Cenovus Energy Inc. Q3 FY2022 Earnings Call

Good day, ladies and gentlemen and thank you for standing by. Welcome to Cenovus Energy’s Third Quarter Results. As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. 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 over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.

Thank you, operator, and welcome everyone to Cenovus’ 2022 third quarter results conference call. Please refer to the advisories located at the end of today’s news release. 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 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. Please follow up with these 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. As I do every quarter, I'm going to start this morning's call with our top priority, which is health and safety. In late September, there was a tragic fire at our non-operated joint venture refinery in Toledo. We were devastated to learn about the fatalities of two workers there and our hearts go out to their families and colleagues. This is a heartbreaking reminder that safety must be absolutely fundamental in our business. It is our responsibility as an industry to ensure all our workers who start a shift get home safe every day. Our focus on the Toledo refinery remains twofold. We will continue to support our joint venture partner as well as the staff and everyone at the site in every way that we can. We'll also continue to work closely with our partner to assess the damage and gain a better understanding of the path forward. Investigations into the cause of the fire are ongoing, but early indications from aerial and drone footage suggest the damage is localized to a small area of the refinery. Restricted access to the site has limited the operator's ability to fully assess the damage, but the refinery will remain shut down in a safe state and we'll provide further updates when we can. Turning now to the third quarter, we continue to deliver solid operating and financial results even with increased volatility in commodity prices. The oil sands segment led the way with Christina Lake back up from its Q2 turnaround and producing over 250,000 barrels a day. We safely deferred our turnaround at Foster Creek to Q2 2023. However, there is still some necessary planned maintenance that impacted production in the quarter. There was also an issue with the water tank that lowered production in August, but production was back up to normal rates in September and continues at that level. In the Lloydminster Thermals, Bruce Lake North produced first oil in early August and has since hit daily rates well above its nameplate of 10,000 barrels per day. Recall that when we took over the Lloyd Thermals, those combined assets were producing around 80,000 barrels a day by adding Spruce Lake North, as well as continuing to apply Cenovus' SAGD expertise we now see the Lloyd thermals run closer to 110,000 barrels a day. We also closed the Sunrise deal in the quarter, where we acquired the remaining 50% working interest in that SAGD facility. We are reporting 100% of Sunrise volumes from August 31 onwards. We have seen strong performance from the redrill and redevelopment program at Sunrise and just drilled two of the longest wells to date at that site with 1,600 meter laterals. In the conventional segment, we successfully executed a major turnaround at our Elm Worth plant without incident and restarted our development rigs coming out of breakup. Conventional production was running between 125,000 to 130,000 BOE per day coming to October. The team has also been reactivating some base well production at a very low cost. In the offshore, our partners recently brought the MDA-MBH fields online in Indonesia. We expect them to ramp up over the fourth quarter. Additional new fields will follow to bring total net volumes closer to 20,000 BOE per day in 2023, doubling the previous run rate. In the US downstream, the throughput was up with a utilization rate of 87% compared to 75% in Q2 as we had most of the Q2 turnarounds behind us. The Synovus operated Lima Refinery continues to run well after its major turnaround last year with utilization in Q3 coming in at 94%. However, there were outages at the non-operated refineries in the quarter with turnaround activity at Wood River and Toledo. In addition, Toledo was taken back offline on September 20, following the incident I mentioned earlier. Lima operations have shown significant improvement throughout the year, and our goal is to continue to demonstrate this level of operating capability across our US refining operations as we restart the Superior refinery and take on operatorship of Toledo. Our priority for the US refining business is establishing a solid track record of safe and reliable performance. This is one of the company's greatest opportunities in the near term. Turning to our financial results, the quarter's adjusted funds flow was nearly $3 billion, while free funds flow was about $2.1 billion. Excess free funds flow was about $1.8 billion, and this included a cash payment of about $400 million on closing the Sunrise acquisition, which was fully offset by net proceeds recorded on closing the retail fuels network sale. The volatility in commodity prices in Q3 manifested in two primary ways: first, in oil sands operating margin. And here, the lag on condensate pricing was seen in realized pricing in the oil sands assets, where higher-priced condensate purchased in earlier months was blended and included in sale volumes through the quarter. Second, in US manufacturing operating margin, processing crude oil purchased in prior periods at higher prices and manufactured later in the quarter when pricing decreased had an impact of almost $420 million. Throughput increased and unit costs came down relative to Q2. However, the