Cenovus Energy Inc. (CVE) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy First Quarter 2018 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] 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, Senior Vice President, Strategy & Corporate Development. Please go ahead, Mr. Sandhar.

Thank you, operator. And welcome, everyone, to our first quarter 2018 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 annual MD&A and the most recent Annual Information Form and Form 40-F. The quarterly results have been presented in Canadian dollars and on a before-royalties basis. We've also posted our results on our website at cenovus.com. Alex Pourbaix, our President and Chief Executive Officer, will provide brief comments. And then we will turn to Q&A portion of the call with Cenovus' leadership team. Please go ahead, Alex.

Thanks Kam. Let me first begin by addressing the obvious. This was a challenging quarter for us financially. Our results were significantly impacted by sizable hedging losses, the widest light-heavy oil differentials we've seen since late 2013, and one of the largest maintenance turnarounds ever executed at our jointly owned refineries. I want to be clear that these are temporary not structural financial challenges and they are not indicative of our future potential to generate funds flow and earnings. As a company that's primarily focused on the oil sands, we are in this business for the long-term and one quarter alone does not represent the strength of our company. For example, in the first quarter we can attribute over $600 million to hedging losses, increased downstream operating costs associated with turnarounds at our refineries and one-time severance. That's without considering the loss of refining revenues associated with planned maintenance. You should also note the sensitivity provided in our guidance document indicating that with every $1 decrease in WTI-WCS differentials, we expect $80 million of increased annual adjusted funds flow. We have seen differentials narrow in April. Our oil sands and Deep Basin operations were very strong in the first three months of the year. I really want to emphasize again that our financial results are not a reflection of our operational performance. I joined Cenovus six months ago because I believe the Company has top tier assets and I saw the opportunity to generate significant value for shareholders. What I have seen over the last two quarters has only reinforced that belief. These assets live up to their reputation and continue to perform very well. As you saw in the operational update, we released last month, we responded to wider price differentials and transportation constraints in Q1 by temporarily slowing production at our Foster Creek and Christina Lake oil sands projects, while maintaining steam injection to continue mobilizing oil. That enabled us to take advantage of our significant capacity to store mobilized oil in the reservoir to be produced when prices improved at a later date, and that's exactly what we did. As heavy oil prices improved in late March and into April, we ramped oil sands production back up to normal levels. It is a great example of our ability to adapt to changing market conditions. Despite the temporary pullback in production in the first quarter, we still expect our oil sands volumes for the year to be within our original guidance of 364,000 to 382,000 barrels per day. The volatile price discounts we face for our oil will continue to be an issue, but we monitor and manage until new pipelines are brought into service and crude by rail activity increases. In the meantime, should the need arise again, we have the option of managing our production levels to achieve optimum pricing as we did in the first quarter. To help alleviate transportation congestion, we're also working to increase our ability to ship more barrels through our Bruderheim oil by rail facility which has a capacity of 100,000 barrels per day. As part of these efforts, we're actively negotiating with rail providers to gain better access for locomotive hauling capacity and track space. We expect the rail situation to improve in Alberta in the second half of 2018, but ultimately what we need is new pipelines I want to take a moment to address this critical market access issue. Cenovus will continue to work with industry and government to get the Trans Mountain Pipeline Expansion Project built. This pipeline has all of its approvals and has been determined to be in the national interest. This has moved beyond an oil industry issue and is a pertaining question whether Canada is open for business. Back to our operations. In the Deep Basin, we executed our winter program and have substantially completed our planned capital spend for the year. I know there's a lot of interest in our potential divestitures in the Deep Basin. East Clearwater sale process is proceeding as expected with good interest from capable and qualified buyers. For a broader Deep Basin, we've been evaluating all of our assets in an effort to streamline and focus our portfolio, maximize value and accelerate our deleveraging plan. We expect to have additional divestitures in 2018, assuming we realize value that makes sense for shareholders. In the downstream side of our business, planned turnaround were substantially completed in Q1 at the Wood River and Borger refineries, which we jointly own with the operator Phillips 66. For Wood River, it was the first major turnaround on the new coker project, since it was completed in 2011. Both refineries are now back to planned operating levels. As I mentioned earlier, we recorded sizeable realized risk management losses in the first quarter of $469 million. This was largely the result of hedging about 80% of our 2018 forecast liquids production for the first half of this year, in order to support the Company's financial resilience and ensure downside price protection as we work to deleverage our balance sheet. These hedging decisions were made in mid-2017 in a lower commodity price market, before we had certainty around the timing and amount of proceeds from planned divestitures. In the second half of 2018, our hedging commitments drop off significantly to just under 40% of forecast oil production. Going forward, the Company will not implement hedging program on the same scale as we did in the first half of 2018. The best protection for exposure to a volatile commodity price is a strong balance sheet and that will be our focus. I want to reiterate that despite the financial challenges we faced in the first quarter, our facilities and subsurface performance were exceptional and we expect that to continue. Before we conclude, I'd like to thank Ivor Ruste, our Chief Financial Officer for all his contributions to Cenovus. Ivor will be retiring at the end of this month and I wish him all the best in his well-earned retirement. Jon McKenzie will be starting at Cenovus next week as our new CFO. Jon has over 20 years of experience in the energy industry and a diverse background in both finance and operations. I've made a lot of changes in the Company since I joined, and going forward we're going to be focused on stabilizing our organization and engage in our workforce to generate shareholder value. With that, the Cenovus leadership team is ready to take questions.

