Cenovus Energy Inc. (CVE) Q3 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for standing by. Welcome to Cenovus Energy’s Third 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 over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.

Thank you, operator, and welcome everyone to Cenovus’ 2021 third quarter results conference call. I will refer you to the advisories located at the end of today’s news release. These 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 Cenovus’ annual MD&A and our most recent annual information form and form 40-F. All figures are presented in Canadian dollars and before royalties unless otherwise stated. Alex Pourbaix, our President and Chief Executive Officer will provide brief comments, and then we will take your questions. We ask that you please hold off on any detailed modeling questions and instead follow-up on those directly with our Investor Relations team after the call. And if you could please keep to one question with a maximum of one follow-up. You can rejoin the queue for any other questions. Alex, please go ahead.

Thanks, Sherry and good morning, everybody. First, let me update everyone on our current response to COVID-19, which remains a challenge in all of the jurisdictions where we operate. We continue to encourage full vaccination for all of our staff and we are following the latest advice from public health officials, government and our own health and safety experts. That includes continued rapid testing at a number of our field locations and mandatory work-from-home for office and other staff who are able to do so or required by local health officials. In addition, in alignment with recent direction from the Canadian government, we are now requiring proof of full vaccination as of October 30 for travel on all Cenovus scheduled and ad hoc flights to and from our sites, including charter, company owned aircraft and helicopter flights. As we modify protocols that our operations we will continue to follow public health guidance and work closely with governments health authorities, and industries to protect our people. Safety is foundational to how we operate. I was disappointed by our safety performance and particularly our process safety performance immediately after closing the Husky deal. We learned from these events and took rapid actions to strengthen our combined safety culture. Since then and throughout the second and third quarters, we have seen significant improvement in our safety performance. For example, we cut in half the frequency of process safety incidents in these periods compared to the first quarter. As another example, our conventional business did not have a single recordable occupational injury in the first nine-months of this year. However, despite these improvements, we have had a couple of concerning safety incidents very recently. These serve as important reinforcement that we must be unrelenting in our top tier safety journey. At Cenovus there is no priority more important than safety and continuing to do everything we can to make sure everyone goes home safely every day. Turning now to our third quarter results. By now, you have all seen our plans to increase shareholder returns, and I’m sure everybody is keen to talk a little bit more about that. Before we turn to that though why don’t we start with the operating results that drove this quarter’s financial results and led to that shareholder returns announcement. I’m incredibly proud of the accomplishment of our operations teams and assets this quarter and year-to-date. In the Upstream segment, we continue to deliver consistent and strong operating performance with total production of nearly 805,000 BOE per day in the third quarter, an increase of 5% over the second quarter. This production increase was led by records single day and quarterly average production rates at both Foster Creek and Christina Lake. Production at Christina lake averaged about 243,000 barrels per day in the third quarter, a 5% increase over the prior record set in the second quarter. This reflected redevelopment and re-drilled wells coming online in the quarter. These redevelopment wells are high returns, short cycle projects we’d included in the capital budget this year and reflect the kind of opportunities that exist for Christina lake. Moving to Foster Creek, now you might remember that on our second quarter conference call, I talked about some emulsion and treating issues we had coming out of the turnaround, which impacted production into July. As we discussed in the Q2 call the teams quickly incorporated learnings and returned Foster Creek to full rates as of mid-July. With our Q3 results, we are pleased to report that the teams not only recovered Foster to full rates, but went on to deliver production of over 200,000 barrels per day from the asset in each of August and September. For perspective, remember, the Foster Creek is an asset with a nameplate capacity of 180,000 barrels per day. This is just another demonstration of our industry leading asset quality and operating expertise in the oil sands. Turning to the Lloydminster thermal projects, the benefits of applying Cenovus’ operating techniques continue to be demonstrated and the assets delivered an average of about 98,000 barrels per day in the third quarter. Oil sands operating performance combined with strong realized pricing to deliver segment operating margin of nearly $2 billion, driving the company’s total operating margin of $2.7 billion for the quarter. Oil sands unit operating costs decreased relative to the second quarter mainly due to increased production from the well pads we brought online and the turnaround activity in the second quarter. Looking at our conventional business, production was down about 7% relative to the second quarter, primarily due to the impact of assets sales as well as a unplanned third-party processing plant outage. Even with lower production volumes, unit operating costs for conventional held flat relative to the second quarter as the business delivered nearly $200 million of operating margin. This was 35% higher than the second quarter operating margin with the increase driven by increased realized prices and high production on time. Our offshore operations continue to be a strong contributor to free funds flow, delivering operating margin of nearly $330 million in the quarter, and operating margin totaling over $1 billion so far this year. Asia Pacific operations continued performing well with daily production of 60,000 BOE per day in the third order, which was in line with the second quarter. Production rose in Indonesia in response to strong demand, offsetting production impacts of planned maintenance of assets in China during the quarter. And as