Cenovus Energy Inc. (CVE) Q3 2022 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’ 2022 third quarter results conference call. Please 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. They also outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus’ annual MD&A and our most recent AIF 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. Please follow-up with these -- on those directly with our Investor Relations team after the call. And please also 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, everyone. As I do every quarter, I'm going to start this morning's call with our top priority, which is health and safety. In late September, there was a tragic fire at our non-operated joint venture refinery in Toledo. We were devastated to learn about the fatalities of two workers there and our hearts go out to their families and colleagues. This is a heartbreaking reminder that safety must be absolutely fundamental in our business. It is our responsibility as an industry to ensure all our workers who start to shift get home safe every day. Our focus on the Toledo refinery remains twofold. We will continue to support our joint venture partner as well as the staff and everyone at site in every way that we can. We'll also continue to work closely with our partner to assess the damage and gain a better understanding of the path forward. Investigations into the cause of the fire are ongoing, but early indications from aerial and drone footage suggests the damage is localized to a small area of the refinery. Restricted access to the site has limited the operator's ability to fully assess the damage, but the refinery will remain shut down in a safe state and we'll provide further updates when we can. Turning now to the third quarter, we continue to deliver solid operating and financial results even with increased volatility in commodity prices. The oil sands segment led the way with Christina Lake back up from its Q2 turnaround and producing over 250,000 barrels a day. We safely deferred our turnaround at Foster Creek to Q2 2023. However, there is still some necessary planned maintenance that impacted production in the quarter. There was also an issue with the water tank that lowered production in August, but production was back up to normal rates in September and continues at that level. In the Lloydminster Thermals, Bruce Lake North produced first oil in early August and has since hit daily rates well above its nameplate of 10,000 barrels per day. Recall that when we took over the Lloyd Thermals, those combined assets were producing around 80,000 barrels a day by adding Spruce Lake North as well as continuing to apply Cenovus' SAGD expertise we now see the Lloyd thermals run closer to 110,000 barrels a day. We also closed the Sunrise deal in the quarter, where we acquired the remaining 50% working interest in that SAGD facility. We are reporting 100% of Sunrise volumes from August 31 onwards. We have seen strong performance from the redrill and redevelopment program at Sunrise and just drilled two of the longest wells to date at that site with 1,600 meter laterals. In the conventional segment, we successfully executed a major turnaround at our Elm Worth plant without incident and restarted our development rigs coming out of breakup. Conventional production was running between 125,000 to 130,000 BOE per day coming to October. The team has also been reactivating some base well production at a very low cost. In the offshore, our partners recently brought the MDA-MBH fields online in Indonesia. We expect them to ramp up over the fourth quarter. Additional new fields will follow to bring total net volumes closer to 20,000 BOE per day in 2023, doubling the previous run rate. In the US downstream, the throughput was up with a utilization rate of 87% compared to 75% in Q2 as we had most of the Q2 turnarounds behind us. The Synovus operated Lima Refinery continues to run well after its major turnaround last year with utilization in Q3 coming in at 94%. However, there were outages of the non-operated refineries in the quarter with turnaround activity at Wood River and Toledo. In addition, Toledo was taken back offline on September 20, following the incident I mentioned earlier. Lima operations have shown significant improvement through the year, and our goal is to continue to demonstrate this level of operating capability across our US refining operations as we restart the Superior refinery and take on operatorship of Toledo. Our priority for the US refining business is establishing a solid track record of safe and reliable performance. This is one of the company's greatest opportunities in the near term. Turning to our financial results. The quarter's adjusted funds flow was nearly $3 billion, while free funds flow was about $2.1 billion. Excess free funds flow was about $1.8 billion, and this included a cash payment of about $400 million on closing the Sunrise acquisition, which was fully offset by net proceeds recorded on closing the retail fuels network sale. The volatility in commodity prices in Q3 manifested in two primary ways: first, in oil sands operating margin. And here, the lag on condensate pricing was seen in realized pricing in the oil sands assets, where higher-priced condensate purchased in earlier months was blended and included in sale volumes through the quarter. Second, in US manufacturing operating margin, processing crude oil purchased in prior periods at higher prices and manufactured later in the quarter when pricing decreased had an impact of almost $420 million. Throughput increase in unit cost came down relative to Q2. However, the volatility of commodity prices had a much larger impact on operating