Imperial Oil Ltd (IMO) Q2 2021 Earnings Call Transcript

Good day, and thank you for joining us. Welcome to the Imperial Q2 2021 Earnings Call. I will now hand the conference over to your host, Mr. Dave Hughes, VP of Investor Relations. Please proceed. Thank you, Grace. And good morning everybody. Thanks for joining us on our second quarter earnings call. I’m here today with Brad Corson, Chairman, President and CEO; and as usual with Brad, as the senior management team, Dan Lyons, Senior Vice President of Finance and Administration; Simon Younger, Senior Vice President of the Upstream; Jon Wetmore, Vice President of the Downstream; and Sherri Evers, Vice President of Commercial and Corporate Development. First thing I need to do is read the cautionary statement. Today's comments include reference to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in Attachment VI of our most recent press release and available on our website with the link to this conference call. Today's comments may also 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. All of those documents are available on SEDAR, EDGAR and on our website. So, I would ask you to please refer to those. So, we are following our usual format today. Brad is going to start out offering some opening remarks and then Dan is going to provide a financial update. And then we'll go back to Brad for an operational update, following which we'll go into the Q&A Session. So, with that, I'll turn it over to Brad.

Thank you, Dave. And good morning, everybody. And welcome to our second quarter 2021 earnings call. I hope each of you and your families are doing well and continuing to stay healthy. It's great to see the high levels of both first and second vaccinations we are achieving here in Canada and the significant reduction in case counts across the country. Hopefully, this is bringing some sense of normalcy back to all of our lives, which is desperately needed. However, we do recognize we're not out of the woods yet, given what we are seeing globally and here in Canada, with respect to the variants. Think about how to best characterize the second quarter. First on the market side, we saw another quarter of increasing commodity prices, but with continued slow recovery in demand. From an operational perspective, we continue to deliver very strong performance. As we talked about on our first quarter call, we had plans to execute a significant amount of maintenance this quarter. I’m pleased to say this maintenance was executed successfully, and now that most of our scheduled downtime is behind us, we are in great shape heading into the second half of the year. This is especially exciting as we've seen many of the pandemic-related restrictions in Canada lifted and are looking forward to seeing a more pronounced recovery in demand. So, I'm very pleased with the strong execution of our plans and the subsequent results this quarter. And likewise, I'm very excited about the momentum we're now carrying into the second half of the year. Over the next few minutes, Dan and I will detail the results of what was a very strong second quarter for us. So now let's turn more specifically to those second quarter results. Earnings for the quarter were $366 million, and our cash from operating activities was $852 million, both down slightly from the first quarter, but very much as expected, given our turnaround activities. We saw improvements in crude prices through the quarter although our ability to fully capture this improved market environment was impacted by the high level of turnaround activities that I mentioned. We've delivered a strong first half of 2021, underpinned by the actions we took last year and are building on this year to maximize the value of our existing assets. Not only was our operating cash flow in the quarter higher than in the second quarter of 2020, it was actually higher than all four quarters of 2020 combined. Our upstream continues to perform very well. I'll talk more about each asset in a few minutes. But I want to take just a moment now to highlight a major milestone we achieved at Kearl. I'm excited to let you know that we are implementing a new strategy this year to extend intervals between turnarounds at Kearl. Consequently, we will only have a single annual turnaround starting this year, which we just completed instead of the two we have typically had in the past. The Kearl turnaround that was originally planned for September, October this year has now been canceled. While we have been talking for some time about our intention to make this change, I'm pleased to say we are delivering this a year ahead of schedule. This is due to the progress we have made on our multi-year reliability improvement plans and specifically the work we've been doing to prepare for this capability over the last several years. Kearl’s demonstrated performance gives us the confidence to accelerate our plans. This type of performance underpins our strong cash flow generation, which in turn supports our focus on shareholder returns. During the second quarter of 2021, Imperial returned over $1.3 billion to shareholders through share repurchases and dividend payments. This compares to just over $900 million for all of 2020. In June, the company announced the renewal of its share repurchase program, allowing us to repurchase up to 5% of our outstanding shares over a 12-month period ending on June 28, 2022. I would also like to briefly highlight the launch of the Oil Sands Pathways to Net Zero alliance. Imperial is very proud to be one of the five founding members of the alliance, which combined account for around 90% of Canada’s oil sands production. As a group, we are committed to working together along with our federal and provincial government counterparts, with the goal to achieve net zero greenhouse gas emissions from oil sands operations by 2050. This level of emissions reduction is clearly a significant task we face, and we look forward to working together with our industry and government partners to overcome this challenge. It is also a further example of why Canada continues to be the best place globally to produce oil. As we have talked about in the past, Canada continues to lead all major reserve holders in all three aspects of ESG: environmental, social, and governance. This unprecedented alliance serves to further underscore how important Canada is as a producing nation and the role we play on the global stage. The first phase of this foundational project is a major carbon capture utilization and storage trunk line connected to a carbon sequestration hub, which will enable multi-sector tie-in projects for expanded emissions reductions. This is only the start, and we believe that through collaboration, Canada has what it takes to be the responsible energy provider to the world. With that, I’ll now turn it over to Dan to go through our financial performance for the quarter in more detail.

