Cenovus Energy Inc

TSX:CVE

Earnings Call Transcript 2019-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] Please be advised that the conference call may not be recorded or rebroadcast without the expressed consent of Cenovus Energy. I would now like to turn the conference call over to Ms. Sherry Wendt, Director, Investor Relations. Please go ahead, Ms. Wendt.

[Sherry A. Wendt, Director of Investor Relations]

Thank you, operator, and welcome, everyone to our first quarter 2019 results conference call. I refer you to the advisories located at the end of today's news release. These advisories 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 our annual MD&A and our most recent annual information form and Form 40-F. The quarterly results have been presented in Canadian dollars and on a before royalties basis. We have also posted our results on our website at cenovus.com.Alex Pourbaix, our President and Chief Executive Officer will provide brief comments, and then we will turn to the Q&A portion of the call with Cenovus' leadership team. We would ask analysts to hold off on any detailed modeling questions and follow up directly with our Investor Relations team following the call. Please go ahead, Alex.

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

Thanks, Sherry, and good morning, everyone. As you've seen from our news release today, Cenovus delivered excellent operating and financial performance in the first quarter of 2019. We've generated just over $1 billion in adjusted funds flow, more than $730 million in free funds flow and had cash from operating activities of about $440 million. And with the additional debt repurchases we made during the quarter in this month, we've now reduced our total debt outstanding by about USD 1.4 billion over the last 6 months. Since all of our first quarter financial details are available on our website, and I'm sure many of you have already had a chance to look through them this morning, I'm not going to spend a lot more time talking about numbers today. This is a new approach that we will be taking in all of our future quarterly conference calls, I'll be keeping my formal remarks brief, so we can get to more of your questions.What I really want to highlight today are 3 things: first and foremost, we remain focused on safety above all else. I'm happy to report that we recently completed our winter program with a total recordable injury frequency and significant incident frequency of 0 with no reportable spills. That's a record for the program and during the first quarter, our company-wide total recordable injury frequency and significant incident frequency were both better than the target we set for our company. So I'd like to congratulate our teams on their excellent safety performance.Second, our strong financial performance in the first 3 months of the year was clearly influenced by the significant improvement in WCS prices that we began to see in December. However, it was also the result of the substantial improvements we've made to our business over the last 1.5 years. When I joined this company in the fall of 2017, my first order of business was to refocus Cenovus on creating value for shareholders. I said that our top priorities after delivering safe and reliable operations would be deleveraging, capital discipline and cost leadership. Clearly, our job is not over, and we have a lot more to do. But I can confidently say this morning that we have made great strides, and we have been doing what we said we would do. We've significantly improved our balance sheet, maintained capital discipline and established our position as an in situ cost leader. The third thing I'd like to highlight is that I believe our first quarter results truly underscore this company's long-term potential to generate significant cash flows and create shareholder value. We have some of the best oil sand assets in the industry with a low-cost structure and demonstrated reliable performance. We have diversity in natural gas and natural gas liquids through our Deep Basin businesses. We continue to benefit from integration through our jointly owned U.S. refining assets and our Bruderheim rail loading terminal. And through our significant committed capacity on new pipeline projects and our crude-by-rail contracts, we have a strong long-term market access position with increased access to global prices for our oil. In the first quarter, I think, you've seen what our assets and our strategy can do. In a current commodity price levels, I'm confident that we are well positioned to continue to generate significant free funds flow and make additional progress towards our debt reduction target over the rest of 2019 and beyond.Deleveraging remains our #1 financial priority this year, and we are on track to achieve our long-term target of getting our net debt down to about $5 billion. At that level, we believe, we will be in a position to maintain a net debt to adjusted EBITDA ratio of less than 2x at low commodity -- at low-cycle commodity prices. And once we have a clear line of sight to achieving our deleveraging target, I believe we'll be well positioned to begin balancing our capital allocation decisions to include increased shareholder returns and disciplined investment in growth.Turning to the government's mandatory curtailment program. This continues to be a controversial issue. So I'd like to take a minute to reinforce why it was the right decision for the people of Alberta and our industry. With respect to provincial royalty revenues, I think the numbers tell the story. In the fourth quarter of 2018, when light-heavy differentials reached record highs, peaking at more than USD 50 a barrel, Cenovus had a net royalty credit with the province of Alberta of approximately $30 million. So in other words, not only did we not pay royalties, the government in fact owed us for the royalties. In the first quarter, as a result of improved commodity pricing, which drove our strong financial performance, we made royalty province -- payments to the province of more than $190 million. And our production accounts for only 10% of total oil production in the province. If you multiply the net benefits of higher WCS prices, which are directly related to mandatory curtailment to our industry's financial performance and to the province's royalty take, and you extend those benefits through the rest of the year, it's crystal clear that temporary mandatory curtailment has been a big win for our industry and for our province.As a result of curtailment, we've updated our full year guidance for production and oil sands operating costs. While we'll continue to operate at reduced production volumes while mandatory curtailment remains in place, we've made a strategic decision to maintain normal steam injection levels at our oil sands facilities so we can continue mobilizing barrels in our reservoirs. So while curtailment reduces production volumes, our steam use and operating costs remain somewhat static, resulting in temporarily higher per barrel operating cost and steam to oil ratios. We expect our operating cost and SORs to return to more normalized levels when the curtailment is lifted.And as our first -- strong first quarter results have demonstrated, the net benefit of higher heavy oil prices resulting from mandatory curtailment has more than offset the impacts to our production volumes and operating costs. And we expect this to continue. So with that, let me conclude by saying, I'm very pleased with our first quarter results, by the performance of our operations and by the tremendous progress our teams have achieved. I believe we are building strong momentum that will continue to contribute to our ability to generate significant cash flows and build long-term value for our shareholders in the months to come. Finally, I'd like to remind you that we expect to update the market on our strategy and 5-year business plan at our Investor Day in Toronto on October 2, 2019. So with that, let's get straight to your questions. Thank you.

