Imperial Oil Ltd

TSX:IMO

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and welcome to the Imperial Oil 3Q Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Dave Hughes, Vice President, Investor Relations. Please go ahead, sir.

[Dave Hughes, executive]

Thank you, Mary, and good morning, everybody. Thanks for joining us on our third quarter earnings call. As usual, I'm joined by Imperial's senior management team, including Brad Corson, Chairman, President and CEO; Dan Lyons, Senior Vice President, Finance and Administration; Simon Younger, Senior Vice President of the Upstream; Sherri Evers, Vice President of Commercial and Corporate Development; and Jon Wetmore, Vice President of the Downstream.

Just let me first go over the cautionary statement. Today's comments include reference to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in our Attachment 6 of our most recent press release and are available on our website with a link to this conference call.

Today's comments may also contain forward-looking information. Any forward-looking information is not a guarantee of future performance, and actual future performance and operating results can vary materially depending on a number of factors and assumptions.

Forward-looking information and the risk factors and assumptions are described in further detail in our third quarter earnings release that we issued this morning as well as our most recent Form 10-K. All of these documents are available on SEDAR, EDGAR and on our website. So please refer to those.

As usual, Brad and Dan are going to provide an operating and financial update, after which we'll cut over to the Q&A. So with that, I will turn it over to Brad for his opening remarks.

[Bradley Corson, executive]

Thanks, Dave. Good morning, everybody, and welcome to our third quarter earnings call. I hope you're all doing well. I am really pleased to report another very strong quarter for Imperial. We saw outstanding performance across all of our assets, both Upstream and Downstream, and we are also seeing the strong operating momentum continue into the fourth quarter.

The overall macro environment remains quite positive for our financial performance. We're continuing to experience high commodity prices driven in large part by supply challenges and ongoing geopolitical events both of which serve to remind us just how important a stable and reliable energy supply is.

Our unrelenting focus on safety and reliability enables our strong operating performance in this environment and underpins the results, which we will be talking about this morning. And we continue to look for ways to further increase production and ensure reliable energy supplies when Canadians need them most. And so far, the fourth quarter seems to be a continuation of this economic environment.

With all of our major planned maintenance activities behind us, our plans are to continue running at maximum levels as we have so far this year. This sets us up well for a very strong finish to the year. So over the next few minutes, Dan and I will detail the results of what was a very strong quarter.

So now let's review the third quarter results. Earnings for the quarter were just over $2 billion, and our cash from operating activities was almost $3.1 billion. These results reflect the strong operating performance in the quarter as well as the strong commodity fundamentals we are currently experiencing.

I would also remind you that along with strong financial results like this, comes increased royalty and tax contributions to the government that go to support our local communities.

We achieved total Upstream production of 430,000 barrels per day in the quarter, which reflects a return to normal operations at Kearl post the second quarter turnaround and ongoing excellent performance at Cold Lake as well as the impacts of a large, planned turnaround at Syncrude.

Performance of the downstream continues to excel. Our refinery utilization in the third quarter was 100%, which not only represents the fifth consecutive quarter of utilization above 90%, but also the highest utilization we have seen in over 40 years. This sustained outstanding performance is so important in the current environment given the current supply challenges we have talked about.

The third quarter also saw significant cash generated, including cash received from the proceeds of the sale of our interest in XTO Energy Canada, which closed at the end of August. We opted to use those sales proceeds to reduce our outstanding debt by $1 billion. This also lowers our debt-to-capital ratio even further from 19% at the end of 2021 to below 16% now.

In addition to this debt repayment, we continue to maximize shareholder returns. Not only did we return $227 million in dividends. By mid-October, we had fully executed our current normal course issuer bid well ahead of the program's expiry in June of 2023. These buybacks represented an additional $1.5 billion of cash returned to our shareholders during the quarter and another $434 million in October.

And finally, this morning, we declared a dividend of $0.44 per share payable January 1st of 2023. That represents an increase of $0.10 per share or over 29%. This is the largest dividend increase in Imperial's history. And we also announced our intention to initiate another substantial issuer bid to return an additional $1.5 billion to our shareholders in the fourth quarter.

Altogether, as of the end of the third quarter, we have now delivered record shareholder returns of $5.1 billion this year with more to come.

And with that, I'll pass things over to Dan.

