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Edited Transcript of HSE.TO earnings conference call or presentation 25-Jul-19 3:00pm GMT

Q2 2019 Husky Energy Inc Earnings Call

CALGARY Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Husky Energy Inc earnings conference call or presentation Thursday, July 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan Cuthbertson

Husky Energy Inc. - Director of Communications & IR

* Jeffrey E. Rinker

Husky Energy Inc. - SVP of Downstream

* Jeffrey Ryan Hart

Husky Energy Inc. - CFO

* Robert J. Peabody

Husky Energy Inc. - President, CEO & Director

* Robert W. P. Symonds

Husky Energy Inc. - COO

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Conference Call Participants

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* Neil Singhvi Mehta

Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst

* Robert Tuttle

Bloomberg News - Media

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Presentation

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Operator [1]

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Welcome to the Husky Energy Second Quarter 2019 Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I would now like to turn the conference over to Dan Cuthbertson, Director, Investor Relations. Please go ahead, Mr. Cuthbertson.

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Dan Cuthbertson, Husky Energy Inc. - Director of Communications & IR [2]

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Good morning, and thanks for joining us on the call this morning. CEO, Rob Peabody; COO, Rob Symonds; and CFO, Jeff Hart, are here to review our second quarter results and take your questions.

Today's call contains forward-looking information and non-GAAP measures. The risk factors and assumptions pertaining to the forward-looking information and additional information pertaining to the non-GAAP measures are contained in this morning's news release and in our annual filings on SEDAR and EDGAR.

All numbers are in Canadian currency and before royalties, unless stated otherwise.

Any specific modeling questions can be directed to our Investor Relations team after the call.

Rob will now begin the call.

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [3]

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Thanks, Dan, and good morning. We continue to execute against the plan we outlined at our recent Investor Day, with an ongoing focus on capital discipline, consistent execution and increased margins across our Integrated Corridor and Offshore businesses.

The second quarter saw a large amount of planned and extended maintenance turnarounds in both the Upstream and the Downstream segments. Most of this work has now wrapped up, and we're looking forward to higher production in the second half of the year.

In addition to the turnarounds, our second quarter results were also negatively impacted by a number of nonroutine adjustments. Jeff and Rob will give more details on these in their respective sections.

In the Integrated Corridor business, we are continuing to build low-cost thermal projects in Saskatchewan to provide feedstock for our upgrader, Asphalt Refinery and U.S. refineries.

The most recent Lloyd thermal project at Dee Valley is now steaming with production starting later this quarter. We have 4 more of these Lloyd projects in development, with 2 more coming on next year. At Sunrise and Tucker, we're focusing on using this period of Alberta production quotas to focus on increasing efficiency.

In the Downstream manufacturing business, you can see the positive impact of the work we completed at the Lima Refinery during the last turnaround. Throughput at Lima averaged almost 180,000 barrels per day in the second quarter. This is up about 15% from a few years ago, and lets us spread the fixed cost of the refinery over more barrels.

In addition, following a planned shutdown for tie-ins in Q4, we finished the crude oil -- we'll finish the crude oil flexibility project. This will allow us to process up to 40,000 barrels per day of heavy crude at Lima by the end of this year. This project is now more than 85% complete. At the Superior Refinery, our rebuild plan includes improvements designed to increase our average throughput while improving safety and efficiency.

In the Offshore business, we continue to benefit from direct market access for our production. We see this in the realized price, which averaged over $82 per boe in Q2.

In the Asia Pacific region, we finished drilling the final 3 of 7 wells at the 29-1 field at Liwan. This project will add additional high netback production when it comes on stream around the end of 2020.

And in the Atlantic, West White Rose is now more than 40% complete. It is expected to contribute more than $1 billion per year of cash flow during its peak years. Better price planning assumption of USD 64 flat rent.

Altogether, while our results in 2Q were impacted by turnarounds and nonroutine financial adjustments, we remain well-positioned for the remainder of this year.

And with that, I'll hand the call over to Jeff for a more detailed view of our financial performance.

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Jeffrey Ryan Hart, Husky Energy Inc. - CFO [4]

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Thanks, Rob. Funds from operations were $802 million compared to just over $1.2 billion in Q2 2018. This reflected a number of factors, including lower production due to Alberta quotas, a heavy turnaround schedule and reduced volumes in the Atlantic and Asia Pacific regions. We were also impacted by lower year-over-year commodity prices, with Brent down about USD 5.50, compared to the year-ago period.

Heavy oil location differentials tightened by more than USD 5 U.S. per barrel compared to Q2 2018. Typically, this would be captured by our Upstream Heavy Oil business. However, production in that segment was lower due to our busy maintenance schedule.