[Operator Instructions] Your first question comes from the line of Greg Pardy with RBC Capital Markets. Your line is open.

Just a couple, I want to hit on, you touched on your hedging policy and approach and so forth. I guess, what caught me a little bit is, is you've got hedges in 2019 albeit, you know utilizing collars, but could you just talk about how the approach is changing and how you are thinking about 2019?

Sure. You know, I think I've been pretty clear and you heard me mention that again on in my prepared notes. But, I really do believe that the best – the best defense for a volatile commodity is a strong balance sheet. And my view as we get to the balance sheet to the level where I expect it to be, our shareholders should expect to see a much more conservative hedging program. And I would also say that from – as I've sort of been here for six months, I think it's really important on the hedging strategy. On a go-forward basis, we're going to be more conservative as I said. I think that going forward, I would also – our shareholders should not expect us to be hedging significant volumes just WTI or Brent. I think there may be elements of that in our hedging strategy, but I think with the dislocation in – and correlation between WTI Brent and WCS, I really don't think we're achieving risk reduction by doing that. So, you see a very small collar position in 2019, but I wouldn't expect to see – a lot more of that type of activity going forward.

Okay great. And second one is, I mean no impact obviously on cash or value per se, but what is the $100 million impairment just say about Clearwater?

Hi Greg. Ivor Ruste here. I think you know we're required for accounting purposes to have a look at the recoverable valuable of all those assets. That the impairment charge went against the assets we're retaining in the Deep Basin, which are natural gas primarily focused. And we bought those assets back in 2017 at a – assuming a $3 natural gas prices. We used strip pricing at the end of the first quarter to do the recoverable value test at March 31, and then the case of the gas prices, it had actually gone down 7% from the end of December. So, that's where the margin decline went on those asset and again natural gas prices as you know forward, long-term natural gas prices have come down that much 7% in the quarter.

Okay great. But obviously nothing to read into in terms of the disposition process, which I think, you've already answered?

That's correct.

Your next question comes from the line of Benny Wong with Morgan Stanley. Your line is open.

Hey Alex, was wondering if you could give us an update on your targeted cost reduction, maybe some color for how the progress is in each bucket and if you see any upside in any of those? Thanks.

