Cenovus Energy Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2025

Key Takeaways

  • Operating margin of $2.8 billion and adjusted funds flow of $2.2 billion in Q1, driven by strong upstream performance and narrow heavy oil differentials.
  • The board approved an 11% dividend increase to $0.80 per share and returned $595 million to shareholders via dividends, share buybacks and preferred-share redemptions.
  • Narrows Lake tieback completed with steam injection underway; first oil expected early Q3 2025 and production set to rise by ~20,000 bpd at Christina Lake.
  • West White Rose gravity-based structure and topsides are being towed and prepped for offshore installation this summer, targeting first oil in Q2 2026.
  • Downstream posted a $240 million operating margin shortfall due to seasonal low crack spreads, tighter heavy oil differentials, $26 million of inventory losses and $81 million of turnaround expenses.
AI Generated. May Contain Errors.
Earnings Conference Call
Cenovus Energy Q1 2025
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

morning, ladies and gentlemen. Thank you for standing by, and welcome to Synovus Energy's First Quarter twenty twenty five Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this call is being recorded.

Operator

I would now like to turn the meeting over to Mr. Patrick Reed, Vice President, Investor Relations and Internal Audit. Please go ahead, Mr. Reed.

Patrick Read
Patrick Read
VP - Investor Relations at Cenovus Energy

Thank you, operator. Good morning, everyone, and welcome to Cenovus' twenty twenty five First Quarter Results Conference Call. On the call this morning are CEO, John McKenzie and CFO, Cam Sandar, will take you through our results. Then we'll open the line for John, Kam and other members of the Cenovus management team to take your questions. Before getting started, I'll refer you to our advisories located at the end of today's news release.

Patrick Read
Patrick Read
VP - Investor Relations at Cenovus Energy

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 Cynovus' annual MD and A and our most recent AIF and Form 40 F. And as a reminder, all figures we reference on the call today will be in Canadian dollars unless otherwise noted. You can view our results at cynovus.com.

Patrick Read
Patrick Read
VP - Investor Relations at Cenovus Energy

For question and answer portion of the call, please keep to one question with a maximum of one follow-up. You're welcome to rejoin the queue for any other follow-up questions you may have. We also 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. I will now turn the call over to John. John, please go ahead.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Great. Thank you, Patrick. Good morning, everybody. Just before we get, started on our first quarter performance, I'd like to take a moment to recognize some of our great people who have accomplished great things while also ensuring we do it the right way, protecting our people and our assets. For example, on West White Rose, we have now worked over twenty seven million hours with a total recordable incident frequency of 0.18.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

This is exceptional performance by any measure and a clear example of how we'll continue to ensure that all of our workers return home safely each and every day. As another example of our safety programs at work, we've instituted a program on dropped object, prevention across our company. This pro, program focuses on planning, hard barriers, and work controls to reduce the risk of dropped objects. We have seen the impacts of this program and how our work is performed, mitigating risks across our business through the commitment and dedication of our people in the field. At Synovus, and process safety is ingrained in our culture and our values.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

So now turning to our results. Our focus in 2025 is on flawlessly operating the base business, building momentum in the downstream, delivering on our growth projects, and maintaining our focus on cost structure. Upstream production in the quarter was 819,000 BOE per day, highlighted by yet another impressive result from our oil sands business. At Christina Lake, production was 238,000 barrels per day and we have completed the Narrows Lake project which connects to the Christina Lake plant and are now running steam through a tieback pipeline and injecting steam into the first two well pads. First oil from Narrows Lake is expected early in the third quarter as planned.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

With first production on the way, let me take a moment to talk about what makes this project so special and unique. What we've done at Narrows Lake is a real feat of engineering and I'm incredibly proud of the technical and operations staff who have made this possible. At 17 kilometers long, the Narrows Lake tieback is the longest steam line ever started up in the oil sands industry. It allows us to access some of the best reservoir in the basin at a fraction of the cost of building a new plant. Over their producing lives, these first well pads at Narrows are expected to have cumulative steel steam oil ratios well below two and the best wells are expected to produce at peak rates of over 3,000 barrels per day.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

These are some of the longest and most productive wells in our industry showcasing our technical and operating capability. We have now drilled the first five well pads at Narrows Lake. After bringing the first two well pads on, we'll begin steaming the third later this year with two more to follow in 2026. At Christina Lake, we already have the lowest steam oil ratio in the industry today, and with the narrows tie with the tie in of Narrows Lake, this will decrease further. By using steam more efficiently, we'll drive the SOR down and increase production by about 20,000 barrels per day.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

This is the first of our major growth projects, that we'll be bringing on over the coming year, marking an important milestone for the company. Outside of Christina Lake, performance at Foster Creek continues to be exceptional with production of 203,000 barrels a day over the quarter. This was a result of new well pads drilled into very high quality reservoir coupled with a successful redevelopment and optimized program. Foster Creek is now undergoing a turnaround that began in mid April and we're making excellent progress on the turnaround. We're already bringing back production to around 170,000 barrels a day with the remainder of the volumes expected to be back before the May.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

