Cenovus Energy Inc. Q4 FY2023 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's Fourth Quarter and Year-end 2023 Results. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, there will be 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 call over to Mr. Jason Abbate, Senior Vice President, Investor Relations. Go ahead, Mr. Abbate.

Thank you, operator. Good morning, everyone, and welcome to Cenovus's 2023 year-end and fourth quarter results conference call. On the call this morning are CEO, Jon McKenzie, joined by Cenovus's management team who will take you through our results. Then we'll open the line to take your questions. Prior to passing it over to Jon, I refer you to our advisories located at the end of today's news release. Please describe the forward-looking information, non-GAAP measures, and oil and gas terms referred to today. They also outline risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus's 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. You can view the results on our website at cenovus.com. I ask that you 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. Jon, please go ahead.

Great. Thank you, Jason, and good morning, everybody. I'm going to highlight some important safety milestones that we achieved in the fourth quarter of 2023 and in the full year. We achieved a total recordable injury frequency of 0.31 in 2023. And importantly, we noted a marked decrease in the potential severity of our safety incidents, a trend we are very focused on continuously improving. 2023 was an important year, which included the restart of two refineries and the progression of the West White Rose project, which today stands at 75% complete. And we did this as we would expect, without a significant incident. I'm proud of the team for their continued focus on safety and what they've accomplished over the year. Early in 2023, we signaled that the first two quarters of the year would be impacted by the startup of Superior and the delayed closing and start-up of Toledo. We also signaled that we expected to have our full suite of assets, operationally available to us in the third and fourth quarters. Our fourth quarter reflects the results of the second consecutive quarter of operating integrated value chain. Our upstream business continued to build on operating momentum. We increased production to nearly 810,000 barrels of oil per day, our highest quarterly number for this year and the second highest in the company's history. This is something we are extraordinarily proud of. We saw a particularly strong performance at our oil sands assets, most notably at Foster Creek. The ramp-up of new sustaining pads added about 10,000 barrels a day of increased production relative to the third quarter, taking this asset to nearly 200,000 barrels per day. We also started steaming our first sustaining well pad at Sunrise, and we have two more well pads to bring on in 2024. This is the first step in our multiyear development of this asset that will see us push production volumes to or through nameplate capacity. Our upstream business generated an operating margin of about CAD 2.5 billion in the fourth quarter, and this reflects higher production, lower unit OpEx but also lower crude prices and wider heavy oil differentials. Now with the startup of the TMX pipeline, we anticipate light-heavy differentials to narrow. This is an important piece of infrastructure and creates additional egress in the Western Canadian basin and Cenovus is an anchor shipper. Our oil sands and thermal assets continue to perform exceptionally well as we enter 2024. We are focused on executing our capital plans at Christina Lake, Foster Creek, and Sunrise in support of the organic growth of this business over the next two years. In our conventional business, fourth quarter production volumes remained steady around 124,000 BOE per day. And the business was consistent and stable after dealing with wildfires through much of the summer. Offshore production reached about 70,000 barrels a day in the fourth quarter, a 6% increase quarter-over-quarter. And in Asia Pacific, gas volumes were up by about 20% in Indonesia, as we brought on the MAC Field in September. Our Asia Pacific business continues to generate predictably great results, generating about $1 billion of operating margin for the year. In the Atlantic region, the Terra Nova FPSO returned to production in late November, contributing about 4,000 barrels a day to Cenovus in the month of December. The operator has since seen a ramp-up of production in the field and is working towards the asset being increased to full rates. We also advanced work for the regulatory dry dock of the CROs FPSO. In late December, the vessel was taken off station. The vessel has now arrived in Belfast and maintenance work has begun. We anticipate the CROs to return in the third quarter of 2024. The investments we are making today ensure the vessel will be ready well in advance of the startup of the West White Rose project, supporting production from that field well into the late 2030s. Overall, it's been a very strong quarter and a very strong start to 2024 for upstream businesses. Consistent with our guidance, planned turnaround activity will occur in the third quarter, and we expect to grow production exiting the year at higher production rates. Turning to the downstream. The fourth quarter was another good step forward for our operated refining businesses. In Canadian refining, crude utilization was 91% in the fourth quarter. The Lloydminster upgrader and refinery demonstrated consistent and strong performance. This performance has continued in the first quarter as we prepare for a major turnaround of the Lloydminster upgrader beginning in the second quarter. We anticipate the quarterly throughput impact to be about 42,000 to 46,000 barrels a day, consistent with guidance. And coming out of the turnaround, we expect the Lloyd complex to continue to run reliably, with high rates of utilization for the foreseeable