Kam Sandhar – Senior Vice President, Strategy & Corporate Development Alex Pourbaix – President and Chief Executive Officer Ivor Ruste – Executive Vice President & Chief Financial Officer Keith Chiasson – Senior Vice-President-Downstream Drew Zieglgansberger – Executive Vice-President-Upstream Harbir Chhina – Executive Vice President & Chief Technology Officer.

Benny Wong – Morgan Stanley Neil Mehta – Goldman Sachs Phil Gresh – JPMorgan Greg Pardy – RBC Capital Markets Paul Cheng – Barclays Phil Skolnick – Eight Capital Mike Dunn – GMP FirstEnergy Joe Gemino – Morningstar Nima Billou – Veritas Investment.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy Fourth Quarter and Year End 2017 Results. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.

[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 call over to Mr. Kam Sandhar, Senior Vice President, Strategy & Corporate Development. Please go ahead, Mr. Sandhar..

Thank you, operator. And welcome, everyone, to our fourth quarter and year end 2017 results conference call. I would like to refer you to the advisories located at the end of today's news release.

These advisories describe the forward-looking information; non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion. Additional information is available in our annual MD&A and our most recent annual information form and Form 40-F.

The quarterly results have been presented in Canadian dollars and on a before-royalties basis. We've also posted our results on our website at cenovus.com. Alex Pourbaix, our President and Chief Executive Officer, will provide brief comments. And then we will turn to Q&A with the Cenovus leadership team. Please go ahead, Alex..

Thanks, Kam and thanks everyone for dialing in this morning for our latest quarterly and annually earnings report, my first as CEO of Cenovus. Before we begin this morning’s call, I really would like to express once again how deeply sadden we are by the death of a third-party contractor at our Christina Lake side earlier this month.

Our thoughts are with the workers family and friends and with his colleagues. His loss will be felt profoundly in his community and out our operations for a long time to come.

At Cenovus safety has always been our first priority I will be working with our team and third-party contracting company over the coming weeks to review the results of the fatality investigation and ensure we're making any improvements we possibly can.

When people make a commitment to work with us, I want to make a commitment back that we will get them home to their family safely every day. Now I would like to turn our fourth quarter and 2017 results. I'd also like to share some initial thoughts on the company from my first months as CEO and discuss some of the progress we have made already.

I'd like to start by saying and some of you will have heard this already, that the board didn't hire me to be a status quo CEO. Through conversations with each of our board members, I'm confident that I have their full support to make necessary changes even if they are difficult ones.

I believe Cenovus achieved a lot of successes over its first eight years and has a lot to be proud of. I can say without hesitation that I believe Cenovus as top-tier assets and some of the most technically confident people in the industry. This is in fact what attracted me to Cenovus.

At the same time, our industry is evolving so fast that more urgent changes required in certain areas. On the cost side, Cenovus has come a long way in improving its cost structure over the last few years. Significant reductions have been made in operating costs, sustaining capital and G&A.

Our 2018 budget highlighted further improvements we expect to achieve this year and we look forward to updating you on the progress in the coming months. Let's briefly discuss organizational structure. When I started at Cenovus, there were 9 Executive Vice Presidents.

I thought it was critical that our leadership team be streamlined and accountabilities be more clearly defined. Changes to our leadership team were announced in December. Subsequent changes with other senior leaders were made last month, again, reducing the number of leaders in increasing responsibilities.

Today, our number of senior leaders is almost half of what it was a year ago. We conducted most of our previously announced workforce reductions last week and expect to be largely complete by the end of the first quarter.

While letting good people go was never easy, these reductions were necessary to streamline our company and to better align the size of our workforce to the pace of activity in the current environment. Some of the recent reductions were also associated with our completed divestitures over the past few months.

Now that we have a more appropriate staffing level to match the work in front of us, I will focus on reengaging our workforce. Pay-for-performance will become even more apparent through compensation. I'm encouraging our leaders to think more like shareholders rather than employees.

Restricted share of units have been replaced with performance share units for our Vice Presidents and the minimum share ownership requirement now extends beyond the leadership team to all of our Vice Presidents. I'd like to spend a little time now on our balance sheet and our approach to capital allocation.

One of my biggest priorities is to continue to make further progress on deleveraging the balance sheet. We ended the year at just under $9 billion in net debt compared with almost $13 billion at the end of the second quarter. Our long-term goal is to be below two times net debt to adjusted.

Through generation of free funds flow and potential of further asset sales, our focus will remain on deleveraging. I believe that one of the best ways to mitigate the risks of our business is that a strong balance sheet and my preference is to maintain significantly lower leverage ratios.