[Operator]

[Operator Instructions] Greg Pardy from RBC.

[Greg M. Pardy, Managing Director and Co]

Couple of ones, maybe just a technical one and that is just with Christina Lake, I think you guys had a planned turnaround there. I think we've modeled like 21 days in the second quarter, but is that still the plan?

[J. Drew Zieglgansberger, Executive Vice]

Yes, Greg, it's Drew here. Yes, it is. Actually, literally, today we are starting with the ramp down to go into that turnaround, and it'll be about 23 days. And so we expect to come up in the middle of May. And so that was what we had planned there last -- late last year, and we just moved it here to this quarter now. So it's, literally, starting today for the next 3 weeks. With that turnaround, one of the things we did, which may be another question that somebody would have is, how are we doing around curtailment. And one of the benefits that we've kind of have had here because we kept steaming our reservoirs, we allow -- we brought both Foster and Christina Lake up here at the beginning of April. As you saw last year, we were able to kind of bring up to say, 400,000 barrels a day of production. We were able to do the similar thing here again, for the first 3 weeks of April to make sure we got our volume basically banked to accommodate the turnaround that's starting here literally this week.

[Greg M. Pardy, Managing Director and Co]

Okay. Yes, that's great. Good to know. The second one is maybe just a bit more macro and that is, have you been surprised at just how narrow WCS Maya spreads have been given the Alberta storage levels? And is there any -- and when you triangulate curtailment storage levels and differentials, does that math go around in your minds?

[Keith Chiasson, Executive Vice]

Greg, it's Keith here. Obviously, when the curtailments were announced in December, we saw a very significant market reaction with regards to the differential and they've kind of held. And we've seen through the first quarter as the government started backing down off the curtailment from the original 325,000 barrels a day to kind of the forecasted 175,000 by the end of June. The market continued to main that -- maintain that differential. We also saw rail come off a bit, and I think what that's really telling us is that the market is essentially balanced between production and takeaway capacity, between existing pipelines, internal use in the province as well as kind of that rail capacity, and I do think that over time, as additional production is brought into the system through the reduction of curtailment, that we will see that differential potentially widen a little bit to incent additional rail to grow.

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

Yes. Greg, it's Alex. I think there's just a couple of other, what I would call, kind of short-term things that are probably impacting storage. You've heard Drew talk about the fact that we have -- I mean, we're preparing for turnaround, I think, a lot of the other industry is preparing for their spring turnarounds. And, frankly, we're also in an upward price environment, which has probably motivated a lot of people to store in hopes of seeing a better price for their barrels in the future months. So I think, those have also -- those factors have also contributed in the short term to storage remaining relatively full.

[Operator]

Your next question is from Phil Gresh from JPMorgan.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

I guess, first question's a little bit of a macro follow-up. I guess with the new government taking over here, how are you viewing the support for their curtailments? And how do you see that playing out through the rest of the year? Do you think it'll be kind of status quo on that plan? Or would you expect something to change?

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

I think -- and sorry, Phil, it's Alex. I mean, I think you'll recall at the time that the government announced curtailment in December last year, you had the UCP come out on a nonpartisan basis supporting that legislation for the same reasons that we identified. And I -- if you look at that royalty take for the province that I referred to in my opening comments, you can see a scenario where this royalty -- or this curtailment is contributing somewhere probably between $8 billion and $10-or-even-higher billion a year in increased royalty revenue for the government. So I do think everybody is motivated to see this curtailment come off, and particularly come off when we have options either pipe or rail to get it off, but right now I -- as I said, I think it's proving itself to be pretty valuable to the province and to the industry.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

And as you look at the expectations for your own rail and the government rail commitments, do you have a view as to how much longer their curtailments would be required considering that Line 3 has been delayed?