Sure. Thanks Benny. You know I think if you look at our corporate deck, you can see and if you look at our – the guidance that we put forward and we have added to, you can see where we've got to in terms of our sustaining capital operating costs. I think that we have – still have material opportunity to reduce operating cost in the Deep Basin, but I think one of the things you are going to see with this planned streamlining of the Deep Basin is pure, more geographically concentrated areas of focus, with and a lot of what I hope to achieve here is the ability ultimately going forward to move a lot more of our own barrels to our underutilized facilities which should go a long way to helping the per barrel cost on the Deep Basin. With respect to the oil sands, as I said, I think you can see in our guidance where we think, we expect to get to. I think that's industry leading. We probably have a little bit of opportunity to continue to drive cost savings at Foster Creek, Christina Lake is already I would argue best-in-class. And if you look at sustaining capital on Christina G, we really think we are delivering probably at or near the very top of the best capital performance that we think any SAGD company has delivered, so that's kind of the outside. On the G&A side, I've obviously made very significant changes corporately. We've reduced our headcount already by about 15%. I think there will probably continue to be opportunities to see lower costs on the G&A side, but once again when I compare our non-rent G&A to our peers, I think that is actually a pretty good story right now. So I think there is some more to come. Hopefully, we are going to be able to sublease some of this excess office space that is presently an overhang forests and to the extent we do that that also will obviously go to our G&A bottom line.

Great. I appreciate that color. And just in regards to your operational update. I think it was mentioned, you guys are looking at opportunities to optimize oil sands maintenance. Is that just a referring to dialing up volumes up and down in response to differentials? Or are there anything else that you guys looking at? And if you can, can you give us an update on where your current maintenance schedule stands right now?

Yeah. Sure Benny. It's Drew here. I'll just give you a quick update. So, the operational update we gave here a number of weeks back has basically turned out exactly as planned. We are back up to full rates now. During that time though, we actually did do some maintenance and took one of her six down at Christina as an example and did some maintenance on it. We have been reviewing whether we are going to move our current budgeted and plan turnaround at Christina Lake, that's kind of scheduled for late Q3, September timeframe. We have reviewed and we have moved some of that maintenance here into the spring, but we are going to still plan to run that turnaround in September as originally budgeted and planned and it's all within guidance. What we see happening here in May and June in Alberta is probably the biggest single turnaround season that I think we probably ever experienced in Western Canada. So right now, we think there is going to be some substantial volume come-off in the market here in May June, and the amount of activity in service level availability is going to be pretty stretched. And so we are going to stick with our current plan and budget of September for Christina Lake.

Great. Thanks guys.

Your next question comes from the line of Phil Gresh with JPMorgan. Your line is open.

Yes. Hi. Good morning. First question is just on your production management strategies that you executed in the first quarter. Just wondering longer term if we get to a wider differential scenario in the second half of the year once we bypass this big industry maintenance that you are just referring to. How much capacity do you have to executive on a strategy like this? And how long can you maintain it without causing any reservoirs?

Thanks Phil. It's Drew again. So this is the first time we've probably done this on a kind of a prolonged period of time, like a month and a half so to speak. We've obviously done this quite a bit when we had normal turnaround activity over the last number of years. So going forward here, we dial down upwards of 70,000 to 80,000 barrels a day here over certain weeks. I think a comfortable range for us is probably better closer to the 30,000 to 50,000 barrels a day, because then we can actually truly target different pads configurations in Foster Creek and Christina. But again, from a timing standpoint, we'd react to be able to do this like quarter-to-quarter. And so, with that we don't see any fundamental risk in the reservoirs at all if you just look at it from a month-to-month basis. And in that kind of volume range, we are able to move to different parts of pads in different parts of the reservoirs to manage that type of volume for a longer period of time, but again you're only going to do this on a month-to-month basis in certain pads. But we think it's a great new tool for us now to respond to different pricing environments and has did the markets move. Obviously, we've proven to ourselves and hopefully the markets realizing that we have some elasticity here in production volume coming out of the oil sands and we've got a great tool now in our toolkit to use.

