Cenovus Energy Inc

NYSE:CVE

Earnings Call Analysis

Stable Capital Spending, Growth Projects, and JV Stance

The company is targeting a capital spend of $4.5 to $5 billion, largely unchanged from 2023, to fund high-return projects started in the previous year. They remain committed to exiting a downstream joint venture that isn't core to their operations and would rather sell than buy more of it. Despite volatility in commodity prices affecting volume and profit margins, the company anticipates the dip in prices to narrow as the new Trans Mountain pipeline commences, providing wider market access and likely resulting in a tighter price spread. Working towards reducing debt, the company plans tactical use of the pipeline, initially selling Free On Board at the dock, with aspirations to expand into Asian markets once operations stabilize.

Commitment to Shareholder Returns and Opportunistic Buybacks

The company has reiterated its policy to return 50% of excess free cash flow to shareholders either via buybacks or variable dividends. They continue to assess the intrinsic value of their shares under a flat $60 WTI scenario and remain active in the market for buybacks, adhering to this model through Q3 and intending to persist in Q4.

Operational Recovery and Capacity Increases

The sense of optimism is clear as the company has successfully reinstated operations at the Superior refinery after a 5-year hiatus and recovered from operational setbacks at Toledo. They not only aim to enhance the reliability of these sites but also seek to further leverage their integration potential. This, coupled with the 120,000-barrel heavy conversion capacity, offers a significant advantage in the current market. The push to reduce unit operating expenses and improve reliability underscores their determination to maximize margins and overall asset performance.

Stable Capital Expenditure with Focus on High-Return Projects

Capital expenditure for the upcoming years is expected to hover between $4.5 billion to $5 billion, paralleling the 2023 budget. Within this range, there is a dedicated slice for high-return growth projects which began funding in 2023 and will continue into the coming year. The impetus on these projects evinces the company's strategic approach to investing at the lower end of the cycle to secure efficient and substantial output in the future.

Accelerating Growth Through Strategic Projects

Significant growth is expected from the Foster Creek, Christina Lake Sunrise, and West White Rose projects, collectively poised to contribute over 100,000 barrels per day of additional production. With varying timelines leading into 2026 and 2027, the diverse projects include a steam expansion, pipeline construction, and technology application to existing infrastructures. These advancements are set to extend the company's growth trajectory into the latter half of the decade.

Progress On Major Capital Projects

The progress on the West White Rose project is promising with over 70% completion and important milestones achieved. Despite an impending 9-month hiatus for asset life extension work, it’s on track with its expectations concerning cost and schedule. Once operational, production growth is anticipated to commence from 2026.

Strategic Clarity on Asset Ownership

The company is transparent and steadfast in its stance regarding joint venture assets. Clear on their intent to operate core assets themselves, they are more inclined towards selling than acquiring, and will continue this approach if needed. The position remains unaffected by partner strategies, underpinning a focus on business operations and long-term asset management.

Navigating New Access with Trans Mountain Expansion (TMX)

While anticipating some initial hiccups in the operations starting in Q2, the TMX pipeline is expected to provide the company with enhanced access to new markets, notably in Asia. The approach involves securing agreements and supply FOB at the dock before fully embracing the opportunities that global market access will offer. The management demonstrates prudence in leveraging these advances while aiming to secure market stability.

Inventory and Working Capital Considerations

No significant change in inventory volumes has been noted from Q2 to Q3, with the increase in working capital attributed mostly to movements in pricing. Some structural changes are expected in Q1 associated with TMX line fill. However, it's much less exposure than last year, indicating strong performance and planning.

Expected Narrowing of WCS Differentials

The management anticipates that the spread will tighten up in the second half of the following year, potentially reducing to about half of its current magnitude once the TMX is fully operational. This projection is based on incremental regional production growth and revised market positioning in response to TMX developments. Likewise, the operational resiliency of its refineries considerably insulates the company against differential volatility.

Unwavering Focus on Reducing Debt and Increasing Shareholder Payouts

There is a clear goal to reduce debt to $4 billion and eventually transition to 100% shareholder payouts. While the timeline is flexible due to market volatility, it's identified as a priority for the company, underscoring their commitment to shareholder value and financial strength.

