Cenovus Energy Inc. (CVE) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's 2021 Budget Release Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Cenovus Energy. I would now like to turn the conference call over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.

Thank you, operator, and welcome, everyone, to our 2021 budget conference call. I'm here this morning with President and Chief Executive Officer, Alex Pourbaix; our Chief Operating Officer, Jon McKenzie; Chief Financial Officer, Jeff Hart; and our Executive Vice President, Strategy and Corporate Development, Kam Sandhar. Due to COVID-19 physical distancing guidelines, the rest of our leadership team members are in listen-only mode today from other locations. We look forward to having everyone back in the same room once protocols allow. I'll refer you to the advisories located at the end of today's news release. These describe the forward-looking information, non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus' annual MD&A and our most recent annual information form and Form 40-F. All figures are presented in Canadian dollars and before royalties unless otherwise stated. You'll find our updated guidance posted on cenovus.com under Investors. Alex will provide brief comments, and then we will take your questions. We'd ask analysts to hold off on any detailed modeling questions and follow up directly with our Investor Relations team after the call. [Operator Instructions] Alex, please go ahead.

Thanks, Sherry, and good morning, everybody. It's really hard to believe that just 3 months ago, we were announcing our intention to combine Cenovus and Husky. And now after a lot of great work by our combined team, we've closed this transaction. And today, we've released our 2021 capital budget, which puts us firmly on track to significantly progress the integration of the company while realizing or exceeding our synergy targets. Of the $2.3 billion to $2.7 billion we expect to spend across the business this year, about $2.1 billion of that is sustaining capital. This will enable upstream production of about 755,000 BOE per day at the midpoint and downstream throughput of around 525,000 barrels per day. That budget range also includes above CAD 520 million to CAD 570 million this year for the rebuild of the Superior Refinery. We plan to restart Superior in the first quarter of 2023 at a total rebuild cost of about USD 950 million. About 1/3 of that has already been spent, and we anticipate the bulk of the go-forward costs will be recovered through insurance proceeds, although we haven't reflected that in our capital estimates. Our new time line for the restart is largely due to our conservative estimate of COVID-19 impacts on construction activities, and our revised cost estimate reflects the addition of safety enhancements and modernized systems to improve performance and reduce costs. We spent a lot of time studying this project, and we're highly confident in our revised budget and timing. We believe the project will add value, increasing throughput capacity at Superior to 49,000 barrels per day with up to 34,000 barrels per day of heavy capacity, giving us the ability to run a wider variety of feedstock and further diversifying our product mix with increased asphalt capacity. One of the key benefits of combining Cenovus and Husky is the $1.2 billion in annual run rate synergies we expect to achieve. That includes $600 million in annual corporate and operating synergies and a further $600 million in capital allocation synergies. With today's budget, we are on track to realize nearly $1 billion of those synergies in 2021 and to exit the year meeting or exceeding a run rate of $1.2 billion. Let me give you just a few examples of the work we have underway to get us there. We've already started consolidating our IT systems and services. That includes moving to single planning and HR platforms this year. Besides the significant run rate cost savings we'll achieve from integrating these systems, we'll also be able to work more efficiently. We're also evaluating the benefits of applying best practices from our top-tier FCCL projects across our Oil Sands portfolio. We believe that this is going to enhance their value and increase efficiency. And by combining our companies, we'll be able to realize greater economies of scale in areas such as procurement. In addition to these cost synergies, with our fully integrated value chain, we now have a clearer view of the revenue synergies and an even better position to optimize the commercial value of every barrel of oil we sell. This includes leveraging our expanded storage capacity to increase optionality