Cenovus Energy Inc. (CVE) Q2 2023 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's Second Quarter Results. As a reminder, today's call is being recorded. [Operator Instructions]. I would now like to turn the conference over to Mr. Jason Abbate, Senior Vice President, Investor Relations. Please go ahead, Mr. Abbate.

Thank you, operator, and welcome, everyone, to Cenovus' 2023 Second Quarter Results Conference Call. Please refer to the advisories located at the end of today's news release. Please describe the forward-looking information, non-GAAP measures and oil and gas terms referred to today. They also outline the risk factors, assumptions relevant to these discussions. Additional information is available on 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. John McKenzie, our President and Chief Executive Officer, will provide brief comments, and then we'll take your questions. We ask that you hold off on any detailed modeling questions. You can follow up on those directly with our Investor Relations team after the call. And then please keep to 1 question with a maximum of 1 follow-up. You're welcome to rejoin the queue for any other follow-up questions you may have. John, please go ahead.

Great. Thank you, Jason, and good morning, everyone. Before we start, you will have seen a few changes to our executive team that we announced this morning. When I succeeded Alex in April, it did create an opportunity for us to move some of the executive group around to really take advantage of their capabilities and versatility. You can read the full details in our news release. However, I'd just like to snap you through a few of the changes. Keith Chiasson will become our new Chief Operating Officer and replacing Keith in the downstream will be Doreen Cole, who's been promoted to the position of Executive Vice President, Downstream. Drew Zieglgansberger will become our new Chief Commercial Officer; and Andrew Dahlin will replace Drew as the Executive Vice President of Natural Gas and Technical Services. Jeff Hart, who's currently our Chief Financial Officer, will succeed Andrew as the Executive Vice President of Corporate and Operations Services. And finally, Kam Sandhar will replace Jeff as our new Chief Financial Officer. I really do feel incredibly fortunate to be surrounded by such a talented group and we have absolute confidence in their ability to continue stewarding this company. At this time, I'd also like to recognize Canning Fok, who's announced his retirement from our Board. I have known Canning for over 10 years and have really benefited from his knowledge and experience. I think further, Canning has played a significant role in the repositioning and success of Cenovus over the past 2 years. We all wish him the very best and really look forward to his continued presence as one of our major shareholders. But now let's move to our results. So as always, I'll start with our top priority, which is health and safety. In this quarter -- this quarter poses some unique and significant health and safety challenges and I couldn't be more proud of the way our people have stood up to the challenge. In this quarter, we focused on a safe and disciplined ramp-up of the Superior and Toledo refineries as well as completing the major turnaround at our Foster Creek asset. I'd like to thank all our people for their continued commitment to safety and our core values as we completed these tasks. The results were truly exemplary. Similarly in our conventional business, we dealt with a number of wildfires through the quarter. We temporarily shut in 85,000 BOE per day of our natural gas and NGL production through most of May and part of June and supported our staff and their communities. The company worked tirelessly to keep our people and our assets safe. In addition, we greatly appreciate the actions taken by local authorities and the provincial emergency management teams. Our staff truly demonstrated our core value in protecting what matters. Going above and beyond for each other, and our communities is truly something we're all proud of. And with that, I'll take you through our operational results. So starting with our U.S. manufacturing assets. As we mentioned in the first quarter call, our focus has been on bringing the Superior and Toledo assets online. Toledo was fully operational by mid-June while Superior continues to ramp with a focus on safely restarting the cat cracker, which is the last of the major units to restart. These assets are incredibly important and meaningful contributors to our integrated heavy oil strategy, our focus in the third quarter and beyond will be to operate them reliably, efficiently and profitably. Our Lima refinery continued to operate at high rates of utilization through the quarter while the Wood River refinery ran well through the quarter following the completion of some planned maintenance. The Borger refinery is back up to full rates after some planned and unplanned outages over the course of the second quarter. So turning to our Canadian manufacturing. Our Lloydminster Upgrader and refinery ran at a combined utilization rate of 86% in the quarter, and they're fully operational as we enter the third quarter. We expect both of these assets to run at high levels of utilization through the remainder of the year. Overall, I'd say we achieved everything we set out to do in the downstream during the second quarter. and we're very confident in our ability to produce reliably and profitably through the remainder of 2023. In the upstream, we revised guidance and result of the wildfire impacts, which had an annualized impact of approximately 10,000 BOE day in our conventional business. And we've also built in a modest decrease of 5,000 barrels a day for our Lloyd Thermals, adjusting for the slower-than-anticipated ramp-up in the year. These changes have resulted in an overall lowering of our guidance to between 775,000 and 795,000 BOE per day. At our oil sands assets, we safely completed a large turnaround at Foster Creek early in the quarter. The turnaround was on schedule and on budget, and the asset is now running at pre-turnaround rates. Our focus through the quarter has been on continued execution of projects that support our short- and long-term production volumes with our new well pads progressing as planned. You can see the benefits of our continual effort to optimize these assets with the increased production at Sunrise. And in addition, at the Lloyd Thermals, we saw record daily production and quarterly production volumes of approximately 112,700 barrels per day and 106,000 barrels a day, respectively. We expect strong production from oil sands in the second half of 2023, and with all major maintenance behind us. In Asia Pacific, our volumes over the quarter were lower as a result of planned and unplanned outages. On April 7, the non authorized vessel traveling in our dedicated pipeline quarter and struck an umbilical line at the Liwan 29-1 field in China. The line attached is designed, which resulted in immediate and secure shutdown of our subsea wells. Our operating group restored production by the first week of June, with no environmental impacts on the surrounding area. And as I mentioned, with the vast majority of our major maintenance behind us and the forecast continual ramp-up of wells across the upstream portfolio, we expect to see elevated and steady production numbers over the remainder of the year. I'd now like to highlight our corporate performance and shareholder returns. We delivered almost $2 billion of adjusted funds flow in the quarter, supported by tighter differentials and increasing oil sands operating margins, partially offset by no recorded sales in our Atlantic region during the -- due to timing of liftings and a negative FIFO adjustment of about $170 million, which really impacted our U.S. manufacturing segment. With the dividend increase announced in April through our base dividend in NCIB, we distributed about $575 million directly to our shareholders in the quarter. As per our June 14 announcement, the warrant repurchase transaction presented us with a unique opportunity to repurchase about 2.4% of our diluted shareholder base at an attractive price purchasing just over 45 million warrants. I believe we obtained favorable payment terms that provide us with the flexibility to remain within our shareholder returns framework and we'll continue to dedicate 50% of our excess free funds flow to shareholder returns until we reach our $4 billion net debt target, at which time will dedicate 100% of our excess free funds flow to shareholder returns. We continue to focus on running our assets safely and reliably. As we align on our integrated business model, we expect to have strong production and throughput in the second half of '23 which will continue to move us forward to achieving that $4 billion net debt target. So before we take your questions, I'd also like to update you on our sustainability work. Our 2022 ESG report was released in June, and we announced a new milestone to reduce our methane emissions in upstream operations by 80% by year-end 2020. We see reducing methane as a key near-term action that contributes to our 2035 emissions target. We also continue to advance technologies that will help us address our 2050 net 0 ambition. You can read more about those achievements and the progress we've made towards other ESG targets in the ESG report on our website. So in closing, we've succeeded in accomplishing the operating goals we set out for ourselves in the first quarter. and are well positioned for a significant improvement in our financial performance in the back half of 2023. And with that, we're happy to take your questions.

