Imperial Oil Ltd (IMO) Q3 2021 Earnings Call Transcript

Good day, and thank you for joining us. Welcome to the Imperial Q3 2021 Earnings Call. I would now like to turn the conference over to your speaker today, Dave Hughes, Vice President of Investor Relations. Please proceed.

Thank you. Good morning, everybody. Thanks for joining us on our third quarter earnings call. I'm joined today by Brad Corson, Chairman, President and CEO and the rest of the management team, including Dan Lyons, Senior Vice President of Finance and Administration; Simon Younger, Senior Vice President of the Upstream; Sherri Evers, Vice President of Commercial and Corporate Development; and John Wetmore, Vice President of the Downstream. I'm going to start by reading the cautionary statement. Today's comments include references to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in attachment 6 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 performance 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 third quarter earnings press release that we issued this morning as well as our most recent Form 10-K, and all of these documents are available on SEDAR, EDGAR and on our website. So I'd ask you to please refer to those. Usual format today, Brad will start with some opening remarks, and then Dan will go over the financial performance. Then back to Brad to talk through our operating performance for the quarter. Then we'll follow it up with a Q&A session. So with that, I'll turn it over to Brad.

Thanks, Dave. Well, good morning, everyone, and welcome to our third quarter 2021 earnings call. I hope each of you are doing well and had the chance to enjoy some time with friends and family over the summer. What a difference a year makes. The third quarter is now in the books, and I'm very much looking forward to taking you through our results today. It was a great quarter by any measure as our strong operational performance continued to allow us to make the most of this very attractive business environment. Our assets performed well, meeting or exceeding our expectations. And once again, we have a few records to talk about across all of our business lines. Along with very strong operational performance, we continue to benefit from actions we took last year to reduce our overall cost structure and improve reliability. This combination is advantageous when commodity prices are strong, as it allows us to capture maximum value today while ensuring our resiliency in a downturn should that occur in the future. In this quarter, the momentum you have heard me talk about was fully on display. We had very little planned maintenance and high reliability, which allowed us to take full advantage of the improving business environment. Over the next few minutes, Dan and I will detail the results of what was again a very strong quarter. So now let's turn more specifically to the third quarter results. Earnings for the quarter were $908 million, and our cash from operating activities was over $1.9 billion, both up significantly from the second quarter. Crude prices continued to strengthen through the quarter, and downstream and chemical margins remained robust. Our upstream continues to perform very well, and I'll talk more about each asset in just a few minutes. But I would point out that we delivered our highest third-quarter upstream production in over 30 years, driven by the second-best quarter ever at Kearl. Our downstream also performed extremely well with utilization of 94% and higher product sales as demand continued to recover. We also announced our intention to pursue a renewable diesel project, which at the time of commissioning is projected to be the largest in Canada. This will deliver incremental shareholder value while helping Imperial and Canada with the energy transition and overall reduction in emissions. I can't say enough about our chemicals results. Wow, not only did we set a quarterly earnings record, but our year-to-date earnings are already greater than the best-ever full-year earnings for the last 30 years. Obviously, we have one quarter to go for the year, so it's not a direct comparison and says nothing about the fourth quarter, but gives you an idea of just how strong our performance has been year-to-date. So in total, our strong cash flow generation in a period of very strong commodity prices is underpinned by excellent operational performance. We were able to get the most out of very attractive markets for crude, refined products, and chemicals. And once again, our strong cash position has enabled us to continue to deliver on our promise of shareholder returns. In the quarter, we returned over $500 million to our shareholders in the form of dividends and share buybacks. So far in 2021, we have returned in excess of $2 billion to our shareholders. The last time our shareholder returns were this high three quarters into the year was 2008, and of course, there's more to come. All of this adds up to a very strong year so far, which the market has recognized. As of yesterday's close, our share price had risen over 85% since the start of the year and is up 50% since pre-pandemic levels at the beginning of March 2020. So with that, I will 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 third quarter was $908 million, up $905 million from the second quarter of 2020. This increase was driven primarily by an increase in upstream realizations and volumes, as well as improved margins in our downstream and chemical businesses. If we look sequentially, our third-quarter income of $908 million is up $542 million from the second quarter of this year, driven by higher margins in the downstream and higher volumes in the upstream and downstream due to substantially lower planned turnaround activity. Looking at each business line, the upstream recorded net income of $524 million, up about $280 million from our second-quarter net income of $247 million, driven mainly by higher volumes due to the absence of planned turnaround activity at Kearl and Syncrude. In the downstream, net income was $293 million in the third quarter, up about $230 million from net income of $60 million in the second quarter, reflecting higher margins and the absence of the planned turnaround at our Strathcona refinery. Our chemicals business continued to demonstrate strong performance through the third quarter with net income of $121 million, up from net income of $109 million in the second quarter, driven by strong polyethylene margins. This is the highest quarterly net income in over 30 years for our chemical business. Moving on to cash flow, in the third quarter, we generated over $1.9 billion in cash flow from operating activities, or just over $1.5 billion excluding working capital effects. Our free cash flow for the quarter was about $1.7 billion, bringing our free cash flow for the year to over $3.2 billion, an improvement of about $3.5 billion from last year. Even with substantial returns of cash to shareholders, we ended the third quarter with close to $1.9 billion of cash on hand. Moving on to CapEx, capital expenditures in the third quarter totaled $277 million, up almost $140 million from the third quarter of 2020 and up about $20 million from the second quarter of this year. In the downstream, our spending reflects increased spending for the Sarnia products pipeline; in the upstream, we continue to progress the Kearl in-pit tailings projects as well as spend on mine progression and efficiency projects at Kearl and volume sustainment work at Cold Lake. Based on the great work done by the organization around capital discipline, we were able to revise our capital guidance down for the full year to around $1.1 billion without impacting the key projects that we had planned for the year. Shifting to shareholder distributions, earlier today, we announced the fourth-quarter dividend of $0.27 per share. We remain fully committed to returning surplus cash to shareholders. We've demonstrated this this year by increasing our dividend 23% as of July 1 and returning over $2 billion to shareholders year-to-date, including $1.2 billion via an accelerated NCIB program in May and June. Given our strong cash position, we are actively evaluating options to return additional cash to shareholders, including accelerating our NCIB, executing a substantial issuer bid, or paying a special dividend above and beyond our base reliable and growing dividend. Now I'll turn it back to Brad to discuss our operational performance.