future. In US refining, our operated assets continue to run safely and reliably, performing mostly as expected. I'm very pleased with the improvements we continue to make in this business. The Toledo refinery ran steadily over the quarter and was able to take advantage of the wider light-heavy crude differentials. We also completed planned maintenance of the distillate hydrotreater at the Lima Refinery in the quarter. We expect this asset to run at high levels of utilization through the first three quarters of this year going into the fourth-quarter turnaround. Now, we continue to have some challenges to the Superior refinery. You'll see the throughput was in line with the prior quarter. We're working to improve reliability, which will allow us to increase crude throughput in the second quarter of 2024. Our non-operated Borger Refinery underwent significant planned maintenance in the fourth quarter, and the operator experienced significant delays bringing the facility back up, which impacted utilization and profitability in the quarter. This refinery is now operating at full rates. The most notable item in the fourth quarter results was the weak Chicago crack crush environment and volatility quarter-over-quarter. The Chicago 3:2:1 crack spread averaged US$13.24 per barrel, a decline of over 50% compared to the third quarter. The December crack averaged US$7.65 per barrel, and at times gasoline cracks were negative, which caused us to respond by economically optimizing throughput. This not only drove lower US refining operating margin in the fourth quarter but also lower throughput, and contributed to a significant FIFO headwind in the US refining, about $450 million as we processed higher-priced crudes that were purchased in prior periods. Now, the weak crack environment has persisted through the month of January with an average Chicago 3-2-1 benchmark of about US$5.50 per barrel. But recently, the Chicago refining crack environment has improved. Cracks have risen into the low teens into the high 20s. And with seasonal impacts easing and product inventories rebalancing, as well as refineries entering the turnaround season, we anticipate seeing more normalized cracks going forward. We expect to continuously improve our operating and financial performance in this business as we produce refined products into this pricing tailwind. Now, to our corporate and financial performance. In the fourth quarter, Cenovus delivered approximately $2.1 billion of adjusted funds flow. As mentioned, the upstream business was impacted by lower realized prices with wider WTI-WCS differentials. And the downstream was impacted by lower refined product pricing in the US and a negative FIFO impact. Through our base dividend, share buybacks, and final payment of the common share warrant obligation, we distributed over $700 million directly to our shareholders in the fourth quarter. In addition, the company's net debt was approximately $5.1 billion at the end of the fourth quarter, a reduction of more than $900 million from the third quarter, which reflects a working capital release as well as the application of free cash flow. We remain focused on achieving our $4 billion net debt target and delivering 100% of excess funds flow to our shareholders once this milestone is met. So looking back at 2023, there are some important achievements I would like to highlight. We delivered safe and reliable upstream performance throughout the year while responding to significant wildfire activity in our conventional areas in the spring and summer, and safely executed a major turnaround at Foster Creek in the second quarter. We successfully delivered our capital spending guidance in 2023, with total investments of $4.3 billion and achieved several key project milestones as planned. We materially progressed construction of the West White Rose project, which, as I mentioned, is now about 75% complete and reached a major milestone in the second quarter with the completion of the Conoco slip form on the gravity-based structure. At Christina Lake, we achieved approximately 45% completion of our Narrows Lake tieback pipeline on time and on budget. This will allow us to produce our high-quality, low SOR resource back to the Christina Lake processing facility. We further integrated our heavy oil production and refining capabilities through the acquisition of the remaining 50% of the Toledo Refinery, and we safely returned that refinery to full operations in June. We brought Superior online and combined with Toledo, we added approximately 130,000 barrels a day of refining capacity, much of that heavy oil refining capacity. We reduced our long-term debt by almost $1.6 billion, with US$1 billion of that being repurchased debt. We also strengthened our credit ratings during the year with a credit rating upgrade from Fitch ratings to BBB stable and a change in our Moody's outlook from stable to positive. We generated nearly $9 billion of adjusted funds flow in the year. This enabled us to deliver around $2.8 billion to shareholders through our base dividend, the purchase of common shares, and the purchase and cancellation of about 46 million Cenovus warrants. We end 2023 on a strong note operationally, and we'll continue to build on this throughout the year. 2024 will be focused on achieving our $4 billion net debt target, progressing our high-return growth projects in the upstream, and continuing to improve the profitability of the downstream business, while running it safely and reliably. Ultimately, as part of our capital allocation framework, we look forward to shifting 100% of excess free funds flow back to shareholders. We are well positioned as a company. The achievements I just spoke to set us up well for 2024 and will continue to generate value for years to come. On March 5, we'll be hosting an Investor Day, and I welcome you to attend to hear more about our strategy and detailed five-year plans at that time. And with that, I'll stop, and we're happy to take your questions.

