Imperial Oil Ltd (IMO) Q2 2020 Earnings Call Transcript

Good morning, everybody. Thanks for joining us on our second-quarter earnings call. To start, I'm just going to introduce the senior management here in our virtual room. We have Brad Corson, Chairman, President and CEO; Dan Lyons, Senior Vice President, Finance and Administration; Theresa Redburn, Senior Vice President of Commercial and Corporate Development; and Simon Younger, Senior Vice President of the Upstream. As you know, I'm going to start with the cautionary statements and 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 a number of factors and assumptions. Forward-looking information and the risk factors and assumptions are described in further detail in our second-quarter earnings press release that we 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, please refer to those. The format as usual, we will start with some opening remarks from Brad. And then Dan is going to take us through the financial results. And then back to Brad for an operational update. Once that’s done, we’ll then go to Q&A. So, with that, I'll turn it over to Brad.

Thanks, Dave. Well, good morning everybody, and welcome to our second-quarter earnings call. I hope each of you and your families are staying healthy as we continue to manage through these challenging times. As you know, we’ve been faced with unprecedented health and market conditions over the last quarter. Unfortunately, many of the impacts are still with us today. As a company, we have been able to demonstrate our ability to adapt quickly and although our second-quarter results reflect just how challenging the environment has been, I am pleased with our response across the organization. This response, along with our strong balance sheet and level of integration, has allowed us to weather the storm without taking on further debt and positions the company well to capture the value of improving market conditions going forward. Before we get started with reviewing the second-quarter financial and operating results, I want to take a minute to give a quick update on our efforts to manage the health and safety of our workforce during the COVID pandemic. As you’re aware, we talked on the first-quarter earnings call about multiple cases of COVID at our Kearl asset. I detailed at that time the steps we were taking to manage and address the situation, such as working closely with Alberta Health Services, making voluntary COVID testing available to all employees and contractors at Kearl, and various other steps such as changing our location schedules, reducing capacity on flights and buses, and ensuring our workforce is employing best practices with safe distancing and use of proper protective equipment. As a result of these efforts, I'm very pleased to say that Alberta Health Services declared the COVID outbreak to be over as of June 14. In fact, we have not had any new onsite cases related to the Kearl workforce since May 18th, which is very positive. I would also point out that we continue to take COVID mitigation steps at all of our operating facilities and office locations across the country. Finally, I would like to take this opportunity to once again express our deep and heartfelt appreciation and gratitude for all those working on the front lines of this global pandemic. We just can’t thank them enough for the sacrifices they are making each and every day to keep us all safe and provide essential services. Thank you again. Now let’s turn to the second quarter. The combination of demand reductions brought on by the COVID pandemic and the oversupply resulting from the OPEC plus actions created an unprecedented challenging business environment. As a company, we have remained focused on maintaining the health and safety of our workforce, ensuring the strength of our balance sheet, and preserving optionality for the future. Significantly lower global demand had a material impact on crude oil and product prices, which in turn negatively impacted our reported financial results. Early in the quarter, we communicated a number of steps we were taking to reduce spending and modify our business plans to adapt to these challenges, including capital and expense reductions, revisions to our turnaround plans, and suspension of our share buybacks. Each of these steps was necessary and prudent. I'm pleased to say the entire organization has worked very hard and made excellent progress towards delivering on these commitments. With respect to our optimized turnaround plans, I’ll provide more details when I speak at the asset level. However, let me summarize by saying these revised plans and other efficiency steps we have taken resulted in our second-quarter production and manufacturing expenses being over $300 million, or 19% lower than in the first quarter, which puts us year-to-date over $450 million, or 14% below 2019 year-to-date expenses. These reductions are being delivered across the entire organization, and while some are related to the deferral of work such as some of our revised turnaround plans, over 50% of these savings are structural in nature and will fundamentally reduce our unit cost and breakevens going forward. Also, consistent with our long history of driving increased value in the business, we will continue to focus on identifying further efficiencies. In addition, our capital expenditures in the second quarter were down $222 million, or 52% versus the same period last year. This reduction is being achieved in large part through adjusted pacing of project execution which, in the COVID environment, helps enable us to ensure the health and safety of our workforce. We continue to spend at typical sustaining capital levels, which of course is critical to ensure we do not compromise safety and reliability, as well as spending on some selective growth and value enhancement projects. So between the operating cost reductions and the CapEx efficiencies we have delivered so far, we are well on our way to delivering the combined $1 billion in expenditure reductions we committed to at the end of March. Now moving to operations. While production and refining volumes were down versus the first quarter, this was not only driven by external demand factors but also by the conscious decisions we made to accelerate and extend planned turnarounds. These adjustments were made to better align volumes with the demand challenges that we saw in the market and to protect the health and safety of our workforce. I'm very proud that the organization was able to complete the significant planned turnaround activities both safely and cost-effectively. With much of this activity completed now, we are well positioned to capitalize on the strengthening market factors and are looking forward to the ongoing recovery. I'd also like to point out that once again, Kearl delivered very positive results relative to our revised guidance. The new crushers continue to support our goals of higher reliability and lower unit operating costs at Kearl. While we reported a loss of $526 million in the quarter, it's important to note that this was in large part driven by challenging upstream price realizations and significantly reduced downstream refinery throughput and product pricing due to weak demand; factors that we have little control over. However, we did take actions to mitigate these impacts and, in the areas we do control, we delivered strong results, and I'll highlight these in greater detail. I would also note that our earnings increased month over month as the quarter progressed. Cash used in operations in the quarter was $816 million, including a working capital headwind of $170 million. Our cash on hand and cash conservation efforts supported capital expenditures of $207 million and a return to shareholders of $162 million by way of our second-quarter dividend payment. This was accomplished without increasing our debt position. So let me say that again, without increasing our debt position. My guess is you have not heard that very often this quarter. While market factors were a significant drag on cash generation in the quarter, cash from operating activities also saw improvement as the quarter progressed and commodity prices strengthened. Combined with cost reductions, operational strength, select growth initiatives, and with a significant portion of our turnaround activity for this year completed, we feel confident about the business going forward. We also remain in a strong financial position, with an industry-low debt-to-capital ratio of 18% and sufficient access to liquidity. All of these factors support the third-quarter dividend that we declared this morning of $0.22 per share, unchanged from the prior quarter. Our balance sheet remains strong, and we ended the quarter with $233 million of cash on hand. Now at this point, I'm going to pause and turn it over to Dan to go through our financial performance for the quarter in more detail.

