Earnings Call Transcript - CVE Q4 2021

Operator, Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to Cenovus Energy’s Fourth Quarter and Year End 2021 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.

Sherry Wendt, Vice President, Investor Relations

Thank you, operator, and welcome everyone to Cenovus’ 2021 fourth quarter and year-end results conference call. I will refer you 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 and outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus’ annual MD&A and our most recent AIF and Form 40-F. All figures are presented in Canadian dollars and before royalties unless otherwise stated. Alex Pourbaix, our President and Chief Executive Officer, will provide brief comments, and then we will take your questions. We ask that you please hold off on any detailed modeling questions and instead follow up on those directly with our Investor Relations team after the call, and if you could please keep to one question with a maximum of one follow-up, you can rejoin the queue for any other questions. Alex, please go ahead.

Alex Pourbaix, President and CEO

Thanks, Sherry, and good morning, everybody. Before we get to our operating and financial results, I thought I would update you on our ongoing response to COVID-19. We’re closely monitoring the Omicron variant and maintaining safe and reliable operations at all of our field sites. Over the last two years, we’ve learned a lot about how to maintain the health and safety of our people and communities and to ensure business continuity. We have robust protocols in place and adjust them as needed. The pandemic underscores for me how foundational safety is to the way we operate, and how focused we must be on continuous improvement in our performance. Meanwhile, the natural disasters in British Columbia this year presented an example of how our teams worked together to not only ensure business continuity but also meet the needs of the local community. It was a challenging year for British Columbia with widespread forest fires followed by severe flooding, which caused significant interruption to the supply of refined products to impacted areas. In both situations, our teams worked tirelessly to keep this product supply moving safely and our sites and impacted areas operational, where it was safe to do so, in order to continue meeting the needs of the communities and customers we serve. I think this reflects how we do business at Cenovus, including how seriously we take our role in the local communities where we operate. As we complete our first year as a combined company, we have harmonized our safety programs and are continuing to roll out our Cenovus Operations Integrity Management System, outlining how we manage health, safety, operational integrity, and environmental risk. Despite the challenges related to the integration and COVID-19, we have had solid overall health and safety performance in 2021. The year was not without recordable injuries, though, and this further underscores how focused we must be on continuous improvement in our top-tier safety journey. Above all, our focus is on doing everything possible to make sure everyone goes home safe every day. Turning now to our fourth quarter and annual results, our first year as a combined company has been a really good one for Cenovus. We accomplished everything we set out to do in 2021 and more. That’s not to say that there weren’t a few bumps along the way, but when I look at what we’ve accomplished overall this year, I want to commend our employees and leadership team on a job very well done. I’ll start with the Upstream segment; we continue to deliver very strong Upstream operating performance. Our total production was 825,000 BOE per day in the fourth quarter, an increase of 20,000 BOE per day over the third quarter. Despite experiencing some extremely cold weather in Alberta and Saskatchewan in December, the production increase was led by record quarterly average production rates at our three largest oil sands assets, Foster Creek, Christina Lake and the Lloydminster thermals. Foster Creek production for the fourth quarter was nearly 212,000 barrels per day, an increase of about 25,000 barrels per day over the third quarter. We spoke in our last quarterly call and at our Investor Day about the performance of the new well pads at the west arm of the reservoir, and these pads continued to deliver some of the highest rates we’ve ever seen at Cenovus. Production guidance for Foster in 2022 is in the range of 185,000 to 205,000 barrels per day, which includes the impact of a planned turnaround in the year. Production at Christina averaged 251,000 barrels per day in the quarter, reflecting additional production volumes from redevelopment and re-drill wells that we spoke about at our Investor Day. Production guidance for Christina in 2022 is in the range of 230,000 to 250,000 barrels per day, which also includes the impact of a planned turnaround later this year. At the Lloyd thermals, we continue to see the benefits of applying Cenovus’ operating techniques. These assets have delivered an average of nearly 100,000 barrels per day in the quarter. Our realized pricing across the oil sands segment reflected the volatility in WTI and WCS prices that we saw between October and November. Results also reflected higher condensate pricing and our normal additional seasonal blending requirements for diluent in the winter months. In addition, an increase in natural gas prices contributed to higher oil sands operating costs quarter-over-quarter to about $11.76 per barrel. Turning to conventional, as a result of higher commodity prices and reliable operations, the conventional business delivered nearly $260 million of operating margin in the fourth quarter. Production was about 5% lower than the third quarter due to asset sales, but unit operating costs still held relatively flat with the third quarter. Our offshore operations continue to be a strong contributor to our business, delivering operating margin of over $400 million in the quarter and contributing over $1.4 billion of operating margin in 2021. Asia Pac operations continued performing well with daily production of over 62,000 BOE per day in the fourth quarter, which was slightly above the previous quarter. We continue to see strong gas demand in Asia, and as we said at our Investor Day, we continue to explore with our partners opportunities to add additional value there. In Indonesia, a production-sharing contract