We will now begin the question-and-answer session and go to the first caller. The first call comes from Dennis Fong at CIBC World Markets. Please go ahead.

Hi, good morning and thank you for taking my questions. I would like to start with the downstream segment. Could you discuss some of the opportunities you are currently exploring to enhance the cost structure, operating efficiency, and margins within the downstream business, especially now that you own and operate those three refineries in the U.S.?

Sure. So I'll let Keith answer the question. But as you know, Dennis, Toledo and Lima are sister refineries and their pipelines interconnected, which does give us some opportunities to improve the integration of those two refineries and the overall synergy that we hope to capture when we bought that refinery. Superior, there's lots of opportunities that we think in the future, we'll be able to take advantage of the focus today really though it's bringing up that refinery to full capacity and running that in a reliable way. But maybe, Keith, you could talk a little bit about what you're seeing in terms of opportunities in the refining sector.

Thanks for the question, Dennis. In our guidance, you'll notice a significant increase in our operational efficiency in US downstream for 2024 compared to 2023. Last year focused on restarting the refineries, while this year will concentrate on their consistent operation. We were pleased with how the refiners managed a cold snap in January. Our main goal now is to operate effectively and maximize margins. Improvements in reliability are ongoing, and overall, the equipment is functioning well. While cracks remained weak in January, we observed a positive shift in February, and the facilities ramped up to full capacity reliably. We are satisfied with our current progress and will continue prioritizing the long-term reliability of these assets, especially with over 110,000 barrels a day of additional heavy conversion capacity now operational. We have significant opportunities to optimize our output within the PADD 2 network and enhance our margins.

Great. I appreciate that color there. My second question here, maybe shifting gears a little bit. It seems like there was obviously significant progress made on lowering outstanding leverage. I guess, that progress, as you alluded to in the prepared remarks, was driven a little bit by the changes or the unwinding of working capital. As we think about this going forward, can you provide maybe a little bit of a structure or an idea as to what may be a normalized rate of like net debt paydown might be, and are there any one-time items we should watch out for in the next couple of quarters?

Good morning, Dennis, it's Kam. There are a few points I'd like to emphasize. As you observed, we experienced a working capital release in the fourth quarter, resulting from slightly lower inventory levels and adjustments in pricing. Regarding any unusual developments, we've mentioned before that we are still awaiting a line fill on TMX. While a small portion has been called, we still have amounts pending to complete that line as soon as it starts up. You can anticipate an additional 1 million barrels from that, likely occurring between now and mid-year. Aside from that, I wouldn’t expect any other significant changes. Overall, the reduction in debt observed in the fourth quarter was quite impressive. Considering the current pricing environment, which has improved in both the upstream and downstream sectors from January to February, I believe we will continue to make headway on our debt throughout the year.

Dennis, I'd just add to that. I think we've been pretty clear with the value chains that we've built, whether it be condensate or the value change that we've constructed to move our heavy oil out of Hardisty and into our refineries. You should expect us to be carrying somewhere around 45 million to 50 million barrels in inventory. And we're always going to be optimizing that over time. And with the refineries running more stably and predictably, there's an opportunity maybe to optimize that some more and take a few more barrels out of inventory. The other thing that we do pretty consistently is we run that value chain for the optimum cash flow and where we have opportunities to store barrels and sell them in future periods at higher prices, we'll do that as well. But what you should count on us is kind of that 45 million to 50 million barrels, as Kam mentioned, there will be about one million barrels coming into that, related to the start-up of TMX, but we're always going to be optimizing that depending on the pricing scenarios that we see going forward and the opportunities that this value chain gives us.

Great. I really appreciate the additional color there, Jon, and Kam. I'll turn it back. Thanks.

Thank you. The next question comes from Menno Hulshof at TD Securities. Please go ahead.

Good morning, everyone, and thanks for taking my question. I'm just going to start with a quick follow-up on Superior and Toledo. You did answer quite a bit of it already. But can you just guide us on what current utilization for the two refineries looks like today? And then Jon, you talked about potentially seeing a bigger ramp in Superior in Q2. Like what are the risks that you see in being able to run Superior within that time frame?

