Imperial Oil Ltd

TSX:IMO

Earnings Call Analysis

Imperial Oil's Profits Dip but Operations Strong

Imperial Oil witnessed a decrease in third-quarter profits to $1,601 million, down approximately $400 million from the same quarter in the previous year, mainly due to lower refining margins, but the figure represented a $900 million increase over the second quarter. Upstream production increased by 5,000 barrels per day year-on-year to 423,000 barrels per day after adjusting for the previous year's divestitures. New records were hit with Kearl production, reaching its highest quarterly output. Refinery throughput was strong at 416,000 barrels per day, with refinery utilization at 96%. In shareholder returns, the company completed an accelerated issuer bid, buying back 5% of its shares for $2.3 billion, and plans to return an additional $1.5 billion in the fourth quarter.

Resilient Performance Amidst Challenges

In the arena of high-stakes oil production, a notable company recently revealed its quarterly prowess with earnings reaching $1,601 million. This number signifies a decrease of about $400 million compared to the same quarter last year, yet also an impressive climb of over $900 million from the previous quarter. This financial rollercoaster can be attributed to the ebb and flow of refining margins and planned turnaround activities that coincide with the unpredictable waves of commodity prices.

Strategic Investment and Robust Cash Flow

Continuing with the company's strategic tale, capital expenditures were prudently managed at $387 million, aligning well with their yearly guidance. These investments centered around key projects aimed at sustaining and boosting production. Among these were the Kearl and Cold Lake expansions, along with the in-pit tailings project. In the downstream segment, the renewable diesel project at Strathcona drew considerable attention with its anticipated 2025 launch. These endeavors were supported by a substantial cash flow from operating activities totaling nearly $2.4 billion, of which $1,946 million was attributable to stronger earnings and favorable working capital changes, sans the favorable working capital impacts.

Kearl's Record-Setting Quarter

A highlight of the company's quarter was Kearl's record-setting production, reaching new heights with an average of 295,000 barrels per day. This triumph surpassed both the previous quarterly record and the highest single monthly production in September with 322,000 barrels per day. These feats parallel a marked reduction in unit cash operating costs to just above $20 per barrel, signaling Kearl's journey towards the target of less than $20 per barrel. The synergy of high production and low costs fortifies the forecast for the full year, projecting a production range of 265,000 to 275,000 barrels per day.

Syncrude and Downstream Dexterity

Elsewhere in the company's portfolio, the Syncrude segment experienced enhanced production owing to completed turnaround activities earlier in the year. Imperial's share averaged 75,000 barrels per day, an uptick from both the second quarter and the same period last year. Meanwhile, the Downstream operations boasted an average refining volume of 416,000 barrels per day, showcasing an impressive 96% utilization rate. This positions the company comfortably on course to meet its full-year guidance of 92% to 94% utilization. The petroleum product sales mirrored this positive trend and coupled with stronger diesel margins, allow for an optimistic outlook.

Conclusive Insights for Investors

Pivoting towards the future, the company is poised to deliver up to $1.5 billion back to its shareholders through a substantial issuer bid. Such investor-friendly initiatives coupled with the strategic execution across all business lines depict a company determined to maintain its competitive edge and create value, even in the face of market volatility and operational challenges. For the astute investor, this story of fiscal fitness and operational excellence paints a narrative of a company that's not just surviving, but thriving.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and welcome to the Imperial Oil 3Q '23 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.

[Dave Hughes, executive]

Good morning, everybody. Welcome to our third quarter earnings conference call. I'm joined this morning by Imperial's senior management team, including Brad Corson, Chairman, President and CEO; Dan Lyons, Senior Vice President, Finance and Administration; Sherri Evers, Senior Vice President of Sustainability, Commercial Development and Product Solutions; and Simon Younger, Senior Vice President of the Upstream. Also joined today by the new Vice President of Investor Relations, Peter Shaw.Today's comments include reference to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in Attachment VI of our most recent press release and are available on our website at 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 the 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 these documents are available on SEDAR, EDGAR and on our website. So please refer to those.Brad will start with opening remarks and then Dan will provide us with a financial update, and then I'll go back to Brad for an operations update. And once that's done, Peter will take over and take us through the Q&A period.So with that, I'll turn it over to Brad.

[Bradley Corson, executive]