was signed for the Liman contract region in East Java, and in December, we drilled the development well in the MBH field, which was completed in January. In the Atlantic, lower production volumes reflected some turnaround activity in the region, but we were able to capture a higher net back overall as the business realized the benefit of strong Brent pricing. Moving to the downstream business; in the US manufacturing segment, refinery utilization averaged 72% in the quarter. This reflects the impacts of a planned turnaround at the Lima Refinery. The Lima turnaround was a major five-year event, involving planned outages at the crude unit and the cat cracker units, with a total cost of around $145 million. Following the turnaround, we encountered some challenges with secondary processing units, which impacted run rates beyond the initial six to eight week planned timeline, extending through December and into January. Due to the reduced rates, turnaround-related expenses, and repairs associated with the outage, unit operating costs for US manufacturing in the fourth quarter increased to $16.88 per barrel. We also expect throughput and operating expenses in the first quarter to be modestly impacted due to the continued reduced throughputs in January. The repairs of Lima are now complete, and I’m pleased to report that operations are back to normal. The operations team is confident that this was a one-time issue and has been resolved. In the Canadian manufacturing segment, we continue to see very steady and reliable operating performance at the Lloyd upgrader and asphalt refinery with an average utilization of 98% in the fourth quarter. This finished out a strong performance year for the Lloyd complex with 96% average utilization for the full year. Fourth quarter utilization and unit refining margins in this segment were similar to the third quarter, generating an operating margin of $131 million, reflecting the strong reliability of these assets, as well as capturing wider price differentials at the upgrader. For those of you who joined us at Investor Day in December, you know we announced ambitious targets for our five environmental, social, and governance focus areas. These are all available on our website; however, I wanted to remind you of a couple this morning. We are committed to spending at least $1.2 billion with indigenous businesses between 2019 and year-end 2025. Working with indigenous business partners has always been an important part of our approach to supporting indigenous reconciliation. As part of our efforts to address climate change and greenhouse gas emissions, we have set a target to reduce our absolute scope 1 and 2 emissions by 35% by year 2035, from 2019 levels. We’re also maintaining our ambition of net-zero emissions from our operations by 2050, which includes our work with the oil sands pathways to net-zero initiative. Turning now to our financial results; in the fourth quarter, we generated cash flow from operating activities of nearly $2.2 billion, adjusted funds flow close to $2 billion, and free funds flow of more than $1.1 billion. Capital spending was $835 million in the quarter, which placed us well within our guidance range for the full year. We recorded a $1.9 billion impairment in the US manufacturing segment this quarter. The impairment related to the carrying value of our assets in US refining and changes in current independently derived commodity price outlooks, specifically around crack spreads, RINs, and the WCS differential. We also booked a reversal of prior impairments in Q4 related to our conventional business. This does not reflect any change in the way we think about the downstream business. We continue to see long-term value in our integrated model and to reduce cash flow volatility that comes with a more diverse portfolio of upstream and downstream assets. On the corporate side, we saw an increase in our general and administrative expenses in the fourth quarter, which impacted adjusted funds flow. This mainly related to a non-cash accrual for a synergy incentive plan that was implemented at the time of the Husky transaction. This one-time incentive program was clearly very effective in motivating our employees to pursue those synergies for our shareholders. We generated $7.2 billion in adjusted funds flow and free funds flow of nearly $4.7 billion in 2021, with total capital for the year coming in at about $2.6 billion. These results really speak to the free funds flow generating ability of the company, especially when you consider that free funds flow reflected one-time costs associated with the Husky transaction and capital for the Superior refinery rebuild, on which we’re still collecting related insurance proceeds in 2022. This financial performance, including asset sale proceeds received in the fourth quarter, enabled us to reduce our net debt by another $1.4 billion over the quarter, closing 2021 with net debt below $9.6 billion. That’s a reduction of $3.5 billion since January 1, 2021. In the fourth quarter, we also announced the sale of Wembley assets in the Conventional business, the Tucker oil sands project, and the disposition of two-thirds of our retail stations. The three transactions together represent additional proceeds of nearly $1.5 billion. Tucker closed in January, and Wembley is also expected to close in Q1. Retail is still expected to close in mid-2022. I’ll also take this opportunity to provide an update on our NCIB program, which we announced in the fourth quarter and began executing in November. As of February 7, we have repurchased approximately 26 million shares at a weighted average price of $16.31 per share. Looking back over the past year, we’ve created a better and more resilient Cenovus. We’ve delivered on everything we’ve set out to do, including the successful integration of the Husky business, delivering over and above our targets for upstream operations, Canadian downstream, transaction synergies, asset sales, net debt reduction, and increasing shareholder returns. Now, assuming commodity prices continue to hold, we will rapidly hit our net debt target of $8 billion, implying we could be looking at even more free funds flow to allocate in 2022. I assure you, we will continue the capital discipline you’ve come to expect from us. Above all, opportunities for adding value for our shareholders and increasing shareholder returns will be top of mind for this management team. So with that, we’re happy to take your questions.

