Cenovus Energy Inc

TSX:CVE

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's Second Quarter Results. As a reminder, today's call is being recorded. [Operator Instructions ] Please be advised that this conference call may not be recorded or rebroadcast without expressed consent of Cenovus Energy. I'd 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 second 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. [Operator Instructions]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 exceptional results in the second quarter of 2019. We generated $830 million in free funds flow, and as promised, we put that cash towards debt, reducing our net debt to just about $7 billion at the end of the quarter. This is a key milestone for our company. We have now essentially achieved our near-term target for net debt and materially improved Cenovus' balance sheet. This leaves us well positioned to begin considering opportunities for increasing shareholder returns and considering incremental investments in our business. But let me be clear, we remain committed to maintaining and further strengthening our balance sheet. We're closing in on a ratio of 2x net debt to adjusted EBITDA in the current commodity price environment. We will continue to be relentless in our drive to reduce net debt towards our longer-term target of $5 billion. At that level, we expect to be in a position to achieve and maintain a target ratio of less than 2x net debt to adjusted EBITDA, even at bottom of the cycle commodity prices. Our excellent second quarter results and strengthened balance sheet should demonstrate to investors that Cenovus continues to have positive momentum. In the first 6 months of the year, we generated almost $1.6 billion in free funds flow, approximately $2.1 billion in adjusted funds flow and $1.7 billion in cash from operating activities, and we've been positioning ourselves to continue generating significant free funds flow in almost any commodity price environment. These results are a reflection of our persistent focus on safe and reliable operations, capital discipline and cost leadership. At Cenovus, safety comes first. I'd like to congratulate our teams for completing a safe winter drilling program this year as well as a nearly month-long planned turnaround at Christina Lake in the second quarter with no significant injury incidents and no process safety events. Company-wide, our safety record is moving in the right direction, but we must always remain vigilant to ensure that we continue to protect the health and safety of our workers and the environment. Our strong financial results so far this year are supported by the continued outstanding performance of our operations. Our plants have continued to run very efficiently. Even with Oil Sands production lower year-over-year due to the Christina Lake turnaround and mandatory curtailment as well as increased royalties, we more than doubled our Oil Sands operating margin compared with the second quarter of 2018. In the Deep Basin, we made the decision to shut in some volumes during the quarter due to low natural gas prices, and the vast majority of those wells have now returned to production. We also continue work to optimize our Deep Basin operating model to reduce costs, improve efficiency and drive value. Refined product movements from our Wood River refinery were partially impacted by pipeline outages and significant flooding on the Mississippi River during the quarter. However, the combined utilization rate for both our refineries was nearly 100%. To comply with Alberta's mandatory curtailment program, our oil sands team are doing a great job of managing production at lower volumes while maintaining normal steam injection levels to continue mobilizing oil in the reservoir for production later once curtailment is lifted. While curtailment has resulted in a temporary increase in per unit operating costs and steam to oil ratios, I firmly believe that the benefit of temporary curtailment for Cenovus, the provincial treasury and for our entire industry is undeniable. By balancing production with takeaway capacity, curtailment has successfully prevented more blowouts in light-heavy price differentials and is helping Canada receive fair value for its oil in the absence of new pipelines getting built. And to give you an example of what this means for the people of Alberta, provincial government royalties on Cenovus' production for the first 6 months of the year amount to more than $0.5 billion. As a reminder, when differentials reach record highs in the fourth quarter of last year, we were actually in a royalty credit position with the province. As long as takeaway capacity out of Alberta remains constrained, we believe the government will continue to use curtailment as a temporary tool to ensure that Canada and Canadian taxpayers receive fair value for our oil. On that note, we're seeing some encouraging news on the rail front. It's still early days, but crude-by-rail transportation capacity out of Alberta is growing. During the second quarter, Cenovus made good progress advancing its crude-by-rail strategy. In June, we shipped an average of nearly 36,000 barrels per day of our oil to the U.S. Gulf Coast, up from about 16,000 barrels per day of our oil shipped by rail in the first quarter. And we remain on track to ramp up our rail capacity to approximately 100,000 barrels per day by the end of the year. As I've said before, we consider rail to be an important structural component of our diversified transportation strategy. It allows us to get our oil to markets on the U.S. Gulf Coast, where we have the opportunity to achieve higher prices than we can get here in Alberta, and it gives us optionality during times of pipeline constraint. As other producers look to expand rail capacity, we see an opportunity for the Alberta government to encourage increased movement of crude-by-rail by allowing ship producers to ship barrels in excess of mandated curtailment levels if those barrels are transported by rail. We're also supportive of the provincial government divesting its contracted crude-by-rail capacity to industry. It's important to note here that while expanding rail capacity is critical to resolving Alberta's near-term market access issues, we still need new pipelines. And I can't stress that enough and we cannot take our eyes off the ball. Unfounded attacks on Canada's oil and gas industry have repeatedly stalled the construction of sensible pipeline projects that are in the best interest of all Canadians and society as a whole. Our critics will not let up and neither can we. Canadians have every reason to be confident that Canadian oil is among the most responsibly produced in the world. We provide economic opportunity for indigenous communities. We are subject to some of the most rigorous regulatory standards in the world and operate in a jurisdiction boasting some of the best environmental, social and government standards globally. Meanwhile, we've significantly improved our environmental performance and reduced the intensity of our greenhouse gas emissions. As noted in our 2018 environmental, social and governance report published yesterday, the emissions intensity of Cenovus' oil sands operation is lower than the global average and about the same as the average barrel of oil refined in the U.S. We work to continue to improve our environmental performance every day and we'll continue to make it part of our commitment to delivering safe and reliable operations. It makes no sense whatsoever to stop Canadian oil from reaching customers who need it and want it. That will not address the global climate change challenge. If Canadian oil cannot get to international markets, global demand for oil will continue and be satisfied with higher emissions barrels from other jurisdictions with inferior environmental, social and governance standards. Limiting market access for Canadian oil will only harm an industry that contributes billions of dollars to the Canadian economy. Dollars that are spent building roads, hospitals, schools and supporting services used by all Canadians. With that, let me close by saying how proud and excited I am at what this company has achieved in such a short time. When I began as CEO in late 2017, we set a clear plan. We said we'd focus on reducing debt, lowering our cost structure and maintaining capital discipline while continuing to deliver safe and reliable operations. And while that job is never truly complete, I feel confident in saying that, so far, we've done what we said we would do. We've delivered on all of our key commitments to our shareholders, and we will not deviate from that path. Our results in the first half of this year demonstrate our commitment and our passion, and we'll work to deliver even more value to our shareholders in the months ahead. 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. And with that, let's get straight to your questions.

