Cenovus Energy Inc. (CVE) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy’s first quarter 2017 financial and operating 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 first quarter 2017 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. The quarterly results have been presented in clean dollars and on a before royalties basis. We've posted a link to our quarterly results on our home page of our Web site at cenovus.com. Brian Ferguson, our President and CEO, 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 that the first three months of 2017 marked yet another solid operational quarter for Cenovus. We also mark a turning point for our Company. While 2016 brought heightened commodity price volatility, Cenovus proved its resilience and entered 2017 in a position to take advantage of the significant liquidity and improved cost structures that we've achieved since 2014. In a volatile commodity price environment, economies of scale are important and the acquisition we announced last month approximately doubles the scale of our Company. This is something that I believe will give us a greater competitive edge and it transforms us into a better stronger company with long-term upside potential. The oil sands will continue to be our prime focus. The production ramp up of the latest Foster Creek and Christina Lake expansion phases, as well as the go forward capital efficiencies that we’ve been able to achieve for Christina Lake phase G and for potential future expansions, reinforces the strategic rationale for consolidating our ownership in these top tier oil sands assets. In the first quarter of 2017, Foster Creek production averaged approximately 81,000 barrels per day net, a 33% increase from the first quarter of last year. Our successful execution of our focused well maintenance program and completion and start up of seven new well pads, including the on-time start up of phase G in 2016, reaffirms our teams ability to leverage 15 years of experience operating these assets and apply a manufacturing approach to deliver on our plans. As you will see from our results today, our Christina Lake asset continues its impressive operational performance. Production in the first quarter averaged more than 100,000 barrels per day next to Cenovus. Compared with the first quarter of 2016, Christina Lake production was up 31% with a start up of phase F in the fourth quarter of last year, contributing strong volumes over the first three months of 2017. Non-fuel operating cost of both Foster Creek and Christina Lake were lower in the first quarter compared with the first three months of last year, primarily driven by increased production and reduced work force costs, as well as improved prioritization of maintenance activities. At Foster Creek, non-fuel operating cost averaged $7.06 per barrel, that’s down 26% from the first quarter of 2016. Christina Lake non-fuel operating costs averaged $5.51 per barrel in the first quarter, that’s down slightly from a year ago. Late last year, we announced our plans to resume investment in the Christina Lake phase G expansion. Field construction has resumed and we expect activity to ramp up in the first half of 2017. We continue to anticipate first oil in the second half of 2019. Our conventional oil and natural gas portfolio remains the most flexible component of our capital and continues to generate significant free funds flow to invest in our company wide growth opportunities. In the first quarter, our conventional oil and gas portfolio generated $57 million in free funds flow after the investment we made to resume our tight oil program in Southern Alberta. We have successfully completed planned turnaround at both the Wood River and border refineries. While this reduced our crude utilization rates, higher average market crack spreads, improved operating margins over the year. The refining and marketing segment generated $53 million in operating margin in the first quarter of 2017 compared with an operating margin short fall of $23 million for the first three months last year. As I mentioned earlier, the first quarter of 2017 marks a turning point for our Company as we look ahead to the successful completion and integration of our recently announced acquisition. Let me say once again how excited I'm about this transaction. We are transforming our Company and what I believe is a pivotal time in the industry and the beginning of a technological renaissance. Following the completion of this acquisition, we will have full exposure to our future oil sands growth opportunities and significant upside potential from emerging technologies that are already underway. We will also gain an established extensive position in the Deep Basin where we see substantial opportunity for short cycle, high internal rate of return growth potential. We will nearly double our existing production capacity with a clear line of sight to meaningful growth, resulting from our large inventory or regulatory approved oil sands projects and a decade of identified drilling opportunities in the Deep Basin. The greater size and scale of Cenovus significantly enhances our cash generation capacity over a range of commodity prices. Assuming the successful closing of the acquisition and including the anticipated impact of planned asset sale, Cenovus expects to have capacity to generate 2018 free funds flow of approximately $500 million, assuming WTI price of U.S. $50 barrel and NYMEX gas prices of $3 per million BTU. With this kind of capacity, we’ll have the scale and flexibility necessary to have a far greater competitive edge. Since the agreement was announced in March 29th, Cenovus has made good progress in executing its acquisition plan. To reduce debt associated with the transaction and the strength in our balance sheet, we begun marketing our legacy Pelican Lake and Suffield Conventional oil and natural gas assets. We're very pleased with the response that we’ve seen today and our data rooms have been very busy. There is strong interest in high quality Western Canadian property right now and we received a number of inbound calls on both our existing legacy conventional assets and components of the newly acquired Deep Basin assets. We are evaluating all options available to us and we’ll take a portfolio approach as we look ahead to further streamline our asset base, preserve our financial resilience and deleverage our balance sheet. In addition, we successfully completed a $3 billion bought deal equity financing and closed the U.S. $2.9 billion debt offering of senior notes. I'm also pleased to announce that we now have commitments from our lending syndicate to extend the tranches of our existing credit facility out to 2020 and 2021, and increased the total capacity to $4.5 billion. We expect this credit facility transaction to close later this week. To further support our financial resilience while the asset sale bridge loan remains outstanding, we plan to hedge a greater percentage of our forecast liquids and natural gas volumes, allowing us to increase certainty on a large portion of our expect cash outflows. For the remainder of this year, we have 87,500 barrels per day of crude oil hedges in place at an average minimum price of U.S. $49.20 per barrel and 50,000 barrels per day hedged at an average minimum price of U.S. $49.74 per barrel for the first half of 2018. The solid financing plan that we have in place, coupled with the post acquisition liquidity of approximately $4.5 billion, affords us the flexibility to execute on our planned divestitures. I'm extremely pleased with the milestones that we’ve achieved to-date. We're doing what we said we do. And as we move forward with our plan to complete this acquisition, preserving our financial resilience and remaining committed to investment grade credit rating, remains top of mind. I'm confident and excited about our new company and I look forward to sharing more with you following the close of this transaction. With that, the Cenovus leadership team and I are ready to take your questions.