[Operator Instructions]. First question comes from Dennis Fong at CIBC Wealth Markets.

My first question here is just on capital structure. Just with respect to term debt, you guys are showing about a 14-year average maturity. How are you thinking about continuing to take either advantage of the free cash flow that you're generating to change essentially the structure of what you guys have for term debt?

It's not necessarily the first question that I was anticipating, but maybe [indiscernible] Jeff to answer that for you.

Yes. No, and I'll just give you some color, Dennis, on where we see the capital structure, and we talked to the $4 billion net debt we view that as driving towards $7 billion on the gross side. And you're right, we're right around the 14-year average term mark. Look, we'll be balanced through all of this. So I think you have to view -- our end goal on this is to have a tower structure that is sustainable and that we like and has balanced through. So we'll target throughout the different towers and be balanced in it. So -- and it will really be dependent on the market and where we see where we see the curve and different factors in there as well. So roundabout answer is that we'll be balanced and end up with the structure that we like as we get through this deleveraging and see us taking to about $7 billion in gross debt.

Great. Great. My follow-up or my second question is probably aligns more with maybe what you're expecting. In terms of Superior and the kind of ramp-up of the FCC unit there, I was just hoping to get a little bit more context in there. Are you able to sell some version of, we'll call it, slightly offset product? And how should we be thinking about the timing of, we'll call it the full ramp-up of all units at Superior?

Yes. I'll let Keith answer that question, but the FCC is really a gasoline producing unit, and it's more incremental to where we are versus what we're producing today. But Keith, maybe you can provide some color on Superior.

