Cenovus Energy Inc. (CVE) Q3 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's Third Quarter Results Conference Call. 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 third quarter 2020 results conference call. Here with me is our President and Chief Executive Officer, Alex Pourbaix; our Chief Financial Officer, Jon McKenzie; our Executive Vice President, Upstream, Norrie Ramsay; and our Executive Vice President, Downstream, Keith Chiasson. 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 will provide brief comments and then we will turn to the Q&A portion of the call. Please go ahead, Alex.

Thanks, Sherry, and good morning, everybody. Did you know, on Sunday, we announced this for teacher combination between Cenovus and Husky to create a resilient integrated energy leader? This transaction optimizes our cost structure, expands our market access, and strengthens our balance sheet. It positions us as a more resilient company with increased and more stable free funds flow. It also gives us opportunities to expand margins across the value chain, lowering our breakeven, and accelerating deleveraging and returns to shareholders. You've already seen us drive significant costs out of our business through corporate and operating optimizations. I'm extremely confident that we will achieve the goals we have set with the transaction and realize the potential of the combined company. But today, I'm here to talk about our third quarter results. I want to start by giving credit to our staff at Cenovus for keeping our operations running safely and reliably, if we're continuing to adapt to all the additional measures we've put in place in response to this pandemic. I continue to be impressed with the dedication of each and every one of our employees, and how they continue to support each other through this time. Through all of this, our teams remain focused on delivering safe and reliable operating performance. We've had zero significant incidents across our operations to-date in 2020. Our teams have successfully navigated the health and wellness challenges of the pandemic, while increasing production and executing plan turnarounds at our two oil sands facilities as well as in our conventional operations, as well this quarter we saw some significant health and safety milestones across our operations. At Christina Lake, our drilling operations as well as completions and well services teams achieved one year without a recordable incident, and our conventional operations marked a one year milestone since recording a significant process safety event. This third quarter once again demonstrated our flexibility and ability to utilize our full suite of assets to maximize the price received for every barrel. It reinforced our commitment to discipline spending, maintaining our low operating and capital cost structure, and deleveraging our balance sheet. As crude oil prices showed signs of a gradual recovery through the summer, we were able to increase our crude oil production and clear our inventory of store barrels to capitalize on the significantly improved benchmark price for Western Canadian Select. We continue purchasing low cost production credit from peers, so we could produce above our curtailment limit. That allowed us to produce high quarterly volumes at our Christina Lake facility. This increase was partially offset by plant turnaround and maintenance activities. Our oil sands operation this quarter averaged almost 386,000 barrels a day, up from 373,000 barrels a day in the previous quarter, and a 9% increase from the third quarter of 2019. We recorded adjusted funds flow of $414 million, which was a significant increase from the second quarter of 2020, when the unprecedented drop in oil prices resulted in adjusted funds flow of negative $462 million, and we generated free funds flow of 266 million in the third quarter and made meaningful progress on reducing our net debt. At the end of the third quarter, net debt declined to approximately 7.5 billion from 8.2 billion at the end of the second quarter of 2020. We had an operating loss of 452 million and a net loss of 194 million in the third quarter of 2020. The operating loss was largely due to an impairment charge of 450 million on the border refinery and negative operating margin from the refining and marketing segment. While we are pleased with our performance in this quarter, we expect commodity price volatility for the foreseeable future. That's why we look forward to the increased cash flow stability and enhanced free funds flow the transaction with Husky will provide. With that, I'm happy to take your questions.

[Operator Instructions] First question comes from Menno Hulshof with TD Securities.

I have one question and it's unrelated to the Husky transaction. Maybe you could just give us your thoughts on the outlook for your SAGD operations over the near-term, and more specifically, to the extent that WTI continues to trade in the mid-30s, and the heavy differential, call it in the $10 range? And what can we expect to operationally through year-end and maybe even early 2021? I'm assuming dynamic storage becomes a part of the conversation, but any thoughts on that front would be helpful?

Hey, Menno, it's Keith Chiasson. I'll start and maybe Norrie can talk about the operational side of things. But when we looked at kind of the economics even in the mid-$30 WTI range and the tight differential that we see, we still see ourselves as variable cost netback positive. So, we would anticipate produce through this time at full rates. As we look forward, obviously, with curtailment ending in December, we are unconstrained and no longer have to acquire production credits to be able to do so. So, it's something that we watch really closely and monitor, and because of the low cost nature of our production, we're able to produce and generate positive variable costs netback.