Operator, Operator

We’ll take our first question from Greg Pardy with RBC Capital Markets.

Greg Pardy, Analyst

Thank you. Good morning. I appreciate the overview, Alex. To follow up on your points, it seems like you're indicating that we will be below $8 billion, and it appears there isn't much interest in increasing organic investment. Can you provide some insight on the options available for shareholder returns and whether those are currently the highest priority on your agenda?

Alex Pourbaix, President and CEO

Yeah, no. Thanks for the question, Greg. I mean, I think what we said, and you’ll recall, at our Investor Day, we made very, very clear that as we delivered the balance sheet, we were going to increasingly look at allocating cash to returning to our shareholders. You’ve seen that. We got off, I think, to quite a decent start with our NCIB. You’ve seen us double the dividend, and here we are rapidly heading towards and below a billion in net debt. I think what I would say is, we are very, very focused on the importance and the urgency of returning more value to our shareholders. We’re frankly delivering it at a pace probably quicker than anyone here even thought about. We have a little bit of work to do, as a management team, as a Board, but I think that our shareholders can expect that in fairly short order, we will be coming back to our shareholders with an updated plan on how we’re going to continue to return and increase our returns to shareholders. So I think I’d say just bear with us, we’re very alive to the issue; we just need to do a little bit of work to come back with a plan that we can announce to our shareholders.

Greg Pardy, Analyst

Thank you for that. My second question is likely more relevant for Jon. What can we anticipate from your US refining operations? I'm not focusing on cash flow generation, but rather on aspects like utilization or measures taken to enhance reliability or performance. Feel free to elaborate in any direction you choose.