During the turnaround, we're completing some of the tie ins as part of the optimization project that will add four new steam generators and around 80,000 barrels a day, of steam capacity. This will be the first new steam capacity added at Foster Creek since 02/2016, enabling us to bring forward high quality resource that will add 30,000 barrels a day of production. The project is now 75% complete and on track for first oil in early twenty twenty six. At Sunrise production averaged, about 52,000 barrels a day in the quarter. In April, we brought on the fourth and final well pad from our first well package since acquiring this asset.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

And we've now completed the first phase of our growth program, which was focused on the Central development area. Starting in May, we'll be commencing on the first of two turnarounds at Sunrise this year in preparation for bringing on the next phase of well pads, from the East Development area. This will move, us into some of the highest quality reservoir in the portfolio and will allow us to fully optimize the steam capacity leveraging new Synovus well and completion designs. That means lower SORs and higher production as we bring those well pads on starting in early twenty twenty six. In the offshore segment, Atlantic volumes were higher quarter over quarter as we saw increased rates from Terra Nova and the West or sorry, White Rose Field returned, to production in March.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Now most importantly, the West White Rose project continues to make great progress. The gravity or concrete gravity structure is ready to leave the graving dock and will begin tow to Arnold's Cove in the next few days. That is where the dry ballasting will be completed before we move the structure, to the White Rose Field location in June. The topsides are also being prepared for sail out to the field with transportation vessel with the transportation vessel now on-site in Ingleside. We'll bring these two major components together for installation this summer, which will position us to commence drilling, from the platform before the end of the year and achieve first oil in the second quarter of twenty twenty six.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

In the Downstream Canadian, refining performance was exceptionally strong with record quarterly throughput and utilization rate of 104%. We're certainly seeing the benefit of improvements we've made, during the upgrader turnaround last year, and we expect that business to continue to perform well despite narrow light heavy differentials. In The US, we're continuing to build momentum in our operating performance highlighted by strong throughput, lower costs, and better process unit reliability in our operated assets. Our Toledo refinery is currently undergoing major turnaround including maintenance on eight units within the refinery, eight major units within the refinery, including the smaller of the two, crude units. This work will help to drive a step change in performance going forward.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Turnarounds at both are operated sorry, at our non operated refineries, which began in the first quarter are also now complete. With crack spreads improving and our Toledo turnaround, wrapping up this quarter, we expect to see a clear runway for our U. S. Refining business to deliver higher performance through the second half of this year. I'll now turn it over to Cam to walk through the financial results.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

Thanks, John. Good morning, everyone. In the first quarter, we generated $2,800,000,000 of operating margin and approximately $2,200,000,000 of adjusted funds flow. Operating margin in the Upstream was around $3,000,000,000 an increase of approximately $380,000,000 from the fourth quarter, driven by our strong operating performance and higher sales volumes. Our business continues to significantly benefit from narrow heavy oil differentials since the TMX pipeline came into service last year.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

Oil Sands non fuel operating costs were $8.92 per barrel in the first quarter as we continue to deliver some of the lowest cost production in the basin. In the Downstream, an operating margin shortfall of approximately $240,000,000 reflected seasonally low Chicago crack spreads as well as the tighter heavy oil differentials. Our Downstream operating margin also included 26,000,000 of inventory losses and $81,000,000 of turnaround expenses in the quarter. In the Canadian refining, our operating margin was $68,000,000 up $21,000,000 from the prior quarter despite a nearly $4 per barrel decrease in the upgrading differential. Operating costs in the Canadian refining business were $10.81 per barrel, down around 12% relative to Q4 excluding turnaround costs.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

We are also pleased with the progress we made in the first quarter in The U. S. Refining business. Our adjusted market capture of 62%, which excludes inventory holding gains and losses or FIFO impacts, was approximately 10% higher than the fourth quarter. This reflects higher liability and resulted in an increase in adjusted refining margin of more than $2 per barrel.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

Excluding turnaround costs, our operating costs in The U. S. Refining business were $12.15 per barrel. Importantly, we saw continued decrease quarter over quarter in controllable costs in our operated desks and we expect those costs to continue to trend downward over time. Capital investment of $1,200,000,000 was driven by sustaining activity across the business as well as growth capital in both the Oil Sands and Atlantic Region where we're advancing our major projects.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

Free funds flow was approximately $1,000,000,000 in the quarter and consistent with our commitment to grow shareholder returns, our Board of Directors has approved an 11% increase to the annual base dividend to $0.80 per share. This increased dividend and the sustaining capital required to maintain our business is fully supported in a $45 per barrel WTI oil price. This dividend increase is an outcome of the continued growth we see in our business and as we deliver our growth projects and build momentum in our downstream business, we're confident in our ability to continue to grow our dividend consistently over time. Our net debt was approximately 5,100,000,000 at the end of the first quarter. This includes the redemption of the preferred shares and increase in non cash working capital largely related to tax installments and payments of annual incentives as well as normal course reductions in accounts payable.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

