Cenovus Energy Inc. (CVE) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for standing by. Welcome to Cenovus Energy’s Second Quarter Results. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [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 Ms. Sherry Wendt, Director, Investor Relations. Please go ahead, Ms. Wendt.

Thank you, operator and welcome everyone to our second quarter 2019 results conference call. I 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 our 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 have 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 the Q&A portion of the call with Cenovus’ leadership team. We would ask analyst to hold off on any details modeling questions and follow-up directly with our Investor Relations team following the call. We would also ask that you keep to one question with a maximum of one follow up per question and then rejoin the queue if you have any other questions. Please go ahead, Alex.

Thanks Sherry and good morning everyone. As you've seen from our news release today, Cenovus delivered exceptional results in the second quarter of 2019. We generated $830 million and free funds flow and as promised we put that cash towards debt reducing our net debt to just about $7 billion at the end of the quarter. This is a key milestone for our company. We have now essentially achieved our near term target for net debt and materially improved Cenovus balance sheet. This leaves us well positioned to begin considering opportunities for increasing shareholder returns and considering incremental investments in our business. But let me be clear, we remain committed to maintaining and further strengthening our balance sheet. We are closing in on a ratio of two times net debt to adjusted EBITDA in the current commodity price environment. We will continue to be relentless in our drive to reduce net debt towards our longer term target of $5 billion. At that level, we expect to be in a position to achieve and maintain a target ratio of less than 2 times net debt to adjusted EBITDA even at bottom of the cycle commodity prices. Our excellent second quarter results and strengthened balance sheet should demonstrate to investors that Cenovus continues to have positive momentum. In the first six months of the year, we generated almost $1.6 billion in free funds flow approximately $2.1 billion in adjusted funds flow and $1.7 billion in cash from operating activities. And we've been positioning ourselves to continue generating significant free funds flow and almost any commodity price environment. These results are a reflection of our persistent focus on safe and reliable operations, capital discipline, and cost leadership. At Cenovus safety comes first. I'd like to congratulate our teams for completing a safe winter drilling program this year as well as a nearly month long planned turnaround at Christina Lake in the second quarter with no significant injury incidents and no process safety events. Companywide, our safety record is moving in the right direction, but we must always remain vigilant to ensure that we continue to protect the health and safety of our workers, and the environment. Our strong financial results so far this year are supported by the continued outstanding performance of our operations. Our plants have continued to run very efficiently even with oil sands production lower year-over-year due to the Christina Lake turnaround and mandatory curtailment as well as increased royalties. We more than doubled our oil sands operating margin compared with the second quarter of 2018. In the Deep Basin we made the decision to shut in some volumes during the quarter, due to low natural gas prices and the vast majority of those wells have now returned to production. We also continue work to optimize our Deep Basin operating model to reduce costs, improve efficiency and drive value. Refined product movements from our Wood River Refinery were partially impacted by pipeline outages and significant flooding on the Mississippi River during the quarter. However, the combined utilization rate for both our refineries was nearly 100%. To comply with Alberta's mandatory curtailment program, our oil sands team are doing a great job of managing production at lower volumes while maintaining normal steam injection levels to continue mobilizing oil in the reservoir for production later once curtailment is lifted. While curtailment has resulted in a temporary increase in per unit operating costs and steamed oil ratios, I firmly believe that the benefit of temporary curtailment for Cenovus, the provincial treasury and for our entire industry is undeniable. By balancing production with takeaway capacity, curtailment has successfully prevented more blowouts in light heavy price differentials and is helping Canada receive fair value for its oil in the absence of new pipelines getting built. And to give you an example of what this means for the people of Alberta. Provincial government royalties on Cenovus’s production for the first six months of the year, amount to more than half a billion dollars. As a reminder, when differentials reached record highs in the fourth quarter of last year, we were actually in a royalty credit position with the province. As long as takeaway capacity out of Alberta remains constrained, we believe the government will continue to use curtailment as a temporary tool to ensure that Canada and Canadian taxpayers receive fair value for our oil. On that note, we're seeing some encouraging news on the rail front. It's still early days but crude by rail transportation capacity out of Alberta is growing. During the second quarter, Cenovus made good progress advancing its crude by rail strategy. In June, we shipped an average of nearly 36000 barrels per day of our oil to the U.S. Gulf Coast up from about 16000 barrels per day of our oil shipped by rail in the first quarter, and we remain on track to ramp up our rail capacity to approximately one hundred thousand barrels per day by the end of the year. As I've said before we consider rail to be an important structural component of our diversified transportation strategy. It allows us to get our oil to markets on the U.S. Gulf Coast where we have the opportunity to achieve higher prices than we can get here in Alberta. And it gives us optionality during times of pipeline constraint. As other producers look to expand rail capacity, we see an opportunity for the Alberta government to encourage increased movement of crude by rail by allowing ship producers to ship barrels in excess of mandated curtailment levels if those barrels are transported by rail. We're also supportive of the provincial government divesting its contracted crude by rail capacity to industry. It's important to note here, that while expanding rail capacity is critical to resolving Alberta's near-term market access issues, we still need new pipelines, and I can't stress that enough. And we cannot take our eyes off the ball unfounded attacks on Canada's oil and gas industry have repeatedly stalled the construction of sensible pipeline projects that are in the best interests of all Canadians and society as a whole. Our critics will not let up, and neither can we. Canadians have every reason to be confident that Canadian oil is among the most responsibly produced in the world. We provide economic opportunity for Indigenous communities. We are subject to some of the most rigorous regulatory standards in the world, and operate in a jurisdiction boasting some of the best environmental, social and government standards globally. Meanwhile, we've significantly improved our environmental performance and reduced the intensity of our greenhouse gas emissions. As noted in our 2018 environmental social and governance report published just yesterday, the emissions intensity of Cenovus’s oil sands operation is lower than the global average and about the same as the average barrel of oil refined in the U.S. We work to continue to improve our environmental performance every day and we'll continue to make it part of our commitment to delivering safe and reliable operations. It makes no sense whatsoever to stop Canadian oil from reaching customers, who need it, and want it that will not address the global climate change challenge. If Canadian oil cannot get to international markets, global demand for oil will continue and be satisfied with higher emissions barrels from other jurisdictions within inferior, environmental, social and governance standards. Limiting market access for Canadian oil will only harm an industry that contributes billions of dollars to the Canadian economy. Dollars that are spent building roads, hospitals, schools and supporting services used by all Canadians. With that, let me close by saying how proud and excited I am and what this company has achieved in such a short time. When I began as CEO in late 2017, we set a clear plan. We said, we'd focus on reducing debt, lowering our cost structure, and maintaining capital discipline while continuing to deliver safe and reliable operations. And while that job is never truly complete, I feel confident in saying that so far, we've done what we said we would do. We've delivered on all of our key commitments to our shareholders, and we will not deviate from that path. Our results in the first half of this year demonstrate our commitment and our passion and we’ll work to deliver even more value to our shareholders in the months ahead. Finally, I'd like to remind you that we expect update the market on our strategy and five year business plan at our Investor Day in Toronto on October 2nd 2019. And with that, let's get straight to your questions.