This is going to be continued to be a priority for me in the short-term. With regards to capital allocation, you would've seen our 2018 budget in December with capital coming in well below Street expectations.

I hope the budget conveys my intent for Cenovus to become an extremely capital disciplined company, an area in which we have been challenged in the past. Of the $1.6 billion capital midpoint, we are guiding to for this year, $270 million is growth capital associated with the Christina Lake phase G expansion. The rest is sustaining capital.

Oil sands is sustaining capital is forecasted to be approximately $5.50 per barrel this year as improved well designed and well board performance, longer horizontal wells and redesigned well pads are really start to improve our efficiency.

These are all changes that have been implemented over the last couple of years but because of the longer cycle nature of SAGD, they're starting to show their value in today's capital spend.

The sooner we can fix the balance sheet, the quicker we can get back to balancing capital allocation between returning more cash to shareholders and investing in high return growth projects. Let's turn to the quarter now.

I'm happy to report that we repaid and retired in full our $3.6 billion asset sale bridge that was put in place last year as part of the ConocoPhillips acquisition. Successful sales of our Pelican Lake, Palliser, Weyburn and Suffield assets generated growth proceeds of $3.7 billion and have helped to significantly improve our balance sheet.

During the fourth quarter, Cenovus generated approximately $280 million and free funds flow, a strong upstream volumes and improved pricing were complemented by a strong downstream operating margin. Foster Creek and Christina Lake continue to pull strong performance with combined production of just over 360,000 barrels per day in Q4.

Due to the Keystone pipeline outage in the quarter and subsequent apportionment, sales volumes from Foster Creek and Christina Lake were approximately 7% lower than production. Christina Lake phase G construction remains on track for first oil and the second half of 2019.

And as noted in December, go forward capital cash from the time the project was restarted last year through completion are now expected to be approximately 20% lower than previously forecast. Oil sands continue to be the core of Cenovus.

Our refineries took advantage of continued strength in crack spreads through the fall and wider crude differentials by year end. Operating margin from our refining and marketing segment was $236 million on the last in first out or LIFO accounting basis or $314 million on a first in first out or FIFO basis as reported under Canadian GAAP.

For the full year, our refining and marketing segment generated almost $600 million in operating margin. In the Deep Basin, we drilled 24 net wells and participated in four non-operated net wells. In 2017, and we tied in 14 net wells by year-end.

Production averaged approximately 118,000 barrels equivalent per day in Q4 and approximately 120,000 BOE per day in December. Most of the 15 net wells planned for 2018 will be drilled as part of this winters program and are expected to be tied in this year.

We have added a couple of slides to our corporate presentation with some summary stats in the Deep Basin thus far and we are very pleased with our operational performance. Our results are even more impressive when you consider the team only started drilling operations this past summer. I would characterize our success in the Deep Basin as twofold.

First, we’re achieving very strong drilling efficiencies on these first wells. And second, the well production results are either in line or better than our expectations. We continue to market the initial non-core Deep Basin package, which commenced in early December.

This clear water package consist of above 15,000 BOE per day of production and associated facilities. We have also completed a more comprehensive review of the entire Deep Basin portfolio. With more than 3 million net acres of exceptional assets, we simply have more opportunity than we can fully capitalize on with anytime to reasonable timeframe.

Accordingly, we intend to continue our ongoing efforts to look for opportunities to streamline and focus this portfolio to maximize value. We continue to manage our exposure to WCS pricing through our refining and transportation portfolio. We remain approximately 25% integrated through heavy oil processing capacity and Wood River and Borger.

Another 30% to 35% of our heavy oil exposure is mitigated through various transportation options including pipeline commitments and rail capacity. Altogether about 55% to 60% of our light heavy differential exposure is mitigated in some way through asset integration. To conclude, generating long-term value for shareholders is very much my focus.

In the near term, debt reduction will be our top priority. I'm also spending a lot of time and effort setting up this organization for success. I think we'll be in a better position to compete on the cost side and will continue to focus on the margins in the business to drive cash flow going forward.

I did also want to welcome Keith Chiasson, who is – in his new role as Senior VP, Downstream. He will be participating in the call today for the first time. And with that, the Cenovus leadership team and I are ready to take questions..

[Operator Instructions] We will now begin the question-and-answer session and go to the first caller. Benny Wong, Morgan Stanley. Your line is open..

Good morning. Thanks.

In your prepared remarks, it sounds like you identify a little bit more assets to divest, just wondered if you able provide any color on areas or maybe the size of what you're thinking makes sense? And if you could get an update on the process of the existing package, any indication of interest and when we should expect to hear something about it?.

Sure, I'll – why don't I actually pass it over to Ivor, he can talk about the existing process..

