Cenovus Energy Inc. (CVE) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy’s fourth quarter and year-end 2016 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. [Operator Instructions] Members of the investments 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 expressed consent of Cenovus Energy. I would now like to turn the conference call over to Mr. Kam Sandhar, Vice President Investor Relations and Corporate Development. Please go ahead, Mr. Sandhar.

Thank you, operator. And welcome, everyone, to our fourth quarter 2016 results conference call. I would like to refer you to the advisories located at the end of today’s news release. These advisories describe the forward-looking information, non-GAAP measures, and oil and gas terms referred to today, and outline the risk factors and assumptions relevant to this discussion. Additional information is available in our most recent annual information form or Form 40-F. Due to recent industry guidance, we have relabeled cash flow as adjusted funds flow, operating cash flow as operating margin, and free cash flow as free funds flow. There has been no change to the composition of these measures. The quarterly results have been presented in Canadian dollars and on a before-royalties basis. We’ve also posted a link to our quarterly results on the home page of our website at cenovus.com. Brian Ferguson, our President and Chief Executive Officer, will provide brief comments. And then we’ll turn to the Q&A portion of the call with Cenovus’ leadership team. Please go ahead, Brian.

Thanks, Kam. Good morning, everyone. I’m pleased to report today that we delivered another solid quarter. Oil sands production was up, reserves are up, operating costs are down, capital costs are down, finding and development costs are down, and our balance sheet is strong. 2016 brought heightened commodity price volatility. Cenovus proved its resilience and ended the year in a very strong position. Early in 2016, we discussed our plans for significant oil sands sustaining program and the start-up of two expansion phases, all while maintaining a focus on cost improvement. As you can see from our results today, both capital and operating costs came in under budget as our teams drove efficient execution and applied a manufacturing approach. You may remember that last year at this time, we were planning a focused well maintenance program and the completion and start-up of seven new well pads at Foster Creek. The successful execution of that work, combined with the on-time start-up of phase G in the third quarter resulted in fourth-quarter average daily production of over 81,000 barrels per day. Foster Creek continues to be a cornerstone asset. Non-fuel operating costs at Foster Creek averaged about CAD 8.10 per barrel in 2016. That’s compared with our original guidance of CAD 10 to CAD 11.50 per barrel. That’s a 17% decrease relative to 2015. These reductions are related to lower workforce costs, the deferral of a planned turnaround, and maintenance optimization. As discussed in our 2017 budget conference call, the startup of the new pads at Foster Creek extends through the end of last year, with incremental production continuing to ramp up in 2017. Christina Lake also enjoyed another year of strong performance. Production grew by 6%. Non-fuel operating costs came in better than expected at CAD 5.40 per barrel, well below our original guidance of CAD 6 to CAD 8.50 per barrel and a 7% reduction compared to 2015. This performance was mainly driven by reduced workforce costs and maintenance optimization. Since our planned turnaround in October and following the safe and successful start-up of Christina Lake phase F in the fourth quarter, we’ve experienced an accelerated ramp-up of production that we expect to continue throughout this year. Our new cogen facility is up and running, providing a secure source of power for Christina Lake and we’re selling excess power into the grid. We expect that the ramp-up of the Foster Creek and Christina Lake expansion phases will drive oil sands production growth of approximately 19% this year. We recently announced that we intend to resume investment in the Christina Lake phase G expansion. Module assembly resumed in the fourth quarter of 2016, with field construction expected to ramp up by mid-year as modules arrive at site. We will continue to focus on disciplined growth in areas where we can add value and increase cash flow. As Kam said, that’s now known as adjusted funds flow. With more moderated industry activity levels compared to prior years, we think that this is a great time for us to be countercyclical and invest in our top-tier asset base. Our conventional oil and gas portfolio remains the most flexible component of our capital and continues to generate significant free funds flow to invest in our oil sands business. In 2016, our conventional assets generated over CAD 540 million in operating margin or approximately CAD 370 million in operating margin in excess of capital investments. Downstream performance for the year was also good. Despite seasonally lower crack spreads in the fourth quarter, refining benefited from cheaper feedstock purchased earlier in the year. The refining and marketing segment generated CAD 346 million in operating margin for the full year or about CAD 126 million in operating margin in excess of related capital investment. Integration remains an important part of our strategy to help stabilize corporate cash flow in times of fluctuating oil price and differentials. Cenovus added 221 million barrels of oil equivalent of proved reserves in 2016. That’s production replacement of 220%. These additions were primarily bitumen reserves and were driven by the expansion of the development area at Christina Lake and improvements in reservoir performance at both Foster Creek and Christina Lake. These additions translated to proved finding and development costs of CAD 3.49 per barrel of oil equivalent for the year and generated a recycle ratio of approximately 3.2 times. More importantly, the independent qualified reserve evaluators – or IQREs – have now begun to recognize and book the success that we have had on reducing costs. The IQREs’ estimate of future development costs on our undeveloped proved bitumen reserves dropped 11% to approximately CAD 8 per barrel in 2016. We expect that demonstrated improvements in our cost structure and the shift in our reservoir management strategy, utilizing longer wells with wider spacing, should result in our IQREs continuing to recognize cost improvements in 2017 and beyond. We continue to do further engineering and design work on our other deferred oil sands expansions, and we’ll provide an update, including cost estimates and project timing for both Foster Creek phase H and Narrows Lake phase A at our investor day in June. Defining these opportunities as well as other developments will provide clear visibility to our investment plans through 2020 and beyond. I am confident and I am optimistic about our prospects for the year ahead. With that, the Cenovus Leadership Team and I are ready to take your questions.