[Operator Instructions] Your first question is from Phil Gresh with JPMorgan. Your line is open.

Yes hi good morning. Just first question here. Capital spending certainly in the second quarter is trending at a pretty low run rate despite the fact that you still some spending on Christina Lake G maintenance spending and things like that. So, just curious how you're thinking about the run rate of the rest of the year? I know you don't want to talk to long term about this and say that at the Analyst Day, but just maybe any initial read about how this might bridge to 2020 with Christina Lake rolling off. Are there other things in the short term, given the market access issues that you’d be thinking about her as a more of a wait and see? Thanks.

Hi, Good morning Phil, its Drew. So yes, if you look at our capital spend particularly the oil sands, we are trending to the low end and the teams continue to do some really great work just really looking at our sustaining capital, is as you referenced with Christina G, essentially that project is complete including the pad. So our spending on that project is done as you probably are aware. The project came in ahead of schedule, so relative to our budget, we actually came, we’re in quite good shape after Q1. With curtailments still going through Q2 here and coming and staying here in Q3. It's allowed us to relook at when we have to bring sustaining pads on and it's allowed us to defer some capital spend that was going to be budgeted this year that we think we can push out a bit into 2020. So I think we're doing the right things as far as managing the capital level with the current level of production and considering the curtailment that we're under. But I wouldn't be thinking about Christina G or any further capital required for that, because that's essentially all been spent now. And the second thing around your comment around 2020, I wouldn’t be surprised if you see a stay in a similar guidance range that we saw here in 2019 with the project being done at Christina. In particular, it's really a sustaining maintenance capital program for us heading into next year, so it's not essentially going to be that different relative to the spend levels we're seeing here.

