Cenovus Energy Inc

NYSE:CVE

Earnings Call Transcript 2021-Q1

[Operator]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's First Quarter Results. As a reminder, today's call is being recorded. [Operator Instructions] Members of the investment community will have the opportunity to ask questions first. At the conclusion of that session, members of the media may then ask questions. 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 call over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.

[Sherry A. Wendt, Director of Investor Relations]

Thank you, operator and welcome everyone to our 2021 First Quarter Results Conference Call.I'm here this morning with our President and Chief Executive Officer, Alex Pourbaix Executive Vice President and Chief Operating Officer, Jon McKenzie; Executive Vice President and Chief Financial Officer, Jeff Hart; and 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's 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'll take your questions. We ask that you please hold off on any detailed modeling questions and instead follow up on those directly with our Investor Relations team after the call. [Operator Instructions] Alex, please go ahead.

[Alexander J. Pourbaix, CEO, President & Director]

Thanks, Sherry and good morning everybody.Today marks an important milestone for Cenovus. We are reporting our inaugural results as a newly combined company after closing our transaction with Husky on January 1. The entire company has been working diligently to integrate the legacy organizations and I and the rest of the team are extremely pleased with the progress we've made in such a short time. And I just want to make a really important point that this has come -- did not come without personal impacts to our staff. Since the closing of this transaction, we've had to make difficult decisions about workforce reductions as we drive to deliver on our plans, synergy targets. I'd like to acknowledge the professionalism and contribution of Cenovus as people through this period, including those who have left the Company.I've really been impressed by the grit and determination of our staff who have pushed forward our integration with a sense of urgency, even with the incredible challenges posed by COVID-19. Through it all, our staff have continue to reinforce that they're the most talented and dedicated team that I've ever worked with and they continue to drive the exceptional performance of our assets. You may recall the workforce reductions represented the bulk of the planned $600 million, in operational cost reductions included in our initial target of $1.2 billion in annual run-rate synergies.In the first quarter, we completed about 2/3 of our planned workforce reductions with the balance to occur later this year and into 2022. Combined with our 2021 capital budget, which set us to deliver the $600 million in capital synergies. We are on-track to achieve the combined $1.2 billion annual run rate synergies by the end of this year. And we're already seeing synergies in the operations that were not included in the initial annual run rate.In the quarter, we demonstrated the benefits of applying Cenovus as thermal operating expertise on assets brought into the portfolio through the Husky transaction, which resulted in increased production rates at the Lloyd administer thermals. I'll speak to that in a little more detail shortly.One thing I want to make clear before we get into our results is the safety performance including asset integrity remains our highest priority. We're harmonizing the 2 legacy safety programs, which is an important focus of our integration work and we're driving for continued improvements in our safety performance.With COVID-19 cases rising across Canada, including the areas where we operate, the health and well-being of our workforce remains a critical priority. Our sites are operating safely and efficiently. We're continuing to work closely with governments, health authorities and industry to protect our people and we have the necessary protocols in place to help ensure worker health and safety across the company. Our goal is to make the Cenovus, a top tier safety performer and to achieve this we'll continue to prioritize safety above all else.Turning to operational results now. As I mentioned, the combined assets have been performing exceptionally well. Starting with the upstream production of 770,000 barrels per day in the first quarter was at the higher end of our full year guidance range. In our oil sands business, Christina Lake and Foster Creek continue to be the foundation of our operations. These 2 assets were key to our $1.9 billion operating margin for the quarter contributing the majority of the $1.1 billion of operating margin from the Oil Sands segment, with netbacks of $25.60 per barrel at Foster Creek and $27.28 per barrel at Christina Lake.Christina Lake's steady performance continued through the quarter. At Foster Creek, we commissioned the most prolific well pads ever, and our oil sands operation and production grew steadily through the quarter with March averaging 171,000 barrels per day. As I mentioned earlier, we're starting to see some of Cenovus' operating strategies pay early returns at the Lloyd Thermals.Cenovus has a long track record of continuous improvement at the Foster Creek and Christina Lake operations and we're bringing this mindset and experience to the SAGD and thermal assets acquired through the Husky transaction. To put this into context, Cenovus' drilled over a third of all SAGD wells in Alberta. And in mid-April this year, the Christina Lake integrated team completed the longest SAGD lateral well in history at 2,234 meters. With that well, Cenovus now holds all of the top sixteen spots for longer SAGD wells drilled in the industry and this