Toledo - A Core Asset Vital for Integration

The Toledo refinery is emphasized as a critical asset, consuming heavy oil from its own production and serving as a hedge against oil differentials. Its central role in the company's integration strategy affirms its status as a key infrastructure piece, bridging the upstream with downstream operations.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's third quarter results. As a reminder, today's call is being recorded. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question-and-answer session. You can join the queue at any time by pressing star 1. Members of the investment community will have the opportunity to ask questions first. At the conclusion of their question, members may then ask questions. Please be advised that this conference call may not be recorded or rebroadcast without expressed consent of Cenovus Energy. I would now like to turn the conference call over to Mr. Jason Abbate, Senior Vice President, Investor Relations. Please go ahead, Mr. Abbate.

[Jason Abbate, executive]

Thank you, operator, and welcome, everyone, to Cenovus' 2023 Third Quarter Results Conference Call. Please refer 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. They also outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus' annual MD&A and our most recent AIF and Form 40-F. All figures are presented in Canadian dollars and before royalties unless otherwise stated. We have also posted our results on our website at cenovus.com. Jon McKenzie, our President and Chief Executive Officer, will provide brief comments, and then we'll take your questions. We ask that you hold off on any detailed modeling questions. You can follow up with those directly with our Investor Relations team after the call. And please also 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. Jon, please go ahead.

[Jonathan McKenzie, executive]

Great. Thank you, Jason, and good morning, everybody. I'll start this call with our top priority, which is always health and safety. At our offshore China operations, Liwan 3-1 recently achieved a significant milestone of producing 1 trillion standard cubic feet of natural gas sales with no serious incidents or safety events. This is truly an impressive record of safety. And the comprehensive pre-start-up safety reviews conducted at our Toledo and Superior refineries resulted in strong process safety performance throughout the restart of these assets. These achievements underscore the importance of our values and safety commitments and the work that we do every day, and I'm proud of our staff for the hard work and effort that they put into achieving these milestones. Now we forecasted earlier this year that we would see strength of our operations and the value of our integrated strategy in the back half of the year. Our third quarter results are a demonstration of that with both upstream and downstream businesses delivering strong operational and financial results. Our upstream business saw an increase in production to nearly 800,000 BOE per day in the third quarter, and combined with higher commodity prices, we generated an operating margin of about $3.4 billion. In the conventional business, production volumes were impacted by wildfire activity in Q2 but returned to normal rates in the third quarter. Our production increased to over 127,000 barrels per day versus the second quarter number of 105,000 BOE per day. So I'd again like to thank our staff and contractors that play an integral role in our ability to resume or safely resume our operations following the unprecedented wildfire events. Our Oil Sands assets continue to perform exceptionally well following the execution of redevelopment programs and the start-up of new well pads, both of which support short and long-term production growth. Production increased over 600,000 barrels per day versus the second quarter number of 300,000 or 572,000 barrels per day. At our Sunrise oil sands production, third quarter production rose 17% to about 55,000 barrels per day. The asset continues to perform well as we apply Cenovus operating processes, including the implementation of redevelopment wells, adjusting well designs and operating parameters. Now I expect Oil Sands assets to continue their positive performance through the remainder of 2023 and beyond. We'll remain focused on operational reliability and the safe and efficient execution of our growth capital and product optimization projects with the Narrows Lake tieback, Foster Creek team edition and New Well Pads at Sunrise being a few key examples that support short- to medium-term growth plans. In our Offshore segment, our Asia-Pacific assets performed extremely well. The company achieved first gas from the Mac field in Indonesia in September. In the Atlantic, the Terranova FPSO has now returned to offshore Newfoundland and is expected to produce first oil in the fourth quarter, while our West White Rose project is also progressing as planned with approximately 75% of the work completed to date. We'll continue to advance the work for the regulatory dry dock of the CROs FPSO that will commence in January in preparation for the startup of the West White Rose project. Now turning to the Downstream business. The third quarter results generated much healthier operating margins from the refining and upgrading assets in our portfolio. Overall, our downstream business contributed over 900 million in operating margin with favorable crack spreads and FIFO tailwinds. Following a challenging first half of the year, the U.S. Manufacturing segment, we delivered on our expectations of getting the last of the refining assets online and running reliably. Following the purchase and start-up of Toledo and the commissioning and start-up of Superior, crude utilization increased significantly from 70% in the prior quarter to 88% in this quarter. This is largely due to Toledo having performed well at 90% utilization through the quarter. You also would have seen a sizable reduction in the unit operating costs in our U.S. manufacturing segment, with the majority of our refining assets running at or near full rates in the third quarter and a reduction in the overall operating cost associated with the start-up of Toledo and Superior. At the Superior Refinery, we achieved a safe startup of the fluid cat cracker in early October. While the startup of this unit was delayed, the business unit completed this complex work without compromising the safety of our staff and assets. And you will know that the Borger refinery is now undergoing plant maintenance, which will impact Q4 throughput. We're really pleased with the Canadian manufacturing segment. Crude utilization was 98% in the quarter with the Lloydminster upgrader and refinery demonstrating strong and stable performance and the ability to capture margins as heavy oil differentials widen. With the seasonally weaker crack spreads and the recent weakness in gasoline cracks, we're focused on optimizing our assets to maximize the economic results. We will continue to build on solid operational execution and reliability we've demonstrated this quarter going through year-end. I'd now like to highlight our corporate and financial performance. In the third quarter, Cenovus delivered approximately 3.4 billion of adjusted funds flow with both upstream and downstream businesses, demonstrating strong performance and contributions to operating margin. Through our base dividend share buybacks and partial payment of common share warrant obligation, we distribute over 1.2 billion directly to shareholders. In addition, the company's net debt was approximately 6 billion at the end of the third quarter. Long-term debt decreased to 7.2 billion after we purchased 1 billion of notes that were due between 2029 and 2047. We did see an increase in our working capital as compared to Q2, although this was driven by largely higher commodity prices. Looking forward, we remain focused on achieving our 4 billion net debt target and delivering 100% of excess free funds flow to shareholders at that time. So in closing, we believe we've delivered a stronger third quarter in line with our expectations. We're focused on furthering the operational successes that we've achieved in the quarter and continuing to progress both short- and long-term goals of the company. And with that, we're happy to take your questions.