All right. Thanks, Dave. Well, good morning, everybody, and welcome to our third quarter earnings call. I hope everyone is doing well. I'm really pleased to report another strong quarter for Imperial. We saw strong performance across both our Upstream and Downstream businesses, and we are seeing continued strength as we move into the fourth quarter.Notwithstanding some tempering of demand, the overall macro environment remains quite positive for our financial performance. We're continuing to experience high commodity prices driven by continued robust demand and lower than normal inventories. 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 remain committed to delivering reliable, affordable and lower emission energy to Canadians.Now let's talk about our third quarter performance. The results we will review over the next several minutes are reflective of a quarter that saw lower planned maintenance relative to the second quarter. We completed a turnaround at Cold Lake, safely and consistent with our plans. We also began planned turnaround work at Syncrude and also at Sarnia that continued into the fourth quarter. As of today, the turnaround at Sarnia is mechanically complete, and the facility is in the process of starting up and Syncrude is expected to complete in the coming weeks.The third quarter also saw continued strength in the commodity price environment with benchmark oil prices, such as Brent, WTI and WCS, all improving versus last quarter. While we saw lower motor gasoline cracks toward the end of the quarter, diesel cracks strengthened throughout. And overall, refining margins remain solid. Over the next few minutes, Dan and I will detail the results of this very strong third quarter.So now let's review those third quarter results specifically. Earnings for the quarter were $1,601 million, with cash from operating activities of $1,946 million when excluding working capital impacts. These results reflect continued strong operational performance and lower levels of planned maintenance across the Upstream and Downstream.We achieved total Upstream production of 423,000 gross oil equivalent barrels per day. The quarter was highlighted by the highest ever quarterly production at Kearl of 295,000 total gross oil barrels per day. In late September, Syncrude began work on its planned hydrotreater turnaround, which is expected to complete in the middle of the fourth quarter. This turnaround will have a smaller impact on volumes and costs in comparison to the much larger coker turnaround completed earlier this year. I'll talk about each asset in more detail in a few minutes.In the Downstream, we continue to see very strong operating performance. Refining throughput averaged 416,000 barrels per day, which equates to a refinery utilization in the quarter of 96%, which includes the Sarnia site turnaround, which began in mid-September. And as a reminder, the Sarnia turnaround included maintenance at our chemical facility as well.We ended the third quarter with year-to-date refining utilization of 94%, which is consistent with our guidance for our refining business. On share buybacks, I'm very pleased to report that by mid-October, we had fully executed our accelerated normal course issuer bid. These buybacks represented an additional $1,342 million of cash returned to our shareholders during the quarter and another $958 million in October for a total return of $2.3 billion, representing 5% of our shares. And earlier today, we announced our intention to initiate another substantial issuer bid to return an additional $1.5 billion to our shareholders in the fourth quarter.So with that, I'll pass things over to Dan.

[D. Lyons, executive]

Thanks, Brad. Getting into the financial results for the third quarter, we reported net income of $1,601 million, down about $400 million from the third quarter of 2022. We're down about $200 million when we exclude the impact of the XTO Canada sale in the prior year. The decrease is primarily driven by lower refining margins in our Downstream business.Looking sequentially, our third quarter net income of $1,601 million is up over $900 million from the second quarter, reflecting stronger realizations and improved volumes, along with the absence of significant second quarter turnaround activity in both the Upstream and Downstream.Looking at each business line, the Upstream reported net income of $1,028 million up $644 million from the second quarter, reflecting higher realizations and improved volumes post plan turnaround activity at Kearl and Syncrude. The Downstream net income was $586 million, up $336 million from the second quarter, reflecting the absence of planned turnaround activities at the Strathcona refinery and stronger refinery margins.Finally, our Chemicals business generated net income of $23 million, down $48 million from the second quarter, reflecting weaker margins as well as impacts from the gas cracker turnaround that commenced in September.Moving on to cash flow. We ended the quarter with more than $2.7 billion of cash on hand. In the third quarter, we generated almost $2.4 billion in cash flows from operating activities, an improvement of almost $1.5 billion over the second quarter, reflecting stronger earnings and favorable working capital impacts. Excluding favorable working capital impacts of $413 million, cash flow from operating activities for the third quarter was $1,946 million, up about $800 million from the second quarter.Cash flows from operating activities were also impacted by unfavorable LIFO WAC deferred tax impacts, driven by higher commodity prices in the third quarter as compared to the second quarter. As a U.S. GAAP LIFO reporter, we tend to see negative inventory driven deferred tax impacts when prices rise and positive impacts when prices fall.Now we'll discuss CapEx. Capital expenditures totaled $387 million in the third quarter, down slightly from $392 million in the third quarter of 2022, but remain in line with our current year plans and full year guidance of $1.7 billion. In the Upstream, third quarter spending focused on smaller projects to sustain and grow production at Kearl, Cold Lake and Syncrude as well as progressing the in-pit tailings project at Kearl and the SA-SAGD Grand Rapids project at Cold Lake. In the Downstream, third quarter spending mainly included progressing our renewable diesel project at Strathcona. Facility construction continues with project startup planned for 2025.Shifting to shareholder distributions. In the third quarter of 2023, we paid $292 million in dividends. Beyond base dividends, we continue to demonstrate our long-standing commitment to return surplus cash to shareholders. As Brad noted, we completed our most recent accelerated NCIB program on October 19, returning a total of $2.3 billion to shareholders over the last 4 months.And as Brad also noted, given our robust free cash flow generation, we intend to launch a substantial issuer bid, returning up to an additional $1.5 billion to shareholders in the fourth quarter of 2023. The terms and pricing will be determined and the bid is expected to commence within the next 2 weeks. Lastly, this morning, we announced a fourth quarter dividend of $0.50 per share, consistent with our third quarter dividend.Now I'll turn it back to Brad to discuss our operational performance.