latest well is 23% longer than our previous record.With the expertise and data that comes from the company's collective experience, Cenovus has established leading operating practices, including improved conformance, subcool strategy and bottom water management. Now Cenovus' operating strategies are being implemented at the assets acquired through the Husky transaction. And these shifts we're beginning to show early results in the first quarter, including supporting, increased production rates at the Lloyd thermals.Production was up to an average of 96,000 barrels per day in the quarter, including a few days where we actually achieved over the 100,000 barrels per day mark. Overall that strong performance of the Lloyd thermals contribute about a quarter of the total oil sands operating margin in Q1.Conventional operations continued to provide strong operating margins. We've benefited from our Q4 winter drilling program coming into production coupled with marketing activities, allowing us to take additional advantage of higher Aiko prices.Meanwhile, our assets in the Asia-Pacific region continued to demonstrate stable production and strong netbacks of $58.53 per barrel, which contributed to operating margin of more than $344 million from the offshore business. In downstream recovery of refined product demand lag the recovery of crude oil pricing in the quarter. There were also some significant weather impacts to U.S. operations.Moving to the downstream segments, in Canadian manufacturing, the upgrader and Lloydminster Asphalt Refinery continued to deliver reliable operating performance, running near capacity through the quarter and with an average utilization of 96%. In U.S. manufacturing, economic run cuts to balance throughput with lower demand early in the quarter as well as winter storms resulted in overall lower utilization rates hindering financial results.Escalation of the cost of RINs also weighed into what we captured on the crack spread. While refining margins were challenged in the quarter, we're now seeing pretty clear signs of the demand recovery for refined products will happen at an accelerated pace through the rest of the year, especially in the United States. As a result, we expect stronger results from U.S. manufacturing for the remainder of 2021. Rounding out the operational discussion, the Superior Refinery rebuild is progressing well, on track to meet our schedule and budgeted capital before insurance proceeds.Turning to our financial results, we reported adjusted funds flow of just over $1.1 billion or $0.56 per share with free funds flow of just about $600 million. But I'd ask everyone to keep in mind, if you added back the transaction related costs that hit adjusted funds flow for the quarter, our adjusted funds flow for the period would have been nearly $1.5 billion, which would have equated to about $0.75 per share, and similarly free funds flow would have been about $950 million.Turning to our net debt position. I'll reiterate the deleveraging remains a top priority for Cenovus. You might recall that when we put out our fourth quarter results in early February, we talked about an opening combined net debt position of about $13.1 billion on January 1. Net debt rose slightly quarter-over-quarter, driven by a working capital build of almost $900 million, driven mainly by the rise in commodity prices over the period. In addition, we have the transaction-related costs that I just mentioned.With current commodity prices and having a significant portion of the transaction-related cost behind us, we expect to make substantial progress on our deleveraging through the rest of the year. Meanwhile, we have already seen net debt come down below $13 billion since the end of the first quarter, and assuming the forward curves play out, we have line of sight towards our interim net debt target of $10 billion by the end of the year, opening the door to consider other forms of capital allocation, including increasing shareholder returns. That said, the bulk of free funds flow will continue to be applied to the balance sheet until we have achieved our longer-term target net debt level at or below $8 billion.Switching gears to ESG, we're encouraged by the potential for government support for GHG reduction opportunities that will benefit our industry. We've been vocal in our position that government involvement at all levels, working with partners in industry will be critical to finding solutions to allow our industry to play an important role in helping Canada meet its climate goals.As we work through the refreshed business plan for the newly combined company, we've conducted a thorough assessment of our significant ESG areas. Safety and asset integrity along with a robust government framework remain the foundation of our ESG strategy and underpin the 5 ESG focus areas we've identified for the combined company. These are climate and GHG emissions, Indigenous reconciliation, water stewardship, biodiversity and inclusion and diversity. We're working to establish meaningfully ESG targets for each of the 5 focus areas embedded as part of our business plan for the expanded company and we expect to announce some later this year.Looking forward, we remain well on track to achieve our budget commitments and production targets with the strength of our upstream, operating margin in the first quarter and the outlook for accelerated refined product demand recovery over the rest of the year. We have a runway for meeting our first net debt target of $10 billion sooner than we originally expected. We're very confident that we will achieve our initial target run rate synergies and we have already started assessing opportunities that could create additional efficiencies in 2022 and beyond.And with that, we're happy to take anyone's questions.