[Operator Instructions] Your first question comes from Phil Gresh from J.P. Morgan.

Good morning, and congratulations on a good quarter. My first question is just – you had mentioned the 19% production growth guidance for 2017 for oil sands. And in the context of how you’re thinking about the company longer-term and the opportunities at Foster Creek and Narrows that you’re going to talk about at the investor day, how do you think about the long-term growth potential of the company and the ability to do, say, multiple projects at one time and things like that, given that you’re already resuming Christina Lake phase G?

Thanks for the question, Phil. So, I think as we characterized in our budget news release last December, we are reactivating disciplined growth. So, we have, and very purposely, positioned our balance sheet, so that we’ve got a very strong balance sheet that will allow us to be countercyclical during a period of time where industry activity is down. So, we want to be able to take advantage of that. We’re taking a three-year view of the world and looking through to 2019 right now. As we mentioned in the news release, we’ve got very clear, full regulatory-approved portfolio of opportunities in the oil sands where we literally have the next five years of investment opportunity ahead of us. We’re staffed to be able to proceed with two oil sands growth phases concurrently, but we’re going to be very disciplined and very measured about that because we want to make sure that we’re delivering a good, solid value as we go forward. 2015, 2016, we have really taken the opportunity – and actually, I believe, taken advantage of the downturn, and choosing to go at a slower place of investment over the last two years has really allowed us to focus on all aspects of our business in terms of how we operate, how we develop new projects. And you saw those benefits when we talked about the reductions in cost and our capital efficiencies for Christina Lake phase G. Those are the sorts of things that we are now currently working through as it relates to Foster Creek H and to Narrows Lake A. And as we said, expect to get more details in terms of timing of the reactivation of those two projects and the capital associated with them at our June investor day. But we are in a position where we’re reactivating Christina Lake G. We’ll be in the field on that in April of this year. We could be in a position where we’re reactivating one more phase in 2018 and then potentially one more phase in 2019. But stay tuned for details on that in June.

Okay, got it. And, I guess, taking into account what looks like a strong cash flow profile in 2017 even at, call it, $55 Brent and the amount of cash you have in the balance sheet and even the projects you’re talking about doing, it seems like you’re very well positioned to do many things. So, I guess, one of the things I’m wondering about is the willingness to take the dividend to a higher level. If we think about where it is right now, on my numbers, it’s around 10% of CFO [ph] in 2017 – give or take – which is on the lower end of the universe of companies we look at. So, I was just wondering, is there any possibility of raising that in 2017?