[Operator]

[Operator Instructions] Your first question is from Phil Gresh with JPMorgan.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Just first question here. Your capital spending, certainly, in the second quarter is trending at a pretty low run rate despite the fact that you do have -- you still have some spending on Christina Lake G, the maintenance spending and things like that. So just curious how you're thinking about the run rate for the rest of the year. I know you don't want to talk too long term about this. You're going to say this at Analyst Day, but just maybe any initial read about how this might bridge to 2020 with Christina Lake rolling off. Are there other things in the short term given the market access issues that you'd be thinking about? Or is it more of a wait and see?

[J. Drew Zieglgansberger, Executive Vice]

Phil, it's Drew. So yes, if you look at our capital spend, particularly in the Oil Sands, we are trending to the low end, and the teams continue to do some really great work. Just really looking at our sustaining capital, as you referenced with Christina G, essentially that project is complete, including the pads. So our spending on that project is done. As you probably are aware, the project came in ahead of schedule. So relative to our budget, we actually came -- we're in quite good shape after Q1. With curtailment still going through Q2 here and coming and staying here in Q3, it's allowed us to relook at when we have to bring sustaining pads on, and it's allowed us to defer some capital spend that was going to be budgeted this year that we think we can push out a bit into 2020. So I think we're doing the right things as far as managing the capital level with the current level of production and considering the curtailment that we're under. But I wouldn't be thinking about Christina G or any further capital required for that because that's essentially all been spent now. And the second thing around your comment around 2020. Don't be surprised if you see us stay in a similar guidance range that we saw here in 2019. With the project being done at Christina, in particular, it's really a sustaining maintenance capital program for us heading into next year. So it's not essentially going to be that different relative to the spend levels we're seeing here.