While our net debt remains elevated above our $4,000,000,000 target, we are prioritizing the balance sheet with our excess refunds flow, while continuing to remain active with our NCIB given the current valuation of our shares. In total, during the quarter, we returned $595,000,000 to shareholders through dividends, share buybacks and the redemption of the preferred shares. Subsequent to the end of the quarter, the company repurchased $178,000,000 worth of shares through our NCIB from May 5 through to May 5 or about 11,000,000 shares. With the value we see in our shares today and with the capital investment decreasing as we complete our major projects, we see a significant opportunity to increase our returns to shareholders through buybacks going forward and continuing to ensure our balance sheet remains strong. I'll now turn the call back to John for some closing remarks.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Great. And thank you, Cam. We accomplished a lot in the first quarter. And looking forward, we've had a great start to the second quarter, and we have a lot more to do over the next six weeks. By the end of q two, the vast majority of our 2025 turnaround activity in both the upstream and the downstream will be behind us. Narrows Lake will be ready to begin production and both the concrete gravity structure and the topsides for West White Rose will be preparing for installation offshore.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

With major maintenance activities behind us and production beginning to ramp up, we're positioned for a very clear runway of strong operating performance in the second half of the year and into 2026. Now with the recent volatility, in the market or sorry, the recent volatility in the market has been a good reminder of why we put our strategic priorities and financial framework in place. We continue to progress our growth plans with minimal impact to the business. This financial discipline coupled with our focus on reducing costs makes Synovus resilient and durable for the long time and well positioned in any reasonable commodity price scenario. And with that, we're happy to take your questions. Thank

Operator

The first question is from the line of Greg Hardy from RBC Capital Markets. Your line is now open.

Greg Pardy
Greg Pardy
MD & Head of Global Energy Research at RBC Capital Markets

Yes, thanks. Good morning and appreciate the rundown. John, can you dig into the, maybe just the scope of the work you've got going on at Toledo, I guess that you're wrapping up, but also maybe what the objectives are in terms of the the stepwise improvement performance that you referred to.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yeah. Sure. Good morning, Greg. So at Toledo, we're we're currently, in turnaround in the smaller part of the plant. So I think it's the west side of the plant.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

I often get Lima and Toledo mixed up, and we call one north, one west. But I think it's the west side of the plant. But we're into eight major vessels. So this would include the small crude unit, the cokers, the reformer, the tail gas unit, and the like. But the real intention here, Greg, is just to continue on this journey of, improvement in the reliability of our assets.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

So we've got a, you know, a very tight scope on this. We're now through, I think, the riskiest part of the turnaround, and and we've, you know, been through all our major inspections, and we're, you know, continuing forward. As I mentioned in my call, you know, we see this as as kinda wrapping up at, you know, in the second quarter and sort of the mid June time frame. But it really marks a progression of improvement that we've been making, through our assets, over the past while. So you'll remember in q two last year, we took down the the Lloyd upgrader for a major, major turnaround.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

You know, that asset operated incredibly well, coming out of that turnaround as we were able to get after a lot of the major issues that were haunting us there. And similarly, in, q three, q '4, we took down Lima, and that asset, has operated really well coming out of turnaround, operating at or close to full capacity through q one, and that continues through q two. So we expect to see the same kind of step change performance in Toledo coming out of this and, looking forward to, you know, an unencumbered run through q three and q four where we don't have any major, outages in our downstream business.

Greg Pardy
Greg Pardy
MD & Head of Global Energy Research at RBC Capital Markets

Okay. Got it. Got it. Thanks for that. Yeah.

Greg Pardy
Greg Pardy
MD & Head of Global Energy Research at RBC Capital Markets

Maybe just shifting gears onto the marketing side. You know, just at times, the realizations on Foster Creek can be, you know, just a little all over the place, at least by by our yardstick. And I'm just curious, how do you decide on Christina or Foster Creek in terms of moving those barrels through TMX into Asia or California or moving them down into the Lower 48?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Sure. So I've I've got, Jeff Murray on the line with me. So Jeff, that's a good question for you.

Geoff Murray
Geoff Murray
Executive Vice-President of Commercial at Cenovus Energy

Greg, it is a it's a great question. And and when you look at the assets on an asset by asset basis, I think you're gonna continue to to see that movement around. When you take a look at, oil sands as a whole, you'll find that the value of the assets we own, for moving product around sort of consistently resolve themselves at the oil sands level. The reason for that is, you know, we make a decision every month taking a look not only at locational differentials, between, you know, Alberta and the West Coast, Alberta and the Gulf Coast, but we also take the grade differential into account. So there are slight differences in quality between the high tan and low tan, and we do find that that moves around notably in The US rather than so much on the West Coast, but we will move to find an extra $25.50, 75¢ on grade choices, and that is to optimize the value of pipeline contracts like Trans Mountain, Keystone, and Flanagan South.