Jonathan McKenzie, CFO

Thanks, Greg. I’ll make a few comments, and then I’ll let Keith chime in. The first comment I’d make is US refining is absolutely core to our strategy of the company and during the quarter we did execute a 45-day turnaround in Lima. The actual execution of the turnaround was quite good. The total cost, as Alex mentioned, was about $145 million. We did struggle with the isocracker and the reformer coming out of that turnaround, but the Lima refinery is now up to normal rates of operation. We expect it to run through 2022 at normal rates of operation. What we have seen in the past is utilization has been lower than historic due to largely commercial reasons, so as the cracks continue to justify, we will continue to take those rates of utilization up. I would mention we do have another major turnaround in 2022 at Toledo, and that will be executed by our partner at BP. But going forward, you should expect to see more historic rates of utilization and availability, as we get into a more robust crack market. I don’t know, Keith, if there’s anything else you want to add to that.

Keith Chiasson, CFO

No, I think you got it. The Lima turnaround is a once-in-five-year type of event, and that’s now behind us and the refinery is back online. I think just, Greg, in the quarter, obviously, we saw some seasonal weakness in cracks, neck cracks of RINs around $10. Obviously, gasoline impacted a little bit with Omicron, but we’re expecting that to be transitory, and we really think that gasoline and diesel demand will be really strong through 2022. So, even with the turnarounds Jon alluded to, we’re expecting higher throughput in 2022, based on what we’re seeing.

Alex Pourbaix, President and CEO

Hey, Greg, it’s Alex. I would agree with everything that Jon and Keith said, and I might just put one kind of overarching comment on the US downstream. As Jon said, at the start, this is an absolutely core part of our business and our integrated strategy. I think our investors should expect to see the exact kind of focus that we put on the thermal business in 2021 and the results we’ve delivered there. Jon and Keith and Norrie are putting that same collective effort into making sure that we deliver that same kind of performance out of the US downstream business. It is an area of very significant focus for us in 2022.

Greg Pardy, Analyst

Understood, thanks very much.

Operator, Operator

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

Dennis Fong, Analyst

Hi, good morning, and thank you for taking my questions. The first one here, actually both might be directed more at Jeff. But as you noted there in your opening comments, Alex, you did take a $1.9 billion impairment charge, just kind of digging into the financials and not wanting this to be a modeling stock question. It looks like the discount rate changed in terms of some of your assumptions but I was hoping that we could get a little bit more detail and color around some of the changes in assumptions as well as the embedded RINs pricing that you’re looking at, going forward, with respect to the impairment charge.

Jeffrey Hart, CFO

Thank you for the question. This situation primarily reflects the current state of third-party price lines, which is the main driver. In both the upstream and downstream sectors, it mirrors the IQRE prices that we experienced, leading to the reversal. Essentially, it highlights the impact of these third-party price lines. Additionally, the discount rates are subject to variation and will be adjusted based on different investment structures within the refinery. We've made some adjustments for the various investments, but ultimately, it's about those third-party price points.

Dennis Fong, Analyst

Okay. Okay, thanks. And then the second question, maybe it falls a little bit along, but Greg was asking there to begin with. The company has done a really good job in terms of managing term debt maturities, especially with the most recent redemption. Just in terms of an optimal capital structure, how should we be thinking about that just given the amount of free cash flow that you’re generating? How should we be thinking about the term debts and kind of the structure as well as the maturities as we are going forward? And is there any ways that you can think about optimizing or improving the cost structure on that side?

Jeffrey Hart, CFO

Yes, it's Jeff again. Firstly, as Alex mentioned, we aimed for balance between ten and eight, and we've maintained that over the last quarter and into this year with our share buybacks and dividends. The balance you referred to has been largely even. Generally, we've always mentioned holding up to a billion in cash, but I anticipate we'll operate more in the range of one to two billion. As we build up cash until we reach eight billion, we will continue to balance shareholder returns with reducing debt. Regarding your point, we will examine the maturity profile. We aim to maximize our debt reduction, and as we did in the third quarter last year, we'll explore opportunities to optimize cost and terms throughout the curve, ultimately being guided by market conditions.