[Bradley Corson, executive]

All right. Thanks, Dan. So now let's talk about our operating results for the quarter. Upstream production for the quarter averaged 423,000 oil-equivalent barrels per day, which is up 60,000 barrels per day versus the second quarter of 2023 and down 7,000 barrels per day versus the third quarter of last year.When adjusting for the sale of XTO that closed in the third quarter last year, we are actually up around 5,000 barrels per day year-on-year. This higher production was driven primarily by strong performance at Kearl and the absence of the second quarter turnaround work at both Kearl and Syncrude. This was partly offset by planned maintenance at Cold Lake and the commencement of Syncrude's hydrotreater turnaround in late September.In the quarter, we saw WTI and WCS prices rise to the highest level in a year, leading to substantial strengthening of bitumen realizations. Going into the fourth quarter, we have seen a recent widening of the WTI-WCS differential, but the overall commodity environment remains strong, and the industry outlook for egress is positive.So now let's move on and talk specifically about Kearl. Kearl's production in the third quarter averaged 295,000 barrels per day gross, which was up 78,000 barrels per day versus the second quarter and up 24,000 barrels per day from the third quarter of last year. I'm excited to highlight that this represents another production record and the best ever quarterly performance at Kearl, surpassing the previous record, which was set in the fourth quarter of 2020 by 11,000 barrels per day gross.And there's more. Kearl has also set a number of other production records in the quarter, including the highest ever single month production of 322,000 barrels per day in September, also the highest ever August production of 283,000 barrels per day and a new daily production record of 360,000 barrels a day, which was set on September 5. With a record performance at Kearl in the third quarter, we remain positioned to meet our full year guidance of 265,000 to 275,000 barrels per day.Turning now to cash operating cost for Kearl, which is another positive achievement. Unit cash operating costs in the quarter were just over USD 20 per barrel, a decrease of over USD 70 per barrel versus the second quarter due primarily to the absence of the planned turnaround and the higher volumes. We also saw a decrease of almost USD 5 per barrel versus the third quarter of last year. Year-to-date cash operating costs at Kearl are just below USD 24 per barrel, which is about USD 5.75 per barrel lower than the same period in last year.This is the trend in costs we are expecting to see as we continue to work towards our target of sustainable unit cash operating costs at or below USD 20 per barrel at Kearl. I'm very pleased to see these results, and congratulations to the Kearl team.During the third quarter, we also completed the autonomous haul program with all 81 of our Caterpillar 797F-heavy haul trucks now fully converted to autonomous operation. With this, we now operate the largest autonomous fleet in our industry and one of the largest autonomous mining fleets in the world, which enables us to capture improvements in truck productivity, further enhance our safe operating environment and also reduce operating costs.I'm very proud of what we have achieved to date with this program, and we continue to look at other potential opportunities to expand our autonomous concept to other areas of our mine fleet. This program reflects our commitment to safety, technology and innovation and becoming the lowest cost operator.In addition to completing the conversion of our haul trucks to autonomous operation, we also started up the sixth and final boiler flue gas waste heat recovery unit at Kearl. This technology recovers waste heat from a boilers' exhaust to preheat processed water, resulting in less steam usage and lower greenhouse gas emissions and is one of the key initiatives underpinning our 30% greenhouse gas intensity reduction target by 2030. The 6 units are expected to eliminate a total of 220,000 tons of CO2 per year and also capture significant cost savings of approximately $40 million per year.Wrapping up Kearl, I wanted to provide an update on the environmental protection order. With respect to the work at our site, as we have previously shared, key construction work was completed in June, and we continue to assess and conduct monitoring to determine if any further mitigations are required. Our initial data shows that the mitigations are working as intended and preventing further off-site migration of impacted water. We continue to engage with the indigenous communities to ensure they are aware of the progress and to address any questions or concerns. And to-date, there is no indication of adverse impacts to wildlife or fish populations or risks to drinking water for local communities.So with that, let's shift now to Cold Lake. Cold Lake production for the second quarter averaged 128,000 barrels per day, which was 4,000 barrels per day lower than the second quarter and 22,000 barrels per day lower than the third quarter of last year. The lower third quarter production was primarily the result of steam cycle timing and the planned turnaround at the Nabiye plant, which was completed last month. With the maintenance work behind us, we expect Cold Lake to trend higher on volumes and are reiterating our guidance and expect to deliver full year production in the range of 135,000 to 140,000 barrels per day.Moving to the Grand Rapids Phase 1 project. I'm pleased to share that the critical equipment tie-ins were completed during the recent Cold Lake turnaround. The project is nearing completion and remains on track to achieve the accelerated start-up timing with steam injection expected prior to year-end. And once fully up and running, Phase 1 of this project is expected to deliver profitable production volumes of 15,000 barrels per day and support our emissions reduction strategy.So now a few comments on Syncrude. Imperial share of Syncrude production for the quarter averaged 75,000 barrels per day, which was up 9,000 barrels per day versus the second quarter and up 13,000 barrels per day versus the third quarter of 2022. Higher production in the third quarter was primarily due to timing of the annual planned coker turnaround. In 2022, Syncrude's coker turnaround began in the third quarter and in 2023, work was primarily completed