Cenovus Energy Inc. Q2 FY2024 earnings call

• Safety: Completed the largest turnaround in Lloydminster Upgrader history with 1 million man hours and 3,200 contractors, no incidents. Monitored wildfires near assets, returned staff to Sunrise site. - Financial Milestone: Achieved net debt target of $4 billion in July, moving to return 100% excess free funds flow to shareholders. - Upstream Operations: Oil sands performance exceptional; Christina Lake turnaround in Q3 expected to reduce production by ~45,000 bbl/day; growth projects like Narrows Lake tie-back and Foster Creek Optimization Project on track. Conventional and gas production ~123,000 BOE per day; offshore production ~66,000 BOE per day; Asia operating margin $264 million; Atlantic region non-operated Terra Nova asset production increased. - Downstream: Lloydminster Upgrader turnaround completed, ramping up to normal rates; U.S. refining focus on reliability, cost structure, and profitability, with some planned maintenance deferred to 2025.

Upstream: In the second quarter, upstream production was over 800,000 BOE per day, in line with the prior quarter. First half of 2024 trended at the higher end of guidance. Oil sands produced around 610,000 barrels a day in Q2 with an operating margin of approximately $2.7 billion, an increase of over $500 million from the prior quarter. Upstream production guidance was updated to a range of 785,000 to 810,000 BOE per day, with the lower end increased by 15,000 BOE per day. Downstream: Canadian refining results were impacted by the planned turnaround at the Lloydminster Upgrader. U.S. refining had combined crude utilization across assets at about 93% in Q2. Downstream throughput guidance was updated to 640,000 to 670,000 barrels a day.

• Upstream production guidance increased to 785,000-810,000 BOE per day. - Operating cost guidance reduced in several business segments. - Capital spend guidance remains $4.5 billion to $5 billion, with planned spend for growth and optimization projects ramping up in the second half. - Downstream throughput guidance updated to 640,000-670,000 barrels a day.

• Weather-related delays impacting turnarounds and productivity. - Uncertainties around Bill C-59 affecting ESG disclosures. - Market volatility and supply-demand imbalances in refining affecting margins.

Q: Good day, Jon and team. The first question is actually around West White Rose. It's an unbelievably important project as we think about the free cash flow progression. So can you just talk about what are the gating items here and as we move towards top side in 2025?

A: Sure. So maybe I'll start and then I'll let Keith chime in on this. You're absolutely right. Hitting the $4 billion net debt target has been something this organization has been really focused on for a number of years, and it's a great day for this company and a great day for our shareholders. I think as it relates to West White Rose, we mentioned that we're about 80% complete. We've really largely completed the work on the gravity-based structure in the top sides, and we now move really into the marine-based part of the project. But maybe, Keith, you can talk a little bit more detail about where we are with that project.

Q: Yes, thanks. Good morning, and thanks for taking my questions. The first one, and I guess also, congratulations on achieving the $4 billion net debt floor. My first question, there have been some news reports on some operational hiccups with some of your U.S. refineries namely Lima and Toledo. And I also appreciate the comments that you made in the prepared remarks around progress being made around improving profitability of the operations. My question here is, can you comment on the current operations, all of the U.S. refineries as well as discuss some of the projects that are ongoing? And when you think some of these best practices improving margins and so forth can potentially bear fruit.

A: Hi, Dennis. It's Keith. Thanks for the question. Maybe I'll get to your specific question in a minute, but I just want to reflect on a little bit of the progress that is being made. So in 2023 was a lot of work on restarting the superior refinery and the Toledo refinery and driving improvement across the fleet to improve crude utilizations. We're starting to see some of that bear fruit as we head into 2024 with higher utilizations. But by no means are we done. There's still lots of work we have available to us to improve reliability, to improve profitability and to drive down our costs. And interestingly, sometimes it takes a turnaround to be able to drive those reliability improvements. So we do have the Lima turnaround come up here in the fall, which will allow us to advance some additional reliability improvement as we progress down this journey. Specifically, today on Toledo and Lima, both went through a couple of process upsets which brought the refineries down into a controlled manner. That -- some work is progressing as we speak on maintenance. That should be wrapping up in the next day or two, and we'll be progressing with restarts of both those refineries. And then maybe to the back end of your question, just specifically, we are seeing some of those reliability initiatives bear fruit. Jon just talked about the Lloyd Upgrader turnaround. That's another opportunity for us to go in there and reduce the bad actors that we had at the Upgrader to help drive that longer-term reliability improvement that we expect. So there's lots of work underway, but by no means are we declaring victory. There's still room to improve and room to go on all aspects, reliability, profitability and our operating costs.

Q: Hi, guys. Quick question. A little bit of a follow-up on John Royall. It's very clear surplus cash is all going to go to shareholders and no -- nothing for debt reduction. Just trying to understand a preference between buyback and variable dividend. Should we continue to see a combination of those? Or you have a very strong preference for one of those? Definitely, buybacks over variable, but if you could talk about that.

A: Yes, good morning, Manav. I kind of alluded to this and when I answered John's question. But I think, number one, the principles around how we return cash, none of that has changed. So you're going to continue to see us ratably, predictably grow the base dividend over time. We've typically done that kind of in that April, May timeframe, obviously driven by the Board discretion. But as the business grows, you're going to continue to see us target, let's say, double-digit growth in the base dividend over time. That's the first thing. I think the second is, as I said, given where the share price is today and what we see is value and intrinsic value and the return on acquiring our shares back we see that as an attractive value proposition. So the variable dividend we paid in May was more a function of we under allocated our shareholder returns in the first quarter. nd so that's not a reflection, I would say, the value that we see in the buyback. So going forward, to the extent that you continue to see an attractive share price, which we do, you should expect most, if not all, of our return -- excess returns will be done in the form of share repurchases.