Cenovus Energy Inc. (CVE) Q1 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's First 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 express 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 first quarter 2020 results conference call. Today's call is a slight departure for us. Since we've all been working remotely for the last several weeks due to COVID-19, we are coming to you today not from our conference room downtown, but via cellphone from the respective home offices. If we have any technical issues, we hope you'll bear with us. To keep it simple and limit background noise, we have our President and Chief Executive Officer, Alex Pourbaix, our Chief Financial Officer, Jon McKenzie, our Executive Vice President Upstream Nori Ramsey; and our Executive Vice President Downstream Keith Chiasson on the call to answer your questions. The rest of our leadership team is in listen-only mode today. 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 M and Form 40 F. The quarterly results have been presented in Canadian dollars and on and before royalties' basis. We have also posted our results on our website at cenovus.com. Alex will provide brief comments and then we will turn to the Q&A portion of the call with Cenovus' leadership team. We would ask analysts to hold off on any detailed modeling questions and follow-up directly with our Investor Relations team after the call. We would also ask that you keep to one question with the maximum of one follow-up question and then rejoin the queue for any other questions. Please go ahead Alex.

Thanks, Sherry and good morning everyone. I hope that all of you, your friends and your families are staying safe and healthy during this challenging time. Before I get to our quarterly results, I wanted to touch briefly for a second. Just on the steps we've taken in response to the COVID-19 pandemic to protect the health and safety of our staff and service providers and the continuity of our business. Virtually, all of our office staff and some of our field staff who don't need to be at sight for our operations to continue running safely and smoothly have been directed to work from home. At our field operations, we've reduced the number of staff on site, establish the extensive physical distancing measures, stepped up cleaning procedures, implemented active screening for people traveling to site, brought in mandatory self isolation policies and we've restricted business travel. To date, we have not had a confirmed case of COVID-19 at Cenovus and we're doing everything we can to reduce the risk of that happening. Turning to our first quarter operating and financial results, I expect, you've all seen our news release this morning, so I'm not going to spend a lot of time walking through the numbers. I do want to provide you with some color on what's behind the financial results we reported this morning and I want to talk about how Cenovus is positioned to navigate through the rest of this current downturn, what I think our potential is over the longer term. These are obviously unprecedented times for our industry. During the first quarter, the combination of a global pandemic that sharply reduced demand for oil and its supply dispute between two of the world's largest producers, Saudi Arabia and Russia resulted in a significant drop in benchmark prices for oil and refined products. And while we expect the supply demand imbalance to be relatively short-term in nature, it has led to a rapid decline in share valuations for global energy companies including Cenovus and has temporarily impacted financial results for our industry and for our company. As you know, the balance sheet has always been a top priority for us. And in this economic environment that is more true than ever. Over the last few years, we've been relentlessly focused on paying on debt, reducing costs and maintaining capital discipline. And as a result, we came into this downturn with a relatively strong balance sheet. We also have ample liquidity in place to see us through this downturn. Right now, our number one priority is protecting the health of our staff. After that, our focus remains on preserving our balance sheet, maintaining liquidity and continuing to manage our business to drive our cash flow breakevens as low as we can. During the first quarter, the combination of the sharp decline in benchmark oil prices and widening light heavy differentials in Alberta, contributed to a more than 50% drop in realized pricing for our barrels compared to the first quarter of 2019. It has also resulted in a number of temporary impacts to our financial results. For example, the condensate, we used to blend with our heavy oil was purchased a few months ago, when prices were higher, which negatively impacted our upstream results. And the same principle applies to refinery feedstock, which negatively impacted our refining and marketing results. In addition due to the rapid decline in oil prices, during the quarter, we recorded significant noncash inventory write-downs and asset impairments which combined with the non-operating foreign exchange loss contributed to the operating and net losses we reported this morning. Inevitably, we know this pandemic will pass, the markets will recover. And as benchmark prices begin to return to more normalized levels, we expect to see these price-driven impacts to our business begin to reverse themselves. And I fully believe we'll see share prices for our industry follow too, but it's not clear is exactly how long that's going to take. While we can't influence the macroeconomic environment, there's plenty we can do to protect our balance sheet during this challenging period and that's exactly what we've been doing. We were in a strong financial position coming into 2020. We had net debt of $6.5 billion down almost $2 billion from a year previously. We had and continue to have among the lowest cost structures in the industry. And in 2019 we demonstrated that in a West Texas intermediate environment of $45 or more we have significant cash-generating potential. In 2019 we delivered $2.5 billion in free funds flow. I believe that reflects the true underlying strength of our assets, our financial position, and our business plan. And of course we are not in a $45 WTI world at the moment, so we've taken decisive steps to improve the resilience of our business and protect our balance sheet for the duration of this downturn. On March 9th and again on April 2nd, we took advantage of the flexibility in our business to make significant adjustments to our 2020 budget and business plan. We reduced our plant production volumes for the year and are actively managing production levels as market conditions change to optimize the value we receive for our products. We cut planned capital spending by $600 million and released our forecast operating results for this year by about $100 million. We trimmed our planned G&A costs for the year by about $50 million which includes pay reduction for me our Board and our executives and to a lesser degree our staff. We defer final investment decisions on growth projects and have now essentially ramped down our crude-by-rail program. We suspended our dividend which we've always said would be sustainable at a West Texas intermediate price of $45 or more. And we've worked to improve our already strong liquidity position adding another $1.1 billion of committed capacity with some of our lenders this month. Together with our largely undrawn existing committed credit facilities and uncommitted bilateral credit lines we have liquidity to sustain operations through an extended period of low oil prices. To sum up, we've been proactive about protecting our balance sheet and enhancing our liquidity and I believe we are in a relatively strong position to navigate the current commodity price environment. While the significant changes in the macroeconomic and business environment over the last couple of months have impacted our recent financial results, the underlying strength and value of our business has not changed. And with that let's get straight to your questions. One thing I should say since we're all not together in the room. What I'm going to do is I'll probably do a little quarter backing and either take the call or all direct who I think should answer just to try to make things a little more easy. So, with that, let's open it up for questions.

