Cenovus Energy Inc. Q1 FY2022 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy’s First Quarter Results. As a reminder, today’s call is being recorded. Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Cenovus Energy. I would now like to turn the conference call over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.

Thank you, operator and welcome everyone to Cenovus’ 2022 first quarter results conference call. Please refer to the advisories located at the end of today’s release. These describe the forward-looking information, non-GAAP measures, and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus’ annual MD&A and our most recent AIF and Form 40-F. All figures are presented in Canadian dollars and before royalties unless otherwise stated. Alex Pourbaix, our President and Chief Executive Officer, will provide brief comments and then we will take your questions. We ask that you please hold off on any detailed modeling questions and instead follow up on those directly with our Investor Relations team after the call. And please also keep to one question with a maximum of one follow-up. You can rejoin the queue for any other questions. Alex, please go ahead.

Thanks, Sherry, and good morning everyone. I want to start with our top priority, as always, which is health and safety. We continue on our top-tier safety journey. Over the past month, our safety performance has fallen short of our own expectations. Thankfully, the incidents were at the relatively minor end of the spectrum such as slips on ice; they reinforce our need to be unrelenting with our focus in getting everyone home safely from their jobs. Turning to our handling of COVID-19, I am pleased to report that we welcomed our corporate Western Canadian staff back to the offices earlier this month. This is the first time in 2 years as a combined company that we’ve reopened our head office without major capacity restrictions. It has been great to have the full team here in person again. For some teams, this has been the first opportunity to collaborate face-to-face since the Husky transaction. That being said, we know that COVID-19 hasn’t disappeared, and we continue to closely monitor the situation. Now, regarding our announcement this morning about increasing shareholder returns, since I came to this company, our leadership team has been focused on positioning the balance sheet for increasing shareholder returns. I’m excited that our new framework reinforces the alignment of the company with our shareholders on the importance of long-term balance sheet strength as a foundation for strong and increasing shareholder returns over time. Our Board has approved tripling the base dividend on our common shares, effective for the second quarter dividend. They have also approved the introduction of potential variable dividends in addition to our continuing share buyback program. We have also implemented a net debt floor of $4 billion, which represents a leverage ratio of about 1x adjusted funds flow at a $45 WTI price. This provides shareholders more certainty around when they would receive incremental shareholder returns with a rapidly improving balance sheet. Between $9 billion and $4 billion net debt, we will target 50% of excess free funds flow towards shareholder returns and the remainder to the balance sheet. Our preferred mechanism for that will be share buybacks, which we will continue to execute opportunistically to the extent our share price remains below intrinsic value at around $60 WTI. If the value of share buybacks in the quarter is less than 50% of excess free funds flow, we will use variable dividends to make up the difference. When reported net debt is at the $4 billion floor, the company will target to deliver shareholders 100% of that quarter’s excess free funds flow. Again, our preference will be for opportunistic buybacks with variable dividends to make up the difference. You will also continue to see the same capital discipline that you’ve come to expect from us. The 5-year business plan we laid out for you at our Investor Day in December remains in place, and we will continue to test investments in our business based on returns at the bottom of the cycle, including a $45 WTI price. So, let’s turn to financial results. In the first quarter, we generated cash flow from operating activities of $1.4 billion and adjusted funds flow of $2.6 billion, our best financial results so far as a combined company. Capital spending was $746 million, which led to a free funds flow of over $1.8 billion overall in Q1. This financial performance, combined with proceeds from asset sales achieved in the first quarter, enabled us to reduce our net debt to $8.4 billion as of March 31. Our net debt reduction was impacted by a build of working capital in the quarter, primarily due to higher crude oil and refined product pricing. So, turning to operations in the first quarter, our upstream assets have been performing exceptionally well, including delivering total upstream production of around 800,000 BOE per day in the quarter. Oil Sands production was nearly 600,000 barrels per day, once again demonstrating the strength and dependability of these top-tier assets. Production at Christina Lake averaged around 254,000 barrels per day in the quarter, clearly reflecting not only the strength of the reservoir but also the capabilities of our operations team. They are continuously improving and innovating with our ongoing redevelopment and redrill programs. Looking ahead now for a moment, we recently commenced a planned turnaround at Christina Lake, so you should expect that to impact second quarter production by around 20,000 barrels per day. At FCCL, production for the first quarter was nearly 200,000 barrels per day, and as expected, we are seeing a modest decline from the prolific West arm pads that we’ve recently brought into service. These are some of the best SAGD wells drilled in the industry, and this decline from peak rates was as expected. Meanwhile, we have commenced another redrill program, which we expect to maintain around 200,000 barrels per day of production at Foster. The Lloydminster Thermals continue to produce very reliably, delivering an average of more than 96,000 barrels per day in the quarter. With the application of Cenovus’ operating strategies here, and now with increased gas injection and a redrill program, the team has brought production back to over 100,000 barrels per day. In addition, the Spruce Lake North project remains on track and will contribute another 10,000 barrels a day of production at Lloyd by the end of this year. Cenovus was able to significantly improve the operating performance at the Lloydminster assets by implementing our operating strategies. As we told you at our Investor Day in December, this year, we’re going to take a much closer look at Sunrise. Production at Sunrise in the quarter was 24,000 barrels per day net to Cenovus. Since the quarter has ended, production has reached over 25,000 barrels per day as we see additional benefits from our operating strategy rollout. The facility has a nameplate capacity of 30,000 barrels a day net to Cenovus, and we are confident we can achieve this level of production