Earnings Call Transcript - CVE Q4 2022

Operator, Operator

Good day, ladies and gentlemen, and thank you for being here. Welcome to Cenovus Energy's Fourth Quarter and Year-end 2020 Results. This call is being recorded. Please note that this conference call cannot be recorded or rebroadcast without the explicit consent of Cenovus Energy. I will now pass the call to Ms. Sherry Wendt, Vice President of Investor Relations. Please proceed, Ms. Wendt.

Sherry Wendt, Vice President, Investor Relations

Thank you, operator, and welcome, everyone, to Cenovus' 2022 Year-end and Fourth 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'll take your questions. We ask that you please hold off on any detailed modeling questions and 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.

Alexander Pourbaix, President and CEO

Thanks, Sherry, and good morning, everybody. Before we talk about our fourth quarter and annual results, I thought I’d take just a minute to discuss our other news that we announced this morning. After our AGM at the end of April, I will be shifting to the role of Executive Chair. John will become our next President and CEO. This is something that I’ve been working with the Board on for quite some time, ensuring a robust plan for executive succession, including developing strong internal candidates has been a key focus of mine and the rest of Cenovus’ Board. And I am very proud to say, in my entire career, I have never worked with this capable a leadership team as I am lucky to have here at Cenovus today. When I joined Cenovus, the feedback we received from shareholders was that the company had historically lacked a strong succession plan. One of my very early acts as President and CEO was to bring on John as CFO to help achieve three key priorities we've set for Cenovus: optimize our cost structure, expand our market access, and strengthen our balance sheet. As many of you know, when John joined the company, he and I weren't strangers; in fact, we've known each other for the better part of our careers. I knew that John's towering strengths of discipline, accountability, work ethic, and deep knowledge of the energy business would be immensely beneficial to me as we embarked on delivering on those priorities. The entire leadership team and all the people in this company came together to deliver on those priorities, culminating with the Husky transaction and John's move to COO. I won’t say it’s all been a walk in the park. The reality is that we've worked through some incredible challenges along the way. But I can say with complete honesty that John and I have never been misaligned on what we believe is best for the company. I think it's fair to say we come at problems from different perspectives, and I think this diversity has made us a really successful team. Since the Husky acquisition, we've achieved many milestones together. I'll take a moment to revisit just a few. We delivered above and beyond our targeted synergies from the Husky deal. We continued to aggressively reduce debt, and we implemented and are executing on our shareholder returns framework. We've also evolved the asset portfolio with opportunistic A&D transactions, better positioning the company to maximize the heavy oil value chain, which will support further growth in cash flow and shareholder returns. Most importantly, we've created a low-cost, resilient, integrated energy company that is profitable at all parts of the commodity cycle. John has been instrumental in these efforts and our vision for Cenovus. With his breadth of experience, strategic thinking, and incredible commercial acumen, there is no better person to be our next President and CEO. While I could have stayed in the role for another year or two, Cenovus is in really great shape, and I think John has earned the right to lead Cenovus. I don't think there could be a better time for this leadership transition. Thanks, John.

Jonathan McKenzie, CFO

Well, thanks, Alex, and maybe I’ll chime in. Thank you for those kind words. You’re right, this company has accomplished a great deal over the past five years under your leadership. You've really built a much more resilient Cenovus, and something that I'm really proud of is that we have a reputation for delivering our commitments under your stewardship. In my view, you've left the CEO chair and the company in a much better condition than you found it, which is a great measure of success. So I’m very much looking forward to the next phase of Cenovus and continuing on the path that you’ve set us on. As you said earlier, you and I have known each other for the better part of our careers, including working closely together on other projects prior to us getting together at Cenovus, and through that time, we've been good friends. So I'm thrilled that you're staying on as Executive Chair and continuing your ongoing support and advocacy for Cenovus and more broadly, the Canadian energy industry. And I’m grateful to continue working closely with you over the coming years. Thank you very much.