Thanks, Dan. I'll now take a few minutes to talk about operational performance in the third quarter, which, as I noted earlier, was very strong across the entire company, across all business units. Starting with the upstream, production averaged 435,000 oil equivalent barrels a day in the third quarter, which represents an increase of 34,000 barrels per day versus the second quarter of this year, and an increase of 70,000 barrels per day versus the third quarter of 2020. It also represents our highest third-quarter production in over 30 years. This is the first time we've seen four consecutive quarters with upstream production exceeding 400,000 oil equivalent barrels per day since 1990. The increase was a result of continued strong operating performance, driven in large part by our focus on reliability and the absence of the planned turnaround activity we saw in the third quarter of 2020, notably at Kearl. I'll now talk in more detail about each asset, starting with Kearl. I'm pleased to report that Kearl continued to deliver impressive results. Kearl production averaged 274,000 barrels per day gross in the third quarter, which is the second-best quarter in the asset's history. Recall that in the fourth quarter of 2020, Kearl's production was 284,000 barrels per day. This quarter's production of 274,000 barrels per day was up 19,000 barrels per day versus the second quarter due in part to the elimination of the planned turnaround, which has historically started in September. As we discussed on the second quarter earnings call, we eliminated this second turnaround a full year ahead of our original schedule and began our strategy of only one turnaround each year versus two each year. The third quarter's production also represents an increase of 85,000 barrels per day versus the third quarter of 2020, again due in part to the absence of similar turnaround activities and the absence of a third-party pipeline outage. As of yesterday, Kearl production for the month of October has averaged 289,000 barrels per day. So with our third-quarter performance and the strong production and reliability we have seen so far in the fourth quarter, we are confident that we will achieve our increased production guidance for Kearl of 265,000 barrels per day, which we communicated in July. I want to take just a minute to talk about unit cash costs at Kearl and our target of USD 20 per barrel. We highlighted that we were close to reaching this target late last year, and we continue to focus on reducing our operating costs and are making great progress. In fact, Kearl's unit costs are down year-to-date, almost CAD 3.75 on a unit basis versus 2020, despite continued pressure from energy prices. We reached just under USD 19 per barrel in the third quarter of this year. These strong energy prices, along with the strong Canadian dollar, are creating real pressure on the U.S. dollar equivalent cost. But despite these challenges, we continue to focus our efforts on achieving this target of USD 20 per barrel of unit cost at Kearl. Now moving to Cold Lake, we had another strong quarter at this asset. Production averaged 135,000 barrels per day, which was down 7,000 barrels per day versus the second quarter due in part to planned maintenance, but was up from 131,000 barrels per day versus the same quarter in 2020. The key driver is that we continue to see improved well performance, driven by our continued focus on reliability and optimization at the site. The minor planned maintenance at the Mahihkan plant in the third quarter was completed as planned. As with Kearl, our third-quarter results and continued strong reliability position us well to achieve and potentially exceed our increased annual guidance for Cold Lake of 135,000 barrels per day. Now moving to Syncrude, Imperial's share of Syncrude's average production was 78,000 barrels per day in the third quarter, up 31,000 barrels per day versus the second quarter and up 11,000 barrels per day versus the third quarter of 2020. A major turnaround on one of the cokers at Syncrude was executed during the second quarter of 2021. The absence of this turnaround activity drove the significant increase in production for the third quarter. There was also a turnaround in the third quarter of 2020 at the asset. This asset has performed well post-turnaround, although there were some relatively minor challenges late in the quarter, which have since been resolved. The original plan was also for a second turnaround at Syncrude in the fall of this year. However, this plan was optimized earlier this year, and by slightly increasing the scope of the spring turnaround as well as deferring some less urgent work into next year's turnaround, Syncrude was able to eliminate the fall turnaround this year. This optimization helps to reduce overall costs at the asset and maximize production, which is particularly beneficial in today's commodity price environment. Also of note was the transition of the operatorship of Syncrude from Syncrude Canada Limited to Suncor, which happened at the end of the quarter. The owners are completely focused on improving the asset's performance and delivering meaningful synergies over the next few years. Now let's move to the downstream. We refined an average of 404,000 barrels per day in the third quarter, which was up 72,000 barrels a day versus the second quarter. Recall, we had a major turnaround at our Strathcona refinery in the second quarter, which primarily accounts for the significant increase in throughput in the third quarter. Throughput was also up 63,000 barrels per day from