over time. Our realized prices for oil sands were very strong in this quarter, supporting an average oil sands netback of over $56 per barrel. Overall, the Oil Sands segment generated $2.2 billion in operating margin in the first quarter. So why don’t we turn to conventional? Operations in that business continue to provide strong results, generating an operating margin of $263 million in the first quarter with production of more than 125,000 BOE per day. We benefited from our Q4 winter drilling program coming into production, allowing us to take additional advantage of higher AECO prices. While still early, initial results have been better than anticipated. Our offshore operations delivered 76,000 BOE per day of production and an operating margin of more than $450 million in the quarter. We continue to see very strong gas demand in China, and we’re having constructive discussions with our partners there on opportunities to increase our gas sales to help offset some of the forecast reduction in contracted natural gas from previous agreements. We also continue to progress our growth projects in Indonesia with the M fields. This month, we commenced drilling the first of 5 planned development wells in the MDA field. The MBH and MDA fields are expected to start producing later this year. The new production is dry gas and is expected to increase Indonesia to around 20,000 BOE per day by year-end 2023 from current rates of around 10,000 BOE per day. You can expect some ramp-up to begin in Q3 of 2022. In the Atlantic region, the business delivered unit netbacks of more than $83 per barrel, reflecting production of 14,000 barrels per day and higher overall commodity prices. The Terranova floating production storage and offloading vessel remains in dry dock in Spain and is expected to return to operation near the end of the year. We also expect to make a decision on the West White Rose project with our partners in the coming weeks. We have taken the time over the past 16 months to substantially derisk this project. Regarding any decision to proceed with development, it must represent meaningful increased value for Cenovus’ shareholders relative to decommissioning. West White Rose is currently around 65% complete. If the decision is made to move forward, we estimate production net to Cenovus would ramp up by 2026 to a peak of around 45,000 barrels per day by the late 2020s. Shifting to the Downstream, in the U.S. Manufacturing segment, our refinery utilization increased to 80% in the quarter and generated $423 million in operating margin. This reflects stronger margin capture during the quarter with a much improved price environment in March. In a rising price environment like we had in Q1, our results also reflect a net benefit from the first-in-first-out accounting of our U.S. refineries. Throughput in the quarter was impacted by some extended downtime at the Lima Refinery as well as planned and unplanned maintenance at our joint venture refineries. Looking ahead, the Toledo refinery began its once-in-every-5-years turnaround in mid-April. The refinery will be down for a large part of the second quarter, and you should expect to see higher unit operating expenses in Q2 given turnaround costs and lower utilization rates. In our Canadian manufacturing segment, we saw utilization of 89% at the Lloydminster complex in the first quarter, with an operating margin of $114 million. The refinery ran well. However, throughput was impacted by an unplanned outage at the upgrader. We also reduced run rates later in the quarter as we prepared for planned maintenance that began in April. Now turning to our 2022 corporate guidance updates. We have updated our commodity price assumptions to better reflect the current business environment. We’ve increased our guidance ranges for oil sands royalties and cash taxes as a result. We’ve also revised our oil sands per barrel OpEx ranges to reflect higher AECO prices, which drive our fuel costs across the business. On the CapEx side, due to inflationary impacts on labor and supply chain as well as increased costs stemming from COVID-19 impacts, we revised total estimated rebuild capital for the Superior refinery by $300 million. That said, overall insurance proceeds related to Superior will still largely offset the rebuild capital. To-date, about $1.1 billion has been received in insurance proceeds related to Superior, and we expect about another $100 million to come in around the second quarter of this year. In terms of an update on the rebuild itself, we remain on schedule to restart by the end of the year. We very much look forward to that day. With a nameplate capacity of 49,000 barrels per day, Superior will be an important addition to our heavy oil value chain as the first stop on the Enbridge mainline. I am just going to take a moment to talk about sustainability. As you likely saw earlier this month, the federal government announced an investment tax credit for carbon capture utilization and storage projects. This is a positive step in working collaboratively with governments to help Canada achieve its climate goals and ensure the country can be the world’s preferred supplier of responsibly produced oil. We applaud the federal government for recognizing the importance of both developing new technologies to help Canada fight climate change, but also the vital role our industry will play in supporting our country’s energy security and economy. We continue to have discussions with the government to determine how the investment tax credit will be implemented as well as what other support will be available to advance GHG reduction technologies. Those details will help inform our capital allocation decisions as we move forward our target to reduce our absolute Scope 1 and 2 emissions by 35% by 2035 and our 2050 net-zero ambition. As I look forward to the rest of the year and beyond, I am really excited about the future of Cenovus. Commodity prices have recovered substantially in the past 2 years, and I am seeing a growing acknowledgment of the important role our industry will play in helping the world diversify to a lower carbon economy while protecting jobs, economic contributions, and global energy security. We are setting up for even stronger momentum in Cenovus’ business for the second half of the year. Our assets will reach full operations across the business after completing important planned maintenance in the first half of the year. The WTI price risk management program will have largely wound down. We expect to see higher downstream margins with improved market cracks, and the contingent payment to ConocoPhillips expires as of May 17. We’ve built this business with a focus on free funds flow generation, and we’ve made rapid progress on the balance sheet. We’ve also executed on 40% of our current share buyback program. That represents over $1 billion above the base dividend that we’ve returned to shareholders since we put the buyback program in place. Today, we’ve laid out a clear path for how we will continue growing shareholder returns while positioning the balance sheet to support the returns growth profile for years to come. So with that, we’re happy to take anyone’s questions.

