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Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's second quarter results. As a reminder, today's call is being recorded. [Operator Instructions] Please be advised that this conference call may not be recorded or rebroadcast without the expressed consent of Cenovus Energy.I would now like to turn the conference over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.
Thank you, operator, and welcome, everyone, to Cenovus' 2021 Second Quarter Results Conference Call. I'll refer you to the advisories located at the end of today's news release. These describe the forward-looking information, non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus' annual MD&A and our most recent Annual Information Form and Form 40-F.All figures are presented in Canadian dollars and before royalties unless otherwise stated. You'll find our updated guidance posted on cenovus.com under Investors.Alex Pourbaix, our President and Chief Executive Officer, will provide brief comments. And then we will take your questions. We ask that you please hold off on any detailed modeling questions and instead follow up on those directly with our Investor Relations team after the call. [Operator Instructions]Alex, please go ahead.
Thanks, Sherry, and good morning, everyone. First off, let me say how great it is to see vaccination rates continue to rise in Alberta and across Canada. However, we know that COVID-19 hasn't gone away. And I assure you, at Cenovus, we're not letting our guard down. With restrictions easing, I know I'm looking forward to life getting back closer to normal, and the health and well-being of our workforce and our communities remains the company's priority. As we modify protocols at our operations, we'll continue to follow public health guidance and to work closely with governments, health authorities and industry to protect our people.Safety is foundational to how we operate. We're working diligently to finish integrating our safety systems after closing the Husky transaction at the beginning of this year. Our goal is for Cenovus to be a top-tier safety performer, and to achieve this, we prioritize safety above all else.So turning to the second quarter. We continued to build on our first quarter results with strong operations delivering even better financial performance. If you heard our last conference call, we communicated that if you added back the transaction-related costs that impacted adjusted funds flow in the first quarter, our adjusted funds flow would have been nearly $1.5 billion and free funds flow nearly $1 billion. Now in the second quarter, that performance has more than played out with our adjusted funds flow hitting $1.8 billion and free funds flow of $1.3 billion. Establishing this cash-generating power of the combined company and only our second combined reporting period, I think, reinforces the strength of the combined portfolio, and we expect this to continue in the second half of the year assuming forward curves hold.Looking at net debt and deleveraging. We reduced net debt by almost $1 billion in the quarter, and we expect an accelerated pace of deleveraging in the third quarter and through the back half of the year, again, assuming commodity prices and foreign exchange rates continue to hold. The $1.3 billion in free funds flow went towards the balance sheet, and we also had the benefit of an unrealized foreign exchange gain on U.S. denominated debt. However, this was partially offset by a change in working capital of about $389 million.The working capital build was driven mainly by the impact of higher commodity and refined product prices on inventory and accounts receivable as well as increased inventory volumes. The accounts receivable at the end of June will benefit July cash flow, which should help accelerate deleveraging in Q3.Speaking to the inventory build now. As U.S. refinery utilization ramped up in the second quarter based on higher refined product demand in the third quarter, downstream inventory volumes increased. We also utilized our midstream storage capacity in the quarter to capture higher prices in the third quarter rather than take discounted pricing resulting from apportionment on the Enbridge main line in June. We've ramped up our rail program in Q3 to capture more attractive pricing in the U.S. Gulf Coast.Asset sales will also accelerate, reaching $10 billion in net debt. During the second quarter, we closed our sale of the Marten Hills GORR for $100 million. In June and July, we reached 2 other agreements to sell asset packages and Conventional for additional proceeds of $110 million, which will appear in the third quarter. We also have another -- a number of other potential asset sales we're working in earnest. We continue to expect cumulative asset sales proceeds in the many hundreds of millions of dollars in 2021.Assuming the forward curves play out, we have our net debt target of $10 billion or under $10 billion well within sight in 2021. And once we're in range of that $10 billion mark, there will be room to consider other forms of capital allocation, including increasing shareholder returns. And I just want to make the point that we very much recognize that our share price is in a range that would represent compelling value for potential share repurchases.I'll turn now to the operating results this quarter. In the upstream segment, we continued the production strength established in the first quarter. Overall