[Operator Instructions] First question comes from Greg Pardy with RBC Capital Markets.

Thanks. Good morning Alex, and Jon and others. A couple of quick ones for you. I guess just with respect to the 60,000 that you've got shut in right now. I'm just wondering if you could provide just more background around that. Is that all at Christina is this the implementation of dynamic storage that you've used successfully in the past? And is that number kind of climbing as we speak or is it relatively stable?

Why don't I -- hey Greg, it's Alex. Why don't I -- I'll have Norrie respond to that and then I might give a little bit of color at the back.

Sure. Hi, it's Norrie Ramsay here. Just a bit of context we have taken about 60,000 barrels a day down from Christina Lake, that's correct. And a lot of is driven by our mandatory production curtailment cap that we actually have in Calgary.

Okay. And is this is dynamic starts? In other words are you still injecting steam in the system or is this more a kin to shut in?

Yes, I mean we've just tailed back some production. So, we have very low OpEx and very low cost per barrel. So, what we're doing just now is really just optimizing value rather than volume. So, at this stage we're not putting it into storage, but we have that flexible ability to do that as it been required.

Yes. And Greg its Alex. I -- just to kind of add to Norrie's comments we are continuing to steam the reservoirs. And so this really falls within that dynamic storage process that we've talked about before. And I think the one thing I would say about it, one of the benefits of our business is we have very, very low variable cost of production. And we're always going to do the right thing. And as long as we are covering our variable costs and making a contribution to the fixed costs, generally -- we would generally look to keep that production going but we're going to be very thoughtful as to looking at the overall situation.

Okay. Terrific. Last one for me maybe for John is, I mean you've got a lot of liquidity in place. You've enhanced it, which is good to see. It looks like it's certainly very large in relation to what your cash burn might be this year, but just any color around that would be great as to how you see the year unfolding with obviously a lot of moving pieces right now?

Yeah. Thanks, Greg. It's very difficult to understand how the year is going to unfold because you're right. There are so many moving pieces and they're all moving with the velocity that we haven't really seen before. So what we've done and this is very consistent with our management philosophy is we have been very conservative in the way that we've positioned our balance sheet, positioned our liquidity and the way we've cut costs to make sure that we're sustainable regardless of what happens through the end of the year. But what we've done is on the liquidity side is we've added $1.1 billion revolver to our portfolio just to increase that liquidity through time. We've also got $4.5 billion as you know in our syndicated facilities. We've got a $1.2 billion facilities that matures on November 22 and $3.3 billion that matures on November 23rd. So altogether we're up to $5.6 billion of banking facilities today. Now on top of that, we also have some bilaterals. We've got $1.6 billion of uncommitted bilaterals. There's about $1 billion of that that's available for LC support and about $600 million of that that can be drawn upon. So all-in it's about $6.7 billion. And we think that will be adequate to get us through anything that the year is going to throw at us and certainly be well into 2021. So we feel very good about that. Now in terms of our cash burn and our profile, you're right it is really difficult today to get a firm hand on it because things are moving around. But the way that we look at it is through a breakeven analysis. And what we've done through the year by cutting the capital and cutting the dividend and taking the prudent steps that Alex talked about on the operating and G&A side is we've really reduced our all-in cash breakeven to about $38 WTI. And that's predicated on a $0.70 dollar sort of a $13 Chicago crack, a WTI WCS differential of $13 and a C5 differential to WTI of about $3. And the way to think about our cash burn on an all-in cash basis and that would include capital is we break even at about $38, and then on an operating cash flow basis about $33. So taking up the capital component brings us down to $33. So for every dollar that our cash breakeven exceeds WTI, the annualized burn is about $180 million to $150 million. So if WTI averaged $38 or $28 for example, we would expect our annualized debt to grow by $1.5 billion to $1.8 billion. But as you mentioned this is really fluid and it really depends on all the underlying assumptions because the breakeven really is a calculated number. That's how we think about it and that's how probably you can best model it, understanding the sensitivities all around that. Maybe, Alex, you might I want to talk a little bit about the additional liquidity that we've been thinking through with the governments as well.