margins in the US downstream. We also began incurring increased expenses for the startup of the Superior Refinery, which combined with the Toledo outages to add operating expense drag without throughput. Taking out the inventory and FIFO gains in Q2, along with the FIFO losses in Q3, the US Manufacturing segment performed better this quarter compared to last. We also experienced cash flow headwinds related to the cost of higher-priced feedstock and condensate from earlier periods included in our products and sales volumes in the quarter, or in other words, FIFO impacts. These dynamics serve as tailwinds on our results in a rising price environment, but serve as a headwind in a falling price environment, like we've just experienced in Q3. In accordance with our shareholder returns framework, we've allocated half of Q3 excess free funds flow to shareholder returns. This is over and above our base dividend. We also continued our opportunistic and disciplined approach to share buybacks through the quarter. This resulted in a return of about $660 million to shareholders through the NCIB program. In addition, the Board of Directors has approved a variable dividend of about $220 million, or roughly $0.14 per common share with this variable component, fulfilling our commitment for 50% of excess free funds flow going back to shareholders. The current NCIB program will expire in early November. As we announced earlier, this morning, our Board has approved the application for another NCIB program. It will provide capacity to repurchase approximately 136 million additional common shares over the next year. We also completed a tender transaction in the quarter, repurchasing about $2.8 billion of debt, bringing our total of repurchase notes this year to $4.3 billion. This exercise mitigated refinancing risk for the company until 2027. It also reduced our weighted average coupon rate, and will save about $200 million in annual interest expense going forward. Our net debt reduction was accelerated this quarter by a working capital release, and now sits at about $5.3 billion. And to put things in perspective, we started this year with $9.6 billion in net debt. So that is a reduction of $4.3 billion of net debt in just three quarters. Q3 was another great example of how our financial and shareholder returns framework delivered up to and including Q3, we will have returned nearly $2.9 billion to shareholders this year through our base dividend, share buybacks and the variable dividend, while at the same time, also deleveraging. At the same time, as paying down our debt and providing returns to our shareholders. We are also making significant contributions to government. When the oil and gas sector does well, Canada does well. Recent Peters & Company analysis shows that oil and gas companies are expected to contribute about $50 billion in royalties and taxes to the Canadian federal and provincial governments in 2022. That's money that pays for health care, education, arts and culture and much more across this country. To put this in perspective, our sectors anticipated government contributions this year are equivalent to more than two-third of the funding for all of Canada's hospitals last year. That's at a time of heavy demand under the strain of COVID and Cenovus and our peers are further bolstering the economy by investing our revenues back into our businesses, supporting jobs and providing economic benefits for suppliers and manufacturers in every province. That same Peters & Company analysis shows our sector making capital investments of about $40 billion this year alone, and it's much more when you add in our spend on annual operating costs. These investments include money for environmental and GHG reduction initiatives. In fact, our sector is the largest spender on environmental services in Canada. The Pathways Alliance, Cenovus jointly founded with five of our oil sands peers to get to net-zero emissions by 2050, recently announced our decarbonization projects will require investments of more than $24 billion by 2030 alone. This includes Alliance's foundational carbon capture and storage pipeline and hubs, as well as energy efficiency, cogeneration and electrification projects. We are ready to move forward with more advanced investment decisions about the significant decarbonization projects once governments provide assurance that the necessary policy mechanisms and support are in place. Cenovus and our peers continue to work with government officials on these details, so we can all continue to achieve the shared goal of emissions reductions. We are committed to both investing in our business, including decarbonization projects and providing strong returns to investors. These two things combined are what will support a strong oil and gas sector in this country and enable us to continue contributing in a significant way to the Canadian economy for a long time to come. Recapping what we've achieved at Cenovus this quarter and where we're headed. Our upstream operations continue to build on momentum towards 800,000 barrels a day and above and delivering meaningful value and returns on investment. Our downstream performance has not yet fully shown what it can do in this environment. And that will be management's focus going to Q4 and 2023. Overall, we've posted another solid quarter highlighted by strong operational results and substantial further deleveraging towards our $4 billion net debt floor. At current strip, we expect to reach that level around the end of this year. We look forward to delivering 100% of excess free funds flow to our shareholders for periods when we're at that level. And with that, we're happy to take your questions.