previously announced in respect of our Atlantic business, we received about 75 million during the quarter from exiting partners as a contribution towards future decommissioning liabilities with the restructuring of working interests in the Teranova field. Moving to the downstream segments. In Canadian manufacturing, reliable operating performance continued at the Lloyd upgrader and asphalt refinery with an average utilization of 98%. While utilization and unit refining margins at the upgrader and Lloyd refinery were slightly higher than the second quarter, total operating margin of $130 million was about $60 million lower than in Q2 for Canadian manufacturing. The difference was about the amount of a settlement recorded in the second quarter on a customer contract at Bruderheim crude by rail terminal. In U.S. manufacturing, refinery utilization averaged 89% in the quarter, which was 2% higher than the second quarter. This included the impact of some turnaround activity and other minor unplanned outages at some of our partner operated joint venture refineries during the quarter. Unit operating costs held about flat relative to the second quarter while unit refining margin increased about 7% to $13.45 per barrel. This included the average unit cost of RINs decreasing by about 10% from the second quarter to about $7.30 per barrel for the quarter. And just I would remind everybody to keep in mind that is still nearly three times the average unit cost for RINs in the third quarter a year-ago. I will take a moment to discuss in a little more detail our U.S. refining assets, where we are operator. At the Lima Refinery, recall that throughput rates began ramping up in the second quarter following unplanned outages earlier in the year. In the third quarter, we achieved crude utilization of 93% at the Lima Refinery. We have been pleased to see performance stabilizing at the refinery, which reflects the Lima team’s focus on base operations. We slowed production at the Lima Refinery at the end of September in preparation for a planned turnaround we are completing in the fourth quarter. As we have said previously, this is a large turnaround so it is fair to expect that throughputs will be lower in Q4 as a result. Closing out the discussion of U.S. refining I’m pleased to report that the Superior refinery rebuild construction continues to proceed well. Capital spend remains on-track and we still expect rebuild costs to be largely offset by insurance. There is no change to our expectations for the refinery to be ramped back up in early 2023. Focusing on sustainability, we continue critical work on emissions reduction for our company and the broader industry through the oil sands pathways to net zero initiative, co-founded by Cenovus. Pathways is currently advancing its foundational carbon capture utilization and storage project, which will have phased capacity to transport carbon from more than 20 oil sands operations to a safe storage hub. In addition, the pathways teams are analyzing other technology opportunities to address GHG emissions in the oil sands. Meanwhile, we are working with both levels of government to ensure the necessary policy and financial support is in place to achieve the pathways vision and help Canada achieve its climate and economic recovery goals. We look forward to sharing more on this and our updated targets for our ESG focus areas at our Virtual Investor Day to be held on December 8th. Turning now to our financial results for the quarter. Our strong operating performance combined with rising commodity prices to drive solid financial outcomes. And while, it is true that a rising tide lifts all boats, Cenovus maximize the opportunity by increasing oil sands production and optimizing our pipeline capacity to make the most of higher prices. This supported the generation of cash from operating activities of $2.1 billion, adjusted funds flow of $2.3 billion and free funds flow of $1.7 billion, during the quarter. We also took the opportunity to de-leverage as quickly as possible. As promised, we applied free funds flow to the balance sheet, and we completed strategic financing transactions in the quarter aimed at deleveraging. These transactions extended the overall maturities profile, as we executed public offerings of 10 and 30-year notes at attractive rates, while repurchasing a portion of our near-term maturity notes. These transactions supported deleveraging and helped reduce financing risk in the near-term. In addition, we leveraged the strong market to progress several assets sales during the quarter. This included the sale of our shares of Headwater Exploration for net proceeds of nearly $220 million announced in the quarter with proceeds received shortly after quarter end. We also closed previously announced, assets sales in the East Clearwater and Kaybob areas for combined gross proceeds of about $110 million. All of this has led to Cenovus de-leveraging faster than anyone could have imagined a year-ago. We finished the third quarter with net debt of about $11 billion, a reduction of $1.4 billion since the end of the second quarter. And today, we are very close to achieving our interim net debt target of below $10 billion, which takes me to our shareholder returns announcement. We have been clear that increase in shareholder returns would be our first priority upon reaching our interim net debt target. Delivering on that commitment, our Board has approved doubling the dividend on our common shares effective for the fourth quarter dividend to $0.14 per share. In addition, the Board has approved filing of an NCIB application with the TSX for share buyback program of up to about 150 million common shares, which we expect to commence following the achievement of net debt below 10 billion. We will provide more context on how we think about capital allocation at our virtual investor day on December 8th. However, as we have said previously, when we are below 10 billion net debt, you should expect to see a more balanced approach to free funds flow application between further de-leveraging and shareholder returns. And at current commodity prices, we would expect to be able to execute our buyback plan in 2022, while achieving net debt under eight billion around mid-year. This disciplined approach will also support our commitment to achieving mid BBB investment grade ratings over time. In closing, this quarter has once again reinforced the strength of our business including the benefits of our best-in-class assets and reliable operating performance, as well as the financial results driven by those operations. I think, it has also once again demonstrated this Company’s discipline to deliver on our goals. So with that, we are happy to take your questions.