[Operator Instructions] We will now begin the question-and-answer session, and go to the first caller. Your first question comes from the line of Benny Wong from Morgan Stanley. Your line is open.

Just in regards to Deep Basin, you put in a target of potentially reaching 170,000 barrels per day or 40% growth by 2019. What are getting factors to reaching that? Are there any other strategic considerations you got to balance out that growth other than say commodity prices?

So you’re correct. We believe that we have the opportunity to increase production in the Deep Basin by 40% between now and 2019, and that is largely focused on simply reactivating some drilling rigs there. We have more than sufficient firm transport takeaway capacity, the existing infrastructure is only about 40% utilized. So this really is -- primarily a focus on drill complete and tie-in. There is a small amount of pipeline that has to be done to make sure that we got gas flowing to the right facilities. But its primarily drill complete and tie-in, I would just emphasize that we have identified 1,500 economic risked locations, which is a decade of drilling activity for us.

And you mentioned in your opening remarks, you guys plan to take a portfolio approach as you look in more divestitures. Can you may be give color on how you're thinking about this and what the key strategic considerations you're balancing when you're going through this process?

So we have Suffield and Pelican Lake, which are two legacy Cenovus conventional properties in data rooms right now; they are very active; we’ve got lots of CA signed on both of those assets. And there is quite a variety of potential purchasers in the data rooms. So our prime focus here over the next several weeks is to continue with the divesture program on those assets. We have got a number of other alternatives, whether it’s other producing assets, whether it’s potential infrastructure those sort of things; also, had a lot of inbound calls already on portions of the acquired assets in the Deep Basin; so we’ll be taking and really thinking about the pro forma portfolio and where and how we will allocate capital as we think about how we achieve the minimum of 3.6 billion divestiture target; and just to reiterate, our target is to have that substantially complete by the end of this year to de-lever our balance sheet.

