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

Hello and welcome to this annual meeting 2021. Today's meeting is being recorded. It is my pleasure to turn the meeting over to the Director of Communications, Brett Harris. The floor is yours.

Thank you, operator, and good afternoon, ladies and gentlemen. Welcome to our 2021 Virtual Annual Meeting of Shareholders. This is the second year in a row that Cenovus is holding its shareholders' meeting in this virtual format. We view the use of technology-enhanced shareholder communications as a method to facilitate greater individual investor participation regardless of physical location. In addition, the virtual-only format for the meeting will help mitigate health and safety risks to our community, shareholders, employees and other stakeholders. Let me just spend a minute explaining to you how this works. Your information screen displays instructions on how to participate in the meeting by voting and submitting questions. Vote and question functionality are available only for registered shareholders and duly appointed proxy holders. All other guests are in listen-only mode. Also, please note that because today's meeting is being webcast, there is a delay between what our speakers are saying in real time and what participants of the meeting hear. And polling is now open. Voting is displayed on your information screen. If you've already voted, you do not need to take any further action unless you'd like to change your vote. If you are a shareholder or proxy holder, you may submit your questions at any time during the meeting by selecting the messaging icon on the information section of the screen and typing in your questions. Please note that questions related to the business of today's shareholder meeting will be addressed during the formal portion of the meeting and all other questions will be addressed following the formal meeting. When answering your questions, we may aggregate those that are similar. Any questions of a general nature that we don't address here will be posted and answered on our website, cenovus.com, in the coming days. And now I will ask Mr. Keith MacPhail, Chair of Cenovus' Board of Directors, to call the meeting to order. Mr. MacPhail?

Thank you, Mr. Harris. Good afternoon, ladies and gentlemen, and welcome to Cenovus' Annual Meeting of Shareholders. Before we start the formal portion of the meeting, I'd like to say a few words about our Board renewal process. On January 1, 2021, the combination of Cenovus and Husky Energy was successfully completed. The transaction was a result of extensive due diligence on the part of the leadership team with a high level of governance from the Board of Directors. As a result, the Board renewal process has focused on amalgamating the Board of Directors of the company. As such, I would like to once again welcome the 4 directors from Husky Energy standing for nomination to the Cenovus Board: Canning Fok, Eva Kwok, Wayne Shaw and Frank Sixt. All 4 directors were long-standing members of Husky's Board and joined our Board on January 1 of this year. They bring a diverse skill set and valuable depth of knowledge of Husky's portfolio of assets, which complements the expertise of the legacy Cenovus Directors. For their dedicated service to Cenovus, I would also like to recognize Susan Dabarno, Steven Leer and George Lewis, who departed Cenovus' Board upon completion of the Husky transaction. Now we'll move on to the business of the day. In accordance with Cenovus' bylaws, I will chair the meeting. Gary Molnar, our Corporate Secretary, will act as secretary and Stephen Bandola from Computershare Investor Services will act as scrutineer. The record date for determining shareholders entitled to receive notice of and vote at this meeting was fixed on March 15, 2021. I have been advised by the secretary that Notice of this Meeting was properly given and a quorum is present. Accordingly, I declare the meeting properly called and constituted for the transaction of business. The reading of the Notice of Meeting will be dispensed with, and I direct the secretary to include with the minutes a copy of the meeting materials, confirmation of mailing to shareholders and report on attendance. I now call the meeting to order. Alex Pourbaix, our President and Chief Executive Officer, is on the line today, along with Jeff Hart, our Chief Financial Officer; Jon McKenzie, our Chief Operating Officer; and as already noted, Gary Molnar, our Chief -- our Senior Vice President, Legal, General Counsel and Corporate Secretary, all of whom are available to answer your questions following the formal portion of the meeting. The rest of the Cenovus leadership team and our Board members are joining us virtually but are in listen-only mode. The business of today's meeting is described in the Notice of Meeting and management information circular dated March 15, 2021, that was delivered and filed in advance of this meeting. A link to the circular and annual report is available on the file icon on the information section of your screen and can also be found on Cenovus' website. The business of today's meeting is to receive the audited financial statements for the year ended December 31, 2020, and to consider and vote on 4 items as set forth on Pages 6 to 9 of the circular: the appointment of our auditor, the election of directors, the amendment and reconfirmation of the shareholder rights plan and the nonbinding advisory vote on the corporation's approach to executive compensation. For efficiency, we have prearranged for Alex Pourbaix and Gary Molnar, both Cenovus shareholders, to move and second the formal business motions. We will now proceed with the formal business of the meeting. The first item of business is to receive the consolidated financial statements and the auditor's report for the year ended December 31, 2020. The 2020 annual report containing these audited financial statements was delivered to shareholders in advance of the meeting, and a link can be found on the information section of your screen and on cenovus.com. We will now move on to the voting items. The polls are still open for voting on the items of business. As mentioned earlier, voting will be conducted by online polling and your voting options will be visible on your screen if you are a registered shareholder or duly appointed proxy holder. If you have already voted, you do not need to take any further action unless you would like to change your vote. Item 1 on the agenda is the appointment of our auditor as set forth on Page 6 of the circular for this meeting. Could I have a motion?