[Operator Instructions] We'll go to Greg Pardy with RBC Capital Markets.

Yeah. Thanks. Good morning. Thanks Alex for the rundown. Just a couple of questions for you guys. I guess the first one is you talked about downstream improvements that you're focused on. If we just maybe talk about the upstream for a minute, do you continue to see a favorable rate of operational change occurring? And then if so, where is that happening?

Sure. No, I'm happy to talk about the upstream and I'll probably pass it on to Jon and Keith and Norrie at some point. But I think, Greg, how I look at it, since we've been able to get the Husky deal done, we've had a really good run of finding a lot of what I would call brownfield opportunities to continue to grow production, drive our operating costs down, drive our SORs down. And we picked a bit of the low-hanging fruit. But I think from my perspective, we see that opportunity continuing. I think Sunrise, you're going to see significant things from Sunrise going forward. But maybe I'll pass it on to Jon and he can give some thoughts.

Thanks, Alex. So Greg, one of the things this industry and this company hasn't really done over the last five or six years through the commodity cycle downturn is put a lot of money or put any money into growing production and harvesting some of the little hanging fruit that Alex has mentioned. And that goes for Cenovus, but it also goes for the assets that we acquired through the Husky acquisition. So when we look at our portfolio, we see lots of opportunity for kind of incremental growth that starts to re-rate your cost base and starts to recalibrate not just production, but the cost base that goes with it. So Alex mentioned Sunrise, that's a great example, hasn't had a new well pad since 2017. And we acquired the other half of that this quarter, and we see lots of potential growth there for marginal capital and similar in our conventional business, we see the same thing happening there. So I think what you can expect from us is similar to what we just did at Spruce Lake North and what we've done in Indonesia and what we're about to do with Terra Nova is kind of add incremental production through time that comes with relatively modest capital requirements, but does kind of provide that 5% rate of growth through time.

Okay. Terrific. Thanks for that. And I'll switch gears. And so a small special dividend, how should we think about maybe special dividends versus base dividend growth? Because clearly, you've got the financial wherewithal to go and raise the base dividend now.

Yes. Greg, it's a good question. And I think I would say to you that over the long-term, I would view that one of the primary ways that companies like Cenovus add value is growing their base dividend. And to do that, ultimately, you need to grow both your top line and your bottom line. And you heard Jon, we think we can continue to grow at a pretty reasonable pace as described by Jon, just by kind of keeping to our knitting with those sort of organic and brownfield opportunities. But I think we do see -- we see opportunity over time to grow both the base dividend. And obviously, there'll be opportunities for variable dividend. But from my perspective, to the extent we can afford it at the bottom of the commodity cycle, it would certainly be management's goal to continue to grow the base dividend also.

Maybe I'll just add on to that, Greg. I mean, the two things are kind of synergistic. You invest in the business and generate returns at $45, which just gives you more capacity to grow your dividend through time. So the incremental investment that you make in the business just supports that growth that Alex talked about of the base dividend through time, which is kind of at the core of this company in terms of returning cash to shareholders.

Understood. Thanks very much.

Yes. No worries. Thanks, Greg.

Thank you. We'll take our next question from Neil Mehta with Goldman Sachs.