And just as a final question, it seems like the markets to be acted pretty strongly to the deal. What do you think the market may not be focusing on, and what do you think are the key steps needed from this point forward before that value becomes more clear to investors?

So we had a lot of feedback around the short-term increase in leverage on the balance sheet. So we’ve absolutely gone from having a very, very low leverage and low level of net debt, which is actually one of the key reasons we've got a financial strength to take advantage of all of the things that we’ve been able to accomplish over the last two year in terms of changes in our cost structure to be able to undertake this. So there has been a lot of feedback on the short-term increase in leverage and the plan to de-lever the balance sheet. I would just reiterate that we have got three investment grade credit ratings, Standard and Poor and DBRS have reaffirmed their investment grade. Fitch is a new investment grade credit rating for us and we are very focused on making sure that we continue to manage the Company as an investment grade company, so that’s been the prime feedback. We've also had feedback expressed around the price of the total transaction, and I strongly believe that we have paid a fair price for top tier assets that position us for a decade of organic growth opportunities as we go forward in two of the very strongest oil and gas plays in Canada and in the oil sands and in the Deep Basin. And once we substantially completed the divestitures then we will be absolutely revisiting the optimal level of our dividend and returning cash to our shareholders is going to be a very top priority for us as we go forward. I think this transaction really does make us a better, stronger company. We more than doubled the cash generation capacity at company; we do not double our capital; we’ve got a lot of flexibility in our capital program go forward. If we see downward excursions in oil prices, we've got 4.5 billion in liquidity pro form when we close this transaction. So we got a very strong financial plan in place and now it's really up to us to demonstrate that we are going to continue to deliver just as we have quarter-after-quarter for the last several years.

Your next question comes from Greg Pardy from RBC Capital Markets. Your line is open.

Brian, in your opening remarks you mentioned scale being an important driver just on the field. But when you think back to the motivation in terms of doing this, did you feel as though you had just too many eggs in the long cycle throwing basket and they’re needed to be rebalancing, especially in the oil price environment we’re in, or am I missing -- I just want to understand that motivation?

So I think as I mentioned, I think that this transaction really anchors us in two of the best oil and gas plays in Canada, it gives two growth platforms. Cenovus’ existing conventional business has always been managed as a financial asset and we manage it to optimize free cash flow coming off of it. This positions us to have a free cash flow generating growth platform in the Deep Basin, which is immediately free cash flow generating at $50 WTI and $3 ECHO price that very importantly has got meaningful organic growth opportunities ahead of us for the next decade. So really what it does, and I think about Cenovus in a fluctuating commodity price environment; where to have the appropriate complement of short, medium and long term opportunities to grow earnings and cash flow; so as a going concern, this gives us that and that to me is critically important. As I mentioned, also in response to the earlier question here, it doubles our cash generation capacity. Now, that’s part of the opportunity of scale; and economies are still are critically important, I believe, in a commodity business. We’ve got to have a very robust business model in $50, $55 WTI environment as we go forward; so anything that we can do to continue to take advantage of scale. And one of the great opportunities here I think for us as we go forward is going to be on supply chain, as an example. And the opportunity to apply manufacturing techniques that we are really focused on in the oil sands to be able to apply that now to a decade of investment opportunity in the Deep Basin, are going to be very important in terms of how we focus on continuing to drive improvements in our cost structure; again, in what will likely be a fluctuating commodity price environment. Our ability to be able to organically grow cash flow and earnings at flat oil prices of $50 without reliance on commodity prices to be able to grow cash flow, to be able to do that in flat price environment, I think is going to be a very powerful model for us as we go forward.

Last one from, Telephone Lake, where does it fit or not fit into the portfolio now?