[D. Lyons, executive]

Thanks, Brad. Getting into the financial results for the third quarter, our net income of $2.031 billion was up $1.123 billion from 2021, were about $900 million when we exclude the impact of the XTO sale. This increase was primarily driven by higher margins in the Downstream and improved realizations in the Upstream.

Now if we look sequentially, our third quarter income of $2.031 billion is down $378 million from the second quarter were down around $600 million, excluding the XTO sale, reflecting softer crude prices and refining margins that were partly offset by improved Upstream and Downstream volumes.

Looking at each business line, the Upstream, which reported net income of $986 million is down $360 million from our second quarter net income of $1.346 billion. We're down about $570 million when we exclude the impact of the XTO sale.

The Downstream reported net income of $1.012 billion, relatively flat for the second quarter, as strong utilization rates allowed us to continue to take full advantage of the attractive refining margin environment. Finally, our Chemicals business continued to demonstrate solid performance with net income of $54 million in the third quarter, essentially flat with our second quarter net income.

Moving on to cash flow. In the third quarter, we generated nearly $3.1 billion in cash flows from operating activities, an improvement of just over $400 million from the second quarter, bringing our year-to-date cash flows from operating activities to almost $7.7 billion, up about $3.8 billion from last year, reflecting strong conditions and favorable working capital impacts.

Free cash flow for the quarter was $3.453 billion, bringing our year-to-date free cash flow to about $7.5 billion, around $4.3 billion higher than last year, primarily driven by the increase in cash flows from operations that I just mentioned and by the cash received from the XTO sale.

As Brad mentioned earlier, we completed the sale of our interest in XTO during the third quarter. We utilized the proceeds from the structural change in our business to structurally improve our balance sheet by reducing debt by $1 billion, further enhancing our financial resilience and flexibility going forward.

On previous earnings calls, we noted that we expected cash payments in 2022 of around $400 million that, that remains the case. And that includes about $350 million that has already been paid in the third quarter year-to-date.

Looking forward, there are, of course, a number of factors that could impact our final income tax payment for 2022 that will actually be made in the first quarter of 2023. But under current conditions, we continue to anticipate that this first quarter 2023 cash income tax payment would be on the order of $2.5 billion. Finally, we ended the third quarter with just under $3.6 billion of cash on hand.

Moving on to CapEx. Capital expenditures in the third quarter totaled $392 million, up from $277 million in the third quarter of 2021, in line with our full year guidance of $1.4 billion. Spending in the third quarter was primarily in the Upstream with increased spend in our Grand Rapids project and volume sustainment at Cold Lake as well as spending on our in-pit tailings project and new maintenance facilities at Kearl. In the Downstream, we continue to progress our renewable diesel project at Strathcona.

Shifting to my favorite topic, shareholder distribution. Reliable and growing dividend remains the bedrock of our cash distribution strategy. As Brad noted this morning, we declared a fourth quarter dividend of $0.44 per share payable in January. With this $0.10 per share increase, we have now doubled our dividend over the last 2 years.

Beyond base dividends, we remain committed to returning surplus cash to shareholders through our normal course issuer bid program and other means. We completed our most recent accelerated NCIB program in October, returning $1.9 billion to shareholders over the last 4 months. Looking back, over the past 18 months, we returned $7.1 billion to shareholders via share buybacks, reducing our share count by 129 million shares or 18%.

As Brad noted, given our robust free cash flow generation, we intend to launch a second substantial issuer bid this year, returning up to an additional $1.5 billion to shareholders in the fourth quarter. The terms and pricing will be determined, and the bid is expected to commence within the next 2 weeks. Both the dividend increase, and our second SIB announcement continue to demonstrate our ongoing commitment to return cash to shareholders.

Now I'll turn it back to Brad to discuss our operational performance.

[Bradley Corson, executive]

Thanks, Dan. Upstream production for the quarter averaged 430,000 oil-equivalent barrels per day, which is down 5,000 barrels per day versus the third quarter of 2021, but up 17,000 barrels per day versus the second quarter. This increase reflects our strong operating performance at Kearl and Cold Lake, which more than offset the impacts of a major planned turnaround at Syncrude.

While ongoing strength in commodity prices continues to be a key part of the story this year, I would note that the WTI, WCS differential came under some pressure in the quarter, resulting in a widening of around $6 per barrel versus the second quarter. And while these pressures have continued so far in the fourth quarter, WCS absolute prices continue to be quite strong.

