Earnings call transcript: Cenovus Energy Q2 2025 highlights operational strides

Cenovus Energy reported its Q2 2025 earnings, showcasing robust operational achievements despite a challenging market environment. The company generated $2.1 billion in operating margin and reduced its net debt to $4.9 billion. However, its stock saw a slight decline of 0.44%, closing at $17.07, influenced by general market trends and sector performance.

Key Takeaways

• Cenovus Energy achieved a significant reduction in net debt, lowering it by $200 million.
• The company returned $819 million to shareholders through dividends and buybacks.
• Operational milestones included the first oil at Narrows Lake and increased steam capacity at Foster Creek.
• Cenovus anticipates tight heavy oil differentials due to the TMX pipeline.

Company Performance

Cenovus Energy demonstrated strong operational performance in Q2 2025. The company managed to reduce its net debt and returned significant capital to shareholders. Operationally, the completion of key projects like the West White Rose and enhancements at Foster Creek underscored its strategic focus on efficiency and growth.

Financial Highlights

• Operating margin: $2.1 billion
• Adjusted funds flow: $1.5 billion
• Net debt: Reduced to $4.9 billion
• Shareholder returns: $819 million through dividends and buybacks
• Share repurchases: $300 million at an average price of $17.50

Outlook & Guidance

Looking forward, Cenovus plans to reduce its capital expenditures to around $4 billion in 2026. The company is targeting 10% growth in cold heavy oil production and expects the West White Rose project to generate approximately $800 million in free cash flow by 2028-2029.

Executive Commentary

CEO Jon McKenzie expressed optimism about the company’s future, stating, "We are through this major maintenance cycle that we’ve been in over the last six quarters, and we’re really looking forward to seeing what we can do over the next 12 months." He also highlighted the company’s focus on maximizing free cash flow from assets.

Risks and Challenges

• Market volatility due to fluctuations in oil prices and OPEC+ production changes.
• Potential impacts from the TMX pipeline on heavy oil differentials.
• Ongoing geopolitical tensions affecting global energy markets.
• Regulatory changes that could influence operational costs and project timelines.
• Competition in the refining sector, requiring continuous efficiency improvements.

Q&A

During the earnings call, analysts inquired about potential cost reductions in U.S. refineries and the company’s strategy for releasing working capital. Executives addressed these concerns, emphasizing their focus on cost efficiency and capital management to enhance shareholder value.

Full transcript - Cenovus Energy Inc (CVE) Q2 2025:

Speaker 4: Good morning, everyone. Thank you for standing by and welcome to the Cenovus Energy second quarter 2025 results conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. As a reminder, this call is being recorded. I would now like to turn the meeting over to Mr. Patrick Reed, Vice President, Investor Relations and Internal Audit. Please go ahead, Mr. Reed.

Patrick Reed, Vice President, Investor Relations and Internal Audit, Cenovus Energy: Thank you, Operator. Good morning, everyone, and welcome to Cenovus Energy’s 2025 second quarter results conference call. On the call this morning, our CEO, Jon McKenzie, and CFO, Kam Sandhar, will take you through our results. We’ll then open the line for Jon, Kam, and other members of the Cenovus management team to take your questions. Before getting started, I’ll refer you to our 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. They also outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus Energy’s annual MD&A and our most recent AIF and Form 40F. As a reminder, all figures we reference on the call today will be in Canadian dollars unless otherwise indicated. You can view our results at cenovus.com.

For the question-and-answer portion of the call, please keep to one question with a maximum of one follow-up. You are welcome to rejoin the queue for any other follow-up questions you may have. We also ask that you hold off on any detailed modeling questions. You can follow up on those directly with our Investor Relations team after the call. I will now turn the call over to Jon. Jon, please go ahead.

Jon McKenzie, CEO, Cenovus Energy: Great. Thank you, Patrick, and good morning, everyone. As always, I’ll start with our top priority, health and safety. This quarter posed some unique challenges, and I couldn’t be more proud of the way our people responded. In late May, the Caribou Lake wildfire forced the evacuation of over 2,000 workers from our Foster Creek and Christina Lake operations. The fire came within a couple of kilometers of Christina Lake, and as a result, the facility underwent an orderly shutdown as per our protocol. After a brief outage and thanks to the tireless and determined work of our people, we safely ramped production back up to 250,000 barrels a day and returned to normal operations over the course of the week.