Telephone Lake has got very focused small team looking at how we derisk it. There is a very small amount of capital. Our prime focus for the next five years is going to be on the great organic opportunity that we see today at Christina Lake, Foster Creek, Narrows Lake, that’s five years of full regulatory approved growth for us on those assets, which is largely essentially Brownfield expansion. Telephone is a tremendous long term asset for us, but it's not in the near term going to get a lot of capital applied to it.

Your next question comes from Phil Gresh from J.P. Morgan. Your line is open.

First question just you made a comment about your focus over the next few weeks on these asset sales, so I don’t want to read too much into. But I was just curious if you feel like you made enough progress at this point that you might be able to see something in the second quarter, or is it too early to call that?

I think it's too early to give a specific date. We have got and are running very competitive process as there -- we've got a lot of interest, so it's going to take us a little bit of time to actually get through all the management presentations and get through first around bids. But certainly, we would anticipate that in that late third quarter time frame that we should be able to give very clear information about those two packages in particular and the timing of their divestiture.

And then second question just in terms of the oil price, yet we talked about the hedges that you put in place. So I'm just curious, I know it's not the base case for the market at this point that OPEC wouldn’t extend the cuts. But in the event that we do see oil prices fall, I'm just curious how you're thinking about the additional levers that Cenovus could pull to protect the balance sheet as you work through the asset sale process and worked on the leverage?

So we did announce that we have added additional downside protection. You should anticipate that we will continue to increase our hedge positions to protect downside excursions in particularly in oil price, but also potentially natural gas price to ensure that we’ve locked in a minimum floor in terms of our cash generation on a pro forma basis, to make sure that we have got a very strong backdrop to continue to proceed with the divestitures and accomplish those. I would just also, as part of that, just to remind you that we are keeping $1 billion in cash on the balance sheet; we will have $3.5 billion in undrawn capacity on our credit facilities; and the asset bridge has 12, 18, 24 months tenure to it. So we’ve got lots of capacity under one; first, the asset bridge; number two, the backstops on liquidity between cash and the undrawn; and we've also got a good selection of opportunity on the divestiture side to ensure that we achieve that minimum $3.6 billion divestiture target. We also have flexibility on the capital program. So recall in the perspectives that capital forecast was in the $2 billion to $2.2 billion range, the sustaining capital component of that is $1.5 billion to $1.6 billion. So we estimate that at $45 WTI, we can cover all the sustaining capital plus the pro forma level of the dividend on a pro forma basis post closing.

And then one question just on the quarter with Foster Creek. I noticed that the OpEx was below the range guided for the year and then the royalty was actually above the range for the year. So I am just wondering if either those had something more one-time in nature or is it the sustainability on both of those?

I am going to ask Kieron McFadyen to respond to that.

It's essentially a story of three pops. So production growth, first of all, helped us on OpEx in Foster. I think our team obviously doing great job in terms of focus on optimize way on facility maintenance so we’re seeing a significant impact there. Earlier this year we went through some reorganization work in Forster Creek, so we’re seeing the impact of one-third reductions overall. So these are the three things toward maintenance focus and monitor levels.

Got it, and then on the royalties... I can take it off line if you guys don’t have it…

Prices were a little bit higher in the quarter, so royalties are price sensitive because Forster Creek’s entail.

And then just in terms of modeling the dealing, should we be factoring it in as a Q2 event given the effective date that you talked about for the transactions? Or should we think it more of a second half?

So we do expect to close the transaction mid to late May is the target. And you’re right it is effective the beginning of the year. So the cash flow of that we’ll get for that first four and half five months will be a treat as a purchase price adjustment.

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

I want to circle back on asset sale potential, and appreciate the color on Pelican Lake and Suffield. Can you talk about other opportunities potentially within the portfolio as you think about going above the $3.6 billion level? And what the framework you guys are using internally to that? What are the assets that are best for divestiture?