I would also note that at the same time, we saw an increase in Downstream crack spreads, notably for diesel, which provides a counter to the wider differentials and highlights the value of integration that we have.

Additionally, our Downstream directly benefits from the lower prices on the heavy crudes we process, especially when coupled with the higher diesel crack spreads, I mentioned. And further, Syncrude's synthetic product commanded a strong premium in the third quarter.

So now let's move on and talk specifically about Kearl. Production in the third quarter averaged 271,000 barrels per day gross, which was up 47,000 barrels per day versus the second quarter, which included our annual major turnaround, and just under the 274,000 barrels per day from the third quarter of 2021. This year's third quarter production represents the third highest quarterly production in Kearl's history.

And operations remained strong at Kearl, and I'm pleased to report that October month-to-date production has averaged 305,000 barrels per day. I would also like to highlight that so far in October, Kearl has set a number of single-day production records with the best ever single-day production in the history of the asset being 357,000 barrels per day on October 12.

Back on the second quarter call, we provided updated full year guidance of around 245,000 barrels per day for Kearl, reflecting the challenges we faced in the first quarter. And given the strong performance in the third quarter and so far into the fourth quarter, we are reiterating the current full year guidance of around 245,000 barrels per day.

Finally, turning to operating costs. We saw a reduction in unit operating costs at Kearl in the quarter of around USD 6 per barrel versus the second quarter to just over USD 25 per barrel. Although, we are still facing pressures from high energy prices, this reduction reflects the absence of the second quarter turnaround as well as the impacts of our ongoing focus on optimization and improving reliability. We continue to work towards a sustainable unit operating costs at or below USD 20 per barrel at Kearl.

Moving to Cold Lake. 2022 continues to be a great year for our Cold Lake asset. Production for the third quarter averaged 150,000 barrels per day, which was up 6,000 barrels per day from the second quarter, and up 15,000 barrels per day from the third quarter of 2021. This is also the fourth consecutive quarter with production at or above 140,000 barrels per day.

As I've talked about before, these results reflect our ongoing focus on production optimization and reliability, resulting in year-to-date production of 145,000 barrels per day. And if you recall, our original guidance for Cold Lake was 135,000 to 140,000 barrels per day for the year. With these strong year-to-date performance results, we are now increasing this guidance to a range of 140,000 to 145,000 barrels per day, and I expect it will likely be at the upper end of that range.

Imperial share of Syncrude production for the quarter averaged 62,000 barrels per day, which was down 19,000 barrels per day from the second quarter and down 16,000 barrels per day from the third quarter of 2021. The lower production reflects the impacts of a major planned turnaround at the asset in the third quarter of the year, which is now largely complete, and operations are returning to normal.

The interconnecting pipeline between Syncrude and Suncor was heavily leveraged during the turnaround months, averaging about 7,000 gross barrels per day of bitumen and other products during the quarter. This highlights the value of the interconnecting pipelines in support of increasing utilization at the site.

To wrap up my comments on the Upstream, I would also note that we successfully closed the sale along with ExxonMobil Canada of our XTO assets at the end of August. Imperial's 50% share of these assets represent production of around 5,000 barrels per day of liquids, and 65 million cubic feet per day of gas.

Cash consideration for Imperial share of the sale was around $900 million, which Dan already mentioned, we used to pay down debt. While debt remains a lower capital allocation priority for us given our strong balance sheet, we felt it made sense to use this nonoperating source of cash for that purpose, serving to further enhance our already strong balance sheet and improving our financial flexibility going forward.

So now let's move on and talk about the Downstream. In the third quarter, we refined an average of 426,000 barrels per day, which was up 14,000 barrels a day versus the second quarter, and up 22,000 barrels per day versus the third quarter of 2021. This reflecting continued strong operating performance and minimal planned turnaround activity.

Refinery utilization was exceptional at 100%, which is the highest quarterly utilization in over 40 years and a result of our continued focus on reliability and optimization. This is up from 96% in the second quarter and 94% in the third quarter of 2021. This is tremendous performance. And I would like to credit our refinery teams who remain focused on reliability and optimization to deliver this phenomenal result.

Year-to-date utilization is 96%, which not only reflects strong operating performance, but also the fact that 2022 has been a light year for planned maintenance. We expect to see 2023 go back to more typical maintenance levels and we will be providing more details on the turnaround schedule when we release our 2023 guidance later this year.