[Operator Instruction] We will take our first question from Greg Pardy with RBC.

Yes. Thanks. Good morning. Thanks for the rundown. Alex, a couple of questions for you that the first one is probably just surrounding your appetite for organic investment, once you hit that $8 billion target, let’s just say that that is kind of mid next year, how does the –modus-operandi begin to change at Cenovus?

You know I think when you talk about organic in investment, Greg, and I think I have talked about this a little bit at the last quarter, but I think one of the things, and I might at some point turn this over to Jon, to talk a little bit too. But one of the things that I think has been a huge positive out of the Husky transaction is we are finding very, very significant opportunities to grow production, improve our profitability, and these are largely what I would call smaller Greenfield or Brownfield type opportunities coming out of our existing asset base. And so I think that is going to be a continued focus area with us. The other thing I would say, before I turn it over to John is, with the advances the company has made in our operating strategies, it is just really, really unlikely. I think that you are going to see this company announcing any large scale Greenfield developments any time in the near to medium term. A great example, I think would be Narrow’s Lake. So that was a project that for decades was thought of in this Company, and frankly construction started on it as a standalone Greenfield facility. And we have made so many advances in our ability to move emulsion and [steam] (ph) long distances that we are going to develop Narrow’s Lake, but it is really going to be developed as pads at Narrow’s lake with the emulsion being brought back to Christina lake for processing and treating them. So those kinds of advances just give us an opportunity to massively reduce the capital associated with these sorts of facilities, but maybe I will turn it over to Jon. I know he had some thoughts.

Yes, good morning, Greg it is Jon. And maybe one of the things that I would just remind you, is just some of the principles we have around organic investment and a couple of those that are core to this company. Any investment that we put into the ground has to return a cost of capital return at $45 WTI or $1.70 gas. And secondly, I guess, remind you that in terms of sustaining capital a good run rate for this company is still in that 2.4 billion range. But one of the things that we have been really looking at particularly with the asset base that we have inherited and then again with our own assets is what are the real short cycle opportunities that we have that don’t require a lot of capital in generate cost of capital returns well in above $45 that we have available to us. And you have seen some of those this quarter in Foster Creek and Christina and we are working in our inner deep basin assets as well as our heavy oil assets to identify even more of those kinds of opportunities. And we think we have built a pretty good backlog of those kind of short cycle, low capital, Brownfield type, de-bottlenecking opportunities that we have that are really high return. So I would say that we have been pretty clear on what we are doing on our capital going forward and you shouldn’t expect a left-hand turn from what we have talked about before, which is largely a sustaining capital budget with some marginal increases going forward. But, we have lots of opportunities I think on - or across the asset based on that kind of a paradigm.

Okay, terrific. Thanks for clarifying that. And then, just on the non-core assets set, I know you indicated in the release, you have done around $440 million. You have got lots of irons in the fire. What I’m curious about is whether the sharp escalation in oil price is actually making non-core assets sell harder from a bid-ask perspective, but any color around the processes underway would be great.

No, I mean, my general observation is that sort of trend to higher commodity prices has kind of been with us for quite some time. And I think it has actually helped us in terms of creating some competitive tension for those non-core assets. And I think when it - as you are in these processes, I would say as commodity prices rise, our expectation of value commensurately rises and I’m quite happy at the state that we are at with our non-core asset divestiture program.

Okay. Thanks very much, Alex. Thanks, Jon.

Yes. Thanks Greg.

We will take our next question from Menno Hulshof from TD Securities.