Geoff Murray
Geoff Murray
Executive Vice-President of Commercial at Cenovus Energy

So I think you'll continue to see that movement, but within the oil sands segment, you should see it resolve itself based on, you know, those larger market indicators.

Operator

Thank you. The next question is from the line of Dennis Fong from CIBC. Your line is now open.

Dennis Fong
Equity Research Analyst at CIBC Capital Markets

Hi. Good morning, and thanks for taking my questions as well as congratulations Good morning. My first one is just on the downstream side and a bit of a follow on to Greg's question. As you've kind of gone through the as you just highlighted the major part of the turnaround at Toledo, like are there any parts of the facility that you found can be further optimized?

Dennis Fong
Equity Research Analyst at CIBC Capital Markets

And further, how are you thinking about products marketing and and so forth, once you kind of ramped that that asset back up?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yeah. You know, one of the things we're always looking to do, Dennis, is, you know, improve the the, ability of our refineries to operate more efficiently, capture more margin, and take costs out of the system. And those things are all kinda tied together. One of the longer term or medium term, objectives of that we've got is is to really start to run Lima in Toledo as an integrated operating unit. Those refineries were meant to be run together.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

They were designed that way. And, ultimately, that's the direction we're going. So, you know, in light of where we've been over the last six months in in dealing with some fundamental reliability issues and getting that behind us. You probably haven't noticed that we are also working on, you know, a number of things to get products to market, in a different way that captures more and more margin for us. So, you know, some of the things that I would point to is opening the dock at Toledo and moving more and more product off the dock, getting those products into higher realization markets.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

We're looking at all options of egress from from really rail to, marine to pipe, we've got some, you know, some interesting interesting things happening on the pipe side as well. But as we kind of progress this and, increase the competitiveness of these refineries, we're really tackling this on all fronts.

Dennis Fong
Equity Research Analyst at CIBC Capital Markets

Great. Appreciate that color on the downstream side. Shifting gears towards upstream, I wanted to kind of ask a question on Sunrise here. Obviously, you've been making a lot of progress on that particular asset with kind of the new well pad adds a view of increasing production over the next couple of years. As you further optimize that, how are you thinking about where OpEx and SOR could eventually trend towards?

Dennis Fong
Equity Research Analyst at CIBC Capital Markets

And kind of what's the upside in terms of this asset maybe in terms of applying again to know what's best practices in terms of underlying operations?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

What we've talked about publicly, Dennis, is taking that asset to about 75,000 barrels a day. And that would tell you that the SOR is coming down, from its design basis of about 3.5 to something close to three and potentially below that. And one of the things that's really exciting for us on that asset is, and I mentioned this on the call, we're actually moving to the Eastern Side of Sunrise, which is some of the best resource that we have inside our portfolio. So as we kind of move into what we call the V pads, which would be V you know one, two and then you'll get four and five and three later on. These are some of the best reservoir that we have in the portfolio when we'll be drilling sort of the longer wells with the steam separators and really give us the ability to use steam differently.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

And ultimately, you know, the recovery on these wells is enormous as well. Some of the best wells you know that we have in the V pads you know are going to recover north of 4,000,000 barrels, over their life. So you know, we're really excited about, you know, the the strength of that reservoir and the quality of that reservoir. And as we move more and more into it, you know, you'll see this SOR come down, and you'll see the production come up, to that 75,000 barrels a day that we talked about.

Operator

Thank you. The next question is coming from the line of Menel Haussup from TD Securities. Your line is now open.

Menno Hulshof
MD - Equity Research at TD Securities

Thanks, and good morning, everyone. I'll start with a question on the CapEx profile in your slide deck that points to a fairly large drop in 2026 on spending into the, call it, dollars 4,000,000,000 range. So my question is, what is your confidence level in that estimate? And what are the factors that could nudge the 2026 budget a bit higher or lower as the year progresses?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yeah. Good. Thanks for the question, man. I'll start by preferencing this, then I'll turn it over to Cam. But the capital spend actually starts to come down in the fourth quarter of this year as some of our projects move from the project phase to commissioning and start up.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

But we have high confidence that we are going to be decreasing our capital budget from the 5,000,000,000 that we've been running at to a lower number in 2026. But maybe you wanna take that on, Kim?