So, it’s certainly my expectation that, as we achieve growth in cash flow or adjusted funds flow, that’s driven by production increases; as we bring on new phases and continuing to maintain our cost structure and improve margin, that we will absolutely be in a position to consider increases in the dividend. One of the things that’s going to be important to me – and I’ll just comment that, in 2016, with WTI averaging less than $45 per barrel, we generated enough funds flow, so that we covered all of our capital and our existing dividend at that price level. So, when we look to increase the dividend, I want to make sure that it’s something that is very sustainable even at the bottom of the price cycle. I do believe very strongly that paying a dividend is a commitment to our shareholders and that it is a very strong form of capital discipline inside the organization. So, as we move through 2017, I expect that I’ll be having that discussion with our Board of Directors later this year. I can’t comment specifically on timing as to when we may increase the dividend yet. I haven’t had that conversation with the board.

Okay. If I could sneak in one last question, I’m just curious where you feel you’re at on solvent-aided SAGD at this point. If we look at Narrows, do you feel like you’re in a spot beyond just, say, pilot mode?

I’m going to ask Harbir Chhina to respond to that, Phil.

We’re very comfortable with the solvents. Narrows, it’s using butane. So, once we trigger that project, we were going to go in two phases, light and full SAP. And today, we’re so comfortable that we’re going to go full SAP as soon as we start off that project. And we have a number of other pilots that are optimizing different amounts of solvents and things like that that we’ll probably be in a position to tell you more about in June. But we’re very comfortable going forward in using solvents, and not only improving our NPVs, but also reducing our greenhouse gas emissions.

It’s our opinion that solvents are the next major step change in value for the oil sands.

Okay. I’ll turn it over. Thank you.

Your next question comes from the line of Neil Mehta from Goldman Sachs. Your line is open.

Good morning. And congrats on a good quarter here. First question, Brian, is just on Palliser, if you could provide an update on the development of the conventional drilling program there and how that’s going thus far?

Sure. I’ll start and then I’ll ask Kieron McFadyen to respond. We’re taking a very focused approach on a bit of unique opportunity for us on tight oil. It’s medium to light oil on the Palliser block and it’s a very focused program there. So, over to Kieron to give you an update on appraisal activity so far.

Thanks, Brian. Neil, we’re pleased Palliser is going very well – very well indeed. From an executional point of view, we started drilling operations August last year. And since then, we have drilled some 17 strat wells and some 20 horizontal wells. So, that drilling program is on track. The other thing that’s on track – and we’re paying close attention to it – is our cost. Our costs remain in line with expectations and indeed in line with guidance. Crucially, the reservoir targets that we are targeting are coming in as expected. So, very pleased, overall, not only by the execution, but also with the outcomes that we’re seeing.

Appreciate that. And a follow-up is on Foster Creek H and Narrows Lake A. Do you guys see those as projects that can make your return hurdles at the current forward curve? And I would imagine we’ll get more color on this in June, but how should we think about the oil price bogey to make these projects economic?

Thanks for that follow-up, Neil. You’re quite correct you’re going to get – we’ll be in a position to give detailed economics and capital forecast timing at our June investor day. I would say that these are 30-year investment decisions for us. So, we’re not focused on what the price around 2017 is to make a decision on reactivation of these oil sands phases. We’re using a $60 flat Brent price as a mid-cycle price to evaluate the economics on all of our investment opportunities in our portfolio, whether it’s on the oil sands or on the conventional side. So, these are things that regardless of what the price of oil might be here in 2017, we can actually take advantage, as I said, of being countercyclical. And it’s really a view on the longer-term mid-cycle type prices that are going to drive those investment decisions. We, clearly, have the balance sheet strength that we can afford to be countercyclical. So not really focused on just the next one or two-year oil price.

Appreciate it. And one last one for me. Appreciated opining on this issue of border tax at our conference a month ago, Brian, but any latest thoughts in terms of the implications if in fact we do go down this path for the oil markets and then for Canada specifically?

