Ladies and gentlemen, thank you for standing by, and welcome to the Imperial Oil First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Dave Hughes, VP of Investor Relations. Thank you. Please go ahead.

Thank you, Jeff, and good morning, everybody. Thanks for joining us on our first quarter earnings call. With me today is our senior management and that includes Brad Corson, Chairman, President and CEO; Dan Lyons, Senior Vice President of Finance and Administration; Simon Younger, Senior Vice President of the Upstream; Jon Wetmore, Vice President of the Downstream; and Sherri Evers, Vice President of Commercial and Corporate Development. First thing I'm going to do is read the cautionary statement. Today's comments include reference to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in Attachment VI of our most recent press release and available on our website with the link to this conference call. Today's comments may also contain forward-looking information. Any forward-looking information is not a guarantee of future performance and actual future financial and operating results can differ materially depending on a number of factors and assumptions. Forward-looking information and the risk factors and assumptions are described in further detail in our first quarter earnings press release that we issued this morning as well as our most recent Form 10-K. All of those documents are available on SEDAR, EDGAR and on our website, so please refer to those. Usual format, we'll start out with Brad offering some opening remarks then Dan will provide a financial update, and then Brad, again, with an operational update. And after the opening remarks, we will move to the Q&A. So with that, I'll turn it over to Brad.

Well, good morning, everybody, and welcome to our first quarter 2021 earnings call. I hope each of you and your families are doing well and continuing to stay healthy. Now, last time I spoke to you back in early February, we discussed what was a very challenging year for our industry, but one in which Imperial delivered very solid business results in the face of both the global pandemic and the associated economic challenges. I also noted Imperial's foundational improvements, including increased production capacity and a reduced cost structure. Over the past year, we have emphasized the priority that we were placing on making sure that we remained well positioned for the eventual recovery as we were taking steps to respond to the business environment. I'm pleased to tell you that the very positive note we ended 2020 on has continued through the first quarter of 2021 despite the continued challenges brought on by the pandemic. Over the next few minutes, Dan and I will detail the results of what was a very strong first quarter. So now let's talk about those first quarter results. Since we entered 2021, we have been facing lower-than-normal product demand, but have seen commodity prices and product margins strengthened. The improved market environment, coupled with our continued strong operational and cost performance, resulted in us delivering our highest quarterly earnings since the third quarter of 2019 and the highest first quarter since 2018. Earnings for the quarter were $392 million, an improvement of over $1.5 billion versus the fourth quarter. But recall that the fourth quarter results reflected an impairment of close to $1.2 billion related to our unconventional assets. Without this impairment, our earnings, excluding identified items, have still improved by over $360 million versus the fourth quarter. I'd also highlight that all…

Thanks, Brad. Before getting into the numbers, I wanted to highlight as Dave did at the very beginning that we are releasing some added information this quarter, and this is by popular demand, I think, in fact, from a number of you on this call. This quarter, we began publishing five additional non-GAAP measures. You'll find these in Attachment VI at the back of the press release. The measures are cash flow from operating activities, excluding working capital, free cash flow, net income excluding identified items, cash operating costs, unit cash costs for the Upstream and by major Upstream asset being Kearl, Cold Lake and Syncrude. We hope you'll find this added disclosure useful. We'll refer to these measures as appropriate going forward. Getting back to the numbers, our net income for the first quarter was $392 million, up $580 million from the first quarter of 2020, or up almost $300 million when looking at earnings excluding identified items. As Brad noted, looking sequentially, our first quarter net income of $392 million is up just over $1.5 billion from the fourth quarter and earnings excluding identified items are up about $360 million, driven by improved results across all of our business lines. Looking at performance by business line. The Upstream recorded net income of $79 million in the first quarter of 2021 compared to a net loss of $1.192 billion in the fourth quarter of 2020. Again, excluding the non-cash impairment charges of $1.171 billion in the fourth quarter, we saw improved results of about $100 million, driven by higher realizations, partly offset by lower seasonal volumes. Turning to the Downstream. Downstream net income of $292 million in the first quarter was up $186 million compared to the fourth quarter’s net income of $106 million, mainly driven by improved margins.…