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

Sure. So, Menno, I think, you know, at the end of day, maybe where it start is, you know, this is really a function of, you know, the fact that we've spent the last three years focusing on the growth plan that we've gotten. As you know, this year, we've got about one point four to one point eight billion of growth spend, and that growth really in earnest starts to show up this year and going through into 2027. So, I think the big benefit we've got is we've got a fairly robust trajectory of volume growth over the next few years and couple that with, I'd say, a desire to have lower spending. I think at the end of the day, we are really focused on driving what's the best value for our shareholders.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

So I think, you know, given, other capital allocation priorities we have, particularly around shareholder returns, I think we've got pretty high confidence that you're going to see the capital come down. And just to give you a bit of a frame of reference, you know, one of the biggest changes you're going to see year over year is, you know, as West White Rose gets completed, that probably singularly will be one of the largest decreases we're going to see in capital profile going into 2026, given that project will be largely completed by the end of this year and the drilling of the wells starting up kind of late Q4 and into Q1. So, I'd say from a confidence level, think at the end of the day, we're pretty confident that we're going to see a drop. I'd say for now, I think somewhere in that low $4,000,000,000 range is is a good starting point for you guys to think about for 2026.

Menno Hulshof
MD - Equity Research at TD Securities

Great. Thanks for that. And then then my second question is on Narrows Lake and how it ultimately gets reported. My understanding is that it simply gets slayered into Christina Lake reporting right out of the gate, but maybe you can confirm that. And then second, you touched on and you did touch on this in your opening remarks, John, but what sort of an impact are you expecting Narrows Lake to have on overall Christina Lake blend quality and netbacks? Thank you.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yeah. So you're absolutely right, Menel. This is gonna just, be part of, the Christina Lake reporting. It's all one complex now. And in terms of quality of of production, it's very similar to what we see at Christina Lake.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Now the interesting thing though, and and I touched on this in my in my opening comments, is is building that pipeline of 17 kilometers and getting that operating well and, you know, seeing the start up as flawlessly as as we, have seen it. Also gives us a lot of confidence to think about resource development going forward in in places like Kirby West, which is to the South of Christina Lake seem accessible with the technology that we've got today. So it really does open up a lot of things for us, at Christina Lake. But, you know, in the short term, what you'll see is Narrows just come in to Christina. It'll be reported as one complex, and and the point that I was making earlier is that the quality of crude is very similar.

Operator

Thank you. The next question is coming from the line of Neil Mehta from Goldman Sachs. Your line is now open.

Neil Mehta
Neil Mehta
Head of Americas Natural Resources Equity Research at Goldman Sachs

Hey. Good morning, John and team. Just wanted your respect hey. Good morning. I wanted your perspective on West White Rose.

Neil Mehta
Neil Mehta
Head of Americas Natural Resources Equity Research at Goldman Sachs

We're getting close to that inflection. I know there's some really big milestones ahead here over the next six months, so we wanna just see how that's tracking and what you're spending time thinking about.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yeah. You know, we use the word inflection a lot inside this company, and it kinda describes where where we think we are as a company as well. But as I mentioned in in my notes, Neil, I'll just kinda give you a rundown of of how we see this project unfolding over the next six, eight months. But we are we are literally days away from towing out the gravity based structure from Argentia, and we'll take it to a place called Arnold's Cove, where we'll do the dry ballasting. You know, and that that could happen as early as tomorrow, but it's it's, it's gonna happen over the next few days.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

You know, similarly, we have the Costco vessel now in Ingleside, and it's preparing for the load out of the topsides that will happen, at the end of the month, early June, and we'll be bringing the topsides up to Newfoundland to, to Bull In June, we will tow the gravity based structure out to the field, and we will put it replace it on the seabed. And then in July, we'll bring the topsides from Balarm, and we'll mate them up with the gravity based structure. From there, there's a few months to do of commissioning and start up work. And then in q four, we'll start drilling with first production, as I mentioned, expected in the second quarter of twenty twenty six. But it's a pretty exciting time, and this is this is becoming very real very, very quickly.

Neil Mehta
Neil Mehta
Head of Americas Natural Resources Equity Research at Goldman Sachs

Yeah. And as you think about derisking those items, what what what is the most important of them? And how much confidence do you have that you have have mitigated those risks?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Well, we we have great confidence in in, where we are today. We actually floated the, gravity based structure last night. So we we just continue to kind of derisk this project and get to, important milestones in a very methodical way. So there's nothing that we're doing here, Neil, that is unique and and out of sequence with what others have done in this basin. It's just, you know, big pieces of equipment, happening in very short periods of time right now.

Neil Mehta
Neil Mehta
Head of Americas Natural Resources Equity Research at Goldman Sachs

Thanks, John.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Thanks, Neil.

Operator

Thank you. The next question is coming from the line of John Roy from JPMorgan. Your line is now open.

John Royall
John Royall
Executive Director at JP Morgan

Good morning. Thanks for taking my question. Good disconnected for a chunk of the call, so I'm hoping that none of this was addressed. But I wanted to start on capture rates in refining and you had a nice improvement this quarter despite a tight diff. You mentioned some impact from improvements you made at Lima.