Thanks, Brad. Getting into the financial results for the quarter, our net income in the second quarter was $366 million, up $892 million from the second quarter of 2020, or up almost $1.2 billion when looking at earnings excluding identified items. This increase was driven primarily by stronger upstream realizations in volumes and by stronger margins in the downstream and chemicals. Now looking sequentially, our second quarter net income of $366 million is down $26 million from the first quarter of this year, as higher realizations in the upstream were more than offset by the impact of significant turnaround activity at Kearl, Syncrude, and Strathcona, which together reduced earnings by about $400 million, as well as weaker realized margins in the downstream. Looking at each business line, the upstream recorded net income of $247 million, up about $170 million from the first quarter’s net income of $79 million driven by higher realizations, partly offset by lower volumes as a result of turnarounds at Kearl and Syncrude. Downstream net income was $60 million in the second quarter, down from $292 million in the first quarter, with the lower earnings reflecting the impact of a 55-day turnaround at Strathcona, along with lower realized margins driven by timing impacts. Our chemicals business demonstrated continued strong performance in the second quarter, earning $109 million compared to net income of $67 million in the first quarter, making the second quarter of this year the highest quarterly results for our chemical business in over 30 years. These strong results continue to be driven by higher margins. Moving on to cash flow, in the second quarter, we generated $852 million in cash flows from operating activities, or $893 million, excluding working capital effects. Despite the execution of three major turnarounds, our free cash flow in the second quarter was $645 million, bringing our free cash flow for the year to just over $1.5 billion, up $2.4 billion from last year. These strong cash flows enabled us to return over $1.3 billion to shareholders in the second quarter, mainly via share buybacks while still ending the quarter with a cash balance of almost $800 million. Looking ahead, with our major turnarounds complete, strong commodity prices, improving product demand, and continued capital discipline, we are well-positioned to generate substantial free cash flow over the remainder of the year. Now, moving on to CapEx, capital expenditures in the second quarter totaled $259 million, up about $100 million from the first quarter, reflecting a continued ramp-up in activity, including increased spending related to the Sarnia Products Pipeline and the Downstream and the Kearl in-pit tailings project in the Upstream. Consistent with our previous guidance, we continue to expect capital expenditures for the year to be about $1.2 billion as spending continues to ramp up on the Sarnia Products Pipeline and the Kearl in-pit tailings projects and as we increased spending on volume sustainment at Cold Lake, as well as mine progression and efficiency projects at Kearl, including converting additional trucks to autonomous haul and recovering heat from Boiler Flue Gas. Shifting to shareholder distributions, as I previously mentioned, we returned over $1.3 billion to shareholders in the second quarter, repurchasing about $29.4 million or 4% of our outstanding shares for about $1.2 billion in May and June and paying $160 million in dividends in April at $0.22 per share. On June 23, we announced that we would be renewing our share repurchase program as of June 29 to repurchase up to 5% or about $35.6 million of our outstanding shares over the following 12 months. In early July, we paid our second-quarter dividend of $0.27 per share, an increase of around 23% from the first quarter dividend. Earlier today, we announced that we will pay a third-quarter dividend of $0.27 per share on October 1. These actions demonstrate our confidence in the future and are consistent with our longstanding commitment to return surplus cash to shareholders. Now I’ll turn it back to Brad to discuss our operational performance.