Thank you, Brad. Our second-quarter results were a loss of $526 million as compared to earnings of $1.2 billion in the second quarter of 2019. Driven by rising commodity prices at the end of the second quarter, our second-quarter 2020 earnings include a non-cash gain of $281 million associated with the reversal of the inventory write-down we took in the first quarter. Looking sequentially and excluding non-cash charges, we were down $900 million from the first quarter of 2020, driven by low oil and product prices and COVID-19 demand impacts. These negative factors were partially offset by the substantial reductions in production and manufacturing expenses mentioned by Brad. Looking at performance by business line, Upstream recorded a net loss of $444 million in the second quarter of 2020, compared to a net loss of $608 million in the first quarter. Excluding the favorable non-cash impacts of the inventory revaluation change in the first quarter and its reversal in the second, results were down about $300 million from the first quarter. These results were mainly driven by lower realizations and lower volumes partially offset by our focused efforts to reduce operating expenses. Turning to the downstream, downstream results decreased about $430 million from net income of $402 million in the first quarter to a net loss of $32 million in the second quarter. Again, excluding the impact of the non-cash inventory revaluation, results were down around $530 million. Results were negatively impacted by lower margins and lower sales volumes. These items were partially offset by favorable foreign exchange effects and lower operating expenses associated with our cost reduction efforts. Chemical earned $7 million in the second quarter compared to $21 million in the first quarter of 2020, with the change primarily driven by lower margins. Looking at cash flow, cash used in operating activity was $816 million in the second quarter, down from cash generation of $423 million in the first quarter of 2020. Cash flow is impacted by negative earnings and unfavorable working capital effects. Nonetheless, we ended the quarter with just over $230 million of cash on hand and as Brad noted, our total debt remained stable at $5.2 billion. Imperial’s liquidity remains strong with substantial undrawn credit facilities, and an industry-leading credit rating, and ready access to commercial paper and term debt markets. Moving on to CapEx, capital expenditures in the second quarter totaled $207 million, down $124 million from the first quarter. Year-to-date 2020 CapEx totaled $538 million down $420 million from year-to-date 2019, consistent with our commitment to reduce CapEx by $500 million and in line with our guidance of $1.1 billion to $1.2 billion for the full year. Reduced year-to-date spending compared to last year reflects the suspension of the Aspen project, completion of the Kearl crushers, lower unconventional CapEx, as well as significant reductions in downstream CapEx. As Brad noted, our ongoing CapEx is focused on ensuring safe and reliable operations of our assets while continuing to progress high-value growth and efficiency projects like autonomous haul trucks at Kearl. Moving on to dividends, in the second quarter, we paid $162 million in dividends at $0.22 a share, an increase from $147 million at $0.19 a share in the second quarter of 2019. As Brad noted, and in case you missed it, we did this without increasing our debt. Our integrated business model and strong balance sheet position us well in this dynamic and challenging economic environment to continue to return cash to our shareholders. Earlier today, as Brad noted, we announced the third-quarter dividend of $0.22 per share. I'll now turn it back to Brad to go over our operational performance.