volatility of commodity prices had a much larger impact on operating margins in the US downstream. We also began incurring increased expenses for the startup of the Superior Refinery, which combined with the Toledo outages added operational expense drag without throughput. Taking out the inventory and FIFO gains in Q2, along with the FIFO losses in Q3, the US Manufacturing segment performed better this quarter compared to last. We also experienced cash flow headwinds related to the cost of higher-priced feedstock and condensate from earlier periods included in our products and sales volumes in the quarter, or in other words, FIFO impacts. These dynamics serve as tailwinds on our results in a rising price environment, but serve as a headwind in a falling price environment, like we've just experienced in Q3. In accordance with our shareholder returns framework, we've allocated half of Q3 excess free funds flow to shareholder returns. This is over and above our base dividend. We also continued our opportunistic and disciplined approach to share buybacks throughout the quarter. This resulted in a return of about $660 million to shareholders through the NCIB program. Additionally, the Board of Directors has approved a variable dividend of about $220 million, or roughly $0.14 per common share with this variable component, fulfilling our commitment for 50% of excess free funds flow going back to shareholders. The current NCIB program will expire in early November. As we announced earlier, this morning, our Board has approved the application for another NCIB program. It will provide capacity to repurchase approximately 136 million additional common shares over the next year. We also completed a tender transaction in the quarter, repurchasing about $2.8 billion of debt, bringing our total repurchased notes this year to $4.3 billion. This exercise mitigated refinancing risk for the company until 2027. It also reduced our weighted average coupon rate and will save about $200 million in annual interest expense going forward. Our net debt reduction was accelerated this quarter by a working capital release and now sits at about $5.3 billion. To put things in perspective, we started this year with $9.6 billion in net debt. So that is a reduction of $4.3 billion of net debt in just three quarters. Q3 was another great example of how our financial and shareholder returns framework delivered, up to and including Q3, we will have returned nearly $2.9 billion to shareholders this year through our base dividend, share buybacks, and the variable dividend, while at the same time also deleveraging. At the same time, as paying down our debt and providing returns to our shareholders, we are also making significant contributions to government. When the oil and gas sector does well, Canada does well. Recent Peters & Company analysis shows that oil and gas companies are expected to contribute about $50 billion in royalties and taxes to the Canadian federal and provincial governments in 2022. That's money that pays for health care, education, arts and culture, and much more across this country. To put this in perspective, our sector's anticipated government contributions this year are equivalent to more than two-thirds of the funding for all of Canada's hospitals last year. That's at a time of heavy demand under the strain of COVID and Cenovus and our peers are further bolstering the economy by investing our revenues back into our businesses, supporting jobs, and providing economic benefits for suppliers and manufacturers in every province. That same Peters & Company analysis shows our sector making capital investments of about $40 billion this year alone, and it's much more when you add in our spend on annual operating costs. These investments include money for environmental and GHG reduction initiatives. In fact, our sector is the largest spender on environmental services in Canada. The Pathways Alliance, which Cenovus jointly founded with five of our oil sands peers to achieve net-zero emissions by 2050, recently announced that our decarbonization projects will require investments of more than $24 billion by 2030 alone. This includes Alliance's foundational carbon capture and storage pipeline and hubs, as well as energy efficiency, cogeneration, and electrification projects. We are ready to move forward with more advanced investment decisions about the significant decarbonization projects once governments provide assurance that the necessary policy mechanisms and support are in place. Cenovus and our peers continue to work with government officials on these details, so we can all continue to achieve the shared goal of emissions reductions. We are committed to both investing in our business, including decarbonization projects, and providing strong returns to investors. These two things combined are what will support a strong oil and gas sector in this country and enable us to continue contributing in a significant way to the Canadian economy for a long time to come. Recapping what we've achieved at Cenovus this quarter and where we're headed: our upstream operations continue to build on momentum towards 800,000 barrels a day and above and delivering meaningful value and returns on investment. Our downstream performance has not yet fully demonstrated what it can do in this environment. And that will be management's focus going into Q4 and 2023. Overall, we've posted another solid quarter highlighted by strong operational results and substantial further deleveraging towards our $4 billion net debt floor. At current strip, we expect to reach that level around the end of this year. We look forward to delivering 100% of excess free funds flow to our shareholders for periods when we're at that level. And with that, we're happy to take your questions.