Thanks, Dan. So now let me talk about our operational performance in the second quarter. Upstream production averaged 401,000 oil equivalent barrels a day in the second quarter, which was up 54,000 barrels per day versus the second quarter of 2020. This represents our highest second quarter production in over 25 years. The increase was a result of very strong operating performance. Although we were in the very early stages of the pandemic in the second quarter of last year and we're taking steps to manage production levels in a highly volatile market environment at that time. It's also notable that the second quarter of this year was a quarter where we had significant plan maintenance. Production was down 31,000 oil equivalent barrels per day versus the first quarter of 2021, mainly due to the significant turnaround activity at Syncrude. I'll now talk in more detail about each asset, starting with Kearl. As you may recall, last quarter’s Kearl production set a best-ever mark for the first quarter, and that strong performance continued through the second quarter. Kearl is really delivering now. Total gross production was 255,000 barrels per day, which is actually up 4,000 barrels per day from the first quarter of 2021. This is not only the best second quarter production throughout Kearl’s history, but also the second-best quarterly production ever for any quarter at this asset. What makes this even more impressive is that these records were achieved during a quarter with a major turnaround, a turnaround that was completed on time and on budget during a challenging period in the Wood Buffalo region due to the pandemic. The highest production quarter was the fourth quarter of 2020, which was a quarter with no turnaround. I would also note that eight of the last nine months have been individual monthly production records for Kearl. The exception was May of this year, which was just short of the previous best-ever May by around 3,000 barrels per day, due to the turnaround this year. I look forward to next May when we'll take another shot at that record. And at 311,000 barrels per day in June, June is now the highest production month on record for Kearl. As of yesterday, July 29, Kearl’s production for the month has averaged just over 290,000 barrels per day, which puts us on track for another monthly record for the month of July. This strong performance just continues. This is the point at which I would normally be providing some comments on the second annual turnaround at Kearl. However, as I mentioned earlier, we won't be having one this fall. Moving to a single turnaround per year, effectively doubling the maintenance intervals, is something we've been talking about for a long while as a key part of our journey to 280,000 barrels per day. At our Investor Day last November, we indicated that we would be taking the step in 2022. Advancing these plans by a full year is a testament to all of the work that the Kearl team has done over the last few years as part of our overall reliability improvement strategy. With this in mind, and as a result of the strong performance, the asset continues to demonstrate, we are raising our Kearl annual production guidance for 2021 to 265,000 total gross barrels per day, which represents an increase of 10,000 total gross barrels per day relative to our earlier guidance. I wanted to take a minute to talk about unit cash costs at Kearl, which continue to be a positive story as well. We've discussed a target unit cash cost of US$20 per barrel, all-in at Kearl, and highlighted that we were very close to reaching this target late last year and with a firm commitment for this year. We continue to focus on reducing our operating costs and are making great progress. Unit costs are down year-to-date almost C$3.50 per barrel versus 2020. However, I would also note that while the strong Canadian dollar is creating some pressure on this U.S. dollar equivalent, we continue to target US$20 per barrel for full-year 2021. I'm also pleased to report the start-up of the first Boiler Flue Gas heat recovery unit at Kearl. This technology will allow us to recover heat from boiler exhaust and use it to preheat process water. This is exciting not only because it provides operating cost reductions, but it is also estimated to reduce emissions by up to the equivalent of 30,000 tons per year of carbon dioxide. That's on a single boiler. We have five additional boilers that we plan to apply this technology to as we continue to take steps to reduce the greenhouse gas intensity of our operations. This is a great example of emissions reductions efforts that also deliver value to the bottom line. So now let's talk about Cold Lake. Cold Lake had another strong quarter as well, with production of 142,000 barrels per day. This is up 2,000 barrels per day versus the first quarter and up 19,000 barrels per day versus the second quarter of 2020. The second quarter of 2020 had a high level of planned maintenance, whereas we had relatively light maintenance activity in the second quarter of this year, as I mentioned on our first quarter call. While this accounts for a large part of the year-on-year increase we realized, the improved reliability and optimizations we made at Cold Lake are also contributing to the strong performance. Given this strong performance, full-year production is now expected to be 135,000 barrels per day, an increase of 5,000 barrels per day over our prior guidance. I will also note that we do have some additional minor planned maintenance at the Mahihkan plant in the third quarter at Cold Lake and estimate the production impact to be around 2,000 barrels per day over the quarter. Now, moving to Syncrude. Imperial's share of Syncrude average production was 47,000 barrels per day in the second quarter. This was down 32,000 barrels per day versus the