Thanks, Dan. Upstream production averaged 347,000 oil equivalent barrels a day in the second quarter, reflecting significant turnaround activity at Kearl, Cold Lake, and Syncrude. While volumes were down 53,000 barrels per day versus the second quarter of 2019, we continue to see exceptionally strong performance at Kearl. As I told you on the first-quarter earnings call, we expected upstream production volumes to be negatively impacted in the second quarter as we dealt with the unprecedented drop in demand, as Canada, along with the rest of the world, dealt with unnecessary travel restrictions, self-isolation, and social distancing measures to address the global pandemic. And in fact, we did see our production volumes drop 72,000 barrels per day versus the first quarter, due in large part to the steps we chose to take to optimize turnarounds in the current environment. However, even with the reduced demand we have seen so far this year, we still expect to see a slight year-on-year volume growth, albeit less than originally planned. I would also note that we are not driven by volumes but rather value. At current prices, the value equation drives us to maximize production. So that is exactly what we are doing once the turnarounds are completed. With our focus on reducing cost, our year-to-date production and manufacturing expenses in the upstream are down almost 15% versus the first half of 2019. Now while no one should be surprised that volumes are down this quarter, let me tell you about the positive side of this, and that's Kearl. In the second quarter, we produced 190,000 barrels a day on a gross basis at Kearl, down from 226,000 barrels per day in the first quarter and down from 207,000 barrels a day in the second quarter of 2019. The lower production volumes versus prior quarters are reflective of the revised plan turnaround activities at one of Kearl's two plants. As we spoke about back on our earnings call last quarter, we made the decision to advance and extend our typical second-quarter turnaround at Kearl to roughly an eight-week duration versus four weeks, so that we could better manage the health and safety of our workforce through appropriate physical distancing. The turnaround started in early May and was completed in late June, actually ahead of schedule with less than seven weeks duration and at a 40% lower cost. Our view at the time was that we would see production at Kearl average around 150,000 barrels per day gross in the quarter. So the actual production of 190,000 barrels per day is an excellent result, driven not only by our ability to complete the maintenance activities ahead of plan, but in addition, we have seen the asset perform above expectations outside this turnaround period. Again, a testament to the effectiveness of our new crushers. In fact, despite the significant extension of our plant turnaround, Kearl was still able to deliver a first-half production record, the highest first-half volumes for any year in Kearl’s history. Since the train was restarted and up to the point where we commenced the turnaround of the second train, which I'll comment on in a minute, Kearl averaged nearly 300,000 barrels per day gross production over a period of more than two weeks, which is a strong indication of its capability. Given the success of our revised second-quarter turnaround activities, both in terms of managing health and safety and in completing the same scope of work at a significantly reduced cost, we decided to move up our annual turnaround of the second plant at Kearl. This effort is normally conducted in the late third quarter to early fourth quarter timeframe, but instead, we have now commenced this work as of July 11th, and expect it to be completed in late August. This will leave us well positioned to take advantage of the ongoing economic recovery. Again, the current pricing environment supports maximum production at Kearl once the turnaround is completed. The other thing I would note is that although we had committed to an annual gross production rate at Kearl of 240,000 barrels per day for this year, the decisions driven by the market environment to extend both of our annual turnarounds suggests now that our annual production will be slightly lower, closer to 220,000 barrels per day on an annual average, but still reflecting year-on-year growth. I would like to underscore, however, that this revised production level is not in any way reflective of operational limitations. As I have pointed out, the asset continues to outperform expectations when the environment supports running at maximum rates. In fact, this strong volumes performance is what has resulted in such a small revision to our initial annual guidance, despite the extended duration of the turnarounds. We've seen significant operating expense reductions at Kearl with production and manufacturing expenses for the first half of this year down over 20% versus the first half of 2019, which reflects a unit cost reduction of close to 30% and exceeds our $4 per barrel reduction target for this year. This is in large part due to both the performance of the new crushers and to the way in which we executed the turnaround. By extending the duration, the turnaround staffing levels were more than 65% lower than typical, and we were able to extensively leverage Imperial employees for much of the work. Additionally, we continue to invest in projects that will deliver further value, such as the fleet conversion to automated haul trucks. Altogether, this reflects material progress towards our US$20 per barrel unit operating costs commitment. Moving to Cold Lake, production at Cold Lake was 123,000 barrels per day for the quarter, in line with the 15,000 barrels per day impact we communicated on the first-quarter call related to the planned turnaround work at our Mahihkan Plant, which was an almost five-week effort and is now complete. Year-to-date production and manufacturing expenses at Cold Lake are also down, in fact nearly 10% down, as a result of the cost efficiencies we have been focusing on with that asset. Looking at the rest of the year for Cold Lake, we expect full-year production volumes to be around 135,000 barrels per day, which is slightly behind our original plan of 140,000 barrels per day. The difference is driven mainly by steam management challenges we are currently experiencing at Nabiye. We are also continuing to progress our future growth investment in Grand Rapids, where we will be deploying our SA-SAGD technology to grow volumes and reduce costs and lower greenhouse gas emissions intensity. We've had to slow the pace of development due to COVID considerations with execution but continue to progress it as a high-priority growth opportunity. Syncrude’s average production of 50,000 barrels per day, our share in the second quarter came in at the high end of the 45,000 barrel per day to 50,000 barrel per day range we provided on the first-quarter call. As we've discussed back then, the owners agreed to move forward with a revised turnaround plan whereby the turnaround efforts would be managed as a number of smaller discrete scopes of work, which can be completed by a smaller workforce, enabling appropriate physical distancing. This plan originally had the work running through October, but it now looks like the majority of the work should be completed in September as that turnaround is going better than planned. The key work completed up to this point also provides flexibility around production levels through the third quarter, depending on changes to market conditions. The asset continues to move ahead with the construction of the bidirectional interconnecting pipeline, which will support increased reliability and utilization. This line is still expected to be in service in the fourth quarter of this year. This is just one example of how the asset and the