Dennis Fong, Analyst

Great. Thank you for the color.

Alex Pourbaix, President and CEO

Thanks, Dennis.

Operator, Operator

We’ll go to our next question from Phil Gresh with JPMorgan.

Philip Gresh, Analyst

Good morning. For my first question, as I consider the first quarter, some of your competitors have mentioned facing challenges with working capital. I’m curious if you have any insights on this, particularly given your positive momentum in the fourth quarter. Are there any factors we should consider in a rising oil price scenario? If not, it seems like reaching the $8 billion target in the first quarter could be achievable. I would appreciate any thoughts you have on these points.

Jonathan McKenzie, CFO

Hi, Phil. It’s Jon speaking. I think one of the things that we did a really good job of in Q4 is managing working capital, and you would have noticed there was about a $300 million working capital release. That being said, one of the things that we did see in December in particular was some pretty weak pricing, both WTI as well as the WTI, WCS spread, and so we did take an opportunity to build some inventory and not sell in December, and some of those sales will be reflected in January and February of this year. So we don’t necessarily see any working capital impediments or headwinds going forward. We think it’s something that I think we managed through Q4, and you’ll see us continue to manage through Q1. We did put some barrels into cap line in Q4, and that’s all reflected in the number. But, overall, we did see that working capital release and we are expecting to sell some of that production that we stored in Q4 and Q1.

Philip Gresh, Analyst

Got it. And anything on the broader view at these spot prices of the ability to be below the $8 billion target by the end of Q1?

Jonathan McKenzie, CFO

You're inquiring about the timeline for our progress, and what I can tell you, Phil, is that in Q1 we will receive proceeds from the two asset sales that Alex discussed, both Wembley and Tucker, which is now completed, and these sales are significant. We are swiftly approaching $8 billion in net debt. While I don’t have a specific date for when we will reach that figure, we are moving towards it quickly.

Philip Gresh, Analyst

Okay. Fair enough for that. Thank you. And then just one follow-up, obviously, ConocoPhillips was pretty clear on their earnings call, that they intend to sell down their full stake by the end of the first quarter. And so just in terms of managing that, is there anything Cenovus is thinking about or is that more of the shareholders, we’d have to be buying the stock, and you just kind of buy it back in the open market or any update there and then hopefully, it is in the review soon.

Alex Pourbaix, President and CEO

Yeah, I mean, it’s Alex, Phil. First off, my observation is that our NCIB program has been a reasonably effective offset to Conoco’s action selling down their block. At this point, you guys have heard me say this so many times that it sounds pretty rote but we’re always happy to work with them; we haven’t really found any opportunities to coordinate, and it’s made a little bit difficult by the rules, but as long as the pricing works for us with our NCIB program, we think that that remains a pretty effective offset to their sell-down. There’s some comfort that it appears that it’s going to be coming to the end here pretty quickly.

Philip Gresh, Analyst

Right, okay. Fair enough. Thank you.

Alex Pourbaix, President and CEO

Yep, no worries.

Operator, Operator

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

Neil Mehta, Analyst

Good morning team. I wanted to spend some time on risk management. And maybe there’s a question for Jon or Jeff, but just talk about your philosophy around inventory management and risk management and hedging. It was a big number in the fourth quarter, is that something that as we think about Q1 with oil prices having picked up, you would think would sequentially move higher. So just talk about the philosophy around that, in general, and any quantification you can provide at the forward curve would be terrific too?