In addition, refinery throughputs were lower because of planned maintenance at Toledo and Prince George, and both of these turnarounds went on longer than originally planned.

As Rob mentioned, our maintenance program is now largely complete and our facilities are ramping back up. As such, we expect our overall annual production to remain within guidance.

And funds from operations were further impacted by nonroutine negative adjustments totaling $106 million. This included just over $36 million for write-offs related to the Tiger's Eye exploration well in the Atlantic region. It also included a $59 million adjustment associated with the lump sum contract related to the Saskatchewan Gathering System expansion.

Net earnings were $370 million, which included a positive $233 million provision for Alberta corporate tax reductions, partially offset by $77 million after tax of nonroutine negative items.

Overall, Upstream production averaged around 268,000 boe per day. The average realized price was $53.35 per barrel, a 7% increase over Q2 2018. The Upstream operating netback was $33.61 per boe. The per unit operating costs in the quarter were up 11% over the previous year, to $15.83 per boe, which was driven by turnaround activity, coupled with lower production.

The Infrastructure and Marketing segment recorded a loss of $38 million compared to a gain of $154 million in Q2 2018. This was due to the nonroutine provision associated with the Saskatchewan Gathering System as well as tighter heavy oil location differentials.

The Downstream operating margin was $286 million compared to $466 million at this time last year. This included a favorable FIFO pretax inventory valuation impact of USD 0.60 per barrel.

Downstream earnings also included $71 million in insurance proceeds related to the Superior Refinery, of which $54 million was related to business interruption.

Capital spending was $858 million compared to $708 million in Q2 last year. And this is in line with the budget, and we're on track with our annual guidance.

Net debt at the end of the quarter was $3.7 billion or 1x trailing 12 months funds from operations.

Liquidity was $6.7 billion, including $2.5 billion in cash and $4.2 billion in nonused credit facilities.

Finally, our Board has approved a quarterly dividend of $0.125 per common share.

And thanks, and Rob Symonds will now provide some additional operational details.

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Robert W. P. Symonds, Husky Energy Inc. - COO [5]

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Thanks, Jeff. As mentioned, Q2 was an active quarter for planned maintenance, including the consolidation of 5 Lloyd thermal turnarounds in June to provide for better efficiency. The Lloyd production also reflects our reduced Atlantic operations and the mandated quotas in Alberta, which were only marginally changed from what we faced last quarter. In fact, we were allowed to produce only 770 barrels a day more in Q2 than what was ordered in Q1. But July and August quotas are up by only another 1,000 barrels per day. As a result, Upstream production in Q2 was down 9% from a year ago.

Our Saskatchewan thermal program continues to progress, with Dee Valley coming on production later this quarter. Once it is fully ramped up and we complete 3 additional planned turnarounds in Q3, we expect to exit this year at just over 90,000 barrels a day of Lloyd thermal production.

I'll just add to this thermal growth, combined with the expected increase in off-take in Asia and the Atlantic coming fully back on stream, will have us exiting the year at around 320,000 boes a day.

In the Downstream, overall throughput from the upgrader and refineries was about 340,000 barrels a day. At the Superior Refinery, demolition work is progressing to plan. We expect to start rebuilding this fall, pending the appropriate permits, with a target of resuming full operations in 2021.

As Jeff noted, we had 2 major turnarounds in Q2, both of which went on longer than originally planned. All of our Downstream facilities, with the exception of Superior, are now back running at full rates.

Moving to the Offshore business and starting with Asia. In the second quarter, our share of gas production from the Liwan gas project averaged 160 million standard cubic feet per day, and our share of Madura was 34 million standard cubic feet per day.

In the Atlantic, 2 infill wells were brought online in May. A new flow line connector was recently installed on the seabed, and the drill centres at North Amethyst and South White Rose Extension are being readied for restart. The Southern Drill Centre was brought back online in early June.

We've used the downtime on the SeaRose to tackle various maintenance and regulatory scopes, so we no longer require the turnaround originally planned for the vessel in August.

And finally, at the West White Rose Project, construction is progressing at our 3 fabrication sites in Newfoundland and Texas. The (inaudible) and installation of the concrete gravity structure is scheduled for 2022, and first one around the end of that year.

Thank you, and now I'll turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Neil Mehta with Goldman Sachs.

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Neil Singhvi Mehta, Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst [2]

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I guess the first one is a high level question, Rob, it's just where we stand in terms of the operational performance turnaround. I know that is your #1 priority as leader of this organization. So just talk about where we are and how this quarter fits into that strategy.