[Operator]

[Operator Instructions] We will now begin the question-and-answer session and go to the first caller from Greg Pardy at RBC Capital Markets.

[Greg M. Pardy, MD & Co]

I'll just maybe just hit the 2 elephants in the room. I guess, one is, could you provide any color maybe around your asset disposition process and then the second is kind of related, which is how are you thinking about just the COP news this year or news this week, and then just the potential for buybacks?

[Alexander J. Pourbaix, CEO, President & Director]

Okay. Sure, I'll talk about the asset disposition process, first, Greg. And I've said this a couple of times, but nobody who follows this company should assume that we've been relatively muted in talking about specific assets for sale, our target prices, or targets for divesting assets. Nobody should mistake the fact that we've been relatively quiet about that, with a lack of interest or attention.We see -- we are laser focused on getting our debt down to $10 billion and below, and we recognize that getting the asset -- getting asset sales of non-core assets, can accelerate that very meaningfully and free up lots of optionality for the company going forward. So I think, I'm happy to say that we are well advanced in our thinking and actions around asset divestitures, and as before, we're just not going to talk about any specific issues.On Conoco, I'll give some thoughts and others may jump in. As I have said for many, many years, we always knew Conoco was not going to be a long-term shareholder. So the decision to divest doesn't surprise us. I will say, we were a little bit surprised in the manner and the decision as to how they intend to do it. I mean we have been in close contact with Conoco the entire time that I've been here and we've indicated, many, many times that we'd be very willing to work with them and offer up any ideas, we had as to good ways to do that. And that I think that opportunity is still open to us. I've certainly talked to my counterpart, and I know my team have talked to their counterparts over there. So we'll see where that goes.And as I said, kind of at the start of talking about asset divestitures, the whole goal for this company is to drive our net debt down and if we're successful doing that, and if we can accelerate doing that, that opens up the opportunities, how we could be helpful potentially with the Conoco share block. I don't know, if anyone else has any comments.

[Jonathan M. McKenzie, Executive VP & COO]

I think one of the things we always knew is, how and when Conoco chose to come -- chooses to come to market, is really their prerogative. And they've got to do what they feel is in the best interest of their shareholders. As Alex mentioned, we've had numerous conversations through the years with Conoco. But at the end of the day, we will continue to take a disciplined approach to this. And, as Alex said, look out for the best interest of our shareholders in all respects.

[Operator]

The next question comes from Neil Mehta at Goldman Sachs.

[Carly S. Davenport, Business Analyst]

This is Carly on for Neil. The first one was kind of a status check on the Husky integration process. It seems like the synergies are progressing nicely here. You mentioned in the prepared remarks, the synergies coming through that weren't initially identified, or able to provide any more color there and kind of frame the upside potential?

[Alexander J. Pourbaix, CEO, President & Director]

Jon, why don't you take this one.

[Jonathan M. McKenzie, Executive VP & COO]

Sure. So one of the things that we've really tried to signal through all of this is that and we've said this many, many times and the synergies that we identified and called out the $1.2 billion were those synergies that we had very high confidence in achieving in a very short period of time. And I think if you look at our capital numbers in Q1 and you look at our guidance going forward, the $600 million of that $1.2 billion on the capital. Obviously we're very, very confident in it and we think the street will get more confident in that as we prove that out. Of the $600 million of operating synergies, about $400 million of that relates to staffing reductions and where we're currently about 70% of the way through that in the first quarter in the residual $200 million. We have a lot of confidence that, that will be realized in very short order. So the message, I think to you is that the $1.2 billion was a number that we were very, very confident getting in a very short period of time. Where we're turning our attention to are some of the integration opportunities that weren't part of that original synergy calculation and I'll give you a great example of this. We alluded to it in Alex's note, and we have alluded to it in the press release. But if you look at Lloyd administer for example, Lloydminster was an area that we wanted to get on top of very, very quickly, post-acquisition. We want to do that for 2 reasons. One, we really like the asset, we think that small scale thermals in the Lloydminster area are going to be very prolific economically for a long period of time and we think we can add a lot of value to what's already there.So the other reason, we want to get on top of a very quickly, is it had a reasonable capital program this year about $250 million, which we felt we could optimize. So within the first 90 days, what we've done is we've reduced our capital program by about $50 million and we also got on top of the drilling program that was going on there pretty quickly.So we've -- in that first 90 days, we've changed the drill spacing, we've got longer wells going in. We're completing those wells with our liners and using our completion techniques, and we're seeing productivity gains there. We also thought that there was a real opportunity on the operation side, which is very capital-light to reduce the sub calls, reduce massive jobs, and to do things that increase our productivity on the existing fields.So we think in a short period of time, what we've done is increased the production in Lloydminster to about 1,000 barrels a day. We think that sustainable with a bit of upside and very low capital simply by bringing what we do best to the application in that field. So we're very comfortable that there is more of this to come and we're very comfortable that other assets inside the portfolio you're going to provide this as well. But this is kind of all above and beyond the $1.2 billion that we originally identified.