and capture higher margins. Bringing the 2 companies together also inevitably means overlap and redundancies in a number of areas and roles across our business. When we announced the transaction, we said these redundancies would likely result in a 20% to 25% reduction in the size of our combined workforce. We wanted to move quickly and respectfully to address this. Since January 1, we have completed a significant portion of our planned workforce reductions, although there will be additional adjustments over the rest of the year and into 2022 as we continue our integration work. With our broader, more fully integrated suite of assets, we have greater latitude to focus our spending on higher-return opportunities to maximize value across the consolidated business. For example, of the $1.2 billion to $1.4 billion we plan to spend on our upstream assets this year, about 70% will go to our Oil Sands segments. This includes sustaining capital of around $4.50 a barrel for that segment with spending focused on our Foster Creek and Christina oil sands and Lloydminster thermal projects. And while sustaining capital will vary from year-to-year, we expect to stay well within our long-term target range of $4 to $6 per barrel. At Foster Creek, our production estimate for 2021 reflects incremental volumes anticipated from 3 new well pads scheduled to come online in the first half of the year. We have limited capital spending plan for our Sunrise and Tucker oil sands projects this year. Our 2021 plans for these assets include bringing on wells that have already been drilled and assessing opportunities to enhance our facility and operating models there. At our Lloyd Thermal assets, Spruce Lake North remains on hold, while we focus our capital spending on drilling wells and implementing Cenovus' subsurface optimization techniques. For the Conventional segment, we have a capital budget of $170 million to $210 million, primarily for optimizing existing infrastructure and for some land expiries. And about 1/3 of the Conventional budget is for a planned drilling campaign that ramps up in the third quarter and will focus on high-return opportunities in a relatively robust natural gas price environment. In our Offshore segment, we have development and drilling planned for our Asia Pacific assets this year. We expect those assets will significant -- will generate significant free cash flow for the company over time, helping to accelerate our deleveraging efforts. In the Atlantic, West White Rose is on hold as we evaluate our strategic alternatives for the project, which is currently economically challenged. And in our Downstream segment, we continue to experience a weak crack environment in the near term. Our plan for 2021 reflects slightly lower throughput in the first half of the year due to weak demand with some improvement expected in the second half. Overall, we remain committed to strengthening our balance sheet and maintaining and improving our investment-grade credit ratings. We'll allocate free funds flow towards reducing our net debt to below $10 billion, which would represent about 2x EBITDA at USD 45 WTI. Longer term, we're targeting net debt more in the range of $8 billion or below. Above all, our disciplined approach is focused on maintaining a safe and reliable operations across our expanded portfolio. That includes the commitment to continuous improvement in process safety and operations integrity and to maintaining robust COVID-19 protocols to protect our staff. We also remain dedicated to delivering leading environmental, social and governance performance. Our expanded portfolio represents additional opportunities for Cenovus to lower its greenhouse gas emissions intensity and address other key ESG areas, such as investing in our local indigenous communities and businesses. We're in the process of refreshing our ESG materiality assessment to make sure we continue to pursue ESG focus areas that are most meaningful to our combined business and stakeholders. Then we'll develop meaningful practical targets for climate and other ESG topics that aligned with a refreshed long-term business plan for our expanded portfolio. And we expect to share those with you all later this year. So in closing, our 2021 budget reflects our confidence that the Husky transaction was well-timed, positioning Cenovus with a more diverse and more integrated asset base. This allows for a stronger, more resilient company with an expanded set of opportunities for margin capture across the business and broader participation across the economic recovery. And with that, I'll conclude, and I and my team are happy to take any questions anyone may have.