the third quarter of 2020, reflective of the demand recovery we have seen since last year. Our throughput of 404,000 barrels per day equates to a utilization of 94% versus the 78% we reported in the second quarter and represents the highest quarterly utilization since the fourth quarter of 2018, well before the pandemic. I would also remind you that on the second quarter call, I mentioned we exited June at 93% utilization, so the strong performance and reliability continued throughout the third quarter, positioning us well to meet our full-year guidance of 89%. As I mentioned on the second quarter call, we did have some planned maintenance activity in the quarter, specifically a smaller turnaround at our Nanticoke refinery, which started in mid-September and was completed in October, ahead of schedule. At the time, I mentioned this was not expected to have a material impact on utilization or margins in the quarter. I can confirm that the work was completed as planned and actually ahead of schedule. Looking at cash operating costs, our downstream business continues to excel in managing its spending. Year-to-date cash operating costs in the downstream were $1.455 billion, down $87 million compared to 2020 and down even more when normalizing for the high energy prices we see this year. This is especially notable because our refining throughput has increased by 33,000 barrels per day and our petroleum product sales have increased by 19,000 barrels per day. Not only are we refining more barrels and selling more products, but we are doing it at a lower absolute cost. In August, we announced plans to construct a renewable diesel manufacturing facility at our Strathcona refinery. This facility will be world-class with the capability to produce 20,000 barrels per day of renewable diesel from locally sourced feedstocks. We are excited about this opportunity, as it has the potential to reduce greenhouse gas emissions by up to 3 million tons per year while delivering shareholder value at the same time. So stay tuned for more updates as we continue to progress towards a final investment decision. Petroleum product sales in the third quarter were 485,000 barrels per day, up 56,000 barrels per day from the second quarter, largely driven by increased demand during the summer driving season. Sales were also up 36,000 barrels per day versus the third quarter of 2020 as we continue to see demand recover from the pandemic-related softness of 2020. As of September, we saw industry demand consistent with what we saw in the second quarter, with gasoline demand nearing 95% of normal and diesel remaining close to historical levels and jet pushing above 55%, benefiting from further easing of travel restrictions. I would add that if we look specifically at Imperial sales, our jet volume is actually about 10% better than broader industry levels, around 65% of historical, predominantly related to competitive gains we've captured this year, increasing our overall market share. Looking at downstream margins, unlike crude prices, our third-quarter crack spreads hovered around the middle of the five-year band, which reflects steady improvement over early 2020 at the onset of the pandemic. Despite ongoing demand volatility, our continued focus on reliable and efficient operations ensures we capture as much value as possible in the current downstream environment. I'll wrap up our operating results with chemicals. 2021 has been an incredible year for our chemicals business, and we continue to see outstanding results in the third quarter. Continued strong production reliability and margin supported chemical earnings for the quarter of $121 million, representing the highest quarterly earnings in over 30 years, an increase of $12 million versus the second quarter of 2021 and $94 million higher than the third quarter of last year. Year-to-date chemical earnings are $297 million, which is higher than the previous third-quarter year-to-date record of $220 million set in 2018. We have continued to see volume and margin strength so far in the fourth quarter. As I mentioned, the best full-year earnings for the chemicals business was $287 million set in 2015. We still have the fourth quarter in front of us, so this is not a direct comparison, but this gives you a flavor of just how strong our performance has been year-to-date. In closing, we had an excellent quarter on all fronts. We have talked over the past few quarters about our commitment to put the company in the best possible place to maximize value, and we see those benefits now. The decisions we have made and the work the organization has done over the past several quarters have been exceptional and are allowing us to take full advantage of prevailing market conditions. I'm sure you will agree that our third-quarter results highlight this. Having our operations firing on all cylinders when commodity prices are strong allows us to deliver on our value proposition, which has a large focus on shareholder returns. Looking forward to the fourth quarter, commodity prices have remained strong, and we continue to focus our commitment to deliver maximum value to you. We are carrying a lot of momentum into the fourth quarter. Just to reiterate, we remain committed to returning surplus cash to shareholders through a reliable and growing dividend, and through other means like an accelerated NCIB share buyback program, a substantial issuer bid, or a special dividend. Given our very strong cash position, we are actively evaluating those steps. Stay tuned. With that, I'll turn it over to Dave for the Q&A session.