Hey, this is Nicole Wesser [ph] on for Neil Mehta. Thanks for taking the time. So just kind of a follow-up on the capital allocation side. Can you provide any insight around the timing on reaching the CAD 4 billion net debt target at the curve? And then any sort of carryforward implications should be thinking about after the announced variable?

I mean I think I mentioned it in my call notes, but we see us hitting the 4 billion, all things being equal, probably right around the end of the year. And we are -- if there's one thing we strive to demonstrate its discipline, we've committed that once we hit that 4 billion, we're moving to 100% payout, and that is still our intention, no changes there.

Great. Thank you. And then as a follow-up, just curious how you're thinking about next year's spend outlook. And also, if we should be thinking about any sort of updated maintenance capital range on the back of elevated costs?

Do you want to talk about that, Jon?

Yes. I think we've been pretty clear, and we'll come on with a more formal budget set of guidance later next month. But I think we've been pretty clear that the strategy is pretty much set, and we are in a world where you may see some incremental dollars go towards growth, but it will be exactly that will be marginal and incremental. So don't think about next year's budget as being much different than this year’s. I think there will be some monies to get after some of that low-hanging fruit that we talked about that allows us to maintain sort of that 5% growth rate right across the business, upstream, downstream and conventional. So I think that we'll flesh that out more so in the next month. And sorry, I forgot the second part of your question?

That’s on the maintenance capital range, if there's any sort of update we should be thinking there?

Yes. Okay. On the maintenance capital, you'll remember that when we acquired Husky, we came out with a number of CAD 2.4 billion, as being the number that's required to keep production flat and keep our ex-plants in a safe and stable condition. What we have done over the course of this year, if you think about the assets that we've acquired, the other half of Sunrise, our anticipated acquisition of Toledo, and then some allowance for inflation. We kind of expect that number to move up in sort of the 2.7 to 2.9 range. But I think that's a good number moving forward. We'll provide even more color on that, once we get through the budget. But that's kind of a run rate number that you should be thinking about for the next five years.

Hey, great. Thanks for the clarification there.

Thank you. We'll take our next question from Menno Hulshof with TD Securities.

Thanks, everybody and good morning. Just maybe I'll start with pathways. In the release, you talked about Canada facing intense pressure on CCS from the US, Norway and the Netherlands. So maybe you could just give us a refresh on how Canada currently stacks up. And I think everybody on the call has a good sense of what that looks like for the US. But where do we stand relative to Europe? And then you also mentioned that government discussions are ongoing. But just in terms of the track to resolution, is it possible that we see something before the end of the year. Or is 2023 more realistic?

Yes. No, it's a good question, Menno. I'll give you my thoughts and Rhona may jump in with some color on it. But look, I mean, where we are now, we've had ongoing discussions with the federal government and the provincial government now for many, many months. Earlier this year that kind of one of the initial outcomes of that was the investment tax credit that the federal government put forward for CCUS. And I think we really viewed that as a strong commitment from the federal government. And that was something that was more reasonably equivalent to the US fortified Q support that they were giving to carbon capture. Since that time, the US government has come out with the Inflation Reduction Act, which added significant support for industrial de-carbonization through – including CCUS. And that – right now in the US, they're getting producers in the US are getting support both for capital investment and for operating costs. And I think our perspective, this goal of de-carbonizing not just the oil and gas industry, but every major heavy industrial industry in Canada is a massive task. It is a huge lift. Industry is going to spend many billions of dollars on it ourselves, but pretty much every jurisdiction in the world that is proceeding on carbon capture and storage is really doing that with significant involvement in multiple levels of government. You've heard me talk about the US, Norway is in a similar position. So I mean, I think Canada needs to be focused on competitiveness. This is an incredibly important business for the Canadian economy and Canadians. And as I said, we're going to do our part, and we are doing our part. But there's more discussions needed with both levels of government. I don't know, Rhona, if you have anything to add on that.