production was about 766,000 BOE per day, nearly in line with Q1. And that's even with turnarounds at Foster Creek, Sunrise, 8 of the 11 Lloydminster thermal projects and 3 of our Conventional natural gas processing plants in the quarter.Foster Creek production was down in Q2 due to the turnaround already mentioned and unplanned operational events as a result of some treating issues at the plants. This impacted production into July. However, the teams quickly incorporated learnings to adjust, and Foster Creek has been back to running at full rates since mid-July. And I think it's really worth pointing out that this production includes 4 new well pads with some of the highest production rates we've ever seen at Foster Creek. And basically, if you think about that treating issue we had, we basically had to adjust for bringing in larger volumes than we've ever had before at Foster Creek, which I think is actually a pretty nice issue to have.Christina Lake exceeded its own solid and steady operating performance, delivering over 230,000 barrels per day of production. That's almost 3.5% higher than its already strong first quarter production with the increase reflecting new wells coming online in the quarter.Turning to the Lloydminster thermal projects. Not only were the turnarounds there are well executed. We also beat the record quarterly average production rate we achieved in the first quarter, averaging overall almost 98,000 barrels per day. And I would just make the point that overall, coming out of the turnarounds, we're seeing upstream production now consistently exceeding 800,000 barrels of oil equivalent per day. And I think that's a pretty good testament to how the assets are operating.Driving the company's $2.1 billion total operating margin for the quarter was a $1.4 billion contribution from Oil Sands, reflecting strong realized pricing. Oil Sands operating costs increased somewhat relative to the first quarter, mainly due to the turnarounds I mentioned and increases in AECO pricing and other commodity-linked costs.Looking at Conventional. Production was also up about 3.5% relative to the first quarter. This reflected the addition of new wells coming online in the second quarter and included production impacts of the 3 turnarounds mentioned earlier.Our Offshore operations were a really strong contributor to free funds flow, delivering operating margins of $340 million in the quarter with operating margin totaling almost $700 million so far this year. That roughly translates to about $600 million in free funds flow from the Offshore business so far this year, a really significant contributor to our deleveraging efforts from that high netback production.Moving to downstream segments. In Canadian Manufacturing, the Lloydminster Upgrader and Asphalt Refinery continue to deliver reliable operating performance with an average utilization of 94%. Canadian Manufacturing operating margin of $189 million in the quarter was more than twice the segment's operating margin in the first quarter. This reflected a much stronger average refining margin of nearly $30 per barrel in the second quarter with Asphalt Refinery sales increasing alongside the start of paving season. The increased operating margin also included $55 million in revenue for settlement of a customer contract at the Bruderheim crude-by-rail terminal.The U.S. Manufacturing demand for refined products continued to rebound and so, too, utilization, averaging 87% in the quarter, recovering another 15% from the first quarter. This increased utilization included turnarounds and other outages at a few of our U.S. refineries during the quarter. While throughputs were stronger and market crack spreads were higher, operating margin of $96 million in the second quarter was only slightly higher than the first quarter of this year. This was mainly due to the average cost of RINs increasing about 45% to over $8 per barrel quarter-over-quarter, hindering net crack capture and higher feedstock costs due to the increased WTI benchmark price. We expect stronger results from U.S. Manufacturing in the second half of the year as the demand recovery for refined products continues and utilizations continue to increase.Building on the strength of upstream production in the first half of the year, we've updated our 2021 guidance, increasing total production guidance by about 2% at the midpoint while holding our total capital budget to the $2.3 billion to $2.7 billion range announced in January. Since coming out of the turnarounds of the Oil Sands assets, as I said earlier, we've seen many days where company-wide production has been over 800,000 BOE per day. We expect production performance for the second half of the year to be stronger than the first half, and this is reflected in our updated guidance range of 750,000 to 790,000 barrels per day and reflecting our confidence in the value we've been able to add at the Lloydminster thermal projects so far this year. We've included an additional 10,000 barrels per day of expected production from the Lloydminster thermals for the year.Our updated capital guidance includes an additional $100 million of capital allocated to the Oil Sands, primarily for accelerating some of the work we've been doing at the Lloydminster thermals, including capital allocated towards the completion of Spruce Lake North as well as carrying out some redevelopment wells at Christina Lake.We've made an offsetting capital reduction in the downstream segment, which