It's Norrie Ramsay from our Upstream business. If you remember, in the second quarter, we actually curtailed our production and our oil sands business by month for a month about 60,000 barrels a day, and in some days, it was actually down 80,000 barrels a day. We brought that all back on, as you can see in the third quarter, as 90% higher than our second quarter, overall average production, and we have full flexibility to increase that up to our higher levels. And again, curtailment is obviously limiting what we could do. And once from December onwards, we'll have a lot more flexibility. But it's always going to be a value conversation and it's the value rather than the actual volume of production that would have been most interested in.

Next question comes from Greg Pardy with RBC Capital Markets.

A couple for you. Maybe Alex, just to pick up on the safety theme. Just wondering, if there are specific actions or thoughts you have that will be taken to ensure that the combined entity here proposes is going to have similar safety and reliability as noticed. Is there anything you can add around that?

Yes, I know Greg, I'm happy to talk about that. And I think as you guys can tell, every quarter, I usually start out by talking about our safety performance. And it is the number one focus of this company, commodity prices can come and go, but our commitment to human safety and process safety is our number one criteria at all time. So, as we get through this deal and the deal closes, everybody can expect that the exact same focus on human and process safety that you've seen from us, so over our entire history is going to continue. And we're going to ensure that we put the resources towards that to ensure that we can deliver that exact same track record.

And the second one really comes back how we should be thinking about hedging policy again. In the context the new organization very different integration prospects, but also tie to that question will be is with -- if you were to continue hedging would remain connected with storage optimization? I'm just wondering if you can dig into that.

Sure, maybe Keith can start that and Jon may want to weigh in.

Yes, thanks. Thanks for the question. When we look at hedging, there is kind of really two different components, one is around kind of the optimization side of the business where we're really trying to capture value from our storage and our transportation assets. When we think about that, really we're seeing a value opportunity over a period of time or in different locations. And to capture that opportunity, we lock up both sides of that transaction. So, from a financial side we may lock it up. And then as that price settles, there could show plus or minuses. But when we actually physically sell the barrels, we realize that on the netback side of things. So we actually see an uptick. And maybe just a key example of that was kind of in April, where our barrels were selling for about $4 a barrel. We could have produced and sold in Hardisty for that price too, we chose not to do that. We stored those barrels or transferred those barrels down to the Gulf Coast and store them there. And then come June or July, we sold those barrels and realized an uplift of almost $25 to $30. In that transaction though we would have locked in the WTI components as well as the physical sale, and because of that if WTI settled at $35, we may have shown a realized loss even though our net backs were materially higher than what they would have been in April. So when we think going forward, obviously, the combined entity has a lot less exposure to the WCS, WTI differential and Hardisty, so that becomes less of a concern for us. But the combined entity still has no exposure to WTI. So maybe with that, Jon, do you want to pick up on corporate hedging?

So, Greg, I think there's three answers to your questions that I would give you and I think Keith really touched on the first. As part of this transaction is about us acquiring a number of other assets to give us many, many more options to take our molecules to market to optimize the value that we get for them. So you should absolutely believe that we're going to continue with the type of optimization hedging that Keith has just described. And for example, today we would have about 10 million barrels of storage. Going forward, we're going to have closer to 16 as well as incremental pipes. So those opportunities are going to present themselves an increased ways for us and we intend to take full advantage of that. Secondly, I would say that one of the major reasons for doing this is to reduce the volatility in our cash flows. So sort of at a corporate level, that becomes an inherent hedge or this transaction will become an inherent hedge and now we manifest the cash flow streams. But finally, I would come back to something that Alex said, time and time, again is the under levered balance sheet is the best way to hedge to the corporate level to rise through these commodity price fluctuations. And we've been really clear since we started talking about this transaction that balance sheet deleveraging is our number one commitment. And you can expect us going forward to continue to prioritize the balance sheet on a free cash flow basis until we've reached a point that we're comfortable with our debt levels.

Next question comes from Prashant Rao with Citigroup.