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

I'll give you my thoughts on this, and then I'll probably ask Keith to jump in. And I kind of take a pretty simple view of this. Until and unless we get new pipelines, our route to getting more oil to market is going to be reliant on the railways, and I think it is very, very important for our industry to not take a too-short-term view of this and obviously, we have pretty attractive differentials right now, but we need -- ultimately, we need that oil moving by rail to ensure narrow differentials and to ensure that the government can get off this differential. And I think people need to understand that the rail companies who have made a lot of capacity available to move oil are not going to do that forever. And I think it's very important that our industry continue to follow through on plans to add rail because that is what is going to add long-term value to our industry, rather than focusing on short-term profits.

[Keith Chiasson, Executive Vice]

Yes, and Phil, I'll just add, with regards to our rail program, we were moving over 15,000 to 20,000 barrels a day in the first quarter on our 100,000 barrel a day growth commitment and really the bottleneck for us has been receipt of those railcars, and we're starting to receive those and just echoing Alex's points, we're very committed to growing our program. We think it's a structural part of how we will move barrels to the market over the long term and in order to get really good at it, it's going to require maintaining that growth through 2019, ramping up to that 100,000 barrels and then working on getting very efficient in that program. But we see it as a structural part. But also echoing Alex's point, until pipelines come on, the province is at a balance between what it can access the markets with, with regards to existing pipelines and the capacity of production in the province.

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

Phil, it's Alex, again. Just one other comment, I'd say on rail. This is not a business to lends itself -- that lends itself well to flexing up and down on a daily or weekly basis. How you drive efficiency and how you drive your rail costs down is by having very consistent ratable oil movements by rail, and that's really where we're focused and particularly, as we see differentials likely continuing to widen out over the balance of the year.

[Operator]

Your next question is from Manav Gupta from Crédit Suisse.

[Manav Gupta, Research Analyst]

Congrats on a good quarter. I had a one quick question and a follow-up. So the first question is, can you talk about the noncash working capital buildup $591 million? And what were the components of it? And more importantly, can you reverse this as the year progresses?

[Jonathan M. McKenzie, Executive VP & CFO]

Manav, it's Jon. Yes, I'll walk you through the noncash working capital buildup, but I'm just going to remind you, and you're obviously aware of this, but what we've seen, and you can almost time it to December 31, is really a V-shape recovery in the commodity price environment as well as the crack spread environment. So when you look at our working capital increase through Q1, you're quite right that this will reverse itself and then there's a timing between the booking of our receivables and inventory and the conversion of that to cash. But if you look at the receivables unto themselves, and there's a build there of over $300 million, what you're really comparing is the revenue accrual from December to the revenue accrual for March, and that commodity price plays a big role in the increase in working capital and receivables. And then you remember, that there's a 1-month lag between the time that we book the receivable and the time that we receive the cash. So all of that build will convert itself into cash in the following month, and we'll receive that in April. When you look at the inventory accounts, you have the same phenomena, you've got a rising commodity price environment, so the value of the products that we're inventorying is going up and that again, converts itself to cash when we sell it. One thing, I would say, is we did take the opportunity in Q1 to store an additional about 1.8 million barrels of blend. And we did that for 2 reasons: one, because it was commercially expedient to do that; and two, we want to manage our sales as we go into turnaround at Foster Creek and Christina Lake. So all of this build converts itself into cash, but when you see these V-shaped recoveries in the commodity prices, like we did through Q1, there is that temporary build in your working capital.

[Manav Gupta, Research Analyst]

And I have a very quick follow-up and I assure you, it's related. So on Page 12 of the press release when you talk about deleveraging, you say, the net debt went down from $8.1 billion to 8 -- from $8.4 billion to $8.1 billion. That's a $300 million improvement, but that's only because your cash from operations took a $600 million hit. If that was not the case, then net debt would have been down a lot more than this $300 million number is indicating. Am I thinking about it in the right context?

[Jonathan M. McKenzie, Executive VP & CFO]

Yes, you're thinking about it right. The way we measure net debt is we only measure total debt less cash. So when you see this kind of working capital build, we haven't taken the credit for that in measuring our working capital. What you'll see is that come to fruition in Q2 when that working capital build converts itself into cash.

[Operator]

Your next question is from Benny Wong from Morgan Stanley.

[Benny Wong, Vice President]

I just wanted to dig a little deeper in your prepared remarks, Alex, about your capital allocation options once you achieve your leverage targets. I think you've indicated cash returns is a priority. Just wondering if there's a general preference between dividends and buybacks. And in terms of investments, what areas of your business makes sense for extra capital at that point?