Yeah. And I think that the importance of what you said, Alex, is that the focus has to be on both the capital cost and the operating cost. And that's what we've seen in examples around the world, where significantly large CCS projects have gone forward. There's been anywhere from two-thirds to getting to close to full support from governments across the project. These are multi-decade projects and so the capital is great. That's the first thing that you talked about, but you also have to look at balancing the operating costs over the life of these projects, because that's the most significant part of them. But CCS is the focus right now, because that's a proven technology. And anywhere in the world right now, there's CCS everywhere, our companies have experienced with CCS when it's linked to enhanced oil recovery, because then it makes sense to go ahead without having to partner with government. But this truly, we’re looking at the CCS projects that we're talking about, where they are not the oil sands partnered up with Enhanced Oil Recovery. These are joint projects that we want to do with the government. This is infrastructure that's for the Canadian goods. And it's infrastructure that is going to result in tens of thousands of jobs that will be a real next construction boom in Alberta. So there are so many levels of benefit to these projects going ahead.

Just – thanks, Rhona. And Menno, just one last – just to be responsive to your last question about timing. My kind of guess on this is, there's a lot of discussion that is ongoing with government. And just given the complexity of this issue and the need to make sure, it is done right, and we deliver what is needed. I would suspect that, this will ultimately extend into the New Year.

Okay. Thanks to you both. That's very helpful. I'm just going to flip over to the superior rebuild project you're still targeting Q1 restart. Where do you see the risk in the ramp-up process, if at all? And what should we be modeling for utilization for the first half of 2023?

Hey, Menno, it's Keith Chiasson. Yeah, we're really happy with the progress on the project. We've always been forecasting ramping up through Q1 2023, and we're still on that track. We're actually in the process of transitioning from construction into commissioning. We brought our first set of crude into the tanks of Superior and have floated the roofs at those tanks and filled up our inventory. So we're imminently getting ready to commission the crude unit and start that up. And so really still on track to ramp up through Q1, 2023, as we've been saying for the past several quarters.

Thank you, Keith.

Thank you. [Operator Instructions] We'll go next to John Royall with JPMorgan.

Hey, good morning, guys. Thanks for taking my question. So on downstream, if I heard this right, I think you mentioned the results were better than 2Q in 3Q when you strip out FIFO and inventory impacts. Can you talk about the drivers there? And I know you had less downtime and better throughputs overall, but anything you're seeing on the cost or the margin side that improved into 3Q?

Yes. Hi, John, it's Keith Chiasson. We saw a really strong throughput at our Lima Refinery. We actually set a throughput record in the quarter at Lima. Obviously, the cracks are very supportive in the quarter as well. As we think about kind of what the forward view looks like, we're really excited about this set of assets, because right now, we're still incurring a lot of cost without any throughput at Superior. And as you know, with the tragic fire at Toledo, we were down for most of the quarter at that joint venture operated assets. So as those assets come on stream, we're even more encouraged about what the US structure can perform at. As you know, with WCS differentials, kind of, where they are, these refineries are well set up to consume Canadian heavy, both Superior, Toledo our joint venture at WRB as well as Lima. So, really constructive heading into this, as well as kind of the very constructive crack. So pretty exciting time for the US manufacturing, as those assets come back on stream and continue to perform.

Great. Thank you. That's helpful. And then, just flipping to upstream. When I look at royalties for Foster, Christina and Sunrise, it looks like all three went up in terms of the rate in 3Q versus 2Q, despite price going down, assuming I'm doing my calculation right. Anything you would point to that's driving those rates higher in 3Q versus 2Q?

No, it's Jeff here. No, there's nothing structural. I'll just remind you of the framework. It's -- those -- Foster Creek and Christina Lake are post payout. So they'll range on from 25% to 40% of a payout there. So basically, your revenue less your op cost, less your CapEx. They've been running in and around 30%, but there's nothing structural. It's just a factored in. And when we're in post pay, it's an annual calculation. So there's always just true-ups and different pieces, but that's how you should be thinking about it.