Sure. I think -- I mean there's been a lot of talk about this and we have had a significant discussion with both the Alberta government and the federal government, and about the need for incremental liquidity support. And I think that there are a relatively small number of companies like Cenovus and a number of the bigger companies who have been able to put in place liquidity to support their business through this downturn. But I think it's fair to say that that does not apply to the entire industry. There is a really significant need for government to provide immediate liquidity support to the industry and we've, obviously, been hearing for weeks. That that support is coming. Weeks have passed and the industry is still waiting. And particularly the larger side of the industry, the government, the Feds did announce some support at the smaller side of the business. And I think it's fair to say the province in the country are amassing significant deficits as a result of this crisis. And once the current situation passes, we're going to need a rapid injection of revenue to support Canada's economic recovery. And I think as most people know, this industry is the largest contributor to Canadian GDP. In 2008, 2009 it was the energy industry that actually led the recovery in Canada. And I think with adequate liquidity support from government, I think the industry can do that again. And I think back to 2008, 2009 on the significant liquidity support that was provided to Canadian auto industry an important industry to the country, but a much smaller industry than the energy industry. I think there are -- so there are obviously precedents to this. One last thing I would say on that is, I don't think the industry is looking for a handout at all. What they're looking for is a temporary safety net. And just as a final point, I do want to give a bit of an appreciation to the Canadian banks. In all my discussions with them, I think to an institution, they see the importance of this industry and they have been very, very strong and standing behind the industry and working with the industry to provide liquidity. So, just a bit of a shout out there. So that probably is enough on that. Thanks Greg.

Yeah. No, thanks guys. Great answers.

Next question comes from Emily Chieng with Goldman Sachs.

Hi. Good morning. Just a follow-up from one of Greg's question if I may. If I recall during November 2018, I remember production across Foster Creek and Christina Lake was taken down by about 100,000 barrels per day. So how should we think about the 60,000 barrels that you're talking about today? Is that a matter of taking the time to safely reduce production further? And so therefore should we be expecting to see more production cuts in the near term, or is there something else that we're not considering here?

No. I mean -- thanks for the question, Emily. The as I said in a previous comment with respect to our decisions in the field, we're looking at those on a daily basis and our decision is very much based on are we covering our variable costs? And are we making a contribution to our fixed costs. And so those cuts that we have made today are in line with that analysis. And as I said we do that analysis on a daily basis. Back in the fourth quarter of 2018 we did demonstrate. We were able to take those production cuts for that dynamic storage. Now we were able to take the production down about 100,000 barrels a day. We are completely comfortable that we could do that for a significant period of time and we believe that we could go further with further deeper production cuts if we need to. And that's something that we've been looking at for quite a while here.

Got it. That's helpful. And my follow-up is just around the CapEx profile for the remainder of the year, given the full year guidance I think the midpoint is around $800 million. I think going forward on a quarterly basis, this would imply about $170 million. What does this mean for operations? I don't think we've necessarily seen CapEx at such low levels. I guess the question is what types of activities make the cut and what doesn't? Thank you.

Norrie, do you want to take a shot at that?

Yes, sure. At Christina Lake, we've actually retained a number of pads that are ready to start-up from our phase G's development. We've just left them on off just now. We don't need the production. So those are the kind of costs that we actually are not exposing ourselves to. Additionally, we're really only spending money on the lowest cost netback that we have activity wise. So we basically are just balancing being able to retain our low production and have an ability to ramp-up in the future as the oil price improves and our netbacks improve.

Yes. And I think ,Emily I would just add. I think we're quite confident that that kind of capital expenditure you're seeing or that we've announced we can maintain that without much difficultly certainly for the balance of the year. And if things work -- and if things continue to be challenging in 2021, we think there's -- we can continue for an extended period. But if you think about sustaining capital, I think right now we're down to sort of $2.50, $2.60 something in that range. I don't think people should think of that as sustainable. I think you should think about us as we come out of this moving back up to that kind of a $4 to $6 kind of range you've seen us give guidance on in the past. But we can certainly keep at this level, while maintaining integrity, safety and production for an extended period of time.

Got it. That's helpful. Thank you.

Next question comes from Manav Gupta with Credit Suisse.