We'll go to Greg Pardy with RBC Capital Markets.

Yeah. Thanks. Good morning. Thanks Alex for the rundown. Just a couple of questions for you guys. I guess the first one is you talked about downstream improvements that you're focused on. If we just maybe talk about the upstream for a minute, do you continue to see a favorable rate of operational change occurring? And then if so, where is that happening?

Sure. No, I'm happy to talk about the upstream and I'll probably pass it on to Jon and Keith and Norrie at some point. But I think, Greg, how I look at it, since we've been able to get the Husky deal done, we've had a really good run of finding a lot of what I would call brownfield opportunities to continue to grow production, drive our operating costs down, and improve our SORs. We picked a bit of the low-hanging fruit. But I think from my perspective, we see that opportunity continuing. I think Sunrise, you're going to see significant things from Sunrise going forward. But maybe I'll pass it on to Jon and he can give some thoughts.

Thanks, Alex. So Greg, one of the things this industry and this company hasn't really done over the last five or six years through the commodity cycle downturn is put a lot of money or put any money into growing production and harvesting some of the low-hanging fruit that Alex has mentioned. That goes for Cenovus, but it also goes for the assets that we acquired through the Husky acquisition. So when we look at our portfolio, we see lots of opportunity for kind of incremental growth that starts to re-rate your cost base and starts to recalibrate not just production, but the cost base that goes with it. So Alex mentioned Sunrise, that's a great example, hasn't had a new well pad since 2017. And we acquired the other half of that this quarter, and we see lots of potential growth there for marginal capital. Similar in our conventional business, we see the same thing happening there. So I think what you can expect from us is similar to what we just did at Spruce Lake North and what we've done in Indonesia and what we're about to do with Terra Nova: to add incremental production through time that comes with relatively modest capital requirements, but does provide that 5% rate of growth through time.

Okay. Terrific. Thanks for that. And I'll switch gears. And so a small special dividend, how should we think about maybe special dividends versus base dividend growth? Because clearly, you've got the financial wherewithal to go and raise the base dividend now.

Yes, Greg, it's a good question. I think I would say to you that, over the long term, I would view that one of the primary ways that companies like Cenovus add value is growing their base dividend. And to do that, ultimately, you need to grow both your top line and your bottom line. And you heard Jon, we think we can continue to grow at a pretty reasonable pace as described by Jon, just by keeping to our core with those sort of organic and brownfield opportunities. But I think we do see opportunity over time to grow both the base dividend and obviously, there'll be opportunities for variable dividend. But from my perspective, to the extent we can afford it at the bottom of the commodity cycle, it would certainly be management's goal to continue to grow the base dividend as well.

Maybe I'll just add on to that, Greg. I mean, the two things are kind of synergistic. You invest in the business and generate returns at $45, which just gives you more capacity to grow your dividend through time. So the incremental investment that you make in the business just supports that growth that Alex talked about of the base dividend through time, which is kind of at the core of this company in terms of returning cash to shareholders.

Understood. Thanks very much.

Yes. No worries. Thanks, Greg.

Thank you. We'll take our next question from Neil Mehta with Goldman Sachs.

Hey, this is Nicole Wesser on for Neil Mehta. Thanks for taking the time. So just kind of a follow-up on the capital allocation side. Can you provide any insight around the timing on reaching the CAD 4 billion net debt target at the curve? And then any sort of carryforward implications should we be thinking about after the announced variable?

I think I mentioned it in my call notes, but we expect to reach 4 billion by the end of the year, all things being equal. If there's one thing we focus on, it’s discipline. We have committed that once we reach 4 billion, we will move to a 100% payout, and that intention remains unchanged.

Great. Thank you. And then as a follow-up, just curious how you're thinking about next year's spend outlook. And also, if we should be thinking about any sort of updated maintenance capital range on the back of elevated costs?

Do you want to talk about that, Jon?