Okay. Thanks, Brad. We did have a number of questions pre-submitted, so why don't we open up the Q&A with a couple of those, and then we'll move over to the live Q&A line. The first question comes from Phil Gresh, JPMorgan. How should we think about the production progression over the next few years at Kearl as you aim to ramp to 280,000 plus?

Thanks for the question, Phil. We continue to see record performance out of Kearl based on our supplemental crushing capacity that we have discussed in the past and other enhancements and reliability. This gives us great confidence in the asset's productive capability. Moreover, as we've announced last quarter, we moved to one turnaround starting this year from two previously, which was a key driver for us increasing our 2021 guidance to 265,000 barrels a day. A target we remain very confident in achieving given the continued strong performance through the third quarter and now into the fourth quarter. Beyond the 265,000 barrels a day level, we have low-cost projects to get to the 280,000 barrel a day level over the next couple of years, including plant debottlenecking, enhanced mine planning, bitumen recovery, and some digital initiatives. You may recall at our previous Investor Day, we outlined that path to 280,000 barrels a day with Kearl reaching 270,000 barrels a day in the 2023 to 2024 timeframe and ultimately to 280,000 barrels a day by 2025. We still see a progressive path. However, as evidenced by our recent performance and our track record of continued improvements, I fully expect that we will do better than that 2025 timeline. At our upcoming Investor Day in March, we'll give more information on that. I also note that as we continue to debottleneck Kearl and put more barrels over a relatively high fixed cost asset base, we also expect to continue to drive down our overall unit cost. We are only partway through the ramp-up of our autonomous haul truck program, talking about realizing a USD 1 per barrel saving from the full rollout, which we expect to achieve over the next two years. We also see opportunities to apply digital solutions more broadly at Kearl, which include drones and other optimization technologies with an overall objective to continue to drive costs down, not only to the targeted $20 per barrel but even lower beyond that. Thanks for the question, Phil.