Phil, it's Alex. And just one comment I should make. When Drew is talking like that 70,000 barrels, you are talking blend as opposed to just pure bitumen.

Yeah. Okay. Got it. Thank you. The second question was, I saw some recent news flow about Cenovus looking for a partner to help fund infrastructure standing at Narrows Lake. So I just wanted an update as to where you stand at Narrows Lake, and just a project that you'd be considering sanctioning at some point soon. And I was just trying to tie this back to your cash flow and balance sheet priorities where you stand today?

Sure. Phil, it's Alex. No, I mean, here is I think the number one most important point. Regardless of what other opportunity your values at future developments might bring to Cenovus. We will not be considering it any material new additions until we see a clear line of sight to increased pipeline takeaway capacity out of the province. And so that would be number one. And number two is, any of those development opportunities have to wait for a material improvement in our balance sheet. We think we're going to start seeing that material improvement as these hedges roll off and I think the market starts to see the true cash flow generating capability of the company absent these onetime items. But whether it's Foster H or Narrows, they're all going to wait for pipeline certainty and for a stronger balance sheet.

Actually, this has led on my next question which was, if you run the numbers at the strip, just curious how you think about when you might hit that target leverage level at sub 2 times?

Sure. I continue to think that two times is kind of the minimum. The point at which I think we get our leverage to the level which I really think we start having some options. I think my preference would probably ultimately B-to-B in mid cycle pricing to probably be lower than two, but two is the point at which we have options. And we obviously don't give guidance on our cash flow, but I know that the consensus among our analysts is that in 2018 give or take at $60 WTI and a high teens WCS, we are producing – sorry 2019. Our analysts would expect they will be producing over $3 billion of adjusted funds flow and somewhere north of $1 billion of free cash flow. And at that level and if all we do is in terms of asset divestitures is this Clearwater divestiture, then I think it is entirely achievable that we can get to that 2.0 of threshold by the end of next year.

Okay. Thank you. Last question is that there was a comment that the refineries are running back at normal speed right now, but I know there is also been some news out there about Borger and there is some timing factors on that start-up at the saltwater recovery units impacting product deliveries. I also believe I heard it might even be affecting the refinery routing. So I just wanted to just follow-up on that point very quickly.

Thanks for the question Phil. It's Keith Chiasson. Obviously both our refineries went through some very major turnarounds in the quarter. Wood River had the largest refinery turnaround in his history in the first time starting-up the coker units in 2011. And just to give some context over 3900 people at the Wood River refinery and 2500 people at the Borger refinery turnaround. Wood River finished on schedule and on budget. Borger had a little bit of startup challenges with some foaming and aiming system. They flush that and are now nearing normal operation rates.

Okay. Thanks a lot.

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

Good morning team. Thanks for taking the question. Alex, you got a unique perspective on takeaway and market access given your background. Guessing your thoughts with the Enbridge Line 3 potentially, are you getting some resistance in Minnesota? What's happened in Trans Mountain in the British Columbia? How did you think this ultimately plays out? From a differential standpoint, how do we think about the impact of IMO if come 2020 some of these pipes aren't online particularly some of the slippage that we are seeing here in the U.S.? Then have a follow-up. Thank you.