Thanks, Dan. I'll now take a few minutes to talk about operational performance in the first quarter. Upstream production averaged 432,000 oil-equivalent barrels a day in the first quarter, which was up 13,000 barrels per day versus the first quarter of 2020 and represents our highest first quarter production in 30 years. This excellent performance was driven by continued strong production at all three of our major Upstream assets: Kearl, Cold Lake and Syncrude. Production was down 28,000 oil-equivalent barrels per day versus the fourth quarter of 2020 in large part due to lower production at Kearl and Syncrude. This is typical and was expected as the first quarter can provide some real challenges due to winter weather, particularly in our mining operations. And while we did see a very mild start to the year, the typical Northern Alberta winter finally arrived in early February, but the impact was managed exceptionally well by our operations organizations. So now I'll talk in more detail about each asset starting with Kearl. I commented on last quarter's earnings call what a great year 2020 was for Kearl, and here we go again. I'm pleased to say that Kearl’s strong performance continued through the first quarter, while gross production of 251,000 barrels per day was down 33,000 barrels per day versus the fourth quarter of 2020. This was still Kearl’s best ever first quarter production. In fact, it is the second best quarter ever at Kearl behind the fourth quarter of 2020. This is especially notable given the first quarter is traditionally the lowest production quarter of the year given the challenges winter weather can introduce as I just noted and each month delivered record production. So just to be clear, it was a best ever January at Kearl, a best ever February and…

Okay. Thanks, Brad. We have had a few questions pre-submitted, so I think we'll start with addressing questions from a couple of those analysts and then we'll move to the live Q&A line. So Brad, the first couple of questions come from Phil Gresh at JPMorgan. And I'll ask them both, they're both kind of related. Imperial guided to $1.5 billion of normalized Downstream and Chemicals cash flow from operations at Investor Day. What is the breakdown between the two segments? And do you think this normalized cash from ops is reasonable to expect in 2021?

Thanks for your question, Phil. If you look at our average looking back from 2009 to 2019, our Downstream generated about $1.6 billion per year in cash flow from operating activities and Chemicals was around another $200 million. So I would suggest this split can also be applied to the forward-looking $1.5 billion average that we discussed at Investor Day. And now with respect to your second question, our company generated over $1 billion in cash from operating activities in the first quarter and our Downstream and Chemicals business combined for about half of that amount. So that gets us about a third of the way to the $1.5 billion we referenced at Investor Day. So it's certainly possible to reach it given our full-year utilization guidance of 89% and continued increase in vaccination rates. But admittedly, there's still some uncertainty, but on balance we remain confident with those targets. Now notwithstanding demand impacts, our Downstream and Chemical business continues to benefit from structural advantages in Canada that support ongoing profitability. So we are still comfortable with that guidance we’ve provided. Hope that answers your question, Phil.

Okay. Next from Will Lacey at ATB. With the increased focus on carbon by government investors, have you quantified the potential cost implications to the base business under the proposed carbon pricing mechanism specifically at $170 a ton?

Yes. Thanks for that question, Will. First, I just want to highlight that Imperial supports an economy-wide carbon tax and has long operated in jurisdictions with carbon pricing. So we've actually been incorporating the cost of carbon emissions in our plants for a while now. We believe a stable carbon pricing policy provides certainty to our industry, but also accelerates innovation, technology and investment, and really can play to our strengths and technological leadership as we continue to work on pathways to net-zero. We are quite well positioned to operate and compete in a low carbon future. So thanks for that question.

So a bit of a – kind of a follow-up on that one is further – with discussion of the proposed tax incentives that the federal government discussed regarding carbon capture utilization and storage, how may this influence your thoughts on capital related to this? Have you discussed this in more detail with ExxonMobil and their global initiatives?