Thanks and good morning, everyone. I will start with a question on the balance sheet and like, Greg, I see you are getting to rough numbers $8 billion of net debt towards the middle of next year. So my question is, can we assume that the plan is to reset that to $6 million and more generally, what is the end game for the balance sheet beyond a triple BBB IG rating and how are you balancing that against a buyback activity?

Well, I think in terms of ultimately where we want to get to, we are doing a lot of work on that. Right now, our kind of professed target is a billion in it. As you make a point Menno, I think if you are taking a look at your model, you would take a look at prevailing market prices. You can see us hitting that sometime mid next year, and that is without giving any credence to asset the best pitchers. So we think that, there is an opportunity to hit that target in very, very short order. And I think from my perspective, the one thing I have learned about this business in my four years running the company is, a pristine balance sheet and Jon calls it, the fortress balance sheet is incredibly important as part of our strategy. I think at eight we are in a pretty, pretty good shape, but won’t see me cry any tears if at moments of time where we are below that number. We will probably be able to give a little more guidance as we head into our Investor Day in December. Anything to add on that, Jeff?

No. I think he hit it Alex and in the long-term, I think we feel the mid BBB is really the sweet spot. And we have always articulated eight billion is as more of a ceiling, but we want to hold that through the cycle. And between 10 and eight will be balanced between shareholder returns and de-leveraging. And then we will rebalance from there a sub eight. And just to note in the quarter, our net debt, did go down 1.4 billion. But I think as you see that to Alex’s point is, we are very conscious of balancing liquidity, maturities and de-risking the portfolio. So, we took the opportunity here in Q3 really to de-risk that. And if you look at it really extend our bond term by about three years and really balance out that portfolio and de-risk on near term maturities as well.

Terrific. Thanks for that. And so, my second question, I believe is for Jon. Jon, I think we have talked about rethinking some of your non-operated JVs within your refinery portfolio on the last call. And I think your wording was, whether they were held within the right vehicle. Do you have any updated thoughts on that and how much of a priority is that process?

I think Menno we are always challenging our thinking on that. We are always, I think progressing, how we are thinking about Downstream and whether non-operated joint ventures are the right vehicles to hold our refining assets. And what I would tell you during the quarters is, we have been pretty focused on our knitting, and we have talked about synergy capture and de-leveraging and getting our dispositions completed. So, it is something we continue to think about. But, I would say, in the short-term, our priorities are pretty clear around the balance sheet managing costs and ensuring that, we exit this year where we want to be on both of those counts.

Thanks a lot Jon.

And we will take our next question from Neil Mehta with Goldman Sachs.

Hi. Good morning. This is Carly on for Neil. Thanks for taking the questions, and congrats on the good quarter. The first one was just around the buyback, and great to see the incremental capital returns announced there. Can you just talk a little bit about how you are thinking about the pace of the buyback going forward as we move into 2022?

Sure. I can take that. Hopefully I can help a little bit. I’m not sure the answer will be completely satisfactory. But I always say, we endeavor always to do exactly what we say, we are going to do. And you will recall that, I have been saying that, we will not buy back shares till we hit our $10 billion net debt target. People should not think of that as a 2022 exercise, our reach in 10 billion is imminent, and at that point I will feel that we are fulfilled that commitment in the market. I’m not sure I think everybody should understand. We are very, very serious about the share buyback. We wouldn’t have announced it, if we weren’t and we have announced an intention to complete that share buyback by the end of 2022, beyond that there is obviously going to be puts and takes and market conditions, but it is our intention to execute it by the end of 2022. And I don’t think I’m able to give you much more granularity beyond that, other than it is a pretty big number. It is a pretty large commitment, and it is going to take a while to do it so you can expect that we will be pretty active on it.

Great. That is helpful. Thank you. And then the follow-up was just kind of around the assets. You know, you guys have made a lot of progress at assets like Lloyd since applying some of the Cenovus best practices to those operations, and just wanted to get your latest sense on, if there are any other opportunities that you have identified to drive optimization of the legacy Husky assets.

This is Norrie Ramsay here. I run the upstream part of this portfolio. Yes, we are very pleased. We have been applying our Foster Creek and Christina Lake processes over to Lloyd. We actually see we are just scratching the surface at the moment. We see lots and lots of opportunities. We have been able to apply them at Lloyd firstly, that is been the priority. We have been spending capital there and we have been reducing the spend rate, which has been really good, revolting them in other surveillance of the wells. And we see a huge portfolio of opportunities, and we intend to apply that across the other portfolios to Sunrise and Tucker, for some have been spent in capital this year. And as we go into our plan program next year, we see basically applying those FCCL processes to leverage the same magnitude over advantage going forward.