Phil had a follow-up. Since you pushed back the timing of Investor Day, could you provide some updated thoughts on CapEx in 2022 and beyond? Does the framework from the last Investor Day still hold? Or could there be increases in spending from project activity like renewable diesel and/or inflation?

Thanks for the second question, Phil. We were really looking forward to getting back together in person at the end of this year for what would have been Investor Day in November. We see a lot of value in that event being in person, as I know you and other analysts and investors do as well. As we reflected on the situation with COVID across Canada and some of the travel restrictions that are still underway, we concluded it was a bit too soon for an in-person event like that. Consequently, we decided to adjust the timing of our Investor Day, moving it one quarter. We are now planning to host that event in March of next year, and soon, I anticipate you'll receive a save-the-date notice from our Investor Relations team. In terms of 2022 guidance, we plan to share that within the next month or so to provide our latest numbers in a timely manner, more along the lines of what you would have received in prior Investor Days. At our Investor Day early next year, we'll discuss our longer-term outlook, which will include an update on the Strathcona renewable diesel project and other capital investment plans. You'll see a story similar to what we laid out last year, with CapEx growing from this year's updated levels of $1.1 billion. Previously, we projected averaging around $1.5 billion to $1.6 billion over the next few years, and we expect that magnitude of expenditure to continue, especially with the Strathcona renewable diesel project. We believe we'll mostly be able to include that in those levels of spending. Regarding inflationary pressure, we see some cost pressure in our business, but we don't expect it to materially impact our capital spending levels, given our ability to find offsets and efficiencies.

I'm going to add another one here that several folks have asked about, so I'll consolidate it into one question. Following up from the question about inflation in general, a bit more specifically, what is the impact of the much higher natural gas prices on our refinery profitability? Is our fuel cost advantage that we've talked about before during refinery energy efficiency still an advantage? Does this have any implications for potential stepping up development of our unconventional assets?

That's a really good question. Obviously, energy costs are a critical driver for us, so we're watching that very carefully and doing everything we can to offset those upward pressures, as I mentioned in my comments on Kearl and generally the downstream. Speaking more broadly about the impact of higher natural gas prices, what we've indicated in our 10-K filing remains accurate: a modest impact overall. For every CAD 1 change in gas price, we estimate about a $90 million net income impact for that CAD 1 change. We produce about 110 million to 115 million cubic feet per day of gas, mostly from our unconventional assets, providing some internal offsets versus gas input costs across upstream and downstream. Our gas feedstock costs remain globally advantaged and are moving higher in the context of a stronger overall commodity price environment. So on a net basis, we benefit from higher commodity prices, including for crude and refined products, as evidenced by the strong cash flow generated for the quarter. Our refineries are at or near industry best-in-class when it comes to energy efficiency according to our Solomon surveys, and that trend has continued for many years. We have an advantage over Canadian competitors in the high-price environment for gas and energy. That said, we don't take rising costs for granted, and we are always seeking offsets. A good example in our downstream is our investment in the 41-megawatt cogeneration unit at our Strathcona refinery, which reduces our electricity cost exposure and overall energy costs. With the Strathcona cogen project, we now have almost 600 megawatts of cogeneration capacity across our portfolio. As for stepping up investment on our unconventional acreage to produce more gas, we're never sitting idle and always considering our investment choices. At the moment, we are focusing on our core oil sands operations where we haven't exhausted all the highly economic value creation opportunities we see.