This effort included draining and restarting over 50 kilometers of steam pipelines, bringing 26 boilers back online, returning the Cogen facility back to service, and remobilizing all 2,000 people back to site. It was an incredible effort, all safely done and without damage to our assets. It’s a privilege to witness how our people step up when it matters most, and I’d like to thank our staff for their resilience and continued commitment and dedication. Now, turning to the quarter. This was a terrific quarter for the company. A lot of important work got done, and many important milestones were achieved. We underwent a heavy maintenance period, completing large turnarounds in both the upstream and the downstream, which came in ahead of schedule and under budget.

We achieved some very significant milestones on our major projects, bringing us closer to delivering on our production growth targets and completing our three-year cycle of higher capital investment. Through all that activity, we delivered exceptional operating performance across the company. Together, these achievements set the stage for the second half of the year and beyond, and they were accomplished thanks again to the hard work and determination of our people. Now, I want to speak to some of the details. Beginning with the upstream, production in the quarter was 766,000 BOE/d as we completed turnarounds at Foster Creek and Sunrise and managed the production impacts from the wildfire activity at Christina Lake and the steam release at Rush Lake. The turnarounds at Foster Creek and Sunrise both went very well. We completed the work and restored production well ahead of schedule, minimizing volumes lost over the quarter.

At Christina Lake, production came back strongly following the brief wildfire-related shut-in. Production was 218,000 barrels a day in the quarter and has averaged over 250,000 barrels a day in July. We achieved an important milestone with the Narrows Lake tieback to Christina Lake. Narrows Lake produced first oil earlier this month in July. This is a huge accomplishment and a testament to the technical and operations team who made this first-of-a-kind tieback possible. We’ll ramp up the first pads at Narrows Lake over the remainder of the year, and this means a lower steam oil ratio and sustained higher production rates as we maximize the value from this asset. The second quarter was also a very busy quarter at the West White Rose project. During the quarter, both the concrete gravity structure and the top sides were transported out to the offshore field location.

In June, the CGS was placed on the seabed, and in mid-July, the top sides were lifted and set atop the CGS well ahead of schedule. This feat of engineering included the world’s first-ever direct ship-to-ship transfer of a top side to the Pioneering Spirit crane vessel. With both the CGS and the top sides’ work complete and set in place, hookup and commissioning activities have now begun. This will include the connection to the SeaRose FPSO, which began producing oil earlier in the year following the successful completion of the asset life extension. During the quarter, it reliably produced over 7,000 barrels per day. We plan to commence drilling from the West White Rose platform before the end of the year and achieve first oil in the second quarter of 2026.

At Foster Creek, we tied in four new steam generators during the turnaround and turned them over to operations in July. These steam generators will collectively add about 80,000 barrels per day of new steam capacity as part of the optimization project. We will complete work on the de-oiling and water treatment facilities later this year, and we’re on track to bring on first oil from the project in early 2026. During the quarter, we also responded to a casing failure in an injector well at Rush Lake, which resulted in a steam release to surface. The release was a localized incident impacting one well at a Rush Lake 2 asset. In response to the release, both Rush Lake 1 and Rush Lake 2 facilities were shut in. Prior to the shut-in, the facilities had been producing about 18,000 barrels a day.

The well has been brought under control and we will work together with the regulator to complete a full investigation and put together a plan to safely restart production. As a result, and out of caution, we have removed Rush Lake volumes from our production guidance for the remainder of this year. The production impact has been partially offset by strong performance from the other Lloyd thermal assets driven by new development wells and optimization work. Overall, it’s been a very active and productive period for our upstream business, and we continue to deliver on our growth plans. In the downstream, we had strong results in the second quarter. Excluding inventory holding losses and expensed turnaround costs, the downstream business generated about $220 million in operating margin. The Canadian refining had another exceptional quarter.

Crude throughput reached a new quarterly high of 112,000 barrels per day with a utilization rate of 104%. The reliability improvements made to the upgrader during last year’s turnaround have enabled us to test the capacity of the facility, with crude rates reaching as high as 87,000 barrels per day versus an operable capacity of 78,500 barrels per day. The Lloydminster refiner also performed exceptionally well with rates reaching 33,000 barrels per day and record asphalt production in the quarter as we took advantage of strong seasonal demand. In U.S. refining, we delivered crude throughput of 553,000 barrels per day while also executing a major turnaround at the Toledo Refinery. Our execution at the Toledo Refinery was exemplary.