Yes. It is Jon. I will just add onto that too. I think we see a lot of opportunities even beyond the heavy oil assets. In the conventional business, I think we have also been able to work assets like Ancil well rich where we have again applied sort of our drilling techniques to that to I think the benefit of the company. And then the other thing that we have hinted at and one of the reasons that we really liked this merger was the overall integration opportunities that, we have with the upstream and the downstream that we acquired. And we still think that there is integration opportunities that we will have in Lloydminster where we acquired an upgrade in an Asphalt refinery. And then remember, we are in the midst of rebuilding superior which is a small refinery, but it will eat the acid or eat the molecules that we produce here in Western Canada. So we think there is opportunity across the portfolio to improve the operating metrics in the upstream, but longer term, we also think there is integration opportunities between the upstream and the downstream that we have acquired.

Yes. And it is Alex. Maybe I would just make one comment. And I think both Jon and Norrie are probably too bashful to say this, but I was looking on our energy regulator in Alberta’s website, the other day and saw that the top 15 oil wells in the province are all Cenovus wells. And that is a testament to the operating techniques and strategies that Norris’ team bring to that upstream and Drew’s team on the conventional very, very similar.

That is great. I appreciate the color.

Thanks.

And we will take our next question from Phil Gresh from JPMorgan.

Yes. Hi, good morning. Thanks for all the updates today around capital allocation. I did have one follow-up with respect to the dividend piece of the plan moving forward. John, just any thoughts you could share around how you think about the right framework for dividend as a percentage of the capital allocation, whether it is you are focused on a breakeven or a percentage of cash flow or something like that, perhaps on a longer-term basis?

Well, I can give you my thoughts still remember this isn’t my decision in isolation. This is what the board thinks about pretty regularly. But what I would say and we had a long discussion around this at the board meeting, lots of views. Our view around the dividend is that it needs to be sustainable and paid out a free cash flow at $45. So under that scenario, this Company still has lots of room to grow the dividend. Similarly, we would be of the view that share buybacks need to happen when the share price isn’t reflecting its net asset value of mid cycle pricing. And when we looked at the shareholder returns that we wanted to implement in this quarter and recognize this as a point in time, this isn’t a definitive discussion we are going to have on shareholder returns. We felt that there was much more value to the shareholder in us buying back shares of these kinds of valuations relative to increasing the dividend even farther. What I would also say is that, these kinds of commodity prices this companies generating 600 million to 700 million of free cash flow a month. So, these discussions and how we think about shareholder returns are really going to be dependent on that framework that I talked about as well as sort of price movements of our equity in the future. So, I think this will be plenty of room for future discussion on this, but this is where we are today. This is kind of the point in time and how we think we can maximize the return to the shareholders.

Got it. That makes a lot of sense. In terms of CapEx, as you look at 2022, do you think you can stick with the same kind of sustaining framework with maybe a little bit of growth capital and superior or any inflation pressures or other things that we should be thinking about?

Yes, I think we have been really clear Phil that 2.4 billion is the number across this asset base to sustain production in and around sort of 775,000 to 800,000 barrels a day, as well as keep the downstream in that safe and stable condition, that continues to be a good run rate. And you can hold that for the foreseeable future. We have also been pretty clear that over the last few years, we have under-invested in the upstream and there is some catch-up to do, so it is not something that is as I mentioned before, a left-hand turn from where we have been, but there will be some incremental capital to catch up on some underspending than we have had in the upstream. And as you mentioned, we still have to finish superior, and we think there will be 200 million to 300 million more that we are going to have to spend in 2022 to finish that project. But again, we believe that most of that capital will be covered off with insurance proceeds. So, when we do release the budget, I think in December, from December 5th of this year, you will a full picture. But nobody should be surprised. We will be very consistent with what we have talked about through this year, and what we have talked about since we made the acquisition of Husky.

Got it. And then just on the superior proceeds, is there a way to think about the cadence of, what has been spent versus what has been collected so far, obviously, there will be a spend next year and the related collections for that piece. But, is there any kind of additional catch-up that we need to be thinking about relative to what has already been spent?

Yes. It is Jeff here. There will be some catch-up. I will just give you some color. We brought in about $100 million in this past quarter. I would expect us to exceed that in Q4. And so, you will see it, at some point readable here, lagging the spend, and then I think, there will be a catch up here as we get into early part of next year with the insurance providers. But that is just kind of where we are at and we are a few hundred million in on both the PD and the business interruption recoveries to-date. And as I said, we were about 100 million this past quarter. I expect to exceed that in Q4 and then we will have some probably catch-up into next year.