Operator, I think we'll move over to the live Q&A line now, please.

Your next question will come from Neil Mehta with Goldman Sachs.

Brad, you laid out a little teaser around capital returns. As I think about part of the stock reaction today, there may have been some expectation for some incremental updates there. But it sounds like those could be coming. Can you talk through how you're thinking about a buyback relative to a tender, relative to continued dividend growth and help us frame out the timeline around any such decision?

Thanks for your question, Neil. I want to reinforce our commitment to returning excess cash to our shareholders. We've made that a priority and demonstrated it with our actions throughout this year. I know there is a focus on dividends and share buybacks. I would remind you and others that due to the strength of our company and the actions we took through the pandemic, we did not have to cut our dividend; in fact, we maintained it through last year. Earlier this year, we announced a significant increase in the dividend, $0.05 per share, on top of the prior $0.22, representing almost a 25% increase. Later, we reinstated our share buybacks with an accelerated 4% program over two months. Most recently, we reinstated a full-year 5% share buyback program. We have been very active and committed to returning cash to shareholders. As we look to the rest of this year and into next year, the momentum is building for us as a company. We are generating significant cash and seeing our cash balances grow. We are committed to returning that excess cash to our shareholders. That’s why I mentioned we are actively evaluating important steps over the coming months, which could include accelerating our NCIB program, executing a substantial issuer bid, or perhaps a special dividend. We haven't made any final decisions yet; it is subject to Board approval, but discussions are actively underway. I might also ask Dan to comment a bit on our views on a substantial issuer bid versus a special dividend since we have discussed that with our shareholders, which is influencing our decision-making.

Thanks, Brad. Regarding NCIB versus a special dividend, I talked to a number of you on the line and we like to get feedback from analysts and investors. We are typically agnostic; however, the feedback we are receiving is significantly in favor of a substantial issuer bid buyback over a special dividend. That sentiment seems supported by recent research as well. It appears much of the appeal lies with tax considerations and giving shareholders more choice.

Is the logical timing to think about an update around this the fourth-quarter call? That's when you made a big decision around dividend bump earlier this year. Should we base case this as the clearing point for this decision?

I wouldn't get into timing. As Brad said, we are actively evaluating all this stuff. We are committed to returning surplus cash. I think we've demonstrated that.

Okay. All right. The follow-up question is just your thoughts on the Canadian oil markets here. WCS has widened out a little bit in terms of the differentials, but Line 3 is now online. Just how do you think about spreads from here? And as oil has stayed firm, do you think that differentials could stay more contained now that you have pipeline takeaway?

There's no doubt we're encouraged by the additional takeaway capacity here in Canada. It's been a long time coming to get more egress capacity. With Line 3 expansion now operational, I think that's positive. Longer term, we remain optimistic about the plans for TMX completion. All of this provides more access for our barrels to the higher-cost markets in the U.S. Having more stability and flexibility in that regard should help narrow these differentials. We've seen good stability throughout the year, with differentials in the $13, $14, $15 per barrel range, and that, coupled with strong WTI pricing, puts us in a strong position. I believe we will continue to see fairly tight differentials, though some volatility could occur depending on unique market situations and any unplanned pipeline outages. We're feeling quite encouraged.

Your next question will come from Dennis Fong with CIBC World Markets.