Phil, it's Jon. I'm just going to build on it a couple of things that Drew said. So if you're going to read anything into 2020, you're quite right. We'll lay this out for you at our Investor Day in October and then more broadly we'll give you a view of how we allocate capital across shareholder returns, the balance sheet and in the business. But what I would suggest to you, Drew is quite right, don't think of the guidance for 2020 as being materially different from what you're seeing in 2019 and what you should read into that is that the balance sheet is still going to be the priority. And then there will be some incremental room for shareholder returns, but everything that we're doing within that capital allocation framework is really designed to give us free cash flow and our view is that everything needs to make this company more sustainable and more resilient over the long term and at the bottom of the cycle. So core in that, we'll be keeping our OpEx low at the bottom of where I think the industry is. We're going keep our capital low and our efficiencies high. Did a lot of work on G&A and we're not going to backtrack on that and it would be our view as well that we need to run that under levered balance sheet. So if you're going to read anything into 2020 based on the results that you've seen the 2019. Think of it as a continuation of this company making itself more resilient and more sustainable at the bottom of the cycle. Thanks, Phil. Is it clear?

Very clear. Thank you. Just a follow up on -- you've talked about potentially considering a deal to recover unit at some point, that you could just elaborate on your thoughts around that cost benefits and I guess what it would take to actually really move forward with it? Thanks.

Sure Phil. I'll maybe what I'll do is I'll give a little bit of my thoughts on sort of the greater strategy behind that, and then I'll let Keith talk about some of the some of the specifics. And I want to take a second and bring people back to where our strategy has been over the past 20 months. And as Jon just said, everything we have done to this point has been about increasing resiliency and stability of the company long term. And in that time period, just in the time that I've been here, we've cut our net debt from $14 billion to $7 billion. We've reduced our cost structure, the industry leading levels. Jon already referred to that, and I have to say that after all of that, I believe that the greatest headwind that affects our value is market concern over our ability to get our oil to market. To resolve that concern, reduce volatility and increase resilience. We and we've talked a lot about this but we're executing a comprehensive market access strategy and that includes you've heard us talk about incremental pipeline commitments, both on existing and proposed pipelines, the rail contracts. And in addition our likely intention to participate in the upcoming Enbridge open season. And I would -- I what I would say is that the [Indiscernible] view is potentially part of that strategy. It has a number of really attractive characteristics in all. I’ll let Keith talk a little bit about that. But I want to make something really clear here. We have no immediate plans to approve a DRU, and we will wait until we have much more clarity on the likelihood of the expansion pipeline proceeding. But I really want to be clear on this. I do not intend to wake up 18 months from now to find that we need a DRU [ph] and have 18 months of due diligence engineering and projects set up ahead of us because we sat on our hands in the interim. So once again this is all about increasing resiliency, reducing volatility if there aren't clear and compelling advantages to building a DRU we're not going to do it, but with that why don't I pass it over to Keith and he can give a little more detail.

Thanks Alex. Phil, really we see four things that that could make the DRU compelling. And I do want to reiterate, it's early days and we're kind of doing our due diligence to build these out. But when you can reduce the amount of dilution that you have to import from the U.S. Gulf Coast and short circuit it inside Alberta, you do two things. One, you reduce your overall costs for our oil sands production, but you also increase capacity on existing export pipelines. When you go to a neat bitumen on rail, you get your unit cost of that rail transport a lot closer to pipeline economics. And the other thing that we're finding is that with the growth in Permian production in the U.S. Gulf Coast, refineries are actually looking for a neat pitchman product to help fill out the back end of the refinery. So we actually think there could be a value uplift for a neat bitumen product. And the last one would just be from a safety perspective unique [ph] bitumen is not considered a dangerous good by the railroad. So we see four things that that really could be compelling. But like I Alex said, it's early days and we're doing our due diligence over the next year to 18 months.

Actually Keith just one other thing I would add in terms of the advantages, if we were to move to a DRU [ph] my expectation is that the rail companies would look at that as a lot more stable, predictable and attractive commitment. And I think there's even potentially some opportunities to get better freight rates if we can turn this into a very long term sustainable business.