Thanks again, Neil. I’m pretty sure we don’t have any more clarity today than we did a month ago when I was at your conference. It’s, obviously, a very complex topic. And, obviously, the border adjusted tax applies to all imported industrial goods regardless of which country they originate in. Obviously, I can tell you that US/Canada trade relations are top of mind for the Canadian federal government, for our provincial government here. I was in conversations with our premier last week about this. So, it is very much top of mind, but it’s really an international trade question. So, I’m not sure I can actually provide any clarity on it for you.

Appreciate it. Thanks, guys.

Your next question comes from the line of Greg Pardy from RBC Capital Markets.

Yeah, thanks. Good morning. Brian, why don’t we just – I wanted to come back to just your conventional – the conventional business. Can you define what the strategy is there more broadly and how you think about those assets?

Sure. Thanks, Greg. So, we have historically thought of our conventional business really as a financial asset as opposed to a production asset. We have been able to generate, I think, close to CAD 10 billion in free funds flow. We used to call that free cash flow. When you look at the last six years from that part of our business, which has been used to really reinvest and to grow the oil sands business, it is an important part of our portfolio. But one of the big advantages of it is the flexibility they provide us. And just as an example of that, when prices started to drop in late 2014, we were very quickly able to basically shut down the drilling program on the conventional side and really focus on cost and cash preservation there and generating free cash flow. So, it’s been an important free cash flow generator for us in the portfolio.

Okay. And then, when it comes – now, you’ve mentioned in the past you’ve had a couple of packages you’re ready to – you’re ready to sell under the right set of conditions, but it’s not really a business you’d be looking to add to through acquisition, right? It’s more you’ve kind of got the organic opportunities you want now?

Yeah. We’ve got some great organic opportunities. Our prime focus and – if you will, the guerrilla in our portfolio today is our oil sands opportunities for organic growth. As we mentioned in the news release, we’ve got a clear line of sight for regulatory approval for at least the next five years, investment opportunities there. And you’re quite right, we’ve got a couple of conventional properties that are [indiscernible] ready. And when we feel that the market is appropriate, we’ll look to be very disciplined to how we actively manage our portfolio. I think that having an ongoing divestiture program is a good form of capital discipline as well.

Okay, great. Last one for me. I just want to come back to cash balances and then how you’re thinking about the dividend and then either repurchases of debt or even a share buyback, especially given how smacked your stock has been of late. The dividend question sounds to me like that’s going to be more a function of your free cash flow generation that you mentioned on a sustainable basis at whatever oil price you think is the right one to use. You’re sitting there with CAD 3.7 billion of cash. You can do up to two projects. It sounds like you may take another one – you may take another one off the shelf this year. But have you guys looked at either just share repurchases, outright, in size, or even taking a look at repurchasing some of your debt?

Thanks. That really gets to the heart of capital allocation. So, the first call on our cash flow – and free cash flow for us – is about CAD 900 million to sustain our business. That’s the maintenance, safety, sustaining capital. Current dividend levels at CAD 167 million. We are, as you mentioned, reactivating our capital program this year. Midpoint of guidance is CAD 1.3 billion. So, when we look at that – after we’ve covered those sustaining and capital commitments, then the next call is dividend and potential for dividend growth. I am a believer that the worst is behind us on the macro side, but that it is going to continue to be a choppy recovery. It’s going to be interesting to see how 2017 unfolds here. So, we have got, as you pointed out, a very strong balance sheet. We are very much taking a three-year view of the world to manage our business. So, I’m not overly focused on just 2017. As we’ve mentioned before, when we restart the oil sands projects, I want to make sure that we’ve got the financial capacity – regardless of what happens with the price of oil in 2017 – to take them over the finish line. So, if we start another project, we certainly have the financial capacity that – we’ve got more than enough cash on hand, even if prices are somewhat wobbly, to be able to take at least two of them over the finish line starting over – inside our three-year business plan. So, I’m feeling pretty comfortable about that. We will absolutely be looking at how we return capital to our shareholders and taking a look at how do we increase value per share. That’s where you start to ask questions – we start to ask questions about share buybacks compared to competing with further growth investment and capital. So, we’ll be looking at all of those levers in the context of our three-year business plan.