reflects efficiencies identified across the portfolio. We've slightly increased our guidance ranges for operating costs at Oil Sands assets this year, including Foster Creek and Christina Lake. These changes reflect increases in AECO pricing and other commodity-linked costs with our nonfuel OpEx remaining on track to our original guidance. While operating costs for the Lloyd Thermal projects will have these same impacts, they have been more than offset by the efficiencies we have achieved there through application of Cenovus' operating strategies and related SOR reductions. As a result, we've brought operating cost guidance down for the Lloydminster thermals. We've also reduced our operating cost range for Conventional, reflecting some efficiencies we've been able to achieve there and asset sales.I'll take the opportunity to note today that we have a major turnaround planned at the Lima Refinery this fall. This is a "once in every 5 years" event that we've planned for and was always included in our full year guidance. But something to keep in mind is it will impact Lima in late Q3 and into Q4.Returning to the guidance updates. We've also reduced our integration cost guidance by $100 million for 2021. While we still expect total integration costs related to the Husky transaction in the range of $500 million to $550 million over 2021 and 2022, we have adjusted timing such that the remainder is now expected to be spent in early 2022. This doesn't impact our forecast pace of synergies capture. We remain on track to realize at least $1 billion of synergies in 2021 and to reach the annual run rate target of $1.2 billion by the end of 2021. The only change is that we're just spending a little less than we expected this year to do it.On the ESG front, we're continuing to take bold action to address emissions. Last week, we announced we'll be buying solar power produced electricity and the associated emissions offsets from a partnership between the Cold Lake First Nations and Elemental Energy. This power purchase agreement will put 150 megawatts into Alberta's electricity grid in Southern Alberta and help mitigate our scope 2 emissions. It also reinforces our long-standing business relationship with the Cold Lake First Nations.And last month, we were 1 of 5 oil sands companies that launched the Oil Sands Pathways to Net Zero initiative. Our goal is achieving net 0 emissions from our operations by 2050 while supporting Canada's efforts to meet its Paris Agreement commitments and net 0 aspirations. We continue to work with the federal and provincial governments to advance the funding and policy support needed to implement the emerging technologies that will enable 0 emission oil sands production.As a company, we're committed to global climate leadership. Later this year, we'll be reducing the new targets for our combined company's focus areas, climate and GHG emissions, water stewardship, biodiversity, indigenous reconciliation and inclusion and diversity. I look forward to sharing those with you.So in closing, I think this quarter has again demonstrated the operating strength of the combined portfolio and the free funds flow capacity of this business moving through the year at current strip. As these results reinforce, we have the benefit of best-in-class assets, and we're building on our track record of asset reliability and low cost structure.With the first half of 2021 behind us, we're even more confident that we will deliver at least $1 billion in synergies this year and reach our targeted $1.2 billion in annual run rate synergies by the end of this year. We're running a lot more balanced business since the Husky transaction along with expanded market access. We have greater stability of cash flows through the cycle, lower breakevens and less risk on our deleveraging track and on the path to enhance shareholder returns. We're within range of our interim net debt target within 2021, and we expect to increase our pace of deleveraging in the third quarter, and we believe there are clear opportunities to do so.So with that, I'm happy to take your questions.
[Operator Instructions] Your first question comes from Neil Mehta from Goldman Sachs.
Congrats here on a good quarter. I wanted to talk about the cadence of debt reduction. And Alex, maybe you could talk about your confidence interval in achieving the $10 billion level by the end of the year based on what you can see in the business. And talk a little bit about the working capital side of the equation. It was drag last quarter, a little bit of drag this quarter. How do you see that unwinding here? And can that help you get to that level?
Yes, Neil, happy to do so. I mean when we think about net debt and we talk about that $10 billion target being within range, what I would tell you is when we look at this business for the balance of the year, just on our base business, once again, assuming that the strip remains more or less in place, we are highly confident that we should hit that $10 billion target within the end of the year. And I would say that completely ignores the impact of further asset sales. And I've said it before on these calls and with investors. We are really laser-focused on those noncore divestitures. And I expect that they will continue to accelerate that pace. So our confidence on the $10 billion is really strong.With respect to the working capital, maybe I'll hand that over to Jeff, and he can give a little bit of color. Jon may want to jump in, too.