We took down eight major refinery units on the east side of the plant and, similar to Lima last year, took a targeted approach to address the issues that we expect to improve reliability going forward. The turnaround was completed 11 days ahead of schedule, and costs came in at the low end of the guidance range. Importantly, this marks the end of a heavy maintenance period across our downstream business where we have expensed nearly $900 million in turnaround costs over the last six quarters. With our full network up and running and our major maintenance behind us, we have a clear runway to demonstrate the capability of the refining network through the rest of the year and into the second half of 2026. I’m now going to turn it over to Kam to walk us through our financial results.

Kam Sandhar, CFO, Cenovus Energy: Thanks, Jon, and good morning, everyone. In the second quarter, we generated $2.1 billion of operating margin and approximately $1.5 billion of adjusted funds flow. Operating margin in the upstream was approximately $2.1 billion. Relative to last quarter, benchmark oil prices were lower and the Canadian dollar strengthened. This was partially offset by the WCS differential narrowing by more than $2 a barrel in the quarter. Oil sands non-fuel operating costs of $10.73 per barrel increased quarter over quarter due to turnaround activities and lower volumes in the second quarter. We expect operating costs to come down in the second half of the year and into next year as we return from maintenance and begin to bring on additional volumes from our growth projects. In the downstream, we generated an operating margin shortfall of $71 million.

Excluding $50 million of inventory holding losses and $239 million of turnaround expenses, operating margin in the downstream was about $220 million in the quarter. In the Canadian refining business, operating costs of $10.63 per barrel decreased by about $0.20 a barrel from the first quarter, coming in below our full-year guidance range for the second consecutive quarter. In the U.S. refining business, per unit operating costs of $10.52 per barrel decreased by about $1.60 per barrel from the first quarter and over $1 a barrel relative to the same quarter last year. We continue to make progress in driving down costs in our operated refineries as we increase reliability and structurally remove costs across our network.

Capital investment of $1.2 billion included sustaining activity across the business as well as growth and optimization capital in the oil sands, where we advanced our key projects, and in the Atlantic region with the progression of the West White Rose project. At the end of the second quarter, our net debt was approximately $4.9 billion, a reduction of about $150 million from $5.1 billion at the end of the first quarter. In addition to reducing our debt, we returned $819 million to shareholders through dividends, share buybacks, and the redemption of $150 million of preferred shares. We purchased approximately $300 million worth of shares through our NCIB in the quarter, or about 17 million shares at an average price of about $17.50 per share.

Non-cash working capital decreased by $923 million in the quarter, a significant contributor to our ability to continue to return cash to shareholders while further reducing our debt. We will continue to steward net debt towards our $4 billion target while remaining active with our NCIB. With the value we see in our shares today and with our growth projects on track to start up in the coming quarters, we continue to see a significant opportunity to increase our returns to shareholders going forward through share repurchases. To this end, the company purchased another $129 million worth of shares subsequent to the end of the quarter through July 28, or about 6.6 million shares. With that, I’ll now turn the call back to Jon for some closing remarks.

Jon McKenzie, CEO, Cenovus Energy: Thank you, Kim. As I touched on before, we had a terrific quarter and have successfully delivered on a number of key initiatives. We completed the turnarounds at Foster Creek, Sunrise, and Toledo well ahead of schedule and under budget. We achieved first oil at Narrows Lake and are now bringing on new production from some of the best quality resources in the basin. We have begun hookup and commissioning of the West White Rose project ahead of schedule after successfully completing critical work to make the concrete gravity structure with the top sides in July. We’ve tied in four new steam generators at Foster Creek that brings us one step closer to completing the optimization project and adding over 30,000 barrels a day of production at Foster Creek. Our growth projects are approaching completion.

Our major maintenance activities for the year are largely behind us, and we are focused on driving value from our operations. This is a pivotal moment for the company as we execute on our plan to deliver higher production and lower capital into 2026 and increase free funds flow. We have a clear view on the work in front of us and remain focused on creating long-term value for our shareholders. With that, we’re happy to answer any of your questions.

Speaker 4: Thank you. If you have a question at this time, please press the star 11 on your touch-tone telephone. We ask that you please limit yourself to one question and one follow-up. One moment for our questions. Our first question will come from the line of Menno Hulshof from TD Securities. Your line is open.

Thanks, Menno.