Sure. Thank you. [Audio Gap] And pardon me, just turned my mike on. We've been very happy with the level of interest so far in the asset package we've got going at this point in time. I think we're midway through that process would be hoping to update you at the next quarterly conference call if not before..

Thanks, Ivor. Why don't I just talk a little bit about my thoughts on the Deep Basin going forward is, as I said in my prepared remarks, we recently completed a very comprehensive review. And as I said also in my remarks, I mean – this is a really attractive land-based over 3 million net acres.

It is just not possible over any reasonable timeframe for us to fully take advantage of that entire acreage. So as I said to many of you over the past weeks, no one should be surprised to see us continue to focus on value and in terms of the assets potentially focusing on more focused regions where we think we can really drive value.

And I think I would say that in that regard as we consider what assets we could consider it to keep, we're going to focus on those assets that score highly on a number of criteria. Again economics, scalability, sustainability, profitability and other qualitative factors such as infrastructure and working interest. Thanks, Benny..

Thanks. And I just wanted to ask around your downstream, just given relative size to your overall business now.

Just going forward, does that business need to get bigger fit with your overall strategy? Or would selling it ever be within the round of possibility given – it's probably not getting as much credit as you are on – for your business?.

Yes. Thanks, Benny.

One of the things when I got here, I took a really hard look at the downstream business to try to understand sort of the value to the company and whether it had a place within Cenovus and I will tell you after spending that time looking at it, I am very much of the conclusion that integration is a very wise strategy for heavy oil producer.

I would probably love to see it higher than the 25% or so that it represents as a hedge. But at the same time, we're probably until we make some concrete advancements in terms of improving of a balance sheet, I don't think we're going to be in the business of looking at significantly acquiring more refining.

But it is a core part of our business and over time, I'd probably like to see it bigger than smaller..

Great. Thanks.

Just one more final question if I may, just wondering if you'd be able to share how much volume as your railing? Or how much of your Bruderheim terminal you're actually utilizing right now?.

Sure. Why don’t I pass that on Keith Chiasson, and he can give you some thoughts on that..

Thanks for the question, Benny. We have 75,000 barrels of capacity at our Bruderheim facility. In the fourth quarter, we were railing around 12,000 barrels a day gross through that facility. So we have ample opportunity to increase throughput of that facility at this time..

Great. Thanks guys..

Your next question comes from Neil Mehta, Goldman Sachs. Your line is open..

Thank you very much. And Alex welcome. Glad to you have on this call. The first question, I have was just around WTI-WTS differentials and how you guys thinks about where those ultimately settle out over the next couple years. And then what every dollar change in WTI-WTS means for the cash flow of the company any back of the envelope math.

And I think about this in the context of the next couple of years. Obviously, this pipeline under supply with an also longer term with some questions around impacted by IMO as well..

Sure. Thanks for the question, Neil. I mean, obviously, right now, the heavy light differential is obviously an area of intense focus for this company. And I think – just with respect to your question of the sensitivities – in terms of sensitivities, for about that for every U.S.

dollar change in the differential, it would have about $125 million impact on the company just to kind of put that in perspective. But to talk about it, I – obviously, it is going to be a significant issue – it is a significant issue for the company. And I kind of tend to look at it in a couple of buckets.

I would say in the short term, we have an acute challenge and that is largely to do with – what we suspect is a fairly small imbalance in supply and take away capacity out of the province.

What's going to help that in the short term, we expect that TransCanada is going to get their pipeline rerated over the relatively short time and we expect that we are going to see some relief as the unutilized real capacity in the province gets brought into play over the next several months. We are focused on the IMO issue.

I think one thing I would say, I would just caution people that these are two unrelated issues and I think it's important sort of not to compound them and the point, I'm getting at is, there is this problem of the e-GRAS out of the province for barrels of oil.

We think that is going to get solved in the short term through getting Keystone rerated and getting the oil moving by rail and we expect that ultimately is going to be resolved through the three pipeline projects that are approaching various stages of getting towards making their FIDs.

We would expect – I’m very much believe, I'm an optimist in those pipelines and I'm very confident that ultimately all three of those projects are going to go and around the time that those pipelines are coming into service, we have this IMO issue. But I think it's important that we don't pancake the two issues on top of each other.

One is a structural issue, which would be resolved by pipelines and the other one is the IMO issue. But as I said, I don't think it's appropriate to compound them and I might just pass it onto Keith to give his thoughts on the IMO issue..

Yes. Thanks Alex, and thanks for the question, Neil. You know really this industry has had the capability over time to adapt to new regulations as they come into laws around the globe.