Yes, that's correct. And you can expect more from us at the Investor Day that continue our evaluation on this opportunity.

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

Thanks sec. Good morning. Narrows Lake is a project that was commenced and then kind of put on the shelf and obviously just given the egress constraints, we don't expect you to resurrect it right away, but how are you. How are you thinking about that project in today's world, and are there creative ways that you could go about to reduce your capital closure to it?

Yes. Hi, Greg it's Drew here so. We alluded to this here a little while ago that we've relooked at Narrows Lake and the option right now that is pretty compelling is to actually make Christine Lake a little bit more of a regional asset and basically bring the Narrows Lake resource back into the main Christina Lake area into that facility. It does actually allow us to materially change the capital required to probably tap into that resource and kind of add some modest growth later in the future. To your point though, I mean it's not something that you’d expect from us here in the very short term considering egress [ph]. But the teams have and we have been working on it internally here to relook at it. It also allows us to still maintain and have the option around SAP and solvents in the future as well. And some other kind of things we're looking at for that project to help with the bigger kind of environmental footprint stories. So there is a pretty compelling case that does reduce our capital for Narrows Lake and we're looking at it now to bring it back into the pristine area.

Okay terrific. And just technically, I mean, we flew over that recently and there is a lake called Christina Lake, which is not insignificant. Does that provide – does that does that create any just major roadblocks for you or just constraints in terms of being able to move steam that far?

No it doesn't Greg. If we think about the actual distance itself, it's within the same distance we're already distributing steam at Foster Creek as an example from a pure kilometer distance from the facility. So the teams are taking that into account and from a technical standpoint we're looking at doing some potential steam boost to ensure quality and pressure continuity relative to the reservoir we're going to go into and just to balance the pressure. So it is really not a significant technical risk or change relative to what we're already experiencing at Foster Creek as an example so.

Your next question is from the Anil Mehta with Goldman Sachs. Your line is open.

Hi, this is Emily Chieng on behalf of Anil. My first question is just around Capital Times and I'm sure you guys will give more detail at the Analyst Day. But I just wanted to get an early sense of how you view the different forms of capital returns, whether that be dividend increases, special DVs or buybacks. Does Cenovus have a preference for any one of these methods to demonstrate its commitment to its shareholders?

Yes. Hi Emily, it's Jon. As I mentioned previously, we're to lay out a complete capital framework for you at our Investor Day. But what I would say in the short term is we are still focused obviously on getting our balance sheet down to that $5 billion mark. We think that gives us the resilience over the long term to consider more broadly how we want to approach shareholder returns of dividends and share buybacks. And probably to a lesser degree special dividends, but they're ordering and priority will probably move around as we get the balance sheet down into the range that we're talking about and obviously that's that's contingent on where the share price is as well. But we'll lay all that out for you and in some detail in October.

Great. Thanks. And just one follow up, just be interested to hear your views on egress out of Canada for the next 12 to 24 months given rallies ramping, there might be some additional capacity at the main line, given they are lease [ph] agents depending main line open season. How do you see the macro outlook shape for the next next year or so?

Hey Emily, it's Keith. Yes there are a few -- the pipeline companies are getting pretty creative on how they're expanding some capacity out of the country. What I would bring you back to though is the effectiveness that curtailment has had on the differential and balancing market takeaway capacity to internal production capacity. We have seen rail continue to ramp and ideally continue to ramp through the back end of 2019, which could add an additional 150,000 to 200,000 barrels of takeaway capacity so we're seeing some promising things on existing pipelines. Obviously the new projects are going to be delayed beyond that time frame that you discussed.

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

Thanks guys. A lot of questions a lot of my questions have been asked. I wanted to clarify one point on the delay and recover unit. I think you mentioned it might be contingent on line 3 moving forward. I just want to clarify it if you see clarity of that line expansion going forward it means you would not pursue that diligent recovery strategy, and I guess for the debt….

Sorry, was it was that everything Benny?

No. The second part was really just at a high level. Do you have an economic sense in terms of does rail bit compete with pipeline, like if tomorrow egress resolve would rail bit still compete with pipeline delivery at a competitive level?