Can you help us understand a little bit how the condensate price lag was a headwind in 1Q and as condensate prices have come in materially how should we expect that to help you in terms of bitumen realizations as we go into 2Q and 3Q?

Well, I'll leave that to John or Keith can arm wrestle as to who wants to take that one.

Why don't I take a crack at it Alex and then Keith can provide some color. So Manav what we sourced condensate from two pools, resource condensate from Western Canada and we also source condensate from the U.S. from Mont Belvieu. And the way the condensate travels from Mont Belvieu it's usually at least a two or three month lag between the time we procure the condensate and the time that it comes up explore coaching into Fort Saskatchewan gets to our facilities gets turned around and ultimately gets sold. So we carry our inventory on a weighted cost basis and then that flows through the financials as it's consumed. So my expectation is that the condensate lag that you're seeing in Q1 will continue through this month. And then by the time we get through mid May we'll be into the much cheaper condensate that you see in the market today.

Thanks. A quick follow-up here is you have suspended real contracts. I'm just trying to understand here the transportation and blending cost at Foster is still on the higher side relative to Christina? Like is there a point, where we kind of start thinking about that transportation cost – transportation blending and more from the stand by the transportation starting to come down as some of these rail contracts roll off?

Yes, it's John again. You're exactly right. So in Q1, we moved much more to the Foster Creek production through our rail connectivity to the Gulf Coast. And you'll see in our results, we were still moving about 100,000 barrels a day through the quarter that will be ramped down or is ramped down as of today. So what you'll see twofold is you'll see the impact of the reduced rail costs in your transportation and blending as well as the reduced cost of condensate coming through in Q2.

Thank you, guys. Thank you for taking my question.

No worries.

Next question comes from Phil Gresh with JPMorgan.

Hey. Good morning. Actually my first question was a follow-up just on the transportation cost. With respect to the rail contracts that you have, I think in the past you've said that maybe about a-third of those costs are fixed. So, I guess, should we expect to see – I guess, maybe you could just elaborate a little bit more on how that would influence 2Q and going forward in terms of your transportation costs and whether there is any flexibility around this?

Phil, it's John again. Maybe I'll speak to the cost and then I'll let Keith talk to how they're managing down that business, and where they are today. But if you look at our full rail costs on a fully loaded basis for one year, it's about $81 million by ramping down and these are run rate numbers, so you'll have to give them the appropriate sequencing through the year. But when we ramp them down, including transfer, including the cost of storage for the railcars the cost get to about $18 million a year. So there's a very significant reduction in the rail cost when you move from fixed cost of $18 million to the fully loaded plus variable of $81 million. So that's the net savings. And one of the reasons that we chose to ramp down rail, when we did, and it looks increasingly like that was the right decision based on where differentials have gone is we're only really looking at about a $39 million uptick by moving our crude through Bruderheim and Hardisty to the Gulf Coast. So with that, I'll maybe turn it over to Keith and he can talk a little bit more operationally about what we're doing with our rail business.

Yeah. Thanks, John. So we're essentially ramped down at the end of April. We spent a little bit of capital back in 2019. We build out some storage capacity for cars at our Bruderheim facility. So that's in place so we're storing cars there. We also have destination locations where we can store some cars. So, so we actually have the ability to utilize that – those cars for storage, if needed, or quickly ramp back up the program, if prices indicated or shown. But John is exactly right that kind of ongoing fixed costs are in that 20% range of where we were running when we ran the full program.

Okay. Great. Thank you. Second question is a follow-up, John to all of your comments around the breakeven, which was very helpful. Just curious on the tax situation this year your guidance had said no cash taxes obviously with material pre-tax losses. I guess, I presume all of that is generally factored into the way you framed that breakeven. I just want to make sure, I understood, if there's any kind of influence that that tax situation has in those numbers? Thank you.

Yes, Phil, we're not anticipating being cash taxable in Canada or the U.S. this year. And we've really in a position where all of our add backs have been largely used up. So there's nothing to recover from prior years. So zero cash tax is really what you should be modeling for 2020.

Okay. Fair. Thank you.

Next question comes from Asit Sen with Bank of America.

Thanks. Good morning. Alex, good morning. And I just hate to follow-up on the earlier question on the dynamic storage. So if I'm looking at Slide 9 and the 100,000 barrels a day number, which obviously you guys have done in 4Q 2018. And you mentioned maintaining reservoir integrity. First off a question on – you mentioned earlier I think the 100,000 barrels a day could be a little higher. But could you talk a little bit about the variables to consider to avoid the reservoir damage issue?

Sure. Why don't – Norrie, did you want to sort of give your thoughts on that?