[Carly S. Davenport, Business Analyst]

That's great. Appreciate that color. The follow-up is just around wins. It's been highly topical given where prices have gone, so just wanted to get a better sense of an overseas exposure to RIN that the U.S. downstream and how you might be seeing that impacting margin capture this year?

[Alexander J. Pourbaix, CEO, President & Director]

Yes, it's our view and I think it's widely held in industry, I think as well as with the regulator that the RIN is really embedded in the crack and when you see the Chicago crack today, it's around $22, I believe last time, and I looked. The RINs are really a pass through to the consumers of gasoline and diesel. So I think RINs have actually increased to about $8 over the last 48 hours. So the real realized crack that we receive is kind of that $22 less $8. But that's the way we think about it, it's a pass-through to the consumer and it's a straight up reduction from the crack and we really don't see that there is any kind of arbitrage on the blend. We think that the scene was kind of pretty straightforward that arbitrage has really been bid away.

[Operator]

Your next question comes from Phil Gresh at JPMorgan.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Just a bit of a follow-up question to Greg, around the debt reduction versus the Conoco shares, just to clarify, I guess, are you saying that for the year of 2021 absent any asset sales, do you think it makes more sense to just focus on getting that debt down to the $10 billion number before you would participate in, anything?

[Jeffrey Ryan Hart, Executive VP & CFO]

I mean what we've always said and we always like to be consistent. Is that -- it is an absolute priority for us to get to $10 billion. We expect without any asset, divestiture proceeds, we'll get there in the second half of this year at present strip, and asset sales could obviously accelerate that to a meaningful manner. And once we're in that -- once we believe that we're at that point or heading to that point, then I would see share repurchases as one of the options that we would very much consider to returning value to shareholders.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Okay. And if you were to succeed with an asset sale, there's usually time required between a deal announcement and getting cash in the door. So do you have the line of sight that an asset sale has been [indiscernible].

[Jeffrey Ryan Hart, Executive VP & CFO]

We're getting pretty granular, Phil, but well, we'll look at all those things and consider when we kind of feel we've met that target we talked about.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Okay. Fair enough. People are definitely worth picking up for them. I guess my last question would just be, with respect to the quarter, was there a material FIFO benefit on the refining side? I didn't see anything in the releases, but usually there is a moving back to there.

[Jeffrey Ryan Hart, Executive VP & CFO]

Yes. No Phil, it's Jeff here and we did see some FIFO, but this ultimately ties into some of our inventory price risk management and as we source crude into the refineries or make export decisions, we will ensure that we inoculate ourselves or lock in that time spread and ensure that we get that economic result, as we are sourcing the crude into the refineries or exporting out of Canada.So we did see some FIFO in the actual refineries, but that shipment time really was -- we manage that and make sure that we mitigate that through our risk management losses to prevent against FIFO losses as we see that. So we did see some, but not a substantive in the cash flow impacts, given that position.

[Operator]

Your next question comes from Manav Gupta from Credit Suisse.

[Manav Gupta, Research Analyst]

So I want to first quickly focus on the CapEx, you came in below consensus, you also mentioned in your remark, previous comments that you were able to lower the Lloyd CapEx a little. So I'm just wondering if there is a possible downside to the annual CapEx number or is this just a quarterly thing and next few quarters could be a little higher? So we should stick to the annual CapEx guidance for now?