[Jonathan McKenzie, executive]

Well, thank you very much, everybody. We certainly appreciate your interest in the company and wish you the best, and we'll talk to you again in the new year.

[Operator]

Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

[Operator]

Your first question is from Dennis Fong from CIBC.

[Dennis Fong, analyst]

My first one is just around the paydown of the warrant obligation. So in the quarter, as you highlighted, you did about $600 million. When you think about what's remaining for that obligation as well as your cash returns back going into the fourth quarter, how should we be thinking about share buyback cadence as well as any other considerations you're taking into going into the end of the year around the buyback?

[Kam Sandhar, executive]

So I think a couple of things I would highlight. First off, John alluded to this, but the price at which we had transacted on those warrants are obviously a lot lower than where our share price is today. So we made a very conscious decision to proactively pay that warrant obligation down in Q3 relative to continue to buy back stock. So I'd say the principles around that aren't going to change. We'll continue to look at probably paying down that warrant liability in the fourth quarter. I think given where even our share price sits today, I think it's not an unreasonable assumption to assume that we would pay the rest of that obligation in Q4. And then when you think about the rest of the buyback program and potential for variables, the approach for us has not changed. We're going to continue to test intrinsic value of the share price at a sort of flat $60 WTI price. If we continue to see opportunity in buying back stock, you should see us active in the market. And the goal is always to fulfill that 50% of excess refunds flow in any particular quarter, either through buybacks or through variable dividends. But we've been continuing to buy back stock through Q3. You'll continue to see us active in Q4. And I think part of that will also include payment of that warrant obligation.

[Dennis Fong, analyst]

My second question here or as a follow-up is shifting gears a little bit more to the operations side. Appreciate the color that you provided, John, on the flexibility of your downstream operations. I just wanted to ask a quick question about Superior and the FCC unit. As I recall, that FCC unit is generally used to help finish gasoline, and that through the third quarter, you were building some intermediate product. How should we be thinking about the opportunity set or how you're going to manage that inventory, again, just given where gas and cracks happen to sit that and your ability to maintain flexibility within that particular refinery?

[Keith A. MacPhail, executive]

Obviously, Superior being the first stop on kind of the mainline system and the current rate of differentials, it does provide a significant crude advantage and something different than we had online at the end of 2022. So pretty excited to have this asset up and running and fully operational. So we will continue to look at the economics and obviously, we will make economic decisions on on when we run that inventory off. But in today's environment, we're still seeing relatively robust returns to do that. I think the other thing I'd offer up, Dennis, is now that we have the integrated network up and running and the other assets up and running, we've been moving some of that intermediate inventory to other assets to run off those products and make finished product, and we've been doing that for a period of time. So it's not just that we have to run it through the existing assets.

[Operator]

Your next question is from Neil Mehta from Goldman Sachs.

[Neil Mehta, analyst]

Just some early thoughts on 2024 capital would be great. I think you guys do have some interesting growth projects in flight. And so can you help us think about framing this out, recognizing where you can get a little more clarity of this year over the next couple of months?