Thanks Neil. I'll talk a little bit about the pipeline situation, and then I'll like Keith to comment on IMO. But I think from the pipeline perspective and I've said this from the start, I remain an optimistic that ultimately most if not all of those three major pipeline projects would go. I think clearly a bit of a complication has been thrown into the Line 3 project with that decision. From the administrative law judge, it's a really big decision. We are taking a look at it and I know that Enbridge is taking a look at it and I don't understand at this point what their response would be. But I would just say that the logic of replacing an old pipeline with reliability problems with a brand new state-of-the-art pipeline with state-of-the-art leak detection seems to be a very prudent thing for the State of Minnesota. And I hope that there is a win-win resolution. We're obviously in the middle of a process with TMZ and Kinder Morgan. I remain in close conversation with both, Kinder Morgan Canada, the Alberta Government, and the Canadian Government. And I take a lot of comfort that I think those three parties are all very committed to finding a resolution that will allow that project to proceed. And once again, we are just waiting to see where that gets too. And then on Keystone XL, it obviously continues to proceed and I know the company is acquiring land on the new right of way. So I do ultimately believe that that project is going to proceed also. In the interim as production grows in Alberta, we obviously are going to need rail to balance production and takeaway. And as I said in my remarks, there is been a bit of a slow start in getting this oil moving, I think that is overwhelmingly attributable to the lack of spare capacity that the rail companies had when faced with this issue probably earlier then I think everyone anticipated. But I am really confident that as we move into the second half of this year and into the first half of 2019, we are going to be seeing very material volumes of oil moving by rail. And I would expect once that situation prevails, we would expect to see WTI, WCS differentials probably persist in the high teens being reflective of the cost of rail to get oil from Alberta down to the Gulf Coast. But why don't I ask Keith just talk about the IMO issue.

Yeah. Thank Neil. Just building on kind of Alex's comments obviously the Line 3 timing could then bring back in the differentials, so that gets push their past kind of the third and fourth quarter of 2019. We could see some pressure with regards to widen differentials associated with the rail transportation as well as the IMO coming in. But specifically, on the IMO, there are still a lot of questions with regards to the implementation, and the response to the changing regulation, whether or not refineries will have sufficient capacity or how much sufficient capacity they will have to increase coking utilization. How fast the shipping industry can respond to putting scrubbers on the vessels, as well as how well the regulations will actually be enforced, and even if the timing of the regulations sticks to the 2020 implementation. So, lots of unknowns. We are obviously watching that space. We do have our heavy oil integration with our Wood River and Borger refining capacity. But we'd also look at you know, do we want to bring new production growth into that market if we start seeing kind of Line 3 differed in delayed as well as kind of the IMO impact coming.

The follow-up question just is as you think about rail in the negotiations that are going and recognizing there is commercial sensitivities. What do you think of are really the stumbling blocks in terms of getting just to the finish line in the conversation around margins as a conversation around duration. And can you give us a little bit of color of what gives the confident as we'll see some momentum there? And thanks for the conference.

Yeah. Neil, it's Alex. I'll kind of maybe talk at the strategic level and Keith may provide some color on specifics. But my perspective on the rail, I have been closely involved with Keith in dealing with the rail companies, really for the better part of a few months now. And my experience with the rail companies and I might have said this earlier, but I don't detect there is any philosophical concern on the part of the rail companies about moving the product. I think they feel that the last time they ramped up their capacity to move oil. I think they felt they spent a lot of time and resources. And then they lost that business in very short order once the pipeline solutions became available. So I think, I am not surprised, no distressed by the pricing that we are seeing. I think we'll be able to achieve fair pricing. I think that there is going to be some terms to these deals to deal with this issue that the rail companies have. And I think there is going to be – they'd probably desire to have some element of take or pay, which might have been lacking in the past. So, but I don't as I said, I mean, our discussions with the rail companies are very productive. From our perspective, I mean we really see the importance of getting a real deal more towards the end of this year and that's where we are targeting to start seeing our barrels move by rail. But I am not seeing anything that is significantly worrying me that we are not going to be able to achieve that goal. I don't know Keith if you have any color.

Yeah. Thanks Alex. So I mean we are actually starting to see increase rail capacity happening in our conversations with the heads of the two rail companies. It's evident to us that they hired the crews. They're just going through the training process now to get them competent and capable. They've indicated that they're reactivating fair amount of locomotives, so we do see that capacity picking up. As Drew alluded too, there is a fairly heavy turnaround activity happening in the province. And with the new coker start-up – upgrading start-up this year as well, we do see the timing for that rail deal to be in the fourth quarter as being more necessary and we are taking a very disciplined approach to make sure we get the right deal for us and the real companies.

Thanks guys.