Okay. That’s great. Thanks very much.

Thank you.

Your next question comes from the line of Paul Cheng from Barclays. Your line is open.

Hey, guys. Good morning. Brian, just curious, there’s some argument in the industry with shale oil. The cycle has become more volatile and shorter. Does it, in any shape or form, [indiscernible] your thinking, how you decide the oil sands project in the future and perhaps make them smaller and shorter cycle? Or that is doesn’t, it just means that you won’t take on as many projects at the same time. So, just want to understand how you’re thinking.

Thanks for that, Paul. That’s really, I think, a strategic question. One of the things we are very focused on is how we become even more efficient in our oil sands operations as we go forward. I’m really excited about the opportunities that we see on technology and innovation. It’s my belief that – you saw an incredible renaissance from 2010 to 2014 that has generated the success and the significance of the US unconventionals, the tight oil, Permian/Eagle Ford, those sorts of plays. It’s my belief that 2016 to 2020 that the oil sands have that same opportunity for a renaissance. We need to be able to compete against the marginal barrel of supply, wherever it’s coming from, both on a cost and carbon basis. And I absolutely believe that we can do that. I’d observe that in Cenovus’ case because we’ve got full regulatory approval for about 600,000 barrels a day in total, the next five years of opportunity that we have at Christina Lake, Foster Creek, which in many ways are brownfield type expansions, Narrows Lake A, we’ve actually shortened the cycle time because they’ve got full regulatory approval. So, we don’t – we’ve already accomplished the first three years of investment and we’re really sort of 24 to 30-month construction periods on them and we will continue to look at ways in which we can drive the efficiency. One of the things that I think is really important about the oil sands too is we don’t face the same decline curve that the tight oil business does. So, we’ve got a great base load of production that, as we continue to drive the efficiencies on, will be very, very competitive and generate, I think, very meaningful cash flow.

Brian, on the long-term, do you still see refining as a core part of your asset? After all, if you’re not adding refining capacity, with your production growth, you will become far more net long. So, from that standpoint, does it really matter? What exactly that they bring to you?

Yes. Downstream and being integrated is a core part of our strategy. It’s my belief that in a more volatile price environment where we don’t have OPEC solving for price by influencing supply to the extent that they have previously that we are going to have more volatility. And companies that can participate along the value chain, whether that’s midstream or downstream, I believe have the opportunity to capture more of that volatility for the benefit of their shareholders. So, our downstream is a core part of our strategy. We did do an expansion that added about 18,000 to 20,000 barrels a day of incremental capacity at Wood River last year. Beyond that, there really isn’t, as you point out, any real significant organic opportunities inside the existing portfolio. I would say that we’d certainly be open to looking at potentially adding additional – if we could, inside the existing joint venture. Beyond that, you’re right, the only way that we could look to increase our integration, as our oil sands continue to grow, would be to look at adding something outside that joint venture. It’d have to be very, very focused on how do we increase the margin on every heavy barrel that we produce. There isn’t anything that’s imminent right now. And there’d be a very long, long laundry list of menu items that would have to get checked, starting with value, before we would look at adding something in addition to the portfolio.

Brian, just curious, have you had any discussion or any intention to discuss whether your JV partner would be interested to sell their interest to you and you become an operator of that full downstream?

So, that’s a very specific commercial question, Paul. And we never comment on any aspect of our business that is specific to agreements or partner relations.

Okay. Have you seen any sign of cost inflation along your supply chain at all or that is really so different to the – compared to the [indiscernible] inflation at all?

Yeah. I’m going to ask Drew to respond on the oil sands side and then maybe Kieron to respond on the conventional side. So over to you, Drew.