first quarter and down 3,000 barrels per day versus the second quarter of 2020. This drop is due to the large turnaround on one of the cokers at Syncrude during the quarter. By comparison, Syncrude did not have a turnaround in the first quarter of this year. Recall the turnaround originally planned for the second quarter of 2020 was deferred due to the pandemic and did not start until later in June. Most of the major work was completed within the second quarter and impacted most of the quarter. However, as you recall, we talked on the first quarter call about the COVID-19 outbreak in Wood Buffalo at that time. I would note this did impact the turnaround to some extent, as the outbreak necessitated executing the work with a reduced workforce. The turnaround was completed in 95 days versus an original plan of around 80 days. On a very positive note, I would also highlight that the asset did leverage the new interconnecting pipeline between Syncrude and Suncor’s base plant to allow the export of bitumen for the first time in the asset’s history in late June, which helped mitigate some of the impact of the extended turnaround. Looking forward, there is no more turnaround maintenance planned for the asset for the rest of the year, so we would expect to see strong production going forward. The owners continue to focus on the transfer of operatorship and still expect this to be complete by the fourth quarter. Just for completeness, I would note that there are no changes to the production guidance for Syncrude. Let's move to the downstream. We refined an average of 332,000 barrels per day in the second quarter, which was down 32,000 barrels a day versus the first quarter but up 54,000 barrels a day versus the second quarter of last year. Utilization in the quarter was 78%, which was down from 85% in the first quarter but up from 66% in the second quarter of 2020. The higher utilization versus the second quarter of 2020 is reflective of the demand recovery we have seen since last year. The lower utilization versus the first quarter of this year is due to the major planned turnaround at our Strathcona refinery. This turnaround started in early April and was completed on schedule and on budget by the end of May, having an overall impact on throughput of about 70,000 barrels per day in the quarter. Strathcona represents almost 50% of our refining capacity in the country, so a turnaround of this magnitude does impact the downstream financial results. While on average, Western Canada saw some stronger industry margins in the second quarter, the margins were lower in June, which was when Strathcona completed their turnaround and resumed full production. This impacted our ability to fully capture the stronger industry margins in the quarter. After the successful completion of the Strathcona turnaround, overall refinery capacity utilization has increased to around 93% in June. Looking forward, we do have some further planned maintenance activity later this year, but not on the same scale as the second quarter. This specifically involves a small turnaround at our Nanticoke refinery starting in mid-September and running until late October. This is expected to have a small impact on utilization and margins in the quarter. Petroleum product sales in the second quarter were 429,000 barrels per day, up to 15,000 barrels per day from the first quarter, and up 72,000 barrels per day versus the second quarter of 2020. The improved sales in both cases are driven by strengthening demand as the country eases many of the pandemic-related restrictions. Although the second quarter for Canada was still limited by the pandemic and associated lockdowns, as of June, we were seeing industry fuel demands around 90% of normal for gasoline and around 50%, which is a significant improvement versus prior quarters. Now, with diesel remaining close to historical levels, we expect to see continued strengthening in the demand for motor gasoline. Most jurisdictions in Canada have effectively lifted their lockdowns, and Canada has now surpassed the U.S. in administering first and second vaccine doses. We fully expect that this, along with the fact we are now in the summer driving season, will result in a further increase in gasoline demand in the quarter. We also launched the redesigned Synergy Supreme premium gasoline at Esso stations across the country. This is very exciting as this new formulation will help keep engines three times cleaner and also offers enhanced engine protection. Our chemical business continued its outstanding performance as well, delivering an impressive $109 million earnings in the second quarter, the highest quarterly earnings in over 30 years. This also represents a significant increase of $42 million versus the first quarter of 2021 and $102 million higher than the second quarter of last year. Chemical volumes have continued to stay strong as have margins, which continue to be impacted by supply challenges and demands within North America. To sum it up before we move to the Q&A session, the second quarter demonstrated Imperial's resilience by delivering strong financial and operating performance in a quarter where we had a significant amount of planned maintenance. That strong performance underpins the increase in our annual production guidance by 15,000 total gross barrels per day, as well as our ability to return material amounts of cash to our shareholders. I would also reiterate our ongoing focus on cost discipline and long-term structural enhancements. While the last year and a half has been marked by a high degree of market volatility, our attention on what we can control ensures that we continue to maximize shareholder value. I look forward to continuing along this path as the year moves forward. With that, I'll turn it back to Dave to facilitate the Q&A session. Thank you.