Yes. Thanks for the question, Dennis. Maybe I'll just step up a little bit. When I think about the whole downstream throughput we're kind of right at the 690,000, almost 700,000 barrels a day of throughput. So most of our assets are online with the exception of the FCC at Superior. At Superior, I would say it's been a little bit of a challenge for us, but nothing systemic there. It's just working through kind of normal start-up issues. So we're days away from introducing feed into that unit. And as John alluded to, when we go through the crude unit, we do make on-spec products that we can sell, asphalt, gasoline and diesel. And then we make some intermediate products that would require the FCC to continue to process. So we have a fair amount of inventory there that we'll be able to run through the FCC once it's up and running and generate cash. And like I said, it's imminent. We're just knocking through the last couple of challenges that the team has seen as they safely restarted that refinery after being down for 5 years.

The next question comes from Greg Pardy at RBC Capital Markets.

Yes, maybe just to stick with the U.S. manufacturing for a bit. Like your utilization rates actually looked okay from what we were expecting but it's cost, obviously. And I guess the question there is, is the cost are you inflecting now into margin? And then, I guess, a question for Keith, but as you ramp up fully at Superior and now with Toledo, then could we look forward to potentially working capital releases as we go through the back half of the year?

Greg, thanks for the question. What I would offer up on just the cost base is, as you can imagine, through start-up, you're incurring some additional maintenance costs and repair costs. So we do expect those to normalize at the back end of the third quarter and into the fourth quarter. And so we should see some of our cost structure come down as we get to normal operations through this quarter. With regards to revenues and profitability, I would say things are looking good. We're producing products. We're going to be able to -- we're marketing those products and sales. So we're going to see the normal cash cycle associated with the refineries, but all is looking good, kind of coming out of the second quarter into the third quarter across those assets. And like you said, utilization, and I alluded to this in the previous question, utilization is into the low 90% now across all of our assets and the FCC just is the last unit to start up across our fleet and that one is coming up imminently.

Greg, just on the working capital question as well. I think one of the things that you will see is -- and Keith kind of mentioned this, is we do have a reasonably significant inventory of intermediates that we will work through, through the refineries just through time as they continue to produce on-spec product. But when we kind of guide you to where you should be thinking about inventory levels, in particular, you should be kind of in that 45 million to 50 million barrel range. So with these refineries coming up, there is additional inventory that we will carry both on the front end and the back end of those refineries going forward. So while you may see some short-term working capital releases as we chew through the inventory that we built up, I think that's a reasonable number for you to be building into your models.

And then sort of all of this then rolls up into the question everybody is asking, right, which is should we sort of be thinking around $4 billion as around year-end? Is that November? Is that December? Is that the early part of next year? What's your thinking there? And frankly, does it matter that much?

Well, the way we think about it, Greg, is we've now got our assets into the condition that we wanted them to be in. Getting Superior and Toledo up were really kind of the last assets that we wanted to bring forward that kind of completed our vision of the assets that we acquired from Husky. So getting those value chains in order was really important to us. Now one thing I would say is, don't expect us to do anything different other than run these assets well over the coming quarters. So we are focused on getting our debt down to $4 billion. Whether that happens in November, December, January, February is really a function of the pricing and the commodity strip that you want to use. Over the course of the quarter, we've seen crude be as high as $80 and as low as $65 and it's -- today it's back, it looks like it's back to $80. Cracks have been volatile. We saw actually negative diesel cracks for a couple of days this month. So I think the important thing is to understand though, this is the trajectory that we're on. All the assets are up and running. We're going to dedicate 50% of our free cash flow to debt reduction, 50% to shareholder returns, and then we get to $4 billion, we'll flip over to $100 million, but there's nothing that's going to change the operating strategy of this company between now and then.

The next question comes from Neil Mehta at Goldman Sachs.

And congrats to everyone on some of the leadership changes here. My first question was just on the offshore. The tactical question is can you spend a little more time talking about the softer results there? It sounds like it's just a timing effect. If that was an underlift, you get it back in the back half? And then the bigger picture question related to offshore is how do you see this business evolving over the next couple of years and getting into the big -- into the broader portfolio?

Okay. Sorry, Neil, you cut out a little bit. I assume you're talking about the underlift on the East Coast?

Yes. The underlift in the East Coast and then do you get it back in the back half?

Yes. Norrie Ramsay here, from the upstream. We obviously took , as we mentioned, a timely opportunity to take a tar earlier in the year that we were going to take in August. So we're going to have flat production going forward. We're fully operational and up. And it's purely timing, there's two things. We -- the FPA, so we actually offloaded and take it to a storage tax. So those continue to take place. But our lifting was just happened to be a few days after the first -- the second quarter finished. So we've actually had a lifting in very early July, which you'll see kind of coming through in the 3Q results. But we expect to see steady production from our base operations in the East area there. And as we mentioned before, Terra Nova and continues to be at the harbor side just finishing some maintenance that to allow it to go back offshore, and we're collectively supporting the operator and gaining a lot of confidence to be able to see line of sight to that going offshore and then establishing safe production from the Terra Nova asset as well later on the end of this year, beginning of next year.