I move for a vote on item 1 to appoint our auditor as set forth on Page 6 of the circular for this meeting.

Thank you, Mr. Pourbaix. Is there a seconder for the motion?

Mr. Chair, I second the motion.

Thank you, Mr. Molnar. Are there any questions on the motion?

Mr. Chair, there are no questions on this motion.

Thank you. We will now move on to item 2 on the agenda, the election of director nominees as set forth on Pages 6 and 7 of the circular for this meeting, being Keith Casey, Canning Fok, Jane Kinney, Harold Kvisle, Eva Kwok, Keith MacPhail, Rich Marcogliese, Claude Mongeau, Alex Pourbaix, Wayne Shaw, Frank Sixt and Rhonda Zygocki. Could I have a motion?

I nominate the individuals you have listed and is set forth on the Pages 6 and 7 of the circular.

Thank you, Mr. Pourbaix. Is there a seconder for the motion?

Mr. Chair, I second the motion.

Thank you, Mr. Molnar. Are there any questions on this motion?

Mr. Chair, there are no questions on this motion.

Okay. We will now move on to item 3, the amendment and reconfirmation of the shareholder rights plan. Could I have a motion?

I move for a vote on item 3, the amendment and reconfirmation of the shareholder rights plan as set forth on Pages 7 to 9 of the circular for this meeting.

Thank you, Mr. Pourbaix. Is there a seconder for the motion?

Mr. Chair, I second the motion.

Thank you, Mr. Molnar. Are there any questions on the motion?

Mr. Chair, there are no questions on this motion.

Okay. We will move on then to move to item #4, a nonbinding advisory resolution to approve the corporation's approach to executive compensation. Could I have a motion?

I move for a vote on item 4, a nonbinding advisory resolution to approve the corporation's approach to executive compensation as set forth on Page 9 of the circular for this meeting.

Thank you, Mr. Pourbaix. Is there a seconder for the motion.

Mr. Chair, I second the motion.

Thank you, Mr. Molnar. Are there any questions on the motion?

Mr. Chair, there are no questions on the motion.

Okay. Well, we'll pause for a moment to allow those voting online now to do so, so 30 seconds or so. [Voting]

Online polling is now closed. In order for today's resolutions to be passed, the approval by a simple majority of the votes cast by shareholders who voted by proxy at this meeting must be received. I have received the scrutineer's report and confirm as follows: PricewaterhouseCoopers LLP are appointed as auditors of Cenovus; each director nominee is elected to the Board; the amendment and reconfirmation of the shareholder rights plan passed by more than 94% of the votes cast by shareholders; the nonbinding advisory vote to accept the approach to executive compensation passed by more than 97% of the votes cast by shareholders. I direct the secretary to file the final scrutineer's report with the minutes of the meeting. Details of the voting results will be filed with securities regulators and included in our news release following the meeting. The formal business of the meeting is now complete. May I have a motion to conclude the meeting.

I move that this meeting conclude.

Thank you, Mr. Pourbaix. I declare the formal business of the meeting is concluded. And we invite you now to give your CEO remarks, followed by a Q&A session.

