benefit that comes with it. You know, specific to your question on staffing, you know, we have definitely worked to deploy staff related to that. But I'll, Simon's here with me. Maybe Simon can talk a little bit more specifically about kind of our strategy there.

Simon Younger (SVP, Upstream)

Yeah. Thanks, Brad. I can give a little bit more color to that. I mean, the milestone that Brad mentioned is reaching the point where we've now converted all of our 81 heavy haul trucks to autonomous. But as you would have heard, you know, that's taken place over several years. So if you think about sort of a significant step change in staffing associated with that, that's not really the case. As we've autonomized the trucks over several years, there has been a headcount reduction. We've also, as Brad said, redeployed a number of truck drivers onto other mining equipment. Some of them have gone into the autonomous control room and are now delivering value that way.

So it's kind of a combination, but not a, not a significant step change, you know, from quarter to quarter or from, or from year to year. But headcount reduction is definitely-- or headcount efficiencies, I'll call it, is definitely one of the, one of the value drivers for autonomous, but it's by no means the, the most significant. In fact, it's one of the more minor drivers. Really, the bulk of the value comes from productivity improvement that we're able to realize through the autonomous program. If you think about that dollar a barrel plus of cost benefit that we're driving at Kearl through the autonomous haul program, the majority of that comes from improved efficiency and productivity of the equipment.

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

Understood. Thanks very much for that.

Brad Corson (Chairman, President and CEO)

Thanks, Greg.

Operator (participant)

We'll go next to Manav Gupta with UBS.

Manav Gupta (Executive Director)

First, just wanted to thank Dave over the years. Very helpful in helping us with the information modeling and everything, so thank you for that, and welcome, Peter, to the new job. My question here, I'll start with one macro. Your opening statement said that in the near term, we have seen some widening of the WCS differential, but the outlook for egress is positive. If you could elaborate on those two things, what is driving the wider spread right now, and where are we in the process of egress? Because we hear a lot of information. What's the latest on TMX that you have an update on?

Brad Corson (Chairman, President and CEO)

Yeah, thanks for those questions, Manav. First, on the widening WCS, you know, when you look back over the quarter, you know, at the beginning of the quarter, we're seeing pretty tight differentials. You know, I don't know, $15 a barrel or so. But as we got to the end of the quarter, we have seen those widen, and I'd say a couple of factors are driving that. You know, one is us included, you know, we have completed our major turnarounds for the year, and that is resulting in you know, more Canadian production available to move to our customers. And on top of that, we do see that we're still in a refinery maintenance period. Not just in Canada but in the U.S. Several refineries are undergoing maintenance.

But again, those are. You know, that's kind of a, a short-term effect, and, and we would expect to see, you know, more of a balance, as we move to the end of the year. And then on top of that, with regard to your second question on egress, you know, we're quite encouraged by the progress that TMX is making. And what we've heard is that they expect to start up, around the end of the first quarter next year. And, you know, I know from what I've, what I've heard, you know, they are, over 95% complete. You know, there's relatively small sections of pipeline left for construction, and then they'll be moving into the, you know, commissioning line fill, mode. So we view all that as very positive from a, from a egress standpoint.

Manav Gupta (Executive Director)

Perfect. My quick follow-up here is-

Brad Corson (Chairman, President and CEO)

I should say, you know, with... Sorry, go ahead.

Manav Gupta (Executive Director)

No, my, my second quick follow-up here was, some time back, your operating partner had taken over the Syncrude operations from the entity, and you guys had both expressed confidence in terms of the synergy benefits of that. Where are we in that cycle, in terms of, you know, the benefits that come from your actual operating partner taking over the Syncrude project?

Brad Corson (Chairman, President and CEO)

Yeah, thanks for that. And just to close out, the other comment I was gonna make on WCS and egress is, as we see that TMX come online, you know, we do see that as favorable, supportive of a tighter differential. So as we look to next year, we do expect tightening versus where we are today. Now on Syncrude benefits, you know, as we've said, that's a multi-year journey. And you know, we're working closely with Suncor, the operator, to achieve a wide range of benefits, starting with improved reliability, also reduced cost structure. And we are seeing progress. You know, you think about last year, last year's production was a record high year for us and for the asset.