Thanks for that follow-up question, Will. In its recent budget, the federal government announced a substantial funding program for carbon capture and storage, a technology that we view as integral to enabling net-zero emissions. There's still a lot to be defined in those budget details, but we very much look forward to working with the federal government and also along with the government of Alberta and our industry colleagues on the best design for that program in the coming months. But this is an encouraging step to support industry efforts to advance technology, to reduce greenhouse gas emissions. And Imperial is well-positioned as I noted earlier to capture those opportunities arising from energy transition. And with regard to ExxonMobil, as you may be aware, ExxonMobil announced in February, 2021, that they have created a new business to commercialize its extensive low carbon technology portfolio. That business called ExxonMobil low carbon solutions will initially focus on carbon capture and storage, one of the critical technologies required to achieve net-zero emissions and the climate goals outlined in the Paris Agreement. And through Imperial's relationship with ExxonMobil, we have access to industry-leading technologies, and as we develop pathways to support net-zero future, we will certainly be leveraging that relationship and access from ExxonMobil. We truly believe that technology is critical to enable production growth and emission reduction. And we are exploring those next generation technologies, which when paired with carbon capture and storage could result in incremental production with net-zero emissions. So it's our view that CCS has the potential to be even more commercially viable through the convergence of advanced technologies, but also with supportive Canadian policy. So thanks for that question.

And Brad, we had just one final one from Will, and then we'll go over to the live Q&A. Any comments on the implications for operations as a result of the COVID challenges in the Wood Buffalo region?

Yes. I'm glad you asked that question. And first, I would just point out how very unfortunate the situation is in the Wood Buffalo region and our thoughts and prayers go out to all those individuals affected. Our focus has always been continues to be, first and foremost, the health and safety of our workforce and the communities in which we operate. We've been maintaining our strict site protocols to prevent the risk of transmission of COVID-19, and we continue to follow all the government and health authority guidance. You heard me comment on Syncrude operations earlier in the call already. But in regards to Kearl, and certainly acknowledging that there is an escalating situation in the oil sands region around Fort McMurray, we have been successfully managing and really mitigating the transmission so far without any impact to our operations and no impact to our turnaround plans at this time. The plans that we are progressing were developed with full consideration for COVID safety precautions and I would point out that we've been applying learnings from safely executing turnarounds in 2020. And we're not only leveraging those at Kearl, but I also mentioned the Strathcona turnaround. One addition of note though relative to our turnarounds last year, we've now deployed rapid COVID testing for our workforce prior to them boarding planes and buses used to travel to site. So this gives us one other mechanism to identify and manage any potential transmission of COVID. So there have been no impacts again to our operations at Kearl and no impact to our current schedule for the upcoming turnaround, but we're going to continue to monitor that situation and adjust our plans as needed.

Okay. Operator, can we go over to the live Q&A line now, please?

Certainly. [Operator Instructions] Your first question comes from the line of Greg Pardy from RBC Capital Markets. Your line is open.

Hey. Thank you. Thanks and good morning, everybody. I guess, first off, thanks for the enhanced disclosure. We’re definitely looking for that. So that's a great step forward. Couple of questions. I guess, the first one is just on the buyback. Is there – and I’ll almost ask this in the negative. Is there any reason not to assume that you'd, A, renew the buyback post June 29? And secondly, think about repurchasing a similar order of magnitude, share is, I’d like call it 5% or so. Just trying to get – just trying to better understand your thinking from that perspective?

Yes. Thanks for the question, Greg. And first, I appreciate your recognition of the disclosures that we've added. As Dan pointed out, that has been a direct response to the feedback we've heard from you and many analysts. So pleased that we could take those steps to support your request there. In terms of the buyback and our strategy going forward, as both Dan and I commented, we find ourself in a very strong financial position, very much driven by kind of the underlying quality of our assets, the strong kind of fundamentals associated with those and especially, the improvements we've made over the last year in production capacity, in operating expenses. And when you take that combined with the strength we've seen in the commodity market, that puts us in a favorable position with very strong cash flow generation. And as we said in Investor Day and I've repeated on many occasions, we are very committed to returning cash to our shareholders and that underpinned our announcements today around a very material increase in our dividend and amending the share buyback program from last year for up to 4%, which I think is something like 290 million shares just over the next two months.