Yeah. I'm going to let Keith answer the first question last, and I'll start with your last question, and I'm sure Keith will have some thoughts there too. There's no doubt Superior has been a bit of a fist bite for us in starting a refinery that hasn't run in five years, and rebuilding it has been a bit of an issue. And anytime you take a new set of kit in a refinery that hasn't run for that length of time through its first winter, you do find some deficiencies, and sure enough, we found some deficiencies. But there's nothing mechanically process or technically wrong with this refinery; it's just taken us a bit longer to get to where we wanted to get to. I'd also kind of point to the strategy of why we have these two refineries. And it's important to remember when we get Superior up to nameplate capacity in that 49,000 barrel a day range, it's going to consume about 35,000 barrels a day of heavy, and we can get that from Hardisty to Superior for about US$4 with no take-or-pay commitment, Enbridge that is the strategic rationale for wanting that refinery. It's not only going to make profits on its own, but it really does give us egress from Hardisty to Superior. Similarly, on Toledo, of the 150,000 to 160,000 barrels a day of throughput capacity, about 90% to 95% of that is heavy oil, and we can get our oil from Hardisty to Toledo for about US$6 a barrel. So these are really important assets for us not just on a stand-alone basis but on an integrated basis. So getting them up to full rates and demonstrating the full strategic value that we've seen for some time is really important to us. But maybe I'll turn it over to Keith, and he can talk to you more about the details of the path forward with those two.

I think your question probably gears on the 76% utilization in the US downstream in the fourth quarter. In that period of time, we had a pretty large turnaround at Borger refinery, and the operator had a little bit of challenge starting that refinery back up. It's now back up and running at full rates. Toledo ran well through there. But you will recall in December, we saw cracks diminish in PADD II in the Chicago region, and we took the opportunity to optimize the kit and run it down. Heading into this quarter though, we are back up north of 90% utilization across the kit, including Toledo and Superior. Superior though, you should expect through the first several months of this year to run more in the 65% to 70% utilization. All of the kit is running. And to Jon's point about the heavy oil integration, we're able to run kind of that 30,000 barrels a day of heavy, but we're just running off a bunch of intermediates that we've built during startup and shutdowns over the past six months that limits kind of getting the full utilization as we run those intermediates through the processes and fill out those process units. So the kit's running, but you won't see that top line utilization number go up until the second quarter.

Terrific. Appreciate all of the detail. And I'll follow up with a question on solvent Assisted SAGD. We've seen quite a bit of news flow of late with Imperial being the first to bring a commercial SAGD project online a couple of months ago, and I believe CNQ was talking about commercial activity towards mid-year. And I'm going over past presentations. I believe it was at your last Investor Day, you talked about solvent-assisted pilot activity within the five-year plan. And you may want to hold back on this for the Investor Day, but if not, where does SA-SAGD rank on the excitement scale right now? What's getting done in the background? And would you be willing to fine-tune the timeline to commercial development? Thank you.

Hey, Menno, yes, it's Keith again. The way we look at SA-SAGD for Cenovus is we're pretty gifted with very thick clean reservoirs that allow for the actual recovery process to use SAGD and be very effective and very efficient over the years. Probably dating back 15 years, we've piloted all kinds of solvent recovery technology. So I would say those are, in our mind, commercialized, and they are waiting for the resource and opportunity to deploy them at. But right now, we have the resource and capability to utilize our steam most effectively and most economically to drive the highest shareholder return. So that's kind of where we're focused. But we do have that technology in our back pocket should we see an opportunity to deploy it in the future.

Perfect. Thanks, Keith. I’ll turn it back.

Thank you. Next question comes from Greg Pardy at RBC Capital Markets. Please go ahead.

Yes, thanks. Good morning. So lots of emphasis on the downstream, which makes sense. Jon, the upstream has had good momentum. I'm just wondering if you can give us a little bit of an ops update there, including maybe where current production rates are roughly where production rates are right now?

Sure. I'll get Keith to give you the detail on a property-by-property basis. But we entered this year, again, as I mentioned, with the kind of the second-highest production quarter that we've ever had. But December was probably the second highest production month that we've ever had as a company. All that needs to be tempered as you go into the summer months, and we have a turnaround schedule that's all part of our guidance that we've given you. As I mentioned, we expect Q4 to be even bigger next year than it was this year, particularly as we kind of bring on more well pads right across the business, but I feel really good about how we've paced and staged the capital right across the upstream to ensure that those rates that we put into our guidance are very achievable. We've seen some really good rates at places like Lloydminster, where we had some daily production records in December and early January. So it's kind of right across the business, and I think it really sets us up well for the growth projects and integration of those growth projects starting in 2025, with Narrows Lake tieback. But Keith, maybe you want to run through the portfolio and talk about where we are on the individual assets.