[Jonathan McKenzie, executive]

We are going to come out with a more formal budget release in December. But what we've been really trying to communicate to the market is that our capital spending over the next number of years is going to be between the $4.5 billion to $5 billion range, so very similar to what you saw in 2023. In 2023, we made a conscious decision to put some capital to work on some growth projects that we have in the portfolio. These are very high return, very efficient projects that we started funding in '23, and we'll continue to fund through next year and really through the planning period that we're looking at. But I don't think that the capital budget is going to look much different than what you've seen this year in the $4.5 billion to $5 billion range.

[Neil Mehta, analyst]

That's helpful. And then to build off that, can you talk about what some of those key growth projects are in 2024 and maybe that higher spend than maybe some were expecting a couple of years ago, some of it's because of differentiated projects, not just because of higher sustaining capital levels. So providing a little more color on what those are could be helpful.

[Keith A. MacPhail, executive]

I just want to anchor first on the fact that we look at investments in these growth projects at the bottom of the cycle. And they'll obviously in the bar and are relatively low capital to get the growth that we're going to be talking about. And as John indicated, we've kicked these off through the 2023 period, and they'll continue through 2024. But we're pretty excited about the Foster Creek, the Christina Lake Sunrise and West White Rose projects, all contributing about north of 100,000 barrels a day of growth. So at Foster Creek, we're doing a steam expansion. We'll be able to kind of wrap that up in the 2025 time period and start ramping up steam and production. That will add about 30,000 barrels a day of production in the 2026, 2027 time period. Christina Lake, we've been talking about this one for a little bit, but really, it's building a pipeline up into the narrows resource and bringing that back and processing it at Christina Lake, which is a much different concept than we had probably 5, 6 years ago in a way to access this resource at a much lower capital cost. So by doing that, we'll drop our SORs and we will see kind of an incremental 20,000 to 30,000 barrels a day of production at Christina Lake. Again, that kind of starts ramping up in the 2025 time period and full production kind of in the 2026 time period. At Sunrise, we've been actively working on applying the Cenovus technology since acquiring the asset. We've spent a bit of time with infills and redrills and redevelopment wells this year and so you're seeing production kind of north of that 50,000 barrels a day. But we're now we're adding pads. So the last time a pad was added at Sunrise was in the 2017 time frame. So we have a whole pad development program. The first one will be steaming at the back end of 2023 here and through 2024, but we're also adding additional pads. So through kind of that 2025, 2026 time frame, you can see us fully getting the full utilization of all the steam capacity at the asset and that should drive our production up into that mid-60s type range so we're kind of going to see a 15,000 to 20,000 barrel a day growth at Sunrise. And then on our East Coast project, the West White Rose project, this is where a bit more capital will be going in 2024 and 2025 time periods as we finish that project. We're north of 70% complete. We hit some milestones on our gravity-based structure in the quarter. And we'll be spending 2024 and 2025 to finish construction, Toit Offshore made up the top sides and the gravity-based structure and commenced drilling in 2025. So we'll start seeing production growing in 2026 and peaking in that 2028 time frame at about an incremental 45,000 barrels a day. So really excited about the growth projects, the volume it adds at relatively modest or low capital and so John's point, doing all this in that $4.5 billion to $5 billion capital range over the next couple of years.

[Operator]

Your next question is from Menno Hulshof from TD Securities.

[Menno Hulshof, analyst]

I've got a couple of follow-up questions from some of the prior questions so maybe I'll start with a high-level one on the operational outlook for downstream. Scale of 1 to 10, where do you think you are today on a downstream performance from a pure operational perspective relative to where you'd like to get to? And then where else do you see room for improvement within U.S. refining?

[Keith A. MacPhail, executive]

So basically you got to think about kind of what the downstream organization has been through, Superior was down for about 5 years, and we've now safely restarted that refinery and pretty excited about it. Toledo kind of came through an event and then a winter freeze event as well. And the team there has successfully restarted and has run that refinery reliably since kind of the June time frame. So pretty excited about where we are. I think we do continue to have opportunity though. And part of that opportunity is around the integrated nature of that value chain now that we're up and running and running reliably, and we are actively looking at integration opportunities between Lim and Toledo and ways to capture additional margin. Obviously, having around 120,000 barrels a day of heavy conversion capacity in today's differential market provides a lot of opportunity and flexibility to capture additional crude advantage at those 2 refiners. You would have seen our unit OpEx drop substantially in the U.S. downstream in the quarter. We're going to continue to work to grind that even lower over the next several quarters and continue to work on our reliability and continue to improve that. So we're not stopping, but we think we have additional opportunity to drive down unit OpEx, improve reliability and really extract additional margin but the assets are up and running and performing well today.