But needless to say, having such a light turnaround year has served us very well in the high refining crack spread environment we have been seeing throughout 2022. We are also continuing to progress the Strathcona renewable diesel project and expect a final investment decision in the coming months.

To that end, you would have seen our announcement about entering into a long-term contract with Air Products to supply low-carbon hydrogen to the project. An important milestone as we continue to progress our plans to build Canada's largest renewable diesel manufacturing facility.

Petroleum product sales in the quarter were 484,000 barrels per day, which is up 4,000 barrels per day versus the second quarter and down 1,000 barrels per day versus the third quarter of 2021. Gasoline and diesel demands remained strong at levels similar to the quarter and jet fuel demand has stabilized at close to pre-pandemic levels.

We continue to see a positive downstream margin environment in the third quarter. And although we have seen some softening of motor gasoline margins through the third quarter, diesel margins remain extremely strong. These dynamics are driven by a number of factors, including low product inventories and a global shortfall for diesel fuel.

And that brings us to Chemicals. This business delivered $54 million in earnings in the third quarter, which was essentially flat or up $1 million from the second quarter, but down $67 million from the third quarter of 2021, which, as you know, was a period of all-time high realizations for us in the Chemicals business. The performance we have seen so far this year is more indicative of mid-cycle performance, and has been very stable throughout 2022.

As always, I'd like to wrap up by highlighting a few other items of note, particularly as it pertains to our ongoing commitment to improving sustainability and reducing our overall environmental footprint.

First, the government of Alberta selected the Pathways Alliance to continue exploratory work on the development of a CCS hub, which will allow operators to safely store CO2 in the Cold Lake area. This is the poor space, which we have been talking about recently and an important milestone in the Pathways plan to develop infrastructure in collaboration with governments to help achieve Canada's net zero goal.

In addition, the Alliance has completed pre-engineering work on the 400-kilometer carbon trunk line and has begun early engagement with more than 20 indigenous communities along the corridor, as a reflection of its commitment to meaningful engagement throughout the full cycle of the network's operations.

The Alliance is also conducting engineering studies for the first phase of the CO2 capture facilities as well as executing environmental field programs to support the necessary regulatory application submissions. So really a lot going on here.

Second, during the quarter, we released our annual Corporate Sustainability Report, which highlights our plans and progress in key environmental, social and governance areas. We are very proud of the progress we have made so far and intend to build on that momentum in the coming years.

And most recently, in fact, just last week, we announced a unique collaboration with a leading electric vehicle charging solutions company called FLO to jointly develop charging service options for Imperial's Esso and Mobil branded wholesalers, which includes an agreement to transfer credits to Imperial under Canada's Clean Fuel Regulations.

This is expected to support Canada's net zero emissions goals by expanding FLO's charging network for electric vehicles. Our collaboration with FLO will complement other Imperial greenhouse gas emission reduction efforts, including plans to produce and supply lower emission fuels, next-generation resource recovery technologies and carbon capture.

In closing, another excellent quarter. We saw high reliability in our operations across the board, including record high utilization in our Downstream, allowing us to continue to benefit from a strong business environment and to deliver very strong financial results.

We also closed the sale of our interest in XTO Energy Canada further advancing our strategy to maximize shareholder value by focusing Upstream resources on our core long-life, low-decline Oil Sands assets. We returned over $1.7 billion to our shareholders in the quarter via our reliable and growing dividend and the accelerated execution of our current normal course issuer bid.

And today, we announced our largest dividend increase in history as well as our plans to initiate our second substantial issuer bid of 2022, both of which continue to underscore our ongoing commitment to drive shareholder value and our continued commitment to shareholder returns.

Progress continues on our efforts to lowering our carbon footprint. In addition to signing a hydrogen supply agreement with Air Products, we expect a final investment decision on the Strathcona renewable diesel project in the coming months. And we continue to advance our deployment of next-generation in-situ technology with the Grand Rapids project at Cold Lake.

We also released our latest sustainability report. And I would encourage you to have a look to learn more about our plans and progress in this important area. When you couple this with our recent announcements, such as our collaboration with FLO, on electric vehicle charging service options as well as the government of Alberta's awarding a pore space is just a couple of examples.

I hope you can see the active role Imperial is playing in the energy transition and in our journey towards a lower carbon future. As always, I'd like to thank you once again for your continued interest and support of our company. And lastly, a big shout out of thanks to the entire Imperial team, who have worked so hard to deliver these great results.