John Royall
John Royall
Executive Director at JP Morgan

Should we expect that given you'll be back in turnaround this quarter with Toledo that 2Q should come off a little bit on the capture rate? And then you talked about 70% plus being a range that's kind of a near term target. Is that achievable in the second half or should we need some more help from this to get there?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yes, you kind of touched on the three things that impact capture rate. One is the definite that has certainly been tight. And although it's good for the company, it does impact our capture rate and our ability to drive profitability in the downstream. And we expect that to stay tight through the second quarter. You know, the second thing is reliability and are you producing the products that you expect to produce?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

And and I would say that is happening as per plan, and and and I think we're in good shape there. And then that allows you to place those products effectively into the market, and that's the third thing. So as we, kinda work through the turnaround in, Toledo, that obviously affects q two. But coming out of that, we expect to be well above the 62% that we were in Q1.

John Royall
John Royall
Executive Director at JP Morgan

Great. Thank you. And then my second question is on the pacing around the buyback. In 1Q, you had some pref purchases as well as the big working capital build. And the buyback was a little lighter, but you came out of the gate pretty strong quarter to date despite going into a big turnaround period and also prices down a bit.

John Royall
John Royall
Executive Director at JP Morgan

So if you could just talk about the cadence on the buyback side and how you think of how that interacts with the different moving pieces on cash flows, that would be helpful.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

Hey, John, it's Cam. A couple of things I would just say on the buyback program. Think obviously we're always continuing to monitor cash flows, inflows, outflows quarter by quarter. Obviously, in q two here, we're gonna have a fairly heavy, period for turnarounds and turnaround costs as it relates to Toledo and Foster. But, you know, what would say is, you know, I'd just step back a little bit and just describe our buyback is gonna be very flexible.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

It'll be you may not necessarily see it ratable over time, but we're gonna be we'll be flexible, and we'll be value focused on that buyback. So obviously, we stepped it up a little bit as we talked about on the call here in April, repurchasing just under 11,000,000 shares. So I think we'll be thoughtful about when we do it, when we use that capital. But I would say at the same time, the reason we've got that flexibility is our balance sheet is strong. Know, although we're not right at that $4,000,000,000 floor that we talk about for debt, I don't think that's necessarily gonna stop us from being value and flexible around where we see opportunity.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

So, yeah, wouldn't necessarily hold us to some ratable form of a buyback, but I think where we can use our balance sheet and where we see value, we'll continue to assess it. But I think what I would tell you is over the long term, obviously, we want to target getting to 100% returns, but that's not necessarily what you're going to see on a quarter by quarter basis.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yeah, John, I'd just add to that. You know, one of the things that I say is, you know, we are never going to put this balance sheet at risk and we have a $4,000,000,000 you know, leverage target for a reason. But there is a fine line between discipline and dogma. And when you have opportunities like we have with the share price being where it is, I think it's incumbent on us to take a look at that understanding that we have one of the best balance sheets in the business.

John Royall
John Royall
Executive Director at JP Morgan

Thank you.

Operator

Thank you. The next question is coming from the line of Patrick O'Rourke from ATB Capital Markets. Your line is now open.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Good morning, Patrick.

Patrick O'Rourke
MD - Equity Research at ATB Capital Markets

Good morning. And thank you for taking my question. I guess maybe just to build a little bit upon the discussion you're just having with John. Just curious in terms of where you see the most attractive sort of application of shareholder returns right now. You've been aggressive with the buyback in May, but you also raised the dividend.

Patrick O'Rourke
MD - Equity Research at ATB Capital Markets

Then of course, we've got another tranche of the preferreds that are coming up as redeemable here and how you think about that allocation. Of course, I guess there's the interplay you talked on the balance sheet of how working capital releases through the balance of the year.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

Hey John or Patrick, it's Cam. Maybe a couple of things I would highlight. I think first off, maybe I'll start with the base dividend. I think you know, we've been very clear, we've got different components to our shareholder return strategy and I would describe the base dividend as being more a commitment versus say more discretionary returns, which is what the buyback and a variable dividend could be over time. But when you look at the base dividend, it's really about creating a business plan and a strategy that continues to allow us to predictably, ratably grow our dividend over time and that's all underpinned, I would say, by our five year plan that we outlined last year.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

So obviously, I think the dividend growth that we've given this year was 11%. It's I think very tied to our business growth that we see not just this year but going into '26 and '27. And so what I would say is when you look at our growth plan over the next few years and you look at our ability to grow that dividend, I'd say we were very comfortable and confident we're gonna see consistent growth over time. And this this increase we've given, and it's always typically in April, May, is just consistent with that long term strategy. Last thing I would just say on the dividend is it's it is keep in mind, it's always gonna be anchored to a ability to sustain that dividend in a $45 WTI price.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

And I think as that business plan continues to deliver, we're gonna have more capacity to grow that over time. When you think about the kind of interplay between other capital allocation priorities, particularly around buybacks and even prefs, would say, you know, market conditions are continuing to move around. They're volatile. And I would say we are gonna be flexible and thoughtful about where we see the most value. You know, obviously, we took out the pref shares series, five back in, March, at the March, which was 200,000,000.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

We've got another series due here at the June, another 150 and then about 300,000,000 next year. And, you know, I'd say long term, would say, look, the pressures had a had a time and a place in our capital structure. You know, years back when Husky put them in place, I would say those those drivers are probably not the same today but at the same time I think if we see better opportunities to deploy cash like a buyback, we may choose to do that and that's a decision we'll make as these prefs get to their rate reset dates.