So I am going to be primarily focused on our pro forma portfolio, and where and how we’re going to be allocating capital in the pro forma portfolio. So as I mentioned, once we’ve closed the transaction then we’re going to very quickly be assessing which parts of the new portfolio in the Deep Basin for example will be focusing on in the near term in terms of reactivating capital there, and be in a position to assess which parts maybe -- but you should expect that one of the things we’ll be doing in the Deep Basin in particular is looking to continue to high grade through swaps so on and so forth. Obviously, we’ll also be influenced by the initial drilling success that we would have there. But that’s a very competitive part of the basin, so expect there to be ongoing activity there to continue to high grade and increase capacity utilization at the various process and facilities. So there are things that we’ve had numerous in bound calls. I think within the first 24-48 hours. I had calls from seven other CEOs expressing interest in various components, not just of the Deep Basin but Cenovus’ existing portfolio. So we’ve got lots of opportunity I think and it really will be focused on where and how we're going to allocate capital in the pro forma portfolio go forward. So we’ll be really trying to be focused on that and where we think we’re going to be able to generate the best value through both divestiture and the pro forma portfolio investing go forward. So multiple opportunities we’ve had inbounds on infrastructure for example as well, so lot's of ideas. And we’ll be able to give you a lot more color at our Investor Day in June.

Well, I appreciate that. And actually this one might be for the Investor Day in June as well. But as you think about potential growth projects near certainly one of those, what this FCCL transaction, how do you think about near as in the context of growth opportunities?

So Narrows Lake is a tremendous growth opportunity. We've got regulatory approval for 130,000 barrels a day there. We are right now going through a very rigorous capital review on Narrows Lake. One of the things that’s particularly attracted us strategically about Narrows Lake is the application commercially are the use of solvents. So in addition to being an attractive economic opportunity, it's got some strategic value because of the commercial use of solvents there, which I think is going to be a real step change in the SAGD business. So you're right, our plan is that at our June Investor Day that we'll give good fulsome update, both on capital efficiencies and on timing of Narrows Lake and Foster Creek edge.

Last question for me is just on the Conoco’s stake in Cenovus. Can you walk us through again the mechanics of that to the extent that they do want to sell down their stake as they said publically there that is not their intention to hold their publically traded companies. What would be the timeline and what sort of our protections to Cenovus investors has against any pretty mature sale?

I'm glad you asked that question, so I can give some good clarity on that. So there is a six month lockup period after closing where they’re not able to sale or no hedging or derivative activity is allowed during that six month lockup period. We do have agreed upon mechanisms that allow them to execute and orderly disposition of shares that’s through a registration rates and investor agreement. And in addition, there are securities rules in the U.S. which limit the ability to sell shares in the open market as long as they hold more than 10% of our outstanding share. But there is I think the key message is that we don’t expect that they will be a long-term shareholder and that for the first six months after closing, there is no activity and then after six months that there are mechanisms to provide for an orderly divestiture of their position should they choose.

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

Brian just want to clarify, you’re saying that Foster Creek is already in the post payment period, they are not in the prepayment?

That’s correct for royalty proposes. It reached payout a few years ago.

And so yet we don’t re-sanction the phase H that will continue to be the case. And for Christina Lake, if after we sanction phase G, which is probably not the case, but if you stop sanctioning any project, when that is going to become post payment, any what idea?

Yes, so that pertains -- you hit them on the head there. It depends on price, the actual realized prices, but that price that you talked about, it’s two or three years outbound before it would reach payout for royalty purposes.

And with the addition of Deep Basin, does it in any shape or form change your building program and kind of step up?

No, it does not change and we’ve had good success on Palliser with the appraisal drilling program that we have undertaken. We will certainly as I mentioned, after closing, we’re taking a look at the pro forma portfolio and where we see the strongest returns in the portfolio.

And just a final one just on the accounting, in the event that it does any contingency payment to Conoco when that occur, would they be recalled as a P&L item from your book or that is just a cash flow and will be a balance sheet adjustment to the purchase price? Accounting by how should we look at it or treat it?