Yes. So, I think, Neil, just to expand on that a little bit as we see West or White Rose having a good clean run through the rest of the year. I think we've got a line of sight now on Terra Nova to potential production before the end of the year, although we're not calling anything into our forecast, and we continue to make really good progress on West White Rose through the quarter as well, we did achieve a couple of major milestones there. But maybe, Drew, you might want to talk a little bit about the other offshore business in Asia and where we are with that.

Yes. Sure thing, John. So as you would have seen in the news release and then to John's comments this morning, we had an unplanned event in China. And we dealt with that in April and May, and the teams did an extraordinary job getting that back online. And as you guys may recall, we had a very strong first quarter, and the demand for gas and our production was actually over kind of our budget at the time. And happy to say that, that now continues now that we're back up and fully operational in June. So as we see the back half of this year, we expect to have still strong demand for our production in the Asia Pacific business and happy to report that things are running very well, and we are still trending on the high end of our guidance relative to what we thought the demand was going to be.

That's great color. And the follow-up is just on the Pathways project. John, it's hard for us often to get visibility on where we are in those negotiations, but I guess the working assumption for a lot of investors is that it gets to FID next year, just any of your thoughts on timing and what are the gating factors to get the thing to FID?

Sure. I'm actually going to turn that question over to Rhona Delfrari. Rhona is not usually here. She's usually on the road, speaking of the virtues of our industry. But Rhona is here with us today, and she's knee deep in this, and you've probably got the most up-to-date and relevant information on this, Rhona.

Yes, Neil, I mean, I can tell you we are still full steam ahead with the Pathways work, all 6 of our companies, but as well as the federal and now the provincial government, we - there was kind of a bit of a waiting period when the Alberta government was in the election campaigning. But you would have heard that there's been a bilateral talks announced between the Feds and the Alberta government. So that's all positive. And the Pathways companies are right there. We're meeting every week with our government counterparts to talk about how we progress the policy and the fiscal frameworks that are needed to push forward with the Pathways Foundational project, which is the 400-plus kilometer CO2 pipeline in the hub. But there's also -- there's still 70 other technologies that the Pathways companies are working on that will progress us towards our net 0 2050 target. But I think we're still pleased with the amount of attention that the federal and the provincial governments are putting towards this. I would say that it's unprecedented level of attention in Ottawa with multiple departments working together. They're taking this really seriously, and the governments understand how important the CCS project is for -- not just for our sector, but for the entire country. So I remain very optimistic that we're going to get going on this. We've been really clear. The next big spend would be for the Pathways companies would be the purchase of pipeline for that CO2 pipe project. So governments understand that and they understand that they need to clarify things like the investment tax credit and give us more details on that. And things such as contracts for difference that they've already announced. But I'm very positive this is still progressing at the right pace.

The next question comes from Menno Hulshof at TD Securities.

Maybe I'll just follow up on Neil's question with a higher-level government related question as well. Like what do you think of this week's government announcement related to the potential phasing out of what they're calling, inefficient subsidies, I know it's pretty fresh, but when do you think we'll have a better sense of what that means in practical terms? And is it fair to say that ongoing negotiations on CCUS incentives are a separate conversation?

Yes. Menno, it's John. Sometimes I don't know how they name these pieces of legislation, how they end up positioning them. But if it is what it purports to be, it probably should be a fairly short piece of legislation. One of the things I'd say is I'm not really aware of any subsidies that are direct and unique to the oil and gas industry. I've been in this industry for a lot of years. In many of those years, I've been spent in finance. And I certainly remember writing a lot of checks to the provincial and federal government that don't remember receiving a lot of checks in return. A couple of things I would say is in 2022, we spent almost $4.5 billion on royalties and taxes. And that is -- that exceeds the amount of money we spend some capital exceeds the amount of money that we return to shareholders. That is our single largest expense, and we expect that number to be even higher in 2023. So we're kind of like you, we're waiting to hear what this is all about. We certainly hear political rhetoric with regard to oil and gas subsidies. We're just really not sure what it means, because again, we're not really aware of any oil and gas subsidies for the industry.

Okay. Yes. And maybe I'll just follow up with a question on shareholder capital returns. You've made it clear on many occasions that the relative economics of buybacks are tested at mid-cycle $60 WTI. But today, we're sitting at about $80. The stock is off if it's low. So my question is, how are you thinking about buybacks versus a variable dividend? And I'm asking that with the understanding that we've only seen one variable dividend since the return framework was finalized.