Patrick O'Rourke
MD - Equity Research at ATB Capital Markets

Okay, great. I know it's small in terms of cash flow generation here, but one thing that stood out to me in the quarter was the margin that was created in the conventional business. I think it was substantially above the highest estimate on the street. Look at the netbacks, big jump in sort of price realization there. Is that just a function of better gas pricing in the basin?

Patrick O'Rourke
MD - Equity Research at ATB Capital Markets

And what's the sort of appetite to continue to grow that particular business as we see AECO basis improve here?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Jeff, why don't you take the first half of that and I'll take the second.

Geoff Murray
Geoff Murray
Executive Vice-President of Commercial at Cenovus Energy

Great. Thanks, Patrick. Two parts to that. One obviously is we've seen gas prices do what gas prices have done. I wouldn't say that quarter one to quarter one comparison it's meaningfully different.

Geoff Murray
Geoff Murray
Executive Vice-President of Commercial at Cenovus Energy

But when you look at q four to q one, AECO price all in was better. However, the part that you need to make sure you add is that we do have some pretty valuable and significant pipeline space that moves natural gas out of the basin. I would point you to, last year, is the easy way for you to kind of think about it over time, where that added, in the order of about a dollar a dollar US per MMBtu to our realizations. And so I think that's probably, the first thing you should anchor on there, and I'll turn it to John for the balance.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Sure. Just on the second piece, you know, as I mentioned, Patrick, my opening remarks, we're really focused on on four things right now for the balance. You know, 2025 and going into 2026, we are focused on our base business. We're focused on delivering growth. We're focused on the competitiveness of our downstream, and we're and we're focused on our cost structure.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

So while we really like our conventional business, we believe we've some really interesting opportunities. It it's not really a story for this quarter or this year. But at some point in the future, we'll come back, and we'll talk about, the conventional business, more comprehensively. But right now, we are we are, you know, focused on the four things that I mentioned.

Patrick O'Rourke
MD - Equity Research at ATB Capital Markets

Okay. Thank you very much.

Operator

Thank you. The next question is coming from the line of Manav Gupta from UBS. Your line is now open.

Manav Gupta
Manav Gupta
Executive Director at UBS Group

Hi. Hey. Good morning.

Manav Gupta
Manav Gupta
Executive Director at UBS Group

I think you discussed a number of growth projects, including Christina Lake and others. Just wanted to touch on the Foster Creek. I think you're looking to grow volumes at about 30,000. So can you help us understand what's the progress on the volume growth in Foster Creek, and when should we expect it to be online?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yeah. So, you know, Foster Creek is really the only project we've got where we're adding steam capacity. As I mentioned, we're adding about 80,000 barrels a day of incremental steam. And and we've got some good reservoir in front of us both to the West and to the North. And what you'll see from us through the rest of the year is we'll finish the, installation of the steam that'll happen this summer, And then we'll finish the, oil and water handling, by the end of the year, to make that a live project going into 2026.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

So early on in 2026, you'll see the growth coming out of Foster Creek as well.

Manav Gupta
Manav Gupta
Executive Director at UBS Group

Perfect. And, you do have a lot of turnaround in this quarter upstream and downstream. So help us understand some of the risk planning around this to make sure these conclude on budget and on time. Thank you.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yeah. You know, Manav, I I would describe we've been in a heavy turnaround period for the last year, and we're we're really coming to the end of it. Most of this ends within the next six weeks. So as I mentioned, in my opening remarks, we're now complete turnaround work at WRB. Both, Borger, and Wood River are running, online.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

We are largely complete turnaround at Foster Creek, and we're about in the middle of the turnaround at Toledo. On the May 15, we'll start our turnaround at Sunrise. You know, that's a a fairly low risk event. But coming out of q two, you know, the vast majority of our turnaround major maintenance work is done. I think we got one more turnaround in this fall at Sunrise.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

But outside of that, you know, we're emerging from a period of heavy maintenance into a period where we don't have anywhere near the same magnitude of major maintenance going forward. So we're really looking forward to that. But if I were to tell you where we are in terms of the risk profile, the vast majority of this has now been derisked, and we're looking to kind of wind up, these turnarounds and get everything back to full production.

Operator

Thank you. The next question is coming from the line of Menno Hausdorf from TD Securities. Your line is now open.