Dennis Fong, CIBC Capital Markets. Please go ahead.

Hi, good morning. Thanks for taking my questions. The first one actually is related to the share buyback program in your comments. You alluded to being about 40% complete thus far. Just given the strength in commodity and the potential situation around decisions around returning capital, how should we think about a scenario where you complete your prescribed 10% NCIB prior to the timing of renewal potentially in the November timeframe? Does that just shift automatically to variable dividends? Or are there other mechanisms you can look at, buying back stock if the economics or the return still is favorable?

I mean maybe I’ll start out and Kam or Jeff may want to jump in or John. But we’ve always said that share buyback is for us, I mean as long as we’re in the ranges that we’re thinking about, it is a preferred mechanism for returning value to shareholders. I’ve always said it’s opportunistic. If we find that we end this program and our share price is still at a very attractive level, I think we’re going to take a very hard look at continuing it. I don’t know if anyone else has any comments they’d want to add?

Yes, Dennis, thanks for the question. I would just add, you shouldn’t think about the NCIB as a limitation to buying shares. Whether it’s the NCIB and us renewing it or even looking at an SIB, we will always have some option available to us as we think about the strategy going forward. The real gatekeeping item there is the point Alex made, which is looking at what our intrinsic value at $60 is. If we see a share price that’s attractive, we will continue to buy shares. If not, we will shift to the variable dividend.