Great. Thank you for that.

We will go to our next question from Dennis Fong with CIBC World Markets.

Hi, good morning. And thanks for taking my questions. I really appreciate the color that you have provided around capital allocation, as well as the balance sheet. If it is helpful, I would like to switch over to the operational side a little bit more. We are obviously seeing a little bit of an energy crunch within Europe and Asia. Just wondering in terms of, if you could give incremental context. I know you had a small comment there on the Indonesian assets. But, how are you seeing Asia-Pac as a whole, in terms of relative gas demand, just given obviously you guys garner quite strong pricing in that region, and that asset generates a lot of free cash flow. So, just curious as to what you guys are seeing with respect to Q4 and Q1 upcoming as well.

Yes. Dennis, it is John. Norrie may want to chime in on this as well. But what I would remind you is that, when we sell gas in Asia, whether it be with our South Asia assets, just off the Coast of China or Indonesia, this is all fixed price gas, and it is all governed by contracts that have minimum and maximum DC cues. So, the volume and the price is really set by the contract, and what we have been seeing and this has surprised, nobody, I guess, is that, the PRC has been maximizing the daily takes from the assets from the South China sea. We have had rate-able takes, off of Indonesia. So that has been, I think a very good news story for us and Alex has kind of talked about, the amount of free cash flow that those assets have generated, through the past nine-months and where we see that going through the end of the year. One of the things we are working on is, increasing our gas sales there. So looking for when our partners see not to increase the amount of gas we can take into China and we have made some progress on that, nothing is imminent there. But, those are things that are opportunities for us to increase our gas sales. The other thing I would kind of remind you is that, although today we are selling somewhere in between 8,000 to 10,000 barrels a day in Indonesia, we have three expansion projects underway that will take that production up to about 20,000 to 22,000 barrels a day at the end of 2023, and those barrels a little bit a relatively small number will generate about 250 million of free cash flow a year. So it is a very profitable business. It isn’t volatile on pricing, and it is not volatile on the off takes. It is all really governed by those gas contract in South China.

I would just add Dennis, our gas is rich has high liquid content, and we are actually seeing very, very strong Brent plus prices as we do our liquid liftings as well. So across the whole portfolio, gas and liquids, we are kind of maximizing as much as we can contractually do at the moment. And we see that going forward for the rest of the year.

Great. I appreciate that color. And then further my second question here is also shifting over to more of the ESG side. You have outlined a couple carbon capture projects that you are participating in within the Lloyd region, as well as further kind of work on assaulted pilots at Foster Creek. I was just curious to begin a quick update on that side, as well as any of the - we will call it key items or takeaways that you were looking for from those various highlights or initial projects both at a high speed and the Lloydminster plant.

Sure. Happy to do that, Dennis. I think what I might do a Rhona DelFrari is here and Rhona’s our Chief Sustainability Officer, and this is probably a good time to introduce her on our call, but Rhona, why don’t you get them.

Hi, Dennis, thanks for your interest in that. So right now we plan to come up with our revised ESG targets along with our investor day in December. And part of that will be some examples of how we expect to achieve them both in near term, and then our longer term ambition to get to net zero. This work is also connected to the oil pans pathways to net zero initiative that we are part of along with we just announced ConocoPhillips Canada joined today so long with five of our other oil sands peers. And so those projects in particular that you are mentioning some are at different stages. So some are at the feasibility stage, that we are looking at and then there is project to reduce our emissions such as what we are doing to reduce methane in the conventional area that are already well under way. And so there are many pathways as the name of the broader initiative suggests for how we are going to achieve these targets. A lot of them are the bigger projects such as larger carbon capture and storage that we are looking at for our oil sands assets, were needing to decide whether that is something that we are going to pursue, but where right now working closely across our organization. But with the operations groups, as well as with the technology development group to look at different ideas, and really we see that there are many different solutions that we can pursue. We are working closely with the federal and provincial governments right now, because as they have made really strict commitments to achieve, their Paris goals. They have talked about how they need to work with industry on things like tax incentives, grants to really encourage some of these early stage technologies that are really need a lot of collaboration with the clean tech industry, with government, with industry and with others to get them off the ground. So those projects that you talked about and you mentioned in particular we will provide a bit more color on some of them when we get to Investor Day.

Okay, great. it sounds like add to whole price for the details. I appreciate it, thank you for taking my questions.

Thanks Dennis.