Sure. Why don't I talk about the -- you're sorry remind me you're -- the first the first part of the question. Yes. No I got it, I got it. The -- I think it's not quite as simple as whether one pipeline goes ahead. And it is we've talked about a lot. We have pretty significant pipeline capacity on all of the proposed pipelines. And so for us, it's really a situation of looking at our entire portfolio of takeaway options. So I don't, I think it's an oversimplification to say that if line 3 were to go ahead, we wouldn't do the DRU. We’re looking to solve our market access problem substantially. And so we'll take a look at the situation and our view of the likelihood of each of those projects going ahead. But I think, and the other thing that I think is really important to understand, Enbridge is obviously in an open season process related to their conversion of their pipeline system from a common carrier to a contract carrier. That is potentially another option for our company to get to solve for a long-term our market access issues. So we're going to balance all of those. But I would in the meantime as Keith said; we're doing the due diligence right now to be in a position that if we decide that DRU [ph] is warranted that we would be in a position in relatively short order to make an FID decision on that. Maybe Keith you can talk about the second.

Yes. And I'd just build on a little bit of what Alex said. Jon articulated that we're really focused on our cost structure over the past couple of years getting our CapEx, OpEx in line, G&A in line, fixing up our balance sheet and market access was also part of taking away that top line volatility in our revenue line. So, we've been focused on market access. We're committed shipper on KXL. We're committed shipper on TMX. We're going take a hard look at the Enbridge open season here coming up. But what I would say on the DRU it is another ability to gain access to market and it will have to compete on a economic basis and from a capital prioritization basis. And so that's the due diligence we're doing now, Benny, is can we actually get it competitive with pipeline economics and we're early days. But because of the four things that I articulated to the first question we are we are very optimistic that we can kind of get those economics competitive with pipe.

Okay. Great color, guys. Thank you.

Your next question is from Manav Gupta with Credit Suisse. Your line is open.

Congrats on lowering depth to 7 billion. It wasn't any aggressive and you got ahead of market expectation and that's always positive. I also want to talk a little bit on the egress side. So you've had a TMX expansion approved. So I'm just trying to understand in your view do you see that pipeline starting up somewhere in 2022, 2023. I mean, where do you think one starts up? And then in your opinion what the faith of Enbridge Line 3 here, two years, three year decline, what kind of delay are we looking at Enbridge Line 3?

Thanks, Manav. It's Keith talking. Obviously the recent announcement by the National Energy Board was very positive. It sounds like there will be back to construction kind of rates here in the third quarter which is extremely positive. So your time frame on that pipeline is kind of aligned to what we're thinking in that 2022 later in the year timeframe. Obviously we're highly optimistic that these pipelines will get built, but we're not naive enough to think that there won't be further opposition to continue progressing them. With regards to Line 3, we're continuing to evaluate kind of what's happening down in the U.S. with regards to opposition to that expansion and staying actively engaged with Enbridge on kind of progress through that regulatory process. But we do think that the end of 2020 is obviously highly optimistic and we think there will be further delays to that timing.

Okay, great. And just one quick follow-up. During the quarter you did have down time at Christina Lake. You managed around it. Foster I think came in higher. Can you talk about how you managed around, this turnaround to deliver higher oil sand volume despite the fact that one of your facilities was actually in down time?

Hey, Manav, it's Drew here. You're right. Actually we had coming into April we knew that the back half of that month we were going to go and start the turnaround at Christina Lake. So we actually ramped up both Foster and Christina Lake and we utilized actual Phase G equipment as well at Christina to start producing well ahead of ramping down into that turnaround. So as April and then the first part of me came to where the Christina Lake was in turnaround. Obviously we were really leveraged Foster Creek to kind of produce barrels into our curtailment allowance as best we could. And I have to say both assets performed extremely well. So we basically loaded on the front end of April production at both facilities and then kept Foster Creek basically fairly full out through April and May to help offset substantial turnaround at Christina Lake.

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

Good morning. Thanks for taking my question. I wanted to ask -- I think you touched upon this before, but the value to the Gulf -- U.S. Gulf Coast refiners of the heavy barrel particularly in Permian production ramps even the refining get down there. As it relates to price realizations, as we get more rail ramping up here and more product moving out of Canada into the U.S., you've been doing a great job of like beating our expectations on upstream vision in price realizations. And maybe better to answer this question in terms of net back. But as things wide, as things start moving you would expect a little bit of widening out and differentials. Could you help us to maybe think about maybe what we could be missing and how you protect the upstream price realization or maybe total net back? It seems like you guys are doing a great job there. I just wanted to get a sense of how to think about the cadence there going in the next quarter and as you kind of get more and more real ramping, it sounds like he could get 300,000 barrels or more per day on rail over the next six to 12 months?