And now, we'll move to the Q&A session. So I'll pass it back to Dave. Dave?

[Dave Hughes, executive]

Thanks, Brad. [Operator Instructions] So with that, Mary, would you please open up the Q&A line?

[Operator]

[Operator Instructions] We can take our first question now from Greg Pardy of RBC Capital Markets.

[Greg Pardy, analyst]

Yes. And Brad, I typically don't do this, but my goodness, what an outstanding quarter.

I wanted to ask you maybe just about generally around shareholder returns looking into '23, and then your appetite to do further SIB. So it always comes up as a question, right, in terms of the acceleration of the SIB, and then it creates these apparent air pockets and what you might do. Obviously, you've addressed that very elegantly.

What's the appetite for an SIB into next year? And then, how do we -- this is a follow-up, of course. But how do you think about that versus specials versus just grinding way on an NCIB and so on? Just want to kind of dial that in a little bit more than my understanding permits now.

[Bradley Corson, executive]

Yes. Thanks, Greg. And I'll make a couple of comments and maybe turn it over to Dan.

As you've seen throughout this year, a very strong commitment to shareholder returns, returning cash to our shareholders via a multitude of vehicles. And it does start with a long history of a reliable and growing dividend. And of course, we've reinforced those actions with a record-setting dividend increase today.

We've continued our philosophy around share buybacks as an important and structural vehicle to return cash to shareholders. And as you know, we've got this 5% a year limit with our NCIB. And as we've accelerated and exhausted that, for a couple of years running now. That has caused us to now look at SIBs as an additional vehicle to supplement those shareholder returns. So we're getting ready to embark on our second 1 for this year.

And I think as we look to 2023, it's premature to commit on further SIBs, but it's not premature to commit on our long-standing philosophy and principle on returning cash to shareholders. And so you will continue to see that as we move into 2023. I think the vehicle that we leverage is kind of yet to be determined.

Again, it will be something we'll be continuing to focus on discuss with the Board. I don't know, Dan, anything you want to add to that.

[D. Lyons, executive]

Yes, just maybe a bit. Well, Greg, by the way, congratulating us at the beginning of remarks, that's always good. You have to apologize for that. We appreciate it.

But that said, our philosophy of returning surplus cash to shareholders is unchanged, right? So what -- and we've said beyond the reliable and growing dividend, our first quarter call is the NCIB. So I think that's almost a given. Of course, it will depend on market conditions.

But if our cash generation is such current market conditions continue, will be such that we'll have to go to other means to return surplus cash, and we'll do that. We've done 2 SIBs. So obviously, we probably see that as an attractive way of returning cash. We do continue to think about specials.

For us, it's really an investor preference thing. And as we talk to investors, across the spectrum, our investors, there seems to be a pretty strong preference for the SIB over special dividends, but I wouldn't rule a special dividend out. So philosophy is the same. If cash continues to be strong, you'll continue to see the NCIB and additional returns of cash to being developed to us.

[Bradley Corson, executive]

And Greg, maybe just kind of one other -- if I can make one other supplemental comment around that.

What we're talking about here is our capital allocation philosophy, as it relates to surplus cash. Now embedded in that decision is also kind of our commitment to reinvesting in the business. And you see us doing that with significant investments at Kearl, at Cold Lake, in our Downstream with our renewable diesel project and looking further down the road with our Pathways Alliance.

And and our commitment to net zero by 2050, and all the infrastructure investments that will be necessary to achieve that. So I think we're striking a very good balance between investing in the sustainability of our company and in our future, but at the same time, doing that in a responsible way that also yields significant surplus cash that we can return to our shareholders.

[Greg Pardy, analyst]

Okay. Understood. Very, very thorough rundown. Just a second question comes back to the 100% utilization in the refining, was that 1 or 2 facilities in particular, have you seen any capacity creep post your turnaround activity? I'm just trying to get a sense as to how likely this is to get replicated even conceivably in the fourth quarter. But -- just has anything really changed structurally in the Downstream that, that 100% utilization might happen again?

[Bradley Corson, executive]

Yes, it's a good question. I mean, we are super pleased, super proud of the 100% utilization. And there's really nothing that we're seeing in the fourth quarter that suggests a fundamental change to that. I did -- as I did mention, kind of a contributing factor to our overall high utilization throughout the whole year has been our light kind of level of turnaround activity compared to historical levels.