Your next question comes from the line of Prashant Rao with Citigroup. Your line is open.

Hi. Good morning. Thanks for taking the question. Let me just follow-up on that on the real detail there and I appreciate all the color you guys gave. It does feel like both the major Canadian class ones are willing to discuss now and I think recent commentary by one of them is that – sequential volume in queue, and talked about a ramp in the back half. Versus earlier in the year I think the expectation was one more than the other. I was wondering as is with both now sort of coming on board, maybe qualitatively how does this change discussion on pricing. In term even thinking about that we put all the parts together with, also then the headwind news on both Trans Mountain and Enbridge. And then also there is been sort of getting a sense of the incremental volumes, what Cenovus share has been what we've seen in terms of the pickup here? I know it's small, but there's been some market indication that it's a little bit evenly spread out, but sort of just getting a sense of that as well, that will be helpful.

Thanks Prashant. A very detailed question there, so maybe I'll just start. We do have the indications. One, I can't comment on specifically our volumes that we're moving by rail. But as I indicated, we are seeing increased activity at the various transportation facilities here on province. I would say it's both rail companies, both Tier 1 rail companies that we're seeing the ramp-up of activity. They were impacted in kind of the winter months with some significant increased commodity as well as a very challenging winter. So, they are just getting their utilization rates back to kind of normal activity which allows for that kind of ramp up. And then as they bring on the additional staff and locomotives, that is really where we're going to see the significant ramp-up in capacity. And in our conversations with them, that sounds more like early Q3, late Q2 type timing.

And then, there have been some news flow as well about in the meantime, the truck capacity I know it doesn't give much in terms of takeaways for truck, but that – is that more of a blip or is that part of maybe a small percentage of a solution as well that is being contemplated, maybe not just by you, but by the industry as a whole? I just wanted to get your sense or any color around that?

Prashant, it's Alex. I – given the kind of volumes we're talking here, the impact – the safety concerns impact on roads, I don't see – I mean I'm sure there are isolated geographical situations where that might make sense particularly in a situation where you know you are just starting a few field, but I don't think that's a practical solution for Cenovus.

Okay. And just one last one, and thank you for the time. On the asset sales for this year, I think you already covered there is no change in the outlook, just – it's a non-cash impairment. But in terms of cadence, if I just look at the forwards strip in NGL pricing, does that mean that you should think about you know the continuation of asset sales and deleveraging that provides the more back half – closer to back – end of the year and into 2019, or is it – you know there are too many factors to sort of determine that at this point?

Yeah. I mean it's pretty early days. We have identified the packages and the work in preparing for due diligence, you know the virtual data rooms et cetera, all that work is ongoing. But once again, I mean this is a very significant undertaking, so I would think of it in the term – I think will be out marketing these packages in two three months and we're going to be very disciplined. We have got a lot of inbound interest from a number of groups. So, our gut feel, can we do a lot of work on our own internal valuation. So, we think there are some packages that will be accretive to shareholder value to go ahead if we get these valuations. But I want to be clear. We're only doing this with a view of accelerating shareholder value. And if we see that, because of present market conditions, that it might be difficult to get that value, we're quite willing to stand down and wait for a better time. But we certainly are getting a lot of indication that some of the assets we're looking at would be highly valued even in the present situation.

You next question comes from the line of Joe Gemino with Morningstar. Your line is open.

You talked about not pursuing any growth projection until you have a clear line of sight in increased pipeline takeaway capacity. Does that have any impact on Christina Lake Phase G?

Yeah Joe, it's Drew here. So, we're continuing to build out the facility right now as Alex remarked at the start of the call. Things have been progressing very well on Christina G. As we look at when it comes on in the second half of 2019, it is something we are discussing here in mid-year as far as the progression that the team has been making on construction and then we will have the discussion here around pipeline and market egress certainty on whether we actually bring it on fully or ramp it up to full rates under the current schedule that we've looked at in the next three years. So, it is something we will look at, but right now Christina G is continuing to go very well on the construction side and still on track to come on in the second half of next year, but we will be having a discussion around the timing of egress and the right ability to generate great cash flow from that new production and our ability to get to markets. But right now Christina G is still going very well.