Jonathan McKenzie, CFO

Sure. We have two active short-term programs within the company. We have established an integrated oil production operation that allows us to move our barrels out of Western Canada into our refining network in pad two and to a broader market via our pipeline access, which has been a fundamental aspect of our strategy. We aimed to avoid situations where we would have to sell our barrels at a discount during difficult periods. Market access has been a key topic for us over the past four years, which we have improved notably through the Husky acquisition. Typically, we carry about 45 million barrels of inventory at month-end, and we hedge approximately 40% of these barrels each month to protect against sharp declines in WTI prices. In a rising price scenario, the value of those barrels may decrease, potentially resulting in losses. Conversely, in a declining price environment, the opposite occurs. However, over the long term, we anticipate this strategy to be revenue neutral. Recently, we have experienced seven consecutive quarters of rising prices. The second program we implement relates to our WCS exposure, where we synchronize the pricing windows of WTI and the WTI-WCS differential to mitigate pricing risks. We manage about 60% of our exposure this way. In a rising price environment, this approach may lead to losses, while in a declining situation, it can generate gains. Similarly, over the long run, we expect it to be revenue neutral or better. These are the two strategies we utilize.

Neil Mehta, Analyst

And then Jon, can you help the Street calibrate using the forward curve, what those hedging impacts could look like, as we think about 2022?

Jonathan McKenzie, CFO

Well, it depends on where the price of WTI goes through 2022, but if you’re in a world where you’ve got kind of flat pricing, it should be largely revenue neutral.

Neil Mehta, Analyst

Thank you team.

Alex Pourbaix, President and CEO

Thanks, Neil.

Operator, Operator

We’ll take our next question from Manav Gupta with Credit Suisse.

Manav Gupta, Analyst

Hey, guys. I know it might sound like a modeling question, but it’s not actually a modeling question, so bear with me. Foster Creek in this quarter was at 212,000 and Christina 251,000. Now if you look at the annual guidance, you basically are breaching the upper end of guidance on both those; I think Christine has 250,000 upper end, Foster 205,000. So when we think about 2022, should we model you now at least at the top end of it, if not over the top end as it relates to these two assets?

Alex Pourbaix, President and CEO

Manav, what a thoughtful and insightful question, I ask Norrie this all the time, and Norrie will give you a response.

Norrie Ramsay, Vice President, Operations

Hi, Manav. It is Norrie here. I would suggest we give you a range because there are ups and downs as we go through. Our fourth quarter, we had very strong safe performance. We weren’t impacted by the weather. We continue to have a strong program of activity going forward, but I would just guide there is a range and you could use both ends of the range as we move forward. We have turnarounds at both Foster Creek and Christina Lake this year, and that’s balanced with strong inventory and very low finding and development costs kind of going forward, and we will continue to strive to maximize our production.

Manav Gupta, Analyst

Okay. The second question, I remember you –

Jonathan McKenzie, CFO

Manav, I am sorry, this is Jon. Manav?

Manav Gupta, Analyst

Yes, sir.

Jonathan McKenzie, CFO

Apologies. I’ll just remind you of two other things as well that Norrie has spoken to. We do have turnarounds in both Foster and Christina this year, and there will be reduced production during those turnaround periods, but we’ve given you guidance that I think is representative of where we’re going to be.

Manav Gupta, Analyst

Perfect. And my quick follow-up here is I think at the time you did the deal on Foster and Christina with Conoco, the contingent payment had a timeline. I think it was five years from the time you did the deal. But can you help us understand at what point will the contingent payments stop, if they would, as it relates to these two assets?

Alex Pourbaix, President and CEO

Manav, it is Alex. There is a date circled on my calendar of May of this year, and I think that is when it rolls off.

Norrie Ramsay, Vice President, Operations

May 17.

Alex Pourbaix, President and CEO

May 17. Norrie has more granularity than me; May 17.

Norrie Ramsay, Vice President, Operations

17th at 12 o’clock.

Manav Gupta, Analyst

So that’s exactly five years because May 17 was the closure of the date of these two assets back in 2017. So basically post-2Q, you do not pay them, right; is that the right way to think about it?

Alex Pourbaix, President and CEO

Correct.