And we will take our next question from Matt Murphy with Tudor, Pickering, Holt.

Hi, thanks, and good morning. Just on the operations side, I was wondering if you could comment on how we should think about the path forward for Foster Creek. It is just thinking primarily on the new pads that came on, that appeared to be running at I think record rates. I guess the question is, should we anticipate these falling to a lower plateau rates or would you characterize them as already in that kind of standard sort of Seg D plateau rate in the curve?

Yes, it is a Norrie here. We are very pleased for the strong production we are getting from our west arm. There has been - three pods being brought on. I mean, just sort of at a scale. W34 one of the pods is dune steadily for the last 60-days about 40,000 barrels a day, and another one W35 20,000 barrels a day. Very Strong production, we are benefiting very, very deep pay, very clean pay, and very high ops availability in our plant at the moment. If you would like to think of it this way, we have about three pods a year that would bring on and meant it with the drills and redevelopment opportunities. So, we basically see a path forward to sustaining strong production for the remainder of the year. And then, into next year at the Investor Day, we will kind of like give you an update of the RINs then.

Okay, great. And the follow-up to set at actually you are maybe following up there. I was just wondering if you could remind us of how we should think about the pricing mechanism for I think the legacy [indiscernible] going forward not the 29 1 component of sales. I think going back in Europe more, there was some concern that it might get lower, but we are obviously in a bit of a different global gas market today.

Yes. And re we have a mechanism, we are just no - we are overlifting above at 120%. And it goes back to the contract mains mid next year. So, the actual rates are based obviously on the market gas and oil prices in China. So, we are still working within those confines. But production basically goes from this 120% lifting to 85% lifting next year. And as John mentioned, we are actually looking at potential alternatives commercial models to actually help sustain gas production at a high level going forward.

Yes, Matt, it is John. If you are actually looking for the mechanisms on the three producing areas as well as Indonesia, why don’t you give in IR call and making kind of walk you through that. If you look at the corner though on a blended basis, and it is because as Norrie mentioned, they are over lifting relative to the normal DCQ. The blended price in China was about $12 NIM them for the quarter. But there is a few points in takes in there. And then you have got to remember that we have different working interests in 29.1 relative to 3.1 and 34.2. But IR can kind of walk you through the, kind of the sliding scale as well as the difference in pricing as it relates to the layers of off-take that Sienna is entitled to.

Okay, great. Thanks team.

We will go to our next question from Manav Gupta from Credit Suisse.

Hey, guys, congrats on reinstating the buyback. I’m just wondering if there are any kind of agreement can be worked out where the shares that Conoco has, which they own can be treated in a block to you directly. So they don’t come to the market and then you have to buy them. I mean, this is something possible or something could be worked out on the direction?

Yes. Manav, it is Jeff here. I think this process, we kind of view the NCIB is obviously through that execution is more open-market purchases, and I think that provides us flexibility in execution. I think Conoco has been looking at the public disclosures fairly readable in how they have been winding down their position. I think through the NCIB, we have flexibility to do the open market and we feel that will provide the support to the share price and really bounce out in the market. But, I think we feel this is the best mechanism we have now and can provide us flexibility in execution versus a direct block purchase.

Manav, it is Alex. And just kind of, if anyone missed that. I mean, if you look at the scale of the NCIB that we announced, we are always talking to Conoco and that we are always trying to see, if there is an opportunity. But I would say that, we are pretty confident that even in the event there isn’t an opportunity to do one of those big block trades, with the size of the NCIB, that we are contemplating, we believe that we can more than offset any of the pressure that is coming on the stock through the Conoco sort of ratable sell down.

That is perfect. As my follow-up, quickly is on the carbon capture and sequestration, and you kind of mentioned some of the things that they will have will have to be a collaboration between you and the government and stuff. And I’m just trying to understand from the perspective of Cenovus as consortium. Any idea of what kind of partnership or support the government could provide, whether they could chip into some of the CapEx, whether they could give you more in terms of carbon credits, set a price, anything on the direction, what kind of help would the consortium be looking from the government to take this thing and make it work?

Yes. I’m happy to take a cut at that Manav and Rhona may jump in. But I mean, you would have seen probably about three or four months ago, the Federal Government announced a process with respect to setting up a tax credit for people investing in carbon capture and sequestration, and that is a process - there is a consultant consultation process that is been going on for quite some time. I think there is many, many ways that that governments can be upheld and that we can collaborate with governments. And you have seen that, in Norway, you see it in U.S. governments using tax policy to make it easier for new entrance in this kind of technology. So, I think that to me is the most obvious first step on our collaboration with the government. And I think that consultation is going pretty well, but maybe I will turn it over to Rona.