Alexander Pourbaix, President and CEO

Well, thanks, John. As many of you are aware, an increasingly significant proportion of my time is being spent on external efforts, including actively partnering with governments to help support Canada in achieving its climate goals, while also remaining a competitive economy in which Canadians can thrive. Next to safety, there is nothing more important to Cenovus in our industry than reaching a durable solution between government and industry to achieve our emission aspirations. Once I move to the executive chair position, I intend to dedicate even more time to this pivotal external issue for both Cenovus and our industry. Besides my Board governance responsibilities, I will also continue to work closely with John to progress the strategic direction we've established for Cenovus. I really can't tell you how happy I am for John in his new role and how excited I am about my continuing role with this great company and our people. So with that, maybe I'll turn to the year-end and quarterly results. As I do every quarter, I'm going to start with our top priority, health and safety. I would like to recognize our well delivery group, which reduced its recordable injury frequency from 0.91 in Q1 2022 down to 0.53 over the full year. This performance improvement comes with focus and dedication, and I am really proud of what this group has been able to achieve as we continue to ramp up our drilling activity. Similarly, our recordable injury frequency at our Lima refinery fell to 0.1 from 0.5 in 2021. This is an absolutely outstanding result, and we are all proud of our team in Lima for this achievement. That being said, some of the recent incidents at our non-operated refineries are an important reminder to us that we must never become complacent or take our safety performance for granted. We will be unrelenting in our efforts to ensure that Cenovus’ strong safety culture is embedded at every site where we operate. This includes Toledo, where we expect to close the acquisition of the refinery at the end of this month, and at Superior as we commence start-up. Turning to our operating results, I'll begin with the upstream. Looking back on the year, there was a lot of A&D activity that helped us streamline our upstream business. By acquiring the remaining 50% of Sunrise, we now have full control to deploy Cenovus’ operating model and take that asset from about 45,000 barrels per day today, back up to its nameplate production of 60,000 barrels a day and beyond. This is an excellent opportunity for Cenovus to show our SAGD expertise and the benefits of our operating model. We also sold the Tucker oil sands asset in the Wembley conventional asset this year for total proceeds of $950 million combined. These sales helped accelerate our deleveraging efforts through the year. It also allows us to focus our capital spend on higher return projects. Looking at the Q4 operating results, total production averaged over 806,000 BOE per day, up about 30,000 BOE per day from the third quarter. This is a significant achievement of our operating teams who did an exceptional job of managing through extreme winter weather in December. The conventional business contributed about $250 million of operating margin in the fourth quarter while keeping production rates relatively flat. This winter, the team was focused on adding new wells, doing some pre-purchasing of materials that were slated for 2023, and advancing some infrastructure projects to support multiyear development in this segment. The Asia-Pac region also contributed to the quarter-over-quarter production increase, with our partners in China drawing gas above daily contract rates and additional production coming online in Indonesia from new wells recently completed. In the Atlantic segment, production remained relatively flat; however, with the Terra Nova FPSO asset life extension now complete, we expect the Terra Nova field back online in the second quarter of 2023. Turning to the Downstream, I will start by highlighting some of the successes we achieved at our operated assets over the year. The Lima refinery continues to run reliably and achieved record throughput in 2022. It generated about $1.1 billion in operating margin this year and also delivered its best-ever safety performance. These results reinforce our philosophy that strong safety performance drives strong reliability, which in turn, drives strong financial results. The Lloydminster upgrader and refinery continued to demonstrate strong utilization through the year even with turnarounds at each asset. The upgrader was able to take advantage of a wide synthetic to heavy oil differential, while the refinery continued to capture strong asphalt margins. Together, these two assets delivered almost $700 million in operating margin in the year. We also made significant progress on the Superior rebuild with start-up underway. The refinery began circulating hydrocarbons in mid-February, with throughput expected to start mid-March. The refinery remains on schedule to ramp up to full operations in the second quarter of 2023. And in Toledo, the acquisition of the remaining 50% of the refinery remains on track to close by the end of February. The repair estimate stemming from the September fire is not significant, and the refinery is expected to get up to full rates by around mid-Q2 this year. Turning back to our Q4 results. As we announced in early January, our downstream operations were affected by extremely cold weather, unplanned operational events, and a third-party pipeline outage back in December. This morning, we provided a detailed update in our news release, highlighting that almost all of our downstream assets were back up and running at normal rates. The exception is the Wood River refinery, where an incident in December reduced throughput modestly. The refinery's