Okay. Thanks, Brad. As usual, we had a few questions pre-submitted, so I think I'll start by going to a couple of them. Our first question comes from Phil Gresh at JPMorgan. One of your oil sands peers referenced approximately 10% inflation risks on CapEx. What are you seeing here? From an activity level perspective, how are you thinking about any potential changes to your plans from last year's Analyst Day, given the higher prices? Are you seeing any OpEx inflation headwinds?

Well, thanks for that question, Phil. Let me first comment on CapEx and then I'll comment on OpEx. We do see some pressure from inflation, particularly on steel prices, but it's really not having a significant impact on our overall operating and capital plans, given the nature of our projects, our current activity levels, and really our ability to find offsets. For example, one of our key capital projects is the Sarnia Products Pipeline, which by its nature has a lot of steel associated with it, but here we've already purchased most of the pipe and valves required for that project. We really have limited exposure at this point to inflationary pressures. Another major project for us is our Kearl in-pit tailings project, but that project mostly involves earthworks, so there's really limited pressure caused by steel inflation and it's not really material. Now shifting a little to operating costs, I think it is fair to say that we are seeing higher energy costs driven by natural gas pricing, especially compared to a year ago. This is impacting some of our costs. But when you set that aside, actually our company-wide operating costs are essentially flat with the first half of last year.

Okay. And Phil had a follow-up. What's your latest thinking on temporary versus permanent operating expense savings relative to the $1 billion you took out in 2020?

Well, thanks, again for that question, Phil. Just to remind you and everyone, last year we were able to reduce our operating costs by about $1 billion versus the prior year. About 50% of that cost savings was structural, and the other 50% were more temporary or one-off type impacts. As we moved into this year, we had a very strong focus on trying to maintain that full $1 billion of savings. Where there were things that were temporary or one-off in nature, we are working hard to offset them in all parts of our business. I'm quite pleased that we are making progress on that. Other than some pressures we're seeing from energy costs, especially on fuel gas purchases, other than that, we are maintaining pretty flat levels of costs versus last year.

Okay. Operator, can we move over to the live Q&A line now, please?

Your first question comes from the line of Dennis Fong from CIBC World Markets. Your line is open, sir.

Hi, good morning. Thank you for taking my questions. The first one really relates to Kearl. Obviously, you guys have showcased a lot of good work there, driving stronger throughput and production. Just referencing back to 2019 and 2020 investor days, you outlined six items that could help drive production levels to 280,000 barrels a day. In one of the previous conference calls, you kind of indicated that some of those initiatives had already been completed, which seems like part of the driving factor to raising full-year guidance at Kearl. I was just curious as to what some of the remaining incremental projects you have left to help drive you to that 280,000 barrels a day, given your accelerated timeline of switching to one turnaround a year?

Yes. Thanks. I appreciate your recognition of the progress we're making on our journey at Kearl. No pun intended, but Kearl is a rockstar for us. They just continue to deliver in many ways ranging from reliability improvements, other volume enhancements, cost reduction initiatives, a whole range of things. We laid out a core strategy to enable us to ultimately achieve 280,000 barrels per day over several years. A couple of initiatives that are still a focus involve further debottlenecking of our equipment there at Kearl, which will allow higher throughputs. We're also continuing some mining and resource optimization activities. Digital is still a key focus area for us. There are still more initiatives focused on getting us to 280,000 barrels a day. However, as you're seeing, we're accelerating that plan to raise our guidance to 265,000, obviously puts us much closer to 280,000. I look forward to our November Investor Day when we'll give an update on the timeline to reach the 280,000 target, but rest assured it's going to be quicker than what we projected in the past. Thanks for the question.