Manav Gupta, Analyst

Thank you. Thank you for taking my questions.

Alex Pourbaix, President and CEO

Thanks, Manav.

Operator, Operator

We take our next question from Chris Varcoe with the Calgary Herald.

Chris Varcoe, Analyst

Hi, it’s a question for Alex. Alex, there’s been a fair bit of talk about the Trans Mountain pipeline expansion not taking place in 2022 but occurring sometime or at least being completed sometime in 2023 and with a substantially higher price tag. I guess, what are you hearing and what kind of impact will it have upon Cenovus as a shipper on that expansion?

Alex Pourbaix, President and CEO

Hey, Chris. Yeah, I mean, as I think a lot of people are aware, we’re quite a significant shipper on TMX, and as such, we’re in regular contact with the owner and developer. From our perspective, we’re quite confident that nothing we’re seeing will really make a significant difference for us as a shipper. We expect that at any of the range of outcomes that we would model that that toll will still be an attractive toll for getting our production to market.

Chris Varcoe, Analyst

Can you tell me how many barrels have you committed to the expansion?

Alex Pourbaix, President and CEO

I'm not sure if that's public information, Chris. However, we are one of the largest shippers on TMX, and it represents a very significant volume.

Chris Varcoe, Analyst

Just to follow up lastly, we’ve seen a rapid expansion in WCS prices in the last couple of weeks, and obviously in oil prices. I’m curious how this is affecting your thoughts or changing your thoughts at all on capital spending in 2022? Does oil moving towards $100 a barrel or WCS being at $100 a barrel change your perspective at all?

Alex Pourbaix, President and CEO

You know Chris, I have enough experience that when it comes to pricing, I tend to be cautious. We base all of the company’s development plans at the lowest point in the oil and gas cycle. We won’t invest in a project unless it provides an acceptable return at that low point, which we define for oil as around $45 WTI. While we appreciate the current higher prices, we cannot rely on them at this moment. That said, we have an active program in both the oil sands and our conventional business. We will be utilizing a significant number of service and drilling rigs, as well as contractors, as part of our basic sustaining capital program.

Chris Varcoe, Analyst

One final question if I could, and that is what is your understanding of where we’re sitting with the tax credit from the federal government on carbon capture sequestration? Have you received any response yet on whether enhanced oil recovery will be included by the federal government?

Alex Pourbaix, President and CEO

We have been in ongoing discussions with the federal government for nearly a year now. I expect that the next significant update will come from them regarding their plan for the investment tax credit in the 2022 budget, which should be announced around March or April. Much of this process is within the government's control, but we are working closely with them and look forward to their response. We have also discussed enhanced oil recovery, and whenever I have the chance, I remind the government that EOR is currently one of the most cost-effective methods for sequestering CO2. However, we still don’t have any indication of whether they will consider it.

Chris Varcoe, Analyst

Thank you.

Alex Pourbaix, President and CEO

Thanks, Chris.

Operator, Operator

We will go to our next question from Nia Williams with Reuters.

Nia Williams, Analyst

Hi there. You talked about looking to add value in Asia. Do you see there have been more opportunities for investments there than in Canada at the moment?

Alex Pourbaix, President and CEO

Hey, Nia, it’s Alex. You know, look, we have a very good operation in Asia Pacific; we’re quite happy with it. We have great partners, and over time we have been able to continue to add development opportunities, and we continue to have those discussions. It’s relatively early days, but I think it’s a business that we see continued opportunities to make some modest investments in a pretty attractive basin.

Nia Williams, Analyst

Okay, thanks. And then, as a follow up, do you expect to allocate any capital funding towards the Oil Sands Pathways alliance this year?