Menno Hulshof, Analyst, TD Securities: Good morning, everyone. Good morning, Jon. I’ll start with a question on U.S. downstream. With the understanding that you don’t disclose utilization by refinery, and you did touch on this to some degree in your opening remarks, can we just get a rundown on the status of your PAD 2 operated refineries? Given that the little bit of downstream turnaround activity that was planned for Q3 looks to have been pushed to Q4, how would you frame the bookends for Q3 utilization and market capture?

Jon McKenzie, CEO, Cenovus Energy: Yeah. The way I would frame it is we’ve always talked about being competitive in the downstream, and we’ve defined that as kind of a Q1, Q2 cutoff point, and we measure it using Solomon. What we’re driving towards is kind of that 98% availability right across the refining network that we have in the U.S. Today, all those refineries are kind of wide open. We’re out of turnaround at Toledo. Everything is operating as we would expect it to, and we expect to see that through the third quarter. I think we have some scheduled maintenance. It’s relatively small at Toledo, and I think that’s probably the confusion you have with additional turnaround work. As in any refinery, you have regularly scheduled maintenance that you undertake during the course of time.

If I look out from now, the only big turnaround we have happens in 2026 at Lima, and that looks like that’s going to be in the back half of the year, Q3, Q4, and then 2027 at Toledo. We are through this major maintenance cycle that we’ve been in over the last six quarters, and we’re really looking forward to seeing what we can do over the next 12 months and then more broadly with much less maintenance going forward through 2026, 2027.

Menno Hulshof, Analyst, TD Securities: Terrific. Thanks for that, Jon. Maybe just flipping over to Rush Lake, it’s good to hear that you’ve already developed a plan to restart the well. I’m not going to ask for background on the root cause because I know there’s an ongoing investigation. Given that it looks to have been a casing failure on an injection well, can we assume there’s minimal risk to Rush Lake design capacity and operating protocols? Are there any re-throughs at all for your other Lloyd projects? Thank you.

Jon McKenzie, CEO, Cenovus Energy: I think out of an abundance of caution and conservatism, we’ve removed Rush Lake production for the rest of this year. You’re quite right. We’re just finishing our root cause analysis and the investigation right now. We’re confident that this is a casing failure on one well. As I said in my call notes, we’ve got control of the site, and we’re moving to the recovery phase of this where we’ll work with the regulator and convince ourselves that we’ve got a good, safe startup plan for this. Both two things need to come together, and we need to finish the investigation. Suffice it to say we’re in the recovery portion of this incident.

Menno Hulshof, Analyst, TD Securities: That’s great to hear. Thanks again. I’ll turn it back.

Jon McKenzie, CEO, Cenovus Energy: Thanks, Menno.

Speaker 4: Thank you. One moment for our next question. Our next question will come from the line of Dennis Fong from CIBC. Your line is open.

Dennis Fong, Analyst, CIBC: Hi. Good morning. Thanks for taking my questions. First off, congrats on a really strong quarter. My first question here is just around next steps for some of these up-and-coming projects or ones that you’re working on next. I know you’ve highlighted Sunrise, Lloyd Thermal, and Conventional. Lloyd Heavy Oil, including Multilabs, as kind of potential next projects. Can you discuss around sizing of CapEx and how you would think about the cadence of growth, as well as cadence of spending over the next few years as you look towards these projects, as well as how do you maybe right-size them, given obviously the volatile commodity price environment we’re sitting in?

Jon McKenzie, CEO, Cenovus Energy: Yeah. As we’ve kind of signaled to the market, we’re really coming to the end of an investment cycle that we’ve had in this business that started in 2023, and it really concludes this year. We’ve been pretty clear that 2026 capital will be much reduced from where we were in 2023, 2024, and 2025. We’ve kind of used kind of a low $4 billion as a good marker for you to build into your models. One of the things that we think about as it relates to some of the shorter cycle assets that we’ve got, and I guess in particular as it relates to Lloyd, is we just feel like we’ve got some real tremendous structural advantages there in that we own a huge block of land. It’s full of oil. We own all the infrastructure.

We’ve got all the pipelines, and then we have a lot of the royalty rights there as well. As with any investment, we kind of right-size it, and we make sure that it returns capital and return on capital at $45. We kind of think about what’s the right pacing and staging to use in terms of how big that investment needs to be. We think about all kinds of things like, can we do this efficiently? Do we have the drilling location sized and set up and ready to go and that pacing and staging? I think when you think about 2026, it might be somewhere around the $150 million to $200 million range that we would put into that cold heavy oil business in Lloyd, and that kind of supports growth in the kind of 10% range as we move towards 40,000 barrels a day.