in the second quarter. In late September, work began on Syncrude's planned hydrotreater turnaround, which is expected to be complete by mid-November. The impact in the fourth quarter is expected to be around 4,000 barrels per day and around $12 million in operating costs.Lastly, the interconnect pipeline continued to add value, enabling 9,000 barrels per day of Syncrude Sweet Premium production, which was imported over the quarter helping to maintain high upgrader utilization when bitumen production experienced reliability and ore blend challenges throughout the quarter.Now let's move on and talk about the Downstream. In the third quarter, we refined an average of 416,000 barrels per day, which was up 28,000 barrels a day versus the second quarter and down 10,000 barrels per day versus the third quarter of 2022, reflecting a utilization of 96%.Coming off a second quarter that was impacted by the major turnaround in Strathcona, the third quarter has seen lower planned maintenance with a major turnaround at Sarnia, only impacting the final few weeks of the quarter. The turnaround in our Sarnia refinery and chemical plant began in mid-September. And as I mentioned, is now mechanically complete with the facility startup underway. The costs are expected to be in line with guidance of $165 million. Year-to-date, utilization of our refinery sits at 94%. So we are right on track to deliver our full year guidance of 92% to 94% with the Sarnia turnaround being completed per our plans in the fourth quarter.I recently visited our Strathcona refinery and I'm pleased to share that the renewable diesel project team is making great progress with construction currently focused on completing below-ground infrastructure and above-ground tankage. Overall, the project continues to progress on plan with start-up targeted for 2025, in line with the outlook we provided at our Investor Day.Also, at Strathcona, we have successfully completed a co-processing trial and have now completed similar trials at all of our refineries. This technology has the potential to reduce carbon intensity of fuel as well as plastic products by co-processing vegetable oil and ethanol alongside conventional crude feedstocks.Petroleum product sales in the quarter were 478,000 barrels per day, which is up 3,000 barrels per day versus the second quarter and down 6,000 barrels per day versus the third quarter of 2022. We continue to see gasoline demand around 90% to 95% of historical levels and jet at about 110% of historical levels. On diesel, demand in the quarter was between 80% to 85% of normal as we saw some impacts from the B.C. port workers strikes. On crack spreads, diesel margins strengthened quarter-over-quarter and remained on the high end of the 5-year band. Motor gasoline cracks softened toward the end of the quarter as we ended the summer driving season, with cracks now sitting around the low end of the 5-year band.And that brings us to Chemicals. The business delivered $23 million in earnings in the third quarter, which was down $48 million versus the second quarter and down $31 million versus the third quarter of 2022. The lower earnings were driven by the gas cracker turnaround that began in mid-September, which is now mechanically complete as well as was impacted by a softer margin environment.There are a couple of additional accomplishments from the quarter that I'd like to highlight. First, we released our annual Advancing Climate Solutions report, a progress report highlighting our efforts to grow shareholder value and play a key role in a transformation to a lower emission future. The need for effective strategies and solutions to supply affordable, accessible, reliable energy while reducing emissions in support of a Net Zero future is paramount.We also established a low-carbon solution organization during the quarter. This team is focused on leveraging Imperial and ExxonMobil's unique capabilities to bring lower emission technologies like renewable fuels, hydrogen and carbon capture and storage to market, helping customers meet their sustainability goals.Next, I would like to highlight a long-standing partnership focused on indigenous education. We're excited to share that this year marks 20 years of partnership between Imperial and Indspire, an indigenous national charity that invests in the education of FirstNations, Inuit and Metis people for the long-term benefit of these individuals, their families and communities across Canada.Since 2003, we have provided more than $1.8 million in funding to Indspire, most of which has supported their building brighter futures bursaries, scholarships and awards program. Through this program, Imperial has provided more than 500 indigenous students with scholarships or bursaries. We are very proud to play a role in helping break down barriers for indigenous use as they pursue education to achieve their highest potential. I also want to thank Indspire for being a great partner and for all they do for indigenous use in Canada.So to quickly wrap up, this was a strong quarter underpinned by reliable operations and a favorable commodity price environment. With a major turnaround at Sarnia wrapping up, our focus is on a strong finish to the year. We remain confident in our overall guidance for the year across all of our assets. And as you can see from the accelerated completion of the NCIB and the announcement today of the $1.5 billion substantial issuer bid, our commitment to shareholder returns remains a priority.We're also committed to delivering our plans to reduce emissions and generate value. I'm pleased to have shared our progress on Grand Rapids, the Kearl boiler flue gas and our Strathcona renewable diesel projects and would also note our ongoing work with the Pathways Alliance.I look forward to continuing to bring you updates on these attractive opportunities as we continue to focus on maximizing the value of our existing businesses, while at the same time, responding to the changing needs of our customers and communities.I would also like to take a moment to thank Dave Hughes, our Vice President of Investor Relations for all of his contributions to Imperial over his 34-year career. And wish him and his wife Denise, all the best with his upcoming retirement and of course, welcome Peter to his new role. As always, I'd like to thank you once again for your continued interest and support in Imperial.And now we'll move to the Q&A session. So I'll pass it back to Peter.