I am going to ask our Chief Financial Officer, Ivor Ruste to respond to that.

We recorded an estimate for accounting purposes in our pro forma financial information of about $422 million I think for that contingent payment. So any payments against that would be to reduce that liability in a go forward basis.

So that will essentially just say bunch of item than it’s not a P&L item?

That’s correct.

And in the event as it go above it, will that still be a balance sheet item or that is just adjusting further on the purchase cost? Or it would become a P&L item?

It’ll become a P&L item to the extent that’s above that over the five year period.

Your next question comes from Mike Dunn from GMP FirstEnergy. Your line is open.

Brain, just wondering with respect to I guess your other legacy conventional assets, specifically the Palliser block and Weyburn. Public processes have not begun for two yet. Is that because the fate of those in terms of whether you wanted to sell them and how much might depend on what you want to do with divestitures from the Deep Basin assets? Or are there other reasons why you were ready to go with Pelican Lake and Suffield, but not with those two assets? Thanks.

So you may recall in the third quarter of 2016, I said that we had two non-core conventional properties that were data room ready; those were Suffield and Pelican Lake, so that was a portfolio decision that we had made at that point in time. I would like to stress that these are both great free cash flow generators; and the nature of the parties in the deal rooms I think that we’re finding these very attractive; they’ve been well maintained and have very general shallow declines through the main opportunities to offset those declines. So they’re very strong assets. You're absolutely right. We've had numerous inbounds on both Weyburn, on Palliser, on parts of the Deep Basin, so we've got lots of flexibility ahead of us. And we will be moving in a very prompt fashion to ensure that we will achieve that $3.6 billion divestiture target. But we've not made specific decisions yet on which other, either producing or infrastructure assets, we will utilize to accomplish that. But I'm very comfortable that we’ve got a good portfolio of opportunities there to achieve that divestiture target.

Next question comes from Fernando Valle from Citi. Your line is open.

On the Deep Basin, I just wanted to understand the sensitivity that four investments and net backs as gas prices of AECO changes, and also if you’ve probably identified any opportunities for marketing in the gas and NGL outside of just growing the production and economics of scale. Is there anything you can do differently than what Conoco was doing through maximize your netbacks in that part of the question?

So maybe I’ll take the first part of the question there around gas prices. And I’ll ask Bob Pease to just comment on things that we’re thinking about in terms of the transportation and marketing side. The thing that really drives a very attractive economics in the Deep Basin is that is liquids rich natural gas. So it’s very robust in terms of having two revenue stream, but also very importantly it’s got low operating cost in the range of $78 per barrel of oil equivalent today. And we see opportunities to continue to improve that, partially around just simply increasing throughput through the existing processing facilities that are only running at about 40% of capacity. We also have additional opportunity if we chose to look at additional third party processing revenues in the basin as well if that that will improve the economics there. So I think it's very resilient to potential downward excursions in natural gas prices because of the two revenue streams and the opportunity to continue to drive units even lower. Bob if you wanted to comment on future marketing?

We’re actually very excited about what the Deep Basin assets can bring to us in the space in natural gas. We’ve been relatively limited on optionality from what we currently have. The Deep Basin it’s a location, gives you the potential to reach more market. So we’re early in the discussion obviously with potential mid-stream opportunities; but we know we can get to different markets there; we see the potential for infrastructure that could make a better connectivity to our existing oil sands operations as well. And some of the things we’re looking at even from an upgrading and a value added stand point, we see the potential that could unlock additional value from natural gas production in the region. So again, it's relatively early on us exploring these. But it’s -- the Deep Basin assets are good positioned to go multiple routes to markets. So we think we’re going to find additional value that hasn’t been tapped yet.

[Operator Instructions] Your next question comes from Nima Billou from Veritas Investment. Your line is open.