Great. Great. I appreciate that color. My second question, my follow-up, I guess, is just related to the portfolio of assets that you have right now. I know that by and large, you have completed a lot of the rationalization and the optimization of Fed portfolio. Just given that your balance sheet is in a considerably better position, how should we think about how you evaluate further capital allocation from more of a CapEx perspective of things? I know you’ve outlined West White Rose, but more along the lines of other incremental growth projects and/or assets to either be bought or sold?

Dennis, it’s Jon McKenzie. I think just addressing the latter part of your question first, in terms of dispositions. One of the things we did post the acquisition of Husky is we did a thorough review of all the assets to identify assets that were on strategy versus those that are non-core. I think we’ve been pretty clear that we’re getting close to the very end of that program. I think we still need to close on the retail assets. But don’t think about this portfolio that we’ve got today as something that isn’t congruent with our strategy. As we think about growth and capital investment, we have a pretty firm capital allocation criteria, and it’s all rooted in the bottom of the cycle pricing, generating cost of capital returns or above at $45. We believe every dollar we invest needs to generate a return for our shareholders at those pricing levels. So, we are continuously screening everything there. Regarding the current pricing environment, we see additional opportunities for some short-cycle investments. Alex mentioned some of the growth projects that we’ve got coming online later this year, whether that be in Indonesia or Spruce Lake North, or later in the year, we have Terranova coming back online. We are very disciplined about how we allocate capital and remain committed to that framework.

Perfect. Appreciate that color. I will turn it back and let others ask questions. Thanks.

Thanks, Dennis.

Thank you. We will take our next question from Greg Pardy with RBC Capital Markets.

Thanks. Good morning and great rundown. I want to stay with that buyback a little bit. Maybe I’ll try and put words in your mouth. I’m wondering if you can provide some perspective on whether your shares today represent compelling value? Secondly, to the extent that, that intrinsic value is NAV-based, as your debt goes down, that intrinsic value presumably would continue to head north here. So, could we be in a situation where shares just continue to be the preferred method?

Yes. I think, Greg, I would largely agree with the comments that you made. The important point is as Kam mentioned, we really do target share buybacks at the middle of the cycle. While I probably won’t share our exact view of where NAV is, we do calculate that in context of a $60 WTI and other middle-cycle numbers for other important metrics in our business. You are correct. As we continue to execute on this plan, we would expect to see that continue to grow, which I think would continue to provide us opportunities depending on where the share price goes. All things remaining static, we would see a continuing opportunity to buy back shares.

Okay. Thanks for that. And then maybe just switching to the operations side. Is there any commentary you can provide around extending gas sales contracts, how pricing could look in that market at Liwan?

Yes. Hi, Greg, it’s Drew. With Liwan 291, we’ve actually just finished a negotiation for a supplemental contract sales. So we are increasing the sales contract volume there. Pricing is still very strong. It’s probably still some of the best netbacks we have in the company. Pricing around that negotiation is at least as good as we’ve had in the past. Having completed that negotiation literally just in the last week or two, we are quickly shifting to 3-1. There is very strong demand in that area for gas. We’ve got a good reserve base there. We are now shifting our focus to potentially reinstate or look to add a supplemental sales agreement in the 3-1 area as well. Again, pricing is quite strong, and we expect to be at similar pricing that we’ve had for the last number of years.

Okay. So with what you just told me, can I assume Liwan will be kind of flat into ‘23, ‘24 at similar pricing scenarios?

We will provide guidance later this year as we go into ‘23 budget, Greg, but the 291 Liwan contract we just finished is incremental volume to what we’ve had in the past.

Yes. Thanks, Greg.

Thank you. We will take our next question from Phil Gresh with JPMorgan.

