Imperial Oil Ltd (IMO) Q1 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to Imperial Oil Q1 2020 Earnings Conference Call. At this time all participants lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I would now like to hand the conference over to your speaker today, Mr. Dave Hughes, VP, Investor Relations. Thank you. Please go ahead, sir.

Thank you, Daniel. Good morning, everybody. Thanks for joining us on our first quarter earnings call. I'm going to start by introducing you to the senior management we have here in our virtual room. We have Brad Corson, Chairman, President and CEO; Dan Lyons, Senior Vice President, Finance and Administration; John Whelan, Senior Vice President of the Upstream; and Theresa Redburn, Senior Vice President of Commercial and Corporate Development. Before we start, I'm going to note that today's comments may contain forward-looking information. Any forward-looking information is not a guarantee of future performance, and actual future financial and operating results can differ materially depending on various factors and assumptions. Forward-looking information and the risk factors and assumptions are described in further detail in our first quarter earnings press release issued this morning, as well as our most recent Form 10-K, and all these documents are available on SEDAR, EDGAR, and on our website. So I would ask that you please refer to them. We're going to follow our usual format. Brad is going to offer some opening remarks, and then Dan will provide a financial overview of the fourth quarter. Then I'll go back to Brad for more color on the operating performance, and then we will get to the Q&A. As I'm sure everyone is aware, we have our Annual General Meeting today at 10:20 Mountain Time. So I just want to note that we will need to end the Q&A at 10 o'clock sharp. But if there are any outstanding questions, we will certainly follow up directly with you after the AGM. And I thank you in advance for your understanding. So with that, I'll turn it over to Brad.

Good morning, everyone, and welcome to our first quarter 2020 earnings call. I hope you are all doing well and staying healthy. Before we get started reviewing the first quarter financial and operating results, on behalf of the employees of Imperial Oil, I'd like to take this opportunity to express our deep appreciation and gratitude for all those working on the front lines of this global pandemic. We can't thank them enough for the sacrifices they are making to keep us all safe and provide us with our essentials. Our industry, as you know, is considered essential, and so Imperial is working hard to ensure ongoing reliable supply of the energy society requires, while at the same time, managing the health and safety of our workforce. Our teams are also doing everything they can to support our communities and keep them safe and resilient during this unprecedented time. The company has recently announced a promotion to provide up to $2 million worth of free fuel to the real heroes in this, the frontline health care workers. The company is also donating 60 tons of isopropyl alcohol to help meet the significant increase in demand for this ingredient, which is used in applications like hand sanitizer, medical wipes, and rubbing alcohol. We also raised our matching dollars 2:1 for donations by employees to community charities and not-for-profit organizations through its employee giving and volunteer program. Additionally, in order to support online learning and to help meet high demand for technology devices while classrooms remain closed, the company is donating 500 laptops to the Electronic Recycling Association in support of the Calgary Board of Education's EducationMatters campaign. We recognize the need is great, and I am very proud of how our employees and neighbors have come together to donate critical supplies and funding where it is needed the most. Now let's turn to the first quarter. Certainly, what started out as a pretty typical quarter turned out to be anything but typical. The combination of demand reductions brought on by the COVID-19 pandemic and the supply shock resulting from the OPEC+ actions was truly unprecedented and resulted in a challenging business environment by the time the quarter ended. Significantly lower global demand had a material impact on crude oil and product prices, which in turn impacted our reported financial results. We have taken several steps to reduce spending and modify our business plans to adapt to these challenges. We communicated some of these in our March 31st press release, and we will provide more details throughout the discussion. From an operational perspective, I'm very proud of our first quarter performance. Upstream production volumes were quite strong, in fact, near a 25-year high for the first quarter at 419,000 barrels of oil equivalent per day. This included record Q1 production at Kearl, demonstrating the positive impact that the Kearl supplemental crushers have had thus far. We also had strong results in the downstream including record first quarter throughput at our Strathcona refinery, which continues to demonstrate the value of our integration. Putting it all together, I believe we delivered a solid quarter. While we reported a loss of $188 million in the quarter, when you back out the non-cash charges that are primarily related to market prices for inventory at quarter-end, earnings were a positive $113 million on an adjusted basis, ahead of analyst expectations. We also generated $423 million of cash from operations in the quarter, which included an unfavorable working capital effect of $179 million. This resulted in a cash balance at the end of the quarter of $1.4 billion. The value of our integration and balance was demonstrated as we achieved strong financial results in our downstream business. Further, while today's crude prices present a substantial challenge for our upstream business, in April, we have seen some lower prices for light crude, which will support our downstream business profitability in the second quarter. We continue to return cash to our shareholders in the quarter with over $400 million returned through dividends and share buybacks. While we have suspended the buyback in this environment, we continue to pay a dividend and this morning declared a second-quarter dividend of $0.22 per share, unchanged from the prior quarter. Our financial strength combined with the actions taken to reduce spending and costs provide us with confidence to support the dividend despite the challenging circumstances. Our longer-term outlook for our assets and competitive position lends further confidence. At this point, I'm going to turn it over to Dan to go through our financial performance for the quarter.