Yes. Nothing changes in our framework, Menno. We screen all our capital at 45%. We screen our buybacks at 60%. We still think those are sort of the right low cycle and mid-cycle prices. I think I'm looking at Kam and he's nodding his head. I'm looking at Jeff and he's nodding his head. But I think with where our share price is today, we're still more inclined to return capital to shareholders in the form of buybacks and at the share price today, in our view, doesn't reflect the net asset value at $60. So I think you're going to continue to see that until we continue to see shareholder returns come back in the form of largely buybacks until we get there. But we've been pretty clear on the framework. If we get to the point where we think it's in excess of mid-cycle pricing or the discounted value of the shares are in the excess of mid-cycle pricing. I think you'll see a greater majority of the returns come back in the form of special dividends. But Kam, I don't know if you have anything else to add on that?

It's Kam. The only thing maybe I would just add is, like, I think, keep in mind, we're going to keep continue to be disciplined. So 50% is going to go back to shareholders until we get to that debt target of $4 billion. And as John said, I think right now, the bias continues to be towards buybacks. I think the other thing you should be thinking about is we obviously did the warrant transaction back in the middle of June. And we made it clear that, that's something we're going to manage inside of that framework through the balance of this year and sort of latest next January when that payment has to be made by. So the focus hasn't changed. The discipline hasn't changed around the framework, and we'll continue on the path we're on.

The next question comes from John Royall at JPMorgan.

So first one is in refining. You've talked about the run rates. Just wondering on profitability and cash flows. On the prior call, you guided to Toledo and Superior being free cash flow positive by July. Is that the case now? Or is the FCC impacting the ability to generate positive cash flows?

John, it's Keith. Yes, good question. I would say Toledo has been up and running since early June, making products and selling products. So we're highly confident on kind of cash flows there. Superior has been able to sell products as well. But until we actually get to full gasoline make coming out of the FCC, it's kind of going to be -- kind of right at that kind of cash flow breakeven. I would say we're seeing that trend of improvement, though, through the quarter. I think the other thing to look at, though, is kind of where cracks have been. And I think John alluded to it in one of his answers. They've kind of been pretty wide and then very narrow and more recently have come back to kind of matching the various regions around the U.S. So cracks are pretty supportive now. differentials have tightened in. So obviously, the refineries that run heavy crude lose a little bit of that crude advance. But we -- anything that we lose in our downstream, we actually get in our upstream. So I think in general, it's setting up for a great third quarter like we anticipated. And as we've talked about the last units to come up with Superior, which is a relatively small unit in the grand scheme of things.

Okay. And then in terms of the wildfire impacts on the upstream, I know it's a very fluid situation generally and it's tough for us who weren't on the ground to really understand the impact -- how confident are you that you're on the other side of the major impacts and that the 5 to 7 barrels per day -- barrels per day off-line couldn't go the other way in growing scope there. Just trying to understand the risks that the fire, I suppose, as we stand today.

John, it's Drew. Yes. Great question. As you alluded to, it was a very wild quarter, no pun intended. I think one of the things I would start with is that our teams did an outstanding job considering that we actually had the Town of Edson and a lot of our staff, they're actually evacuated three times, two by wildfires and once by an actual flood, to be honest. So just to give you a little perspective on kind of the 5% to 7% that's still left to be brought on. The vast majority of that, almost all of it is still up in our Rainbow Lake asset, just on the -- just inside the BC border and our Bivouac dry gas play. And the reason that we can't bring that back on yet is we just are waiting for some more secondary power lines to still be reactivated by third-party providers. There are some wildfires in Northeast BC, nothing around our actual assets. As you can imagine, with the amount of impact we had that fuel is now all gone. And so the risk to your question about could it go the other way, there's not a lot left to kind of burn and reactivate that risk for us. And thankfully, we've had very little and almost no direct asset damage or concern around the ability to safely produce. So the remaining that's off line now is still just waiting for power and its third-party kind of activation from power poles and whatnot, and it's on a dry gas play. The remainder are just some other remote sites more in Central Alberta, that's waiting for the same thing, is just some power. So I think the risk has been reduced significantly. And it's just the realities of how forest fires burn and where they've now been burned. It's a very low risk that something in those areas could be reactivated, the fuels has been used.

The next question comes from Manav Gupta at UBS.

I just quickly wanted to touch base on Lloyd thermal volumes. It looks like this was one of the stronger quarters, if not the strongest since you've got these assets. So help us understand some of the changes that you have made at this asset, which is allowing you to get a higher volume versus when you acquired them?