[Menno Hulshof, analyst]

Maybe I'll just circle back on West White Rose, it 75% complete. You've got $440 million invested on a net basis since restart. How is that project generally tracking relative to your internal targets? And given that it's offshore, where do you see the most risk between now and 2026? Is it in the time line of the budget?

[Keith A. MacPhail, executive]

Yes, Menno, we're pretty happy with where we're at. When we picked up this project, the gravity-based structure had kind of the base of the structure part and over the past 6 to 8 months we predominantly finished that gravity-based structure. And we have all the necessary contracts in place for the remainder of the project. The top sides are essentially mechanically complete down in Texas, and we're going to start progressing through the commissioning phase. So all in all, things are lining up. I will remind folks though we do have an asset life extension on the SeaRose FPSO, and that will take about 9 months here in 2024. So we will come offstation in early January and come back on production in late August, early September. And that extension really is setting us up for kind of the drilling activity that will happen in 2026 and making sure the asset can stay in place to kind of end of life. So all in all, I would say it's a big project, but it's trending well kind of as per our expectations on both cost and schedule.

[Operator]

Your next question is from John Royall from JPMorgan.

[John Royall, analyst]

So just wanted to clarify one thing on the capital allocation. It sounds like including the warrant paydown in your calculation for the 50% allocation. And then any update you can give us on potential timing of getting to that floor would be helpful.

[Keith A. MacPhail, executive]

So just on the warrant. So I think, John, I would just highlight, so when you remember the time when we announced the transaction on the Warn purchase, we did remind everybody that the warrant paydown will be included as part of our shareholder framework. So to the extent that we pay that liability down, it will be included as part of that 50% of excess free funds flow that we allocate to shareholder returns. So as John mentioned, we paid $600 million of that through Q3 on top of the $360 million of buybacks we did. And so going to Q4, you should expect us to probably pay that warrant liability completely, the remaining $111 million with the incremental either going back to share buybacks or variable dividends. And then on your second question, just around the debt. I think what I would just say is, right now, the focus for us, as the team has talked about, is executing the base business, focusing on continuing to progress these growth projects, moving the downstream to continued improvement on reliability and sustained throughput and the function of our debt is really going to be dependent on that in commodity prices. So I think we'll get there when we get there. I don't think I can give you a time line just given we've seen a lot of volatility in commodity pricing even in the last month or 2. So that timing is going to move around. But I would tell you, the focus is absolutely in getting there as quickly as we can.

[John Royall, analyst]

And then you've talked about being happy kind of with your portfolio as is. But you've also talked about not wanting to be in 50-50 JVs. You still have the one JV on the downstream side that's hanging out there and your partners now rolled out an asset sale target. So how are you thinking about that structure right now with WRB?

[Keith A. MacPhail, executive]

We've been really clear on that set of assets for years now. And we have been clear that we want to own and operate those assets that we see as core. We've been also clear that we are more likely sellers of those assets than buyers of those assets. And we've also been clear there's a fairly healthy bid-ask spread that has persisted through time. So I don't want to comment on what Philips is proposing within their portfolio. What we're focused on is running the business, and we're quite happy with holding that JV through the long term if that's required.

[Operator]

Your next question is from Greg Pardy from RBC Capital Markets.

[Greg Pardy, analyst]

You've got lots of capacity on Trans Mountain. Just curious how you're thinking about timing, but perhaps more importantly, how will your marketing strategy work? So will you sort of look to sell at the dock and to tankers or are you looking at something perhaps more integrated with markets in Asia and so on?

[Unknown Executive]

Maybe to kind of speak on kind of the premise of TMX. We're really pleased that it's still continuing and progressing. And I think even with these latest route change approvals and whatnot, I think it's still pretty positive that, that line is going to come into service here in Q2. So what you can expect from us is that we're probably going to get a call on line fill early in the new year. So with that, we're going to see a working capital build in order to fulfill our kind of volume commitment there. And then how we're thinking about that being one of the biggest shippers on that line and we're also planning for some obvious start-up variability in a line like that, it's pretty substantive in getting that operation up and running to a smooth rate is likely to also take some time. So we expect through 2024 to kind of manage that with probably a little bit of bumpiness in all reality. So how we're thinking from a marketing strategy is that we're going to initially be looking to secure some agreements and supply FOB at the dock itself. We're going to want to see that get up to a good stable rate. However, we do have some intention to get into new markets. It gives us another great tool and a suite potentially into global markets. We've obviously got some good connections and access into Asian markets with some of our offshore work over in Indonesia and China. So, yes, we are looking at that as a full suite of a new market access for us but we're going to do the right thing as we go into 2024, make sure that once they get up and operating, that we can see the reliability of that get there, which I think will take a bit of time, and we'll step ourselves into FOB going on to the water at some point and accessing those new markets that TMX is going to allow us all to go after.