Understood. Thank you.

Thanks, John.

We'll take our next question from Dennis Fong with CIBC World Market.

Hi. Good morning and thanks for taking my questions. The first one for me is just really around the share repurchase program. I know, previously, you discussed focusing on intrinsic value at mid-cycle pricing. And I was just curious, just given what we've seen most recently from macro in general. Has that maybe driven you to revise or update your view on what "mid-cycle" is and how you guys would like to think about repurchasing shares?

Once again, I kind of just go back to this concept of remaining disciplined and conservative of how we think about things. We still think about mid-cycle as kind of in or around $60 WTI. And I mean, I think at this point, I'm not convinced that the world is not going to go back to where it's been over the last 50 years. So we're going to stick with 60 as kind of representative of mid-cycle commodity prices. And I'd remind everybody that from our perspective, we do prefer buybacks, all things being equal over variable dividends when we're trading below intrinsic value. And I think as people think about even like until we hit $4 billion and after, we hit $4 billion, it really like think about the share price, if that share price is looking like $30, people should expect a lot of variable dividends. And conversely, if that share price is trending below $20. They should expect share buybacks. That's really directionally how we think about it.

Great. Great. Thanks. And my follow-up here is maybe just sailing on Greg's question earlier. I know you've made pretty good progress on some of the optimization of your existing assets, both historical Cenovus and Husky. Just curious as to whether or not you can provide us a bit of an update on further down the line projects like, say, connecting the like in Christina Lake, where that potentially happens to be at or where the next leg of upstream optimization could stem from Exxon ride? Thanks.

Yes. Hi, Dennis, its Norrie Ramsay here. Yeah, we are progressing at Christina like the pipeline that connects up -- over the next three years, we'll connect up Narrows Lake down to Christina Lake. So you should expect to see production come from that north area there. Similarly, in Sunrise, John kind of mentioned earlier, now that we're a 100% owner, we have a lot of flexibility, and there haven't been pads drilled there since 2017. So we're making really good progress on the next three lots of well pads there. I expect those over the next 24 months to kind of show up. And at the same time, we're doing a lot of regional readout in areas in Sunrise. So we haven't done it for a number of years. So we have that -- I mean, the other side of it, we have a Terra Nova Atlantic coming back from an asset life extension, which we're looking forward to at the end of the year, that have another 10,000 barrels a day. And I think, I mean, over to Drew's area in Indonesia, we have -- I don't know, Drew, if you want to mention it.

Yeah, sure. Yeah. So Dennis, we've got the MDA-MBH project that's just coming on now. We've got the MAC field that will come into that same flotation production unit here midyear next year. So you're going to see Indonesia production double, very low capital for those types of investments as the FPU was leased. So we've got lots of good, to John's point earlier around brownfield, very efficient use of capital to have continued growth here for the next little while, where we know it makes sense that even in the conventional world, like don't be surprised if you see us probably add an incremental CAD100 million or so into next year to keep kind of driving the performance of that business, where as we fill more and utilize a lot of our infrastructure that has not been invested in the last five, six years. No, it's not only just your unit OpEx that really improves is your capital efficiencies that improve and so your underlying netbacks and affordability to keep with small growth, but basically keep the underlying ability of these assets to generate future free cash flow is just really good business. And then we've got lots of those opportunities across just about every aspect of our upstream.

Great. Great. Thanks. I'll turn it back.

Thanks Dennis.

Thank you. That will conclude the analyst portion of the Q&A portion. [Operator Instructions] We'll take our first question from Chris Varcoe with Calgary Herald

Hi. This is a question for Alex. Alex, in the past week, we've seen the Federal Environment Minister Guilbeault, call out the Canadian oil industry to start spending more money on clean energy instead of share buybacks, those are his words. Meanwhile down in the United States, we've seen President Biden call for more production from the industry and hinting out a windfall tax potentially if they don't do so, how do you view these kind of comments and the criticism of the sector?