Thanks, Keith. Good afternoon, everybody, and thanks for joining us for this webcast version of our Annual Meeting of Shareholders. All of us at Cenovus wish you and your families the best during this ongoing COVID-19 pandemic. Before I begin my remarks, please note the advisory on your screen. It refers to what I am about to discuss. Additional information about our forward-looking statements and financial information can be found in our first quarter news release, first quarter management's discussion and analysis and our annual report. I think we can all agree that this past year has been one of unprecedented challenges for the world, for our industry and for Cenovus, and yet today, I'm more optimistic about the future of the company than I have ever been. At this time last year, we were in the middle of the first wave of COVID-19. Cenovus had taken swift action to protect the health and safety of our staff, preserve our balance sheet, maintain liquidity and ensure the continuity of our business. Today, although the pandemic is still a real and present threat, there is an end in sight thanks to vaccines. The macroeconomic environment has improved significantly, and Cenovus is a stronger, more resilient, integrated Canadian energy leader thanks to our combination with Husky Energy. Since completing the Husky transaction on January 1, the entire company has worked diligently to integrate both organizations and deliver on our targeted synergies from the deal. Along with the rest of the Cenovus leadership team, I'm extremely pleased with the progress we've made in that short period of time. Last Friday, in our inaugural earnings report as a combined company, we announced strong operating and financial results for the first quarter. Our performance over the quarter demonstrated the initial benefits of the Husky transaction, and I'm confident those benefits will become even clearer through the balance of this year and beyond. Today, we are firmly on track to deliver at least $1 billion in synergies this year and reach our planned $1.2 billion in annual run rate synergies by the end of 2021. We're well positioned to generate significant free funds flow, and if current commodity prices are sustained, we expect to approach our $10 billion net debt target this year prior to the benefit of any asset divestitures. In short, we've come a long way over the course of the past 12 months, and I'm excited about the opportunities that lie ahead for Cenovus to deliver increased value for our shareholders. I'd like to touch on some of the key steps we took in 2020 that helped lay the foundation for where we are today. First and foremost, to protect the health and safety of our workforce and the communities where we operate, we responded quickly to COVID-19. Early on, we established comprehensive and proactive health measures. This included enhanced cleaning, physical distancing and daily health screening protocols. During the early days of the pandemic, we reduced staffing at our field sites to essential workers only. And as the pandemic widened across the country, we established work-from-home measures for the vast majority of our office staff. Today, we continue to follow the guidance of public health authorities in the areas where we operate as well as the advice of our internal health experts. Our company's ability to navigate the evolving public health environment is a testament to the agility and commitment of our workforce. Their health and our ability to keep delivering safe and reliable operations will remain our top priority as we move through 2021. We also responded swiftly to the collapse in benchmark oil prices early last year. The collapse was precipitated early last year by COVID-19 as well as the fight for market share between Saudi Arabia and Russia. In March and April, we reduced capital spending by 40% and temporarily suspended our dividend. We took action to improve operating efficiencies across the company reducing both our G&A and operating costs. To further maintain financial resilience, we strategically managed our oil sands assets. We reduced production in April before ramping up again in May and June in anticipation of the recovery in oil prices. We also purchased curtailment credits to produce above the government of Alberta's mandated production limits that remained in place until the end of last year. In line with the recovery in benchmark crude prices, we announced plans to combine with Husky Energy in October of 2020. The announcement was a key lever in our strategy to improve our cost structure, accelerate deleveraging and enhance market access. Our flexible capital and operating strategy in 2020 helped preserve liquidity. And as oil prices recovered, we were able to generate positive free funds flow in the second half of the year, helping reduce the impact of COVID-19 on our full year results. We also reinstated a dividend following the close of the Husky transaction. As you'll see from this slide, our share price traded largely in line with our peer group last year, underperforming the S&P/TSX Composite and Energy Indexes. However, following the October 25 announcement of our plan to combine with Husky, the gradual recovery in our share price began to accelerate, in line with the recovery in benchmark oil prices and ahead of our integrated peers in the S&P/TSX Energy Index. From the date of the Husky announcement to the end of April, our share price increased by 96%. That compares with 88% for our broader peer group of integrated producers and 72% for the S&P/TSX Capped Energy Index. While encouraging, I believe the recovery in Cenovus' share