[Operator Instructions] First question comes from Menno Hulshof with TD Securities.

I'll just start with a question on reliability. Prior to the transaction, Husky has been making a big push towards becoming what they called a high-reliability organization, and they had made quite a bit of headway on that front. So my question is, are there pieces of that program that still exists and incremental to what you were doing already? And as a follow-up to that, maybe you could comment on the reliability improvement targets that you've set for some of the key Husky assets.

Yes. Thanks, Menno. It's Jon McKenzie. And you're absolutely right. Husky was on a journey of reliability improvement and improving their process safety as well as personal safety performance. We are continuing on that journey, and we are adopting what I would call best practices across both companies. We built into our reliability assumptions in the budget is the continued improvement that we've seen over time and a continued trajectory towards what we would consider to be top-quartile performance.

Okay, Jon. And just -- this is probably another one for you. Just on the credit side of things. Many of your integrated peers were put on a negative watch by S&P this week, setting changes to the global risk assessment. And it was great to see that you guys weren't on that list. But any thoughts on why you were exempted? And maybe any thoughts on your IG outlook would be helpful.

Yes. Menno, it's Jeff here. And on that is, as we were going through, and clearly, we work with the rating agencies through the process. And given where we were in that is I think that was considered, and that view was considered in our assessments that -- and I think you're referring to S&P. So that's why it was embedded in, and we don't expect any changes in relation to that. And then as far as credit ratings longer term, I think we would target that mid-BBB's place where we want to be to make sure we're not on the bottom rung of investment grade. But that's really where we want to be, and it was factored into our analysis at the time we worked through the deal.

Next question comes from Greg Pardy with RBC Capital Markets.

A couple for you. First one is just -- maybe I missed it, but just the $300 million reduction in your sustaining CapEx from $2.4 billion to $2.1 billion, can you just give me a sense as to where a lot of that really came from?

Greg, it's Jon again. I'll give you a bit of a sense, Greg. But what I would tell you is that for a go-forward run rate, I would still think that $2.4 billion is the right number. We do have flexibility around the assets to reduce and increase that through time, but $2.4 billion should be the number that you're using. But if you look at where that money is being spent, we have squeezed the upstream again this year, and we continue to spend it at a rate that is probably not indicative of where we need to go long term. And I'll probably talk -- I'll talk to that a little bit more in that Christina Lake, Foster. We've always said that should be around $800 million. This year, we're going to be spending about $600 million, but long term, you should be using that $800 million figure. The other thing that we're doing across the other assets that we've got with Husky's, we're not spending money this year in places like Tucker, Sunrise and Cold Lake. And that's simply because over time, what we'll do there is we'll reconfigure the development plans there to bring those development costs down. So going forward, what you'll see is sustaining capital as well as operating costs continue to decline on those assets. But the squeeze this year has been a little bit on the upstream, but we're very comfortable that we can run that in a safe, reliable way and meet our production targets.

Yes. Greg, it's Alex. The only thing I would add to that is I'd kind of think of it -- this was not a situation where we were kind of squeezing the rock to get everything out. This -- and although, the $2.1 million (sic) [ $2.1 billion ], as Jon said, is probably low as a run rate, it actually is a rate that we are very comfortable that we'll be able to deliver that production guidance and without, in any way, shape or form, starving the assets from a safety or reliability perspective.

Okay. Terrific. Good to know on that then. And the second one is not so much around the budget, but you've had time to look at the portfolio. I know your debt levels are assuming really -- it's the organic allocation of free cash to reducing debt and so forth. What about noncore asset sales? Maybe not so much what you're looking to sell immediately or what have you. But have you completed the bucketing exercise as to which assets are truly noncore, if you get a reasonable price vis-à-vis retention they go versus stuff that you would sort of really see as core to the combined operations?

Yes. Greg, it's a good question. And I would say it's kind of a journey. I think there's some assets that we would have immediately identified as not core, and there's a couple of fairly chunky things that we're continuing to do some work on to determine where they fit in the portfolio. But as I think you were kind of alluding to, the fact that we haven't given and articulated list of noncore with expected proceeds and date of divestiture should not at all be considered that we do not consider this important. In fact, I would view this as probably one of the best ways we can accelerate our balance sheet recovery by divesting of a good chunk of these core assets. We're just taking a tiny bit of time. But more than anything, from a marketing perspective, we're being -- I don't know that kind of giving out that data really helps us in terms of maximizing our proceeds for these assets, but nobody should take the fact that we're being a little circumspect about that as evidence that we're not focused on this. We are laser-focused on this.

Next question comes from Neil Mehta with Goldman Sachs.

The first question was on Superior pushing out the restart there a little bit. Just walk us through at the ground level what's happening at the asset. What are some of the moving pieces there, confidence about timing around restart at Superior?

Neil, it's Jon. Thanks for the question. So at Superior, we've been diligent in [indiscernible] last year. We've been understanding this project in a number of [ different ways ], but where we are today is really a highly derisked project. But what I would say further to your point, I mean, one of the things we really like about this project is it's absolutely on strategy for us. So this is a small refinery that consumes the molecules that we produce, and it's pipeline connected to Hardisty and produce a product slate that is well insulated in the market, and we quite like it. If you look at where you are kind of in the project, I mentioned it's largely derisked. So we're about 94% on the engineering, about 85% on procurement and about 65% on fabrication. So we're very, very confident in the time lines and in the cost estimates that we've given. And then I would just follow-up with that is, we've been working diligently with the insurers as well, and we have high confidence that the vast majority of this is going to be covered by insurance. So we feel really good about it. It's a good project. The economics are good. It's well derisked, and it fits well into the portfolio.