utilization has steadily increased since the first week of January and is currently running at a substantial portion of its normal throughput rates. We expect the refinery to return to normal rates during the second quarter. Turning to our Q4 operating margins. Oil prices were lower in Q4, which impacted oil sands pricing and margins. Sales volumes were less than production as we looked to avoid wider differentials in December, driven by the third-party pipeline outage. This also impacted oil sands operating margin in the quarter. However, those inventory volumes should serve as a future tailwind when sold. In U.S. manufacturing, the fall in commodity prices throughout the quarter resulted in a negative FIFO impact of roughly $180 million in Q4. The U.S. manufacturing operating margin includes operating costs of about $40 million to $50 million a month for Toledo and Superior. It's really important for everyone to keep in mind that those operating costs have been occurring without any throughput to offset them. As these two refineries come back online and start generating revenues, the per barrel metrics of the U.S. manufacturing segment will significantly improve. Turning to our annual financial results. I want to highlight some of the achievements we reached in 2022. I'll start with earnings, which increased tenfold from 2021. Annual adjusted funds flow was $11 billion, which we put to good use, reducing debt by more than half and investing about $3.7 billion in the business. That capital investment supports our other businesses and directly generates jobs and economic benefits in the areas where we operate. The financial discipline and continued focus on deleveraging also led to ratings upgrades by two of the credit rating agencies in the fourth quarter. We also tripled our base dividend in Q1 2022 and rolled out our shareholder returns framework. Overall, we delivered more than $3.4 billion to our shareholders this year through a combination of share buybacks and dividends. At the same time, we contributed over $6 billion in taxes and royalties to Canada and $100 million in taxes in the U.S. Moving now to our fourth quarter financial results. Adjusted funds flow was about $2.4 billion, and free funds flow was $1.1 billion. Net debt came down another $1 billion over the quarter and landed at just over $4.3 billion as of year-end. Under our shareholder returns framework, we’ve allocated half of Q4 excess free funds flow to shareholder returns, which has been delivered in the form of share buybacks during the quarter. Looking ahead, there are a couple of factors that will increase net debt in the first quarter. The first is a cash tax liability payment in Q1 of about $1.2 billion for taxes that were accrued over 2022. Secondly, we expect to close the Toledo refinery purchase for another USD 300 million, plus closing adjustments, including working capital at the end of this month. Now that we are cash taxable in all jurisdictions, taxes will be paid on a quarterly basis going forward. We have become increasingly confident we might get under our net debt floor of $4 billion around the end of the fourth quarter. However, the extreme winter weather, third-party pipeline outages, and operational challenges in December were unanticipated and ultimately prevented us from getting all the way there. Net debt has been forecasted to increase in Q1 2023 above the net debt floor based on the 2022 cash tax payment alone. The issues we experienced in December delayed our forecast timing of reestablishing the net debt floor in 2023 by about two months. Given where net debt sits today, and assuming commodity prices remain around current levels, we now expect net debt to be above the $4 billion floor until around the end of the third quarter. While some impacts from weather and unplanned outages continued into early 2023, we remain confident in our key operating targets. Our 2023 corporate guidance remains unchanged. Turning to our plans to reduce emissions. Cenovus and its peers at Pathways Alliance reached an important milestone in Q4. We’ve entered into an agreement with the government of Alberta that allows us to start a detailed evaluation of the proposed storage hub for our carbon capture project. This work is necessary to get us to the next stage in the regulatory process. A significant amount of work is underway with the Pathways Alliance as we progress feasibility studies, environmental assessments, and early engineering work for the carbon capture and storage project and also advance other technologies. Conversations with the provincial and federal governments about their role in partnering with us to advance these decarbonization efforts also continue to go well. Within Cenovus, we continue to advance our own emissions reduction strategy, including progress on carbon capture and storage project plans for several facilities. Cenovus is also focused on helping support economic self-sufficiency in Indigenous communities. Last year, we spent the equivalent of about $1 million a day on goods and services from Indigenous-owned businesses, and we are already halfway to our target of spending at least $1.2 billion with these businesses between 2019 and the end of 2025. Now I’ll do a quick recap of the year before we move to Q&A. 2022 was a really successful year for Cenovus. We improved our safety performance across the business year-over-year. We generated adjusted funds flow 53% higher than the year before. Meanwhile, we reduced net debt by more than half while also increasing cash returns to shareholders to 6.5 times the prior year. That's almost $3 billion in incremental shareholder returns year-over-year. Our balance sheet is in great shape entering 2023, and we look forward to delivering even greater returns as we grow cash flow and pursue our net debt floor. So with that, we’re happy to take questions.