I think, Chris, you've probably heard my opening comments where I talked about the contribution that the Canadian oil and gas industry is already making. As I said in those initial remarks, we are -- Peters & Company estimates that the Canadian upstream industry is going to contribute CAD50 billion in royalties and taxes in all levels of government in Canada. So, I think we have a very -- we have a very progressive system in Canada, which is quite a bit different than the US, where as the cash flow in the industry goes up, the contribution to government coffers goes up. So, I think any characterization that the Canadian industry is not contributing is just fundamentally inaccurate. That being said, the -- I think our industry has shown that we're very serious about decarbonization. We support the federal government's effort for our country to make significant emission reductions on a path to net zero by 2050. We have that same goal at Cenovus and with our Pathways Alliance peers. But I think really getting there requires a practical and realistic approach to emissions reduction in order to protect jobs, investment in Canada, and help provide global energy security. So, I just -- I would just have you look at those things. Yes -- I think I'll turn it back to you.

Sure. Just to follow-up on that then. The federal government is expected to release their fall fiscal update, I think, later this week. What are you expecting -- or what are you hoping to see from Ottawa as it relates to their investment tax credit on CCUS?

Chris, we are still very much in the discussion and consultation phase with the federal government acknowledge that -- with the moves that the US government has done in their Inflation Reduction Act that that's something that Canada is going to have to look at in terms of having a program that is competitive with the US program. But I'm not expecting anything earth shattering coming out of the fall statement here tomorrow.

And just to, I guess, ask you one last question as it relates to that front. Do you need to see changes from the federal government and the provincial government for the Pathways Group to give the green light to those projects? Is it -- are we at a stalemate there right now?

No, I don't think we're at a stalemate at all. I think, as I said, we're having quite productive discussions. We've -- I mean, as I said, you've heard me talk about, I think it's important the contribution of government has equivalence with what is going on in the US. And at the same time, we are absolutely committed that we are moving down this path of decarbonization. We just require some certainty in all of the -- in terms of the various government programs. And when I say that, I mean I'm not just referring to the federal government, and I'll give you an example would be pore space. In order to proceed on our CCUS foundational project for Pathways, we actually have to have absolute certainty that we have that pore space. We need to understand this would be a joint federal provincial issue, but we need to understand, for example, the environmental permits that are required, are we going down a federal path or a provincial path. These are decisions that need to be made before the industry. We're not in a position to execute on those projects till we have more certainty on those issues. But I think the discussions are going very well. I say everybody ultimately shares the goal of emissions reduction coming out of the industry, and I think we're having -- I think so far, it's been going productively. And I ultimately see a path that I think if everybody is reasonable, I think there's a path to a resolution that works both for governments and for the industry and for the province.

Thank you.

Thanks, Chris.

We'll take our next question from Rod Nickel with Reuters.

Hi, Alex. Just wondering if you can elaborate a bit on your -- keeping $60 as mid-cycle price, futures price strip would seem to indicate that the Street doesn't expect a price like that for several years at least. Can you explain maybe why you're taking a more cautious view of prices down the road?

Rod, four years ago, the forward strip wasn't expecting to price over $60. So I -- it s interesting to me what the futures market is speculating about where price is going. But if there's one thing that we have been focused on beyond anything other than safety at this company, it is on discipline, and that is investment discipline, financial discipline and delivering what the company has promised to deliver for its stakeholders. And if you look back, I haven't run the numbers recently, but if you look at the average price over the past 10 years, I'm sure it is well below $60 a barrel. So, we can hope for the best, but we got a plan for reality. And I think at this point, it is the right thing to do for our company at this time to still think about $60 a sort of a mid-market price.

And I assume that's the reason that you would be looking at just a very similar modest increase, if anything, to your capital budget next year that you're keeping sort of a cautious approach to where prices might go in the next 12 months?