The first one really relates to capital spending somewhat to this year. So there was a modest decrease in guidance from $1.2 billion to $1.1 billion. I was just hoping to understand, obviously, in light of the stronger production you're seeing from Kearl and Cold Lake. Has that influenced any pacing of development for other assets like Grand Rapids and so forth? How do you think about balancing optimizing base production levels versus tackling potentially, we'll call it, ESG/expansion-related focused projects? I have a separate question for the renewable diesel facility, but really more on the upstream side there.

Thanks for that question. First, on capital spending, despite our reduced guidance, that doesn't reflect a change in focus. It reflects that as the year progressed and we have achieved capital discipline objectives, we've completed the planned work at a lower cost, which is a good outcome. Looking to the future, we will discuss this more at Investor Day in March. We are evaluating all our efficiency projects and growth opportunities with debottlenecking and low-cost, high-efficiency use of capital. We position all of those investments to maximize earnings, value creation, and market capture. Considering Cold Lake, one reason for our successful volumes performance is deploying additional rigs to workovers and other optimization activities. We will continue that focus. For larger investments, we're looking at the longer view of the price environment, cognizant of long-term risks. ESG will always be a significant part of our capital strategy to reduce overall emissions. At last quarter's call, we discussed the startup of one of our boiler flue gas efficiency projects at Kearl. We're planning to expand that to five other boilers and deploying new solvent technologies at Cold Lake to reduce emissions. ESG and lower-emission spending are critical and create economic value at each asset where we invest. More details will be shared in March.

Great. And then my follow-up question here is just on the renewable diesel facility. From the language of the initial announcement and the potential significance, it seems like a very attractive project to move forward on. With final investment decision potentially in sight, what are some of the last items you seek clarity on? It sounds like you're continuing to pursue negotiations and discussions with various government and regulatory bodies. How is that progressing?

Thanks for the question. I think you characterized it well, as we view it as a high priority, value-accretive project that offers significant environmental benefits. We are progressing it as efficiently as we can. We're in the middle of several commercial negotiations around sourcing the feedstock and hydrogen production. We're also optimizing our design to leverage the best technologies. This work in progress will bring us to a final investment decision probably sometime next year. We're also having constructive discussions with government entities, both at the provincial and federal levels. There’s shared recognition that this project is fundamental to Canada's net 0 objectives, with provinces like British Columbia viewing it as very strategic for their fuel sources. We're working with these entities to align on a participating plan, and our discussions are going extremely well. We remain optimistic and more information will be available at Investor Day in March.

Your next question will come from Greg Pardy with RBC Capital Markets.

The first one is almost like a modeling question, Brad, it's probably for Dan, but it's really just around tax horizon and cash taxability. Obviously, a high-class problem in the world we're living in with oil price lines. How should we think about that in '22?

Yes, Greg, obviously, yes, it's a high-class problem. A few months ago, I would say we'd have very minimal cash tax payments in '22. I think that's still the case; we won't have significant cash tax payments in '22. But on current trends, we will become cash tax paying in '23. That's probably as good as I can give you at this point. Obviously, it's sensitive to prices; we want them higher. If that drives us to pay tax, that's fine. But yes, we're getting past the point of losses and depreciation. I think '22 will see relatively small cash taxes, then much more significant in '23.

Okay, terrific. Shifting over to the pathways initiative, I know you're in the middle of negotiations still with governments. But what direction is that heading? There have been some appointments with the federal cabinet and so forth. How should we read the progress on the pathways in terms of what you can share?

Thanks for the question. I'm excited about the pathways initiative, and I'm pleased with our progress. The consortium of five companies is very engaged, working closely together. We meet regularly to review our plans, next steps, and progress. There have been positive developments, including new information we shared with the market early last week regarding our plans and emissions reduction initiatives. We aim for significant reduction by 2030. Much work is underway around feasibility studies for the main pipeline from the north to Cold Lake, understanding potential sources of carbon capture, and timelines for those investments. We are also working with the Alberta government around pore space and have submitted our application for access in the Cold Lake region. Concurrently, we’re in conversation with the federal government regarding the investment tax credit. All of these discussions have been constructive. There is strong support for this project as it's fundamental to the country’s 2050 net 0 aspirations. I’ll note the previous minister responsible has moved to NRCan, a key ministerial position for our engagements. While we have yet to engage the new environmental minister, we look forward to it. We've built a history of constructive engagements with various ministers and our objective remains to contribute to Canada's goals. Overall, things are progressing well.