I just wanted to talk about the hedges just a little bit more. I appreciate all the color they do. On the current program, though, and I think the communication our staff at Cenovus did a good job of communicating this to all of us in the MD&A disclosures highlighting that from 2Q. But the current program, how should we be thinking about how much volatility that might cause in FFO per share, next quarter, or I guess, this quarter and next quarter? And I guess related to that question, if we adjust for those impacts of this quarter, it seems the core sort of FFO per share was really mid $0.40 per share, which I think speaks to the underlying quality, the asset base performance environment. So, just curious about that sort of thinking about how we should think about the remainder of this hedging program, the answers into going forward over the next sort of called four to six months and also sort of what's the right takeaway there about the core reliability and performance of the assets?

Prashant, its Jon McKenzie. I think you're thinking about the hedge program the wrong way. And the hedge program that we put in place locks in additional profitability. And my suspicious you're confusing accounting treatment with straight up economics. And you'll notice in this quarter, we sold many more barrels than we produced. And we took the opportunity in Q2 to start storing barrels rather than sell them into different market. And what we do is we lock in that contango along the curve, so that we're locking in sort of a $4 or $5 per barrel margin by selling in Q3 versus selling in Q2. Now, if WTI rises by more than that $4 or $5 increment that they curve was showing us back in Q2. We will show a hedging loss, but the reality is, we're not speculating in the market. And what we're doing is locking in incremental margin by selling in one period versus another. So don't get confused by the hedging gains and losses, they really are a function of how WTI is moving in the marketplace whether it goes up through one period or down through one period. But our hedging program is designed not to speculate, but to lock in incremental margin.

I think another question I had was returning to the transaction. I appreciate that you probably can't give too much color around this right now. But when you look through asset monetization opportunities are sort of, I guess, optimizing the portfolio and posts transaction, post merger. Could you maybe help us to think about how you evaluate that to sort of what's the construct by which he goes through and balancing profitability versus synergies with the overall portfolio? Specifically, I was thinking outside of the outside of sort of black oil production, that portfolio that you have on a consolidated basis. Any color there would be helpful?

Sure, anytime you go two companies have this kind of scale and scope together. You're going to go through a process and we have in our continuing to go through a process of determining what is core to this business and what is non-core. And as you can imagine, there are a lot of criteria that kind of go in into those decisions, but really at the base of them it is about the value of those assets can generate in their strategic importance to the Company. So, we will, I think people can take it as a given that we are going to proceed to look at monetizing non-core assets that are falling out of this combination. And from my own perspective, I mean, I think -- I don't know that I'm willing to share it right now. But I think we already have a pretty good understanding of the kind of assets that we're going to take a really hard look at in that regard. And we're also going to be cognizant of -- are they worth more to other people, but I think the other issue is going to be is the time and can we actually transact at values that are value creating for our shareholders. So, expect more from us on this. I think we're going to act fairly quickly. And, just yes -- I mean it's just going to take us a little bit of time to we're at a point where we can talk a little more freely about it.

Okay, appreciate that. Thank you very much.

Yes, no worries.

Next question comes from Phil Gresh with JP Morgan.

I was just thinking about the rail contract that you have that you signed up a while ago. I think it goes maybe till the end of 2022. And I apologize, if you address this on the last call. But what happens with that, once we get to the end of this period, and now that you have the takeaway the excess takeaway that Husky would provide?

Hey, Phil, it's Keith Chiasson. Yes, you're right, that some of those contracts fall off kind of at the back end of 2022. So we'll evaluate that at that time. What I would tell you is we quickly ramped down the program in the first part of this year when commodity prices collapse. But we didn't sit on our hands through that time, we actually continued to negotiate around those contracts and have been able to further reduce our variable cost on those contracts. And because of some small investment that we made in the Bruderheim facility, last year, we're actually able to store a bunch of unit trains at the facility, which allows us to ramp up the program relatively quickly. So I think in the past, we've talked about this overall program not lending itself to kind of quick ramp up and ramp down in the span of kind of less than six months. But we're what we've been able to do is take a portion of the program, and really have agility and flexibility to ramp it up and ramp it down over the period of a couple of months now. So we will look at kind of market opportunities to be able to do that at those reduced costs for transport to the Gulf Coast, kind of over the next couple of years and then you know coming at the end of the contracts, we'll kind of look at egress and how it's all shaken out whether or not we would want to extend those or not.

I guess my follow-up to that would just be with your comments about having lowered the cost. Does this mean that the new transport costs of each team this quarter, which are lower than prior quarters? Is a function of that cost reduction given real not being utilized? And then is this the right way to think about the go forward? And if we go into it for coming out of curtailment, do you think you'd actually maybe start using that rail as we move into 2021?