Well, we're probably, if anything, we're a little more disciplined on our investment decisions. And when we look at all major investment decisions, those investments have to return their cost of capital at what we would call a bottom of the price cycle or a resiliency price deck, and that's more of a $45 WTI. And I would tell you the good news is, is that all of those projects that you heard Jon and Norrie talk about on this call, everything that we have been continuing to invest in, meets that hurdle and so we are blessed with a great deal of continued opportunity to grow production that have high returns and are resilient even at the lowest commodity prices.

Thanks, Alex.

Thanks, Rod.

We'll take our next question from Robert Tuttle with Bloomberg News.

Hi, good morning. I'm kind of wondering the price of Canadian heavy oil, I mean, we got all the pipelines in pipeline spaces, there's been very little apportionment. And yet, here we are near $30 a barrel differentials, do you see this -- it's been very weak for a long time now. I mean, more than $20 at least through the summer. Do you see this continuing? And what factors would bring the price down to a more normal or the differential down to a more normal level?

Yes. No, I'm happy to give some thoughts on that, Robert. I mean, I think the first thing I would say and this is kind of different from our historical experience. But right now, my observation would be that these really relatively wide light-heavy differentials are being driven more by global issues, which is a lot different than previous years in Alberta, where a lot of those wide differentials were actually being driven by pipeline constraints out of Alberta. And just to kind of -- I'll give you just a couple of thoughts on what is kind of creating a supply imbalance in the heavy market. But the view globally, right now high cost of refining, heavy savor grade in Asia and Europe, you know that is due to spiking natural gas prices in those markets, obviously gas being a significant input in the processing of heavy. On top of that, you do have some limited heavy processing capacity driven by a number of both planned and unplanned maintenance at refineries in both globally, but in North America. And then I guess the final point I would focus on would be the strategic petroleum reserve. And I think everybody is aware that the US government has been significantly bringing those volumes to the tune of 1 million barrels a day of coming out of the strategic petroleum reserve. And those are -- the majority, I think, about two-thirds of those crudes that are coming out of the SPR are medium, heavy sours, and so that's putting more temporary pressure. So I don't think this is a -- I think this is ultimately something that is resolved. I would view it as a temporary issue that could persist into 2023. But I think ultimately, it gets resolved as those issues I referred to get resolved?

Okay. Great. Just one more thing. You guys have all these CCUS projects planned, and they're all going to be evolve at the same time, these major construction projects. How are you going to manage that with everything labor resources. I mean how is that going to happen, when you have all of this stuff being built at the same time. I mean it looks like 24 billion or something of investment in a very…

Yes. Yes. I mean it's a good question. And the one thing I would tell you, Robert, is this industry has learned a lot over the past 20 years of constructing projects and managing construction projects in overheated environments. And I think one of the – it is very much one of the reasons why we give advice to the government that everybody understands the ambitions to reduce emissions coming out of the upstream sector. But we also have to think of other issues that you may exacerbate other issues if you move too quick on that. And one of them would be if there was a mad rush to the gate on CCUS projects, you could vary significantly see both capital cost escalation, but also project delays. There's only a finite amount of craft labor and trades and frankly, procurement and other issues. So I mean, I think we are very acutely aware of this challenge historically. I think one of the great things about the pathways partners coming together is it gives us a forum, where we can actually work together, for example, on the -- on that foundational CCUS and capture project in the Cold Lake area, it gives us the ability to do some coordination, hopefully, and make sure we minimize that. But the key is that we have a reasonable timeline in which to decarbonize.

Thank you.

Yes. No worries. Thanks, Robert.

As it appears, there are no further questions. I'd like to turn the conference back over to Mr. Pourbaix for closing comments. End of Q&A:

Well, I think I would just -- as I always do, thank the investment community and our shareholders for their continued interest in the company and your time today to listen to us talk about the quarter and our plan. So with that, I wish everybody a good morning, and we'll sign-off.

Once again, that does conclude today's conference. We thank you for your participation. You may now disconnect.