[Jonathan M. McKenzie, Executive VP & CFO]

Phil, it's Jon. I'm just going to build on a couple things that Drew said. So if you're going to read anything into 2020, you're quite right. We'll lay this out for you at our Investor Day in October. And more broadly, we'll give you a view of how we allocate capital across shareholder returns, the balance sheet and in the business. But what I would suggest to you, Drew is quite right. Don't think of the guidance for 2020 as being materially different from what you're seeing in 2019. And what you should read into that is that the balance sheet is still going to be the priority, and then there will be some incremental room for shareholder returns. But everything that we're doing within that capital allocation framework is really designed to give us free cash flow. And our view is that everything needs to make this company more sustainable and more resilient over the long term and at the bottom of the cycle. So core in that, we'll be keeping our OpEx low at the bottom of where, I think, the industry is. We're going to keep our capital low and our efficiencies high. We did a lot of work on G&A and we're not going to backtrack on that. And it would be our view as well that we need to run that underlevered balance sheet. So if you're going to read anything into 2020 based on the results that you've seen in 2019, think of it as a continuation of this company making itself more resilient and more sustainable at the bottom of the cycle.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Very clear. Just a follow-up on -- you've talked about potentially considering a diluent recovery unit at some point. Perhaps you could just elaborate on your thoughts around that, costs and benefits and, I guess, what it would take to actually really move forward with it.

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

Sure, Phil, I'll -- maybe what I'll do is I'll give a little bit of my thoughts on sort of the greater strategy behind that, and then I'll let Keith talk about some of the specifics. And I want to take a second and bring people back to where our strategy has been over the past 20 months. And as Jon just said, everything we have done to this point has been about increasing resiliency and stability of the company long term. And in that time period, just in the time that I've been here, we've cut our net debt from $14 billion to $7 billion. We've reduced our cost structure to industry-leading levels. Jon already referred to that. And I have to say that after all of that, I believe that the greatest headwind that affects our value is market concern over our ability to get our oil to market. To resolve that concern, reduce volatility and increase resilience, we -- and we've talked a lot about this, but we're executing a comprehensive market access strategy, and that includes -- you've heard us talk about incremental pipeline commitments, both on existing and proposed pipelines, the rail contracts and, in addition, our likely intention to participate in the upcoming Enbridge open season. And I would -- what I would say is that the DRU is potentially part of that strategy. It has a number of really attractive characteristics, and I'll let Keith talk a little bit about that. But I want to make something really clear here. We have no immediate plans to approve a DRU, and we will wait until we have much more clarity on the likelihood of the expansion pipelines proceeding. But -- and I really want to be clear on this, I do not intend to wake up 18 months from now to find that we need a DRU and have 18 months of due diligence, engineering and project setup ahead of us because we sat on our hands in the interim. So once again, this is all about increasing resiliency, reducing volatility. If there aren't clear and compelling advantages to building a DRU, we're not going to do it. But with that, why don't I pass it over to Keith, and he can give a little more detail.

[Keith Chiasson, Executive Vice]

Thanks, Alex. Phil, really, we see 4 things that could make the DRU compelling. And I do want to reiterate it's early days and we're kind of doing our due diligence to build these out. But when you can reduce the amount of diluent that you have to import from the U.S. Gulf Coast and short-circuit it inside Alberta, you do 2 things. One, you reduce your overall costs for our Oil Sands production, but you also increase capacity on existing export pipelines. When you go to a neat bitumen on rail, you get your unit cost of that rail transport a lot closer to pipeline economics. And the other thing that we're finding is that, with the growth in Permian production in the U.S. Gulf Coast, refineries are actually looking for a neat bitumen product to help fill out the back end of their refineries. So we actually think there could be a value uplift for a neat bitumen product. And the last one would just be, from a safety perspective, neat bitumen is not considered a dangerous good by the railroad. So we see 4 things that really could be compelling. But like Alex said, it's early days and we're doing our due diligence over the next year to 18 months.