Yes. No we are having excellent talks with all layers of government on this. And again, it is a shared goal that we have. It is Canada’s goal to get to net zero, and it is our industry’s goal and Cenovus’ goal to get to net zero by 2050 and so it only makes sense that we are working closely together. And what we are talking to them about is, you know, the tax credit in particular or the investment tax credit that has been announced already is for CCUS it is very specific. And that will be we expect a large part of how it makes these CCUS project economics to be able to proceed, because again, CCUS works. We know that CCUS works. It is been proven many times, but at the scale that we are talking about, it is never been done before. And so there are some risks associated with that. And any time that you are in any industry, when you are going forward with something that is early stages, you have to de-risk that, and part of that is when government steps in to encourage these technologies that are for the benefit of all Canadians, but also that the industry can progress. And the other things that we are talking to the government about is really multi departmental. And so there is certain opportunities through programs to encourage technology development in natural resources department and the environment climate change Canada department, even the Canadian infrastructure bank has some opportunities. And so government departments, when we talk to them, we are not just talking to one ministry or department, we are talking to multiple departments and they are working with us to say, these are the types of initiatives that we can provide to you to support, and really grow this clean tech industry in Canada, working along with the oil and gas sector. So that we have both a thriving oil and gas sector that is low cost and low carbon, but also a thriving clean tech sector that is feeding into the oil and gas sector, some of these technologies that can then be exported around the world. So lots of opportunities that the government acknowledges and that our industry does as well.

Thank you for taking my questions.

Thanks Manav.

We will go to our next question from Harry Mateer with Barclays.

Hi, good morning. One follow-up item on the balance sheet, you made the rationale for the refinancing transaction very clear in terms of pushing out and de-risking the maturity calendar, but I guess thinking through it, doing that as a bit of a cost in terms of shrinking the available pool of shorter term debt, that can be cheaply paid down in advance and rating agencies do vary approach, but generally gross debt tends to be viewed a little bit more important than net debt. So if you want to get to Mitchell will be, how should we think about you guys converting net debt reduction into gross debt reduction in the next year or so?

Yes, it is Jeff here. I mean, I think if you I will use Q3 as a color. I mean, we will be balancing approach. There was opportunities, I think, in the market to effectively refinance de-risk the front end, and obviously I think we will continue to look at different opportunities to attack the gross debt here over time. And look the market moves and I think, we are seeing upward movements on interest rates, but we will be balanced in that. And I think we I think we will continue to focus on more of the front end, but again, it is market dependent. And I think I think over the next little bit, you could probably see us hold a little bit more cash than we have that we say our floor is of a billion dollars. But I think we saw an opportunity to market, to de-risk take care of the front end, at an effective cost, save over 40 million annually and interest and as the market presents itself will be judicious and take those opportunities on the gross debt. So expect us to balance all of that both the maturities, the liquidity and then the gross de-leveraging and I think we have worked through and obviously have very good relationships with the rating agencies as well.

Okay. Thanks for that. And then switching gears a bit. Just wondering if you have any color on the recent widening and the WCS diff in the past few weeks to what might be driving that it is not necessarily what we would have expected after our started line fill, but I know it is also narrowed into that event. So just curious you have perspective there.

Hey, Harry, It is Keith here. I think it is a bit of two stories. We are seeing a bit of widening on the heavy barrel down in the U.S. Gulf Coast. There are some refinery turnarounds that are happening in the Gulf Coast that are kind of pushing out a little wider. Also, I think with kind of natural gas prices globally it is causing some refiners choose to try to run a little leaner and reduce kind of their operating costs and not process as many heavy barrels. When you back up to Alberta, obviously inventories are running high and we are seeing some increased production right here at Cenovus, we are hitting some records. So, that is kind of putting a little pressure we are into the winter blend season. So condensate usage is up. And so, you couple that with a line three coming on and taking additional aggressive and kind of rail running at minimum kind of baseline rates. And we are kind of seeing the differential normalize around that $15, $16, but a lot of it is because of what’s going on down in the Gulf Coast.

Great that is helpful. Thank you.

[Operator Instructions] as there are no further questions at this time. Mr. Pourbaix, I will turn the call back to you for any additional or closing remarks.

Thanks very much, and thanks everybody for your continued interest in the Company. And with that we will sign off and let everyone get back to their day. Take care.

This concludes today’s call. Thank you for your participation. You may now disconnect.