ownership are working together to identify structural changes and capture efficiencies to optimize the operation against the backdrop of a very dynamic market. Now let's move to the downstream. We refined an average of 278,000 barrels a day in the quarter, which was down 66,000 barrels per day versus the second quarter of 2019. The difference is mainly due to reduced runs associated with COVID-related demand reductions and our revised turnarounds, which are progressing very well, I will note. Now let's talk briefly about those revised turnaround plans, which I initially talked about on our first-quarter earnings call as part of our efforts to manage our operations in this current environment. We revised the second-quarter Sarnia turnaround to include primarily just the coker and expanded the duration to reduce onsite personnel. This turnaround started back in April, continues today, and is going very well. We're proud to say that based on progress to date, we expect to complete the turnaround 13% below plan on a cost basis and have kept all of the workforce safe and healthy with our COVID protocols. The work will be completed in mid-August, as per our current plan. Similar to the work at Kearl, the changes here contributed to our reduced expenses in the quarter. We also had a turnaround plan for our Strathcona refinery that was originally expected to start late in the third quarter. In this case, we accelerated the shutdown work into the second quarter, but with significantly reduced scope, and that work has now also been completed. Our cogen project at Strathcona is nearly complete and is expected to be online by the end of August. The cogen will deliver operating cost reductions as well as environmental benefits. These are just a couple of examples of various efforts executed in our downstream business that cumulatively are expected to contribute over $200 million towards the company's 2020 cost reduction efforts. I'm extremely happy to have much of this essential work behind us this year, leaving us well positioned to respond to improving product demands. It's really a testament to the agility of the organization to respond to rapidly changing demand and price signals, especially recognizing that these turnarounds are multiple years in the planning, and we adjusted them in a matter of weeks. I want to emphasize that all business-critical work will be completed as planned to ensure optimum operation once things return to normal. None of the work deferred will impact the safe and reliable operations of these assets. As for how the rest of the year looks, while we are seeing demands for refined products recovering, given the uncertainty in the marketplace, we are not offering updated guidance at this time. We will continue to adjust and adapt as demand and market conditions change. However, with most of our downstream maintenance behind us, we are very well positioned to respond consistent with the recovery and market demand. As with the upstream, our downstream organization has been focused on cost reduction, and our year-to-date operating expenses are down over 12% versus the first half of 2019. On the sales side, petroleum products sales were 357,000 barrels per day in the second quarter, down from 477,000 barrels per day in the second quarter of 2019. Consistent with refining throughput, the demand impacts due to COVID have resulted in volumes that are significantly lower than we would typically expect to see in the quarter. But now a bit more comments on demand for the various products we make and sell. On the first-quarter call, I mentioned we were seeing demand reductions in the range of 50% to 60% on motor gasoline, probably 20% to 30% on diesel and 80% to 90% reductions on jet. Through the second quarter, industry demands did start to recover as various jurisdictions around the country move towards reopening. While current demands vary, depending on several factors including geography, I have seen industry numbers that indicate demands for motor gasoline are approaching 90% of typical. Diesel is in the 85% to 95% range. Gas demand has seen some minor improvement but still sits at only around 30% to 35% of normal, so clearly the most challenged from a recovery standpoint. We saw petroleum product sales increase each consecutive month in the quarter, reflective of the ongoing recovery in the economy. However, I would also point out that in this tough demand environment, our demand for asphalt remained quite robust, and we were able to deliver very strong results in that segment. In fact, we set an all-time production record at Strathcona for the month of May, and sales in the East were at record levels in both May and June, enabled by shifting jet production to Sarnia so we could produce more asphalt at Nanticoke to meet these stronger demands. Shifting to chemicals, our chemical business continues to be profitable in the current market, with earnings of $7 million in the second quarter, although this was down from $21 million in the first quarter. Volumes remained fairly flat, but we continue to experience margin pressure as we've talked about for the past few quarters. However, our strong integration with the refinery and proximity to customers does mitigate this impact. Just before we wrap up, I'd like to also highlight that the Canadian Center for Diversity and Inclusion (CCDI) has awarded Imperial its Employer Initiative of the Year Award for Western Canada, as a result of our benefits focused indigenous business performance in the Athabasca program. We are very, very proud of our relationships with the indigenous communities, especially near our operations. In this particular instance, it all started quite a few years ago with the realization that indigenous communities near our Kearl operation were facing challenges funding a variety of necessities, including housing, power generation, community infrastructure, training, and education. Imperial came up with a novel approach to contracts and partnerships that has benefited all parties. We started providing in-depth support for business development of indigenous suppliers that helps these companies grow and learn to compete in the marketplace. This priority focus on growth in our partnerships with indigenous businesses and communities is happening near many of our operations, and we are pleased to be recognized for this as an example of our commitment to ESG. So now to wrap up, while there is no question that the second quarter was extremely challenging, in fact, probably one of the most challenging quarters in the history of our company. I'm very pleased with our operational results, and how effectively we were able to safely execute our revised turnaround plans. Our turnaround work was completed in a way that not only resulted in significant cost savings but also at a time when the financial impact of the lower production was minimized due to the low price and demand environment. Now that we are seeing some recovery on the demand side, having most of this key turnaround activity behind us positions us well to take advantage of further recovery. Our progress towards delivering the key operating and capital reductions is another highlight. Across our entire business, in all departments in all locations, the company has risen to the challenge and delivered material cost reductions. The savings we delivered in the second quarter should provide everyone with confidence that we will deliver on the annual commitments we are making. These savings also support our ability to continue to deliver returns to shareholders. We again maintained our dividend in the quarter and have achieved this with no change to our debt position. This underscores the financial strength of Imperial and our ability to weather the more challenging times in this cycle. So with that, I'll turn it over to Dave for the Q&A session.