Yes. So Phil, you shouldn't be surprised to see us use the rail kind of in the fourth quarter here, we are looking at starting up a portion of the program. In November, it still enables us to accumulate additional production credits versus having to acquire them in the market through the supplemental production allowance. And then in December, it really comes down to a cost benefit analysis and with the cost reductions we've been able to achieve on the variable costs. We can actually make this program economic to run barrels down to the Gulf Coast and realize higher netbacks. So you shouldn't be surprised to see us move some volume, obviously not the full program for the fourth quarter, but some volumes for the fourth quarter, which will help improve our overall netbacks.

Phil, it's Alex. Just maybe one thing I'd add to that. This improvement in pricing we've been able to achieve is really significant. And it's a tribute to Keith's team, but also our freight partners, they have been really good to work with and making this a much more compelling opportunity going forward.

And Alex from a macro perspective, with the removal of their curtailment, do you think the broader industry is going to need rail? I know that the commentary suggested not until mid 2021 as the decision point for why to remove the contaminants, but what's your view?

I mean, I suspect. I think I've been pretty consistent about this, but I think one of the very clear features of our industry is, I think all of us have been very successful in driving costs out of our operation. And I suspect with curtailment going away those barrels on the sidelines, be they sort of 200,000 to 400,000 barrels a day. I do expect them to come back and I would not be terribly surprised at all to see rail. I don't think we're going to see it, where it was a year and a bit ago. But as Keith said, it looks like it's making real economic sense for us. And I wouldn't be at all surprised to see rail volumes moving up here over the next few months.

Next question comes from Manav Gupta with Credit Suisse.

Quarter-over-quarter, there was a lot of improvement in the netback. Obviously, the benchmarks are more supportive, but just trying to understand what was condensate pricing a big headwind for you in 2Q and as that kind of lag went away. You started closing the gap to the benchmark and that led to improvement in netbacks. If you could comment a little on the condensate pricing lag and how exactly what about give 2Q versus 3Q?

Manav, it's Keith. I think this is kind of a build on what Jon had talked about earlier and kind of how we are trying to improve our netbacks by moving barrels out of one period into another. So in the second quarter, we were able to store a lot of barrels, obviously, those, the pricing, if we have sold them in that quarter would have been at very low pricing. We store those and move those into Q3 quarter, and realized much higher realizations for those. So I think if you look at our sales relative to production, you can see an increase in sales in the third quarter relative to production. And that's really putting those barrels in the market in a higher price environment. And that obviously, all flows back into an improved net back for us.

Perfect. A quick follow up here is. You've seen a very positive trend in transport and lending costs going down at Foster. Obviously rail is a part of it, but if you look at from 1Q where it was 14.37 now all the way down to 8.60. Is there anything else that you're doing at Foster Creek to push the cost down in transport and lending besides rail, which is helping you out?

Manav, I think you'll see a lot of variability quarter to quarter. It all depends on barrels that we move by rail, as you indicated, but also barrels that we move on pipeline and which production we choose to move down the pipeline. So some months and quarters, it may be Foster, some months in and quarters it may be Christina Lake. It all depends on how we can get the maximum value for our barrel and that will drive some of that variability and transport costs. But you we are going to utilize obviously, our assets to maximize that value. You're right that with rail off through the third quarter our transportation costs are down because of that, but we will use those assets to capture incremental value for the Company. So, you will see a bit of variability quarter to quarter, assets to asset.

And last question is. Enbridge Line 3 replacement, any color, anything you're hearing out there? Do you think this could be a 2021 event? Thank you.

Everything that we're hearing, Manav is that they are marching towards 2021 startup. And obviously, some critical decisions coming here in the November time period around some permits, and that will then drive construction of that project. So, we'll be watching kind of through the fourth quarter, intently and if they get their permits and start construction then we do think that 2021 startup is realistic.

Next question comes from Chris Cox with Raymond James.

Thanks guys and thanks for taking my question. Maybe just the first one on the quarter, just any comments on/ why you didn't also record any impairments, that would revert and just anything that may be differentiated bad asset tax versus what you conducted at quarter?

Yes, Thanks, Chris. It's Jon McKenzie. One of the things we do with all our assets every quarter is assess for indicators of impairment. And obviously with refining cracks dropping as precipitously as they have been and then not recovering as quickly as they have, we took that as an indicator of impairment in our Downstream. So we evaluate both of those assets. The one thing I would say is a Wood River is a more complex refinery with much greater scale efficiency than we have at Borger. So, the reality is when we look at that one versus the net book value and we kind of ran it out on the discounted cash flow basis. We got to the answer to that we did get to, but relative to the carrying value of Wood River we did not have any impairment.