[Jeffrey Ryan Hart, Executive VP & CFO]

Yes. What I would tell you Manav is that we are focused on cost control right around this business. Alex mentioned our desire to get down to $10 billion of net debt quickly. So we are being very judicious in the way that we spend our capital in the way that we operate our assets on the OpEx side as well. What I would also tell you is that you should be sticking with CapEx guidance for the year. There is some phasing in the Q1 numbers. So you shouldn't take that as a run rate. In longer term in terms of sustaining capital, though, will be under this year, you should still be using the $2.4 billion as kind of your run rate for sustaining capital going forward.

[Manav Gupta, Research Analyst]

Okay, perfect. My quick follow-up here is, when we look at the netbacks on your supplement, what we're seeing is the Foster at 25, Christina is 28 and surprisingly other oil sands are 28. So I'm assuming that Tucker and Lloyd. And again, the way we're thinking about this is that Foster and Christina would be higher netback barrels than some of the other like Tucker and Lloyd, so was there something in this particular quarter, how should we think about the netbacks between those assets.

[Alexander J. Pourbaix, CEO, President & Director]

Yes, I think what you should think about is the quality differential of the crudes from the various places that we produced. So Christina is a heavier higher tank crude than what we have at Lloydminster, for example, and we have higher operating costs in the Husky assets than we have in the legacy Cenovus assets and we'll bring down those operating costs in the Husky assets over time as we get the SORs down and we optimize those assets. But the other thing that really affects those netbacks, Manav, is the royalties, and the Cenovus assets at Foster Creek and Christina Lake are post payout, where the Husky assets are pre-payout. So you'll notice very different royalty rates on those 2 things.

[Operator]

Your next question comes from Prashant Rao of Citigroup.

[Prashant Raghavendra Rao, Vice President]

My first one is around the risk management program. Since we reported last, the outlook for oil prices improved, downstream demand is, at least in North America, is looking much healthier. So I was just wondering, how at all, if at all, do you adjust your risk management program as we look out towards, hopefully, more normal supply-demand environment, and I'll leave it there and then I have a follow-up.

[Jonathan M. McKenzie, Executive VP & COO]

Yes. It's Jon McKenzie. I'll take a crack at this and then if Alex or Jeff want to chime in, they can. But post acquisition of Husky, this business carries around 40 million barrels of inventory at any given time. And one of the things that we do on a daily basis is, we make decisions as to whether we're going to sell barrels into the spot market, or we're going to put those barrels into a pipeline and take them to the U.S., usually pad 2 or pad 3, or we're going to take those barrels and we're going to put them into a tank, because we're going to forward sell them for a higher price. So typically, on about 15 million barrels, what we'll do is, we will price protect those, if the decision that we're making is to put them into a tank or into a pipeline. What you'll see over time, is that when TI goes up, you can expect us to have hedging losses on those barrels, we still get the uptick in the decision we've made, we've simply locked in the economics and TI has moved up and when TI goes down, you'll see us with hedging gains. So at the end of the day, all we're doing is locking in a better netback for our barrels by putting them in a pipe or putting them in a tank and we're taking off the WTI price risk there. So you should think about that as a continuing and ongoing program. That's what we call our inventory management through optimization program. What I would say is unique to this quarter, which you won't see, again, is a unwinding of the Husky inventory management program and there's about a $90 million to $95 million hedging loss associated with that. That's a onetime cost for this business related to the acquisition of Husky.

[Prashant Raghavendra Rao, Vice President]

Okay. And Jon, just to clarify there, so the integration value that Husky provides just sort of a natural hedge to some degree as well. So that's kind of where I was going with the question. But I think I got it from the way you talked about it there and pointing out -- highlighting the onetime is also helpful. My follow-up is... yes...

[Jonathan M. McKenzie, Executive VP & COO]

So let me touch on that before you bring up your next question, because I think that's actually kind of important. One of the things that we did do in the quarter is we moved a lot of our barrels on Husky transportation to the US, and so we have optimized, and if you have a look at our transportation and blending phase, you'll notice that they're down because we were able to optimize that. And then, similarly, you'll remember in legacy Husky, we had quite an exposure to WC asset at Hardisty. In today's world, on a blended basis, that exposure is much smaller, so is the differentials. You'll notice it widened to about $15 today, we have a much lower exposure to that differential than we would have had just 90 days ago.