Yes. 29.4 million.

I’m sorry, 29, right? And so that is, I think, a strong indication of the pathway we're on. And so as we look to the next share buyback timeframe, we will be clearly evaluating that. But I think it's a fair assumption that if we continue to see this strength that we will continue to proceed with share buybacks even after this current program expires.

Okay. That's helpful. And the second question is a little bit jumble to how I'm going to ask you. But if you look at the interior model pre-Kearl sanctioning back in 2009, it was limited CapEx, buybacks as you just framed, and then – and dividend growth. And what I'm wondering is, is essentially, has that model now come full circle or when signals are appropriate, is there a scope to resume Upstream growth? I'm just trying to get an understanding of how you're sort of thinking about reinvesting in the business versus distributions.

Yes. It's a good question. And I think it does build on some of our discussions at Investor Day where we highlighted that our priority focus in the near-term is maximizing value from our existing assets. And that's why we have been so laser-focused on improving reliability, improving production capacity, reducing operating expenses, applying capital discipline. All those things are allowing us to generate significant value. But I'd also point out that integral there to – is that capacity growth. And if you take Kearl as an example, prior to implementing the supplemental crushers, we were at volume at or below 200,000 barrels a day. Last year, we saw an increase substantially above that. This year, we're now indicating 255,000 barrels a day. We have a pathway to 280,000. So over just a few years’ time, we will grow production from 200,000 to 280,000 barrels a day. So an 80,000 barrel a day increase, which is on par to several growth opportunities in our portfolio, like Aspen, I think, was targeted at about 75,000 barrels a day. So we are achieving similar growth, but at a much lower cost and that's delivering significant value. So we want to make sure, we progress that strategy and maximize the value from it. We will continue to look for growth opportunities giving priority to those that generate the highest return and we do see continued debottlenecking opportunities at Kearl and other sites. Longer-term, we will continue to revisit broader growth strategies as we look at the market, as we look at other considerations with supportive government policy, competitiveness, all those things. We have a deep inventory as you know with projects like Aspen and others. And we always keep an eye to M&A opportunities as well, should we see some particularly unique strategic accretive opportunities there.

Very good. Thanks very much.

Thanks, Greg.

Your next question comes from the line of Neil Mehta from Goldman Sachs. Your line is open.

Hi. Good morning. This is Carly Davenport on for Neil. Congrats on a good quarter. The first question was just around the Downstream. You highlighted reduced demand due to COVID as driving the sequentially lower sales during the quarter. So can you just talk about your outlook for the demand recovery in Canada? Maybe what you're seeing real-time on the ground and then if there are any key milestones to look out for there?

Yes. Thanks for the question, Carly. I would frame that response by really pointing to the volatility that we've been seeing. I noted some of the current demands that we're seeing. The diesel demand is mostly in line with where we were back pre-pandemic levels. But we still see a softening in gasoline, motor gasoline currently in that 80% of normal demand. And that's very much reflective of just personal mobility around the country, which has been very impacted by this third wave of COVID cases across all the country, and so that is having an impact. And then most severely impacted has been jet fuel demand, which is currently only 35% to 40% of normal levels. And I would contrast what we're seeing in the U.S. is, I mean, in Canada, it’s totally different than the U.S. In the U.S. personal mobility is in many cases returning to more normal levels. There's a lot of domestic travel in the airports in the U.S. But in Canada, very different situation with COVID because of this third wave, reintroduction of restrictions in many of the provinces, all of that is restricting mobility impacting demand. We do expect that demand will recover as the year progresses. Canada is actively progressing vaccination campaigns across the country. We see the momentum picking up, and we believe that coupled with good behaviors and restrictions will allow those COVID cases to significantly reduce over time, allowing mobility to resume to more typical levels and that will allow demand to grow again back to pre-pandemic levels, especially motor gasoline. Jet demand will probably take even longer depending on kind of how businesses react and how business travel returns for long-haul flights. So continued – I think volatility, continued uncertainty, but we do see a pathway for demand recovery over time as the year progresses.