Thanks, Brad. Our first-quarter net loss was $188 million, down $481 million from earnings of $293 million in the first quarter of 2019. The first-quarter results in 2020 include non-cash charges of $301 million mainly associated with the revaluation of our crude inventory to market value at quarter-end. Excluding these non-cash charges, as Brad noted, earnings would have been $113 million compared to $293 million in the same period last year, with the drop mainly driven by the decline in commodity prices. On a sequential basis and excluding non-cash charges, we were down $158 million from the fourth quarter of 2019. Looking at our performance by business line, upstream recorded a net loss of $608 million compared to net income of $96 million in the fourth quarter of 2019, reflecting non-cash charges of around $250 million and the impact of lower realizations. The downstream recorded net income of $402 million, up from $225 million in the fourth quarter of 2019 as crude runs increased with the completion of turnaround activities at Sarnia and Nanticoke and the restoration of the damaged tower at Sarnia. We also benefited from record first-quarter crude runs at Strathcona as Brad noted. Chemicals earned $21 million in the first quarter, up $23 million from a loss of $2 million in the fourth quarter of 2019 as margins and volumes increased. I'll now discuss cash generation. Cash generated from operating activities was $423 million in the first quarter compared to just over $1 billion in the fourth quarter of last year. Cash flow was impacted by lower earnings and unfavorable working capital impacts. As Brad noted, we ended the quarter with $1.4 billion in cash. Our strong liquidity position is supported not only by our cash on hand, but also by our industry-leading balance sheet and credit rating, which provide Imperial with advantageous access to debt markets. Moving on to CapEx. Capital expenditures in the first quarter totaled $331 million, upstream expenditures of $231 million represent about 70% of the total in the quarter. Reduced spending compared to last year is associated with the ramp down of the Aspen project, as well as the completion and startup of the Kearl supplemental crushers. On March 31st in response to COVID-19 and market conditions, we provided updated guidance reducing our capital spending outlook by $500 million to the range of $1.1 billion to $1.2 billion for the full year 2020. We also indicated that we plan to reduce our operating expenses by $500 million compared to 2019 spending levels as we build on our ongoing OpEx efficiency plans. Our spending will focus on ensuring ongoing safe and reliable operations of our assets and paced investments to continue work on key projects at a level reflective of the current challenges presented by COVID-19 and the business environment. Now, I'll discuss dividends and share buybacks. In the first quarter, we paid $164 million in dividends at $0.22 per share, an increase from $149 million at $0.19 per share in the first quarter of 2019. We also continued share buybacks in the first quarter, totaling $274 million or 9.8 million shares consistent with our Toronto Stock Exchange-approved NCIB program. While we suspended our share purchases as of April 1st, we continue to view our share purchase program as a flexible way to return surplus cash to shareholders. The company will continue to evaluate its share purchase program in the context of its overall cash flow and capital activities going forward. As Brad noted earlier, we announced the second quarter dividend of $0.22 per share today, maintaining our dividend in this challenging period for the industry, reflects our strong balance sheet and our confidence in the long-term outlook for our business. I'll now turn it back to Brad to cover our operational performance.