Manav, it's Norrie here. Yes, we've talked about it in the previous quarter as well. I mean, fundamentally, we've been applying our subsurface technologies and methodologies from our Foster Creek and Christina Lake assets over to our Lloyd Thermal assets. The assets are really, really good assets, and we have lots of opportunities around the central processing facilities. So what we have been doing is basically drilling longer wells that have what we call higher conformance so that they actually produce at a higher rate. We've also been utilizing our zero-based design facilities and using submersible pumps to actually increase the rate of production. So we'll -- basically, the philosophy is trying to fill all of our plants that we have and keep them full as we kind of go forward. So it's been very successful. We continue to build out new pads to sustain this level of production. And at the same time, we take advantage of opportunities as we understand them. So our production company is very, very strong, and that's the kind of plan kind of going forward.

Perfect. And if I could pick your brain around, I mean you had some downtime in 2Q. Some of your peers had downtime in 2Q, now all you guys are ramping up. So last -- I mean, the last few months, our apportionments were 0, but like what's your outlook for near-term apportionment, do you expect them to rise? And then eventually, what are you hearing on the TMX pipeline start-up?

It's Keith. You're bang on apportionment on Enbridge has been 0 for the past several months, which is just pointing to the fact that egress out of the country is matching production. I think you're also bang on that some of the upstream has been taking turnarounds through this period. With regards to TMX, it's scheduled to come on in Q1 2024. Obviously, there's pre-startup activities in line fill that happens into the fourth quarter of this year. With all of that kind of happening, we actually anticipate, for the first time in a long time that it would be sufficient egress from the province even as we head into the winter months where all the upstream producers are back on, and you're at that higher concentration of diluent in your and blend. There probably will be a little bit of widening on that just as the system normalizes. But I think we're looking at tighter dips and with TMX coming on that should sustain itself for a longer period of time.

The question comes from Harry Mateer at Barclays.

I guess first, circling back on the debt reduction question at the start of the call, your $7 billion gross debt landing zone implies about $1.5 billion of reduction. Rates markets have been tough to call a year, but for the time being, you've got no shortage of options under curve that are below par. So how are you thinking about prioritizing? Is it maturity ladder, coupon ability to buy back below par CAD versus USD and then open market versus doing something a little bit more accelerated like a tender to get it done more quickly?

Yes. So it's Jeff here. And the answer is yes to all of it. So what we count on that is we'll look at relative interest costs where we see you'd say, discounts relative to premiums and then the end tower structure. And so -- and then as far as execution goes is, again, it will be, yes, we'll look at both what does it look like on a tender and open market purchases. So we'll be -- we'll spread it around in all of that and take a balanced approach in all of it.

Yes. Harry, we don't mean to be coy on that, but obviously, we can't answer that question literally.

Yes. No, I get it. Second one is [indiscernible] that came up last year a couple of times on calls is just around your JV and your strategy going forward. And at the time, you indicated you've taken some steps towards this in some of your assets, but the strategy is to be an operator and a 100% owner of your refineries where possible. Just curious, is that still the case? Is that still the vision? And are there any discussions you've had on that front that might have advanced beyond a preliminary stage?

Yes. Harry, one of the things we've been successful in is unwinding the JVs we've had with BP, and we purchased the 50% of the interest in Sunrise that we didn't own and more recently, we bought the 50% of Toledo and assumed operatorship of that refinery. The way we think about the refineries where we have an ownership interest is those are core assets for us. In core assets, you want to have both operating and strategic control. We think that is important. So we have always signaled to the market that we have a desire to own and operate those assets that we have an interest in that we believe are core to the future of this company. So nothing has really changed there. There's certainly no update on any kind of discussions that may or may not be happening with in and around that JV. We're happy to own those assets in the form that they're in. understanding that longer term, we want to own and operate the assets that we would consider core to our portfolio.

[Operator Instructions]. Next question comes from Dennis Fong at CIBC World Markets.

Just two on the -- one on the upstream side. I know you provided a brief update on the Narrows Lake to Christina Lake connection and development. Can you provide a little bit more details in terms of what the next steps happen to be? I know there's some CapEx this year, but also maybe an update on timing and how we could see that kind of ramp up through time?

Norrie Ramsay here. We continue to make good progress. The context is obviously Narrows Lake is an extension from our Christina Lake operations, and it's a 17-kilometer pipeline that takes us up to another very rich area for development. The pipeline is 2/3 kind of complete. We expect to actually be starting to steam up our first pads, which we've actually started to drill already in early 2025. So by about midyear 2025, we should expect to see impact production coming from that asset area. And the first phase of development of 4 rich pads up in that area that will tie back to Christina Lake. And that really reflects long-term business plan, and then we'll start building out from there into the second and third phase of drilling opportunities. So it's all on track. It's going to -- it's a very exciting opportunity. We like the rock there. It's very clean and very thick. So it's a great opportunity and quite innovative rather than building a central processing facility all way up at the site. We have been able to tie it back to our existing plant it is a very accretive approach.