Great. Thanks. And on your SAP technology, are you still – everything on track to start implementing it into your sustaining and maintenance processes for 2019?

So, currently it's Harbir, Joe. We just started up a pilot last November, December and another one started up earlier this year. So, we're getting a lot more information on propane. We already understand butane, and so from these pilots, we'll be making a decision later on this year on how fast to proceed on the commercialization and the timing of it. Right now we're focused just on the pilot.

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

Alex, I know that you guys probably don't want to talk about specifically for Cenovus from a commercial reason. But can you give us some idea that what's the bid ask between the industry and the well company in terms of how much they want or how much they industry is willing to pay on shipping from Alberta down to the Gulf Coast? Any kind of color you can share?

So, yeah, it's a good question, but I think Paul you are correct. It's – given that we are right in the middle of very sensitive commercial negotiations, I am reticent to share our perspective on that. I think what I can say is so far what I have seen, I think there is room for the rail companies to make a very good business out of this. And at rates that allow us to deliver good value for shareholders. So, I think there usually when there is enough room for two parties to make money, you can get a deal done and that's where I feel we are right now.

And since you joined the Company, you're making already quite a lot of changes both in the personnel and organization. So, at this point, are you – believe that all the major changes is done, or that you think there's area that you still need to address?

No. Paul, I certainly at the senior leadership level and the mid-level leadership in this company, we are – I am very happy with where I've got to from the perspective of my senior leadership team with Ivor's retirement and Jon joining the leadership team from my perspective that was really the last puzzle piece. And so, I think we're in great shape and I don't foresee any significant changes in that regard going forward.

Just a final quick question, maybe this is for Ivor. On the charges that you for the contingency payment evaluation, what future price strip that you have based on? Is it on the future strip or there is a different set of prices?

No, it's based on future strip prices. So, it's – you know it is a financial option.

Okay, so that's – just simply you are using the future strip on that. So, if the futures strip go higher, because that the curve, become less, that would pay, and that's another charges that we may see?

It's correct. We'll value that. Fair value each quarter end. So, you see volatility in that,

We will now open the lines to members of the media. [Operator Instructions]. Your first question comes from the line of Ashok Dutta with Platts. Your line is open.

Hi good morning guys. Thank you for taking my question. The first one that I had was, Alex, did I hear you saying that the capacity of Bruderheim is 100,000 but I wanted to ask you in the last quarter how much are you doing and with the crude by rail shipments expected later this year, is there a targeted figure as to why – as to how much of volume should we get moving?

Hi Ashok, I – that once again is – we consider that fairly sensitive commercial information. So, we're – and now once we do report in our financial statements, I think we said at the end of Q4 last year, we were moving somewhere in the range of 12,000 or 15,000 barrels a day. We would expect that to increase as the year goes on and my own personal view about that is that, this industry right now has a short-term challenge. We need to get oil moving by rail as a major oil producer in this province. I think it is reasonable for Cenovus to be part of that solution. So, nobody should be surprised to see that as barrel – as barrels of oil increase in movement by rail to see that our participation and that increases also.

Okay. And the second question, thank you for that Alex. The second question is that both the Canadian and the Alberta government have indicated that if need be, they will join in as equity partners for Trans Mountain Expansion. Now, is this going to be tax payers money, or would the beneficiaries, say like shippers, like you guys be joining this project?

Other than getting some updates from time to time as to how sort of the general tone of the negotiations, we are not involved as a company in those negotiations. So, I can't speculate as to ultimately what the deal would look like, or what the participation would look like of the province or the feds. I just know that those discussions are ongoing. Both – all parties at the table and so we're just waiting and hoping that a positive outcome comes out of this. It is high time. This pipeline has gone through the most exhaustive regulatory and environmental review process of any pipeline in the history of Canada. It has been approved and it is time for the federal government to take whatever action is necessary to get this project over the line.