Operator, Operator

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

Greg Pardy, Analyst

Congratulations, Alex and John, on your fantastic job. It's great to see that Alex will continue to be involved moving forward. I have a question that I've been getting that relates to acquisitions concerning Cenovus, particularly in the upstream sector. Specifically, there's been some suggestion that you might be exploring opportunities in the deep basin. Instead of just addressing the acquisition aspect, I'm curious about what parts of the business you are looking to reshape. I assume the downstream might be a significant focus, but any insights on that would be appreciated.

Alexander Pourbaix, President and CEO

Sure, Greg. Happy to talk about that. I mean, maybe I can kind of simplify this for people. I’ll really talk about what I view as the key priorities for the company in 2023. Right off the bat, I’ll say this until I’m gone: safety is number one for this company. You heard me talk about the work that we've done and what we've been able to accomplish; it is everybody's focus on getting the new assets in the company to the same level of safety that we’ve enjoyed in this company for all these years. On top of that, I would say I have two real focuses. The first is getting to $4 billion as soon as we possibly can. John made this comment in his remarks, but we really pride ourselves when we say something—we really mean it—and we intend to deliver on it. That $4 billion target is sacrosanct to us, and we’re not going to sacrifice anything to get to that target. The next priority for me beyond that is really getting this new portfolio we have in the downstream to operate at the same level of operational efficiency, safety, and quality as we experience in our upstream business. We’re bringing— as you heard me talk about—Superior back, and we’re already starting to bring it back. The Toledo deal is going to close very shortly. Everyone in this company, particularly John and Keith, are just laser-focused on bringing those assets in and demonstrating to our investors that this downstream business can perform as well as we know it can. Those are the priorities. We’re not going to sacrifice anything for those priorities. We always look at M&A transactions. I’ve always said we’re opportunistic about that, but we would not ever do anything from that perspective that would materially move us from that target, the $4 billion target I’ve said is our focus.

Operator, Operator

We’ll take our next question from Dennis Fong with CIBC World Markets.

Dennis Fong, Analyst

I would like to echo Greg's sentiments and congratulate both of you on this next phase of your careers. My first question pertains to the balance of integration and, more specifically, the refining operations. Considering the recent downtime on pipelines and outages at various refineries, how are you approaching the flexibility of your marketing assets going forward? Additionally, were there any near-term lessons learned from the downtime experienced in Q4 that you'd like to apply to your various assets moving forward?

Keith Chiasson, Marketing

Dennis, it's Keith. Thanks for the question. It was a pretty interesting time in December, obviously, with the weather impacts coupled with our third-party pipeline going down. I actually think the teams responded well. We were able to ramp up our rail program in a matter of a couple of weeks and start shipping crude by rail to alleviate some of the concerns we were starting to see in Alberta. We were able to store some barrels, which is why you saw some of the inventory growth in Q4 and resell those later on at a higher market price. I think from a marketing and commercial capability standpoint, I’m really happy with what the team was able to do. When I think about the future, and think about Superior and think about Toledo coming online, they're served by the mainline system, which is going to be really interesting for us to get our crude out of Alberta and into an integrated refinery set of assets that consume the molecules we produce. We see that integration as being beneficial for a heavy oil producer. We’re also excited about what we're seeing even at our Lloyd refinery and Lloyd Upgrader and being able to integrate our oil sands production into those two assets. So that integrated value chain is valuable for us, and we'll utilize both the conversion assets and our marketing activities to maximize that value.