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

Actually, Keith, just one other thing I would add in terms of the advantages. If we were to move to a DRU, I -- my expectation is that the rail companies would look at that as a lot more stable, predictable and attractive commitment. And I think there's even potentially some opportunities to get better freight rates if we can turn this into a very long-term sustainable business.

[J. Drew Zieglgansberger, Executive Vice]

Yes, and that's correct. And you can expect more from us at the Investor Day to continue our evaluation on this opportunity.

[Operator]

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

[Greg M. Pardy, Managing Director and Co]

Narrows Lake is a project that was commenced and then kind of put on the shelf. And obviously, just given egress constraints, we don't expect you to resurrect it right away. But how are you thinking about that project in today's world? And are there creative ways that you could go about to just reduce your capital exposure to it?

[J. Drew Zieglgansberger, Executive Vice]

Greg, it's Drew here. So yes, we alluded to this year a little while ago that we've relooked at Narrows Lake, and the option right now that is pretty compelling is to actually make Christina Lake a little bit more of a regional asset and basically bring the Narrows Lake resource back into the main Christina Lake area into that facility. It does actually allow us to materially change the capital required to probably tap into that resource and kind of add some modest growth later in the future. To your point, though, I mean, it's not something that you'd expect from us here in the very short term, considering egress. But the teams have and we have been working on it internally here to relook at it. It also allows us to still maintain and have the options around SAP and solvents in the future as well and some other kind of things we're looking at for that project to help with the bigger kind of environmental footprint story. So there is a pretty compelling case that does reduce our capital for Narrows Lake, and we're looking at it now to bring it back into Christina area.

[Greg M. Pardy, Managing Director and Co]

Okay, terrific. And just technically, I mean, we flew over there recently, and there is a lake called Christina Lake, which is not insignificant. Does that provide -- does that create any just major roadblocks for you or just constraints in terms of being able to move steam that far?

[J. Drew Zieglgansberger, Executive Vice]

No, it doesn't, Greg. We -- if we think about the actual distance itself, it's within the same distance we're already distributing steam at Foster Creek, as an example, from a pure kilometer distance from the facility. So the teams are taking that into account. From a technical standpoint, we are looking at doing some potential steam boost to ensure quality and pressure continuity relative to the reservoir we're going to go into and just to balance the pressure. So it is really not a significant technical risk or change relative to what we're already experiencing at Foster Creek, as an example. So...

[Operator]

Your next question is from Neil Mehta with Goldman Sachs.

[Emily Christine Chieng, Associate]

This is Emily Chieng on behalf of Neil. My first question is just around capital returns, and I'm sure you guys will give more detail at the Analyst Day, but I just wanted to get an early sense of how you view the different forms of capital returns, whether that be dividend increases, special divis or buybacks. Does Cenovus have a preference for any one of these methods to demonstrate its commitment to shareholders?

[Jonathan M. McKenzie, Executive VP & CFO]

Yes, Emily, it's Jon. As I mentioned previously, we're going to lay out a complete capital framework for you at our Investor Day. But what I would say in the short term is we are still focused obviously on getting our balance sheet down to that $5 billion mark. We think that gives us the resilience over the long term to consider more broadly how we want to approach shareholder returns of dividends and share buybacks, and probably to a lesser degree, special dividends. With that ordering and priority, we'll probably move around as we get the balance sheet down into the range that we're talking about. And obviously, that's contingent on where the share price is as well. But we'll lay all that out for you in some detail in October.