[Prashant Raghavendra Rao, Vice President]

Appreciate that. My follow-up is switching gears to sort of carbon pricing. Broadly speaking, I wanted to -- I know you said before, there's, a lot of opportunities for you, at least as a carbon price in Canada comes up really in the upstream on carbon capture, CO2 injection. I just wanted to get a sense of, how much -- how we should think about capital, that sort of longer term, that's deployed there. And are these sorts of higher return projects with the size of the capital required, versus the scale of the assets he has in the upstream? And then sort of as a follow-up to that -- follow-on is, do you have any exposure to Canada's low-carbon fuel standards that looks like it's going to -- go into the sector, the enforced in 2022 and 2023? And I'll leave it there.

[Jeffrey Ryan Hart, Executive VP & CFO]

I'll take a shot at it and Jon may have a few comments, but I think the first thing I would say when you think about maybe I'll first talk about just carbon tax and the impact on our business and then I'll talk about some of the opportunities and the capital associated with them and but then, I'll probably have forgot your last comment, you're going to have to remind me, but one observation I would have is that I think a lot of people probably overestimate the dollar per BOE equivalent impact on us when they hear things like $170 a ton federal carbon tax but in the present situation with the provincial tier compliance costs, because we are a best-in-class facility, we actually have -- the carbon costs are really quite low and they make a very small component of our operating costs and our modeling would really suggest that would be -- continue to be true, even if those carbon costs were ultimately to escalate up to that kind of ultimate 700 -- or $170 a ton. So that's kind of the impact of the carbon tax in terms of sort of our aspirations to and plans to move to decarbonize particularly the upstream side of the company. I would say there is a number of things we're doing, there is a whole range of things and you've heard Jon talk about the success, we've had at Lloyd just in the few months and a number of the things that we're doing not only do they improve production. They also improve SOR. And so they significantly improve our carbon intensity, or GHG intensity per barrel, and we think there is far further to go in that regard of improving our carbon footprint. And then as you probably would have seen, the Canadian government came out with announcing a number of initiatives, including a tax credit for carbon capture utilization and storage. So in some of those -- those would be at the higher end and I would suggest -- and this would be the same for our industry in Canada, as pretty much any industry worldwide. The costs of implementing carbon capture and storage, those are going to be quite material. And the cost is not so much in the transportation, and putting it down into the ground. I mean that's all pretty well known. The larger costs for the upstream industry are -- and actually capturing and creating a relatively pure stream of CO2 and then pressurizing it. And there's a range of those costs, but if Canada wants to get there, the costs are going to be material. And I think what you've seen with the Canadian government's announcement is an acknowledgment that, if we're going to get there, it's going to take everybody working together to get there. And the cost ultimately has to be something that is manageable and bearable, and keeps our industry competitive.And the -- so we are looking -- we have quite a number of initiatives going on and have had for far beyond the time that I've been here, but you look at things whether it's our solvent pilots that were advancing, that would be another option to decarbonize, that would come -- that would be more economic. EOR technologies, obviously, would require less subsidy or support than carbon -- than pure carbon capture and sequestration. So there is an entire menu of opportunities and I wish it could be more specific, because they really do run a gamut of capital costs and efficiencies, but as I said, we're well advanced on kind of all elements of those from everything from the really short-term to operational performance, improving some of our worst performing assets. And then to -- what I would call kind of the medium term options, like solvent and then ultimately moving to the larger scale and more capital intensive, like carbon capture and that's kind of how we look at it.

[Prashant Raghavendra Rao, Vice President]

And yes, that last part of that was the system, more sort of just wanted to check quickly on the Canadian low carbon fuel standard that looks like...

[Alexander J. Pourbaix, CEO, President & Director]

Yes, I knew I was going to forget something. Yes, the government made a decision several months ago that the gaseous industrial fuels would not be part of the low carbon fuel standard. So particularly, the SAGD in our situation, because it does not apply to gaseous industrial fuels, does not particularly impact us now. It does impact us on the downstream side and obviously, on the downstream side, we'll be passing those costs through to ultimate consumers.

[Operator]

[Operator Instructions] Next question from Chris Tillett at Barclays..

[Christopher Paul Tillett, Research Analyst]

I guess just first quickly for me on the balance sheet, appreciate all the commentary so far. But I just want to be absolutely clear. Is it very characterize the approach at this point as you're aiming to get to $10 billion sort of as quickly as prudent, and then the march to $8 billion, we should expect capital allocation in that window to be a little bit more balanced between balance sheet, shareholder returns, CapEx, et cetera?