Jonathan McKenzie, CFO

Dennis, this is John. I’ll just add a couple of things to what Keith said. I completely agree with him that those downstream assets give us the flexibility and optionality to perform differently in times like we saw in December when the Keystone pipeline went down, and more broadly with the wider differentials. Those assets, particularly our operated sites, performed really well. I think one of the reinforcing thoughts we had going through December is that we still have a strong desire to own and operate those assets we’re participating in. So we see the U.S. downstream as absolutely core to our strategy. We really look forward to putting Superior and Toledo into our stable of refineries and bringing those up over the next few weeks.

Alexander Pourbaix, President and CEO

Dennis, it’s Alex. I'm going to sound like I'm gilding the lily by being the third person to comment on your question. But the one other observation I would make is, I think the ability Keith talked about to mitigate the impacts of those challenges. If we had not done the Husky transaction, we would not be remotely in the position to manage these kinds of circumstances. Cenovus just did not have those storage resources or pipeline takeaway opportunities. So the goal of that deal was to create a much more resilient company, and I think the response during what was a significant incident was really good.

Dennis Fong, Analyst

Great. I appreciate that color and context from all three of you. My second question, maybe you followed along the lines of what Greg was asking as well. I think I kind of know the answer to this in terms of your current portfolio. But just given, as we look forward, there is, over the next few years, a ramp-up of potentially volumes out of the variety of your oil sands assets, really from low-cost optimization, narrows like tieback and debottlenecking. How should we think about, or how are you guys thinking about the balance of upstream exposure versus downstream exposure on an ongoing basis, especially given the multiple shifting macro environment throughout North America?

Jonathan McKenzie, CFO

Dennis, I don’t think anything has changed. As Alex mentioned, we’re in a world right now where we look at our downstream exposure and our takeaway capacity from Alberta as putting us in a relatively beneficial spot. So I don’t think we need to materially increase our takeaway capacity or refining capacity. We're happy with the balances. I’d just reiterate something Alex was talking about here. I know people are thinking about growth, but what we're really focusing on in the coming months, especially Q1 and Q2, is getting our net debt back to $4 billion and bringing these two refineries online to produce positive free cash flow. The growth part of the agenda that seems to be a theme can be discussed in future quarters. Right now, we’re focused on getting our debt down and getting our 100% shareholder returns intact, alongside getting our downstream operating well.

Operator, Operator

We’ll take our next question from Neil Mehta with Goldman Sachs.

Neil Mehta, Analyst

Yes. Congrats Alex and John. It’s awesome to have you in the role. I just wanted to start off on capital returns. Alex, you've been pretty clear that you want to take a countercyclical approach to buying back stock and didn't want to buy back stocks at the local highs. Stock shares have pulled back here a little bit. So just your perspective on the preferred return of capital mechanism versus buying back versus a more variable component as the business inflects closer to that sub-$4 billion mark?

Alexander Pourbaix, President and CEO

Yes. Look, we’ve said this many times. Our preferred method of returning cash to shareholders is through share buybacks. I think at the current valuations, we’re obviously in a range where there’s compelling value to buy back shares. But at the end of the day, we’re committed to returning those returns to shareholders. If we are trading significantly above our NAV, we’ll be thoughtful about whether we're creating value with those share buybacks. If we're not, we’ll still return that money through variable dividends. But the priority has been and remains share buybacks.

Neil Mehta, Analyst

That's helpful. And the follow-up is just on the macro. We've seen a lot of volatility in the WCS differential. I recognize that you guys are much more protected than you were when you first came in, Alex, into that spread, but curious on how you see that playing out and the moving pieces. Maybe you can also comment on TMX because that's going to move the needle potentially a year out?