Yes. I think we've been pretty clear, and we'll come on with a more formal budget set of guidance later next month. But I think we've been pretty clear that the strategy is pretty much set, and we are in a world where you may see some incremental dollars go towards growth, but it will be exactly that will be marginal and incremental. So don't think about next year's budget as being much different than this year’s. I think there will be some monies to get after some of that low-hanging fruit that we talked about that allows us to maintain a sort of that 5% growth rate right across the business, upstream, downstream, and conventional. So I think that we'll flesh that out more so in the next month. And sorry, I forgot the second part of your question?

That’s on the maintenance capital range, if there's any sort of update we should be thinking there?

Yes. Okay. On the maintenance capital, you'll remember that when we acquired Husky, we came out with a number of CAD 2.4 billion as being the number that's required to keep production flat and keep our ex-plants in a safe and stable condition. What we have done over the course of this year, if you think about the assets that we've acquired, the other half of Sunrise, our anticipated acquisition of Toledo, and then some allowance for inflation. We kind of expect that number to move up in sort of the CAD 2.7 to CAD 2.9 range. But I think that's a good number moving forward. We'll provide even more color on that once we get through the budget. But that's kind of a run rate number that you should be thinking about for the next five years.

Hey, great. Thanks for the clarification there.

Thank you. We'll take our next question from Menno Hulshof with TD Securities.

Thanks, everybody and good morning. Just maybe I'll start with pathways. In the release, you talked about Canada facing intense pressure on CCS from the US, Norway, and the Netherlands. So maybe you could just give us a refresh on how Canada currently stacks up. And I think everybody on the call has a good sense of what that looks like for the US. But where do we stand relative to Europe? And then you also mentioned that government discussions are ongoing. But just in terms of the track to resolution, is it possible that we see something before the end of the year? Or is 2023 more realistic?

Yes. No, it's a good question, Menno. I'll give you my thoughts and Rhona may jump in with some color on it. But look, I mean, where we are now, we've had ongoing discussions with the federal government and the provincial government now for many, many months. Earlier this year, one of the initial outcomes of that was the investment tax credit that the federal government put forward for CCUS. I think we really viewed that as a strong commitment from the federal government. That was something that was more reasonably equivalent to the US fortified Q support that they were giving to carbon capture. Since that time, the US government has come out with the Inflation Reduction Act, which added significant support for industrial decarbonization through including CCUS. Right now in the US, they're getting producers in the US are getting support both for capital investment and for operating costs. I think our perspective on the goal of decarbonizing not just the oil and gas industry, but every major heavy industrial industry in Canada is a massive task. It is a huge lift. Industry is going to spend many billions of dollars on it ourselves, but pretty much every jurisdiction in the world that is proceeding on carbon capture and storage is really doing that with significant involvement from multiple levels of government. You've heard me talk about the US, Norway is in a similar position. Canada needs to be focused on competitiveness. This is an incredibly important business for the Canadian economy and Canadians. As I said, we're going to do our part, and we are doing our part. But there's more discussions needed with both levels of government. I don't know, Rhona, if you have anything to add on that.

Yeah. I think that the importance of what you said, Alex, is that the focus has to be on both the capital cost and the operating cost. That's what we've seen in examples around the world, where significantly large CCS projects have gone forward. There's been anywhere from two-thirds to close to full support from governments across the project. These are multi-decade projects and so the capital is great. That's the first thing that you talked about, but you also have to look at balancing the operating costs over the life of these projects, because that's the most significant part of them. CCS is the focus right now because that's a proven technology. Anywhere in the world right now, there's CCS everywhere, our companies have experience with CCS when it's linked to enhanced oil recovery, because then it makes sense to go ahead without having to partner with government. This truly, we’re looking at the CCS projects that we're talking about where they are not the oil sands partnered up with Enhanced Oil Recovery. These are joint projects that we want to do with the government. This is infrastructure that's for the Canadian goods. It's infrastructure that will result in tens of thousands of jobs that will be a real next construction boom in Alberta. There are so many levels of benefit to these projects going ahead.

Thanks, Rhona. Menno, just one last – just to be responsive to your last question about timing. My kind of guess on this is, there's a lot of discussion ongoing with the government. Given the complexity of this issue and the need to make sure it is done right, and we deliver what is needed. I would suspect that this will ultimately extend into the New Year.