And really with the IMO, there's still a lot of questions on how that legislation is going to get past and what the implementation timing is and really, how is it going to be enforced. So we're watching the space but I would say that if history repeats itself, the industry has adapted to new regulations coming into play very well..

I appreciate the comment.

And then the follow-up Alex, on your point on rail, recognizing this commercial sensitivities in any negotiations but are you seeing progress with the last one railroads being willing to take through by rail barrels, because there has been commentary that they have been congested and some questions about duration of contracts as well? And any color there would be helpful?.

Sure. Thanks, Neil. Once again, this has been a key priority for Keith and his – in his new role.

So why don't I ask Keith to give – dig some color on that?.

Yes. Thanks a lot Alex. When you look at actual structure in the province, it's only been about 50% utilized. There's still ample opportunity to ramp up crude by rail across the province both at third-party industry facilities as well as our Bruderheim facility. So we think that there is opportunity obviously with the differentials where they're at.

There's also deals that can be made. So we're in active negotiations with both rail companies can't really comment on the progress of those negotiations. But we believe with restrictions on pipelines, over the 1.5year to 2 years, crude by rail will be the source of getting crude to market..

All right. Thanks team..

Your next question comes from Phil Gresh, JPMorgan..

Yes. Hi, good morning.

Can you hear me?.

Yes. Hey, Phil..

Okay. That’s all right. Thanks. First question is just on the asset sales – all right, I guess more just more broadly the deleveraging. You mentioned the two times target and you've expressed in the past the high degree of urgency and getting to your leverage target.

So what are your latest thoughts on when that can be achieved, obviously, acknowledging the oil prices are not under your control, but how you are thinking about this?.

Thanks, Phil. Yes, I would say straight out, I still think it is a priority for this company to get below to two times net debt to adjusted EBITDA.

And really the tools that we're going to use to get there is through cost-cutting, continuing with non-core asset sales and as you've heard me talk about quite a bit capital discipline, all of, which should drive an increase in free funds flow.

Obviously, with differentials with where they are, that provides a little bit of a challenge to us in terms of how quickly we can get there. But I can tell you it is still a priority and we're going to move as quickly as we are able to get to two times or below. I think that remains a very important priority for the company..

Okay.

And I guess with the asset sale, it sounds like you're not willing to commit to maybe a specific amount of asset sales this year to help with that objective or?.

Even I've said this to a lot of people over the last few months. But I am much more focused on reducing our leverage ratios than committing to any specific dollar of divestures. One of my worries is that if you get too focused on a dollar amount, you may bring in that cash to pay down your debt.

But you might have done enough damage to your cash flow that you actually or either running in place or going backwards on your debt metrics. So I am – as I said, suffice it to say it's a priority for us. We see asset sales as one of the tools that we can use and where we're going to be targeting to get down at the ratios down below two times..

Sure. Okay.

One last question just on Foster Creek, if I look at your production in the second half of the year relative to the guidance for 2018, are there specific levers that are going to drive that production higher? You're talking about reducing – keeping sustaining capital spend low but your production guidance is higher year-over-year relative to the second half..

So that's a very good question and why don't I pass you on to Drew and he can give you a comprehensive answer to that..

Phil, thanks. Yes, so if you look at the second half of the year for Foster, we did have a few treating upsets of service as we brought some more sustaining pads on throughout summer and whatnot. A lot of that is basically behind us.

We came into Q4, had a couple of power bumps and a few minor issues, but the performance of the reservoir in the wells continue to improve and so the fundamental operation of Foster Creek is running extremely well.

As we came into December actually, we took the plant down for five or six days, we wanted to get a little bit bit of proactive maintenance done before we came into 2018.

And so coming out of December actually production came back very well and actually January now as you guys will see here shortly that we are actually in the top end of guidance that we put out for 2018. So the assets are running extremely well.

We're actually producing steam at a rate we've never produced that before from operational reliability prospective. So it's going extremely well and that's why we've got some confidence in that guidance that we put out for the 2018 budget..

Okay. That’s helpful. Thanks a lot..

Your next question comes from Greg Pardy, RBC Capital Markets. Your line is open..

Thanks, good morning.

Alex, when you commented on the reiterating on Keystone, are you talking about kind of going at capacity of 591? Or are you talking about going beyond that?.

No. Just getting back to full capacity..

Okay. No problem, that helps.

And then with the rail ramp up, one question would just be around contemplated expansion there, are you still thinking that you might expand that facility and if you do what timeline would that be?.

Yes. I mean I think our priority right now is going to get that facility operating at or near its existing capacity. We do have the ability to bring on further capacity in a relatively short order.