Hey, good morning. I just want to ask first about the updated debt target. In the past, you’ve talked about 1x EBITDA or $6 billion of debt. Now you’re talking about 1x cash flow or $4 billion of debt. I presume the EBITDA versus the cash flow are roughly equivalent, but I just thought I’d clarify on that. Just in terms of this lower absolute debt target of the $4 billion, is it just a desire to have a bit lower debt, which obviously would make sense, or something different? Just wanted to unpack that a little bit more if there’s anything to add?

Thanks, Phil, it’s Kam. Broadly speaking, the debt target has come down. When you look at our cash flow at $45, it’s in that 4% to 4.5% range. So it does equate to approximately 1x. We’ve spent a lot of time thinking about the trade-off between moving towards, say, the 100% of excess funds going back to shareholders, and where we want to take the balance sheet from a no-regrets perspective. We believe $4 billion from our perspective is the right level, and we are committed to giving back all the cash flow once we get there. That really allows us optionality. Whether it’s continuing to opportunistically buy back shares or considering opportunities that come up in the future, it puts the company in a very good position to be opportunistic in terms of what can come. So, we’re comfortable with $4 billion. I’d say we’ve considered all scenarios from leaving it at $6 billion to even going to no debt. From our point of view, the certainty around having a clear floor was important, but also setting it at a level that feels appropriate given the commodity price environment we’re in, and where we’d like to be if commodity prices ultimately come down.

That makes a lot of sense. It seems like you can get there pretty quickly, actually. And then just on the M&A side, since the framework does allow for M&A, I just wanted to ask a little bit more here. You’ve talked about the potential to clean up your Downstream JV structures. Curious if that’s something that you would consider somewhat of a near-term priority for the company, and/or would you be considering upstream opportunities at this point? Just what are your latest thoughts on M&A?

I mean, it’s Alex. I would say with respect to M&A, we’ve always said it’s very opportunistic. We’re very value-focused when it comes to that, but we also prioritize shareholder value. I do think we have some opportunities to continue to drive shareholder value by expanding margins. Ultimately, if we intend to continue to grow shareholder value, we are going to have to grow the top line. But nobody should expect that there is any word salad here, where we’re looking to move away from the discipline that we’ve shown to date. We have talked in the past, and Jon may want to add a more thorough comment or two, but we do have some focus on the Downstream side. That is owning and operating our assets, and we will continue to look at that. But none of that should suggest we’re going to lose any of the discipline we’ve shown to date.

No, I think that sums it up well. We’ve been really clear since we acquired Husky that one of our strategic goals is to own and operate and have strategic direction over our business, particularly in the U.S. Downstream. None of that has changed. But as Alex mentioned, this has to be done within the framework of the financial discipline that we’ve set forward.

Okay. Great. So probably more downstream than upstream, I guess, is my takeaway if you’re looking at things. Is that fair?

Yes. If you look at our upstream and stick within the North American context, we operate most of what we participate in. Conversely, in the U.S. Downstream, we currently have less control. So, it’s largely a function of the asset base versus a preference one way or another.

Thank you. Alex and Jonathan, I want to congratulate you; the last 18 months have been terrific for the business. In fact, you can culminate this with a clear return of capital strategy showing how far the business has gone. So congrats on the progress. I had a couple of questions for you. The first is around capital spending levels being bumped up this year. It looks to us like that’s just for Superior. But is there any of that, that you think carries forward given the inflationary forces the industry is contending with? And then, as it relates to Superior, just any update on your confidence in getting that project online? How do we think about insurance proceeds potentially offsetting some of that higher spend? Thank you.

Sure, Neil. As to your first question, that capital increase relates exclusively to Superior. We are starting to see some cost pressures in the business. Let me get some comments from the leadership team. First, I’ll get Keith to discuss how we feel we’re doing with Superior.

Hey, Neil, thanks for the question. As Alex indicated, the strategic nature of Superior is important to us. It is the first stop on the mainline system, helping us mitigate our heavy oil, heavy-light spread in Alberta and diversifying our product mix. Nothing is changing concerning its strategy. Even with the cost pressures we’re facing, we’ve indicated $1.2 billion of total capital costs, with $1.1 billion of insurance proceeds already received and another $100 million expected. We maintain that this will be offset by insurance proceeds, which still holds firm. We haven’t seen any schedule slippage; we’re still on track to startup and operate the refinery at full rates in Q1 2023. We’re looking good for the timing of the entire startup.