Great. That's helpful context. And then the follow-up is just a housekeeping item. When we are looking at the cash flow for the quarter, it looks like the cash flow statement shows $125 million inflow from kind of in other items, could you just walk through what items are reflected there?

Yes. Thanks for that. I'm going to let Dan answer that question.

Yes. Carly, this quarter kind of what I talked about earlier with these non-GAAP measures, including cash flow from operating activities, excluding working capital. In the past in our press release and the attachments we've sort of lumped working capital and some other things together. And this quarter started going forward, we split them out and we put working capital on a separate line, obviously working capital is quite volatile. It can swing a lot quarter-to-quarter. The other items or other things that flow through the income statements that are non-cash, I mean, a good example would be pension-related expenses that we run through net income, but are not cash. So that's an example of what's in that other line, but there's a number of items in there, but they're obviously things that run through income that aren’t cash, that aren't working capital – for working capital based on the feedback we've gotten, folks want to call it out separately. So that's what we've done.

Great. Thanks for taking the questions.

Your next question comes from the line of Menno Hulshof from TD Securities. Your line is open.

Thanks for taking my question and good morning, everyone. I just have one. You touched on the LASER project at Cold Lake, but could you just elaborate on where things stand operationally and what the next couple of years could look like for LASER specifically? And I guess my follow-up there would be whether there is anything that could drive your 25% intensity reduction target higher over time?

Yes. Thanks for that question, Menno. As I mentioned on the call, we have now started up LASER at Mahkeses. We're quite excited about that. That's been a multiyear initiative for us, as I mentioned, previously deployed at Mahihkan. Now, Mahkeses, its part of our Cyclic Steam cycling program. So it takes multiple years to achieve kind of full benefits from it. And so over that period, we're going to continue to evaluate its effectiveness. We're going to continue to look for further deployment opportunities and that gives us line of sight to what's the optimum applications for LASER. But equally important is the fact that we're continuing to develop and look for application of other solvent technologies that also provide the potential for not just up to 25% reduction in greenhouse gas intensity, but some technologies we're looking at could achieve up to 90% reduction. So again, this is very much kind of an evolving effort by our technologists, but also our operations teams to take all the steps we can to further reduce greenhouse gas intensity. We've achieved as you maybe aware already 20% reduction in our greenhouse gas intensity since 2013. And we have a stated objective, a commitment to reduce our greenhouse gas intensity by another 10% by 2023. And as I mentioned, we're continuing to look for what are the further steps even beyond that, that ultimately allow us to progress a net-zero pathway.

Thanks a lot, Brad.

Thanks, Menno.

Your next question comes from the line of Chris Tillett from Barclays. Your line is open.

Hi, guys. Good morning. Thanks for taking my call. I guess, first for me would be on the cost breakout for the Upstream assets. Are you able to provide any color, I guess, specifically at Kearl? How much of that – looks like $35 million year-over-year is what you would classify as sustainable or just otherwise due to operational changes?

Yes. Thanks for the question, [Greg]. I don't have that detail in front of me. But what I would tell you about Kearl’s expenses – of course, we see some seasonality in those costs, as I mentioned, due to weather considerations. And as we move into the second quarter, there'll be turnaround considerations. So you'll see some volatility from quarter-to-quarter in those asset level metrics. But I think most importantly is to talk about the pathway that we're on for significant reductions in Kearl’s operating costs. The last – if you go back to 2019, Kearl’s unit operating costs were around $28 per barrel on a U.S. all-in basis. We've made significant improvements in that last year, driving it down to something in the $22 range. And what we laid out at Investor Day was a commitment and a plan to achieve $20 a barrel this year. So whereas you may see some noise in those numbers from quarter-to-quarter, what's most important is the pathway we're on and the commitment we made to achieve $20 annual average for this year.