Yes. No. Neil, I think the confidence here -- and if you look at the working capital build for the Q, which is about $400 million, and you think primarily that's largely price related as we saw the price impacts here in oil rise, getting WTI kind of from a month average March to month average June by about $10 a barrel. So we saw an investment in inventory. And we also built volumes in and around the U.S. refining, which gets to the utilization increases that Alex was talking about, as well as building in and around upstream given the apportion we could build inventories and optimize commercially throughout our infrastructure.And I think that reinforces our confidence to getting to under $10 billion. I think it sets up and reinforces the utilizations running up in the refineries, the integration benefits, and you can start to see it really in the realizations coming through next quarter. And so we're quite confident. I think the inventory build and working capital build reinforces that confidence.
All right. And the follow-up is just on asset monetization. So 2 comments there. One, how do you think about Liwan in the context of it? Obviously, that is the biggest nut there, but it's been a really profitable asset. And we would argue that LNG balances look pretty tight in Asia, so there's a lot of value in that asset. And then the couple of hundred million dollars of smaller singles and doubles, talk a little bit about what are the logical assets around that. And how should we think about the timing there?
Sure. When you talk about Asia Pac -- and Neil, I think you're quite right to kind of draw attention to the free cash flow generating capability of that asset. It's been performing very well for us. I think it's also fair to say as we get to know that business better, we are seeing some opportunities to actually continue to add value. And as I've said in the past, I don't think -- when you think about asset divestitures, my kind of guidance to the market is, as I said, we are really focused on this. But I think people should think about divestitures largely, though not entirely, coming out of the Conventional business and being North American focused.The Asia Pac business for us is something that we really want to spend a good amount of time with, really get to know our partners in the situation there. So I don't see it as something where we would be considering in the short term. With respect to the kind of singles and doubles, maybe Kam might want to give a little bit of color on that.
Thanks, Alex. So Neil, I think Alex has kind of touched on this already, but we are largely focusing most of our efforts in the Conventional space. And I would say it's really about assets that aren't competing for capital inside of our portfolio, assets that have slightly higher operating costs, and assets just really aren't going to receive the funding. So I think as you go through that portfolio, I think that's probably the way to think about pieces that don't fit.Alex did allude to this, but there are -- we are looking at other parts of the portfolio, too, not necessarily solely focused on the Conventional business. So just for good reasons, we won't be giving details around what those specifics are. But you shouldn't be surprised to see other areas that we're also focused on and looking at asset divestitures going -- through 2021.
Your next question comes from Greg Pardy from RBC Capital Markets.
Could you frame maybe the role that you see the Lloyd Thermal is playing in the years ahead? And I'm also interested in just other areas of either the upstream and the downstream portfolio where there's low-hanging fruit that would benefit from just operational improvement.
Greg, it's Jon. Your question is a really good one, and it's something that we've been actively working on prior to the merger and then in real earnest thereafter. And I think one of the things that we think with Lloydminster thermals is there is still opportunity there for future growth, and there's still opportunity there to improve the operating metrics in that area.And what you'll notice, I think, through the rest of the year is we'll spend a couple of hundred million dollars there. But in the background, we've been working on mapping those assets, making sure we fully understand the reservoir. And then coming into next year, you'll see a fully baked capital plan together with a production forecast that goes with it. But we think that those are very economic and highly prospective assets. They were one of the things that we had our eye on. We think that long term, those assets will produce over 100,000 barrels a day and generate significant free cash flow.The other areas that we have been working on in the background would include Sunrise, Tucker Cold/EOR on the thermal SAGD side as well as Cold/EOR. And in those assets, we haven't put any capital into them this year. I think the cumulative capital would be about $5 million between the 3 assets, but we've kept production flat to growing there. But again, in the background, we've been working on mapping those reservoirs and building out our development plans and asset plans around that. And I think what you'll see going into 2022 is those assets as well are very economic assets at the bottom of the cycle and very prospective in terms of production and operating metrics. So we're really, really pleased with the suite of assets that we've got from Husky on the SAGD side.Similarly on the Conventional side, we've been working in areas like Ansell. We think there are opportunities there to improve the operating metrics as well as future prospectivity. And you'll see that again going into 2022 with the budget that were put forward.The other area that I think is kind of interesting for us and we haven't talked a lot about, Alex has kind of tweaked on it, is Asia Pacific. And we see lots of opportunity there to increase gas supply going into Mainland China in our South China Sea assets there. And we are actively building out the Madura Strait in Indonesia as well. We think those are very profitable assets going forward as well.So when we kind of look at sort of the suite of assets that we acquired from Husky, we think that a lot of these assets, we would say our Tier 1 assets and a lot of these assets are going to be core part of the assets of this company going forward, all cash flow positive at the bottom of the cycle.