Jon, the follow-up is just on the Asia gas business. One of the risks around Liwan over the years has been the potential for price recontracting. But given the volatility in Asia gas pricing and your ability to also get a premium price because there is a capital element to your pricing as well, do you feel like some of that risk has been reduced? And just talk about pricing economics as you see it over the next couple of years for both Liwan but also for Indonesia.

Yes. It's Jeff here. I mean I think you look at -- I'll start with Indonesia. If we look at that is we do sell into industrials in the area, and we've seen stability there. And obviously, it's a government -- when you think about the upstream, it's a government project. And so we're tied in there, and we've seen very little moves there. And through that, if there's any change in prices, we've always -- there's always -- you always made whole. In Asia and China, what we kind of see is, as we talk about USD 9.50 to USD 10 for kind of the existing fields between 3-1 and 34-2 and clearly, 29-1 coming on, we'll be in that kind of USD 7.50 range. And I think with what we've seen in demand and offtake and obviously, I think the prioritization of the domestic gas production and the activity there, we're feeling fairly confident about it. And the proof is always in the pudding with the offtake we're seeing, and we're seeing very good demand. And we have seen prices recover just generally in the import business in China as well, which kind of feeds into confidence in the pricing.

Next question comes from Dennis Fong with CIBC Capital Markets.

I guess the first one here is just a quick follow on, I guess, to Neil's question there around Superior. Just given the revised project cost estimates to $950 million from $750 million, what were some of the major, I guess, differences between the 2 estimates? I know you mentioned just a focus around the safety component of things as well as ensuring that the B project is -- has a bit of a conservative CapEx budget. But were there any like specific changes that drove the incremental costs associated with the project? Or was it kind of a start-and-stop situation that was co-bid?

Yes. Thanks, Dennis. It's Jon. It's actually exactly what you said. It's really -- this is really a like-kind rebuild, and there have been some upgrades that are necessary just as you go through time, technology changes, and you can't make exact like-kind changes. But with things around some of the processing units, we've added additional safety procedures, which we think are prudent. But I've just come back to the point I made earlier, and that we've had an opportunity to get under the covers of this project for the last 8, 9 months and really beat it up. So this is something that we're very confident in. We've given you a schedule and a capital budget that we feel is conservative but appropriate, and we think we can deliver well under the parameters that we've said we've put out to the marketplace. So we feel very good about it.

Yes. And Dennis, it's Alex. As a guy who spent a lot of his career on major construction projects, I would just say, as Jon said, this is almost a uniquely derisked project at this stage in its development. And you think about the engineering at 95% complete, procurement in almost 90% complete and fabrication 2/3 complete. Those -- where we are with those elements of the project just really significantly derisk it because there's so many fewer unknowns than you would normally expect in a -- at the start of a project. So we are highly, highly confident of that capital number and that in the service data. I think Jon and his guys have put a great deal of conservatism going forward.

Great. Great. And then my follow-up is really just around capital allocation thoughts. Obviously, there's a high degree of focus on driving best practices between -- or picking best practices between the 2 companies, but there is obviously a little bit of focus on some of the higher-quality assets in general or the ones that have maybe a lower threshold for driving economic returns. What yardsticks -- or how could you describe some of the factors that you guys are considering with respect to looking at asset management as well as, we'll call it, kind of offsetting or managing any kind of the production declines or kind of incremental costs that could be driven on a per unit basis. When you're looking at some of the assets that are receiving, we'll call it, less capital in the near term and how that influences your capital allocation decisions going forward?