[Emily Christine Chieng, Associate]

Great. And just one follow-up. Just be interested to hear your view on egress out of Canada for the next 12 to 24 months, given rail is ramping, there might be some additional capacity at Mainline, given the area usage and the pending Mainline open season. How do you see the macro outlook shape for the next year or so?

[Keith Chiasson, Executive Vice]

Emily, it's Keith. Yes, there are a few -- the pipeline companies are getting pretty creative on how they're expanding some capacity out of the country. What I would bring you back to, though, is the effectiveness that curtailment has had on the differential and balancing market takeaway capacity to internal production capacity. We have seen rail continue to ramp and ideally continue to ramp through the back end of 2019, which could add an additional 150,000 to 200,000 barrels of takeaway capacity. So we're seeing some promising things on existing pipelines. Obviously, the new projects are going to be delayed beyond that time frame that you discussed.

[Operator]

Your next question is from Benny Wong with Morgan Stanley.

[Benny Wong, Vice President]

A lot of questions -- a lot of my questions have been asked, but I wanted to clarify one point on the diluent recovery unit. I think you mentioned it might be contingent on Line 3 moving forward. I just want to clarify, if you see clarity of that line expansion going forward, it means you would not pursue the diluent recovery strategy. And I guess further that…

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

Sorry. Was that everything, Benny?

[Benny Wong, Vice President]

No. The second part was really just, at a high level, do you have an economic sense in terms of does railbit compete with pipeline? Like if tomorrow egress resolved, would railbit still compete with pipeline delivery at a competitive level?

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

Sure. Why don't I talk about the -- your -- sorry, remind me your -- the first part of the question.

[Jonathan M. McKenzie, Executive VP & CFO]

Line 3...

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

Line 3. Sorry...

[Benny Wong, Vice President]

I just want to clarify...

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

Yes, I know. I got it, I got it. The -- here's -- I think it's not quite as simple as whether one pipeline goes ahead. And as we've talked about a lot, we have pretty significant pipeline capacity on all of the proposed pipelines. And so for us, it's really a situation of looking at our entire portfolio of takeaway options. So I don't -- I think it's an oversimplification to say that if Line 3 were to go ahead, we wouldn't do the DRU. We're looking to solve our market access problem substantially. And so we'll take a look at the situation and our view of the likelihood of each of those projects going ahead. But I think -- and the other thing that I think is really important to understand, Enbridge is obviously in an open season process related to their conversion of their pipeline system from a common carrier to a contract carrier. That is potentially another option for our company to get -- to solve for long term our market access issues. So we're going to balance all of those. But I would -- in the meantime, as Keith said, we're doing the due diligence right now to be in a position that if we decide the DRU was warranted, that we would be in a position in relatively short order to make an FID decision on that. And maybe, Keith, you can talk about the second.

[Keith Chiasson, Executive Vice]

Yes. And I'll just build on a little bit of what Alex said. Jon articulated that we're really focused on our cost structure over the past couple of years, getting our CapEx/OpEx in line, G&A in line, fixing up our balance sheet. And market access was also part of taking away that top line volatility in our revenue line. So we've been focused on market access, we're a committed shipper on KXL, we're a committed shipper on TMX. We're going to take a hard look at the Enbridge open season here coming up. But what I would say on the DRU, it is another ability to gain access to market, and it will have to compete on an economic basis and from a capital prioritization basis. And so that's the due diligence we're doing now, Benny, is can we actually get it competitive with pipeline economics. And we're early days, but because of the 4 things that I articulated to the first question, we are very optimistic that we can kind of get those economics competitive with pipe.

[Operator]

Your next question is from Manav Gupta with Credit Suisse.

[Manav Gupta, Research Analyst]

Congrats on lowering net debt to $7 billion. It was a very aggressive target and you got there ahead of market expectations, and that's always positive. I also want to talk a little bit on the egress size. So we've had a TMX expansion approved. And so I'm just trying to understand, in your view, do you see that pipeline starting up somewhere in '22, '23? I mean where do you think that one starts up? And then in your opinion, what's the feat of Enbridge Line 3 here? 2-year delay? 3-year delay? What kind of delay are we looking at Enbridge Line 3?