Hey, Prashant, it's Alex. I'll just jump in sort of with a high level comment and then I'm sure Keith will have some more thoughts. But one of the points that I think people really need to keep in mind is it ultimately curtailment is a temporary tool. And I think we would acknowledge that as permanent or long term forms of egress emerge. It is the right thing to ramp that down. But I think if there's one positive that has come out of this curtailment discussion and implementation in Alberta it is that the government I think they understand that they have a tool that can allow the industry and the province to avoid the massive wealth and value destruction of punitively large differentials. So our view has been similar kind of from the start that we do expect over time. Economics are going -- differentials are going to move more in line with rail economics. But at the same time I see a really significantly reduce risk of differentials going much wider than that. I think that has become a preventable situation in the province. But with that, I let Keith talk a little bit more detail.

Hi, Prashant. It kind of builds on our rail strategy, so we don't just look at the economics of the rail barrels that we're moving, but all barrels that we produce we think that getting some of those additional barrels out on rail is helping kind of the net back on all the barrels. And then when you actually get the barrels into the Gulf Coast with Venezuelan production coming off, Mexico production coming off, recent reports on kind of asphalt prices going through the roof. There is a significant demand for the heavy barrel and through the quarter we saw WCS pricing in the Gulf Coast exceed WTI pricing. So it truly is a matter of getting it there. And then we're obviously active on the cost side when it comes to getting very efficient in our rail economics and cycle times as well as kind of our condensate strategy and how we procure and acquire that condensate to keep our overall costs low.

Thank you. That's helpful. I mean, I agree that the path towards differentials widening seems a lot less volatile and lot less drastic given the current government plans and understanding with the industry. I guess my next question sort of related to that then -- is if we look at the understanding that and then your conversations with the Alberta government how they view curtailment a tool. As I look up to 2020 in rail ramping out of the industry for more capacity being added maybe curtailments going to come off. Is it fair to say that we could get to some sort of material make modest material growth in total upstream production at Alberta? And maybe a follow on to that is, given where you sit position of leading you could be maybe a little bit ahead of our expectations. It seems like we don't necessarily need a pipeline in the next 12 to 18 months, but obviously we'll need one later, but we could get some upstream growth without it for a period of time in 2020. Is that a fair assessment or is there something that would be missing in that analysis?

Yes, I mean I think that's generally fair. I would hate to ever make a statement that we don't need pipelines because as I said in my prepared comments I think it's very clear we'll welcome many incremental pipeline capacity. But I think one thing that is worth maybe highlighting again as this idea. This concept of rail above curtailment that I alluded to in my prepared comments, and there is a lot of discussion going on right now amongst industry including the government. And this is the idea of amending the plan around curtailment to allow producers in the province to exceed their monthly curtailment allocation if they can demonstrate that that increased production moved on incremental rail. And I truly refer to this as sort of a win win-win situation. It would allow the production out of the province to increase. It would do significant benefits to the upstream industry. But on top of that you have the benefits to government royalties. You're going get royalties on barrels that otherwise we're not going be produced. And it gives a clear egress option above curtailment, but on top of that is a really strong incentive to the upstream community to get those barrels onto rail. So that were relatively early days but from my perspective that I can't think of a negative from that strategy being implemented and I think that could be a real catalyst to getting more -- even more oil moving by rail in the relatively short term.

Yes. And the only thing I would add to that is obviously the government's been very clear on trying to move the rail contracts back to industry and this is a win win there too because obviously if people were allowed to move rail above curtailment there's a huge incentive to take out the long term contracts.

Ladies and gentlemen, we will take questions from the media as well. [Operator Instructions] Your next question comes from Asit Sen with Bank of America Merrill Lynch. Your line is open.