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

Yes, I mean, Benny, from -- I'll give you my views and Jon may want to chime in. But I think we've been really clear obviously until we get the debt down to $7 billion, 100% of our free cash is going to debt. Once -- and once we get below $7 billion, don't misread me, we still have a very strong desire to move quickly to get our debt down to that $5 billion level. We just feel that once we hit $7 billion, we have enough flexibility that we can consider options for that free cash of returning cash to our shareholders either via dividend increases or share buybacks or disciplined and attractive growth opportunities. I would think -- obviously, a dividend increase is something that is a Board decision, but as between dividend increases and share buybacks, I tend to view share buybacks as much more opportunistic, whereas I think dividends are something that are work at throughout the commodity cycle. And from our perspective, there is, and I'll give you my view there, there is no benefit to increasing dividends unless we are a 100% confident that it's sustainable at the bottom of the cycle. So when you see us increase dividends, that will be with the view that, that is a permanent use of our cash going forward. That's kind of how we look at it, but I think, as I said, once we hit and get past $7 billion, we'll be at a point where we're going to be taking a very serious look at that. I don't know Jon, did you want to add anything?

[Jonathan M. McKenzie, Executive VP & CFO]

No, I think, you summed it up well, Alex. I think when we get into Investor Day in October, we'll be more explicit about our capital allocation and shareholder returns philosophy. But until that time, we're really taking nothing for granted, and we're staying laser-focused on deleveraging the balance sheet, and although things do look like we're going to delever much faster than we would have anticipated at the beginning of the year, we're really taking nothing for granted right now, and we're just keeping our eye on the prize in terms of getting down to $7 billion and then ultimately, to $5 billion of net debt.

[Benny Wong, Vice President]

Okay. And just wanted to touch upon the crude-by-rail program. I think it's mentioned in the past, Cenovus had the option to potentially expand the program by another 20,000 barrels per day. Is that an option that still exists? And what was the decision be predicated on, just wider crude differentials? And a second part to the question is, I think, the current government has been vocal about potentially removing the government-backed rail program. I know there's debate whether -- if they can or cannot do that, but in the event they can, is there an opportunity for Cenovus to assume any of that?

[Keith Chiasson, Executive Vice]

Thanks, Benny. It's Keith here. Yes, so we're spending a little bit of capital at our Bruderheim rail facility as we speak to basically expand that capacity beyond the 100,000 barrels a day that we know we have today to up to and potentially above the 120,000 barrels a day, which would allow us 2 unit trains plus. So we're making that investment as we speak, now whether or not we take on the additional components of the logistics with regards to freight and railcars to support that is a question that we will continue to evaluate as we watch differentials, as we watch additional pipelines, in-service date timing and make that decision as we move through 2019. With regards to the government's position on rail, and I think, the government will make their decision, but in the end, crude-by-rail is going to be important as a clearing mechanism for the basin for the foreseeable future with pipeline timing potentially pushing out additional rail capacity is essential in order to clear the basin, and so if it's not the government taking those rail capacity, I think it's going to be industry stepping up to take that rail capacity.

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

Yes, it's Alex. I -- just to kind of put a point -- a finer point on that. I mean, obviously, I think you'd like to see a world where government doesn't need to own that rail transport. But as Keith said, somebody needs to take that capacity and get it moving. And I have a lot of confidence, this incoming government has been -- really shown that they listen to our industry, and they're thoughtful about the strategic and policy decisions they make, and I think there's lots of opportunities to do something with that rail that can potentially get it out of government hands and get it where it needs to get.

[Operator]

Your next question is from Dennis Fong from Canaccord Genuity.

[Dennis Fong, Exploration and Production Analyst]

I've got 2 quick questions, and they're both a little bit of follow-up. So just firstly, on the storage and kind of the strategic storage that you guys happen to have, I recall the catch was about 2 million barrels and it sounds like from Drew's previous comments, you guys have built up about 1.8 million barrels of blend, should the view really be that, a, because you guys are managing the dynamic storage components and potentially managing that around the mandatory curtailment that in addition to that, you could potentially supplement your sales in Q2 via a kind of drawing down this strategic inventory that you built up over Q1 and I presume at the end of Q4 as well.

[Jonathan M. McKenzie, Executive VP & CFO]

Yes, Dennis, it's Jon. I'm going to answer the first part of your question and then I'm going to get Drew to answer the question on dynamic storage. But the barrels that I talked us storing are barrels aboveground in storage. So if you look at our financials or if you have a chance to get into our reporting this morning, what you'll see is that our production was greater than our sales. So those volumes that we've stored are really intended to be volumes that we're going to use to manage through the turnaround, and those will convert themselves into cash. In terms of the dynamic storage, and in terms of volumes that we're actually storing in the reservoir, that's a different set of volumes than what I was referring to. And I'll pass that to Drew to give you an explanation of that.

[J. Drew Zieglgansberger, Executive Vice]

Yes, Dennis, so how we're -- I mean, the benefit of using dynamic storage last year was more of a self-imposed value creator that we felt was just prudent, and we have the technology -- the technical and operational know-how and the reservoir understanding to be able to do that. We're actually storing today in the reservoir, if you want to call it that, to manage to the curtailed volumes. But because we're still steaming to manage the reservoir for the long term, we actually have an additional benefit, which we can produce more, and we have actually bought some production from other operators in the quarter that could not meet to their curtailment level.