Thanks, Dan. Moving on to operating results, as noted earlier, upstream production averaged 419,000 oil equivalent barrels a day in the first quarter. This represents an 8% increase over the first quarter of 2019 and includes record Q1 production rates from Kearl as production benefited from our new supplemental crushers, which I will talk more about in a couple of minutes. We expect upstream production volumes to be negatively impacted in the second quarter as we deal with an unprecedented drop in demand as Canada, along with the rest of the world, deals with the necessary travel restrictions, self-isolation, and social distancing measures to address the global pandemic. I'll talk more about how each asset is impacted, but at this point it's too early to determine what the annualized impact of this demand and price reduction will be. Now, I'll comment on the individual assets starting with Kearl. We've had some very positive performance at Kearl in the first quarter. On a gross basis, we produced 226,000 barrels a day, up from 208,000 barrels per day in the fourth quarter of 2019 and up from 180,000 barrels a day versus the first quarter of 2019. I would also note that in the month of March, we achieved a rate of 248,000 barrels a day for the month. Now back in January and the fourth quarter call, I expressed how pleased we were with the completion and commissioning of our supplemental crushers at Kearl and how well they were performing. I'm excited to announce that this first-quarter result reflects the continuation of this strong performance. These new crushers are performing as well, if not better than expected. The first quarter is historically a lower production quarter for Kearl due to cold weather and associated operating challenges. However, the availability of these supplemental crushers allowed us to compensate for this historically lower productivity period. I would also tell you that, considering the health and safety of our workforce, we have been looking for opportunities to manage workloads at our sites to better support physical distancing. One of the areas we've mentioned, we were looking at was the scheduling and scopes of the various turnarounds we had planned for this year. With this in mind, we have opted to advance and extend our typical second-quarter turnaround at Kearl to roughly eight weeks. It will now begin in early May, literally within just a few days, and continue to late June or early July. This allows us to progress work at a more measured pace and greatly reduce the number of people we have working on-site at any given time, without affecting the overall scope. It also allows us to execute the turnaround during a likely low demand and price period, so we can have the asset fully up and running when prices do recover. As a result, we currently see second-quarter production at Kearl running at approximately 150,000 barrels per day. I'd like to take a few minutes now to talk about our employees and contractor partners at our Kearl asset. By now, you've likely seen reports of several confirmed cases of COVID-19 at the Kearl site. This news is certainly concerning for Imperial's leadership team, our employees, the public, and of course the members of our extended Kearl family. The safety and health of our people and the communities where we operate is our very top priority. We've taken several steps to protect the Kearl workforce, including reducing capacity on flights and buses to ensure physical distancing, as well as providing cloth face coverings to all workers for use during bus and flight travel, as well as at the camps and work sites. These measures are in addition to the extensive list of preventative steps that have been in place for over a month at Kearl, such as enhanced health screening and cleaning practices at all sites and the implementation of temperature monitoring. We are ensuring our workforce has all the proper personal protective equipment needed, such as masks. And to ensure we are meeting the guidelines for physical distancing, we have reduced our onsite workforce to essential workers only. Out of an abundance of caution, and in coordination with Alberta health services, Imperial made voluntary COVID-19 testing available to all employees and contractors at Kearl, regardless of whether they were showing any symptoms. The information gathered through this testing will help us better protect our workforce. To date, approximately 1,900 of the Kearl workforce have been tested and most results have been received. As we have seen in other provinces, when testing is expanded, there's often an increase in confirmed cases and as we conducted this widespread testing at Kearl, this was certainly the case. As of yesterday, and since our very first case a few weeks ago, we have now confirmed a total of 83 cases of COVID-19 within our Kearl workforce, both onsite and offsite. Of these 83, 22 have now fully recovered, and 61 are still being actively monitored and treated as necessary. We continue to manage the situation very carefully and in close coordination with Alberta health services. We are in contact with those cases who had earlier tested positive to ensure they have the full support of their Imperial family. And of course, our thoughts are with these individuals, and we hope they make a full recovery. I would also point out that we are taking COVID-19 mitigation steps at all of our facilities across Canada. Now moving on to Cold Lake, production was 140,000 barrels a day in the quarter, similar to the fourth quarter of 2019, and we continue to expect production for the year to be around 140,000 barrels a day. As I mentioned on the fourth-quarter call, we have a turnaround at the Mahihkan Plant in the second quarter, which is now scheduled to run from early May to the end of June. To reduce onsite workforce, the scope of work has been scaled back and the timeline extended. We’re still in the process of finalizing revised production estimates. At Syncrude, Imperial's share of production was 73,000 barrels per day in the quarter, up from 66,000 barrels per day in the fourth quarter, and consistent with earlier guidance. In January, I told you about a coker turnaround at Syncrude that was scheduled for the second quarter with an expected duration of about two months. However, in our March 2020 press release, we indicated that this turnaround had been deferred into the third quarter. Since then, however, the ownership of Syncrude, the partners have continued to look at options and have now decided that, given this environment of COVID-19, low demand, and low prices, to go ahead with that scheduled work at this time. The intent is to manage these efforts as a number of smaller discreet