Yes, sure. So what we're doing when we actually curtailing just now is we're actually just slowing down our pumps that pumped oil to the surface. And that allows us to retain oil as much as we want within the reservoir and the fluid levels to rise and that's the dynamic storage. So as we do that, we continue to inject steam into the various pads depending on how old they are to actually keep the temperature correct and actually keep the pad flowing with oil. So we're very comfortable that we could do this for a long time basically and continue to store our heated oil within the reservoir itself so that's the principle of it.

And Norrie maybe talk just a little bit about what integrity issues with the reservoir we're managing to ensure that the reservoir is not damaged in any way?

Yes certainly. Obviously, what we do when we're actually extracting oil is we're heating the reservoir and we're actually creating a cabin of heat which then flows – allows the oil to flow down and it's extracted. So what we're doing is just keeping the dynamics of that to keep the reservoirs at the correct temperature. We also co-inject gas in a number of the pads and that's to keep the pressure at the right level. And that's how we ensure that the reservoir will always be in a good condition to flow oil. And that we're balancing here, how long it's going to take us to get back to ramp up to fuel production as we do that, so that's how we protect the reservoir.

Yes. And Asit I would say one of the benefits that we had, if you can call it a benefit is having gone through this in sort of Q4 of 2018 and the early part of 2019. As we dialed back production with dynamic storage, we did a great deal of analysis at that time. And since that time have looked back at all of the decisions we made. And I think it's fair to say that Norrie and his team are extremely confident that we can maintain 100,000-plus barrels a day for an extended period without any concern to reservoir integrity.

Thanks. Great. Very helpful. Norrie, thanks for the color. Alex my follow-up is perhaps for you. When you're thinking about the crude by rail program and I'm thinking longer term a2021 and beyond and thinking about rail versus pipe clearly pipeline spaces freeing up. And when you're thinking about the cost arbitrage of transportation as it plays out over time. And with CBR being out of money for some time, how are you thinking about the balance of the two and strategically not more longer term?

Sorry between pipeline and I missed?

Crude by rail

Yes, yes. I mean I think for us when you heard John talk about what the fixed cost of that program are and what the all-in costs are. And for me it really relates to where – what are the market egress challenges getting out getting out of Alberta and getting to our markets. And as you quite rightly noted as production is coming off in Alberta differentials are narrowing and there's really not a call on rail right now. But I do expect – I don't in any way shape or form view the situation we're in to be permanent or to become the new normal. And I expect, as we see global demand and Lower 48 demand improve. I expect we're going to see that production come back on in the province largely if not entirely. So we just – we really – we kind of gauge it on – are there – is there economics in moving oil by rail? And you will recall that most of our rail contracts are relatively short-term in duration. And I think there – I suspect there could be a point here within the term of those contracts where we may see an opportunity to move. But because of our low fixed cost associated with it. If it's not there, it's really not a big imposition on us. You know, we are -- we do remain confident with the larger pipeline development projects that over the kind of two to three years, I expect, we're going to get some relief there so which is really why we've kept the rail commitments to a relatively short tenure.

Appreciate the color, Alex. Thank you.

No worries.

Next question comes from Benny Wong with Morgan Stanley.

Hey, guys. Good morning. Thanks for taking my question. I hope everybody on the line is staying safe and healthy. First question is really around storage. Obviously, a lot of focus in the market around reaching tank tops and congestion. Just wondering, if you can maybe give us an update in terms of what the storage or inventory levels are in Alberta how that situation is playing out? And for Cenovus, specifically, beyond the deeper production cuts or curtailments you mentioned maybe if there's any color you can provide on the marketing and storage capability side that you guys have to navigate through this as well.

Sure. Thanks Benny. Why -- Keith, why don't you take that and talk about what we're seeing in the storage situation in Canada. And then you can maybe talk a little bit about our storage opportunity.

Sure, Alex. And thanks for the question, Benny. Maybe I'll step back and just answer a bit of the question on how we're looking at kind of the production levels that we are at and really running to a variable cost netback. When we look at that we look at a bunch of things. Obviously, our variable cost but the company has done a great job in cutting its costs over the past four to five years to get them really low. But one of the other things obviously we are looking at is kind of demand for the product and inventory levels. And I think this is kind of where you're going with your question Benny. And we currently see Alberta essentially flat on inventory levels so kind of sitting in that 32 million to 33 million barrel range and not really material builds kind of week on week. So we actually think the market is reacting to the requirement to reduce production and balancing on that. On top of that Cenovus has a significant storage capacity both in Alberta as well as down in the U.S. Gulf Coast and U.S. that exceeds over 10 million barrels. So we have a lot of opportunity to use that storage to capture market opportunities that become available both here in Alberta as well as down in the Gulf Coast.

Yes. Benny, it's Alex. There's obviously pros and cons in every business, but I think one of the real attractive features of our businesses are very, very low variable cost of production, which as I think most people know is really kind of in the very low single dollars per barrel which is -- which allows us to make a contribution to our fixed costs at a very low price which is certainly different than other businesses. So that is that's helpful to us in this present circumstances.