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

Sorry, production entitlements.

[J. Drew Zieglgansberger, Executive Vice]

Yes, production entitlements that they would have had under their curtailment orders. And because we're still managing our reservoirs the way we are, we could take advantage of providing that production in the province that was allowed and getting a financial benefit for doing that. So this dynamic storage plays into our favor for a couple of ways obviously, is to manage the long-term kind of effectiveness and viability of the reservoirs themselves and our ability to ramp up very quickly to levels that we would be allowed to ramp up to or we would want to ramp up to post curtailment. But it's also given us a little bit of a nice marketing, kind of, lever as well to utilize our barrels in the event that other operators cannot utilize their barrels under the current curtailment orders, and we've taken -- we've done that a couple of times here in the quarter.

[Dennis Fong, Exploration and Production Analyst]

Okay. Perfect. So the thought process here should be that Q2 you'll essentially looking -- be looking at a combination of, a, removing or kind of producing some barrels that were frankly in, we'll call it dynamic storage, as well as potentially drawing down the 2 million barrels of storage capacity that you have in aboveground in salt caverns to essentially fulfill transportation contracts as well as potentially bolster sales through the Q2 component, while Christina Lake is going through a turnaround?

[Jonathan M. McKenzie, Executive VP & CFO]

Yes, you're thinking about the right way, Dennis. The volumes that we're storing in the subsurface, we're using to optimize versus our curtailed production limit. And then the volumes that we produced in the first quarter and are storing aboveground we'll use as sales volumes in Q2 to manage through the turnaround that we have. You're thinking about it the right way.

[Operator]

Your next question comes from Phil Skolnick from Eight Capital.

[Philip Ross Skolnick, Managing Director of Energy Research]

Just a couple of questions. Just one on -- clarifications just on the crude-by-rail. What, you had 50 that went through in Q1, went through Bruderheim, but what was the amount that was Cenovus'?

[Keith Chiasson, Executive Vice]

So this is Keith, Phil. We moved about 15,000 to 20,000 barrels a day, and that's a combination of both our Bruderheim asset as well as a third-party crude-by-rail asset that's in the province.

[Philip Ross Skolnick, Managing Director of Energy Research]

Okay. Got you. And then in terms of what did you get down Flanagan Seaway to the Gulf Coast?

[Keith Chiasson, Executive Vice]

Yes, so I think we've been transparent about our committed capacity on Flanagan South. Obviously, we have a 75,000 barrel a day commitment on Flanagan South, but that's also impacted a bit by Enbridge apportionment. So we do have the ability to move a fair amount of those volumes down Flanagan South, but it is impacted slightly by kind of Enbridge apportionment, which we have seen kind of in that 35% to 45% range through the quarter.

[Operator]

Your next question is from Menno Hulshof from TD Securities.

[Menno Hulshof, Research Analyst]

I've just got a longer-term question on curtailment legislation. I think it's safe to say that eventually all shut-in production is going to be brought back online, but do you think that the legislation will continue to exist as a back pocket option for controlling differentials beyond 2020? Or is the plan to eventually scrap the program entirely?

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

I can't speak for the government, but what I would say, in a normal world where pipelines get built when a demonstrated need is shown and shippers are willing to sign up for long-term shipping commitments, I would think there's no need for curtailment legislation. But in a world where there's no certainty as to whether incremental pipeline capacity can get built, I think -- my own view is it's a relatively important tool for governments to have to ensure that we are not giving away our production and our resources for free for foreign refiners to benefit from.

[Menno Hulshof, Research Analyst]

Is there -- in the legislation as it stands today, is there a finite time line on it?

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

Yes, my recollection is there is a sunset clause -- there is a sunset date, I think it was a -- if I recall, it was kind of a year after implementation.

[Operator]

Your next question comes from Asit Sen from Bank of America.

[Asit Kumar Sen, Research Analyst]

I have two quick questions. On macro, if I could shift focus to the condensate market. Condensate blending ratios have averaged between 25% to 35% historically, so a meaningful component. Could you share with us your outlook for the market in coming quarters into next year? Any thoughts would be helpful.

[Keith Chiasson, Executive Vice]

Yes, Asit, it's Keith here. Your average range is right. And basically there's a winter component as well as a summer component. So you'll see fluctuations throughout the year. We obviously have the capacity and capability to import barrels, and that's necessary for the province when you look at all the barrels that are required with regards to condensate and total production capacity. So we will continue to do that and look at that and import those barrels when it make sense. And really, there's a lot of fluctuations happening in Gulf Coast now around the condensate market where the arbs are opening and closing, and we take opportunity to import when available to meet our long-term demand. So I would say, obviously, with curtailment in place, the demand for condensate is down slightly relative to the overall productive capacity in the province.