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [3]

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Yes. Thanks, Neil. Yes, I think overall -- I guess the first thing I'd just say is, I think the quarter overall was reasonably what I'd call steady for operational performance. We didn't have any sort of incidents or that, thank goodness, that didn't, that really affected operations.

I mean most of the lower production you saw were a combination of quotas and actually planned turnarounds in most cases, and in particular, in the heavy oil segment where we decided to synchronize those turnarounds in order to do them as efficiently as possible in June.

So nothing untoward in the operation. Of course, in general, on the whole journey of continuing to focus on high reliability organization, I think we took a good amount of ground in the quarter with Peter Rosenthal really getting in his feet as the SVP in charge of that, reporting directly to me. We've reorganized a little bit, so that all the safety people in the organization, wherever they sit, line report back to Peter.

And Peter has held engagement sessions with those people. He's been out into all the businesses. I think his report back is, I think, he was happy to see in general, where we were after -- because this wasn't the start of a journey. We've been working with various people for the last year or so, where we were and, but he's setting a very clear plan going forward.

So feeling a lot's going on there. I think we're getting a lot of traction. And it's gratifying to see quarter-over-quarter, when we look at the metrics and we're looking at the lower level incidents which we track in order to get a sense of where -- if things are getting better or worse. We're seeing quarter-over-quarter improvements in all those metrics.

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Neil Singhvi Mehta, Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst [4]

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Yes, that's helpful. I guess the other question I had was just the Infrastructure and Marketing segment. I think there was, there was some -- a nonroutine provision here with your Saskatchewan Gathering System, along with, it looked like per differentials, might have caused this to really miss our expectations. But anything you can call out there and how we should just think about the run rate for the segment.

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [5]

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Yes. Sure. I'll let Jeff kind of start into that. We also have Jeff Rinker here, so if there's a little more detail, he might provide that as well.

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Jeffrey Ryan Hart, Husky Energy Inc. - CFO [6]

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Yes. No, I'll talk number one, to what we call as, kind of one-time or the unusual item and when -- there's a first couple of projects that we had ultimately, were set scope in the agreement. And ultimately, with the expanded scope on this project, it's -- the cost is a little bit higher.

But I'll -- look at last year's. The first couple projects basically had a positive impact last year in a similar magnitude. So we're through the first projects on this, and net-net, it's neutral over the last couple of years. But we did see it manifest itself this quarter. So I wouldn't model that going forward.

And then you're right on the second part, on an ongoing basis is -- really Infrastructure and Marketing has our storage capacity as well as our export capacity out of basin. And that was negatively impacted by the Alberta production quotas and the tighter location differentials. And that's really where it manifests itself in the financials. And as you look last year, is given the wider differentials, we were gaining in that segment versus the upstreams.

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [7]

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To Jeff, did you want to -- Jeff Rinker, maybe just give a sense of kind of if you look forward what's kind of a more -- what's a more typical sort of earnings level, given that it's very hard to pick a typical earnings level in this area?

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Jeffrey E. Rinker, Husky Energy Inc. - SVP of Downstream [8]

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Yes. I mean just, I think you just take out the things that are clearly one-offs, right? So the Saskatchewan Gathering System item is not going to recur. And I think you also had to think about when you compare the results of this quarter to the previous quarter, there is a certain timing element that figures into the I&M segment where we're, typically we're buying crude in January to ship in February and receive in March on the long-haul pipelines.

And so, for example, in the first quarter, we were still seeing some benefits of the very, very wide differentials that we saw in the fourth quarter that were coming through in the results in the first quarter. And we didn't have that benefit in the second quarter this year when the differentials were quite tight and flat throughout the quarter.

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Operator [9]

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(Operator Instructions) Our next question comes from Prashant Rao with Citigroup.

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Unidentified Analyst [10]

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This is Joe on for Prashant. Could you give us an update on the process of your potential sale on the Canadian retail and commercial fields business and the Prince George Refinery? You indicated that you were seeing strong interest. Has the market changed during the last few months? Or should we expect more details by year-end?

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [11]

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So the process continues is what I could tell you. And we're still in negotiation with a number of parties, and hopefully we'll have something to say on that in the, before the year-end.

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Unidentified Analyst [12]

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Okay. Got it. And then my second question is for, for Asia Pacific, after completing and ramping up the Liuhua 29-1 and the projects in Indonesia, what would be some of the future growth opportunities between 2021 and 2023?

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [13]

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I think, we're -- there's a number of options and possibilities we're working in the region with various parties. Rob, did you want to add to that?