Okay, thanks. And then maybe circling back to the transactional Husky here, just wanted to dig a bit deeper into some of the talk about kind of physical integration between FCCL and Lloyd complex, I'm curious how much of your diluent value chain you think you could integrate there? And I believe your current set of slides also ties in monitoring contracts on Wolf Lake and Polaris. And how do you think those contracts on those pipelines by playing those plans or grievance in your other contracts for the Downstream?

We're right on the front end of this. And when we did our synergies and put out our targets, we were really clear that we didn't want to include any of that in our synergies. The 1.2 billion that we put out as capital in operating synergies are really those synergies that we have a really high confidence that we're going to be able to get in a very short period of time. So when you talk about the broader physical integration between FCCL and Lloyd through time, that's an exciting opportunity for us. We think that through time, Lloyd is going to be a very strategic asset and how we integrate that and work through the molecular integration, not just on FCCL molecules going into Lloyd, but the condensate coming back, is something that we are working through today, but it's too early in our minds to be talking about feature values and magnitude of integration that's possible there. But it's really clear to us, that is a legacy asset at Lloyd administer and it's going to give us a lot of optionality on the integration on.

Many just off to the side different ways to achieve that physical integration will it require negotiations with other parties between other than just you and Husky?

Yes, it will.

Next question comes from Matt Murphy with Tudor, Pickering, Holt.

I appreciate with the acquisition release, laying out your carbon emissions over the long-term, and that it'll take some time to work through firming up plans there. But I guess, given that perception of oil sands as being more emissions insensitive, and other girls around the world, and certainly appreciate that all oil sands isn't quite the same. But given those ambitions, just wondering if you guys could provide a bit of a teaser on some of the things just thinking about, in meeting those ambitions, whether we're talking solvents, carbon sinks, or otherwise? Thanks.

I mean, when we came out with our targets and our ESG targets in the spring. I think we gave a little bit of color around that. And what I would tell you is, we didn't come up with those targets until we had done a comprehensive economic and engineering analysis of sort of what options. Not just what were possible, but what options were actually achievable within our business plan. We, it would be pointless to come out with an ESG targets that weren't grounded in the business plan. So that was what we did and if you think about it, I would kind of say, it's a little bit all of the above that, we've obviously been a leader in solvent technology. I expect that solvent technology will be a part of it. Carbon sinks is something we're looking at carbon capture and sequestration. But one of the things -- and there may be, there could be an element of acquiring carbon offsets. But the one thing I would say that I think a lot of people don't appreciate although there are a lot of projects that require capital, whether it's cogen whether it is solvent technology, carbon capture, there's actually -- we believe there are a great deal of benefits that we can reduce our GHG intensity by changing how we operate the assets. And so there's actually a whole suite things. And now, with Husky coming on, there's not only how we operate assets, but what assets on a go forward basis get capital and what assets don't get capital. And all of those have the ability to meaningfully improve the GHG intensity.

Yes, appreciate the thoughts there. If I may and follow up on a completely unrelated note just on the approach to integration with the Husky transaction, if I go back to the 2019, Investor Day, for example, which I appreciate is rolled away at this point. But I think the strategy of the time was to take advantage of accessing a healthy amount of refining capacity in the U.S. market, rather than owning yourselves from a sort of integration. Can you talk about what's changed there in the thinking? Was it just an opportunity with Husky that was just really hard to pass up? Or did something I guess, change in how you're thinking about the value of integration whether our rates are and how you're thinking about pipeline progression from Canada?

Yes, I mean, it's a whole lot of things. But what, I'd maybe go back to where my comments have been on integration from the start, Matt. And I think I think what I've been very consistent on I've always said, like, I love the integrated business model, I looked at our competitors and said it would be fantastic to have that kind of business model and take the volatility out of our cash flow and earnings related to our exposure to Alberta heavy oil pricing. But when we looked at that like very indepthly a couple of years ago, at the time, crack spreads were $18 to $20 and every refining or processing upgrading business or asset we looked at was just extraordinarily highly valued. And I'm just not very interested in been picking off assets at the peak of the market. And that's why we came to a strategy at that time of focusing on rather than on processing, of actually looking at opportunities to get our barrels to market via logistics opportunity -- via logistics, whether it was pipe or rail where we could achieve a global price for our for our heavy barrels. And, the obvious differences is since the pandemic you've seen a you've seen a situation where everybody's values have come down, but if you look at the valuation metrics of the Husky merger. You would see -- if you kind of break that business up into an upstream and downstream business, however you do it that that downstream 400,000 barrels a day of molecularly integrated upgrading and refining to our barrels. I mean, the valuation was absolutely compelling.