Okay. That's a good rundown. Maybe just as a follow-up. Your downstream is more fractionalized. You've got pieces -- bits and pieces all over the place. How are you thinking about maybe streamlining and consolidating some of those areas?
Yes. Similar to what I said before, some of the assets that we acquired from Husky like the Lloydminster Upgrader and Lloydminster Refinery, absolute gem assets. And then we think that there's a lot of opportunity in the other assets that we've got in the U.S. like Lima.One of the things we've been really clear about is that we think that this acquisition of Husky probably gives us the opportunity to rethink some of our nonoperated joint ventures and rethink how we want to consolidate or hold our refining portfolio. We like the assets that we've got. Sometimes we just question whether or not they're held within the right vehicle. But I think all of this activity and this acquisition really gives us the ability to rethink that and address it here in the near and medium term.
Your next question comes from Phil Gresh from JPMorgan.
As we look ahead, just a little further out, given the oil price environment and the path from the $10 billion of debt to $8 billion of debt in 2022, how do you think about that balance between quickly getting to the $8 billion versus the potential to buy back shares to offset some of the -- some effects of Conoco continuing to sell down and/or some of these CapEx opportunities?
Yes. No, it's a good question, Phil. And I mean I think we've said it a million times that on our path down to $10 billion, 100% of free cash flow is going to the balance sheet. But once we hit $10 billion and with the pace of deleveraging that we see possible over the coming quarters, I suspect you're going to see the majority of that cash go to the balance sheet. But as I kind of said in my opening statement, we are very alive to the value proposition that share buybacks represent for the company and our shareholders at our present valuation. So I don't think anybody should be surprised to see us be looking very actively at that as we sort of approach the $10 billion level.
Got it. And then anything on the CapEx side?
I mean we've talked about this before. One of the great things about doing this Husky deal, and Jon sort of alluded to it, is we continue to like turn over rocks and find diamonds. And I really think that what people should expect, I mean, we -- I don't see any large-scale kind of phase expansions anytime in our near future because we have this really incredible portfolio of kind of what I would describe as kind of brownfield opportunities, organic opportunities just around the edges to add production at very, very attractive returns and at relatively modest capital. And I think that's really where you can expect to see a lot of our capital around those kind of things that Jon was referring to. The opportunity around getting FCCL connected to the Lloyd complex, I would kind of put that in the category once again of a really, really attractive opportunity with quite modest capital. But those are the kind of things that I think people should be thinking about.
Yes. And maybe I'd add to that, Phil. I think we've been pretty clear through this acquisition of what is required to keep production flat and keep our fixed plants in a safe and stable condition, and that number that we floated quite publicly is around $2.4 billion. And what I would suggest is you shouldn't expect a right-hand turn from what we've done in the past in terms of capital budgeting going forward. It'll be something that probably looks very similar to what we've done this year when you see the budget for 2020. So I think as Alex said, when you get to $10 billion, clearly, we still want to delever and we want to address shareholder returns. And I think it's a more modest investment in the assets than you might be thinking.
Okay. Great. That's very helpful. One kind of one-off question. Can you just remind me with respect to Superior, the pace of spending versus how the insurance proceeds come in? Is there any kind of timing variables to think about there? And I'll leave it there.