Okay, thanks, Brad. We did have a couple of questions submitted in advance. So I think we'll go to those and then we'll move over to the live Q&A. The first question, Brad, comes from Menno Hulshof with TD. It's on Grand Rapids. The plan as of late last year was to develop the Grand Rapids to Cold Lake declines with startup targeted for 2021. How much has this plan changed given the downturn, and is 2023 still a reasonable expectation for sustained recovery to 150 plus thousand barrels a day?

Thanks for that question, Menno. Grand Rapids continues to be a high-priority growth project for us for the reasons I described, both in terms of its contributions to our cost structure, obviously volumes, which we expect to be quite profitable, and it also has a material impact in lowering the greenhouse gas intensity of our operations. So through this very challenging time, it continues to be a priority for us. We have had to slow it down just to manage COVID safe distancing, which impacts the exit schedule, but the team has been very creative and working hard to see how they can maintain the schedule as best as possible. Our current outlook shows that we would expect to complete the first pad and be able to start injecting steam in early 2022 and would have volumes produced thereafter. At this point, we're still quite optimistic that by 2023 we will see a substantial contribution from Grand Rapids. Obviously, that is a key enabler to us sustaining recovery to 150,000 barrels a day. When we have our Investor Day in November, our plan is to give a complete update on Grand Rapids as well as Cold Lake in general, and we will talk more specifically to what that volume profile looks like in the years. So thank you for that question.

And Menno also had a follow-up. With the full understanding that it’s still very early days in terms of setting the 2021 budget. Can you directionally talk us through some of the key considerations across your upstream and downstream assets assuming the strip?