Yes. I would just add to that, Matt. I think Alex used really important praise there called molecular integration. And that's what this opportunity really presents for Cenovus going forward is the ability to have processing units that are tied to our molecules that consume the molecules that we produce. And I think that gives a whole different level optionality as well as a whole different reduction of volatility going forward. So, this isn't just about integration, it's about molecular integration going forward and tightening up our value chains and shortening up them to the extent that we can.

Next question comes from Chris Tillett with Barclays.

Just a quick one for me. On the conventional side, it looks like you're resuming some activity there in the fourth quarter. And then, my read is that it's tied in sort of stronger seasonal pricing, but just wanted to confirm that or see if maybe this was a sign of interest to pursue some incremental opportunities on the conventional side in 2021?

Hey, Chris, it's Alex. No, I mean, you look at, we've obviously been very disciplined over the last few years with the Deep Basin. And then given gas prices where we found them over the last two or three years, the right decision was not to put material capital to that asset. And this is an opportunity with gas prices, as you've mentioned. We can lock up gas prices for a few years at very attractive levels. It's a bit short cycle, these are very, very high IRR, kind of drill to fill opportunities, and it allows us to take that asset from a decline to basically keeping it at least flat to modestly growing.

And then maybe just as a follow up, anything you can offer, in terms of the role that those assets might play in the pro forma company?

I had responded to that question earlier about asset sales. And I think, as everybody knows, we took a really hard look at a couple of years ago. And whether there was an opportunity to monetize a portion of that conventional business for Cenovus. I think you can kind of assume if you put an overseas conventional business, together with Husky in a higher price environment. We're going to take a really hard look at that. I think my observation today is even though the prices have come up. It's still a pretty tough market for value, but I expect that will likely improve over the next little while, especially if prices stay where they are. So we're going to take a very hard look at that.

Next question comes from Neil Mehta with Goldman Sachs.

I guess the first question here is maybe it's for you, giving you know the Husky assets really well. But as he looked at the last couple of years of Husky one of the challenges has been operational execution and excellence. And that's shown up in different ways and in both upstream and downstream in terms of performance. As you look at those assets, you think there are things Cenovus can bring to the table to kind of get them up to speed. And how do you, as you went through the process of valuing these assets. How did you take that into consideration?

It's Jon, not Jeff.

I'm sorry, it's Jeff, sorry.

It might 20 minutes ahead of yourself, but I tell you, this was an absolute number one concern for us. Alex has mentioned, right off the top of this call the safety is always has been and always will be our number one concern going forward. So when we look to this asset base, I would tell you that we had unfettered access to do our due diligence. And we have been at this for nearly six months. And I would say the diligence that was done on all aspects of these assets is really unprecedented in terms of my experience with the M&A market, particularly on the E&P side. When we look at the asset base that we acquired, everything on the upstream that is operated is really right in our wheelhouse. And it's right inside what we really do well as a company, and we're very comfortable with the reservoirs the conditions of the assets, the conditions of the commercial arrangements over the top and we think we can add value there. And we think that that value can be realized in a fairly short period of time. As it relates to the downstream, we took a lot of time to look at some of the improvements and some of the changes that Husky has been making through time all the way from new personnel coming into their operation all the way through their safety process, safety systems, as well as their asset condition reports, as well as reliability and safety practices. And I remind you, we have two directors on our board who are very, very deep in terms of refining assets and the operations there. So it's something we took our time on, it's something that was absolutely top of mind for ourselves in the board. I think we've done a thorough job of ferreting out our level of comfort in this. And we're comfortable that on a go forward basis we're on the right path, and we've satisfied ourselves where we are not going to have these kind of incidents going forward.

Great. And the follow up here is that I had asked about this over the weekend, but I don't know if there's been a subsequent update. Any conversations with either the ratings agencies or your accredited investors about, how they view this transaction of pro forma way and whether this gets us the breadcrumbs to get back to investment grade?