As we move to next year, we'll be returning to more typical levels. So that will have an effect on us as we move to next year. But as we sit here today and looking to the rest of the fourth quarter, I expect continued very high utilization. And again, a big credit to our refinery teams to achieve that.

[Operator]

We can now take our next question from Doug Leggate of Bank of America.

[Unknown Analyst]

This is actually Kalei on for Doug. For my first question, I'd also like to touch on cash returns as the market looks like it likes what you've done here. So my follow-up is how the call up capital will evolve into '23, and specifically I'm thinking about capital expenditures and also cash tax. So any color that you can provide there would be helpful?

[Bradley Corson, executive]

Yes. Thanks for the question. Maybe I'll first make a comment around CapEx, and then I'll turn it over to Dan so that he can talk more about the other elements.

On CapEx, as we shared at our Investor Day earlier this year, as we -- our guidance for this year is, of course, is $1.4 billion of capital expenditures. We are right on track to achieve that consistent with the full year guidance. And as we look to the next few years, what we've said is we expect to average about $1.5 billion, which is a combination of maintenance capital and some growth capital. We'll update that outlook when we have our next Investor Day sometime early next year.

But as we sit here today and we're finalizing our near-term business plans, I think we still feel good about those levels of capital expenditure. So I think for now, the $1.5 billion over the next few years is still a good average for us, and we'll provide a bit more detail early next year on that. So that's kind of a capital story, CapEx story, and I'll turn it over to Dan.

[D. Lyons, executive]

Yes. As I said before, we expect to be cash tax paying sort of fully cash tax paying the 23-plus especially on the strong market conditions. I've talked about really quite low cash tax payments in 2020, it's about $400 million projected for the whole year. And I talked about in the first quarter that our final payment or catch-up payments for 2022, which will make to the first quarter 2023, about $2.5 billion. I mean going forward, under current conditions, we expect to be currently tax paying roughly 24%.

[Unknown Analyst]

Got it. I appreciate that, Dan. My second question is on the Downstream results. So what stood out to us beyond the really big headline numbers was that the gross margin was nearly identical to the second quarter and refining benchmarks peak then? So can you help us understand what the drivers are for Q3? And maybe some idea of how retail contributed to the overall results?

[Bradley Corson, executive]

Yes. Thanks for that question. I mean, certainly, the margins have stayed quite high in the third quarter. And so that's a large driver for us. That, coupled with us being able to achieve these very high utilization rates, which were higher in the third quarter than the second quarter. That has contributed to us maximizing value through those assets.

And then as is always the case, we're constantly optimizing our crude slates that we run, taking advantage of kind of market availability of crudes and discounted crudes, and ensuring we're placing our products to the highest markets that are available to us.

So you put all that together, and we were able to generate just a hugely profitable third quarter in the Downstream. So I just kind of paint that picture at the highest level. Jon Wetmore is here with us. And he, of course, runs our Downstream. I'll just kind of offer to him, if he wants to add any further detail on that.

[Jon Wetmore, executive]

Thanks, Brad. I think one thing I'll say about the third quarter trend on gross margin is that gasoline softened, but diesel strengthened. And so that's maybe the swap, if you're trying to look at it versus the second quarter, gasoline was very strong in the second quarter, and it did soften globally and softened in North America, but diesel has more than offset that.

And we do expect the diesel trend to be there in the fourth quarter of this year. So very, very positive bullish signals on diesel in the fourth quarter, and I think that's why Brad is signaling that we do expect strong crude rates through the fourth quarter as well, underpinned by that very good diesel signal.

[Operator]

And we can now take our next question from Dennis Fong of CIBC World Markets.

[Dennis Fong, analyst]

And providing some of that color in your opening comments. Maybe my first 1 is just a follow-on to the discussion around refined products on the Downstream side. I was hoping you could highlight some of the investments Imperial has made recently that has either improved the flexibility around either marketing or throughput, and as well as a reminder on the kind of the range or limits around the relative amount of diesel production you guys can do?

[Bradley Corson, executive]

Yes. Just a couple of comments on investments. Certainly, the most recent and material investment we made was in the Sarnia products pipeline that we announced completion and start-up earlier this year. That allows us good access to the high-value Toronto market for our products. And so we are fully leveraging that asset. We're able to deliver those products reliably via pipeline at a lower cost and maybe we have been able to do in the past. So I think that's a key contributor for us.