Yes, Neil, it’s Drew here. Let me jump in on your first question. Regarding Norrie’s area and our supply chain team, we’ve actually done really well in the thermal oil sands business with long-term sustaining program-based capital deployment. The long lead items are mostly on the ground. We are well ahead on tubular buying. This area is probably more insulated from near-term pressure. However, in our conventional short-cycle business, we’re currently under pressure near the end of the drilling season. We will be reassessing capital levels in the second half due to these pressures on steel and service rigs, particularly where we lack multi-year contract commitments. We’ll be deciding soon what to do in the upcoming quarters as we see pressures on costs.

Thanks, Drew. The follow-up is just around the pathways project. It looks like we’re getting closer to clarity around the government subsidies. Alex, I’d love your perspective on why you think this project is important, and more importantly, the timeline associated with it. It’s difficult for us to model until we have clarity on timelines.

Yes. I think the government announcing the ITC was a positive step; it shows that the oil sands industry is represented well by the pathways project in collaboration with the federal government. We need a lot more detail around the ITC, as well as additional programs to help cover costs for the project before we can move forward. However, we have committed to carbon reduction in the 2030 timeframe, so I don’t think you’ll have to wait too much longer for this project. Over the next year, you’ll see a lot more detail on the costs associated with these larger-scale projects, contingent on getting through discussions with various levels of government.

Thank you, guys. I wanted to congratulate you on the threefold increase in dividends. My question is on the dividend hike. In the past, you’ve indicated that even at $45 WTI, you can make over $4 billion cash, and your CapEx is around 2.5. A threefold increase is great; just wondering why you chose not to go with a fourfold increase when you could have made the yield even more competitive.

Hey Manav, it’s Kam. A couple of things to consider. First off, I think the base dividend is just one component of our shareholder return strategy. You should consider all three components when evaluating our value proposition to shareholders. In isolation, yes, we tripled it, and we see opportunities to grow that dividend over time as we execute our business plan. However, we must continue investing in our assets to support the long-term dividend capacity. I think we’re very comfortable with the tripling. We see ample opportunity to grow it further in the future. Additionally, we have to be mindful of committing to the dividend that we can sustain and grow over the 5-year period ahead.

Keith, could you comment on the much improved performance in the U.S. downstream in Q1 versus Q4? I think you had some turnarounds in Q4, but even at 80% utilization, this was a much better quarter. You have some turnarounds coming up in Q2. Overall, how do you look at the downstream margin environment for the second half of the year, especially with product cracks looking strong?

Hi Manav, it’s Keith Chiasson. Yes, we began to see the turnaround in March. Early in the year, cracks were a bit tighter, yet we were able to capitalize on these during March while the Lima ran full out. Q2 will be a significant turnaround period, both in the U.S. and Canada. Many of our joint venture refined assets will be offline in this quarter due to maintenance schedules. Looking forward to Q3, we expect usage to increase as many of these turnaround activities will be completed. The market’s looking strong; gasoline demand has returned to pre-COVID levels, diesel demand has surpassed pre-COVID levels, and jet demand, while still behind, is recovering. Overall, this is setting us up well for a solid back half of the year.

Perfect. My last quick one is regarding if we can envision a scenario in 2 or 3 years where, if the price is right, Cenovus is the operator of both BP Sunrise and the Toledo refinery. You have European companies trying to exit oil sands, and if the price is right, is there a possibility that you could be the sole operator and owner of both?

Well, Manav, I suppose anything is possible. You might want to ask our partners what they think about that. I will probably shy away from further comment for the time being.

Thank you. I will take a follow-up from Dennis Fong with CIBC Capital Markets.

Hi, and thanks for taking my second round of questions. In your opening comments, you alluded to the great work your asset teams are doing at Foster Creek and Christina Lake by showcasing really strong production volumes from those two assets. I was hoping to get a bit of an update about the $1 billion worth of operating margin improvements expected from the oil sands and the downstream side. What’s your perspective on the optimization work at FCCL, and what are the margin expansion opportunities at WRB and Toledo, which I presume could follow after this major turnaround?