I can't speak for the rating agencies that have all put out their comments now. Then, you can read into those what you will but, it's our expectation that we are sowing the seeds for return to investment grade in short order. That would be something that's very important to us.

Next question comes from Mike Dunn with Stifel FirstEnergy.

Thanks, good morning, everyone. Not to beat it to debt, but I did have another question on the, I guess, the hedging strategy around timing of your sales versus your production. Maybe naively, I had thought that this was something that generally maybe somebody else has been players would do based on their outlooks for maybe seasonal turnarounds for them and others. So just wondering, Jon or Alex, if finding of sales versus production was something that was strategically done in the past without hedging, and then a second part to that is, how did you weigh the cost benefits of delaying the sales of your own equity barrels versus you're walking in that contango by buying third party barrels and delivering them later?

Mike, it's Jon. This is something we've always done. But what I would tell you going forward is what is really important to us as maximizing the free cash flow to the organization. So when we look at is, can we sell into the future using the assets that we have, and we have pipelines and about 10 million barrels of storage available to us to increase the free cash flow in any future period. Now, we do attach a cost to that there is an internal cost of doing that. And that kind of approximates a few hundred basis points beyond our cost of capital. But we do that on a diligent and rigorous basis to make sure that, we're maximizing free cash flow maximizing returns to shareholders.

Okay, thank Jon. That's it for me.

The other thing I would say, Mike, is. This is not something we're speculating on. What we're doing is taking what the market gives us in terms of the shape of the futures curves. And all we're doing is using our assets and playing along the length of that curve to maximize future cash flows for the Company.

And Jon, forgive me, there's been a lot of quarterly press releases out, so if I missed it in the body of your MD&A. Did you guys quantify like all when including the financial WTI hedging losses, the net gain from that strategy versus, I guess, timing your sales to be in line with your production volumes?

Yes, what we haven't given you is the net gain, but what you see is the accounting in the MD&A. And I think that's what's causing the confusion is the mark-to-market on the financial components of this versus what the underlying physical business is doing.

Next question comes from Harry Mateer with Barclays.

First question. Maybe talk about your intentions with the pro forma debt structure and if you had planned out treatment for the Cenovus and Husky transaction for closing and then perhaps if so, how you go about doing that?

Harry, it's Jon, again. We're looking at all the options is around to your question on pari passu and that's something well we're going to have to get back to you and I'm not going to talk about that this. What I would say, though, is, we are of the view that investment grade is very important to this new company. It's one of the synergies that we believe haven't taken any value for, but we think it's really important going forward. So you can expect us to do everything required to get us back into that space. We've also committed to do and we'll do this in a reasonably short-term is we'll come back to you with a complete financial framework that would not only talk about capital structure and how we see that playing into that. But it will also talk about capital allocation and the screens that we intend to run on that together with shareholder returns. But we want to do that in a comprehensive way rather than give you one piece of the framework or do it incrementally through time.

And then apologies if I missed this on the call last weekend earlier today, but have you guys talked about upfront costs to realize your synergy targets including our major driver of the deal? But I'm just wondering sort of how much cash you think goes out the door initially to actually capture those.

Hey, Harry, it's Alex. I think that if you want to think about sort of the costs of putting the two companies together. Think about a onetime cost of just over about $500 million. And that compares to the $1.2 billion a year of annual run-rate synergies that we expect to largely get in 2021 and get the entirety of them in 2022.

Our last question comes from the media Robert Tuttle with Bloomberg News.

I noticed there was a permit or something filed with the AVR about a DRU that's going to be built near your rail terminal. As you guys were looking at DRUs, what's your outlook on that? I mean, is there a plan to perhaps have one there at the bigger operating one of your rail terminals?

Hey, Robert, it's Keith Chiasson. We filed that regulatory application just to give us the flexibility around that project. Obviously with the transaction that's underway, obviously, we're taking another look at, obviously, the DRU and the location of the DRU. So, that was just a step in the process to make sure that we had flexibility.

Yes, Robert. It's Alex. Just to be really crystal clear on that. We said when we were looking at the DRU that we were going to do the engineering and permitting to give us the ability to have the option to go forward on a DRU and no one should think about that filing is anything more than just carrying through on that direction.

And this time, I'll turn the call over to Mr. Pourbaix.

I think that's the end of our questions. So thanks, everybody for taking the time and enjoy the rest your day.

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