[Greg Pardy, analyst]

I guess a question for Kam is good cash flow generation. Obviously, there's headwinds and there's an increase in pricing, as John alluded to. What does the balance of the year look like? And the reason I asked that, obviously, a $65,000 a question with you guys is when does the company get to $4 billion? Just curious what your thinking is there.

[Keith A. MacPhail, executive]

So just on the working capital. So a couple of things I would highlight. When you look at Q2 relative to where we ended Q3, first off, remember, we did book the liability associated with the warrant purchase, which was at full $711 million. So we drew that down at the end of Q3 for $600 million. So that was partly what drove working capital up in Q3 relative to Q2. The second piece I would just say is when you look at our inventory, I didn't see a lot of change from a volume perspective relative to where we were in Q2, but obviously, prices moved up significantly quarter-over-quarter, which is the lion's share of the increase that you've seen in the working capital. But as we move into the fourth quarter, it's obviously things continue to move around as we look at our marketing strategy on selling our barrels, but I don't expect a big change. And Drew highlighted the one more structural change that you'll see in Q1 when we add more barrels into the system or the line fill associated with TMX.

[Operator]

Your next question is from Manav Gupta from UBS.

[Manav Gupta, analyst]

We have seen some widening of WCS here. Can you help us understand what's exactly going on? And then where do you see this spread once, as you said, TMX does come online in 2Q? If you could help us understand some of those things.

[Unknown Executive]

As you've alluded to, the dip has widened here, and that was not unexpected. We've had some incremental growth come out of the basin here over the course of this year. And with condensate pricing and whatnot being quite attractive, people are really moving a lot of sales volumes. So we expected this to widen out. And as I alluded to with TMX coming on, I think in the near term, people also probably saw some of those potential delays and construction issues that have kind of come out as of late, and I think people probably shifted some of their positions on timing. But we fully expect, as the line fill even starts here early in the new year, I think you'll start to see things already start to head down the path of tightening back up and then as it comes into full operation into Q2 sometime, we do expect in the second half of next year for it to kind of tighten back up to what we saw when we had some egress space here earlier this year and late last year. So we would expect it to come down substantially from where it is probably in the order of half of what we're seeing today. But that probably won't show itself until it's actually up and operational and probably gets through some of its bumpiness as it starts up.

[Jonathan McKenzie, executive]

Manav I'd say one of the big differences this year from last year, and we certainly saw differentials widen last year when we had the Keystone outage and the like. But with the downstream up and running and performing the way it is, does insulate us from a lot of those wider spreads that we were exposed to last year. So while at a corporate level, we'd still like to see narrower spreads. We're much less exposed to that kind of widening through the fourth and first quarter of this year than we were last year so we're, again, really pleased to have those refining assets up running and performing well.

[Manav Gupta, analyst]

Based on the response you provided to Jon, I got a whole bunch of questions on my Bloomberg so I'm going to follow up on this. As it relates to those 2 assets, sir, is it more of a case of a price or is it more of a case that you always thought of Toledo as a core asset you want to operate and these 2 you don't actually fit that picture? Which one is it more? Is it price or is it more of the thought?

[Jonathan McKenzie, executive]

What I want to tell you is Toledo is an absolutely core asset for us. It consumes 90,000 barrels a day of heavy and it consumes the molecules that we produce inside our upstream. It consumes Christina Lake and it consumes Sunrise heavy oil and provides us insulation against heavy oil differentials and location differentials. So it's an absolutely core asset for us and a key piece of infrastructure. What I don't want to do is give anybody the impression that we're doing anything other than focusing on our base business right now and our core set of assets that we have. Our intention is to continue to build on the operating momentum we have, drive our debt down to $4 billion move to 100% shareholder payout. That is our focus right now. And I understand there's rumor swirling but they shouldn't be

[Operator]

That concludes our question-and-answer session. I will hand the call back to Mr. MacKenzie for the closing remarks.