Okay. Thanks to you both. That's very helpful. I'm just going to flip over to the superior rebuild project you're still targeting Q1 restart. Where do you see the risk in the ramp-up process, if at all? And what should we be modeling for utilization for the first half of 2023?

Hey, Menno, it's Keith Chiasson. Yeah, we're really happy with the progress on the project. We've always been forecasting ramping up through Q1 2023, and we're still on that track. We're actually in the process of transitioning from construction into commissioning. We brought our first set of crude into the tanks of Superior and have floated the roofs at those tanks and filled up our inventory. So we're imminently getting ready to commission the crude unit and start that up. So really still on track to ramp up through Q1 2023 as we've been saying for the past several quarters.

Thank you, Keith.

Thank you. We'll go next to John Royall with JPMorgan.

Hey, good morning, guys. Thanks for taking my question. So on downstream, if I heard this right, I think you mentioned the results were better than Q2 in Q3 when you strip out FIFO and inventory impacts. Can you talk about the drivers there? I know you had less downtime and better throughputs overall, but anything you're seeing on the cost or the margin side that improved into Q3?

Yes. Hi, John, it's Keith Chiasson. We saw a really strong throughput at our Lima Refinery. We actually set a throughput record in the quarter at Lima. Obviously, the cracks were very supportive in the quarter as well. As we think about what the forward view looks like, we're really excited about this set of assets, because right now, we're still incurring a lot of cost without any throughput at Superior. As you know, with the tragic fire at Toledo, we were down for most of the quarter at that joint venture-operated asset. As those assets come back online, we're even more encouraged about what the US structure can perform at. With WCS differentials where they are, these refineries are well set up to consume Canadian heavy, both Superior, Toledo our joint venture at WRB as well as Lima. It's a pretty exciting time for the US manufacturing as those assets come back on stream and continue to perform.

Great. Thank you. That's helpful. And then, just flipping to upstream. When I look at royalties for Foster, Christina, and Sunrise, it looks like all three went up in terms of the rate in Q3 versus Q2, despite prices going down, assuming I'm doing my calculation right. Anything you would point to that's driving those rates higher in Q3 versus Q2?

No, it's Jeff here. No, there's nothing structural. I'll just remind you of the framework. Foster Creek and Christina Lake are post payout. So they'll range on from 25% to 40% of a payout there. Basically, your revenue less your op cost, less your CapEx. They've been running in and around 30%, but there's nothing structural. It's just a factored in. When we're in post pay, it's an annual calculation. So there's always just true-ups and different pieces, but that's how you should be thinking about it.

Understood. Thank you.

Thanks, John.

We'll take our next question from Dennis Fong with CIBC World Market.

Hi. Good morning and thanks for taking my questions. The first one for me is just really around the share repurchase program. I know, previously, you discussed focusing on intrinsic value at mid-cycle pricing. I was just curious, given what we've seen most recently from macro in general, has that maybe driven you to revise or update your view on what 'mid-cycle' is and how you guys would like to think about repurchasing shares?

Once again, I kind of just go back to this concept of remaining disciplined and conservative in how we think about things. We still think about mid-cycle as being around $60 WTI. At this point, I'm not convinced that the world is not going to revert back to its historical norms. So we're going to stick with $60 as kind of representative of mid-cycle commodity prices. I'd remind everybody that from our perspective, we do prefer buybacks, all things being equal over variable dividends when we're trading below intrinsic value. As people consider that once we hit $4 billion and even afterwards, the share price becomes critical. If our share price is around $30, people should expect a lot of variable dividends. Conversely, if it's trending below $20, they should expect share buybacks. That's really directionally how we think about it.

Great. Great. Thanks. And my follow-up here is maybe just sailing on Greg's question earlier. I know you've made pretty good progress on some of the optimization of your existing assets, both historical Cenovus and Husky. Just curious as to whether or not you can provide us a bit of an update on further down-the-line projects like, say, connecting the like in Christina Lake, where that potentially happens to be at or where the next leg of upstream optimization could stem from Exxon ride? Thanks.