I think a lot of concerns stems around potential clarification of what the Company would look like. Just wanted to get a sense, you know the 2018 number in terms of fund low. I am glad you put that out for each fund flow. In the absence of asset sales been what would be the pro forma debt to funds look like for 2018 even that you have 50? Just to give investors a sense of where the ratios would play out; or if you will post the 3.6 billion, can you give us a figure of what the debt to fund flow would look like if you add 50?

Sure. I can comment on that and I'll focus the latter part of your question there, post the divestitures. So as I mentioned, we intend to continue to manage the Company as an investment grade company. So our long term target range is 30% to 40% debt to cap and 1 to 2 times debt to net EBITDA. At a flat $50 WTI and flat $3 NYMEX for 2017, '18, '19 post the divestitures then we see ourselves being inside the debt to cap range that I mentioned by the end of the 2019 period. And we see ourselves being just slightly above the top of the 2 times on debt to net EBITDA. I would say that if you looked at it on a net debt then those ratios obviously are lower. And if you do any kind of price sensitivities then you’ll see that there is -- and we’ve got slide on our Web site that can actually give you some price sensitivities and forecast on those credit metrics.

And just one to get a sense, royalties again; why did they creep up so high in past, because you’ve mentioned they’ve been -- it's been in payout for several years. But just the jump relative to prior year quarter; obviously, because of pricing but even relative to Q4 to 8% arena, why did they jump so quickly in the quarter?

It is largely related to higher pricing, so royalties in Alberta are price sensitive.

So it’s a bitumen threshold that across for the quarter?

Yes, and it's also tied to WTI movement.

Is that 8% fair going forward?

We’ve got some guidance -- there's guidance on our Web site and I think that it’s a little bit less than that. But if you want to have a better understanding of how the royalty regime is calculated here in the oil sands, we can certainly follow up with you separately if you would like to walk detail through how the royalties are calculated.

And for the quarter as well there was not much growth related spending overall, correct? There was focus mainly on sustaining within the oil sands operations?

There was some growth related to reactivation of Christina Lake G, but the majority of oil sands capital, you’re right, was for sustaining capital.

Can you just carve out the amount? Was it $30 million to $40 million in the gross related spend?

I don’t have an immediate answer on that one, but we're happy to follow up with you after the call.

[Operator Instructions] Your next question comes from Dan Healing from The Canadian Press. Your line is open.

I might just have a quick question on this injunction application from, I think it’s pronounced Coerente Capital Management, talking about helping the acquisition, the decision to shareholder of vote is a dilution of the float. What's your comment on that, is that something that the Company is working?

No, I am absolutely not worried. I believe that this is a very strong transaction that it makes us a better and stronger company. I believe it is the right transaction for us and that we've structured the transaction in the right way to help maintain our financial strength in terms of the components of cash and equity. And just to give a an example on that, more than 50% of the purchase price is funded between cash on hand and the bought deal plus the vendor take back and little over 20% is already been funded through the long-term debt issuance that we did a couple of weeks back on the 10%, 20% and 30% paper. This is a transaction that management and the Board has spent several months, analyzing and doing very rigorous review of. We are focused on having a very solid financial plan, which I’ve just described; we're focused on having strong investment grade credit ratings; our Board is focused on the long-term strategy for this transaction; and obviously, our shareholders are going to hold us accountable. Management and the Board to making sure that we execute on the plans that we've talked about and we’ve got to demonstrate that for our shareholders. I don’t know what specifically has been asked of the Ontario Securities Commission. I've not seen what's been asked of them, but I would just emphasize that the transaction was undertaken in full compliance with all securities regulations.

And was there just a governance issue there that the Company should have asked shareholders to vote on this?

I don’t know specifically what the concern is. I can tell you that there is a shareholder vote at 2:00 PM this afternoon.

At this time, I'll turn the call to Mr. Ferguson.

Thank you for joining us today. Appreciate your question and your ongoing interest. Our call is now complete.

This concludes today's conference call. You may now disconnect.