As we look back a bit longer in history, over the last couple of years, we've been investing in our asphalt manufacturing capability. We've been investing in our ability to run our heavy crudes. And that just further strengthens our integration as a Downstream. So I think those are all key contributors for us.

And of course, as we look ahead, we're progressing our planning and early investments in the Strathcona renewable diesel project, which is just another example of how we're positioning ourselves to capture maximum value out of not just today's market, but our view of the future market.

[Dennis Fong, analyst]

Great. My second question, if you wouldn't mind switching gears is, at the beginning of this year due to some extreme cold weather that was experienced up in Northern Operations, Flo performed little bit less desirable. I was curious as to whether or not you can walk us through some of the learnings or changes you've made to operations to help improve or moderate the risk as we enter this cooler temperature season over the next few months?

[Bradley Corson, executive]

Yes. Thanks for that question. And you're right. We had some disappointing performance late last year and early this year, driven by just the extreme cold weather conditions. And of course, we're accustomed to operating in cold weather. But what we saw was a bit unusual for us. And there were several kind of confluence of events that contributed to that downtime.

I would first say that based on our third quarter performance. I think there's a strong indication that, that is long in our kind of rearview mirror now. We feel very, very good that with all the work we did to mitigate those situations that we're well prepared for this coming winter. And probably the biggest learning we had was around kind of the operating envelopes that we needed to be prepared for with our new crushers.

That was the new kind of variable for us, and they experienced some issues in the cold weather, but we've made modifications to that equipment, and we feel quite comfortable. But that's the strength of the Kearl organization, as they have demonstrated their resilience. They continue to adapt. They continue to interrogate any bottleneck in the system, any lack of reliability and continue to learn from that and close the gap. And that is what's put us clearly on this accelerated pathway to 280,000 barrels per day by 2024, with a year earlier than we had previously indicated.

And the team hasn't given up there. They're going to continue to work towards further improvement. So I just kind of leave you with that, that we feel quite positive and optimistic about the future at Kearl.

[Operator]

[Operator Instructions] We'll take our next question now from Patrick O'Rourke with ATB Capital.

[Patrick O'Rourke, analyst]

Just kind of wondering here in terms of the renewable diesel project, you got the agreement with Air Products there. What sort of technical and regulatory milestones remain between now and FID? And then in terms of the Air Products deal, does that have any impact on the nature or amount of capital that -- or timing of those capital spend that will be necessary by Imperial?

[Bradley Corson, executive]

Thanks for the question. Thanks for the interest in the project. We're super excited about it. Kind of concluding the contract with Air Products is a key enabler for us to bring that project to FID. And as I mentioned, we're anticipating that we will bring it to FID within the coming months.

The other key outstanding item that we're working through is some key commercial arrangements around the crop supply that will be the feedstock for the renewable diesel project. Those discussions are well advanced and going well and obviously, though, that's a key element of the project.

From a capital standpoint, we've indicated that our estimated cost is around $500 million investment for that project. And that excludes investments that Air Products would make or that crop suppliers would make. When you look at it in total, it's probably closer to $1 billion, including others third-party investments.

The regulatory work is well advanced. That's not an obstacle for us at this point. So again, we're getting down to kind of the final steps we need to take FID. So I'm super excited about advancing this project. And I think it's got great benefit, not just for us as a company, but for Canada and our objectives as society here.

[Patrick O'Rourke, analyst]

Okay. I appreciate that color. And then just on the financial side here. You guys have maintained the $1.4 billion capital budget for this year. You're pointing to $1.5 billion next year. This is really in stark contrast everything that we've seen in the industry from your peers in terms of being able to mitigate effectively inflation here.

And I know you don't want to give away the entire recipe for the secret sauce, but I'm just curious, if you can point to any key factors because as I said, this is a pretty significant departure relative to your peers in terms of capital outlays?

[Bradley Corson, executive]

Yes. Thanks for recognizing that. And it is a big credit to our team. That is the secret sauce. It's the team, and they are working quite diligently on managing inflationary pressures, both on the operating cost side and on the capital side. We've demonstrated our discipline around cost quite dramatically during the depths of COVID, when we remove almost $1 billion of operating costs and other $1 billion of capital costs. And with that were a lot of structural improvements that we continue to leverage today.

Now when you talk specifically about our $1.4 billion capital budget and our ability to deliver kind of all of the project activities within that original budget. It does speak to the work the team is doing to offset inflationary pressures, continuing to look for further efficiencies in the business.