Great. That's very helpful. I appreciate those thoughts. My follow-up question just a follow-up on the condensate question earlier but maybe looking a little further out. Just curious in terms of your outlook in terms of where your condensate cost is going to trend a little bit more in the medium term. I think obviously there potentially is lower demand in near-term with production cuts and maybe more of a moderate growth outlook particularly in the oil sands in a normalized environment. But at the same time, we could potentially see less supply coming from the U.S. as well. Just curious to see how you see that balance out as you kind of look at your input costs over the medium term?

Sure. Keith, why don't you take a shot at that?

Yes. Thanks, Benny. Obviously a lot of volatility in all commodity prices right now condensate exception as producers continue to reduce production we're seeing some of that condensate come back into the market. But obviously that's somewhat offset by some of the producers even of condensate turning down production. So a lot of volatility we're currently seeing at WTI minus prices over the longer-term as commodity prices recover back to historical norms we kind of see it kind of building back up to that WTI-type pricing. But we do think over the shorter term that condensate pricing will be depressed for the next couple of quarters.

Got it. Thank you very much, guys.

Thanks, Benny.

Next question comes from Joe Gemino with Morningstar. Please go ahead.

Thank you. Just a quick question on how you think long-term about market access. I think it's been public that Cenovus supported the Canadian Mainline push for take-or-pay contracts. Can you talk about how maybe this environment could have reshaped your views or if you still stand by your prior views?

Sure. Keith, why don't you take a shot at that and then I may jump in.

Yes. Sure, Alex. So Joe in reality market access has been a big challenge for Canadian oil producers historically at least over the past decade. Obviously, it looks like we're starting to see some progress on a couple of the growth projects. TMX is under construction new areas. KXL obviously came up with the recent announcement and support from the provincial government and construction has started on that pipeline. So market access for the oil sands producers is a significant opportunity and it looks like some of those projects are progressing. On the mainline, we have been a supporter of Enbridge moving to a mainline nothing has changed there. It does feel like because of the COVID crisis that that process may drag out a little bit longer. So we'll obviously participate and monitor as that progresses through 2020.

Thank you.

Next question comes from Harry Mateer with Barclays.

Hi good morning. First question look it's still over two years before your next bond maturity of USD 500 in second half of '22. But you're going to come out of the cycle with higher debt than you had going in and now you have two of your three credit ratings below investment grade. So I'm curious what the point do you start to think about preparing for those maturities? And then more broadly are there any other liquidity or balance sheet levers you might be considering?

Jon why don't you take that?

Thanks Harry. It's Jon. One of the things Harry that we have been absolutely clear about in this company is that, we really value those investment-grade ratings. And it's important for this company to have investment-grade ratings across the board, but I'll correct you a little bit. We have 2 of 4 investment-grade ratings it's not 1 of 3. What I would say to this is that, we come out of this. Nothing has changed for this company in terms of the strategy and the direction we're going in. We are going to be looking at doubling down on debt reduction as we drive towards that $5 billion target. We are thinking about the '22 and '23 maturities and there's probably more color to come. But today we're really just focused on ensuring we have the liquidity to get through this and that we're doing everything we can to cut costs. But we think we've got adequate liquidity now. We're not really looking at anything or left of center, I would say in terms of doing something different. We think that with the bank facility that we've secured through this quarter. We have more than enough liquidity to get through this and then we'll deal with the 22s and 23s over the coming quarters.

Thanks for that. And you're right apologies for overlooking the Deep RS rating. My follow-up you've been asked a couple of times about condensate dynamics and how those weighed on you in the first quarter and how you how you expect that to go in the next couple of quarters. Before you maybe you can speak a bit more broadly to overall working capital moves for the balance of 2020 and how you see that unfolding?

So I'll speak to that. Obviously the working capital in a depressed commodity price environment comes down and you would have seen that through the quarter as well. So we typically carry about 20 million to 24 million barrels in inventory through the cycle and that's roughly split evenly between upstream and downstream. So they'll speak to the upstream piece. We actively manage that down. We do take some opportunities to take advantage of contango plays with the amount of storage that we've got. But what you should see going forward is with us ramping down our rail program you'll start to see that inventory piece come down in terms of total barrels that we're carrying through the cycle. So that did consume some of our working capital which will be relieved. And then again you'll see the continued relief on the inventory – or on working capital flow through as the full impact of this pricing environment flows through the financial statements.

Got it. Thank you.

Next question is Fai Lee with Odlum Brown.

It's Fai here. I was just wondering the net debt-to-capital ratio reported in your financials was 30%, how close is that to the ratios calculated for your covenant purposes? I'm just wondering if how the non-cash onetime write-down to affect the ratio as calculated for the covenant purposes?

Hey Fai. Jon why don't you hit that?