Great, thanks. One quick follow-up here. Shifting over to capital allocation. Obviously, you've outlined multiple ways that you're returning cash back to shareholders through the share buyback program and your dividend, as well as continuing on a core focus capital program, which is optimizing your base production and kind of carrying that through this year. Given the stronger oil price environment, you're looking to pay back a significant amount of debt just because there are no other options at the time being for allocating capital. How are you thinking about just that thought process? What do you think is an appropriate capital structure? What are the other alternatives you are looking at with respect to capital allocation? Thanks.

Yes, good question. And Dan is here. I'm going to let Dan talk about our approach to capital allocation and our view on the best use of cash. Before I turn it over to him, I would say we do not necessarily view it as a priority to pay down debt; we believe there are better uses of our capital. So, I'll let Dan talk about that.

Yes, our debt levels are low on an absolute basis relative to our peers. The cost is low. It's always an option, but as Brad said, it's not a priority. We've said that we remain committed to returning surplus cash to shareholders. If you look at today's commodity prices, I kind of talked a little bit about in my comments, with the production levels we have going forward, we could see very strong cash generation. We start as always with a reliable and growing dividend. After that we have the NCIB, and we just completed the 4% amendment over a couple of months. Now we have the new one we launched for 5% over the next 12 months. We could still grow cash balances significantly net of all that. Our commitment to return surplus cash remains. We have to look at other methods of share buybacks; we have to look at special dividends, and we haven’t made any decisions in that area. The key message is we are committed to returning surplus cash.

Thanks for those questions.

Okay. Brad, we have a couple more that were pre-submitted, so I’m going to go to those right now. The first one comes from Menno Hulshof at TD. Can you quantify the impacts of the extension of the turnaround interval at Kearl in 2022 and beyond—downtime, unit costs, turnaround costs, et cetera? Is the plan to apply this approach to other projects? If so, which ones and when?

Yes. Thanks for that question, Menno. When you think about turnarounds, I think in Dan’s remarks, he highlighted that in this last quarter we had three major turnarounds: Kearl, Syncrude, and Strathcona. The collective financial impact of those turnarounds was about $400 million on our earnings. All that work was necessary; it underpins the long-term safety, integrity, reliability of our operations. To the extent we can figure out more effective ways to accomplish that work, extend intervals, and do it at lower costs, that’s a huge prize for us. Specific to Kearl, historically, a single turnaround will typically impact us by around 10,000 barrels a day on an annual average, and that turnaround typically costs us $50 million to $70 million. On top of that, there’s a loss margin associated with those barrels. This is a priority focus for us; it’s exciting that we can announce a one-year acceleration to those plans. It continues to be an ongoing focus for all of our turnaround activities on how we can reduce the timeline and the financial impact. I’d say for our other assets, those plans and approaches are quite optimized; we’ve worked at those for many years. I don’t think there’s much applicability there. Most of our other turnarounds are on a longer interval already. But we’re going to continue to look for more opportunities, but Kearl is the big prize, and that’s why it’s so exciting to announce that today.

The next question is turnaround related as well, but in the downstream. It comes from Manav Gupta at Credit Suisse. Help us better understand the impact of downtime at the Strathcona refinery. How much was the throughput lower? What was the total expense of the turnaround and what was the opportunity cost?

Yes, thanks. I appreciate why there’s so much focus on the turnaround. For us as for you, in terms of Strathcona, it’s our largest refinery of the three that we have, representing about 50% of our refining capacity. That particular turnaround at Strathcona was 55, 56 days in duration, with an impact of about 70,000 barrels per day. The financial impact was around $90 million in terms of both costs and margin impacts; a significant impact for us, but one that is important for us to accomplish that work and have it behind us as we look to the future.