[Peter Shaw, executive]

Thank you, Brad. And as Brad said, we'll move into the Q&A session. As always, we'd appreciate it if you could limit yourself to one question, plus a follow-up so that we can get to as many questions as possible.So with that, operator, could you please open up the phone line for questions.

[Operator]

[Operator Instructions] We'll go to our first question from Greg Pardy with RBC Capital Markets.

[Greg Pardy, analyst]

And Brad, thanks very much for the rundown. I guess you're letting Mr. Hughes go, but Dave, listen, all the very best and don't be a stranger when you come into Toronto and welcome Peter. There was really just one area I wanted to dig in because obviously, it's a pretty strong quarter -- well, actually 2 areas. I guess the first is how much of an inventory impact did you feel in the Downstream as a result of the inventory changes that you referred to earlier? And then completely shifting gears as it relates to Kearl, how is that working mechanically now that you've moved to autonomous haul? Does that mean that you're redeploying drivers? Or have you been redeploying drivers? Or how does it work on different shifts? Or are you actually reducing headcount there? So a lot of questions, but any color would be great.

[Bradley Corson, executive]

Yes. Greg and first, I appreciate you acknowledging the strong quarter we had. In terms of your specific questions, on the inventory, that's been an ongoing factor now for several quarters with regard to diesel margins and spreads. And I don't know that we have an explicit quantification on that. But it's clearly a factor as we've seen reducing inventory levels globally. Do you want to say something?

[D. Lyons, executive]

Yes. And maybe, Greg, I think you're referring to kind of the deferred tax impact. Is that right?

[Greg Pardy, analyst]

I think -- yes, exactly.

[D. Lyons, executive]

Yes. And it's a pretty big number, $168 million. And I would characterize it as noise. If you look at we report on a LIFO basis, sort of historical inventory in our earnings, but we pay tax on a weighted average cost basis. And the tax value of inventory will go up and down with prices, right? And if you look at -- not to get too taxable, you look at the price increase quarter-to-quarter, maybe $10. But you look at the last month of each quarter, which more matters for inventory valuation is about $20. So there's a pretty big price movement in the inventory valuation and inventory levels increase somewhat due to turnaround activity. So you see this kind of big factor driven by those increases. Primarily, I mean, we only do deferred taxes for Imperial as a whole, but it's primarily driven by impacts in the Downstream because they hold most of the inventory. But it really is the price increase from June versus September as well as some temporarily higher inventory levels. So at today's prices, you'd expect to see that reverse out. So that's that $168 million, that's where that comes from. It's a deferred tax impact. There's other things in there, but primarily this tax valuation, inventory at weighted average cost and our normal LIFO that we use for earnings. I hope that answers your question.

[Greg Pardy, analyst]

Yes. No, Dan, that's great.

[Bradley Corson, executive]

Yes. Thanks for stepping in on that one, Dan. I was clearly on the wrong track, thinking more broadly about global market factors impacting diesel. So thanks for that.

[D. Lyons, executive]

We got to say -- well, it doesn't reflect an actual cash payment. It's sort of the accrual of what our cash taxes would be at those closing prices. So it's a little bit flaky. But it's obviously the number is correct, but we would expect that to bounce around. This is quite high, and we expect a current prices you'd see a reversal, but we'll see. Sorry, Brad.

[Bradley Corson, executive]

Yes. No worries at all. And on your second question regarding the autonomous haul program at Kearl. We are super excited about that. We've been working on this now for several years and to finally complete all of the conversion of the trucks allows us to really make a step change in all of those kind of beneficiary components that have been driving us. I mean, things around truck productivity, things around unit operating cost. And of course, there is this broader safety benefit that comes with it.Specific to your question on staffing, we have definitely worked to deploy staff related to that. But I'll -- Simon is here with me, maybe Simon can talk a little bit more specifically about kind of our strategy there.

[S.P. Younger, executive]

Yes. Thanks, Brad. I can give a little bit more color to that. I mean the milestone that Brad mentioned is reaching the point where we've now converted all of our 81 heavy haul trucks to autonomous. But as you would have heard, that's taken place over several years. So if you think about sort of a significant step change in staffing associated with that, that's not really the case. As we've autonomized the trucks over several years, there has been a headcount reduction. We've also, as Brad said, redeployed a number of truck drivers on to other mining equipment. Some of them have gone into the autonomous control room and are now delivering value that way. So it's kind of a combination, but not a significant step change from quarter-to-quarter or from year-to-year.But headcount reduction is definitely, or headcount efficiencies going forward is definitely one of the value drivers for autonomous, but it's by no means the most significant. In fact, it's one of the more minor drivers. Really, the bulk of the value comes from productivity improvement that we're able to realize through the autonomous program. If you think about that $1 a barrel plus of cost benefit that we're driving at Kearl through the autonomous haul program, the majority of that comes from improved efficiency and productivity of the equipment.

[Operator]

We'll go next to Manav Gupta with UBS.

[Manav Gupta, analyst]

First, I just wanted to thank Dave over the years, very helpful in helping us with the information modeling and everything. So thank you for that, and welcome Peter to the new job. My question here, I'll start with one macro. Your opening statement said that in the near term, we have seen some widening of the WCS differential. But the outlook for egress is positive. If you could elaborate on those 2 things, what is driving the wider spread right now? And where are we in the process of egress? Because we hear a lot of information. What's the latest on TMX that you have an update on?

[Bradley Corson, executive]

Yes. Manav, first, on the widening WCS when you look back over the quarter, at the beginning of the quarter, we're seeing pretty tight differentials, I don't know, $15 or so. But as we got to the end of the quarter, we have seen those wind. And I'd say a couple of factors are driving that. One is us included, we have completed our major turnarounds for the year, and that is resulting in more Canadian production available to move to our customers. And on top of that, we do see that we're still in a refinery maintenance period, not just in Canada, but in the U.S., several refineries are undergoing maintenance. But again, those are -- that's kind of a short-term effect, and we would expect to see more of a balance as we move to the end of the year.And then on top of that, with regard to your second question on egress, we're quite encouraged by the progress that TMX is making. And what we've heard is that they expect to start up around the end of the first quarter next year. And I know from what I've heard, they are over 95% complete. There's relatively small sections of pipeline left for construction, and then they'll be moving into the commissioning line fill mode. So we view all that as very positive from a egress standpoint.