[Asit Kumar Sen, Research Analyst]

That's helpful. And then shifting over -- gear to the Deep Basin. You have a significant resource base. Could you remind us of the economic threshold and potential base of activity increase if, say, commodity prices were to stay higher?

[J. Drew Zieglgansberger, Executive Vice]

Sure, Asit, it's Drew here. So you're right, we do have a very big position in Deep Basin and very high-quality assets. We have the benefit of having a lot of good base production that's at a nice low decline of only about 16% or 17%, which has allowed us here in a lower-price environment at the time being to really minimize the requirement to have to put capital to work where we can -- and even in Q1 here with some really nice spot prices through that cold month of February, in particular, where I mean, you could generate some nice material free cash flow against the capital that was required to keep it running. It is -- we continue to lower our cost structure in the Deep Basin and obviously, it's very sensitive to a moving gas price that if it were in the higher $1.75 to $2.25 range, that -- our current asset base can generate really good north of 20% return fully burdened on a mid-cycle kind of economics and have it -- actually quite a depth of inventory. So depending on what your view is on that commodity price here in the medium term, we do have a very good position and very good assets to generate a good return and a good business if price was a little bit higher than it -- than what we're seeing right now in spot.

[Operator]

Your next question is from Mike Dunn from GMP First Energy.

[Michael Paul Dunn, Director of Institutional Research]

I just wondered if you folks had changed your thinking at all on hedging strategy, given where differentials and especially, I guess, WTI and Brent are lately? I know in the past the company's kind of been caught off in hedging. Hedging maybe WTI and Brent and not WCS, but maybe just some thoughts on that? And then secondly, in your MD&A, it does say that 34,000 barrels a day of your crude was sent by rail. I just don't know if that's an apples-to-apples comparison with the 15,000 to 20,000 you guys were talking about?

[Jonathan M. McKenzie, Executive VP & CFO]

Mike, it's Jon. I'll answer both of your questions. So I'll start with the hedging question, and I think we've been very consistent in our hedging philosophy and very consistent with our messaging in and around it. We don't have a philosophical view that hedging is entirely negative. What we have told the market and what we do believe is that we have a product that's very difficult to hedge and that it's made up of a number of different components because at the end of the day, what we're really selling is dry bitumen and that's a calculated price, it's not something where there's a marker for it and certainly not something where you've got depth in tenor of market. So anything that we do in the hedge market as it relates to the products that we try to hedge, we would look to do something that's much more surgical than, I think, that has been done in the past. So it's on our radar screen, but there's no intention of entering into a hedge program today, but it is something we always look at and try and think through what the value proposition might be to a company like ours. The other thing I would say on rail, we give you 2 volumes on rail, one are the proprietary volumes that we sell where we get the economic uplift from rail, and that's the volumes that Keith was talking about. And then the other thing are the FOB volumes, where we're selling to other parties that are going to get the lion's share of the uplift for moving those volumes out of Alberta. So that's the combined number of Cenovus volumes that left Bruderheim by rail. The numbers that Keith is talking about are the ones where we've got the economic benefit.

[Operator]

Your next question is from Neil Mehta from Goldman Sachs.

[Emily Christine Chieng, Associate]

This is Emily Chieng on behalf of Neil. Just a quick question on divestments. I know that the asset sales story has been a big part of the early deleveraging process, but now it seems like much of the work here is from cash flow generation. Is there anything else in the portfolio maybe in the Deep Basin that Cenovus is still going to monetize? Or are you sort of comfortable where the portfolio is sitting at today?

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

It's Alex. And I think I'd probably say that anything is for sale at the right price. I think I would -- but I would say that we took a very comprehensive look at the merits of selling more Deep Basin assets. Later last year, I think, Jon and I and Kam had come to the conclusion that the deals that were available we were not increasing shareholder value by transacting. So we've taken a view that what we have in the Deep Basin is for the short and medium-term, that's a business we have and we're going to be pursuing it on that basis. If we saw a situation in the market where the appetite for those kind of assets was much stronger and the financing -- the finance ability in the market was higher for those assets, we'd obviously take a look at it, but we have no plans right now.

[Emily Christine Chieng, Associate]

Right. And then just on Christina Lake phase G expansion. I know that you've got some flexibility with timing of start-up there, but is that -- should we think about that as a second half of '19 or should we still think about balancing between sort of the production curtailments and pipeline constraints in the region?

[J. Drew Zieglgansberger, Executive Vice]

Yes, Emily, it's Drew here. So with Christina G basically being complete now and under budget and ahead of schedule, which has been a very nice project to kind of get landed here, it's now in operation's hands. We actually have been using the steam gens already here through the first quarter. We actually have the majority of the rest of the kit available to operations now and from this point forward, we will be utilizing Christina G to kind of optimize the asset and kind of maximize the cost and the efficiency of all the Christina Lake, kind of, facilities out there. So then it really just comes down to how we're managing our -- kind of, our curtailment and whatever the production level allowances really are. So don't associate a given pad or a given production profile with just ramping up G because we won't be able to probably demonstrate that increment until curtailment actually does get lifted, and we are allowed to bring further volume into the market. And obviously with that, we'd want to make sure that we're bringing further barrels into the market where we know we will get the best price for those barrels. So we are going to be utilizing basically Christina G kind of assets now as part of the bigger facility and as far as the ramp up is really going to be tied now to curtailment and what we see for market access.