scopes of work, which can be completed by a smaller workforce enabling appropriate physical distancing. The plan would have the work running from now through October, but will also provide flexibility around production levels depending on changes to market conditions. Based on this current outlook and execution plans, second quarter production is now estimated to be between 45,000 and 50,000 barrels a day. With respect to utilization of our Edmonton Rail Terminal, I know this is always of interest. In late January, I indicated that rail volumes for the month were just over 100,000 barrels per day. They then increased slightly in February, but as you know, crude by rail economics are very volatile. Given the significant declines we are seeing in global demand and reduced production rates across the industry, pipelines are now running with spare capacity, leading to a narrowing of transportation differentials and making rail uneconomic. Given this and our ability to be responsive to these economics, we began to ramp down our rail terminal throughput in March and ended the quarter averaging 97,000 barrels per day. Our April shipments are down substantially, and we're around 10,000 barrels per day. Now shifting to the downstream, we refined an average of 383,000 barrels a day in the quarter, which was well above the fourth quarter 2019 throughput but slightly below the guidance we provided in January of 400,000 barrels per day target. The difference is mainly due to reduced runs associated with COVID-19 related demand decline at the end of the quarter. Despite COVID-related sparing, we nonetheless achieved a couple of records in the quarter as a result of the expansion completed at the end of 2019, which added about 6,000 barrels a day of additional Cold Lake crude processing capability. Our Strathcona refinery achieved record first-quarter throughput at 192,000 barrels per day for the quarter and also set an asphalt production record. As we look ahead through 2020, our original downstream maintenance plans, while lower than 2019, were still substantial. However, as part of our efforts to manage our operations in the current environment, we have made some changes to these plans as well. The turnaround at Sarnia refinery, which started in early April, has seen a scope reduction and now only the coker will be taken offline for maintenance, with the duration being expanded due to reduced onsite personnel. Given current crude differentials, the incentive to run heavy crude is limited in the near term, which mitigates the impact of the coker being offline. As I noted earlier, given that we run mostly light crudes, our refineries are benefiting from the current narrow heavy-light crude spreads in the market. We had also planned to execute a significant turnaround at the Sarnia chemical plant this year, but have deferred the majority of that work to later years and are now evaluating a much smaller scope of work at the facility for this year. Our Strathcona turnaround originally scheduled for a late third quarter start has been deferred beyond this year. However, we will conduct some minor maintenance at the site in June. Similarly, the turnaround at Nanticoke has been deferred to 2021, with a more limited scope of work being conducted in the fall. Altogether, limiting the scope and extending the duration for these turnarounds and the planned maintenance work enables us to reduce the number of people on our sites, supporting improved physical distancing and reducing costs, while better aligning crude runs with demand levels. I want to be very clear that all business-critical work will be completed as planned to ensure optimum operation once things return to normal. I mentioned that the lower first-quarter refining throughput was driven by the demand reductions we’re seeing due to COVID-19 impacts. Given the current uncertainty and volatility in the marketplace, we are not in a position to offer updated throughput guidance at this time, as our activities will continue to adjust and adapt as demand and market conditions change. On the sales side, petroleum product sales were 462,000 barrels a day in the first quarter, up slightly from the fourth quarter. Again, the demand impacts due to COVID-19 have resulted in volumes that are lower than we would have initially expected for the quarter. To give you an idea of the type of demand impacts we are experiencing as an industry, recent reports show material demand reductions across many products, with motor gasoline down 50% to 60%, jet demand down 80% or more, and diesel demand down 20% to 30%. With these types of numbers, there is no doubt our petroleum product sales will continue to be impacted in the second quarter, although the volumes and earnings impacts are still unknown at this time. Our Chemical business had a solid quarter with earnings of $21 million, stronger than the fourth quarter of 2019. This was due to seasonal volume growth and the absence of turnaround activity. However, as we talked about quite a bit on the fourth-quarter earnings call, Chemical earnings continue to be impacted by recent industry capacity additions that have resulted in a down cycle in the market. I'm excited to mention that earlier this year, we released our new and enhanced sustainability report. As a responsible corporate citizen, environmental, social, and governance matters are a key priority in everything we do. This new report underscores our commitment to keep improving in the area of ESG and provides a significant amount of detail on these topics. I encourage you to go to our website and have a look. Now to wrap up, as I commented earlier, I believe we delivered solid results for the first quarter. We are currently in a more difficult period with significantly lower near-term demand and depressed prices. While we do expect an eventual recovery, the pace and magnitude are inherently difficult to predict right now. As Dan outlined in detail, we’ve taken actions to reduce our spending and costs to align with the current environment. It's important to note that we haven’t taken our eye off of the future and are still progressing work that will enable us to adapt quickly as markets change as well as select strategic initiatives that will enhance our competitive position long-term. As a company, we’ve always prided ourselves on the value and stability provided by our integrated business, the strength of our balance sheet, and our priority on delivering shareholder value. With these actions we have taken and are taking, we are confident that we are well positioned to weather this storm and leave ourselves poised to benefit during the recovery. With that, I’ll turn it over to Dave to facilitate the Q&A session.