Like any investment, it’s got to make money at $45.

Dennis Fong, Analyst, CIBC: Great. Thanks, Jon. Really appreciate that color. My second question here, and maybe a bit of a follow-on to Menno’s first question, and frankly, not to belabor a focus on the U.S. downstream. Now that you’ve completed major maintenance on Toledo and obviously Lima last year, can you talk towards what maybe your team saw or changed during those turnarounds that provides you and the teams with incremental confidence around kind of this runway for stronger operations going forward?

Jon McKenzie, CEO, Cenovus Energy: Yeah. We’ve now had a chance to get inside every asset except for Superior, which we rebuilt and restarted in 2023, 2024. In Superior, sorry, in Toledo, we had a chance to take the east side of the plant down. The big units and the big money-making units that we had a chance to get into for the first time were the Isaac Cracker, the crude unit, the reformer. Got inside the sulfur systems, the vac tower, the small cokers, the hydrogen plants, and the flares. Those are pretty significant assets. When we got inside them, we didn’t find a significant amount of found work, which is always a good thing. The improvements that you make on that and getting everything cleaned, dusted, gives you a much better confidence that you can continue to run those kind of assets, the reliability rates that we’re looking for.

We were pleasantly surprised in the turnaround by what we didn’t find. We look forward to a good clean run in Toledo.

Dennis Fong, Analyst, CIBC: Great. Thanks, Jon. I’ll turn it back.

Jon McKenzie, CEO, Cenovus Energy: Great. Thanks, Dennis.

Speaker 4: One moment for our next question. Our next question will come from Alex Pourbaix from RBC Capital Markets. Your line is open.

Dennis Fong, Analyst, CIBC: Yeah. Thanks, Finn. Thanks for the rundown. Yeah, good questions so far. Jon, maybe just to switch into Asia for a minute. Leeuwon, Indonesia, as I sort of think about those assets, Leeuwon’s not oil price-driven. It’s a good field, reduces your break-even. Just curious how you sort of think about those two assets and how they fit in the portfolio long-term.

Jon McKenzie, CEO, Cenovus Energy: The way I think about them, Greg, is we have real competency inside our footprint, both in Asia and Indonesia. In Indonesia, we’re a non-operated party with 40%. In the South China Sea, we operate the deep water. I think, as you pointed out, these assets throw out a significant amount of free cash flow. It’s fixed-price gas, plus we get liquids. We produce that gas where we get about a $12 realization for. We produce the gas for about a buck. It’s got very minimal capital requirements, sustaining capital requirements, and the fiscal terms are actually quite good in terms of royalties and taxes. Our strategic bent on those has really been to operate well and harvest cash from them. I think, as you know, they kind of generate about $1 billion of free cash flow every year.

Our goal there is really to try and extend the contractual terms around the gas sales and get as much free cash flow as we can out of those assets going forward. It’s kind of a harvest strategy today with an idea that we’ve got some contractual optimization to do through time.

Dennis Fong, Analyst, CIBC: Okay. Makes complete sense. Just a quick one for Kam. I mean, the working capital tailwind was huge in the quarter. Should we expect much of that to reverse in 3Q, 4Q, do you think?

Jon McKenzie, CEO, Cenovus Energy: Hey, Greg, it’s Kam. Number one, I think working capital is something we’re always going to be focused on, making sure we minimize it to the best we can. The tailwinds you saw in the second quarter, a big chunk of it was driven by just the price movement we saw in the quarter. There’s probably about a $400 or $500 million impact on working capital release we had as it relates to commodity price changes on our inventory balances. The second piece, I would say, is there were some tax refunds that we were expecting that we were able to bring in the door through the second quarter that amounted to a couple hundred million dollars. I think the goal for us is to try to minimize any builds in working capital. Obviously, timing of production to sales, those types of things will always move around quarter to quarter.

I think the goal is to try to maintain and minimize and keep working capital as low as possible. I wouldn’t expect you’re going to continue to see fluctuations because of commodity prices, but I think we’re going to try to minimize that as much as we can. Obviously, this quarter, that release really helped us not just deleverage, but also continue on a fairly robust shareholder return program through the quarter.

Dennis Fong, Analyst, CIBC: Okay. Very good. Thanks. Thank you both.