Dennis, it's Jon. One of the things we said during the acquisition phase of this is that there was a real opportunity for us to allocate capital differently between the 2 companies, and part of the synergies that we saw on the capital side was being able to invest more in the higher-return, higher-quality assets and less in some of the traditional assets that Husky had been -- Husky in particular, I guess, had been investing in. And we saw that as something that was part of the $600 million. When you look at the budget that we've put out, as I was mentioning previously, a vast majority of the Oil Sands spend is going to FCCL and Lloydminster. But that shouldn't mean that you should be thinking that that's any kind of a comment on the economics of Tucker, Lloydminster and Sunrise, in particular. We think there's lots of opportunity for us to invest in those assets to bring down sustaining capital and operating costs through time. Now internally, even on sustaining capital, we have internal targets that these -- or the capital needs to generate returns at $45 WTI and then on the conventional side of the business at $1.50 per GJ gas. And we run those screens across everything that we do. I think what you'll see going forward as we get into '22 and '23 is that you'll see an entirely different development plan in areas like Lloydminster, Sunrise and Tucker. That's going to reflect those kind of economics, and you'll continue to see those netbacks get better and better and the sustaining capital costs continue to come down. And I would make the same comment on the Conventional side of the business. We continue to find areas where we can invest capital productively in that portfolio. You'll see we've substantially increased the capital this year to take advantage of some very high economic return projects. But these are all robust to the $1.50 gas, and we're going to continue to see those costs come down in terms of operating costs and sustaining costs in that basin as well. So this is kind of where we are for 2022, but I think you're going to see additional synergies come in the 2020 -- or sorry, this is '21, but you're going to see additional synergies come in 2022 and 2023 as we continue to rework these development plans using Cenovus technology, operating practices and drilling practices.

Next question comes from Benny Wong with Morgan Stanley.

Alex, I just want to get an update in terms of how you're thinking about your downstream strategy. I think refining has largely been in the past view that more of a hedge for differentials for Cenovus. And for Husky, it was more of an integrated model, but I think some operational challenges often are sometimes distracted away from that. So wanted to get an update in terms of how you see that business, how you want to position it going forward to improve overall profitability and reliability. And as investors looking at that part of the business, what they should look for when thinking about ascribing value to that over time?

Sure, Benny. When you -- I think about the Downstream business and the integrated business model, and you'll probably recall that even 2 or 3 years ago when I was relatively new to this role, I was always saying that we like the integrated business model and particularly, the ability to move our molecules to our own upgraders and refiner -- refineries. But at the time, it just wasn't realistic, given the really lofty valuations of the refining sector at the time. And I would say, we always kept it in the back of our mind, and if there was ever any silver lining to this pandemic and the -- call it, the energy commodity crisis that ensued, it was in what happened to the valuation of refiners, including Husky. So that was really kind of the opportunity that we saw to recreate that molecularly integrated business model and to do it at a valuation that I really think is once in a generation that we were able to achieve with this deal. And as I said, I'm a big fan of the molecular integration, and I think it is going to give us a great opportunity, as Jon talked about of continuing to drive overall our free funds flow breakeven lower going forward. It has the added benefit of reducing our exposure to the heavy -- the light-heavy dip, but that -- I would say that was kind of a bit of a freebie that was attached to it. It was not the sole reason to do it. It was really to achieve the benefits of the integrated business model. I don't know, Jon, if you'd add anything there.

Yes. Maybe just a couple of things, Benny. And Alex, again, touched on some really key words, and what we've created is an integrated value chain. At any time you're connecting your upstream to your downstream with physical logistics, what you really have is optionality, and we don't -- we're not in a world where we have to run this on a supply-based model or we have to run the downstream on a merchant model. We have the ability to flip between. So what we will do is optimize across the whole, and we don't necessarily have a strategy that would say the downstream is going to be run as a merchant's group of refineries or it's going to be run as a supply-driven model. We have the ability to flip between and really optimize with what the market gives us, and that's what we're going to do, both in the short, medium and long term.

Great. That's very helpful, guys. Appreciate the thoughts. My follow-up is really on a specific asset, your Lima Refinery. We saw headlines of some operational hiccups. Just wanted to get an update there and any color in terms of how long we should expect that facility to be bound or curtailed.

Yes, Benny, it's Jon again. And you're right, we did have an issue in the Lima Refinery early in January. We had an issue in our cat cracker. You don't ever like to describe any incident to process safety incident as being minor. But this incident will not keep us down for long, and it was relatively minor in consequence. So you can expect that unit to be back up in early to mid-February. So we're thankful that nobody was hurt, more thankful that the issue is relatively minor in terms of consequence.

Next question comes from Phil Gresh with JPMorgan.