price has not yet come close to reflecting the inherent value and cash-generating potential of our company following our combination with Husky. As I mentioned earlier, the combined company reported strong first quarter operating and financial results last week. This included average daily production of nearly 770,000 barrels of oil equivalent per day, adjusted funds flow of more than $1.1 billion and free funds flow of nearly $600 million. And I'd ask everyone to keep in mind that if you add back the transaction-related costs that hit adjusted funds flow for the quarter, our adjusted funds flow would have been nearly $1.5 billion and our free funds flow would have been nearly $1 billion. Our results were largely driven by strong upstream operating margins. Our downstream margins were somewhat challenged during the quarter due to soft refined product demand and some weather-related issues. However, we're seeing clear signs of a recovery ahead in refined product demand, particularly in the U.S. Overall, the first quarter clearly demonstrated some of the early benefits of the Husky transaction, and I believe we're well positioned for a stronger year ahead. With the excellent progress we've made in integrating both legacy businesses, I'm highly confident we'll deliver on our planned $1.2 billion in run rate synergies by the end of 2021. Half of those planned synergies are expected to come from reduced operating costs largely related to workforce reductions. In the first quarter, we completed more than 2/3 of our planned reductions with the balance expected later this year and into 2022. Reducing overlapping roles as we integrate our 2 companies is absolutely critical to our future success. It's also very difficult for our workforce, so I would like to recognize and thank everyone, including those who are no longer with the company for their professionalism as we progress through the integration process. We're also starting to realize synergies above and beyond those included in our initial $1.2 billion target. For example, the application of Cenovus' considerable in-situ operating expertise at the Lloydminster thermal business acquired from Husky contributed to a single-day production record in March of over 100,000 barrels per day. We're continuing to reassess all of the acquired Husky assets for additional synergy opportunities. Looking ahead to the rest of 2021, our strategic priorities remain. We will continue to drive our cost structure lower, maintain capital discipline and direct free funds flow towards achieving our near-term goal of reducing our net debt to $10 billion by the end of the year. Reducing our net debt below $10 billion would open the door for us to consider other forms of capital allocation, including increasing shareholder return. That said, the bulk of our free funds flow would continue to be applied to the balance sheet until we've achieved our longer-term net debt target at or below $8 billion. Underpinning these priorities is our focus on delivering top-quartile health and safety performance as well as leading environmental, social and governance, or ESG, performance. Last week, following a robust ESG materiality assessment, we announced our 5 ESG focus areas for the combined company. These are climate and greenhouse gas emissions, indigenous reconciliation, water stewardship, biodiversity, and inclusion and diversity. And later this year, we'll be setting meaningful targets for each of these focus areas along with our plans to achieve them. Before I wrap up, I'd like to highlight one area of our ESG performance that's of personal significance to me. In January 2020, I announced the launch of our Indigenous Housing Initiative, committing an initial $50 million over 5 years to build around 200 new homes in 6 First Nation and Métis communities near our oil sands operations in Northern Alberta. This is the largest community investment in Cenovus' history, and it's a direct response to the concerns we've heard from indigenous leaders and what I've observed firsthand during my visits to these communities. Over the past year, despite the challenges of COVID-19, this initiative has made considerable progress. Working closely with Cenovus, the communities have been able to build and ready a dozen new homes for move-in, with 38 more scheduled for completion by the end of this year. In March, we also launched a 24-week Construction and Trades Readiness Program in partnership with Portage College for several members of the participating communities to acquire new building trade skills. So before we take any questions you may have, I'd like to play a short video marking the 1-year anniversary of this really important initiative. [Presentation]

I hope you enjoyed that video, and I look forward to bringing you further updates on the progress of our Indigenous Housing Initiative. And with that, we'll open the floor to questions from registered shareholders and duly appointed proxy holders.

Thank you, Mr. Pourbaix, and we will now answer questions submitted online. [Operator Instructions] Questions that are similar in nature may be grouped together for a single response. And if we have any additional questions left over afterwards, we will post the remainder of those questions and answer them on cenovus.com within 3 business days. I'll also add that, that video that you just saw is available on our website at cenovus.com. Mr. Pourbaix, we have no additional questions for the question-and-answer session.

Ladies and gentlemen, on behalf of the Board of Directors and the leadership team, thank you for attending our Annual Meeting of Shareholders.