[Manav Gupta, analyst]

My quick follow up here is…

[Bradley Corson, executive]

And I should say…

[D. Lyons, executive]

Sorry, go ahead.

[Manav Gupta, analyst]

No. My second quick follow-up here was some time back, your operating partner has taken over the Syncrude operations from the entity, and you guys had both expressed confidence in terms of the synergy benefits of that. Where are we in that cycle in terms of the benefits that come from your actual operating partner taking over the Syncrude project?

[Bradley Corson, executive]

Yes. Thanks for that. And just to close out, the other comment I was going to make on WCS and egress is as we see that TMX come online, we do see that as favorable supportive of a tighter differential. So as we look to next year, we do expect tightening versus where we are today.Now on Syncrude benefits, as we've said, that's a multiyear journey. And we're working closely with Suncor, the operator, to achieve a wide range of benefits, starting with improved reliability, also reduce cost structure. And we are seeing progress. If you think about last year, last year's production was a record high year for us and for the asset. So that's an indication that we are making progress on reliability. We're seeing less unplanned downtime events, which I think is positive. We still see a big opportunity with operating costs. And that's probably the biggest challenge ahead of us, and we're working closely with Suncor to continue to look for opportunities to drive those cost structures down so that the asset could be more competitive on a cost basis. But we are seeing progress, but there's still a long ways to go.

[Operator]

We'll go next to Dennis Fong with CIBC World Markets.

[Dennis Fong, analyst]

Again, also, first off, congrats Dave on your retirement, and welcome Peter to the new role. The first question I have is more folks around Kearl. Obviously, that's great to hear that the full deployment of autonomous haul has been completed across that asset. When we think about things, I know at your Investor Day, you outlined a bunch of digital technology, including shovel and truck analysis as well as other aspects that likely help support or are supported by AHS. How do we think about where production and productivity you could potentially get to? And how far have you -- or how much have you captured of that $1 a barrel thus far?

[Bradley Corson, executive]

Yes. I'll make a couple of comments, and then I'll let Simon maybe add a little more color to it. First of all, in terms of the journey we're on, as you're aware from our Investor Day and other discussions, our guidance for this year is 265,000 to 275,000 barrels per day. We're on path to achieve that, which is great recovery from some of the operational challenges we had last year and puts us back on track to this journey to 280,000. And as we said at our Investor Day, we expect to achieve 280,000 barrels a day next year. And then looking beyond that, although we haven't put a specific time line, we do see the potential to achieve 300,000 barrels a day. And certainly, things like autonomous haul leveraging technology are all integral components to achieving those higher volumes.But maybe Simon can add a little more detail around some of the other autonomous things we're doing and other technology applications at the mine or elsewhere in the asset.

[S.P. Younger, executive]

Yes. Yes, happy to. Thanks, Brad. I think actually, earlier in the year, I shared one example of where we're looking elsewhere for the benefits of autonomy. And I foreshadowed that we were going to do a trial of autonomous doses. And in fact, we've now done some of that trial work and got really encouraging results, particularly in our tailings area. We think remote control dosing has some significant potential. So we just continue to see enormous potential in this part of the business.But sort of bigger picture, just to build a bit more on what Brad was sharing. That journey to 280,000 barrels a day next year for Kearl is really driven through 2 main levers. The first is reliability and uptime and mainly there, it's optimizing the scheduled work that we do and minimizing -- reducing the amount of scheduled work that we do to just continue to increase incrementally the annual capacity and production of the plant. And then the other key lever is productivity. And I would tell you that an enormous underpinner of that is our digital efforts.And our digital efforts really are focused in 3 areas. It's analytics, what can we glean from and do with the data, the vast amounts of data that we have. So analytics is a huge driver. Productivity improvements, as we've talked about making our workers more productive, more effective by putting digital tools in their hands. And then applying digital technology like the remote dosing that I mentioned, but using drones for internal vessel inspections, things like that, which are making maintenance and scheduled work more efficient and quicker to do. So that's the continued focus of our digital program. It's a huge driver of us getting our journey -- achieving our journey to 280 kbd at the asset next year. And then, of course, as Brad said, looking beyond that.Specifically to the autonomous haul, there was a question, I think part of the question was on that. I would say we haven't yet achieved all of the $1 a barrel, but I'd say we've achieved the majority of that. And so there's a little bit more to go, but I would also -- there's upside relative to that as well. So I'm sure you can tell, we're very bullish on the autonomous technology.

[Dennis Fong, analyst]

I guess a quick follow-up there on Kearl specifically. As we enter the winter season, I know you've highlighted a multitude of strategies to improve the winterization of the facility. Is there anything further that you've kind of gleaned or applied or added to the asset that could help, again, kind of continue the strength of operations that you've seen thus far and obviously better temperatures. And as we kind of get into December, January and February, which are obviously challenging months, how are you going to further help moderate any, we'll call it, negative impacts around extreme colder temperatures?

[Bradley Corson, executive]

I'll let Simon kind of discuss that in more detail.