Okay. We’re going to start with a couple of pre-submitted questions, and then we’ll switch over to the live Q&A line. So the first question comes from Mike Dunn at Stifel. Can you quantify recent and Q2 plans for output at Kearl and Cold Lake? And how those levels have been impacted by the drop in prices and demand? And could provide an estimate for the approximate WCS price required for revenues to cover variable costs in each of the assets?

Thanks for your question, Mike. In terms of production outlook, Kearl's outlook is 150,000 barrels a day for the second quarter. In terms of Cold Lake, looking long-term, we’re still targeting 140,000 barrels a day for the year, but there will be some impacts in the second quarter, though we haven’t fully quantified those yet. We normally don’t talk specifically about breakevens at the asset level, but I will say that as we look at the external environment and the economics of production, what we’re very focused on is ensuring that the current value we will realize in the marketplace for our products more than offsets or exceeds our variable operating costs. While the overall total cost of many of our assets can be higher, the variable costs tend to be very low. Without getting into the details, I would generally say they’re mid-single-digit-type numbers. In that regard, we are routinely assessing the market conditions and comparing them to the variable costs at each of our operations. That’s what’s guiding our decisions on optimizing the timing of these turnarounds and making full use of this lower price environment to reduce production, complete critical turnaround work, and be ready to take full advantage of the market.

Okay. Our next question comes from Jon Morrison at CIBC. Is there any potential that the extended Kearl downtime could be pulled into the third quarter of 2020, depending on crude pricing? And how are you thinking about the decision to run lower throughput at the Kearl transit versus shutting one of the trains down for longer post the extended turnaround that we talked about?