One of my questions is a bit of a clarification, I guess. The 2x leverage target at $45 WTI, is that a target for 2021 specifically? The reason I ask is because if I go back to the original slide presentation for the acquisition, it looked like it was closer to 3x in '21 and gradually moving to 2x, I think, in roughly 2022. So if you could just clarify that. And the $10 billion leverage target, is that for this year? Is that more 2022?

Yes. Maybe I'll take that one because I was part of that original slide deck that was put together. The debt target of $10 billion, Phil, is the EBITDA-generating capacity of the combined company at $45 WTI with a $13 crack and about a $12.50 differential. It wasn't a target specific to any year, but it's where we want to peg the balance sheet in terms of what we think is the right level of leverage for this company to be carrying on a go-forward basis. So what you can expect from us is that all the free cash flow that we generate as a company until we get to that debt target is going to the balance sheet. And then further, as Alex alluded to in his notes, we're actually going to drive below the $10 billion towards $8 billion. But between $8 billion and $10 billion, there is some room to have a discussion around shareholder returns and some incremental capital that we might wanted to spend on a discretionary basis, but it's more of a framework than an annual target.

Right. Okay. And I guess, just as a follow-up, similar topic of the original slide presentation. How do you think about the WTI breakeven price for 2021? You did have some numbers around that as well.

Yes. Phil, it's Alex. I mean we are -- when we go through this budget, we are dead on that $36 -- or right on that $36 a barrel breakeven. And what -- and I think the other number we had gave -- given was getting below $33 a barrel on the same metric. And the -- in 2021, obviously, those numbers are impacted by the onetime integration costs. And as we kind of get through those, you will see in 2022 and beyond the company getting to that like $33, sub-$33 number.

Yes. So Phil, if you remember, that $36 breakeven number is predicated on a $13 crack and about a $12.5 differential, I think, to $0.75. And the reason that's important to us -- and again, I think it's also contingent on a $2.4 billion sustaining capital program, but when you normalize for the pricing, it really keeps us honest in terms of what we're controllable for. And then as Alex mentioned, when you take out the onetime costs for synergies, you can get to the full rate -- run rate of the $1.2 billion, which we expect to be at the end of 2022, that number drops to $33.

Right. Okay. That's helpful. And the $36 for this year is inclusive of the onetime charges?

It's inclusive of the onetime charges, yes, and a normalized capital of $2.4 billion.

Next question comes from Manav Gupta with Crédit Suisse.

Over the last 1 week or so, we have had a whole bunch of executive orders issued here in the U.S. And I'm trying to understand when Cenovus and Husky look at these, do they see an opportunity set where they say, maybe U.S. production will start declining because of these bunch of executive orders, so at some point, we could bring back our Christina Lake and Foster Creek growth projects. Or is that too early at this point of the cycle? I mean I'm not talking about 2021, but maybe 2022, '23, you're looking at U.S. production actually declining because of the stricter regulations in the U.S. could Cenovus and Husky push forward with some of the future expansions at Christina Lake and Foster Creek.

Manav, I think that, that is -- that's part of the story. And obviously, the other part of the story is, with this pandemic, the massive disruption in capital spending by the upstream business in the Lower 48. And I think the combination of both of those events, ultimately, I think, create the opportunity for a positive situation for Canadian heavy. And just on that point, I would say, one of the things we're finding really interesting is a very, very strong demand for the heavies down in the U.S. and frankly, offshore. So I think all of that sort of directionally bodes well. I, for one, I don't think anyone in our industry should take any pleasure from seeing our industry peers having challenges, whether it's by political decree or otherwise. But yes, I mean, I think, directionally, those are helpful for the Canadian industry as for whether that would cause us to accelerate development of any of the future FCCL opportunities that kind of as -- I know I sound like a broken record, but it's going to depend on our balance sheet, and it's going to depend on egress availability out of the province. And we're feeling reasonably constructive on both of those. But as Jon said, he and I and Jeff have been banging one drum here pretty hard, and it is balance sheet, balance sheet, balance sheet. And that's where our focus is going to be at least until we get comfortably below that $10 billion number that you heard Jon refer to.

Perfect. And one quick follow-up here is, as we look at the operating cost guidance, Christina Lake and Foster Creek, $7 or $8.25 or $8.50, that's absolutely best-in-class. You can breakeven at $30 WTI. But as we move down Sunrise, Tucker, even Lloyd, they're slightly on the higher side. So I'm just trying to understand as Cenovus gets more and more involved with all these projects, what's the confidence level that you could make even Lloyd, Sunrise and Tucker more competitive, maybe not as competitive as Christina Lake and Foster Creek, but definitely more competitive than what they are currently.