Sure. Thanks, Paul. So, I think there’s been a lot of recent chatter out there around potentially cost pressures and inflation. What we’re seeing right now is, in the bigger projects like Christina Lake G, we’re locked in with our services because we’ve been planning this and working on this for a little while. I’m actually very comfortable that we won’t see much pressure. If anything, actually, we’ve continued to see costs coming down. I think the industry, right now, in the service sector, is really looking at an attractive piece of work that could extend a couple years out. And because these bigger projects in the oil sands have that attractiveness, we’re getting some very good cost kind of locked in and we’re getting some supply of services and people locked in. I think, at the same time, if you’re looking at some of the seasonal work that’s going on, I think there’s some supplier availability of people and labor, is potentially starting to come. We’ve been very planned out, though, for this winter program, as an example. And even for the next couple of years, we’ve locked a lot of our suppliers in on our seasonal work. So, I don’t anticipate a lot of pressure on the inflation side. I think if you’re trying to react to what’s going on in the industry right now and you’re not prepared or you don’t have a project or your activities are that planned out, I think people will probably see some inflationary pressure. But I definitely don’t see that in our case because we plan out for the long-term and a lot of our vendors are willing to lock in with us for the long-term.

Yeah, Paul, just to add – and briefly – so prior to us deciding to commence with the Palliser program, we actually anticipated some pressures this year. So, we moved proactively and we moved quickly and secured the pumping services and completion services and our drilling services. So, overall, with respect to Palliser, we’re in a good shape.

A final one for me. Solvent SAGD, how easy it is to retrofit your old SAGD facility to use that? Thank you.

I’ll ask Harbir to respond to that one, Paul.

Yeah. The complexity of incorporating into an existing SAGD plant actually depends on the solvent itself and the price of the solvent. So, for example, propane today is relatively cheap. You could actually look at injecting propane to help you improve your SORs and your oil rate, and don’t need to recover it. If propane prices start to go up, you will have to recover it. So, butane is set up at Narrows Lake to be recovered because of the cost of the butane itself. So – and the complexity of that, I think you’re probably adding maybe about another 15% to 20% on the facilities. Kind of what you are adding into the complexity of the facility. So, it’s not a substantial change, but you do have to incorporate the solvent recovery areas of the plant.

Thank you.

Your next question comes from the line of Fernando Valle from Citi.

Hi, guys. Thanks for taking my question. I guess I just wanted to dig in a little bit more. You spoke about the decision to grow versus buybacks or dividend growth. I just wanted to understand the criteria that you’re going to weigh on whether to decide to put in buybacks or to drive your dividend growth. As you have pointed out, there was a very strong cash flow this quarter and it seems like there’s room for – to accommodate both at this stage.

Thanks, Fernando. So, it’s really a balance of how we allocate capital and – our focus, as we go forward, is on growth in cash flow per share, or now adjusted funds flow per share. That is one of the things we’re very focused on over the next three years. So, there’s different levers we can pull, obviously, in terms of how do we continue to see growth in production or potentially reduction through buybacks. So, that really becomes a question also that’s very strongly influenced around how you manage your balance sheet. I’ve always viewed share buybacks as the flexible component of how you return capital to shareholders and how you manage your overall capital structure and balance sheet. We continue to manage the company as an investment-grade company, so that’s important to us. In an environment where – if I’m correct – that we will see continued volatility and somewhat choppy recovery, then I think that we will have a tendency to run a little more conservative balance sheet than we otherwise would have, say, five years ago in that context. But we will make sure, as I said earlier, that we’re very disciplined. I’m a fan of dividend. I’m a fan of dividend growth. And as we continue to demonstrate growth in cash flow, adjusted funds flow from production growth, from sustainability and our cost structure, we will be looking at how we allocate an appropriate balance between investing to grow particularly in our oil sands versus growing the dividend. And as I said, that’s an important call on capital for us and we’ll be having that conversation with our board later this year. I would say that you should expect us to layout a pretty fulsome financial strategy at our June investor day.

Appreciate that. And on the growth project, I presume you’ll give more answer about this on the investor day. But just wanted to understand, is the – Narrows is, obviously, solvent-assisted, is the technology there, you’re fully proven on that? Is the sanction of Foster Creek expansion and Narrows also dependent on these pipelines coming through or maybe a different technology, such as truckables that Conoco has previously discussed, or anything else that’s today not really certain?