Thanks for your question, Jon. Let me come at that from a couple of perspectives. First of all, the team has spent a lot of time planning the duration and approach to the turnaround that I just mentioned that is about to start in a couple of days. To ensure the safety and health of our workforce and provide proper distancing and minimal-sized crews, we concluded that the best way forward is to undertake that work over an approximate two-month timeframe. We believe we have a good plan for it. I would also say that the approaches we’re taking and the measures we need to apply as a result of COVID-19 continue to be very much a learning process. Time will tell in the first few weeks if we’re able to achieve the productivity that we expect. But at this point, we believe we will be able to complete all that work within the two-month timeframe. Once we complete all that work and find ourselves at the end of June or early July, we hope the market will look much different than it does today. We want to be positioned to restart that train and resume our path to continue production records at Kearl. However, we will need to reassess that, and it’s very difficult to predict now what those economic conditions will look like at that time.

Okay. And Jon did have a follow-up to that one, too, that’s related. Now that we’re through the peak of winter, would you say it’s mechanically easier to have Kearl largely offline for three to six months without major overhaul work needed for restart? Does idling Kearl become more of an economic question now that you’re in the spring versus the mechanical impact in Q4 and Q1?

Certainly, the operations in the winter months are more challenging. However, relative to other assets in our portfolio and in general industry, we do have a fair amount of flexibility with ramping up and ramping down Kearl at any time of the year. That’s one of the benefits of having that asset in our portfolio in this economic condition, as we can make adjustments quickly as needed. That’s a bit different from in-situ operations, which are very dependent on pressure maintenance and long steam cycles, making it more difficult to dial them up or down quickly.

Okay. Now operator, we’ll switch over to the live Q&A line, please.

Our first question comes from Manav Gupta with Credit Suisse. Your line is now open.

Hi, guys. A quick question. You talked about the supplemental crushers and how they have helped you with the production side. Can you shed some light on how the supplemental crushers have helped you on the operating cost per barrel side? I mean, there was an understanding that as these supplementary pressures come online, they will help you lower the breakeven of the project. Any light you could shed on that would be very helpful.

Yes. Thanks for that question. As I mentioned, we’re very pleased with the results of the crushers. They did allow us to achieve record production in the first quarter. In conjunction with that, we are seeing a proportional reduction in operating costs. In prior calls and at our Investor Day, we indicated an objective to reduce US$4 per barrel out of the unit operating cost for Kearl. Everything we've seen suggests that is achievable. Long term, our goal is to drive that unit cost down to US$20 a barrel all in. The supplemental crushers are key to that, and I’m very encouraged by the progress we’re making.

A quick second follow-up. Your refining results were very strong. Clearly, there is a benefit from the light-light crude differentials widening out in Canada. Can you talk about some of the benefits that your refineries uniquely positioned when it comes to exploiting that light-light benefit up in Canada?

Yes, that’s a very good question. We are in a good position with some of these wider differentials. Looking at our refinery configuration, we are balanced more towards running light crude slates versus heavy. As a company, we are a net seller of heavies and a net buyer of lights. At times like this, we’re well positioned. Additionally, the locations of our refineries are advantageous. We have two refineries on the eastern side of the country near Ontario, where there’s historically high demand for the products we produce. We also have the largest refinery in Alberta, which is Strathcona. We’re seeing record throughput at that facility as well. We leverage our equity crude where it makes sense, but we are also in a market acquiring light crudes at discounted prices, improving our economics.

Thank you for taking my questions.

Thank you. Our next question comes from Menno Hulshof with TD Securities. Your line is now open.

Thanks and good morning, all. I’ll start with a question about inventories and storage. Clearly, there’s a widely held view that we hit tank tops out here within the next several weeks, closer to the end of May in the U.S. Do you share that view? What does Imperial look like a few weeks into that scenario? What are the levers that could get pulled to mitigate that risk?