Yes, hi Dennis, it's Norrie Ramsay. We are making progress at Christina Lake with the pipeline connection. Over the next three years, we will connect Narrows Lake to Christina Lake, so you can expect production to increase from that northern area. In Sunrise, as John mentioned earlier, now that we fully own it, we have more flexibility. There haven't been any well pads drilled there since 2017, but we are advancing on the next three well pads, which should be in place over the next 24 months. Additionally, we are conducting regional assessments in Sunrise, which we haven't done in several years. On another front, we are looking forward to bringing Terra Nova Atlantic back online after its asset life extension at the end of the year, which will add another 10,000 barrels a day. Drew, would you like to add anything about your area in Indonesia?

Yeah, sure. Yeah. So Dennis, we've got the MDA-MBH project that's just coming on now. We've got the MAC field that will come into that same flotation production unit here mid-year next year. So you're going to see Indonesia production double with very low capital for those types of investments as the FPU was leased. We've got lots of good, to John's point earlier around brownfield, very efficient use of capital for continued growth here for the next little while, where we know it makes sense. Even in the conventional world, don't be surprised if you see us probably add an incremental CAD 100 million or so next year to keep kind of driving the performance of that business. As we fill more and utilize a lot of our infrastructure that hasn't been invested in the last five to six years. It's not only just your unit OpEx that really improves; it's your capital efficiencies that improve as well, so your underlying netbacks and affordability to keep with small growth but basically keep the underlying ability of these assets to generate future free cash flow is just really good business. We've got lots of those opportunities across just about every aspect of our upstream.

Great. Great. Thanks. I'll turn it back.

Thanks, Dennis.

Thank you. That will conclude the analyst portion of the Q&A. We'll take our first question from Chris Varcoe with Calgary Herald.

Hi. This is a question for Alex. Alex, in the past week, we've seen the Federal Environment Minister Guilbeault call out the Canadian oil industry to start spending more money on clean energy instead of share buybacks, those are his words. Meanwhile, down in the United States, we've seen President Biden call for more production from the industry and hinting at a windfall tax potentially if they don't do so, how do you view these comments and the criticism of the sector?

I believe you have heard my initial comments regarding the substantial contributions made by the Canadian oil and gas industry. According to Peters & Company, the Canadian upstream sector is expected to generate CAD 50 billion in royalties and taxes for all levels of government in Canada. Our system in Canada is quite progressive, differentiating itself from the US, as increases in industry cash flow lead to greater government contributions. Any notion that the Canadian industry is not contributing is simply incorrect. That said, our industry is committed to decarbonization. We support the federal government's goal of achieving significant emission reductions on the road to net zero by 2050, which aligns with our objectives at Cenovus and those of our Pathways Alliance partners. However, reaching this goal requires a practical and realistic strategy for emissions reduction to safeguard jobs, promote investment in Canada, and ensure global energy security. Thank you, I will now pass it back to you.

Sure. Just to follow up on that, the federal government is expected to release their fall fiscal update later this week. What are you expecting or hoping to see from Ottawa regarding their investment tax credit on CCUS?

Chris, we are still very much in the discussion and consultation phase with the federal government, acknowledging that with the moves that the US government has done in their Inflation Reduction Act that that's something that Canada is going to have to look at in terms of having a program that is competitive with the US program. But I'm not expecting anything earth shattering coming out of the fall statement here tomorrow.

And just to, I guess, ask you one last question as it relates to that front. Do you need to see changes from the federal government and the provincial government for the Pathways Group to give the green light to those projects? Are we at a stalemate there right now?

No, I don't think we're at a stalemate at all. As I said, we're having quite productive discussions. You've heard me talk about the importance of government contributions being comparable to the initiatives in the US. At the same time, we are absolutely committed to moving down this path of decarbonization. We just require certainty in all government programs. When I say that, I mean I'm not just referring to the federal government. I'll give you an example: pore space. In order to proceed on our CCUS foundational project for Pathways, we absolutely need certainty on pore space. We need to understand what environmental permits are required. Are we pursuing a federal path or a provincial path? These are decisions that need to be made before the industry is ready to execute on those projects. I think everyone ultimately shares the goal of emissions reduction coming from this industry, and I think the discussions have been productive. I ultimately see a path forward that, if everyone is reasonable, that there is a feasible resolution that works for both governments and the industry, including the provinces.

Thank you.

Thanks, Chris.

We’ll take our next question from Rod Nickel with Reuters.