It's been impressive to see the ramp-up in the latter half of 2023 and into 2024, particularly with the second best quarter in Q4, which has continued into January. I want to commend the teams for managing to operate effectively even in minus 45 degrees Celsius weather, thanks to our winterization programs. We have also introduced new well pads at Foster and Christina, and we're beginning to see strong production from those in January, which will carry on through the quarter. In the Lloyd thermals, production has exceeded our expectations due to successful redrills and redevelopments and the application of subsurface technologies. I'm pleased with the performance of both the Lloyd Thermals and conventional heavy oil. On the East Coast, we are currently extending the life of our SeaRose, which is in dry dock for this project and will last until late Q3. However, Terra Nova resumed operations last November, and production there is ramping up. Our Asia business has also performed strongly and continues to do so. Overall, the conventional sector has been stable too, even through the recent cold snap. In summary, I'm very satisfied with Q4 performance across our upstream portfolio, which is carrying over positively into Q1 of 2024.

Okay, great. It seems like there has been some progress on the financials. In your opening remarks, you essentially addressed the question of reaching the $4 billion net debt target. I wonder if Kam could provide a bit more clarity on this. Is it feasible to achieve that by midyear, or would that be tempting fate? Additionally, regarding the upstream portfolio, is it adequately streamlined, or are there still parts of it that could be sold off as non-core assets? Or are we mostly finished with that process?

I'm going to answer the last question for Kam. We're very happy with the portfolio, Greg. This is probably the first quarter that we've had full access to all our assets. And I'd tell you, they're all investable. They all fit within our strategy, and they are all things that are part of our plan going forward. So, we're very happy with the portfolio that we have today.

Hey, Greg, it's Kam. So I think you're looking for a hard date on the date the debt target, to be honest.

Soft date will be fine. Yes, the soft date will be fine.

It would be hard to give that. So a couple of things I would highlight. Look, we're continuing to see a lot of volatility in commodity prices. So obviously, even with differentials widening out in Q4 and then now starting to see a bit of a narrowing into the first quarter and going into the back half of the year. And then obviously, cracks have improved. So I would say the pricing environment we're in is quite constructive. I think we're really focused on the things that are in our control. And as you heard Keith and Jon talk about, operationally, I think things are going really well. So I think the goal is to get there as quickly as we can. I think it's the number one priority for us as an organization. So I think when you look at the actions we're taking around the business, whether it's controlling our cost to working capital and then obviously running the assets, I think the goal is to try to get there in a reasonable timeframe. So the focus of the whole organization is to get to that debt target. I would say in this price environment, I'm optimistic we can get there in a reasonable timeframe. Whether that's in Q2 or Q4, it's really going to depend on commodity prices.

Thanks, Greg.

Thank you. The next question comes from John Royall from JPMorgan. Please go ahead.

Hi. Good morning. Thanks for taking my question.

Hi, John.

I had another question about downstream. I was hoping you could provide some details on the unplanned downtime at Lima that you mentioned in the release and how it affected the fourth-quarter results. You also referenced what appeared to be some economic downtime in downstream. Could you elaborate on that? Did this issue persist into the early part of the first quarter before crack spreads improved?

Yes. I'll speak to Lima, and then Keith can answer your question more broadly. But the only unplanned downtime that we had in Lima was a short outage that we had on the ISO cracker. And as you know, the iso cracker is your biggest diesel-making unit. And when diesel is really your only product that's making money in the crack environment that we saw in late November, early December or all through December really, it does impact your financial results. But that all being said, that was dealt with quickly, and the Lima Refinery today is at full rates is operating very, very well. So Keith, maybe you can just touch on any other aspects you wanted to mention?

Thank you for the question, John. As you may remember, crack spreads dropped significantly in December. Consequently, we reduced rates at our lighter oil refinery, Lima, and some of our non-operated refineries also made economic run cuts. This situation continued into January; however, on February 1, we observed a substantial improvement in crack spreads, which prompted us to quickly increase our operations to full rates to capitalize on this market opportunity. The crack spread improved by approximately $15 to $20, motivating us to operate at full rates. Looking ahead, we are entering the driving season, and we anticipate some forecasted outages in the region that should help maintain these favorable crack spreads for the near future.