[Operator]

Your next question is from Prashant Rao from Citigroup.

[Prashant Raghavendra Rao, Senior Associate]

My first question's sort of bigger picture. The consolidation environment, if you can maybe comment to how it changed both with respect to now an incoming new administration as well as potentially a better oil price up ahead, any color on what the tenor is in terms of asset movement or consolidation broadly for the oil patch? And then I have a follow-up after that.

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

It's Alex, Prashant. I -- obviously, it's been relatively subdued market from that perspective on the A&D side for most of the time that I've been at this company, I think -- I don't know that the incoming government is going to have much of an impact on that. I -- my gut feel is that commodity prices are directionally helpful in that regard, but I think, at the end of the day, I think, what would really be helpful would be clear evidence that one or more pipelines are going ahead. That would kind of be my -- I would expect that if you're looking for a trigger that would probably be helpful in that regard, it would be that more than government or even commodity prices. Sorry, you had another question?

[Prashant Raghavendra Rao, Senior Associate]

Yes, I had one follow-up. My other question is sort of -- there's been a bit a market conjecture I think and I sort of wanted to address this on this call as to your ability if you needed to get maybe nondebt financing given better cash flow generation materializing this year. I think there's been some conversation around that or just generally from private parties or elsewheres, wanted to ask about that, obviously, a top target of deleveraging here, but if you wanted to be opportunistic is there a way that you could do something without having to stress the balance sheet?

[Jonathan M. McKenzie, Executive VP & CFO]

So Prashant, it's Jon. I think we've been absolutely clear that deleveraging is our first and second priority right now, and we are allocating all of our free cash flow to the balance sheet until we hit that $7 billion target, and then even beyond that you're going to see a vast majority of the cash flow go to the balance sheet. So for us to consider anything in the A&D world, and particularly on the A side, it would have to be something where we weren't using debt or equity as currency, which obviously makes that very difficult.

[Operator]

Your next question is from Fai Lee from Odlum Brown.

[Fai Lee, Equity Analyst]

It's Fai here. Alex, I just was wondering what your thoughts are around Bill C-69 I guess, there's some uncertainties around whether they'd be -- whether it would apply to in situ projects going forward and how does that affect your long-term strategy?

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

Yes -- no, I'm happy to give my thoughts on it, and I guess, I would say to start, I am somewhat relieved to see that the government or the Senate at least is showing some interest in potentially looking at amendments to Bill C-69. But I would just flat out tell you in its current form, Bill C-69 in our view is going to make it way too easy for project opponents to delay, appeal, frustrate development of our natural resources. And I think, the other point that I've made before is that it is almost certainly going to result in numerous court challenges. We've already seen the impact of those court challenges, and our very real fear is that it's going to paralyze project development in this country. And if you paralyze project development, you're going to further suppress investment across the oil and gas value chain, putting tens of thousands of jobs, indigenous businesses and government revenues at risk. So I mean, from my perspective, we've been very clear the government absolutely needs to consider material amendments to reduce those risks for Canada, for our industry and for the province.

[Fai Lee, Equity Analyst]

Okay. And I just had a quick follow-up on the working capital question and the reversal. And is that -- is your expectation for that to take place in the second quarter? I'm asking because WCS has actually been on the rise since the end of the first quarter, so I'm just trying to reconcile the 2?

[Jonathan M. McKenzie, Executive VP & CFO]

Yes, sure. So it's Jon. What I'm suggesting is that the -- there is a 1-month delay between the time that we book our receivables, and that's the revenue accrual for March and the time that we get the cash in the door. So if you're looking and trying to reconcile cash flow to cash in the door, the cash flow for the quarter is recorded January through March, the cash coming in the door is December through February. So what you're seeing is in the rising price environment like we've had, there's that 1-month delay. So when you look at the balance of the receivables on the balance sheet, that converts itself into cash. You're quite right, there's going to be another receivable that we're going to have to book at the end of this month that will be higher than the receivable, or more than likely higher than their receivable, that we booked in March that would represent April's revenue and subsequent cash flow. On the inventory side, we have built incremental inventory that we will be drawing down in the quarter, and that will convert itself entirely into cash in the quarter. So this is entirely normal phenomena that you have in a rising oil price or commodity price environment. What you're seeing here is the magnitude of the volatility is just exacerbating that.

[Operator]

Your next question comes from Joe Gemino from Morningstar.