[S.P. Younger, executive]

Yes. I mean, I guess the key message there is we, again, feel well positioned going into this winter based on the learnings that we had from the prior 2 winters ago and then the successful application of those learnings and mitigations this past winter. There's not a huge amount new or different that we plan to do this year, although we do have some additional equipment deployed. We've got an additional shovel in the mine that we -- that has stronger capability in the colder temperatures and digging through the frozen ore. So I think that will be a help.We're trialing what's known as grizzly bars on top of our crushers -- one of the crushers to better handle the frozen lumps that come at us during the winter months. So there are a few things additional that we've got in our armory versus last winter. But by and large, it will be a repeat dose of just applying all the learnings and the cold temperature protocols and the maintenance equipment preparedness that we applied last winter.

[Bradley Corson, executive]

And maybe just one reminder, after kind of experiencing those challenges and then applying the organization's capability and kind of can do mindset and putting some new procedures in place and other mitigations, the first quarter of this year was a record first quarter for the Kearl asset. So again, demonstrating that we had addressed those challenges and we're back on track.

[Operator]

We'll go next to Doug Leggate with Bank of America.

[Kaleinoheaokealaula Akamine, analyst]

This is Kalei on for Doug. This one goes to the dividend, so maybe Brad or Dan. As we look at it by any measure, dividend coverage is very robust and you guys have hiked it recently. But to be frank, you've been if you hike say 10% to 15% and do that for a while, we could be asking this question for quite a long time. So I guess, why not take a bigger step towards rightsizing that dividend coverage and at the same time, close the gap versus your Canadian peers?

[Bradley Corson, executive]

Yes. And I will let Dan comment, but would just emphasize the significant return of surplus cash that we've made last year over $7 billion. We've just kind of summarized what we've done so far. And obviously, our dividend strategy is key and integral to returning surplus cash to shareholders. But maybe I'll let Dan talk a little bit about kind of how we view one mechanism versus another and kind of our long-term philosophy on base dividends.

[D. Lyons, executive]

Sure. Thanks, Brad. Yes, look, a reliable and growing dividend is the kind of bedrock of our cash return strategy and where it all starts. And we've done a pretty significant increase over the last few years. And on a growth basis, I think caught up with -- well, on a growth basis, exceeded most of our peers. And look, we continue to want to grow the dividend. Obviously, it's a trade-off. You don't want to get ahead of yourself and have to cut and things like that. But I think fundamentally, you're correct. There is room to grow. And obviously, as we deliberate that, we look at our future prospects and everything else, and we set those levels.So we take your point, looking for more dividend growth, and that will certainly come over time. And we're highly aware of what our competitors do in terms of increases in yields. And that obviously reflects our thinking and their actions and yields affect us in a way that probably the way you -- if they're going higher, we would tend to follow that. Of course, looking at our unique situation and what we see as our future cash flows.But you're right, we're very resilient. We put out a $35 and last Investor Day breakeven day, including -- I'm sorry, at our Investor Day at $35 WTI breakeven, which includes sustaining capital and dividends. So our dividend is super secure, and you're absolutely correct, we have room to [ decrease ] it.

[Kaleinoheaokealaula Akamine, analyst]

Look, it's one of those good problems. And we appreciate the thoughts. My really quick follow-up is on Kearl. So third quarter volumes were obviously very strong. And you look on pace for the midpoint of guidance for the full year. Just wondering if you can give a quick update on October volumes and address if there is any tension between volumes and wide differentials as you execute the rest of this quarter?

[Bradley Corson, executive]

Yes. Well, we continue to be committed to our full year guidance for Kearl and the third quarter performance, I think, is demonstrative of our capability to achieve that. October has been a strong month for us so far. There's still, I guess, 5, 6 days to go relative to the latest volumes that I've seen. But we expect to be somewhere in the 280s for this month, which also reflects some very minor kind of routine plant maintenance that we executed. And we see continued strength as we move into November, December.

[Operator]

We'll take our next question from Menno Hulshof with TD Securities.

[Menno Hulshof, analyst]

I'll start with a question on the 2024 outlook. I do understand that you're in the midst of the budgeting process, but would you be able to give us the broad strokes on planned turnaround activity within upstream and downstream for the coming year?

[Bradley Corson, executive]

Yes, we're not in a position to discuss all those details yet. That will be part of our normal guidance. And we're in the process of finalizing all of our plans for next year. But as we think more broadly about it, we're expecting a pretty typical turnaround year next year. I don't think anything kind of extraordinary. So I'd say that would be the planning, rough planning basis now. And then as we get to the end of the year, we'll give more specifics on each of the assets, the target timing, duration cost. But just a little bit too premature to share those details with you.

[Menno Hulshof, analyst]

Totally understandable. Maybe I'll just follow up on Line 5. It's been pretty quiet on that front for a while. And just going back over some of the comments from past conference calls, you've talked about contingency plans and constantly refreshing the different scenarios. Can you just give us an update on what you're hearing there? And what's your best guess on how this plays out?

[Bradley Corson, executive]

Yes. I think you characterized it right from the beginning, it's been pretty quiet. There's continued progress by Enbridge to kind of install the new pipe work through all the technical and permitting considerations there. We continue to be optimistic that there won't be any interruptions of service. We do have contingency plans in place. But I'd say, even as I sit here today versus a year ago or 2 years ago, we're becoming increasingly comfortable that there won't be any interruption. There's obviously things well outside our control, but it has been quite quiet.