Yes. It's Jeff here, Phil. Yes. I mean the -- obviously, the CapEx, we've got around $0.5 billion in the guidance this year. And the insurance, we expect it to be largely -- largely cover the CapEx. There's not a simple rule of thumb on cash receipts. I think we sit down and work through basically our invoices with them and go through all that review. So the receipt will be a little bit more lumpy, but no change to where we're at with that, and we still expect it to be largely covered. And it's just the timing will be a little bit lumpy, and it's not perfectly even flow with the CapEx.
And Phil, it's Alex. I might just add, my team around this table are regularly subjected to my endeavors to accelerate that recovery on the insurance side. I think it is an obvious, obvious opportunity for us to really accelerate the balance sheet recovery. So we are really focused as a team on seeing those proceeds coming in.
Is it fair to say you haven't gotten any of the $500 million yet?
No. No. We're -- we've -- if you think about the CapEx and what we've received, we've received in order of magnitude, let's say, a few hundred million on the property damage. And then obviously, business interruption is separate and well on our way on that over time. So it's not perfectly weighted to year-by-year anything, Phil, but we're well on our way on collecting those.
[Operator Instructions] Your next question comes from Manav Gupta from Credit Suisse.
I just wanted to focus a little bit on Canadian Manufacturing. The results were stronger than expectations. If you could help us understand what drove that so we can model this segment more accurately going ahead.
Sure. Keith, why don't...
Yes. I mean obviously, we saw really strong operating margins at our upstream -- sorry, at our manufacturing facilities in the Lloydminster area. That was also -- included in that was a receipt of a payment from a contract for a customer that wanted to buy out of their contract at our Bruderheim rail facility. So that's kind of more of a one-off event, and that was about $55 million. So that might have been a bit of the lumpiness that you weren't able to model in the quarter.
Okay. But even then, I mean, the earnings were pretty strong. So like in terms of margins, are you seeing those margins continue into the third quarter even if you take out the lumpiness of that onetime contract?
Yes. Manav, we had really strong operating performance out of both of those assets. Throughput at the assets was high and margins are strong. We're really well connected. Alex and Jon alluded to how that industrial complex is very close on the value chain to our upstream production. So we're really happy with the assets. And actually, we're now heading into the paving season, so things are lining up well for the third quarter.
Okay. A quick follow-up on the Superior Refinery. What we're seeing here is your upstream assets are doing really well. But the U.S. refining margins have generally struggled a little. There's a little bit of RIN exposure. So just wanted to understand if Cenovus still fully committed to the Superior Refinery rebuild. And if you could remind us what's the value proposition of Superior, please.
Well, we're very much -- we are very much committed to Superior. And maybe I'll let -- the first thing I would say is we're -- in terms of the project itself, we are very pleased with how the project is doing. It is a challenging project on a constrained site. And everything -- we are well advanced in the construction, and everything is looking very good. I'm really pleased with progress to date. But maybe I'll let Jon talk about sort of a little bit about where it fits in our strategy.
Yes. So Manav, this won't surprise you, but ever since Alex and I got here and Keith took over the downstream, one of the things we've been talking about is market access and needing to get a global price for our heavy oil resource. And more recently, we would translate that into the industrial logic of buying Husky, where we've actually bolted on a downstream business that consumes the molecules that we produce and protects us from location and heavy oil differentials. So the value proposition of Superior is really quite clear. This is a refinery that's going to consume about 47,000 barrels a day. 35,000 barrels of that is heavy. So this is a refinery that's going to eat the barrels that we consume. And on the back end, it produces a full slate of transportation products as well as asphalt whom, as you know, we are a major asphalt producer in Western Canada. And this gives us exposure into the Minnesota and Wisconsin market. So there's strong connectivity in terms of the industrial and company logic and strategy.The other thing I would say is this refinery is the first stop off Enbridge. And because of that, it allows us to nominate barrels onto the Enbridge system, which gives us more takeaway capacity. So we think this is not only going to be a highly profitable refinery, but it's absolutely on strategy with us. And it's got a really nice marketplace to deposit the products that it produces into, and as I mentioned before, is molecularly integrated to our feed slate.
Great. My last question is, can you comment a little bit on market egress? When do you think Enbridge realistically could be in a position to start the line fill? And do you still see the line coming on somewhere late '21, early 2022? And then I'll leave it at that.