[Keith Chiasson, Executive Vice]

Yes. Thanks, Manav, it's Keith talking. Obviously, the recent announcement by the National Energy Board was very positive. It sounds like they will be back to construction kind of race here in the third quarter, which is extremely positive. So your time frame on that pipeline is kind of aligned to what we're thinking in that 2022 later in the year time frame. Obviously, we're highly optimistic that these pipelines will get built, but we're not naive enough to think that there won't be further opposition to continue progressing them. With regards to Line 3, we're continuing to evaluate kind of what's happening down in the U.S. with regards to opposition to that expansion and staying actively engaged with Enbridge on kind of progress through that regulatory process. But we do think that the end of 2020 is obviously highly optimistic, and we think there will be further delays to that timing.

[Manav Gupta, Research Analyst]

Okay, great. And just one quick follow-up. During the quarter, you did have downtime at Christina Lake. You managed around it, faster [indiscernible] and higher. Can you talk about how you manage around this turnaround to deliver higher Oil Sands volume, despite the fact that one of your facilities was actually in downtime?

[J. Drew Zieglgansberger, Executive Vice]

Manav, it's Drew here. You're right. Actually, we had -- coming into April, we knew that the back half of that month, we were going to go and start the turnaround at Christina Lake. So we actually ramped up both Foster and Christina Lake and we utilized actual Phase G equipment as well at Christina to start producing well ahead of ramping down into that turnaround. So as April and then the first part of May came, where the Christina Lake was in turnaround, obviously, we really leveraged Foster Creek to kind of produce barrels into our curtailment allowance as best we could. And I have to say both assets performed extremely well. So we basically loaded on the front end of April, production at both facilities and then kept Foster Creek, basically, fairly full out through April and May to help offset substantial turnaround at Christina Lake.

[Operator]

Your next question is from Prashant Rao with Citigroup.

[Prashant Raghavendra Rao, Senior Associate]

Wanted to ask, and I think you touched on this before, but the value to the Gulf -- U.S. Gulf Coast refiners of the heavy barrel, particularly as premium production ramps, given the refining kit down there. As it relates to price realizations, as we get more rail ramping up here and more product moving out of Canada into the U.S., you've been doing a great job of, I think, beating our expectations on upstream bitumen price realization. So maybe it'd be better to answer this question in terms of netback. But as things wide -- as things start moving, you would expect a little bit of widening out in differentials. Could you help us to maybe think about maybe what we could be missing and how you protect upstream price realization or maybe total netback? It seems like you guys are doing a great job there. I just wanted to get a sense of how to think about the cadence there, coming in the next quarter as you kind of get more and more rail ramping. It sounds like you could get 300,000 barrels or more per day on rail over the next 6 to 12 months.

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

Prashant, it's Alex. I'll just jump in sort of with a high level comment, and then I'm sure Keith will have some more thoughts. But one of the points that I think is -- that I think people really need to keep in mind is, ultimately, curtailment is a temporary tool. And I think we would acknowledge that as permanent or long-term forms of egress emerge, it is the right thing to ramp it down. But I think if there's one positive that has come out of this curtailment discussion and implementation in Alberta, it is that the government, I think, they understand that they have a tool that can allow the industry and the province to avoid the massive wealth and value destruction of punitively large differential. So our view has been similar kind of from the start that we do expect, over time, economics are going to -- our differentials are going to move more in line with rail economics. But at the same time, I see a really significantly reduced risk of differentials going much wider than that. I think that has become a preventable situation in the province. But with that, why don't I let Keith talk a little bit more in detail.