We have a few more that were pre-submitted. The first one comes from Manav Gupta, Crédit Suisse. Neil Mehta had asked a bit about our forward view of the heavy differentials. This one is a bit more specific; we've seen some widening of the heavy-light spread today. Can you talk about what might be driving that?

Thanks for that question, Manav. There are always a lot of moving parts in the market, especially right now. A key factor in the spread, which has generally been tight but widened a bit recently, is inventory builds here in Western Canada associated with the commissioning of Line 3, along with temporary impacts on pipeline egress. There were also short-term pipeline outages affecting egress, causing a temporary inventory build which contributed to widening the differentials. Overall, those factors are temporary.

Manav had a follow-up question related to renewable diesel. Can you talk about the feedstock you plan to use for the renewable diesel facility? Will it be vegetable oil primarily? Or will you use some tallow?

We are planning to use vegetable oils as feedstock, not waste or tallow products. Our choice to locate the renewable diesel project at Strathcona is due to its proximity to abundant local agricultural feedstocks. So, we anticipate most crop sources will be within a day's transit by rail, providing natural synergies. Colocating it with Strathcona also offers strategic advantages, cost efficiencies, and proximity to a low carbon fuel market in BC.

From Prashant Rao at Citi, it's related to renewable diesel but has a more strategic nature. Can you talk about how Strathcona's renewable diesel fits into Imperial's long-term net decarbonization goals, both for the company and in relation to ExxonMobil's recent updates?

Thanks for the question, and there's substantial interest in our Strathcona renewable diesel project. We've been examining potential solutions for a net 0 future for quite some time, categorizing them into short-term, medium-term, and long-term opportunities. The Strathcona project fits into our short-term bucket, but its use could expand over time with other refinery applications. We are already manufacturing advanced fuels and growing our biofuels blending capabilities. The renewable diesel project builds on that foundation, allowing us to participate efficiently and economically in the renewable fuels market. Exxon's announcement regarding the Strathcona renewable diesel project further emphasizes its importance within their portfolio and reinforces alignment between Imperial and ExxonMobil. As mentioned, we started with Strathcona due to its proximity to the feedstocks and fuels market, but expect to explore further opportunities to progress our lower carbon strategy within the downstream business over time.

We have one last question from Prashant Rao at Citi. Investors are expecting industry chemicals margins to decline as 2022 unfolds. Can you discuss Imperial's chemical business within the global context during this period? What should we keep in mind that might differentiate your operations from the global trend?

Thanks for the question, Prashant. I maintain a positive outlook for our chemicals business. We have a low-cost operation that benefits from various strategic advantages, particularly integration with our Sarnia refinery, which helps optimize our product mix and extract the most value from shared feedstocks. Furthermore, our facility is close to our customer base, further strengthening our chemicals business. These factors support the record profitability we've seen this year. While we've benefited from supply shortages and storm-related outages in the Gulf Coast, which are temporary, additional capacity is expected to come online, leading to lower industry margins. However, much of this additional capacity is expected for export markets and not directly impacting our sales markets. We're still optimistic about long-term prospects for our chemicals business. I would note that we previously earned around $50 million annually during prior low-margin cycles, reflecting how resilient and advantaged our chemicals operations are because of the synergies I mentioned. We do anticipate a strong market ahead.

That's the end of our questions. Thank you very much for joining us and for your continued interest. If you have further questions or want to discuss any further details, don't hesitate to reach out to the Investor Relations team. With that, have a great afternoon and a great weekend. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.