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Robert W. P. Symonds, Husky Energy Inc. - COO [14]

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Yes. This is Rob Symonds. So in Indonesia, the existing developments that will be coming on in '21, there are additional M fields that could be tied into that gathering system in the Indonesian space. We're also looking at other alternatives, but that's -- those are the firm ones.

As you move to China, post 29-1, the deepwater space is without specific additional things. But in the shallow water, the discovery we made last year at 15/33, is something that we can bring on stream. So that would be something else. And we're also -- in the shallow water, offshore China, things can move quite quickly, because of the existing infrastructure. We do have 2 additional blocks in the Beibu area that could also be brought on.

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Operator [15]

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Our next question comes from Neil Mehta with Goldman Sachs.

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Neil Singhvi Mehta, Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst [16]

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Just one or two other follow-ups. The -- I guess it's been 6 or 7 months now since the MEG deal didn't go through. Is there any more color you can provide about why that didn't materialize? And then, just your latest thoughts on the M&A environment and whether Husky's happy with the portfolio it has, whether we should continue to think of the organization as a potential buyer of assets?

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [17]

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Okay. In general, of course, I'm not going talk on any specific M&A. I think we've been pretty thorough on our explanations around MEG. We thought it was a good idea strategically. They never really wanted to dance in this party. And as I've always said, it's hard to contemplate a combination if the other side's really not too interested in it.

And by the time we came to the end, we saw decreases in oil prices, very different environment. We had a very clear off ramp. And frankly, again, if you look at where the overall market is, I think if you looked across the entire energy sector, let alone MEG, equity values are quite significantly down. And I think there was a bit of a sense that was coming at the time, too, frankly. And so the idea, at the time, we would have ended up paying substantially higher than the current market price of MEG, even if you add 30% to it. So I think all those factored into it.

And as we said at the time, we're still very happy. And as we outlined again at our Investor Day, we have, still have a very large portfolio of resource to develop, particularly -- well, in both, actually, the Offshore business, but particularly in the Integrated Corridor, where we have a strong pipeline of heavy oil thermal projects. We still have a lot of opportunity to expand Sunrise over time, which we still think is a phenomenal resource. It's a very large resource. And as we expand it, it becomes more and more efficient going forward as well.

So given that portfolio, there wasn't a compelling reason to, where we felt we had to go and do a transaction. That being said, we're going to continue to look at various things. But I think we've been also very clear about the criteria that they've got to be accretive. If we're going to do a transaction, we want it to be accretive to earnings and we want it to be accretive to cash flow. And we actually want it to be accretive to free cash flow.

So those are sort of the criteria we're looking at. There may be some possibilities out there; we haven't seen them yet.

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Operator [18]

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This concludes the analyst Q&A portion of today's call. We will now take questions from members of the media. (Operator Instructions) Our first question comes from Robert Tuttle with Bloomberg News.

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Robert Tuttle, Bloomberg News - Media [19]

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I was wondering your view on the -- Alberta's plans to sell it's -- the rail program and if you guys are at all interested in that, or no?

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [20]

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Yes. I mean, I guess what we'd say there is, we're not a big fan of curtailment. I think we made that clear in the past. But I think what the Alberta government is trying to do is a couple of things, which we would support, which is try to make some of their rail capacity available to companies.

And I think, hopefully, if we can get more crude moving on rail out of this basin, it just gives a lot more flexibility to handle the issues around curtailment and get, fundamentally get this market working again, working with kind of free market principles, which we certainly would advocate.

So I know they're talking about that. I know the industry has put some proposals to the Alberta government around how we could maybe combine using more rail with easing curtailment quicker than might happen if we just have to rely on pipelines. And again, we're very supportive of those sort of initiatives.

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Robert Tuttle, Bloomberg News - Media [21]

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Are you involved in the discussions about this proposal of loosening the limits but -- in exchange for more rail? Are you guys, and -- where does that stand, those talks? Do you know?

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [22]

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I've been involved in some of the work to put some proposals to the government on that.

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Operator [23]

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This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Rob Peabody for any closing remarks.

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Robert J. Peabody, Husky Energy Inc. - President, CEO & Director [24]

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Yes. Okay. Well, thanks very much. Thanks for your questions. And I'll just close by saying that 2Q was a heavy quarter for planned maintenance in both the Upstream and the Downstream. It was also disappointing that we didn't see much of an increase in the Alberta production quotas, and so we continue to work with them on that.

However, we did make some good progress on the projects underpinning our drive to increase volumes, throughputs and margins as we outlined in the Investor Day that we had a few months ago. So thanks again for joining us today.

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Operator [25]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.