[Keith Chiasson, Executive Vice]

Prashant, it kind of builds on our rail strategy, so we don't just look at the economics of the rail barrels that we're moving, but all barrels that we produce. We think that getting some of those additional barrels out on rail is helping kind of the netback on all the barrels. And then when you actually get the barrels into the Gulf Coast with Venezuelan production coming off, Mexico production coming off, recent reports out on kind of asphalt prices going through the roof, there is a significant demand for the heavy barrel. And through the quarter, we saw WCS pricing in the Gulf Coast exceed WTI pricing. So it truly is a matter of getting it there, and then we're obviously active on the cost side when it comes to getting very efficient in our rail economics and cycle times as well as kind of our condensate strategy in how we procure and acquire that condensate to keep our overall costs low.

[Prashant Raghavendra Rao, Senior Associate]

That's helpful. And I agree that the path towards differentials widening seems a lot less volatile and a lot less drastic given the current government's plans and understanding with the industry. I guess my next question is sort of related to that then. It is -- if we look at the understanding that -- in your conversations with the Alberta government as to how they view curtailments that's full, as I look out to 2020 with rail ramping out of the industry and some more capacity being added, maybe curtailments are going to come off. Is it fair to say that we could get to some sort of material, modest but material, growth in total upstream production out of Alberta? And maybe as a follow-on to that is, given where you sit, but positionally that you could be maybe a little bit ahead of our expectations. It seems like we don't necessarily need a pipeline in the next 12 to 18 months, but obviously, we'll need one later, but we could get to some upstream growth without it for a period of time in 2020. Is that a fair assessment? Or is there something that would be missing in that analysis?

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

Yes. I mean I think that's generally fair. I would hate to ever make a statement that we don't need pipelines because, as I said in my prepared comments, I think it's very clear we'll welcome any incremental pipeline capacity. But I think one thing that is worth maybe highlighting, again, is this idea, this concept of a rail above curtailment that I alluded to in my prepared comments, and there's a lot of discussion going on right now amongst industry, including the government. And this is the idea of amending the plan around curtailment to allow producers in the province to exceed their monthly curtailment allocation, if they can demonstrate that, that increased production moved on incremental rail. And I truly refer to this as a sort of a win-win-win situation. It would allow the production out of the province to increase, it would do significant benefits to the upstream industry. But on top of that, you have the benefits to government royalties, you're going to get royalties on barrels that otherwise were not going to be produced, and it gives a clear egress option above curtailment. But on top of that, is a really strong incentive to the upstream community to get those barrels on to rail. So we're relatively early days. But from my perspective, I can't think of a negative from that strategy being implemented, and I think that could be a real catalyst to getting more -- even more oil moving by rail in the relatively short term.

[J. Drew Zieglgansberger, Executive Vice]

Yes. And the only thing I would add to that is, obviously, the government has been very clear on trying to move their rail contracts back to industry. And this is a win-win there, too, because, obviously, if people were allowed to move rail above curtailment, there's a huge incentive to take out the long-term contracts.

[Operator]

Ladies and gentlemen, we now take questions from the media as well. [Operator Instructions] Your next question comes from Asit Sen with Bank of America Merrill Lynch.

[Asit Kumar Sen, Research Analyst]

Just digging a little bit into the rail strategy. In the MD&A, it was mentioned that you have secured additional storage capacity in the U.S. Gulf Coast to support rail. Could you talk about how big that is and the thought process behind it? And then, you're also increasing rail-loading activity in Bruderheim. And wasn't sure whether there's any way to quantify capital spending associated with crude by rail and/or innovative market strategy. And Keith, if you have any thoughts or early thoughts on cost of -- or CapEx associated with the DRU.

[Keith Chiasson, Executive Vice]

Thanks, asit. Yes, obviously, we're always continuing to evaluate our marketing strategies and storage positions in the Gulf Coast. Obviously, the amount of storage capacity that we've taken out is commercially sensitive. But you should understand that, as we grow our volumes towards the 100,000 barrels a day, we're looking at a diverse approach to place those barrels into the market, including storage in the Gulf Coast as well as direct delivered to some of our refinery partners. With regards to Bruderheim, we're investing, I think, $10 million to $20 million type range in growing the capacity. The asset had right around 100,000 barrel a day capacity, and we're taking it up to 2 unit trains, and we're on target to do that by the end of the year. And it still is early days on the DRU, but we're in the -- we're looking at a facility that would handle 180,000 barrels a day of dilbit on the inlet, which would drive you to 2 unit trains of neat bitumen on the outlet. And we think that that's in and around the $800 million to $1 billion capital range. But obviously, it's very early days, and we think that, that capital, if we ever sanction that project, would be spread over several years.