So that's an indication that we are making progress on reliability. We're seeing less unplanned downtime events, which I think is positive. We still see a big opportunity with operating costs, and that's probably the biggest challenge ahead of us, and we're working closely with Suncor to continue to look for opportunities to drive those cost structures down so that the asset can be more competitive on a cost basis. But we are seeing progress, but there's still a long ways to go.

Manav Gupta (Executive Director)

Thank you so much for the responses.

Brad Corson (Chairman, President and CEO)

Thank you.

Operator (participant)

We'll go next to Dennis Fong with CIBC World Markets.

Dennis Fong (Equity Research Analyst)

Hi, good morning, and thanks for taking my questions. Again, also, first off, congrats, Dave, on your retirement, and welcome, Peter, to the new role. The first question I have is more focused around Kearl. Obviously, that's great to hear that the full deployment of autonomous haul has been quite has been completed across that asset. When we think about things, I know at your Investor Day, you outlined a bunch of digital technology, including shovel and truck analysis, as well as other aspects that likely help support or are supported by AHS. How do we think about where production and productivity could potentially get to? And how far have you or how much have you captured of that $1 a barrel thus far?

Brad Corson (Chairman, President and CEO)

Yeah, I'll make a couple comments and then I'll let Simon maybe add a little more color to it. You know, first of all, in terms of the journey we're on, you know, as you're aware from our Investor Day and other discussions, our guidance for this year is 265-275 thousand barrels per day. We're on path to achieve that, you know, which is great recovery from some of the, you know, the operational challenges we had last year, and puts us back on track to this journey to 280 thousand. And as we said at our Investor Day, we expect to achieve 280 thousand barrels a day next year.

And then looking beyond that, although we haven't put a specific timeline, we do see the potential to achieve 300,000 barrels a day. And certainly, things like Autonomous Haul, leveraging technology are all, you know, integral components to achieving those higher volumes. But maybe Simon can add a little more detail around some of the other autonomous things we're doing and other technology applications, you know, at the mine or elsewhere in the asset.

Simon Younger (SVP, Upstream)

Yeah. Yeah, happy to. Thanks, Brad. I think, actually, earlier in the year, I shared one example of where we're looking elsewhere for the benefits of autonomy, and I foreshadowed that we were gonna do a trial of autonomous dozers. And in fact, we've now done some of that trial work and got really encouraging results, particularly in our tailings area. We think remote control dozing has some significant potential. So, we just continue to see enormous potential in this part of the business. But sort of bigger picture, just to build a bit more on what Brad was sharing, you know, that journey to 280,000 barrels a day next year for Kearl is really driven through two main levers,

The first is reliability and uptime, and mainly there, it's optimizing the scheduled work that we do and minimizing, you know, reducing the amount of scheduled work that we do to just continue to increase incrementally the annual capacity and production of the plant. And then the other key lever is productivity. And I would tell you that an enormous underpinner of that is our digital efforts. You know, and our digital efforts really are focused in three areas. It's analytics. What can we glean from and do with the data, the vast amounts of data that we have? So analytics is a huge driver.

Productivity improvements, as we've talked about, making our workers more productive, more effective by putting digital tools in their hands, and then applying digital technology like the remote dozing that I mentioned, but you know, using drones for internal vessel inspections, things like that, which are making maintenance and scheduled work more efficient and quicker to do. So that's the continued focus of our digital program. It's a huge driver of us getting, you know, achieving our journey to 280 KBD at the asset next year, and then, of course, as Brad said, looking beyond that. You know, specifically to the autonomous haul, there was a question, I think part of the question was on that.

I would say we haven't yet achieved all of the $1 a barrel, but we're-- I'd say we've achieved the majority of that. And so there's a little bit more to go, but I would also suggest there's upside relative to that as well. So, you know, I'm sure you can tell we're very bullish on the autonomous technology.

Dennis Fong (Equity Research Analyst)

No, great. Great. Appreciate that, that color and context. I guess a quick follow-up there on Kearl, specifically. As we enter the winter season, I know you've highlighted a multitude of strategies to improve the winterization of the facility. Is there anything further that you've kind of gleaned or applied or added to the asset that could help, again, kind of continue the strength of operations that you've seen thus far, and obviously better temperatures. And as we kind of get into December, January, and February, which are obviously challenging months, how are you going to further help moderate any, we'll call it, negative impacts around extreme colder temperatures? Thanks.

Brad Corson (Chairman, President and CEO)

I'll let Simon kind of discuss that in more detail.