Alex Pourbaix, President and CEO

We are expecting a significant capital investment over the next eight to ten years. However, most of our current efforts are focused on feasibility studies, engineering, and permitting, which means our capital allocation will be relatively modest for the next few years. This could increase, especially if we successfully secure the federal investment tax credit for carbon capture and sequestration. One key project involves developing a carbon trunk line to a carbon sequestration facility near Cold Lake. If the investment tax credit is approved, we would see our partners significantly increase their capital spending over that eight to ten year timeframe.

Nia Williams, Analyst

Okay, thanks. Do you have a rough estimate at this point how much the project would cost? What sort of numbers are we talking about?

Alex Pourbaix, President and CEO

It really depends ultimately on a number of factors, but I think it’s something you could think of kind of being in the scale of many single billions of dollars.

Nia Williams, Analyst

Okay, thanks.

Alex Pourbaix, President and CEO

Yeah, thank you.

Operator, Operator

We’ll take our next question from an unidentified analyst.

Unidentified Analyst, Analyst

Yes. Hi, thanks for taking my question. I actually have two of them for you. The first is about the future of your joint venture with Phillips 66 for the Wood River and Borger Refinery. On their call, they had said that discussions had been floated about not having the joint venture anymore, and they said that their world has changed talking about you. So I was just wondering how your world has changed and what is the future of the joint venture for those two refiners? And then when I’m done, I have a second question.

Alex Pourbaix, President and CEO

Firstly, I want to emphasize that our partnership with Phillips has been fantastic; they are a strong partner and have effectively managed those assets. However, our strategy has evolved, especially following the conclusion of the Husky acquisition. We are now focused on becoming a fully integrated energy producer, from production to the refinery gate. In this context, we can envision a long-term strategy where we operate our own refineries. Ideally, if we are involved with high-quality refineries, we would prefer to own 100% of them, given favorable conditions. There is no urgency to alter our partnership at this time, but we acknowledge that both our companies’ strategies and objectives can change over time, which may lead us to explore other options. For now, there is no immediate plan to announce, and we anticipate further discussions on this matter.

Unidentified Analyst, Analyst

So how would that work out, though? Because, for example, like Wood River uses a lot of WCS, and I imagine that comes from you. So I mean, how would that work out for you? I mean, would you take it? Would they take it? I mean, would you keep some kind of supply arrangement going forward? Have you not thought that far?

Alex Pourbaix, President and CEO

No, it’s really hard to speculate. It could be any of the above, and we really are at a preliminary stage at having those discussions, so it’s too early to comment.

Unidentified Analyst, Analyst

So do you have any timeline around these discussions where you expect to reach a conclusion?

Alex Pourbaix, President and CEO

No, I think these things kind of go at their own pace, and I honestly wish I could give you a little more detail, but it’s going to take a lot more discussions between the parties before we determine what the outcome is. So it’s going to take a bit of time.

Unidentified Analyst, Analyst

I understand. Now here is my second question. You mentioned earlier that you put barrels into Capline in Q4. Can you provide any details on how much this was, and are you a committed shipper? Have you committed any barrels? How do you see this developing in terms of getting WCS to the Gulf and Louisiana? What are your thoughts on that?

Alex Pourbaix, President and CEO

Yeah, we are committed Capline shipper, and we would look at that as part of an integrated strategy to maximize the value for our barrels. Obviously, the Gulf Coast has generally been a pretty attractive market for the heavy barrels, so it’s just another route to market that we hope to maximize our net backs.

Unidentified Analyst, Analyst

Okay, great. Thanks so much for your time. I really appreciate it.

Alex Pourbaix, President and CEO

No worries. Thanks very much.

Operator, Operator

That concludes today’s question-and-answer session. Mr. Pourbaix, at this time, I’ll turn the conference back to you for any additional or closing remarks.

Alex Pourbaix, President and CEO

Well, thanks so much, operator, and thanks, everybody, once again for your engagement with the company and your time today. We’ll let everyone get back to the rest of their day. Thanks again. Take care.

Operator, Operator

And this concludes today’s call. Thank you for your participation. You may now disconnect.