Yes, Manav, it's Jon. That's exactly the message that we're trying to convey is there's lots of opportunity in the assets that we've acquired to bring Cenovus operating and development practices to those assets. We see lots of opportunity through time to drive not only operating costs but also driving the sustaining capital costs down from where we are today through bringing some of those practices and technology to those assets. The thing about Foster and Christina, it's not only the $6 and $8 operating costs, but the sustaining capital costs in a normalized environment are in sort of the $4 to $6 range. And that's the other opportunity that we have at Sunrise, Tucker and Lloydminster. But that's one of the reasons we really like this acquisition so much in that 130,000 to 140,000 barrels a day, almost half of the production that we acquired is SAGD production, and that's right in our wheelhouse of what we do really well.

Next question comes from from Chris Tillett with Barclays.

I guess, first, just a quick clarifying question for me, if you would. I guess, typically, I think we've seen operating costs in Indonesia in the range of about $8 to $9 per BOE. And I guess, just trying to make sure, is the implication there that costs are going up? Or has something changed in the way that this is what's been reported?

Yes, Chris, it's Jeff here. There's a couple of things here. It's really just aligning the Husky -- the heritage Husky classifications to the Cenovus classifications. And broadly speaking is the service cost, when you think about IS, finance, technical and marketing services, historically, at Husky and the operating units were classified as SGA in the operating segments. And now it's in the operating segments but really moving to OpEx, and you'll see that impact throughout the Husky -- the heritage Husky assets.

Okay. Understood that. And then, I guess, lastly, can you just -- and apologies if I have missed this previously, but you mentioned the drilling campaign on the gas side beginning in the third quarter. Can you just talk a little bit about that growth and where you're -- like where that money is being spent? And which side of the gas assets that you'll be focusing on?

Yes. So the majority -- there's actually 2 campaigns. There's one we're finishing up, and then another one that will be starting up later in the year. Most of the drilling is on the Husky -- or sorry, on the Cenovus side of the legacy assets, but there is some money being dedicated to the Husky side as well. So as I mentioned before, all of this capital is economic at $1.50 gas. And in the pricing environment we're seeing today and with this being relatively short cycle, the economics are very compelling. The other thing that this will help do for us is it just drives down some of the unit costs and that we're able to leverage off some of the existing infrastructure as well. So this is something we've been looking at for a while. The Husky assets do play a role in this and a piece of this, but it is really driven by the economic returns that these 2 programs are going to drive for us.

Next question comes from Neil Mehta with Goldman Sachs.

Just a quick follow-up here. RINs prices, particularly the D6 RIN, has continued to march higher. I remember, for Husky, this was a legacy challenge for them in the periods of high RIN prices and volatility. Can you talk about how you're thinking about managing that risk? And I think you have some disclosure in the deck, but just walk us through sensitivities and a ballpark RINs obligation dollar millions that you could anticipate in 2021.

Yes. Thanks, Neil. It's Jon. And you're right, RINs prices have kind of continued to march up all through 2020. And in particular, we've seen the D6 RIN hit sort of the $0.90 per gallon range. But on a blended basis, what we think for us is this translates into sort of $4 to $5 a barrel based on where we are today on RINs pricing. Now we do have the ability to offset some of that with the assets that we've acquired with Toledo and Lima, in particular, where we do have blending capacity in behind those refineries that does offset some of that obligation. The other thing I might say, Neil, and you know this, is we believe that the RINs prices are embedded inside the cracks, and so this is really something that kind of gets passed on to the customer and something you need to deduct from the crack to get to your true available crack. But at that kind of pricing today, we think that's kind of in the $350 million range for us.

Next question comes from Dan Healing with Canadian Press.

I had a question about how the merger is affecting the staff of the 2 companies. Alex, you said that a lot of the reductions have been done already. There was an initial estimate of 20% to 25%. Can you tell me how many people that involves? And are you looking at coming in within the 20% to 25%? Could it be more? Could it be less?