Simon Younger (SVP, Upstream)

Yeah, I mean, I guess the key message there is we again feel well positioned, going into this winter, based on the learnings that we had from the prior, you know, two winters ago, and then the successful application of those learnings and mitigations this past winter. There's not a huge amount new or different that we plan to do this year, although we do have some additional equipment deployed. We've got an additional shovel in the mine that has stronger capability in the colder temperatures, and digging through the frozen ore. So I think that'll be a help.

We're trialing what's known as grizzly bars on top of our crushers, at one of the crushers, to better handle the frozen lumps that come at us during the winter months. So there are a few things additional that we've got in our armory versus last winter, but by and large, it'll be a repeat dose of just applying all the learnings and the cold temperature protocols and the maintenance equipment preparedness that we applied last winter.

Brad Corson (Chairman, President and CEO)

And maybe just one reminder, you know, after kind of experiencing those challenges and then, you know, applying the organization's capability and kind of can-do mindset, and putting some new procedures in place and other mitigations, the first quarter of this year was a record first quarter for the Kearl asset. So again, demonstrating that, you know, we had addressed, you know, those challenges and we're back on track.

Dennis Fong (Equity Research Analyst)

Great. Great. Really appreciate the color there, and I'll, I'll turn it back to you. Thanks.

Brad Corson (Chairman, President and CEO)

Thanks.

Operator (participant)

We'll go next to Doug Leggate with Bank of America.

Kalei Akamine (Senior Equity Research Analyst)

Hey, good morning, guys. This is Kalei for Doug. So thanks again for taking the question. This one goes to the dividend, so maybe Brad or Dan. As we look at it, by any measure, dividend coverage is very robust, and you guys have hiked it recently. But to be frank, even if you hike, say, 10%-15% and do that for a while, we could be asking this question for quite a long time. So I guess why not take a bigger step towards right-sizing that dividend coverage and at the same time close the gap versus your Canadian peers?

Brad Corson (Chairman, President and CEO)

Yeah, thanks. Thanks for the question, and, I will let Dan comment, but, you know, would just emphasize, you know, the significant return of surplus cash that, you know, we've made last year, over CAD 7 billion. You know, we've just kind of summarized what we've done so far, and obviously, our dividend strategy is key and integral to returning surplus cash to shareholders. But maybe I'll let Dan talk a little bit about kind of how we view, you know, one mechanism versus another and kind of our long-term philosophy on base dividends.

Dan Lyons (SVP of Finance and Administration)

Sure. Thanks, Brad. Yeah, look, you know, a reliable and growing dividend is the kind of bedrock of our cash return strategy and where it all starts. And we've done, you know, pretty significant increase over the last few years and on a growth basis, I think caught up with... Well, on a growth basis, exceeded most of our peers. And look, we continue to want to grow the dividend. Obviously, it's a trade-off. You don't want to get ahead of yourselves and have to cut and things like that. But I think fundamentally, you're correct. There is room to grow. And obviously, as we deliberate that, we look at our future prospects and everything else, and we set those levels.

So, we take your point, you know, looking for more dividend growth and, that, that'll certainly come over time. And we're highly aware of, you know, what our co-- what our competitors do in terms of increases and yields, and that obviously reflects our thinking and, you know, their actions, and yields, you know, you know, affect us in a way that, you know, probably the way you want, that if they're, if they're going higher, you know, we would tend to follow that. Of course, looking at our unique situation and what we see as our future cash flows. But you're right, we're very resilient.

We put out a $35, and last Investor Day break-even day, including, I'm sorry, at our Investor Day, a $35 WTI break-even, which includes sustaining capital and dividends. So, you know, our dividend is super secure, and you're absolutely correct. We, you know, we have room to increase it.

Kalei Akamine (Senior Equity Research Analyst)

Look, it, it's one of those good problems, and we appreciate the thoughts. My really quick follow-up is on Kearl. So third quarter volumes were obviously very strong, and you look on pace for the midpoint of guidance for the full year. Just wondering if you can give a quick update on October volumes and address if there is any tension between volumes and wide differentials as you execute the rest of this quarter.

Brad Corson (Chairman, President and CEO)

Yeah, thanks. Well, we continue to be committed to our full-year guidance for Kearl, and you know, the third quarter performance, I think, is demonstrative of our capability to achieve that. October has been a strong month for us so far. You know, there's still, I guess, 5, 6 days to go relative to the latest volumes that I've seen. But you know, we expect to be somewhere in the 280s for this month, which also reflects you know, on some very minor kind of routine planned maintenance that we executed. And we see continued you know, strength as we move into November, December.