No, these are projects that we’re evaluating based on technology that we see as commercial today. They’re not in any way reliant on future pipeline expansions. We do have and did expand the transport system out of – that serves Foster Creek and will serve Narrows Lake two, three years ago. So, that’s already in place. And as we grow volumes at Foster Creek or Narrows Lake, that will reduce our unit transportation costs there. So, we have all of that infrastructure already in place. As it relates to new technologies, that’s something that we’re really going to focus on also at our June investor day. There are some pretty exciting things we see that we believe have the opportunity to have a real step change in cost and recovery and value for shareholders. And with the very significant resource base we have, they’re very meaningful in terms of growing value per share.

Okay. Thanks, guys. Appreciate it.

Your next question comes from the line of Fai Lee from Odlum Brown. Your line is open.

Thanks. It’s Fai here. Brian, you’ve talked about investing countercyclically and you’ve talked about creating shareholder value. I’m just curious, based on your long-term outlook of oil prices and the fundamentals of your business, do you think your shares currently are fairly valued, undervalued or overvalued?

Thanks, Fai, for the question. I think if you ask that question of any CEO, I think they’d probably always say that they think there’s some room to go. I personally don’t believe – and I’ll emphasize it’s my personal belief – that our current stock price reflects future value. I think we’ve got great opportunity to be able to continue to increase value for our shareholders. I am excited. I’m optimistic. Regardless of the price environment, I think that we’re going to demonstrate. And I think that 2016, I hope, really – the performance that you saw, for example, on the reserve side and with our finding and development costs, CAD 3.49 a barrel, over CAD 1 drop in future capital costs, those are things that – you’re going to see those trends, I believe, continue for us in terms of continuing cost improvement as we go forward. As to the sort of share price, share value, I think that the market is the one ultimately that judges the success of our execution on that and the success of our strategy.

Yeah. I agree with what you’re saying. I’m saying I agree with your outlook on your share than your assessment. But, to me, it just seems like, if you actually believe your shares are undervalued, which it sounds like you do, that the decision between dividend – increasing your dividend – doing a share buyback seems a lot easier to me or should be pretty evident that you should weigh more heavily towards the share buyback. But it doesn’t – based on your comments earlier, it seems a little bit more – it’s not as clear cut as that, and I’m not sure why.

I’m not quite sure I understand your question, Fai. We absolutely have an objective to continue to deliver shareholder value. I’m a believer that providing an income stream and providing a growing income stream through a dividend is one way in which you return value to your shareholders. We do have, I believe, a very strong organic portfolio that as we grow in a very disciplined manner, at a more moderated pace than what we did previously. But we have very significant growth and development opportunities, which I believe will demonstrate and will be proved out in terms of growth in our adjusted funds flow per share and earnings per share and return on capital and net asset value growth over the medium and long term. And I absolutely agree with you that it’s also important for us to be assessing the potential to reduce the share count to again focus on growing on a per-share basis. It’s growth on a per-share basis that’s important, not absolute growth.

Yes. No, I agree with you on that. Basically, I’m just – in terms of to clarify what I was trying to say was I think that there is – you create more shareholder value by buying back shares when they’re undervalued. More people would argue, where you would be at this point, rather than buying back later. In terms of increasing the dividend, if you’re right on the fundamentals of the growth and the oil price recovering, you can still do that at a future point when your share price is higher.

I would agree with that statement.

Yeah. Okay, thank you.

Thanks, Fai.

[Operator Instructions]. Your next question comes from Arthur Grayfer from CIBC. Your line is open.

Good morning. These questions are for Harbir. I have two of them. You commented that there is a SAP light and a full SAP at Narrows. Can you elaborate on the difference between the two of them?

Yes. It’s just, originally, when we didn’t have a lot of the – over the last few years, we’ve got a lot of pilot information. And when we first started at Narrows, we didn’t have all this information. So, we were going to go in smaller stages and ramping up the SAP. Now, with all our learnings that we’ve had from our pilots, we’re very comfortable that we can ramp up SAP a lot faster than we first originally envisioned when we started Narrows Lake.