Everybody’s watching inventories very carefully right now, largely impacted by significant reduction in demand that occurred in April, with record reductions of nearly 30 million barrels a day globally. This had a significant impact in North America and Canada. Likewise, the initial supply increases from OPEC+ also exacerbated that balance. The supply-demand balance is coming into check, but it’s going to take a while. In the meantime, inventories are building as refineries have reduced utilization. My impression is that the build is much more extreme in the U.S. As we monitor inventory levels in Canada, the builds have been more moderate. We feel quite confident about our ability to balance production, demand from our refineries, and sales to third parties at this point.

Okay. Thanks for that. My follow-up question is on Downstream. Where do you stand on refinery utilization today? What can we expect that to look like across your portfolio for Q2?

As I mentioned, one of our refineries is undergoing a turnaround right now. The other two are undoubtedly experiencing reduced throughput. I’m hesitant to quote any numbers because those throughputs are adjusted every day as we see changes in demand. I mentioned what some of the overall product demand scenarios look like with significantly reduced gasoline, aviation fuel, and moderate reductions in diesel. All of these factors are impacting our refinery utilization, just like others in the industry. We’re taking full advantage of the markets and maximizing throughputs where it makes economic sense.

Thanks, Brad. That’s it for me.

Thank you. Our next question comes from Benny Wong with Morgan Stanley. Your line is now open.

Thanks, everyone. Just had a follow-up on your comments on product demand, and I appreciate that color. Given your perspective on Downstream and your integrated model, are we seeing any signs of foreign demand slowing or even spot stabilization? Are there observable differences between the eastern and western markets of Canada?

We are starting to see a recovery, albeit still slow and measured. Over the last week or two, monitoring traffic data and utilization in major metropolitan centers, we are seeing a gradual increase. That is starting to benefit gasoline demand, although it remains very depressed overall. The trend seems to be moving in the right direction, indicating we may have bottomed out. On the diesel side, the reductions were slower to occur, from 5% to 10%, which seems to have increased to around 15% to 20%. Diesel was not as severely impacted due to transportation demands for essential goods, manufacturing, and agriculture. We’re optimistic that diesel will rebound quickly with warmer weather and increased agricultural demand. The most greatly impacted is jet fuel which is down over 80%. This will take longer to recover until health restrictions are lifted. East versus west, there have been some changes. Early on, we saw greater reductions in the east, but as I said, they are both responding positively now.

Thanks, Brad. That’s super helpful. My follow-up question is regarding your capital expenditures. Obviously, the level is significantly low this year, but thinking further out into next year, is the $1.1 billion to $1.2 billion sustainable if we are in a prolonged low oil price environment? Or is there a bit of incremental spending that needs to be incurred, considering the deferred maintenance you mentioned earlier?

That's a good question, Benny. To be honest, we haven’t fully updated our plans for future years. Last year, we expected to be in the $1.6 billion to $1.8 billion range for the coming multiple years. We’ve scaled that back, of course, to $1.1 billion to $1.2 billion. This is above our sustaining capital by probably $100 million or $200 million. If we found ourselves in a very extended period of low pricing that warranted continued reductions in CapEx, I think that is sustainable, as we would be able to complete all the safety-critical work, if you will, and reliability-critical work. So I think that is achievable, but that’s not our current outlook. We expect to return to more normal levels once we get to next year. We will be updating those plans later in the year. Hopefully, when we reach our Annual Investor Day, we’ll be able to discuss the impacts of COVID-19 and this unique supply-demand situation we are in.

Thanks, Brad. Super helpful.

Thank you.

Thank you. Our next question comes from Greg Pardy with RBC Capital Markets. Your line is now open.

Thanks. Good morning, Brad. Thanks so much for the rundown. Most of my questions have been answered. Just the only one I'd have for you is about the Mahihkan plant at Cold Lake. What would the rough capacity be there?

At Cold Lake, we have four major plants. Mahihkan is one of the smaller ones. I've got John Whelan here, the Senior Vice President of the Upstream, and I'll ask him to provide the exact numbers.

I think what you're trying to figure out is what do we think the second quarter is going to be. We don't have the full plant offline. But generally, we're targeting 140,000 for the year. We have this turnaround in the second quarter, not as big as last year's turnaround, but off-line at about 15,000 barrels per day for the quarter.