Kalei Akamine (Senior Equity Research Analyst)

Great. I'll leave it there. See you in Houston next month, Brad.

Brad Corson (Chairman, President and CEO)

Yeah, you bet. Thank you. Look forward to it.

Kalei Akamine (Senior Equity Research Analyst)

Okay.

Operator (participant)

We'll take our next question from Menno Hulshof with TD Securities.

Menno Hulshof (Managing Director and Institutional Equity Research,)

Thanks, and good morning, everyone. I'll start with a question on the 2024 outlook. I do understand that you're in the midst of the budgeting process, but would you be able to give us the broad strokes on planned turnaround activity within upstream and downstream for the coming year?

Brad Corson (Chairman, President and CEO)

Yeah, we're not, you know, in a position to discuss all those details yet. That'll be part of our normal guidance, and, you know, we're in the process of finalizing all of our plans for next year. But, you know, as we think more broadly about it, you know, we're expecting, you know, a pretty typical turnaround year next year. I don't think anything kind of extraordinary. So, you know, I'd say that'd be the planning, rough planning basis now and then, you know, as we get to the end of the year, we'll give more specifics on, you know, each of the assets, you know, the target timing, duration, cost. But, just a little bit too premature to share those details with you.

Menno Hulshof (Managing Director and Institutional Equity Research,)

Thanks, Brad. Totally understandable. Maybe I'll just follow up on Line 5. It's been pretty quiet on that front for a while, and just going back over some of the comments from past conference calls, you've talked about contingency plans and constantly refreshing the different scenarios. Can you just give us an update on what you're hearing there? And what's your best guess on how this plays out?

Brad Corson (Chairman, President and CEO)

Yeah, you know, I think you characterized it right from the beginning. It's been pretty quiet. You know, there's continued progress by Enbridge to, you know, kind of install the new pipe work through all the technical and permitting considerations there. You know, we continue to be optimistic that there won't be any interruptions of service. We do have contingency plans in place, but, you know, I'd say, even as I sit here today versus a year ago or two years ago, we're becoming increasingly comfortable that there won't be any interruption. You know, there's obviously things well outside our control, but it has been quite quiet.

Menno Hulshof (Managing Director and Institutional Equity Research,)

Thanks, Brad. I'll turn it back.

Brad Corson (Chairman, President and CEO)

Okay, thank you.

Operator (participant)

We'll take our next question from Neil Mehta with Goldman Sachs.

Neil Mehta (Managing Director, Goldman Sachs and Head of Americas Natural Resources Equity Research)

Yeah, thank you. And, and I'll add my congratulations, Dave. You will be missed, and Peter, wish you lots of luck in the new role. Couple questions here. The first is just around the SIB. Can you just go through the thought process behind the decision around the CAD 1.5 billion, similar to last year? And just thoughts on whether if the commodity price stays up here it's possible to do this again in the spring. Last year was a little tougher, but earlier this year was a little tougher because of the large deferred tax payment. But I don't think you have the same thing in 1Q 2024. So, thanks.

Brad Corson (Chairman, President and CEO)

Yeah, thanks for the question. You know, I, I would, I would like to answer that question, but I promised to Dan that I would let him answer—all the SIB questions because he loves talking about it.

Dan Lyons (SVP of Finance and Administration)

Absolutely.

Brad Corson (Chairman, President and CEO)

It's all you, Dan.

Dan Lyons (SVP of Finance and Administration)

Sure. Hey, hey, look, you know, our philosophy is not, not, not super complicated. You know, as we generate the cash, we, you know, the free cash flow, we return it. You know, so, so that's really, you know, kind of where the CAD 1.5 came from. And I would say, you know, obviously, we round, you know, we don't go to a precise number, so CAD 1.5 is a good round number. It makes sense based on our cash balances and cash flow. Regarding... You're correct, that we do not have a big makeup payment. Like, we, we had that very unique situation last year. That is not expected to be the case this last year.

Unless, in a good world, prices go to $200 or something, maybe then we'd have that, but not likely to happen. So, as we look to next year, you know, our commodity prices stay strong, our cash generation stays strong. You know, we generate free cash flow. Our base plan is to return that to shareholders. So, I think, you know, we'll see where those numbers go. But that's really an unchanged philosophy. It's, you know, a continuation of what we've been doing for a while.