Thanks. Good morning. Hey. Just digging a little bit into the rail strategy, in the MD&A. It was mentioned that you have secured additional storage capacity in the U.S. Gulf Coast to support rail. Could you talk about how big that is and the thought process behind it? And then you're also increasing rail loading activity in Bruderheim and wasn't sure whether there is any way to quantify capital spending associated that put by rail and/or innovative market strategy? And Keith if you have any thoughts or early thoughts on cost of CapEx associated with DRU?

Thanks. Obviously we're always continuing to evaluate our marketing strategies and storage positions in the Gulf Coast. Obviously the amount of storage capacity that we've taken out is commercially sensitive. But you should understand that as we grow our volumes towards 100,000 barrels a day, we're looking at a diverse approach to place those barrels into the market including storage in the Gulf Coast, as well as direct delivered to some of our refinery partners. With regards to Bruderheim we're investing I think $10 million to $20 million type range in growing the capacity. The asset had right around 100,000 barrels a day capacity and we're taking it up to two unit trains and we're on target to do that by the end of the year. And it still is early days on the DRU, but we're in the -- we're looking at a facility that would handle 180,000 barrels a day of drill bit on the inlet which would drive you to two unit trains of new pitchman [ph] on the outlet. And we think that that's in and around the 800 to $1 billion capital range. But obviously it's very early days and we think that that capital if we ever sanction that project would be spread over several years.

Great. And Alex, just shifting gears, a big picture question for you. I think you've been very clear in your strategic variety in terms of focusing on the balance sheet and shareholder returns. My question to you is about the big picture. Growth plans both the deleveraging phase, is the growth CAGR going to be an output of other decisions? Or you have a specific target on growth?

I don't know it would be fair to say we have a specific target on growth. As John said I think earlier and in one of his comments, I think where our relative focus is on those three buckets of debt reduction, share -- return of value of cash to shareholders and disciplined growth opportunities is actually going to vary a bit. As we kind of continue on this path from 7 billion of net debt to five. What I what I can say is we are absolutely committed that we are we are -- every time we make a material capital decision we're going to balance it among those three options and do what we believe is in the best interest of our shareholders in terms of shareholder value. And I would say that I would just observe that we have had some very patient shareholders. And as we're on this path of strengthening our balance sheet it's not lost on any of us the importance that shareholders are placing on returning capital to them and that's going to be an important part of our thought processes as we move -- as we kind of get through seven towards five.

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

Hi. I just wanted to check on when you expect the timing for the government rail deal might come through. By that I mean a decision on from the government on the plan to allow incremental production as long as its moving by rail?

Hey Kevin it's Alex. I can't give any guidance. I mean as I said we've had discussions as an industry both with and without government and I know they're looking at it. And I don't I don't yet have a timeframe.

All right. And then just a quick follow-up as a major gas producer too. We know that there's been some producers asking the government for basically sort of a royalty credit plan for when they hold back production when pipeline capacity is constrained. You took out the plan and you've been involved in that?

Kevin, as a company we're quite supportive of innovative ways to improve net backs for oil and gas or gas and oil producers. But I would say my involvement in this issue today it is a pretty complex issue. I'm confident that all the right people are at the table and I know, there's an ongoing discussion with a lot of interested parties. So we're very supportive of that. But as I said it's quite a complex issue on the gas side and you really want to make sure at the end of the day that you do -- you make the correct decision and you really make sure that you don't create any unintended consequences. In my view it is a more complex situation than the oil situation.

Your next question comes from Dan Healing with Canadian Press. Your line is open.

Good morning. Thanks for taking my question. I just want to ask about the Government of Alberta corporate tax rate changes. Aside from making the second quarter net income look really good, does it change the way you look at growing production and for the company going forward? Like does it make a substantial change as far as the way you look at things going forward in next couple of years?

Yes. I mean to me this is all part and parcel of competitiveness. And tax policy is obviously a very important part of competitiveness and as you alluded to there's obviously been an already material impact on the companies -- on the company's earnings as a result of this. But no, I mean, as we think about where to invest capital I think it is clear that companies like Cenovus are going to be considering the tax regime in which they make investments. So I think its a positive for industry. And I think it'll be helpful for the long-term health for the industry.

Okay. Thanks.

Thanks, Dan.

This concludes the Q&A period. I'll turn it back to Mr. Pourbaix for any closing remarks.

Well I think that’s everything from us and I just want to thank everybody here for taking the time today and we’ll get back to business. Thanks everyone.

This concludes today’s conference call. And you may now disconnect.