Jon McKenzie, CEO, Cenovus Energy: Thanks, Greg.

Speaker 4: Thank you. One moment for our next question. Our next question will come from the line of Neil Mehta from Goldman Sachs. Your line is open.

Neil Mehta, Analyst, Goldman Sachs: Yeah. Good morning, Jon’s team.

Jon McKenzie, CEO, Cenovus Energy: Morning, Neil.

Neil Mehta, Analyst, Goldman Sachs: Good morning, sir. You’ve been always very transparent about your perspective around M&A and have a long history of doing really good M&A, including the Husky deal. Certainly, that’s been a lot of the investor focus and attention around a certain asset. Just your perspective on whatever you can say, whatever comments you would make about M&A strategy, and how do you think about a potential bolt-on deal?

Jon McKenzie, CEO, Cenovus Energy: I don’t think anything has changed in the way that we look at M&A. We have a portfolio that we quite like. We don’t see any holes inside that portfolio. As it relates to capital allocation and organic opportunities, they need to compete. Nothing’s really changed over the course of our tenure in terms of the way we look at M&A. Neil, if you’re thinking about a particular M&A piece, we’re obviously not going to comment on that.

Dennis Fong, Analyst, CIBC: We’ll just keep our eyes open. Why don’t we turn over to the operations here and talk about West White Rose?

Jon McKenzie, CEO, Cenovus Energy: Sure.

Dennis Fong, Analyst, CIBC: The concrete gravity structure is a big deal, getting that on. Just talk about now you’re moving into hookup and commissioning. What are the gating items? Remind us again what that translates to from a free cash flow perspective.

Jon McKenzie, CEO, Cenovus Energy: Yeah. In the last couple of years, starting with your free cash flow question, we’ve been investing about $800 million-plus a year into that project. That’s all going to kind of flip over and generate about $800 million of free cash flow using kind of a $60 WTI, $63 Brent pricing when we reach full production in the 2027 or, sorry, 2028, 2029 time frame. It’s a huge change in terms of cash flow generation versus cash flow consumption that we’re really excited about. You’re absolutely right. It’s a huge step for us to get this CGS on the seabed floor. This was done with precision. It was done really, really well. As I mentioned in my call notes, well ahead of schedule.

I’m always amazed at our technical people in this company, whether it’s in oil sands or whether it’s in the offshore or even in the projects group, what they’re able to do. Getting the top sides mated up with a gravity-based structure as seamlessly as we did and with the precision that’s involved was a real feat for this company and a real credit to those people. If you’re kind of looking at critical path now, the piece of commissioning that’s on the critical path is getting the top sides welded to the gravity-based structure. It’s a huge effort, and that will get underway in short order. We anticipate the entire commissioning and hookup schedule to be about three months. Prior to the end of the year, we will start drilling our first well at the West White Rose project with the first oil expected in early Q2 2026.

Dennis Fong, Analyst, CIBC: Thanks, Jon. Good luck with that. Important.

Jon McKenzie, CEO, Cenovus Energy: Thank you. Yeah.

Speaker 4: One moment for our next question. Our next question will come from Patrick O’Rourke from ATB Capital Markets. Your line is open.

Jon McKenzie, CEO, Cenovus Energy: Morning, Patrick.

Patrick O’Rourke, Analyst, ATB Capital Markets: Hey, guys. Good morning. Just looking here, you’re able to improve the outlook for the operating costs in the Canadian downstream unit with this update to guidance here. I’m wondering what the key drivers are here. Is it utilization? Is it reliability enhancement and margin capture? Or how much of that really came down to lower than anticipated gas prices in the Western Canadian Sedimentary Basin?

Jon McKenzie, CEO, Cenovus Energy: Yeah. It’s all of the above, Patrick. Anytime you’re trying to take costs out of a refining business and get your unit costs down, obviously, you’re looking at the denominator as well as the numerator of the equation, and getting good production on the top line is a big help. When we ran the upgrader and the refinery at the levels we did, you’re going to see a consequence on your unit costs on the output of that equation. One of the things I’d tell you is I think Eric and his team, and I couldn’t be more proud of these guys, not just in Lloydminster, but also in our operated refineries in Pad 2, have been grinding out costs over the last number of quarters. They’re kind of getting after this in a very tactical and in a very meaningful way.