So, this isn’t a change to the design that you had thought about in the past, in the sense that you would still have steam and water, right? So, it’s not you’re excluding steam and water from the process?

No. No. We’re reducing our steam-oil ratios by 30% to 40%, which was always the original design. It’s just the implementation of SAP is going to be done at a lot faster rate because we’re so comfortable with solvents today.

Okay, thank you. And the second question is, I just wanted to make sure I understood what you said. Was the 15% incremental cost or CapEx to retrofit a facility or is that just a greenfield build?

No, that’s the actual material or the change in the plot space. And so, we will see – from a normal SAGD process, we will see a 15% to 20% increase in capital. But that gives us a pretty high NPV increase too. So, that’s what I meant with that, is that the capital in the plot base will increase by about 20%.

Okay, thank you.

But, to me, the critical thing is really – is trying to get approvals passed for these projects and getting the engineering and construction going. And so, that’s actually the critical path item in implementing SAP and solvents, and it doesn’t matter which one you choose in the field. So, right now, we’re implementing it on a pilot basis; and in June, we’ll be in a better position to tell you where we want to start sending – testing out SAP without having solvent recovery schemes in place. And then, as our solvent recovery schemes come into place in our plants, then we’ll ramp up with solvents faster.

Got you. Okay, that’s helpful. Thank you.

Your next question comes from the line of Robert Tuttle from Bloomberg News. Your line is open.

Yes, hi. Good morning. I had two questions. One is, there’s, obviously, these new pipeline projects, Trans Mountain, Line 3, and now Keystone XL. I’m just wondering what your – how committed you guys are to utilizing that much capacity as shippers. I think you’re shippers on a couple of them. And the other question is if you had some estimate for how much of your production goes to the US as a percentage?

Thanks for the question. So, we are fully in favor of all pipelines that currently have approvals. We’re very supportive of Keystone XL, Trans Mountain, Line 3. I think that those are very important from an industry perspective and will have a lot of positive impact for the Canadian economy, not just for our industry as we go forward. And you’re right, we have taken a portfolio approach where we’ve got capacity on various lines. We’re also supporting the Energy East pipeline as well. As it relates to how much of our volume goes into the US, I will ask Bob Pease to respond to that.

Yes. Thank you, Robert. Essentially, almost all of our volume goes to the US. We have done small amounts of exports internationally, both from the West Coast and from the US Gulf Coast. So, we have full capability to take advantage of those as arbitrage opens. But the greatest demand is in the US and the economics usually favors sending it to the US. Over time, we expect that to change; and again, we are well positioned both currently in terms of capability and expectation of future capacity to take advantage of more international moves.

Thank you.

Your next question of Nia Williams from Reuters. Your line is open.

Hi there. Thanks for taking my question. Following up on Robert’s question really about the new pipelines that have been approved, have they changed Cenovus’ strategy in any way in terms of oil sands expansion? Did those approvals have an impact on your future plans?

No, they have not had an impact on Cenovus’ plans. As I mentioned, we’ve taken a portfolio approach. We also have ownership of a unit train loading facility, so we’ve got multiple ways in which we can access markets.

Okay. Thank you. I'm sorry, did you – and so, the portfolio approach, does that include capacity on Keystone XL?

Yes.

Yeah. Okay, thank you.

Your last question comes from the line of Dan Healing from The Canadian Press. Your line is open.

Thanks for taking my question. Another pipeline-related question, TransCanada has said that they were canvassing customers that were interested in taking capacity on Keystone XL. Just wondering what Cenovus' response was. Did you take the same amount of capacity that you had hoped for before and how much is that?

Dan, that's quite a specific commercial question. So, we do have a practice and policy that we don't respond on specific commercial questions. I would just say, we are a supporter of Keystone XL and leave it there.

Okay. At the same level as before?

As I said, I'm going to leave it there. We’re a supporter of Keystone XL.

Okay, fair enough. Thanks.

Thank you.

There are no further questions at this time. I’ll now turn the call back over to Mr. Ferguson.

Thank you for participating in the call today. That concludes the call.