Hi, Alex. Just wondering if you can elaborate a bit on your keeping $60 as mid-cycle price. Futures price strips would seem to indicate that the Street doesn't expect a price like that for several years at least. Can you explain why you’re taking a more cautious view of prices down the road?

Rod, four years ago, the forward strip wasn't expecting to price over $60. It is interesting to me what the futures market is speculating about where price is going. If there's one thing that we have been focused on beyond anything other than safety at this company, it is on discipline: investment discipline, financial discipline, and delivering what the company has promised to deliver for its stakeholders. If you look back, I'm sure the average price over the past 10 years is well below $60 a barrel. We can hope for the best, but we have to plan for reality. I think it is the right thing to do for our company at this time to still consider $60 as a sort of mid-market price.

And I assume that's the reason that you're looking at just a very similar modest increase, if anything, to your capital budget next year, keeping a cautious approach to where prices might go in the next 12 months?

Well, we're probably, if anything, we're a little more disciplined on our investment decisions. When we look at all major investment decisions, those investments have to return their cost of capital at a bottom price cycle or a resiliency price deck, and that's more of a $45 WTI. All of the projects you heard Jon and Norrie talk about on this call, everything we have been continuing to invest in, meets that hurdle. We are blessed with many continuing opportunities to grow production and achieve high returns that are resilient even at the lowest commodity prices.

Thanks, Alex.

Thanks, Rod.

We'll take our next question from Robert Tuttle with Bloomberg News.

Hi, good morning. I'm curious about the price of Canadian heavy oil. We have all the pipelines in place and there has been minimal apportionment. Currently, we are experiencing a nearly $30 per barrel differential. This situation has been weak for quite some time, remaining more than $20 at least throughout the summer. Do you think this trend will continue? What factors could bring the price or differential back to a more normal level?

Yes. I'm happy to give some thoughts on that, Robert. The first thing I would say, and this is kind of different from our historical experience, is that my observation would be that these really relatively wide light-heavy differentials are being driven more by global issues, which is a lot different than previous years in Alberta, where a lot of those wide differentials were driven by pipeline constraints out of Alberta. To give you just a couple of thoughts on what is creating a supply imbalance in the heavy market: the global view right now shows a high cost of refining. Heavy sour grade in Asia and Europe is being impacted by spiking natural gas prices in those markets, with gas being a significant input in the processing of heavy. On top of that, there are limited heavy processing capacities driven by both planned and unplanned maintenance at refineries globally and in North America. The final point I'd focus on is the strategic petroleum reserve. I think everybody is aware that the US government has been significantly bringing those volumes out, to the tune of 1 million barrels a day. The majority of those, I believe about two-thirds, are medium, heavy sours. That's putting more temporary pressure on the market. I don't think this is a permanent situation; it's ultimately something that will get resolved. I view it as a temporary issue that could persist into 2023, but I believe it gets resolved as the issues I referred to are addressed.

Okay. Great. Just one more thing. You guys have all these CCUS projects planned, and they're all going to evolve at the same time, these major construction projects. How are you going to manage that with everything labor resources? I mean how is that going to happen when you have all of this being built at the same time? I mean it looks like $24 billion or something of investment in a very tight labor environment?

Yes. It's a good question, Robert. One thing I would tell you is that this industry has learned a lot over the past 20 years regarding constructing and managing construction projects in overheated environments. It's one of the reasons why we advise the government of the need to consider the ambitions of reducing emissions from the upstream sector. If there is a mad rush to CCUS projects, you could see capital cost escalation, alongside project delays. There is only a finite amount of craft labor and procurement resources. We're acutely aware of this historical challenge. One of the great advantages of the pathways partners coming together is it gives us forum where we can work collaboratively, for example, on that foundational CCUS and capture project in the Cold Lake area, allowing for coordination, hopefully to minimize this risk. We should have reasonable timelines for our decarbonization efforts.

Thank you.

Yes. No worries. Thanks, Robert.

As it appears, there are no further questions. I'd like to turn the conference back over to Mr. Pourbaix for closing comments.

Well, I think I would just, as I always do, thank the investment community and our shareholders for their continued interest in the company and your time today to listen to us talk about the quarter and our plan. So with that, I wish everybody a good morning, and we'll sign off.

Once again, that does conclude today's conference. We thank you for your participation. You may now disconnect.