Okay, great. Thank you. That's helpful. And then just sticking with the downstream is when I look at this year's guidance, is the 30 to 35 kbd of maintenance. Is that kind of a good level to think about going forward? Or is there some extra maintenance in there, given you had some restarts last year? Just trying to think about sort of how to model kind of the earnings now we're in refining and just the maintenance impacts there.

Yes. They're sometimes a little bit lumpy with major turnarounds. But I think in general, John, that's a pretty good number to model, but you can probably follow up with our IR folks off the call, and they can give a little bit more detail.

Thank you.

Great. Thanks John.

Thank you. The next question comes from Neil Mehta at Goldman Sachs. Please go ahead.

Hey Neil.

Hey, this is someone else. Sorry about the mix-up. There are many earnings calls happening today. I'm taking the question for Neil, and I appreciate your time. My first question is about downstream operations. While there's been a lot of discussion, ours is focused on a longer-term perspective. Assuming we get all our assets operational, possibly by 2024 and beyond, are there any initiatives we should watch for, specifically regarding cost savings in the U.S. downstream or improvements in capture rates over time?

Yes, there's nothing that we have that we need to address that relates to vessel retirement that relates to any regulatory obligation of any kind of consequence. Our focus today is continuing to run these assets, integrating them with the upstream, and driving the value from this integrated value chain that we've put together. So, don't think going forward that there's big lumps of capital that are coming in your direction to address those kind of big two issues that I talked about. Where we do have some capital that we've allocated to the downstream is more for projects that are economic in nature and allow us to expand margins and increase our heavy oil capacity throughput, but they're relatively modest. So what you can expect from us as a company over the next couple of years is we'll continue on the investments that we have in the upstream, and we've talked about those at Superior, Foster Creek, Christina Lake, and our West White Rose project with modest capital investment in the downstream to capture some incremental margin but really looking to run our refineries well and integrate them with our upstream on a more sustained basis.

All right. Thank you. Very helpful. And then not to get ahead of ourselves, but just curious, are there any themes we should be on the lookout for? I know it's going to be a longer-term view at the upcoming March Investor Day. But any updates we should be looking out for, whether it's on pathways, low carbon. I know you're going to talk a lot about these upstream projects that you've been investing in, but also if there's anything on the capital return side of things we should be looking out for, but any early thoughts would be very helpful.

Well, one of the things, I think, is we've been pretty consistent on what our strategy is since Alex and I arrived here in 2018. So please don't believe that Investor Day is going to mark any kind of left-hand turn from what's been really important to this company for the last five, six years, which is steady operations, driving to an under-levered balance sheet, getting to 100% shareholder returns, and investing profitably in this business at the margin. So what we're really going to do at Investor Day is reinforce the strategy and the trajectory that we've been on, but give you a lot more detail as to what the next five years is going to look like.

Thank you. The next question comes from Jason Bouvier at Scotiabank. Please go ahead.

Thanks, and good morning, everyone. Quick question on the preferreds. My understanding is they become redeemable later this year and in the first half of next year, assuming you guys hit your net debt target in the back half this year. Are those next on the plate, or would you look for your shareholder returns to come through like share buybacks or dividends?

Hey Jason, it's Kam. You're correct that we have some financial pressures approaching, with some due at the end of this year and others in 2024 and 2025. We are assessing all of these factors, including our debt portfolio, buyback program, and preferred shares. We are continuously evaluating the best economic decisions for the company and considering our capital structure. Just like any other decisions we make, we'll review these options as they reach maturity.

Thanks, Jason.

Thank you. Next question comes from Manav Gupta at UBS. Please go ahead.

Good morning, guys. I have a quick macro question first. Every now and then, we hear that TMX has cleared the last hurdle and the line is already set to come on, and then there is another hurdle, like, is there any update you guys have? You're much closer to it? When do you think the line hits the mechanical completion line-fill? And when do the stiff start actually coming in?

Manav, you hear is what we hear as well. So we've heard all of the starts and stops and starts again. But Drew, you're very cautious, why don't you answer where we are on TMX and our latest thinking there?