What we’ve seen over the quarters is a continued reduction in not just the absolute spend, but as you get that better reliability and you’re not spending as much on maintenance and you’re getting the volumes that come through, it shows up in the numerator and the denominator of that equation. This is really blocking and tackling, and this is getting under the covers of the business, operating in a very deliberate and tactical way. We think we’ve got more to come. We’re on a journey as it relates to unit costs. These guys have been on it, and they continue to stay on it, driving that kind of performance. As it relates to energy, and in particular in Lloydminster, there’s no doubt we benefit from reduced gas costs and reduced electricity prices. The same principles apply.

You’re still trying to minimize the amount of gas you use and minimize the amount of electricity you use and use it as well as possible. All I would say is this is really blocking and tackling one-on-one, and Eric and his team have been all over this for some time, and we’re seeing the results now.

Patrick O’Rourke, Analyst, ATB Capital Markets: Okay. I was going to ask about West White Rose, but I thought that was pretty comprehensive there. I’m just going to switch back to the U.S. downstream. Maybe as it relates to my last question, how low do you think you could get the operating costs there, or if you could quantify the opportunity on a per unit basis? What’s really, when you think about the driver of incremental margin there between market capture, lower costs, product slate optimization, what’s really going to be the biggest driver of margin as we roll into the next 12 months where you don’t have the same level of major turnaround activity that you’ve had through this quarter?

Jon McKenzie, CEO, Cenovus Energy: There are always three drivers of margin in a refinery. One is you have to get the crude slate right, and I think we do a pretty good job of that. Now, differentials have been very tight. If differentials widen, we would capture more of that in our downstream, and that’s kind of a one-to-one relationship in the upgrader. At Toledo and Superior in particular, we do have a pretty high diet of heavy oil. As the differentials widen, you’ll see margin capture in those three assets in particular, those four if you include the Lloyd refinery. We have a lot of work we’re doing on the product side, so product placement is another area where you can drive additional value and additional margin capture. We’ve opened up the dock at Toledo. We think that’s a very strategic asset.

We continue to increase our terminal positions, not just in Pad 2, but we opened an asphalt refinery in Pad 4 recently. That was part of our disclosure in a prior call, and we work that piece of it every day. The commercial piece of the business works on it. As it relates to unit costs, we’ve been pretty clear that we’re not competitive on unit costs, and we need to get our unit costs down through time. We’re going to do this in a smart way. We’re not going to jeopardize reliability or safety to get there. The trajectory that you’ve kind of seen that business on, I would expect it to continue through time. We think there’s probably another $2 per barrel that we can get out of our U.S. refining assets through time, but that’s going to be a journey.

It’s going to be something that we’re going to be very deliberate about. As I said before, we’re not going to compromise reliability and safety, which are always kind of job one in running the refineries.

Patrick O’Rourke, Analyst, ATB Capital Markets: Okay, thank you very much.

Jon McKenzie, CEO, Cenovus Energy: Thanks, Patrick.

Speaker 4: Thank you. One moment for our next question. Our next question will come from the line of Manav Gupta from UBS. Your line is open.

Manav Gupta, Analyst, UBS: Good morning, guys. I just wanted to understand this a little better. You were down for about a week because of the fire, and you probably took a week to ramp back up. I’m just trying to understand the opportunity barrel that was lost. If these fires would not have happened at all, what would be a good number in terms of the volume that would be higher for the quarter versus if because of these fires?

Jon McKenzie, CEO, Cenovus Energy: Yeah. I’m Christina. I think that’s the asset you’re talking about. We were down for about four days, and we ramped up to full production over the coming week. About 11 days in total to go from a standing start to 250,000 barrels a day. I think adding up the barrels that we lost, it’s about 2 million barrels. If that were the number that you were going to use as the kind of LPO or lost profit opportunity, I think that would be a good number to put in your model.

Manav Gupta, Analyst, UBS: 2 million barrels. Thank you. That’s exactly what I was looking for. My second question to you was, you generally have a very informed view on the differential, especially on the heavy side. Multiple things going on here. OPEC raising some volumes, Chevron getting to drill back, very high U.S. utilization and desire for heavy barrels. What’s your outlook for the heavy light differential into the year-end?

Jon McKenzie, CEO, Cenovus Energy: Jeff Murray gets paid to provide insights on these kind of questions, so maybe I’ll turn it over to him.