Yeah, and I assume you're mostly talking to our capital budget in that regard. And you are right. It is early days; we're right in the middle of our business planning cycle, which we would expect to conclude over the next couple of months. Where we started this year, of course, was we expected to have capital spending at the $1.6 billion to $1.7 billion level and we very purposely adjusted that in light of the market conditions to a lower number of $1.1 billion to $1.2 billion. As you heard in my comments and Dan's comments, we're well on track to delivering that. If you were to assume that we would end up the year somewhere around that $1.1 billion to $1.2 billion range, I think we're going to find ourselves somewhere close to that number for next year, maybe a bit higher. I don't see us returning to the $1.6 to $1.7 billion range, but we'll be somewhere in that range. The key is that we're approaching next year very much as we are currently where we absolutely have to progress the sustaining capital projects that maintain safety, integrity, and reliability of the operations. We do have some high-value selective growth projects, like Cold Lake that I just spoke to, and we've got some in the downstream, as well as infrastructure projects as well. We want to progress those as timely as we can. A big question right now is, what will the COVID situation look like as we finish up this year and move into next year? And so because of that, we're going to maintain flexibility with our plans, just as we did this year. Again, in November at Investor Day, we'll paint a more clear picture of exactly what that updated guidance is for next year. But as I said, it's going to be somewhere in the range between where we end up this year versus where we expected to start this year.

And the next question comes from Prashant Rao at Citi. Debt remained controlled through the quarter expectedly net debt-to-capital moved up. Does it feel like where the balance sheet’s been at the end of the quarter as pretty much the high end of where leverage will go during this downturn, or is there room to gear up a bit more, if needed?

Well, I might turn that over to Dan, and let Dan talk a little bit about where we are with debt-to-capital and our views there.

Sure. Clearly, we have plenty of ability to leverage up if that is what's needed. We have quite a bit of undrawn committed facilities. We have ready access with our credit rating and commercial paper in term debt markets, as I said. The question is, why we need to do that, and that's going to depend on market conditions. I think we're optimistic with market conditions and pricing has improved quite dramatically from a really kind of horrific April to June, being a much better month for the industry. With those kinds of continued improvements, we're optimistic we won't have to increase debt. But obviously if we do, we have the capability and we'll do that as needed.

Prashant had a follow-up. Also, how do downstream utilization trends sequentially through the quarter? And based on 3Q to date, is 80% plus a reasonable expectation for the third quarter? Related to this, can you please discuss how the impacts to your downstream network due to the pandemic may have differed from peers, both Canadian and U.S.?

Okay, thanks for that question, Prashant. Over the course of the quarter, obviously a lot of volatility. Certainly, we changed our turnaround plans, as I described, and that moved some significant downtime into the quarter, especially with Sarnia, which is continuing. We had some smaller downtime events at Strathcona, as I mentioned, as well. That was kind of the foundational piece of it, which again, we made those decisions based on our assessment of significantly reduced demand for our products. Every day that downstream organization is optimizing their crude runs around what the demand profile looks like. That was sharply down in the month of April. We saw it pick up in May and June. As a result, over the quarter, our utilization ranged from 60% at the low end back in April to 75% at the high end, and in June, July was also kind of in that range of around 75%. Who knows what the rest of the year will look like at this point? Again, we're going to be well positioned to operate at high utilization rates should the market demand and the economics be there to support that. We're very encouraged by some of the demand profiles we're seeing, as I talked about, in all three key segments. Motor gasoline, we're seeing improvements; diesel, we're seeing improvements. Even in jet, we're seeing some improvements. Now those improvements have been right here at the peak of the summer months, and as we all know, unfortunately, we are seeing some increased COVID cases across the country. So a big question, as to what that recovery period will look like? We continue to be optimistic that we'll continue on this positive trend. But there's still uncertainty with that. Your question about how these impacts compared with our peers, both Canadian and U.S.? I think they're very much in line with what we've seen across the industry. Although, each operator is having to make individual choices based on kind of their own specific economic situation. But I feel very good about where our downstream is positioned, coming out of the second quarter, and now moving into the third quarter. Thank you for that, Prashant.

Okay, we're going to switch over operator to the live Q&A. We just asked folks please to, as usual, ask one question and one follow-up.

Our first question comes from Greg Pardy with RBC Capital Markets. Your line is open.

Thanks, hey. Good morning, all. Brad, you touched on the steam management challenges at Nabiye and I was just wondering if you could add a bit more color there in terms of how problematic it is? I mean, I bet that project has had a checkered past, I think as we all know. But just wondering if you can round that out a bit?

Yeah, Greg, good to hear from you. And thanks for the question. Nabiye has been a challenged project for us, mainly because of the reservoir performance and some surprises there with how the reservoir is responding to steam. We continue to learn from that and we have seen some even slightly lower production than what we had anticipated for this period of the year. That's causing us to slightly revise downward our thoughts on Cold Lake for the year. I would still say it's nothing too material in the context of Imperial's overall oil production volumes. The bright side, the upside is that with Grand Rapids, we're going to put that unused steam to good use and efficiently develop the Grand Rapids reservoir. So, not probably more, and we’ll take more time at the Investor Day to talk about Nabiye. But I wouldn't be overly concerned about it in the big picture of Imperial. And as you just heard, we are compensating for any slight Nabiye reduction with what's going on with Kearl.