Keith Chiasson, Marketing

Neil, thanks. Obviously, we saw the differential widen out for a period of time and tighten back up more recently. We kind of look at it as two parts. We consider the transportation or location spread between Alberta and the Gulf Coast and the light-heavy differential in the Gulf Coast. The good news is, with the third-party pipelines back up and running and heading into the summer turnaround seasons, we see a lower condensate requirement; egress out of Canada is looking good right now. We’re starting to see that component of the differential tighten. Down in the Gulf Coast, we’re also seeing the differential tighten with Chinese demand coming back, some of the SPR releases slowing down, and natural gas prices coming down, which enables more processing in complex refineries and better value from heavy barrels. All these factors are constructive for an improving differential, and we're seeing that and expect that to continue through 2023. TMX coming online at the back end of 2023 will help narrow that differential. We’re large shippers on the pipeline, so we’re looking forward to getting barrels into a new market and accessing the world with them. Exciting times ahead.

Operator, Operator

We’ll go next to Menno Hulshof with TD Securities.

Menno Hulshof, Analyst

I'll follow up with a question to Dennis on the five-year plan for thermal growth and Sunrise optimization and the Narrows Lake tieback in particular. I'm looking at the slide deck. It looks like they will add 35,000 to 50,000 barrels per day over the next, call it, two to two and a half years. But what key deliverables should we be looking for over the next year? And what would you need to see to get to the top end of that range at 50,000 barrels a day?

Norrie Ramsay, Thermal Operations

It's Norrie Ramsay here. We've laid out our plan to grow notionally 3% to 5% per year. We’ve seen great success as we move our pipeline at Christina Lake up to the Narrows Lake area. Our plan is to start drilling in the Narrows Lake area within the next 12 months. In optimization at Sunrise, we’ve had great success applying our historical Cenovus methodologies at the site. We’re pleased to have 100% of the equity, which allows us more flexibility. We have four pads, for example, drilling now. This is setting us up to fill the process plant over the next 18 months or so. Along with that, as we apply our Cenovus subsurface methodologies, examples include drilling two wells that are 1,600 meters in the reservoir rather than maximally 800 previously, significantly cutting costs to give us bigger wells and more flexibility. It’s a steady build plan, and we have a lot of flexibility as we move forward. Christina Lake will grow, and we’ll also grow at Foster Creek through increased pads, while Sunrise is also progressing. We just completed Lloyd Thermal, applying our subsurface methodologies to tie back greater distances than initially planned. It should be steady growth across the whole portfolio.

Alexander Pourbaix, President and CEO

Menno, it's Alex. I wanted to clarify that the extension into Narrows Lake should not be viewed as a high-risk, high-capital expansion of the oil sands. Norrie’s team has already built the road there and is working on the pipelines. The pad work is something we’ve done many times. We consider this a low-risk natural extension of Christina Lake. I just wanted to ensure that people do not see this as a new or relatively high-risk capital project.

Menno Hulshof, Analyst

Alex, can we get an update on regional pricing dynamics in Asia-Pac, given the recent volatility? On the contracting side of things, understanding that you’re largely fixed price across your Asia-Pac portfolio, is there anything we should be aware of regarding ongoing contracting activity or price resets? I think the answer is nothing material, but maybe you can confirm that.

Joseph Zieglgansberger, Asia-Pacific Operations

Sure, Menno, it's Drew. You're correct that on the contracting side around pricing, it’s fairly set from a range-bound standpoint. That will still play out for a number of years. Interestingly, we started to see buyers and demand increase just before Christmas and into December. We’ve been over-selling even on our contract volumes since December, and that’s carried through here into Q1. We are in a nice circumstance at the moment and are having conversations about potentially more supplemental agreements like we’ve had in the past. But day-to-day, week-to-week, we’ve been producing and selling above contract volumes. From a pricing perspective, it’s price-bound as per the longer-term contracts.