Dennis Fong, Analyst, CIBC: Sure thing, Jon. There are sort of two parts to that. There would be what is the differential in Alberta and what is the differential in the U.S. Gulf Coast. I think you were referencing a lot of global things that impact that U.S. Gulf Coast differential. We’ve seen that be quite narrow compared to history, sort of a minus $2, minus $3 to WTI. That’s been obviously appropriate for where things have been. Looking forward, I think the question you need to ask yourself and answer is if there is increased OPEC Plus production. When does that come and how much is it? Much of that volume would be medium sour, which tends to have an impact on the diff in the Gulf. I wouldn’t see that going anywhere further past what is more a normal long-run average of maybe $2 wider, minus $3, minus $4, minus $5.

That tends to percolate back into Alberta. I would say on Alberta, it’s the same thing I probably said the last couple of quarters. TMX is here, and TMX is working, and TMX is doing what it’s supposed to do, which is to maintain the Alberta differential quite tight to the Gulf Coast. I think we would see that persist definitely through the fourth quarter.

Manav Gupta, Analyst, UBS: Thank you so much.

Jon McKenzie, CEO, Cenovus Energy: Thanks, Manav.

Speaker 4: Thank you. At this time, we have no questions in the queue. We will wait a minute to give you the chance to connect with us if you do have a question. I would like to remind you that if you are on the phone and wish to ask a question, please press star 11. One moment for any questions. Our next question will come from the line of Emma Graney from The Globe and Mail. Your line is open.

Neil Mehta, Analyst, Goldman Sachs: Yeah. G’day, guys. Thanks for taking my question. I’m just curious to get your take on the new policy environment that we’re seeing from Ottawa, Bill C-5, and that kind of thing, and where you think this might set Canada going forward, particularly with snow opportunities.

Jon McKenzie, CEO, Cenovus Energy: Thank you for your question, Emma. I’m going to turn this over to Jeff Lawson to give you an answer.

Patrick O’Rourke, Analyst, ATB Capital Markets: Hey, Emma. Thanks for calling in. How’s your day?

Neil Mehta, Analyst, Goldman Sachs: Pretty good, mate.

Patrick O’Rourke, Analyst, ATB Capital Markets: I’ll give you a bit of an answer. I think the federal Liberal government has been the most constructive with us and our industry than we’ve seen in the course of the past decade. They’re out here often, they’re visiting, and they’re really trying to make an effort, I think, to improve the Canadian economy. Bills are bringing in on major projects. I think they’re well-intentioned. They’ve got a lot of work to do with industry and with the provinces to get things done. What we say is perfectly consistent. We love the notion of new projects and strengthening the Canadian economy. At the same time, we need to take a step back and say, "What’s precluding us from proceeding with these things?" There’s a lot of regulatory hurdles.

There’s a lot of talk about an energy corridor or a new pipe to the coast, yet we still have a tanker ban and emissions cap, methane regulations, an industrial carbon tax that isn’t competitive with other jurisdictions. Those are things we need to see, we think, change for major projects to occur. The good thing is that the governments are all engaging on those discussions and being thoughtful about what we’re putting forth to them. I’m cautiously optimistic we’re moving in the right direction, but we’ve got a ways to go.

Neil Mehta, Analyst, Goldman Sachs: Great. Thank you for that. The other thing I was going to ask is basically when it comes to that policy kind of change, I know you don’t want to weigh in on M&A and MAG specifically, but I’m curious whether this broader policy change kind of shifts anything in the energy environment and infrastructure environment when it comes to mergers and acquisitions.

Patrick O’Rourke, Analyst, ATB Capital Markets: I think it shifts everything positively. I think just going back over the past decade, we’ve seen a flight of foreign direct investment in this country in all sectors because we have uncertainty of regulation. We have burdensome regulations and long time frames to get projects done, which are not competitive with other places. If we become more competitive, we’ll become more attractive to foreign capital. We’ll see higher valuations in various industries in different companies and would be more inclined to pursue organic and inorganic growth. We’ll have the funding to pursue organic growth, and we’ll also have the funding and backing—everyone will—to pursue more M&A initiatives instead of simply returning capital to shareholders. I think it’s a virtuous circle, and it would drive more M&A.

Speaker 4: Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Jon McKenzie.

Jon McKenzie, CEO, Cenovus Energy: Great. Thanks, everybody, for the questions today. For those of you online, we absolutely appreciate your interest in the company. Please enjoy a great day. Thank you.

Speaker 4: This concludes today’s program. You may all disconnect. Thank you for participating in today’s conference, and have a great day.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.