Yeah, no, for sure, for sure. And then just the second question I guess just on crude by rail movements. We know that's a pretty dormant market right now. But can you comment on maybe how much you had moving in the second quarter? And then what the thinking is to the balance of the year? It's got to be pretty limited, I would think just given spreads, but wanted to ask that anyway?

Yeah, no, it's a fair question. Normally, I would cover it in my remarks at the front end of the call, but you're exactly right. It has been very limited this quarter. So I didn't really feature it. But in direct answer to your question, over the quarter we moved on average about 15,000 barrels per day. But that was all third-party volumes. So for Imperial volumes, we did not move any on rail over the quarter. As we look forward, to the rest of the year, as we've always said, having rail available to us is a very strategic insurance policy for us to ensure that we have multiple avenues of egress for our produced volumes. As production continues to pick up over the course of the year, it's very possible that rail will come back into the mix especially depending on the arbitrage for movements between here and the Gulf Coast. It's possible that it will pick up at the end of the year. But as we sit here today, it has very limited utility. In fact, I think even Genscape shows that over the entire industry, there are probably 30,000 to 45,000 barrels a day is all that's moving on rail right now. A lot of that is just because there's surplus capacity in pipe, which of course generally is the more cost-efficient means of transportation. Again, we're starting to get signals that some of that surplus capacity is about to get consumed as we move well into the third quarter or so. So again, that may come back into question.

Right. Understood. Thanks very much.

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

Hi, good morning. Thanks for taking my question. Brad, appreciate your thoughts around egress and differential there. I guess just taking it one step further, obviously, we've seen some headlines around Line 5 and DAPL. I guess, just wanted to get your perspective. There's risk of Line 5 being disrupted for an extended period, maybe talk about your flexibility and optionality there for your refineries in eastern Canada? And for DAPL, just curious in terms of you have any thoughts? If there's an extended disruption, what impact that might have on some of the synthetic and NSW differentials on that side?

Yeah, thanks for your question, Benny. In terms of Line 5, we saw a very short-term disruption last month as a result of some concerns about that line, but fairly quickly, we were able to work with the regulator and convince them that the integrity was sound and it was appropriate to put it back in service, and got support for that. That's where we are today. We feel quite good about the reliability of Line 5 going forward based on our understanding of the nature of those concerns. We really don't view that there's much risk for us to have any extended interruption on Line 5. Having said that, the interruption we had obviously caused us to mobilize contingency plans. Through that, we were able to put plans in place that would sufficiently cover our refinery demands, both with the potential for alternate pipeline supply as well as rail and if needed, even waterborne supplies. Our downstream team reacted very quickly to make sure there would be no interruption to our operations. Fortunately, there weren't, but that has given us confidence going forward as well. In terms of DAPL, it really doesn't affect us directly. We're not acquiring any Bakken crude directly from that system. Certainly, it has the potential with an extended outage that it could impact the differentials on light crudes, and of course, our refineries on balance run a light slate. Any widening of that differential could certainly be advantageous for us.

Got it. I appreciate those thoughts, Brad. My second question is really around the interconnect pipeline with Syncrude. Just curious in terms of how strategically and how you guys manage that project is going to change going forward. It's increasingly more tied to run core assets and how they operate it? Just curious in terms of how you guys think about that commercially and strategically? And correct me if I'm wrong, but I believe that the partners are responsible for managing their own barrels. If that is the case, then how does that change going forward when there's much more interconnect within those two plants?

Yeah, Benny, I guess what I would say is, first of all, this project is viewed as having balanced strategic benefits between both Syncrude and Suncor. That underpins the commercial framework that's in place. Broadly speaking, having that interconnection does provide flexibility for both operations during periods of planned and unplanned downtime. By having that flexibility, it should allow for overall improved production. That's the objective. It's not appropriate for me to get into the commercial terms of that. But needless to say, the partners are all actively engaged in how those decisions are made, how the pipeline is operated, and how the value is shared, to make sure it's all fair and appropriate. We feel very good about having that additional flexibility for Syncrude.

Great. Thanks, Brad.

Thank you. And as I mentioned, Benny, it is progressing towards fourth quarter startups. So that's very positive, that we've been able to kind of keep that moving ahead during the pandemic.

Hi, good morning. I just have one question, and it's around your latest view around M&A. I guess the question is now that we have seen a couple of instances in the market. It seems like modest premiums are perhaps more manageable by potential targets. What are the hurdles that you think of, if at all, when you think about inorganic transactions?