Menno Hulshof
MD - Equity Research at TD Securities

Hi. Thanks for letting me back on. Hi. Hi, again. I'm only asking this question because I'm getting the question.

Menno Hulshof
MD - Equity Research at TD Securities

It's related to your definition of market capture, which was adjusted for the I did read the footnote. My understanding here is that the inventory effect gets smoothed out and that the average market capture doesn't change over time when compared to the original definition, but maybe you could just walk us through the mechanics and the rationale for the, the change. Thank you.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

Hey, Mano. It's Cam. So, you know, maybe I'll I'll if you want tons of detail, I'll say, talk to our IR team offline. But just to give you a highlight, so what we've done there is the the way we calculate the market captures, it takes the the two key benchmarks that drive the profitability of our US downstream business, including Group three in Chicago. And so that percentage you see there is a percentage of a blended crack of those two benchmarks.

Kam Sandhar
Kam Sandhar
EVP & CFO at Cenovus Energy

And this quarter, what we've done is we've now adjusted it for what we describe as inventory holding gains and losses or FIFO impact so that you can actually see what the underlying business performance is absent of some of those inventory movements that you typically see because of FIFO accounting. So, and, when you look at our supplemental information, you can see that we've adjusted it going backwards so you can see, what the impact of that is normalized for FIFO.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Yeah. So, the intent there is just to make it more comparable with what you see with The US refiners in those regions.

Menno Hulshof
MD - Equity Research at TD Securities

Thank you. I know that was a borderline modeling question, so I appreciate your taking the time to ask

Patrick Read
Patrick Read
VP - Investor Relations at Cenovus Energy

That's okay.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Alright. Thanks, Mano.

Operator

Thank you. At this time, we have no questions in the queue, so we will wait a minute to give you the chance to connect with us. If you do have a question, I would like to remind you that if you are on the phone and wish to ask a The next question is from the line of Chris Burke from Calvary Herald. Your line is now open.

Chris Varcoe
Senior Editor at Calgary Herald

Hi, John. Thanks for taking the the question. With the federal election now over, what is the status of talks between the Pathway Alliance and the federal and provincial governments? And, I guess, how far apart or how close are the three sides?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

You know you know, Chris, we're we're kind of in a bit of a holding pattern right now. The election has only just happened. And, you know, what we've, always maintained is is, you know, pathways in the, project and projects underneath that are a priority for us. And we need, those two levels of government to come together and, create a path forward for us where those projects can get done and the industry can remain competitive. So, you know, there's not much in the way of new news on that, but it's something that we, maintain as a priority, and we and we're hopeful we can get, back talking with both levels of government fairly quickly.

Chris Varcoe
Senior Editor at Calgary Herald

Do you expect the ability to be able to order pipe for the project in calendar twenty twenty five?

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Oh, I mean, Chris, that really all depends on where we get to with, with those two levels of government. We've been really clear about is is that we need a path forward in a financial framework that keeps us competitive and allows us to move forward with that.

Operator

Thank you. The next question is from the line of Alex Bill from All New Land Labor Program. Your line is now open.

Alex Bill
Editor at allNewfoundlandLabrador

Good morning. I'm following up on hi there. Yeah. I'm following up on reports of layoffs at Synovus, announced recently to staff. And I'm asking, how much of that is captured in Newfoundland and whether that has to do with sort of transition of West White Rose or broader economic principles.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

You know, one of the things we haven't done, Alex, is is talk about numbers or talk about locations where we've seen, you know, job loss. And we do that out of respect for the families and respect for employees. This is a very private matter, and and we wanna be or treat people with dignity and respect. What I would tell you is, you know, as a company, we are getting to the end of an investment cycle in this business, and our capital spending is decreasing. And consistent with that, you know, the amount of work that we have, to do is decreasing, and and that means we've got, you know, to readjust our our labor force to make it fit for purpose, you know, and ensure that we are, you know, competitive as an industry.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

So I don't have an exact number for you nor nor would I probably give it to you if I I had it, top of mind just just to be respectful of the people that are involved in this.

Operator

Thank you. And there are no further questions registered at this time. I would now like to turn the meeting back over to Mr. John McKenzie.

Jon McKenzie
Jon McKenzie
Director, President & CEO at Cenovus Energy

Great, and thank you, operator. So this concludes the conference call. Thank you for joining us today. We really appreciate your interest in the company, and have a great day, everybody. Thank you.

Operator

This concludes today's program. You may all disconnect. Thank you for participating in today's conference, and have a great day.

Executives
    • Patrick Read
      Patrick Read
      VP - Investor Relations
    • Jon McKenzie
      Jon McKenzie
      Director, President & CEO
    • Kam Sandhar
      Kam Sandhar
      EVP & CFO
    • Geoff Murray
      Geoff Murray
      Executive Vice-President of Commercial
Analysts
Powered by Quartr