Thank you, Manav. To Jon's point, we are seeing daily and weekly progress. We are nearing the point where we can use a significant piece of infrastructure for the Western Canadian basin, which is generating a lot of excitement. Looking back at our 2024 budget, we initially expected to reach this milestone around mid-year, and I still think that timeline is realistic. We discussed this in our last call; even once we get it operational, there may be some initial challenges. We have factored that into our guidance. Nevertheless, we anticipate that it will come online in mid to late Q2. We expect the line-fill call for the remaining volumes to occur in the coming weeks and early Q2. However, we also expect some difficulties as we start up. So we are still planning for mid-year and are looking forward to it like everyone else.

A quick follow-up regarding your efforts for growth at Foster, Christina, and other projects. When considering 2026 and 2027, what is a good way to think about the oil sands production levels? I'm trying to gauge how to model the oil sands volumes for those years.

Sure. So the way you should think about our growth projects is we've been investing since 2023 in our growth projects. And that investment cycle kind of ends in 2025. So the money that we're spending last year, this year and next year really facilitates the growth that you're going to see in 2025 and beyond. As I mentioned in my call notes, the first project to come on will be the Christina Lake, Narrows tieback, and that will add kind of 20,000 to 30,000 barrels a day starting in 2025, but more maturing in 2026. You'll see the foster expansion come on in the 2026 timeframe with full rates in 2027. You should see continued growth in Sunrise production as we continue to bring on four well packages over the next two, three years. And we believe again, that we can take that asset beyond the nameplate capacity of 65,000 barrels a day. Today, we're kind of in the 45% to 50% range. So in those kind of time frames, that's where you'll see the growth in our oil sands production. And it's really facilitated by having extra and incremental egress that we get from our refineries as well as TMX and having that underlevered balance sheet that we've been coveting for so long. The other project, Manav, and I think you're aware of this, is our West White Rose project, and we expect to see first oil there in 2026.

Perfect. Thank you so much for all this. And look forward to meeting you in person in about three weeks.

We look forward to it as well. Take care.

Thank you. The next question comes from Lloyd Byrne at Jefferies. Please go ahead.

Thank you for taking my question. I have a philosophical inquiry that you might want to discuss during the upcoming Analyst Day. It seems that the market is fixated on the $4 billion figure at $45 oil, and your debt level is already lower than many of your competitors, depending on your perspective. Additionally, your cost of equity is significantly higher compared to your cost of debt. Considering the multiple projects you have on the horizon like Sunrise, Narrows, Foster Creek, and West White Rose, it appears that your EBITDA could reach $5 billion by 2026 at $45 oil. My question is, would you contemplate speeding up the buyback process at this time?

Yes. I will address this first and then pass it to Kam. I think we have been very clear about our financial framework and our approach to capital structure, capital allocation, and shareholder returns. We firmly believe that companies like ours that produce heavy oil in the Mid-Continent should operate with underlevered balance sheets. It is essential to maintain a sustainable balance sheet at the lowest point of the cycle, which we define as $45. We believe this is the price where hydrocarbon growth halts. Therefore, achieving our $4 billion target is our primary goal, and we are excited about delivering 100% returns to shareholders beyond that, something we have been committed to for an extended period. As time progresses, we continuously assess the appropriate level of debt for the company. We consider 1x EBITDA at $45 to be the optimal level of debt. However, we will not deviate from our financial framework or take an overly opportunistic approach by buying back stock in the current market at the cost of reaching our target net debt level.

Yes, it's Kam. I want to add a couple of points. First, this debt target is not something we aim to achieve in the short term. It's a long-term goal we've been working towards for about five years, dating back to 2018. Our aim is to create a capital structure that ensures a stable balance sheet and gives us the flexibility to take opportunities when others cannot. I want to emphasize that currently, our capital is somewhat high due to significant projects and commitments we have ongoing, like West White Rose and oil sands growth. This debt target is crucial to us, and we will stick to it. As John mentioned, we'll reevaluate it as our growth evolves into 2025 and 2026.

Great. Makes sense. And your sustainable EBITDA is going up, though, too. So I have one more question. How about exports out of PADD II going forward? I mean, the last time I think I saw you guys, we were talking about potentially looking into different options going forward. Do you think there's an opportunity to get more product out so this doesn't happen, the kind of margins you saw this year don't happen again in the future?

Yeah. Hi, Lloyd, it's Drew. Yeah, you are correct that, that is going into PADD I is a nice market. And we've got about 20,000 barrels a day of takeaway capacity there to get into the premium market. We're also using some storage and sell our products in later months right now if we just think about summer versus winter gas spreads, and we are doing that right now because of the ARB that's there. It is on our radar. There are some things we are looking at to be able to access our refined products into better markets that are a little more structured and probably have a little bit more global consistency to being a little more stable. We're seeing that volatility in PADD II right now, and we've talked about it today, and we're seeing it in our results. So it is part of some of our strategy and our thinking, and it's something that we're working on.