Yeah, thanks for that question, Emily. As you can imagine, we're watching that space very closely. M&A is something that we do look at; we do consider as we think about what are prudent investment choices and growth choices for the long-term? As I've shared with you and others on earlier calls, we are keeping that aperture open for any potential opportunities that we think would make very good strategic economic sense for us and our shareholders. The market continues to be, I think, a bit volatile when it comes to M&A. I don't really speak to the two key transactions that were announced in the last month. I'm going to say clearly there was a very unique fit between the purchaser and the seller, and that's what allowed those transactions to go forward. I would still say on balance, there is probably a pretty wide, if you will, bid-ask spread between sellers and buyers that is driven by different views of the price market. Now we have seen a little bit more stability in the month of June and now into July with crude prices, so maybe that does create some space for alignment. But I think that's the biggest question mark right now, especially if people are wondering if the COVID recovery is going to continue on the current path or if there's going to be a setback. All those things weigh heavily on investors' minds. I think it's going to continue to be a fairly slow M&A market in the foreseeable future. There might be some one-off transactions, but I don't think there's going to be a big wave sparked by these most recent transactions. Thanks for your question, Emily.

Thanks. Good morning. Brad, thanks for all the details on Kearl. If I could follow up on that. You've been able to ramp up production up and down fairly successfully. The supplemental crushers have clearly helped, and you're exceeding the unit cost production target. Could you provide an estimate for, let's again, it's a moving target on WCS pricing, where revenues cover your variable cost, and then I thought I heard you talking about maximizing production at current pricing. Could you elaborate on that?

Yeah, thanks for that question. Again, Kearl’s a very positive story for us. Certainly, being able to have a highly reliable operation with a continued improving and increasingly competitive cost structure puts us in this position where we do want to maximize production. We have seen, although, prices in April and May were very challenged, and realizations were very low. In the month of June, we have seen the prices recover pretty significantly, at least relative to where we were. In terms of WTI, we've seen that pretty stable in that $41 and $42 range. Equally important to Kearl is what happens with the differential, and as you mentioned, the WCS differential has actually strengthened and remained quite tight over the last couple of months. That results in realizations for Kearl that are quite competitive for us, quite profitable for us. That's why we're keen to get this turnaround behind us. We'll be there in just a few weeks. There should be no barriers for us maximizing production that Kearl and maximizing cash flow at Kearl. As I said earlier, I'm just super thrilled with the performance of the organization, not just in volumes but especially what they've been able to do on the cost structure. When we set out our expectations back at Investor Day for that $4 per barrel reduction in unit cost, that was going to get us in the mid-20s by the end of this year. Now I'll just tell you we're operating every day in the low 20s now, so this ultimate target of $20 a barrel is just around the corner for us. So I'm quite encouraged by that.

Appreciate that; that's very helpful, Brad. If I could follow up on the cost turnaround that you mentioned, I thought 40% lower cost in the program. Outside of labor costs, such as moving away from contractors, what are some of the other areas of savings? Any particular buckets that you want to highlight that could be used in future turnarounds?

I would like to mention a few things, starting with technology, which I consider a crucial enabler. For instance, we have large pieces of equipment that require inspections during turnarounds, even if there aren’t any issues. We want to ensure they are operating correctly and check for corrosion or integrity concerns. Previously, this would involve extensive cleaning and safety preparations, often requiring scaffolding inside the vessels. Now, we are using drones for these inspections. We have been utilizing drones for external inspections for years, but we are now also using them for internal inspections. I have seen the images, and the visual clarity is impressive. This innovation significantly reduces the preparation costs for inspections, makes the actual inspections more affordable, and allows us to complete them much faster. All these improvements provide great value. That's just one example. Our team is also collaborating closely with business partners on procurement and material costs, which is proving beneficial. We have managed to conduct the turnaround with reduced overtime costs. These are a few examples I wanted to share.

Thanks. Good morning, everyone. My question was just asked. My second one though, could you guys just remind with the cogen at Strathcona how we should be thinking about, I guess, margin improvements today or once that starts up? Obviously, we probably have an escalating benefit over time if clean fuel standards get implemented, etcetera. But what should we be baking into our models for that? Thanks.

Yes. Thanks for that question, Mike. The Strathcona cogen project is a really important project for us, both in terms of the efficiency gains for power and energy consumption but also for emissions improvements. I don't have at my fingertips what the actual cost savings of that will be, but certainly we can follow up with you offline. But it's a very beneficial project for us.

Okay. Well, thank you, everybody. Thanks for joining us this morning. I'd just like to remind you, as always, if you have any further questions, please don't hesitate to reach out to the IR team. We're happy to help. And just like to wish everybody all the best. Thank you very much.

Thanks, folks.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Everyone have a good day.