Okay. We have a question from Phil Skolnick, Eight Capital. How do your Montney assets fit with the corporate strategy?

Well, thanks for that question, Phil. Our corporate strategy is very much focused on maximizing the value of our existing assets. Thinking about major growth in the Montney is not a current priority for us. We have purposely put our focus on our core oil sand assets, looking to further drive down costs, improving reliability, the low-cost debottlenecks. We've demonstrated our ability to generate significant value from that. Given that, we’re continuing to prioritize where the unconventional assets fit into our portfolio; elements of that asset are performing well, delivering value to us. We’ll continue to advance some of those opportunities, but they are lower on our priority list relative to our core oil sands properties. We take a long-term view; we’ve got a lot of acreage in the unconventional plays. We’ll continue to reflect on them, updating that opportunity space, see how it fits in the market. We’ll continue to keep those strategies current, but for now, our priority is really on the oil sands.

Okay. We have one final question that was pre-submitted around the sustainability of chemical margins. That came from Phil Gresh at JP Morgan. On chemicals, how are you thinking about the pace of margin normalization?

Well, first, I would reiterate, it was a very strong quarter for chemicals. As I mentioned, $109 million of net income compares favorably to $78 million for all of 2020. It also compares favorably to $108 million for all of 2019. Very strong quarter, the highest in 30 years. It’s really underpinned by a few fundamentals. First, we have an advantage chemicals business. We’ve got low costs and structural advantages driven by our integration with the Sarnia refinery and our access to readily available feedstocks—proximity to key customers to market our products; all those things put us in an advantageous position. Additionally, some impacts from the winter storms down south and outages at Gulf Coast facilities have pressured the supply side of the market. As the economy recovers from COVID, we’re seeing increased demand for polyethylene and consumer goods related to that. All these factors are creating a strong market environment. Longer-term, into the second half of the year and approaching year-end, I expect some normalization of pricing, but it’s difficult to speculate. There will likely be new sources of supply coming on the market and all those things will impact our margins. However, we feel good about where we are and the advantages we have in our business. As we look even to the end of 2020, I think it's going to continue to be very strong for us. Okay. Operator, can I turn it back to you, please?

Sure. We have a follow-up question from Dennis Fong from CIBC World Markets. Your line is open, sir.

Thanks for taking my follow-up questions. I’ve got two here. One is just on the Boiler Flue Gas projects. You’ve rolled it out to one particular boiler and indicated there are five incremental that you can look at installing the new technology on. What may the timeframe of that potential installation be, as well as are there any other locations throughout your portfolio that you can look at applying that? Secondly, if you wouldn’t mind providing a bit of an update as to where you’re at with respect to the Grand Rapids project. Thanks.

Yes. First on the Boiler Flue Gas, you’re right. We completed one; we have five additional ones that we are in the process of phasing into our Kearl operations. We expect it will take probably two to three years to complete all of those because we need to time it with downtime on those pieces of equipment, and we want to be very orderly in the implementation. This is a positive project, as I mentioned; not only cost advantages, but also emissions advantages. Regarding Grand Rapids, we have a lot of activity underway at Cold Lake. Recently, we have shifted our focus to optimizing our existing assets at Cold Lake with some in-field drilling and further optimization of production driving those great volumes you’re seeing at Cold Lake. This is why we were able to increase our guidance by 5,000 barrels a day. So that’s been our priority in the near term to accelerate volumes. We’re keeping a clear line of sight on longer-term project opportunities like Grand Rapids, and we'll give a more wholesome update at Investor Day. We’ve made progress on that project and continue to see it’s going to add a lot of long-term value. Equally important is what we’re doing with Nabiye and the base Cold Lake, which are also adding to the near-term volumes, which are very profitable right now.

Thank you.

Thank you. I’m showing no further questions at this time. I would like to turn the conference back to Mr. Dave Hughes for any closing remarks.

Okay. Thank you, operator. That concludes our second quarter earnings call. On behalf of the management team, thank you very much for joining us today. If you have any further questions or want to continue any discussions, please don’t hesitate to reach out and contact the Investor Relations team. Thank you very much.

Thank you. Ladies and gentlemen, that concludes today’s conference call. Thank you all for joining. You may now disconnect.