[Joseph J. Gemino, Equity Analyst]

There's been a lot of talk about market access. Do you have any thoughts on how Cenovus' production may fit into Enbridge's proposed priority access on the Mainline?

[Keith Chiasson, Executive Vice]

Joe, it's Keith here. Yes, we're actively participating with Enbridge. They're contemplating moving to a contract carriage from a common carrier. We would see that as an opportunity for Cenovus to further access market. Obviously, we currently have 25% of our production naturally hedged with our WRB partnership. We have fairly large commitments on TMX and KXL and existing commitments on Flanagan South, but we do see kind of that Enbridge opportunity, and we're working with Enbridge on kind of the framework around an open season, and you should expect that Cenovus would be participating through that.

[Operator]

And your last question comes from Dennis Fong from Canaccord Genuity.

[Dennis Fong, Exploration and Production Analyst]

Just as a bit of a follow-up on the Christina Lake fee component of things. In the interim just because you have incremental steam capacity available, is the thought process that you could use that to essentially start warming the reservoirs and therefore, have a much better or a quicker response to the roll back of the mandatory curtailments? How should I be thinking about the utilization of all the facilities as well as maybe some of the new well pads, I think you'll have drilled as in accordance with Christina G?

[J. Drew Zieglgansberger, Executive Vice]

Dennis, it's Drew here. And you're on the right path, the only, probably, thing I would add to some of the assumptions you made is that we've got a lot of well pairs that obviously have been kind of continue to be steamed quite well, but obviously, we've had the ESPs turned down. So, in essence, you've got well pads and good parts of our reservoirs turned down from a production standpoint. So when and -- curtailment does get lifted, we do and will have the luxury of having a lot of volume that we can start bringing on very quickly into a bigger facility now that phase G is basically in operations hands. So your question around pre-steaming new pads to add incremental, kind of, growth in the asset, that really comes down to the timing of when we can see curtailment actually become relaxed or lifted entirely or even relaxed at just about to a very minimal state. And we just have to balance that out with kind of what our current kind of dynamic storage volumes are going to be in the collective reservoir. And so, we should be able to get some nice flush ramp-up fairly quickly actually from existing infrastructure and existing pads. And we would only be steaming new pads when we could kind of time when that additional incremental volume will be needed once we kind of get the rest of the existing reservoir back to kind of normal run state and kind of have our other volumes drawn down. So in the short term, we could actually respond quite quickly and the timing of any new steamed well pads will really have to be timed according with calculating when curtailment comes off and when we would need incremental volume after this kind of flush of the dynamic storage ultimately occurs. So it won't be as simple as it has been in the past for everyone to try to expect a 6- or 9-month ramp-up, say on incremental volumes for G. It won't be the same this time when it comes to that. We actually could show some incremental benefit, say, potentially even quicker than that. But we have to kind of really marry that up with steaming new pads, timed appropriately with when we would see curtailment lifted. So it's going to be harder to probably try to predict or track from the outside, it is something we'll just have to continue to update everyone as we see the year play out.

[Dennis Fong, Exploration and Production Analyst]

Okay, perfect. And then just quickly on the efficiencies essentially of the newly installed steam generation compared to some of maybe your legacy steam generation at Christina Lake, we'll call it, phase A, or the earlier pieces of the facility. Is the view in terms of optimization there, should that potentially in the near term help kind of grind down, we'll call it, nonfuel and maybe unit fuel-related OpEx just from that kind of aspect of it all?

[J. Drew Zieglgansberger, Executive Vice]

Yes, the phase G gens are really, from a technology standpoint, no different than what we've installed here for the last few years. So if we look at all of our steam generation and actually, and I'll talk about OpEx in a minute here as well, we've continued to improve the steam output capability of all of our gens. So we are over-firing relative to their nameplate very safely, and we've done a lot of integrity testing over the last few years that we're getting more steam out of our gens and continuing to optimize that cost of steam output, and we're doing that across all of our gens, it's not just in any given phase. But at this time, when I look at OpEx, in the guidance update, we gave you around our fuel usage relative on a BOE basis, the more important number that I'm actually watching is our absolute spend. So you just kind of don't worry about the production denominator at the moment because of the current curtailment and whatnot, and we are still seeing improvements in our fundamental cost structure in our OpEx. And as I've been watching our absolute spend on a month-over-month basis, we actually continue to trend in a good downward trend against our budget. So I think the teams are still doing a very good job of increasing kind of steam throughput, water management, ultimate costs, whether it's in our maintenance reliability and in other areas of cost drivers, and they're still finding great, creative ways to kind of make the operation even more efficient. Unfortunately, with the curtailment, you may not be able to see that on a per BOE at the moment, but they're still continuing to do the right thing from a cost structure standpoint.

[Operator]

I would like to now turn the call back over to Mr. Alex Pourbaix for final remarks.

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

Hey, I just want to thank everybody for joining us today. I think that's the end of our questions. So the call is complete, and once again, thanks, everyone. Have a good day.