[Operator]

We will take our next question from Neil Mehta with Goldman Sachs.

[Neil Mehta, analyst]

And I'll add my congratulations, Dave. You will be missed, and Peter, wish you lots luck in the new role. A couple of questions here. The first is just around the SIP. Can you just go through the thought process behind the decision around the $1.5 billion, similar to last year? And just thoughts on whether -- if the commodity price stays up here, it's possible to do this again in the spring. Last year was a little tougher. Earlier this year was a little tougher because of the large deferred tax payment. But I don't think you have the same thing in 1Q of 2024, so.

[Bradley Corson, executive]

Yes. Thanks for the question. I would like to answer that question, but I promised to Dan that I would let him answer all the SIP questions because he loves talking of it.

[D. Lyons, executive]

Absolutely.

[Bradley Corson, executive]

Over to you, Dan?

[D. Lyons, executive]

Sure. look, our philosophy is not super complicated. As we generate the cash, the free cash flow, we return it. So that's really kind of where the $1.5 million came from. And I would say, obviously round. We don't go to a precise number. So $1.5 million is a good round number. It made sense based on our cash balances and cash flow. Regarding -- you're correct that we do not have a big makeup payment like we had a very unique situation last year. That is not expected to be the case this last year unless in a good world, prices go to $200 or something, maybe then we have that, but not likely to happen.So as we look to next year, our commodity prices stay strong. Our cash generation stays strong. We generate free cash flow. Our base plan is to return that to shareholders. So I think -- so we'll see where those numbers go. But that's really an unchanged philosophy. It's a continuation of what we've been doing for a while.

[Neil Mehta, analyst]

That's helpful. And it's good to see the return of capital. Follow-up is on Pathways. It's been quiet from our perspective as an investment community around this. I know, Brad, you spend a lot of time on this. So maybe you can peel back the onion a little bit for us and help us understand, are we getting closer to FID? What are the gating conditions here? And is it fair to assume in the base case this gets to FID in 2024?

[Bradley Corson, executive]

Yes, thanks for that question. And yes, I guess, interesting perspective that it's been quiet from your standpoint, if you hadn't been quiet from my standpoint or the rest of the Pathways team because there is an extraordinary amount of work underway. And maybe I'll break that into a couple of key components that all need to come together to achieve an eventual FID.First of all, there is a lot of work underway to progress the engineering side of the project. This is a big multibillion-dollar project and that requires significant pre-engineering work, which we've now essentially completed and positions us to move into kind of more feed engineering studies. There's a significant amount of environmental studies that need to be conducted across the pipeline right-of-way route, that's planned. The network is progressing. There's multiple components to capturing the carbon. So in our first phase, there's 9 key assets and capture projects across the 6 companies, and each company is doing their own engineering and project planning for that work, and that's progressing.And then on the sequestration side, we worked with the Alberta government and been awarded poor space that now we need to do additional technical work so that we can demonstrate that we can safely and reliably store the carbon that we would expect to capture and transport to that site kind of in the Cold Lake region. So, all that work is progressing. And there's a few hundred folks working on that across the 6 companies.And then secondly, I would just say on the indigenous engagement side, which is critically important for us to have a sustainable partnership with the many indigenous communities that are along the route and part of our operations. And so, in recent months, we've been actively engaging them to understand their needs, their desires. As we look at how we can build a sustainable partnership with them, we've had engagements with over 20 communities so far.And then lastly, I would say the third other kind of key element of this is, of course, kind of all the fiscal work that we're doing with both the federal government and the provincial government. And that is to ensure that we have the right policies in place, the right funding mechanisms in place so that these projects can be economic for our shareholders to ensure that they deliver the environmental benefits that are consistent with the government's aspirations for Net Zero by 2050. And so there are regular engagements now with the Alberta government and the federal government around all the details around those plans.We have yet to finalize those discussions on the fiscal mechanisms and the fiscal kind of support that will be necessary for these projects to go forward. But I would say those discussions have advanced materially over the last couple of months. So I'm quite pleased with the progress we're making. There's still a long ways to go. As I said at the beginning, this is a big project, big investments has implications for decades to come. But it's critically important for our industry to be sustainable, critically important for Canada to achieve its Net Zero ambitions. So we're all focused on making it a success.The next key milestone for us would be, once we have all of the fiscal mechanisms in place, once we have the engineering work completed, then we will be looking to place an order for the main pipe that we would need for the trunk line for the 300-kilometer project. And we hope to be in a place that we can place that order sometime next year is kind of our current planning basis. So I hope that gives you a little more color, kind of a reflection of just how much activity is underway.

[Operator]

This does conclude the question-and-answer portion. I would like to turn the call back over to Peter Shaw, Vice President, Investor Relations, for any closing remarks.

[Peter Shaw, executive]

Thank you. So on behalf of the management team, I would like to thank everybody for joining us this morning. And also sharing the thanks to Dave as we've worked over the last several weeks for a smooth handover. If you have any further questions or follow-ups, please don't hesitate to reach out to anyone on the Investor Relations team. We'll be happy to answer any of your questions. And with that, thank you very much, and have a great day.

[Operator]

This does conclude today's conference call. Thank you for your participation. You may now disconnect.