Yes. Thanks, Manav. Yes, everything that we're seeing is lining up pretty constructively for WCS differential pricing. Line 3 is forecasted and we agree with this, that we will see that happen in the fourth quarter -- later in the fourth quarter. Coupled with that, we actually think there will be a DRU start-up in the imminent future, which is another 50,000 barrels a day that will get consumed. Those 2 things and kind of current status of where inventory levels are in Western Canada kind of all is constructive for relatively positive differentials through the back half of this year.
Your next question comes from Menno Hulshof from TD Securities.
Alex, you just mentioned getting Foster Creek, Christina Lake connected to the Lloyd complex as a relatively attractive future opportunity. And this is something that you've talked about on a number of occasions in the past. And so my question is, are you in a position to elaborate on what that's going to look like in terms of scope of work, cost and capital efficiencies? And if not, when do you think you will be?
I mean I think we're pretty -- we've done a huge amount of work on it, Menno. And we actually -- there's -- there are a series of capital projects, and I would really put it in the category of very modest capital, probably kind of in the $200 million-ish range over a few years. And really, we think those projects are going to very -- high-return projects connecting FCCL production volumes to the complex. And I'm just -- I'm probably a little early to go into too much detail, but it's kind of in that magnitude. And maybe one thing, I mean, Keith, maybe you can talk a little bit about what we hope to achieve by those projects.
Yes. Menno, when we think about this, we have a world-class upstream resources sitting within 50-mile radius of a very large industrial complex. And historically, those assets have consumed [ LLB ], which typically fetch a higher price in the global markets. So by converting both the upgrade and the refinery to other feed slates from Foster Creek or Christina Lake, we think we will get margin expansion on the upstream barrels. We also think that we'll be able to recycle more condensate back into the province. And we're a very large consumer of condensate. So those 2 things coming together.We also are partners in the HMGP midstream business. So the connectivity is there. So as Alex alluded to, we think for a modest amount of capital, over the next few years, we can integrate those Oil Sands assets into those 2 industrial conversion assets and really generate more margin and recycle a lot more condensate in the province, eliminating the need to import it from the Gulf Coast.
Yes. So -- and think about that, as Keith said, over the kind of next 1- to 3-year period.
Your next question comes from Harry Mateer from Barclays.
So first question is you -- I mean you've been very clear about the $10 billion net debt target and then a little bit more open ended about the timing of $8 billion. But there's also an "or lower" that's been attached to the $8 billion target. Can you just talk about what you mean there and what might drive you to delever even further?
Yes. No, I mean I think I would say -- and it's probably best to think about it almost from a philosophical perspective. And we -- I think the events over the sort of 4 or so years I've been at Cenovus have really hammered home to me the benefits in this industry of operating with an underlevered balance sheet. We very much want to have a debt level that puts us in the mid-BBB range in terms of credit rating. And I think that over time, that probably would have us tending towards lower debt, all things being considered, than $8 billion.But at this time, we think $8 billion is a pretty ambitious target that we think we can get to quite quickly. And over time, we'll certainly be thinking hard about taking it lower. But for now, we're -- the public target is $8 billion.
Okay. And then credit markets, and I suspect equity markets, tend to reward gross debt reduction a bit more than net debt reduction. So can you just remind us how you're thinking about the balance between those? And then whether liability management, which I know is something Cenovus did in the past, might that again be part of the toolkit to help crystallize some gross debt reduction rather than just running with some extra cash on the balance sheet.
Yes. It's Jeff here. And absolutely, we'll look at gross deleveraging. I think we have historically. And I think we'll balance that and make sure that we probably hold a little bit more cash. And it's not lost on us that I think there's -- credit markets are attractive. But we'll look and balance everything out and make sure that we've got the balance and tenor that we balance our liquidity and look to manage down over time the gross debt, but we'll be balanced through all of that.
There are no further questions at this time. I'll now turn it back to Mr. Pourbaix for closing remarks.
Well, everybody, I know we're looking at the start of a long weekend and in the middle of summer, and we very much appreciate your interest in the company and taking the time this morning. So with that, we'll sign off and thank everybody for participating. Take care.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.