Great. Great. And my next question is just on carbon capture and GC emission reduction plans. Under the list of projects, for CCUS, you have both the Lloydminster Upgrader as well as Christina Lake Phase I. I was hoping to get a little bit of an update on the progress potentially in identifying opportunities at this kind of Phase I Christina Lake carbon capture project? And then secondly, just with the Lloyd Upgrader carbon capture, is that contingent on the Pathways pipeline project moving forward? Or are there other opportunities to store and sequester carbon that's captured from that facility?

Maybe I'll take the second part first, Dennis. It's Keith. And just around Lloyd upgrade and then I can hand it over to someone else to talk about Christina Lake Phase I. But the interesting thing about the Lloyd Upgrader is we have a steam methane reformer there, relatively high concentration carbon dioxide source, relatively straightforward to capture. And the other interesting part is, obviously, we have a very large resource in a close proximity to the upgrade or that we can actually use for enhanced oil recovery. So I would say it's not dependent on Pathways. We can build the infrastructure and have an economic project at that asset. So hence, why we're advancing today through our standard project development process and looking at ways to integrate that with our upstream business for enhanced oil recovery. And maybe I'll hand it off for the upstream.

Norrie here, since it's a Christina Lake kind of question. As we've kind of explained in our public documents, our first phase of our carbon capture is at Christina Lake. There's the ability to have a number of phases there. And it's core to our commitment and our pathways. The pipeline will run adjacently to our operations there. So we've actually started preliminary engineering to understand the size and scale of this complex project, which is, by its scale, almost kind of a world's first. But again, it's in the plan it's consistent with our Pathways commitments, and we're just continuing to derisk it and understand how we'd operate something like this going forward.

And Dennis, it's Rhona. And just to add on to that, just to make it even more confusing. The -- while everything that Keith was explaining and Norrie is absolutely correct. When you look at the numbers overall, when you're talking about Pathways target of 22 megatons by 2030 of a reduction, Lloyd Upgrader is part of that because the federal government includes the Lloyd Upgrader and this oil sands emissions numbers.

[Operator Instructions]. Next question from Chris Varcoe of Calgary Herald.

This is a question about differentials. What impact did the narrow differentials had on you in the first half? But maybe more importantly, where do you see heavy -- like differentials going in the second half of this year?

Yes. Maybe I'll take the first piece of this, and then I'll turn it over to Keith because he lives and breathes this every day. But we saw a real narrowing of the differential from the first quarter to the second quarter. And for this company, it's more beneficial for us to have a narrow differential than a wider differential. With the processing assets that we've got in the takeaway capacity that we have inside the company, we can mitigate roughly 75% of the location differential in about half of our heavy oil differential. So having those narrow differentials certainly helps us. You saw that in the second quarter. Where we go from here, Keith's got some views on, I'll just turn it over to him.

Chris, we kind of look at this in two parts, kind of in Western Canada and also in the Gulf Coast where heavy differentials kind of get set. On a global basis, we're seeing pretty good strength in the differential, driven mostly by kind of the heavy refinery utilization and some additional refineries coming on in Asia that consume heavy barrels. That, coupled with the OPEC cuts being predominantly heavy barrels and then the U.S. Strategic Petroleum Reserve starting to refill all drives a pretty healthy demand for Western Canadian heavy production. In kind of Western Canada, with TMX forecast to come online in Q1 and start line filling in the fourth quarter, and we actually see an opportunity for differentials in Alberta to stay relatively tight as well. So setting up for a pretty good fall, winter and into next year.

And just to follow up on something that you referenced earlier, John, I wanted to ask you about what impact does the talk from the federal government of phasing out these fossil fuel subsidies and their plans for an incoming emissions cap have on the Pathways projects moving forward? Does it have any impact at all?

The second part of your question, I don't believe it does have any impact on Pathways at all. First part of your question, I think I was relatively clear. I really don't know what they mean by subsidies to the oil and gas industry. I'm generally not aware of any subsidies that are direct to the oil and gas industry that they may or may not be speaking of. So like you, we're waiting for more detail on this. similar to waiting for more detail on the emissions cap and how that's going to play in, but we don't necessarily see how this all comes together quite today.

The next question comes from Alex Bill at [indiscernible].