Jonathan McKenzie, CFO

Menno, it's John. We provided a fairly good snapshot of netbacks from our Asia-Pacific business and some of the supplementary information. The gas prices in Asia and Indonesia are relatively fixed, but we do float on the NGL side; therefore, you will see some variance from quarter to quarter based on the NGL sales and the prices we get for them. Usually, they’re on a Brent plus basis for the liquids.

Operator, Operator

We will take our next question from John Royall with JPMorgan.

John Royall, Analyst

Congratulations to John on the new roles. If you could maybe speak to the overall impact of the Keystone outage on upstream. I know it sounds like you've built some inventories. Is it necessary? Or is there a plan to draw those inventories back down from here? And I think reports we've seen indicate that only spot volumes are currently impacted on Keystone, so maybe you could confirm if you're back shipping on that pipe to the levels prior to the spill?

Keith Chiasson, Marketing

John, it’s Keith. The impact of Keystone in December affected both our upstream and downstream assets. We chose to ramp up our rail program, shipping on nine unit trains during December and January. Now we’re ramping that program back down as Keystone is back flowing. Egress out of Canada has improved, and we’re seeing the differential come back in due to sufficient egress out. All our downstream assets are being fed, and the inventory we built will be sold at higher values than if we had to sell it in a distressed market in December.

Jonathan McKenzie, CFO

Yes. To put a finer point on it, John. This is John McKenzie speaking. The assets worked as designed with what we built in our midstream and downstream business. We inventoried about 18,000 barrels a day of heavy oil due to the outage we experienced. We expect to relieve our inventory in Q1. The second impact of Keystone was that they had to cut the rate on the WRB refineries, which are fed off the Keystone pipeline, contributing to a secondary impact from that outage.

John Royall, Analyst

Great. Thinking about the downstream side and a little bit more near-term on the throughput guide. I understand you only provide annual guidance, but just hoping for some high-level color. It sounds like you're getting Superior back online at some point in the mid-quarter and a little later for Toledo. You mentioned lower rates for Wood River and some maintenance. I realize you don't give quarterly guidance; is there any high-level way to think about throughput or utilization for Q1 relative to Q4, or any other way we can think about it?

Keith Chiasson, Marketing

Yes, John, it’s Keith. I suggest thinking of it this way: we had challenges due to the Keystone outage and the weather in December, but all our operated assets returned to full capacity by mid-January. They have been running well since then. For our non-operated assets, Borger was also up and running at good rates by mid-January. Regarding Wood River, the rate cut from December is ramping up through the first quarter to reach normal rates. Remember, there are some turnaround activities happening in the second quarter across our assets. With Superior, we're happy with the progress; we’re now at a point where we're introducing hydrocarbons and will bring in crude in mid-March. It will take time to line out, and we’ll work on ramping that refinery up through the second quarter. For Toledo, we’re ready to take the ball on March 1 and will not lose progress on the repair and rebuild. We expect these repairs to be completed by the end of April, with startup to begin in May and June.

Operator, Operator

We’ll first go to Chris Varcoe with Calgary Herald.

Chris Varcoe, Analyst

This is a question for Alex. Why did you make the decision now to step down as CEO and move to the executive chair role? You said you could have stayed on for maybe another year or longer, but why now?

Alexander Pourbaix, President and CEO

Well, Chris, that's a good question. I would tell you—I sort of said it at the start—but I think that a thoughtful and measured succession plan is a hallmark of a well-managed company, and my board thinks of that. When I joined the company, I remember telling the Board that they could count on me for five to seven years, and I’m probably a little more than halfway through that; I’m heading towards six years with the company. Companies benefit from thoughtful succession, and John has been instrumental in the strategy and execution of things you heard me talk about in my comments. I think he has amply earned the right to lead this company. It’s not lost on me; John and I aren't too far apart in age. If I decided to stick around for another two or three years, I could put John in a situation where he might miss the opportunity to lead, and I don’t think that would be fair to him or our shareholders. They would benefit from his leadership over the coming years. At the end of the day, what’s best for the company and shareholders needs to take precedence over what might be best for me.