Sure. Thanks Fai. What I will tell you Fai is the capital ratio of debt to consolidated capital is on a book capital basis. And I'll tell you that we will run out of liquidity long before we ever debt close to that 65% range. Even if we were carrying something around the $12 billion of debt, we would only be about 40% debt-to-consolidated capital. So the write-down that we had is de minimis in terms of impacting that covenant.

Okay. But the write-downs do affect the covenant calculation for covenant purposes?

Yes they do.

Okay. And I was also wondering about the strategy on the financing strategy as you look further out. We've had a couple of downturns where having U.S. denominated debt hasn't helped you. Any thoughts about whether switching a strategy to holding more Canadian denominated debt in the future?

Yeah. I mean, you're exactly right. We have tapped the U.S. market in the past. And when you kind of think about the transaction this company went through in 2017 and pre-2017. That's obviously a very deep market and very attractive to consumers of capital and that still is a very attractive market to us not understand -- or notwithstanding what's happened to our credit ratings. The Canadian market has really opened up over the next few years, and it's pricing relatively attractively to the U.S. market. And we like both of those markets. I think your question really comes into the translation, which is non-cash until you actually have to pay those funds back. And at this point in time, I think about both markets, but I don't necessarily think about it in terms of one being preference to the other outside of the pricing of the debt.

Okay. Thank you.

Next question comes from Paul Mango [ph] with Wall Street Journal.

Hi, everyone. I'm just wondering if this recent volatility is making it all rethink your hedging strategy. I know in the past you've said, you don't really need in like to depend on the balance sheet. Does this change your posture regarding that?

Why don't I -- I'll let John take a shot at that and then maybe I'll wait in at the end.

I think I'm going to lose my voice. Listen, we've been really clear. And Alex and I are and Keith, are absolutely aligned on this that the best hedging policy is to have a bullet-proof balance sheet. And we've also been really clear that this is a very difficult product that we sell to hedge in a clean way. Any kind of hedge that you put on dry bitumen typically has -- it's a dirty hedge and you're going to have some pieces of that commodity that you can't hedge out. There is no forward market for dry bitumen. It's a calculated number with all the different components. So we've also said fundamentally, we don't have a version to hedging. It's just that we want to do it in a way that we're not going to have any independent consequences if we were to go there. So we haven't necessarily solve that problem in terms of creating a clean hedge, but we've also been clear as well that at times we may be opportunistic. Now in this market, in a down market like this do we have an appetite to hedge at $15 WTI? No. But as we go forward we continue to look at it and we continue to think about it. And maybe you've got some other comments too Alex.

Yeah. I would agree with everything that John said. And I tend to be pretty simple in how I think about hedging decisions. And as you get down towards the all-time historic lows of the commodity, for example, WTI or WCS, I just think I'm much less inclined to hedge. And as you move up to higher prices in relation to historical trading ranges than I think I'm -- I become more interested in it. But other than that yeah, I mean hedging today to lock in losses doesn't strike me as a very thoughtful hedging plan for the next little while anyway.

Thanks, guys.

Thanks.

Next question comes from Chris Varcoe with Calgary Herald.

Hi. I have a question and a follow-up for Alex. Alex you talked a little bit about the liquidity measures from the government. I'm wondering what more do you want to see from the federal government on liquidity? And how does that fit into the longer term the future of the Canadian oil pack?

Hey, Chris. I think -- and as I said, I'm -- when I'm talking about liquidity, I think it's important to understand that I'm really talking about liquidity for the industry rather than necessarily liquidity for Cenovus. As you heard John talk, we've already done quite a bit in terms of shoring up and assuring liquidity for the company. But this is an extraordinarily important industry for the country. It has taken an unprecedented hit with the combination of the demand destruction of COVID-19 coupled with the price war that we saw the Saudis and Russia enter into early in March. And as -- and as I said in my prepared comments, I think everybody expects that as COVID recedes we're going to see global demand come back and I think we'll see a return to commodity prices that Canadian producers will be profitable at paying taxes, paying wages. But in the interim, we have this incredibly acute short-term issue. And I think it is really important that governments are there to support the industry. And I -- obviously, it's not just the energy industry. There's many other industries that have been similarly affected. Obviously, the aviation industry is one that comes quickly to mind or the hospitality industry. And I think it's important that the government step in and ensure some liquidity support to bridge these industries through this very tough time period, so they're there and healthy and able to contribute to the recovery. So that was really the message that I was sending. And there -- and I don't want to suggest that there are no discussions going on. I know that the Alberta government has been great to work with. I know, they're very actively trying to see how -- what they can do. And I know they're talking to the federal government. I know, the federal government is considering it. And I am simply making the point that this is a solution that the industry and the Canadian economy needs in the very short term. This is not going to be very helpful if relief comes to the industry six months from now. This is a very urgent short-term issue.