Neil Mehta (Managing Director, Goldman Sachs and Head of Americas Natural Resources Equity Research)

Okay. That, that's helpful, and, it's good to see the return of capital. Follow-up is on Pathways. It's been, it's been quiet from our perspective as an investment community around this. I know, Brad, you spend a lot of time on this, so maybe you can, peel back the onion a little bit for us and help us understand, are we getting closer to FID? What are the gating conditions here? And, is it fair to, to assume in the base case, this gets to FID in 2024? Thank you.

Brad Corson (Chairman, President and CEO)

Yeah, thanks for that question. Yeah, I guess interesting perspective that it's been quiet, you know, from, from your standpoint. It sure hadn't been quiet from my standpoint, so, or the, the rest of the Pathways team, 'cause there is an extraordinary amount of work underway. You know, maybe I'll break that into a couple of key components that, that all need to come together for the, to achieve an, an eventual FID. You know, first of all, there is a lot of work underway to progress the engineering side of the project. This is a big, you know, multi-billion dollar project, and that requires, significant pre-engineering work, which we've now essentially completed, and positions us to move into, kind of more FEED engineering, studies.

There's a significant amount of environmental studies that need to be conducted across the pipeline right-of-way route that's planned. That work's progressing. You know, there's multiple components to capturing the carbon. So in our first phase, there's nine key assets and capture projects across the six companies, and each company is doing their own engineering and project planning for that work, and that's progressing. And then on the sequestration side, you know, we've worked with the Alberta government and been awarded pore space that now we need to do additional technical work, so that we can, you know, safely and reliably store the carbon that we would expect to capture and transport to that site, kind of in the Cold Lake region.

So all that work is progressing, and you know, there's a few hundred folks working on that across the six companies. And then secondly, I would just say, on the Indigenous engagement side, which is critically important for us to have a sustainable partnership with the many Indigenous communities that are along the, you know, the route and part of our operations. And so in recent months, we've been actively engaging them to understand their needs, their desires, you know, as we look at how we can build, you know, a sustainable partnership with them. We've had engagements with over 20 communities, so far.

And then lastly, I would say that the third other kind of key element of this is, of course, kind of all the fiscal work that we're doing with both the federal government and the provincial government. And that is to ensure that we have the right policies in place, the right funding mechanisms in place, so that these projects can be economic for our shareholders to ensure that they deliver the environmental benefits that are consistent with the government's aspirations for net zero by 2050. And so there are regular engagements now with the Alberta government and the federal government around all the details around those plans. We have yet to finalize those discussions on the fiscal mechanisms and the fiscal kind of support that will be necessary for these projects to go forward.

But I would say those discussions have advanced materially over the last couple months. So I'm quite pleased with the progress we're making. There's still a long ways to go. As I said at the beginning, this is a big project, big investments, you know, has implications for decades to come. But it's critically important, you know, for our industry to be sustainable, critically important for Canada to achieve its net zero ambitions. So we're all focused on making it a success.

You know, the next key milestone for us would be, you know, once we have all of the fiscal mechanisms in place, once we have the engineering work completed, then we will be looking to place an order for the main pipe that we would need for the trunk line, for the 300-kilometer project. You know, we hope to be in a place that we can place that order sometime next year, is kind of our current planning basis.

Manav Gupta (Executive Director)

Okay.

Brad Corson (Chairman, President and CEO)

I hope that gives you a little more color and so kind of a reflection of just how much activity is underway.

Manav Gupta (Executive Director)

That's great. Thank you, Brad. Always appreciate it.

Brad Corson (Chairman, President and CEO)

Thank you.

Operator (participant)

This does conclude the question and answer portion. I would like to turn the call back over to Peter Shaw, Vice President, Investor Relations, for any closing remarks.

Peter Shaw (VP of Investor Relations)

Thank you. So on behalf of the management team, I would like to thank everybody for joining us this morning, and also sharing the thanks to Dave as we've worked over the last several weeks for a smooth handover. If you have any further questions or follow-ups, please don't hesitate to reach out to anyone on the Investor Relations team, and we'll be happy to answer any of your questions. With that, thank you very much and have a great day.

Operator (participant)

This does conclude today's conference call. Thank you for your participation. You may now disconnect.