Okay. And I guess maybe just to clarify, you do expect that $20 to be an annual average and not just sort of a benchmark you might hit by the end of the year?

Correct. Annual average.

Got it. Okay. Thanks for that. And then maybe just turning Downstream for a second here. Thanks for the commentary thus far on the outage at Strathcona. I guess just in terms of the product sales there that are occurring while the asset is under maintenance. From a mix perspective, how much of that is already locked in? Or I guess in other words, is it fair to assume that the product mix there during the maintenance period will be similar to the sort of what we've seen through the first quarter so far?

As I commented, one of the advantages of kind of our Downstream kind of program is we plan these turnarounds many months in advance. And through that we will build inventory that will allow us to maintain our product supply commitments because those relationships are critically important to us. And so in the case of Strathcona, we’ve taken those same steps and hence we'll be able to fulfill all our supply commitments. I don't have readily available how much of that is already locked in versus might be variable and opportunistic in nature. But I think largely it's going to follow a pattern you've seen in the past, so kind of looking to this quarter and last year.

Yes. Okay. Thanks for that. And then just last for me. Appreciate all the commentary from the prior question in reference to buybacks. I guess, just be curious to hear your thoughts or understand where your heads are at in terms of to the extent that there may or may not be a secondary offering coming. Is that something that Imperial maybe interested in? Or would the preference be more sort of open market purchases?

Dan, do you want to comment on that?

Yes. Look, open-market purchases through the NCIB are go-to move. It's a very efficient way to repurchase shares. But look our prices are strong. They could get stronger. So obviously, our intentions as we've said for a long time are to return surplus cash to shareholders. We have a reliable and growing dividend beyond that. Share buyback is the next tool. So to the extent the NCIB is tapped out, if we're in that situation and the cash flows are strong, we'll certainly look at other options.

Understood. Okay. Very helpful, guys. Thank you very much.

Thank you.

There are no more questions at this time. Presenters, you may continue.

Okay. Thank you, Operator. We did have two more questions pre-submitted that I guess we can wrap up with. They came from Manav Gupta at Credit Suisse. Now Manav’s first question is with respect to refined product demand in Canada. And Brad, I think you answered that question in response to Carly Davenport's question a few minutes ago. So maybe we'll just wrap up with Manav’s second question. There is again some noise on Enbridge Line 5, do you think the line can continue to operate?

Yes. Well, that's a good question, Manav. And I know it's something we've talked about on prior occasions. Obviously, it’s the situation we're watching very closely. Line 5 is a critical piece of infrastructure supplying kind of the entire Ontario Eastern Region of Canada. But also with implications to the U.S. specifically for Imperial, we move crude to Sarnia and Nanticoke through that line. I think as I mentioned on the last call, we have put contingency plans in place to address a scenario of a Line 5 shutdown and we continue to refresh those scenarios. But I would say and most importantly, we consider that to be a low probability. That infrastructure is so critical. And when you look at the underlying kind of legal case around shutting it down, we just don't see that, that in [indiscernible]. And we think kind of cooler mines will prevail and that line will stay in service. We're quite pleased to see that the Canadian government has recognized the value of that line and are clearly engaging with governmental kind of counterparts in the U.S. to ensure that that supply security is maintained. So again, we view it as a low probability. But should it happen, we will be prepared.

All right. That's it for the questions. So I guess on that note, on behalf of the management team here with us, I'd like to thank everybody for joining us this morning. As always, if you have any further questions or want to have any follow-up discussions, please don't hesitate to reach out to the IR team here. And with that, I’d wish everybody a good weekend and stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.