Dan, it's Alex. Yes. No, I mean, I think that guidance is still applicable. And if you think about it, you can do the math, but the combined entity when we started out was about 8,600 employees, and I think that 20% to 25% is is still an accurate estimate. And we would be getting a good way through that with the -- just what we've done in the first month of the year here.

Can you give us any indication of how many of those are in Calgary versus out in the Phoenix?

They honestly -- they're all over the -- where the combined entities had operations. But the majority and -- I'd hate to give a percentage, but certainly, the majority of those are coming out of the Calgary head office.

Next question comes from Luke Johnson with Energy Intelligence.

I was just wondering if you could comment a little bit about on how you're thinking about your offshore Atlantic assets, and particularly, the non-op discoveries in Flemish Pass? It doesn't look like you've allocated much of any capital to that region. And obviously, West White Rose is on pause, as you mentioned. It's currently uneconomic. But do you see Bay du Nord or any of these other discoveries as potentially economic right now? Or should we consider them to be kind of more in the category of West White Rose? And I guess, when can we expect an update on development planning for these Flemish Pass assets?

So Luke, I think -- it's Alex. And I think the right way is really to kind of think about all of those assets together. And when you hear Jon or myself talk about that, that East Coast business is -- we have put it almost largely on hold for the time being. Right now, with energy prices where they are, it remains a very challenged business unit for us, and we're going to take the entirety of this year at least to assess the viability of that business going forward.

Next question comes from Chris Varcoe with Calgary Herald.

Alex, I'm wondering, with the cancellation of the permits for the Keystone XL pipeline, what impact is that going to have upon the company? What impact do you think that is going to have midterm and long term for the industry here in Canada?

I think in terms of our company, Chris, it's a relatively muted impact and made all the more so because of the combination of Husky and Cenovus. And one of the obvious benefits of that combination is that it massively reduced legacy Cenovus, our exposure to egress challenges out of the province. If you take a look at the production that we have versus the egress options that we have in the combined company, the large, large majority of our production, we can find a home for and were no longer having to sell at Hardisty or elsewhere in Alberta and be exposed to that -- to any -- that light-heavy dip in the province. In terms of the industry, I mean, I think it's a tragedy. This is probably -- it's not probably, certainly, the most exhaustively reviewed project in the history of pipelines from an environmental perspective. It was repeatedly found by the U.S. State Department to have no material serious risks to the environment, and you're already seeing the impact of thousands of workers in Canada and the U.S. losing their jobs. And I think that's a tragedy. Now I would say, there are many other options for producers to get out of the province. And we see TMX going ahead. We see Line 3 going ahead. And obviously, those are positive counterpoints to it. But it -- yes, it certainly is -- was not happy news and I think unnecessary, unwarranted and damaging for both countries.

My other question is just regarding oil prices obviously moving up right now. Is there any, I guess, thoughts in your mind about increasing spending on production at all in 2021? Or is that money -- any excess free cash flow going towards debt? And I guess, more longer term, where do you see the next production growth coming from the company in terms of your priorities?

Yes. I mean I think we've been pretty clear, Chris. There'll be a point where we think we can talk about growth. We think that, that is -- that's once we get our debt well below $10 billion. But I think one of the nice things about this combined entity is that it really does provide us with a lot of more diversity of options. But I would say, the -- our FCCL assets, our Foster Creek, Christina Lake, continue to be among the jewels in the crown, and I would think in a world where we're able to look at growth again, they would obviously compete very favorably for capital going forward.

And we have a question from Nia Williams with Reuters News.

I was hoping you could talk about your crude-by-rail operations. Do you see shipments increasing this year?

We brought crude-by-rail back on in -- largely in Q4 of last year, and we've been able to do a lot of really good work with our freight partners, and that has allowed us to really bring the costs down of those movements. And I anticipate, at some level, we're going to continue that as long as we see differentials kind of in the -- the kind of mid-teens, low to mid-teens. I think some element of rail movement makes sense, but I wouldn't anticipate, unless we see differentials widen significantly north of $15, for example. It's not going to be a huge element of our business. It's a modest part of it.

And at this time, I will turn the call over to Mr. Pourbaix.

I just want to thank everybody for taking the time to listen in, in on our call, and we'll give you back the rest of your day. Thanks very much, everybody.

This concludes today's conference call. You may now disconnect.