Your next question comes from the line of Geoff Morgan with Financial Post. Your line is open.

Good morning. Thanks for taking my question. I wanted to go back to a number about reducing headcount by 15% already. You had mentioned that you think there might be more opportunities. To what extent do you think you would further reduce the headcount at Cenovus?

When I talk about more opportunities, I'm not necessarily talking about headcount Jeff. There is – you know there is obviously lots of cost in this company in different buckets. And as I've said to the employees, I – the era or major companywide workforce reductions, I think are behind us for the foreseeable future. Every company always faces situations where some businesses ebb and flow and you might have to adjust your headcount for that, but we are not contemplating any material companywide workforce reductions going forward.

And then on the other side of the G&A, the rents cost, you have a lot of real estate available and currently vacancy rates in Calgary are almost 25% up. Have you had any meaningful people or interest in the space that you have?

Yeah. Actually, we have had quite a bit and we have been successful in subleasing some of the incremental space that we have to our needs. The one thing that I caution people on our side is, although the real estate market in Calgary is obviously pretty tough market right now, I've been in this business long enough to know that there are cycles and it isn't always going to remain tough. So, our goal is do what we can to sublease at reasonable valuations. But I also want to make sure that we don't be too aggressive and lock up subleases at low rates that we might subsequently regret in future periods.

Our next question comes from the line of Dave Winans with Prudential.

Hey guys, I'm sorry, I'm not a member of the media. I'm a bondholder actually, but you know kind of come in at the tail end of things. Just I appreciate the comments around leverage, but can you guys give any kind of guidance as to range or what you might expect for asset sales in 2018?

I mean, I am – I – this time around I'm not very interested in setting specific objection – or objectives for total value of dispositions, and we're even going to be pretty cautious about publicly talking about what assets are for sale. Suffice it to say that everybody who might be interested in the assets that are for sale, they fully know they are for sale, and so we're confident we're going to have a robust process. And as I said, I think – we're confident that we're going to get to the end on the East Clearwater assets in the second half of this year. And for the rest of it, as I said, it's really going to depend on valuation. We think there is a lot of interest in the packages that we're putting together, but these are great assets and we're not going to – we're not going stretch if the value isn't there, we're happy to keep them. And as I said, just kind of to reiterate it one more time, the cash flow generating capability of this company going forward absent these one-time, time issues is very, very significant, and we're going to get to an improved balance sheet whether or not we sell a large significant packages of the Deep Basin assets.

Your next question comes from the line of Kevin Orland with Bloomberg News. Your line is open.

Just wanted to – the main strategy is that the province has rolled out for hub and push. Kinder Morgan too is introducing some legislation that would allow the province to cut oil shipments to British Columbia. So, I was curious, what would Cenovus plan be if something like that were to occur? And what if those discussions with the province about that plan been like?

You know other than I was advised by the government of what their plans were a little while ago. You know I – my expectation is that if anything happened, it would probably be – if were the government to take any action in that regard, my expectation or speculation would be it would probably be more around refined products than the blend that we produce. But you know it's kind of – I don't know that it's really valuable for a producer to speculate on what the province might or might not do. But we'll just wait and see if anything comes out of it.

My follow-up, then what kind of planning has Cenovus done you know to prepare for the possibility of that?

Look, we have – you've heard me talk about the rail. We do have a number of options. We are – we are shipper on the Kinder Morgan Canada system, but it is not a huge position and in the event that there was some disruption on that pipeline, I'm confident that we have other options for that relatively modest amount of transport.

This concludes the Q&A portion of our call. I would now like to turn the call back over to Alex Pourbaix for closing remarks.

Hey with that, I just want to thank everybody for taking the time to hear us talk about the quarter. I appreciate your questions and thanks everyone again for participating.

This concludes the conference for today. You may now disconnect.