Chris Varcoe, Analyst

Just to follow up on that, I want to ask you about your new role. You talked about the fact that you're going to focus on advancing the industry and policy. What do you see as those key issues you expect to tackle in that role as Chairman, and why do you feel it's necessary to speak out or advocate at this time?

Alexander Pourbaix, President and CEO

Well, Chris, those priorities are those things you and I talk about so regularly. Over the last two or three years, I’ve spent increasing amounts of my time working on pathways on a larger scale for the industry, particularly focused on Cenovus’ GHG reduction plan. I’m a significant part of pathways discussions with various levels of government in this country about that. I’ve been fortunate to have a leadership team that’s been able to pick up the slack as I’ve devoted more time to that. It is vital that industry, the federal government, and the provincial government reach a durable agreement on our emission reduction ambitions so we can ensure industry can thrive while meeting this critical mission for Canada. I suspect this industry will represent about 10% of the country’s GDP this year, and it’s essential we find a way for it to continue thriving by continually improving our environmental leadership.

Chris Varcoe, Analyst

Finally, I had a question for John. What will be the key issues for you going forward? I’m curious about what significant changes or differences in focus we will see, if any, under your leadership, particularly concerning production, downstream expansion, or anything else.

Jonathan McKenzie, CFO

Yes. As Alex mentioned, he and I have worked closely together over the last five years. My focus has been on running the day-to-day of the company, while Alex has been more focused on involvement in pathways. Both Alex and I share input on the corporate strategy, and we developed this together with the rest of the leadership team. I don’t think you’ll see much change; it’s a continuation of the trajectory we’ve been on for the past five years.

Operator, Operator

We’ll take our next question from Ashok Dutta with S&P Global Platts.

Ashok Dutta, Analyst

Keith, could you share what Cenovus’ views are on WCS and TI differentials average for 2023?

Keith Chiasson, Marketing

I think if I could guess that, I might not be sitting here, but I think it was in my previous answer to the differential question. The structure of the differential is improving; both from egress out of Canada, we’re heading into summer months where upstream production goes offline for turnaround activity. The barrel gets lighter with less condensate, resulting in fewer barrels moving out of the province. So that differential is narrowing. Just from a U.S. Gulf Coast fundamentals standpoint, there’s improved demand with natural gas prices coming down and SPR releases slowing. We’re seeing a firm bid on WCS out of the Gulf Coast. So these two factors suggest we’re likely to see the differential narrow rather than widen through 2023.

Ashok Dutta, Analyst

Okay, understandable. A quick follow-up: you mentioned nine unit trains; how challenging was it to get railcars back on track?

Keith Chiasson, Marketing

It’s an interesting question. We built flexibility into our rail program when we laid it up back in 2020. It’s a testament to the marketing and commercial teams being able to set up agreements and restart the rail program quickly. When Keystone went down and inventories began to build in Alberta, we quickly turned on our rail program and were able to load nine unit trains to offload them on the Gulf Coast. We then turned that program back off quickly, demonstrating flexibility built over recent years.

Ashok Dutta, Analyst

And one last question: when was the last time crude moved by rail?

Keith Chiasson, Marketing

We’re continuously moving some crude by rail. There are some refiners that aren’t pipeline-connected, so it's an ongoing program, but the ramp-up was somewhat different this time.

Operator, Operator

That will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Mr. Pourbaix for any additional or closing remarks.

Alexander Pourbaix, President and CEO

Well, thanks very much, operator. With all the excitement about John and me, a number of our shareholders and followers might have missed an important development this quarter: we promoted Rhona DelFrari to Executive Vice President; she was previously Chief Sustainability Officer. From my perspective, she demonstrates top-decile expertise in this field, and we are thrilled to have given her this promotion. So with that, I will pass it back to you, operator, and thank you all for your time and for listening to us today.

Operator, Operator

Thank you. That will conclude today's call. We appreciate your participation.