[Asit Kumar Sen, Research Analyst]

Great. And Alex, just shifting gear, a big picture question for you. I think you've been very clear in your strategic priority in terms of focusing on the balance sheet and shareholder returns. My question to you is, with the big picture, growth plans, both the deleveraging phase, is the growth CAGR going to be an output of other decisions? Or you have a specific target on growth?

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

I don't know if it would be fair to say we have a specific target on growth. As Jon said, I think, earlier in one of his comments, it -- I think where our relative focus is on those 3 buckets of debt reduction, share -- return of value to -- of cash to shareholders and disciplined growth opportunities is actually going to vary a bit as we kind of continue on this path from $7 billion of net debt to $5 billion. What I can say is we are absolutely committed that we are -- every time we make a material capital decision, we're going to balance it among those 3 options and do what we believe is in the best interest of our shareholders in terms of shareholder value. And I would say that -- I would just observe that we have had some very patient shareholders. And as we're on this path of strengthening our balance sheet, it's not lost on any of us the importance that shareholders are placing on returning capital to them. And that's going to be an important part of our thought process as we move -- as we kind of get through $7 billion towards $5 billion.

[Operator]

Your next question comes from Kevin Orland with Bloomberg News.

[Kevin Orland;Bloomberg;Editor]

I was wanting to check on when you expected the timing for the government rail deal might come through. By that I mean the decision on -- from the government on the plan to allow incremental production as long as it's moving by rail.

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

Kevin, it's Alex. I can't give any guidance. I mean as I said, we -- as we've had discussions as an industry, both with and without government, and I know they're looking at it, and I don't yet have a time frame.

[Kevin Orland;Bloomberg;Editor]

Great. And then just a quick follow-up. As a major gas producer too, we know that there's been some producers asking the government for, basically, sort of a royalty credit plan for when they hold back production when pipeline capacity is constrained. Do you have a plan and you've been involved in that?

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

Kevin, we're, as a company, we're quite supportive of innovative ways to improve netbacks for oil and -- or gas and oil producers. But I would say, my involvement in this issue to date, it is a pretty complex issue. I'm confident that all the right people are at the table. And there's -- I know there's ongoing discussions with a lot of interested parties. So we're very supportive of that. But as I said, it's quite a complex issue on the gas side, and you really want to make sure at the end of the day that you do -- you make the correct decision and you really make sure that you don't create any unintended consequences. In my view, it is a more complex situation than the oil situation.

[Operator]

Our next question comes from Dan Healing with Canadian Press.

[Dan Healing;The Canadian Press]

I just wanted to ask about the government of Alberta corporate tax rate changes. Aside from making the second quarter net income look really good, does it change the way you look at growing production and -- for the company going forward? Like does it make a substantial change as far as the way you look at things going forward in the next couple of years?

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

Yes. I mean, to me, this is all part and parcel of competitiveness, and tax policy is, obviously, a very important part of competitiveness. And two, as you alluded to, there's obviously been an already material impact on the company's earnings as a result of this. But no, I mean, as we think about where to invest capital, I think it is clear that companies like Cenovus are going to be considering the tax regime in which they make investments. So I think it is a positive for industry, and I think it will be helpful for the long-term health of the industry.

[Operator]

This concludes the Q&A period. I'll turn it back to Mr. Pourbaix for any closing remarks.

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

Well, I think that's everything from us, and I just want to thank everybody for taking the time today, and we'll get back to business. Thanks, everyone.

[Operator]

This concludes today's conference call. You may now disconnect.