And just a follow-up does the Canadian industry still need to shut in more production in your mind? And if so, do you think it should be up to the provincial government to do it through their curtailment mechanisms or should they just let the market forces work?

Chris, I mean, my observation right now from -- and I preface this by saying that we don't have any sort of unique insight into this other than our own production. But, I think, that we are seeing, the market right now is working. We've seen significant production come off in April. And I think everybody is expecting that production to continue to fall in May. So the market seems to be working. And as a result, I don't know that I see an immediate need for the government to step in. And I think a really important thing though for people to keep looking at is, where are storage levels going in the province? And, right now, we have a reasonable cushion. And I think you heard Keith Chiasson mention that storage -- we're not seeing a massive growth right now in storage. But I think it's important we watch that. And if we were to see that start getting moving toward tank tops kind of in that 42 million 43 million barrels of storage in Alberta. At that point things could happen very fast and you could see -- there could be some real unanticipated consequences. So, I think, the government doesn't need to step in, but I do think it's important for the government to have a plan as to what the range of options they may have in the event that we see storage in the short-term kind of heading towards its upper limits. And, I know, they're thinking about that. Thanks, Chris.

Next question comes from Dan Healing with Canadian Press.

Good morning. Thanks for taking my question. I had a couple of questions on the G&A front. Cenovus and a lot of other companies are having more people work from home. I'm wondering if there is a permanent or a long-term savings for the company in view of this enhanced flexibility in allowing workers more choices in not needing as much office space particularly in Calgary.

It's a really good question, Dan. And I think we're only kind of figuring this out right now. What I would tell you, my observation is right now, my company seems to be maintaining high levels of productivity. And I think one observation that everybody is having is, maybe we don't need to have all these face-to-face meetings that used to plague our most companies and most industries. I think in some ways there are some benefits. But I will tell you that, I do worry that if this -- I think right now, it's kind of been an interesting experiment for five or six weeks. I do -- I think the judgment is still to be determined longer term. I kind of feel that we -- ultimately, we are going to see some productivity concerns, especially with certain working groups if this were to continue longer term. But I think right now most companies are finding they're able to manage it and without a massive productivity loss. But I think when this is over there is going to be a really interesting discussion and debate in all industries about, is there an opportunity for more remote working. And are there some financial and other benefits related to that?

Okay. And also on the G&A, given how much you've cut back on doing things and so on. Has Cenovus seen a net decrease in its head count compared to last year?

Yes. I mean, I think one of the benefits that Cenovus had, certainly during the time I've been here, the company made a lot of really tough decisions on staffing a number -- a couple -- two years, three years ago. And we really feel that we're largely at this point at an appropriate level, because of those very tough decisions that we made in the past. And as we have ramped down work in the field, we're certainly not employing as many contractors. As we would have had, we had a fully baked and executed capital plan that we would have started the year with. But yeah, right now, I think other than that sort of reduction in our contractor headcount. I think we've pretty much executed on the tough staffing decisions that the company needed to look at.

Okay. Thank you.

Okay, Thanks, Dean.

Next question comes from Kevin Orland with Bloomberg News.

Hi. Good morning. Thanks for taking my question. I know this is a tough one. But I just wanted to see, what you're expecting for how long it might take for oil demand to return to normal or something close to normal, in North America? And just get your thoughts on the broader supply and demand picture in North America in the months ahead?

Yeah. It's – Kevin, that's a really good question. And it's something we spend a lot of time thinking about. And I personally spend a lot of time thinking about. I think -- here's what I would say. I think you really have to look at how quickly is North America and the rest of the world to come out of this social distancing situation that we're in right now. And I think a good example would be China. I think what we're seeing in China with refined product consumption and demand is that, it is basically moving back to pre-COVID-19 levels. But I think that's a pretty good case study for what I hope will happen in North America. We're obviously starting to see, certain states. And we've heard about our provinces certain of them starting to execute or thinking about executing on kind of cautiously relaxing social distancing and getting the economies moving. So, my own personal view is that we're probably going to see in North America demand. I think we'll see it start increasing here over the next month or so. And I would expect to see that significantly increasing as we move into the summer. And I think, the refineries will obviously return to full production over the -- or more or less full production, I think over that time period. The upstream, I think we're obviously going to see a recovery here too. And it's only going to be extended a little bit because -- or to some degree because of the storage builds that we've seen of crude oil. And it's going to take some time to work through those. But I do expect we're going to start seeing a real improvement on the downstream side in demand heading into the summer.

Thank you.

Thanks, Kevin.

And at this time, I will turn the call over to the presenters.

Well. I don't hear Sherry here. So on behalf of Cenovus and our leadership team, I just want to thank everybody for taking the time to hear our presentation and the questions that you've asked. And I just say thanks everyone. And please keep safe in these challenging times. Take care.

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