John, I was wondering if you guys could provide any comment or color on the earning assets that are on the market right now. And assets I would imagine you're pretty familiar with. And you've answered this earlier with some of the comments on debt, but is there any appetite for M&A at all right now?

You know, I think, Alex, we are really focused on staying close to our knitting right now. This organization has been through a lot of change in growth. over the past number of years. And as I mentioned in some of my comments, we've really got the assets configured and built in a way that we are really happy with where we are today. So I think for us, over the next few quarters, it's really about demonstrating the earnings and cash flow capability these assets, running them in a safe and reliable condition and demonstrating the profitability of what we've built. So that is priority one and job one. In terms of , we're aware that just like you of the announcement that they put out. But I haven't worked there in almost 10 years. So we don't have any unique insight into that. But we, as a company, will stick with our knitting for -- or stick to our knitting over the short to medium term.

Okay. And as my follow, I'm wondering if you can provide any color on the asset life extension for the and specifically, if the shipyard has been picked for that and where that stands parallel to West White Rose.

Sure. I'll turn that over to Norrie, Norrie's been the one leading that effort on our side.

Norrie here. Just to confirm, the asset life extension is a statutory requirement to -- in simple terms, recertify, the Zero FPSO and make sure it can stay out for the duration of the period we wish to develop the West White Rose project. It's obviously commercial what we're kind of doing. So I'm not in a position to talk about any details of the supply chain. But the principle is, we will take the FPSO. There's two pieces of work. There's offshore work in the subsea components that are offshore in the bay area. So again, that uses local subsea expertise within the province. And we will be taking the FPSO early next year to an appropriate yard. But as I said, we're just not in a position to disclose that until we've completed all our commercial processes.

And the next question comes from Robert Tuttle at Bloomberg News.

I just want to get your insight on where -- the tolls on the Trans Mountain have come out, there's been a lot of unhappiness by some producers with those tolls as being too expensive. I'm just wondering how this will play out in terms of oil exports how competitive will this pipeline be when it comes to reaching Asia? Or will the oil end up mostly going down to the U.S. West Coast? How competitive will it be to reach a China versus going down to the Gulf Coast? Just want your insight.

Robert, suffice it to say, obviously, the commercial arrangements are sensitive. But in general, there's components of our toll structure that are fixed and components that can fluctuate with increased costs. And you would have seen a few letters going into the just making sure the allocation of those costs was done appropriately. So that's kind of the work that you're seeing around that avenue. From a competitiveness, this is one of the first pipelines that have been built and providing egress out of Canada in a long period of time. First one that kind of goes to the West Coast and doesn't go through the U.S. So we think it will provide a very attractive alternative for Canadian producers to move their barrels to market in a different fashion and potentially even access different markets. So our view would be that this pipeline went up and running, will run full and provide pretty good economics, not only to the producers, but to the country to move those barrels -- excess barrels outside of Canada.

I'd just like to kind of pile on with what Keith is saying, the tolls get a lot of attention right now and justifiably so, but we will work through that with TMX. But the reality is, this is an absolutely necessary piece of infrastructure, not only for Cenovus, but also for the oil and gas industry in Canada at large. This is going to take another 590,000 barrels of Canadian oil to market at a time when the world is really needing more energy and the demand for oil and gas is growing and those barrels should come from Canada. Beyond the tolls, you do have to realize as well that this is an asset that's going to be in service for decades. It's going to provide jobs. It's going to provide tax dollars. And it's going to provide royalties for Canadians going forward. So we think this is a very good news story for Canada, understanding that there are cost overruns and implications for tolls in the short term, but something that is very, very important for this country.

And I'm wondering the reality is there will be more capacity than there will be production at least initially. I mean, which lines are going to -- you see lose the spot. Will that come off Enbridge -- if you got TMX will that come off Enbridge or will TMX not actually run for at least some of those spot barrels will go down to Enbridge. Where do you think that will happen there?

Well, one of the things, Robert, I'd tell you is this industry is a great habit of expanding to fill pipeline capacity and I talked about the 590,000 barrels a day of incremental takeaway capacity that this pipeline will be able to take away, that will be filled, I think, in relatively short order over the coming years. The reality is this industry has grown by almost 800,000 barrels a day since 2015. And those kind of infrastructure projects that increase our ability to get to market tend to get filled fairly quickly with the amount of resource we have in Canada. So you're quite right, there'll be some short-term rebalancing, but longer term, we'll fill this pipeline and I think probably sooner than most people think.

I do.

There are no further questions at this time. I will now turn the call back over to Mr. McKenzie for closing comments.

Great. Well, listen, thanks, everybody, for joining us today. We always appreciate the interest in this company and the questions that come with it. So I'd just end this call by saying, hope everybody has a great day and stay safe.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.