Okay. Terrific. Yes. Thanks very much.

Thank you. Our next question comes from Asit Sen with Bank of America. Your line is now open.

Thanks, good morning. Hi Brad, how are you?

Good. Thanks.

Just thanks for the detail on crude by rail. It's good to see that you guys have ramped down significantly in April. Just wondering if you could share your views on the medium to long-term, how rail plays out as more and more pipeline capacity looks like it's going to be available? Any updated thoughts on pipeline projects, particularly on KXL announcement, if you could share your views?

In terms of rail, we made the investment in the Edmonton Rail terminal purposefully to serve as an alternative egress method for us and act as a backstop if pipeline capacity was unavailable. Over the last couple of years, we've taken good advantage of that and adapted quite rapidly to the prevailing economics. There have been several months where it made sense to move a lot of volume by rail, especially when pipeline capacity was lacking. However, there are other times, like right now, where it's uneconomic, and we quickly scale it back. Pipeline remains our base egress. Looking to the future, we are optimistic with progress made on key projects in Canada and the U.S. Positive announcements on Keystone with the Alberta government providing support mean that the project could move forward. Construction has started, and one of the key aspects— the border crossing—is reportedly far advanced, if not completed. There have been some setbacks in Montana regarding permits, but the project moves forward, which is encouraging. We are also seeing positive progress for Trans Mountain and Enbridge projects, which are important for the industry.

Thank you, Brad, for that. My follow-up is on your asset portfolio. The bottom of the cycle offers challenges as well as opportunities. When you're thinking about bottom of the cycle opportunities, any thoughts on M&A, particularly A&D? How are you viewing your unconventional portfolio tactically in 2020 or perhaps strategically?

That’s a really good question and clearly something that is on our mind. A lot of assets are distressed due to these economic conditions, so we keep the aperture open to evaluate whether there are strategic opportunities for us to expand or change our portfolio. This time is no different. We continue to refresh our analysis in this regard. That said, my experience in M&A is that at these extreme points in the cycle, it can be very difficult to transact because buyers and sellers' expectations diverge, as their views of recovery timing vary. It’s hard to transact, but we will continue to evaluate potential opportunities and see if any make good strategic sense.

Thanks, Brad. Appreciate the color.

Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Your line is now open.

Hi there. It's Emily Chieng on behalf of Neil here. Thanks for giving the time today. My first question is around the operating cost reductions of $500 million you have announced. How durable can we think this $500 million reduction is, for example? Can you give us a sense of what percentage is associated with deferred activity versus what is an actual cost efficiency that we're seeing there?

Thanks for your question, Emily. As we approach these efficiencies, we’re looking at everything. There are structural efficiencies we’re pursuing that we expect to capture for long-term sustainable benefits. There are other steps which are deferrals, and some expenditures are being impacted by the pace of activity. I don’t have a good percent split between structural versus deferral, but our objective is to maximize those structural improvements and continue driving down unit operating costs for all our assets. I’m optimistic we’ll see more cost reductions in that $500 million by year-end.

Got it. Thanks. And just one real quick one, if I may. How quickly do you think Kearl and Syncrude can be ramped back up to full capacity once demand starts to pick up again? And I’ll leave it at that. Thank you.

Thanks. For Kearl, as we’re taking one train down now for the turnaround, we expect to complete that work by the end of June. We will ramp back up within a week. It's very responsive.

I am not showing any further questions at this time. I would now like to turn the call back over to Dave Hughes, VP Investor Relations for any closing remarks. Thank you, Daniel. It is 10 o’clock. We will need to end the call now to move on to our Annual General Meeting. We have a couple of pre-submitted questions that, as I promised, we will follow up today, directly. I’d like to thank everybody for joining us this morning. If you have any follow-up questions or want further discussion, don't hesitate to reach out to the IR team here. I wish everybody all the best in what could only really be considered as some pretty challenging times. Thank you very much.

Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.