Yes. I’m happy to do that, Dennis. I’ll have Norrie talk about the upstream side, and Keith can add some additional insights about the downstream side.

Okay. Hi Dennis, Norrie here. To begin, our upstream optimization has been strong. We’ve applied FCCL processes across the legacy assets acquired, particularly focused on the Lloyd Thermal area. We’ve invested a lot of effort into this asset, including deploying steam effectively as we move forward. We’ve added about 20 well pads to Lloyd this year, positioning them optimally and utilizing longer wells while employing our Foster Creek processes have resulted in strong production performance. Additionally, we’ve identified another 28 re-dev re-drill opportunities at Lloyd Thermal, which should allow us to continue boosting production economically. We are also actively implementing an investment program at Sunrise with a four well pad program. That’s taking shape, and we have 11 re-dev re-drill opportunities this year. Our production remains robust as we advance forward based on our expected figures.

And Dennis, Keith here. Regarding margin expansion opportunities, you'll see benefits at our Wood River refinery coming out of the turnaround process. Improvements are being executed to enhance product yields during this period. On Toledo's side, we’re preparing to handle the full high tan crude. We anticipate margin expansion as we progress the Rewire Alberta project, enabling us to mix Foster Creek and Christina Lake crudes into our upgrader at the refinery. This will result in several benefits, including utilizing lower-cost materials, contributing to margin expansion, and improving our unit costs and product mix. Finally, the TMX project, scheduled to be operational in late 2023 or early 2024, represents significant shipping opportunities in high-value markets. Additionally, we expect long-term benefits both from turnaround scheduling as both Lima and Toledo have completed their major turnarounds, reducing costs and improving utilization.

Perfect. That's great. Really appreciate that. Thank you.

Yes, no worries. Thanks, Dennis.

Hi. I have a couple of questions for Alex regarding CCUS. Is the federal investment tax credit enough, in your mind, to proceed with Phase 1 of the Pathways foundational project, or do you need to see some sort of incentives and assistance from the province of Alberta?

Chris, looking around the world where CCUS projects have moved forward, you’ve typically seen government contributions at the capital level between 60% to 70%. There’s also often support for operating costs. The investment tax credit is a very good start, but as an industry, we’re likely to require more assistance to undertake these large-scale, meaningful CCUS projects. We will likely see contributions from both levels of government as this continues.

Just to follow-up then. With such strong earnings, how do you explain to the public the need for ITC, but also maybe financial assistance from the province of Alberta?

It's interesting, Chris. I find debates about commodity prices tend to have very short memory spans. Personally, I can think back to oil being about $10 a barrel. If you consider the overall average price of oil over the last 10 to 12 years, it’s likely in the low $50 range. Prices can fluctuate, but when making investments, especially those like the Pathways foundational project, we need to ensure they are viable throughout the commodity price cycle. Even though prices are good currently, we are aware of the likely challenges before a project goes live. Therefore, we require collaboration from industry, which will invest tens of billions, and we need government support. We’re discussing a massive transition in energy production as we aim for decarbonization.

What work is going to be done this year on Pathways? When do you expect an FID to be made? You mentioned needing more details, but what details are necessary before making that FID decision?

The larger announcement of the ITC was positive, showing that pathways and the oil sands industry have had cooperative discussions with the federal government. However, we require further details about how the ITC will operate. We have already started preliminary engineering for the foundational project, which includes carbon capture on-site, transport along the CO2 trunk line and eventual sequestration. We’re applying for permitting to kick off significant work. There’s a lot of progress underway, and we’re actively staffing with additional personnel for the Pathways project as we transition to full-scale development.

Thank you. That does conclude today’s question-and-answer session. I’d like to turn the conference back over to Mr. Pourbaix for any additional or closing remarks.

Thank you all for your continued interest in the company and for spending time with us this morning. Thanks, and have a great day.

Thank you. That does conclude today’s conference. Thank you for your participation.