Awesome. Great. Nice job, guys. Thanks.

Thanks, Lloyd.

Thank you. The last question comes from Chris Varcoe at Calgary Herald. Please go ahead.

Morning Chris.

Morning Jon. In November, the Alberta government announced its carbon capture incentive program, which I believe is a 12% grant for CCUS projects. And that obviously comes out of Ottawa announced its investment tax credit for CCUS projects. Now that those pieces are in place, what does Cenovus need to see in order to progress the CCS foundational project? Or maybe looking at it another way, what is still lacking?

Hey Chris, it's Rhona. We still have a lot of details to work out regarding the federal investment tax credit and the provincial ACIP. These are important steps for decarbonization to move forward. However, the ITC was announced a long time ago and is still not finalized, as are details on the carbon credits that the federal government announced a while back. We have been consistently saying that we are in ongoing discussions with both governments, which have been happening for a long time. This process is complex and cannot be resolved overnight, so it's taking longer than many would prefer. It's important to approach this carefully because large-scale decarbonization projects require proper fiscal support. Around the world, these projects need significant government investment to proceed. We are continuing to engage in those discussions. Meanwhile, with the Pathways CCS project, we are making a lot of progress and preparing to submit the regulatory application for the pipeline and port space in the coming months. This is very positive, with substantial engineering work and community consultations already completed. We are also advancing other projects, including feasibility studies for carbon capture, and Cenovus is working on a feasibility study for small modular reactors. Other companies are exploring fuel switching, so there is a lot of activity happening as we also collaborate with governments on the funding support details.

In December, the Federal government announced its framework for the emissions cap for the industry, which targets a reduction of 35% to 38% by 2030. Do you believe this target is achievable? Additionally, does the emissions cap influence the willingness of pathways to invest in CCUS?

Yes, one of the things we've seen, Chris, is a real increase in complexity, density, and velocity of proposed regulation coming out of Ottawa. And our view on all of this is it's largely unnecessary and that the right incentives already exist, assuming that we can get a framework together for financial support that incentivizes investment in this basin, not just for decarbonization, but for the business as a whole. So our view on these things is that they are necessarily complex and they cloud the issue of trying to get to a place where we have some certainty as to what the financial incentive framework is going to look like that allows us to invest, not just in the business, but in the decarbonization of this business as well.

Thank you.

Thanks, Chris.

Thank you. The last question comes from Robert Tuttle at Bloomberg News. Please go ahead.

Hi, good morning. I wanted to follow up on that. You have a goal for emissions cuts by 2030. It seems you need to start ordering the pipeline and other components right away. Are you confident you'll meet that target, or is it at risk?

So our internal target, Robert, is a 2035 target. I think what you're referring to is the 2030 target that was put out by the federal government as well as the Pathways group. There's no doubt that to reach the 2030 targets, we need to move on that today. But we can't move on those targets until we get the certainty from the levels of government that we're currently negotiating with that allow for certainty and investment in these kind of projects. As Rhona mentioned, these are multibillion-dollar projects, multi-year projects, and they can't happen if they leave the industry uncompetitive with the peer group. So once that certainty is established, and we're working with the federal and provincial governments right now to try and get there, we'll move forward. But there's no doubt to achieve the 2030 targets that have been floated. This needs to happen sooner rather than later.

Have you been given a timeline or anything by the government? And when they'll be able to give you certainty on like the credits for difference and the other supports you need? I mean, have they indicated anything?

It's Rhona again, Robert. I mean, everybody, there's commitment from the government to move this forward as well because everybody, again, as I mentioned, has the same shared outcome we're trying to achieve. But I think it's hard to guess when you're having discussions that are complex like this; it's hard to put an exact date on it. But I think everybody wants to get this going because we want to see these decarbonization projects underway, and that's what the governments want, and that's what our sector wants.

Okay. Thank you.

Thanks, Robert.

Thank you. This concludes today's question-and-answer session. I will now turn the call back over to Mr. McKenzie for closing comments.

Great. Well, I'd just like to thank everybody for their interest in the company and attending the call and wish everybody a great rest of your day, and we look forward to seeing you on March 5. Thank you very much.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.