We also benefit from having much of the capital work being contracted prior to these extreme inflationary pressures that we're seeing, and the nature of many of our projects involves -- a lot of earthmoving and not so much steel, which has been subject to significant cost pressures.

But again, it comes down to this relentless focus on managing costs and a big credit to our team. We expect to maintain that discipline as we look to next year and the years beyond with this average of $1.5 billion. So thanks for that question.

[Operator]

We'll now take our next question from Neil Mehta of Goldman Sachs.

[Neil Mehta, analyst]

Yes. Congrats on a great set of results here. Brad, the first question is around the widening of the WCS differential. And typically, we think of your Upstream business a little bit more WCS levered in your Downstream business more levered to light [ sweet ] crude, but I'd be curious how you're thinking about that widening of the dip and how it impacts the way we should think about near-term profitability?

[Bradley Corson, executive]

Yes. Thanks for the question, Neil. And I think you've characterized that right. The Upstream business at least Kearl, at Cold Lake are tied to WCS differentials. I contrast that the Syncrude, of course, which sells a synthetic product, which is trading at a premium to WTI right now. But for Kearl and Cold Lake, we are directly tied to WCS differential.

And that has been under pressure. And what's driving that widening of the differential as I think we talked about in the past, is a combination of multiple events, both on the supply and demand side. Broadly speaking, over the last quarter and earlier this year, a significant release of SPR barrels in the U.S., which have been providing some level of competition and offsetting demand for Canadian heavies.

On top of that, with high energy costs, especially natural gas, we're seeing some refiners that are favoring a lighter crude slate to produce their products. And then there's been some kind of near-term disruptions in refinery operations in the U.S. that is also for short periods of time have depressed the demand of the heavy.

So lots of factors in play. We think that many of those factors are resolving themselves as we move into the next year. And so we expect that differential to start tightening and moving back towards more normal levels, but it's going to take a while to rebalance, I think.

And then on the Downstream side, I mean, you're exactly right. We run more light crudes than heavy, but we do run some of our heavy crudes in our own refineries probably about 1/4 of heavy grades. And so where I want to take full advantage of that wider differential on the Downstream.

And as I mentioned earlier, as Jon mentioned, the diesel crack spreads are extremely high right now. So having an integrated system like we do with both Upstream and Downstream assets, allows us to kind of mitigate the effect of those wide heavy differentials on our earnings and cash flow.

[Neil Mehta, analyst]

Yes. And then I just wanted to go back to Kearl. Did I hear you right to say that you got up to 357,000 barrels a day at one point in October? And just how do you think about the sustainability of running above nameplate in Q4? And then tie that into your OpEx per barrel if you're going to run this hard, I would imagine the $20 a barrel is in sight. So just any thoughts there, too.

[Bradley Corson, executive]

Yes. Well, you did hear it correct. 357,000 barrels a day. That's our new daily record. There's lots of things that impact daily performance and it's not necessarily a reflection of a sustainable level for a whole week or a whole month. But obviously, having record production days contribute to an overall kind of high-volume week or high-volume month. And that's what we're seeing at Kearl.

We saw a convergence of great run time in our crushers, great run time in our processing facilities. But coupled with just great efficiency in our mine operation and high-quality ore, all those things coming together in 1-day, give us the sort of record results.

And of course, our objective is to string together multiple record days. And -- but over the course of a month or a quarter, we expect there will be some planned downtime and maybe some unplanned downtime, and those things will dilute the benefit there.

But fundamentally, we have continued to raise the bar at Kearl and that gives me great optimism in our ability to achieve this 280,000 barrels a day. And you're exactly right. When we look at our target of USD 20 U.S. barrel unit cost, having a strong denominator in that calculation is really important.

And so the more volumes we can put through the facility with high fixed costs that we could dilute across or distribute across a number of barrels. That brings our unit operating costs down and it lowers our breakeven and makes every barrel more profitable. So that's what we're striving to. And we continue to feel good about our ability to get to $20 a barrel.

[Operator]

This concludes question-and-answer session. I would now like to hand the call back to Dave Hughes for closing remarks.

[Dave Hughes, executive]

Thank you. On behalf of the management team, I'd like to thank everybody for joining us this morning. But also welcome you, if you have any further questions, please don't hesitate to reach out to anybody on the IR team here. We're always happy to follow-up. So thank you very much.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.