[Jeffrey Ryan Hart, Executive VP & CFO]

Yes. I think that's basically correct. One -- the thing I would say and this is something I know, Jon and I have said quite a bit. But living through the past year, as we have done has probably made, I think, both of us, we're balance sheet hawks from the start. And I know, Jeff is also, but I think living through the past year has really taught us the advantages and the benefits of running with an under levered balance sheet. So for today, we have these targets out there of $10 billion and $8 billion, but ultimately, I think none of our investors should be terribly surprised to see that $8 billion ultimately trend to a lower number. But we think we got plenty work ahead of us with the 2 targets we have in front of us right now..

[Christopher Paul Tillett, Research Analyst]

Got it, okay.

[Alexander J. Pourbaix, CEO, President & Director]

Yes. And Chris, you're absolutely right -- sorry, Chris, you're absolutely right those sub 10. We've always said there's room for a more balanced approach on capital allocation between shareholder returns and marginal investment in the business as well as debt reduction.

[Christopher Paul Tillett, Research Analyst]

And then just a follow-up from a previous question, I know that you don't want to say too much about asset sales at this point. But we just be curious to know, how would you -- from a broad perspective, how you would characterize the market today, we've seen a number of upstream assets change hands over the last 6 to 9 months, yourselves included in that list. I would say, it seems things downstream and midstream, seem to be a little bit slower. So just curious in terms of kind of how you would characterize everything, overall?

[Alexander J. Pourbaix, CEO, President & Director]

Yes. I -- Certainly, I think the upstream market has materially improved, even in the time since we announced the deal. I know our corporate development people are getting a lot of inbounds and I think financing, although still a little challenged seems to be coming back into the sector. So it feels like we've had a significant improvement particularly on the upstream side, which is frankly largely where we're kind of focused in our divestiture efforts.

[Operator]

Your next question comes from Chris Varcoe at Calgary Herald.

[Chris Varcoe]

Hi Alex. A lot of talk this week about the shutdown or potential shutdown next week of Line 5. I'm just wondering whether you have any concern about that, how that would impact either your company, more broadly, the industry or oil prices in Alberta?

[Alexander J. Pourbaix, CEO, President & Director]

Yes. I mean, it's a good question, Chris. I think that this is -- if people are -- if this were to proceed, people will very quickly find out the importance that oil and gas, propane, butane still have in the economy of both Canada and the U.S. this is a pipeline that is operated safely for decades, and is in the process of being replaced by what will almost certainly be the safest pipeline, perhaps ever built in North America. So I would actually view this as just an incredibly bad decision if the governor were to go ahead and shut down that pipeline. I think all you're going to be doing is you're not going to be improving safety, what you are going to be doing is damaging the economies of that area of both Canada and the U.S.

[Chris Varcoe]

Is there any specific impact that you have looked at for your company in terms of getting barrels down into central Canada? And have you done any analysis at all on the potential impact of a bottleneck in Western Canada on Canadian oil prices coming out of Alberta?

[Alexander J. Pourbaix, CEO, President & Director]

I mean, I think in our case, given our highly integrated nature, Chris, and the location of our assets, we would not perceive this to be an unmanageable problem for Cenovus. I do think that if it were to proceed it -- you can see how it could potentially have some knock on effects pushing back into the basin. But as I said, thankfully, with our integrated portfolio and with our firm pipeline commitments out of the province, we feel we're -- this is manageable for us.

[Operator]

Your last question comes from Robert Tuttle at Bloomberg News.

[Robert Tuttle;Bloomberg News;Reporter]

Yes, I was wondering about your retail -- divestiture of retail. Do you have any progress on that? I think you put it on hold earlier.

[Alexander J. Pourbaix, CEO, President & Director]

Yes, it had -- yes, we put it on hold -- the Husky, the predecessor owner of that business was engaged in a process. We put it on hold and it would be, I've talked in the past about having a going through a process with all of our assets to determine what is core and what is not core or alternatively what might may have more value in other people's hands. So the retail businesses -- we're engaged in that process with the retail business, but I'm not going to comment on specific assets at this time. As I said earlier, we will announce decisions when decisions are made.

[Operator]

That concludes today's Q&A session. I will now turn it back over for closing comments.

[Alexander J. Pourbaix, CEO, President & Director]

Well, thanks everybody for taking the time to listen into our inaugural Q1 Analyst Call. We really appreciate your interest in the company and everyone have a good rest of your day. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines. Enjoy the rest of your day.