But we also do think this is – this present structural issue is going to be largely resolved starting with an Bridgers line three coming into service in 2019.

So right now the focus is on getting the facility up and running much near its capacity rather than adding incremental capacity, which I will be concerned about the merits of it in a more well piped world..

Yes. Understood. That's logical. And I know there are not going to be very near term priorities, just given the balance sheet and so forth.

From where you sit now having take an look at the assets in detail, Narrows Lake, Foster Creek selling the shelf, how do they fit into the overall picture?.

Greg, I said at the start in my prepared comments that I've been really impressed with the assets and I would say that very much holds true for both of those projects and I particularly – I would very much like to see if we could find a way to accelerate the development of some of our high quality projects but I think once again the first priority has to be improving our balance sheet and reducing our leverage.

We are looking at some innovative ways to see if we can accelerate those projects. They – none – neither of those projects were stopped because of insufficient returns even at any sort of reasonable level of commodity prices going forward. These are extraordinarily attractive assets.

So we're going to see what we can do to get one or more of those projects moving but it is always going to be subject to the beyond us on focusing on balance sheet..

Understood. Thanks very much..

Your next question comes from Paul Cheng, Barclays. Your line is open..

Good morning, guys. Maybe the first question is for Keith. Keith, you were talking about the well and certainly in the fourth quarter that you have underneath because of the pipeline issue in sell all you produced, that means that you probably could not get your, where you want them to go up.

So what is the major hurdle to go at that point and do you actually believe that in the first quarter or very near term, you will be able to resolve those hurdles?.

Thanks, Paul. Really the difference between sales and production was driven by the Keystone lead that happened in November followed by the apportionment through December. We are actively moving those barrels as we speak. So we don't see any long-term ratification from that.

With regards to rail as I indicated, we have capacity as well as industry has capacity to ramp up crude by rail and our inactive negotiations with both rail companies do that kind of Q2 timeframe and seeing ramp up probably in the late Q2 to Q3 timeframe..

Okay.

And can you share with us what is the current cost to shift from a Bruderheim to the Gulf Coast?.

Sorry, could you just repeat that question, Paul?.

Okay.

Can you share with us what is the audient cost to shift by rail from a Bruderheim to the Gulf Coast?.

Yes. Thanks for the question, Paul. We haven't seen those costs really differed much over the past year from what we are historically shipping. Obviously, we're in negotiations with the rail companies on increasing getting crude to the coast. But we won't share kind of contractual terms..

Okay. Alex that on – can you give us a relative ranking between Christina Lake and between Foster Creek, Narrows Lake and Telephone Lake that on go forward basis in new development..

Sure. I’m happy to do that Paul and I may have Harbir jump in and give his thoughts too.

But I – I think Foster and Narrows from my perspective are probably the highest priority development opportunities, in particularly, one of the things that causes immediate to be focused on our Narrows is, we do have some not in significant pipeline commitments that in the event we were able to go forward with Narrows would further improve the go forward economics of that project.

So that's kind of how I would look at it but I'd ask our Harbir to jump in..

Yes. So Foster Creek and Narrows are definitely on our highest priority given the capital allocation. Telephone Lake is a really good reservoir but it is really on the low priority at least some of the next three to five years. But I personally feel that play has a lot of potential.

I think that there's two Foster Creek sitting there in Telephone Lake and esteem of ratio of 2.5%. So it is going to be a future major asset for this corporation but not in the immediate two to five year timeframe..

Harbir, if Narrows Lake is not because of your existing pipeline commitment, were they still rank the quarter Foster Creek better or that is actually it would be Foster Creek will be better?.

No. Because of this team or ratio Narrows has very good robust economics now. Foster Creek, we are doing expansions, so those economics a good too so. So I think they're both equivalent in terms of returns. Because the esteemed oil ratio of Narrows Lake is we expected because it's always solvency to be about close to 1.7%.

So that really helps the economics of the play. So even without the pipeline commitment, these projects would be very robust in terms of their economics..

Okay. Talking about, you guys has been on the balance sheet side, I think that two times net debt to EBITDA ratio, but when you're looking at pads and older volatility in heavy oil and Brent oil particularly that in the short term doesn’t look like that you would be able expand your refining exposure to make more of that integrate play.

Should we be still a two time EBITDA fix on the balance sheet or that should we will be really target much lower that?.

Yes I've spoken to a lot of our shareholders and a lot of you on the call over the past several months and I think what I would say is the – in my view, the strongest protection – this is a very capital intensive business with pretty significant volatility in terms of revenue and my view – for example, I think hedging probably has a role in this business.

But I think by far the best and most effective way to deal with that with a volatile commodity environment is to have a very strong balance sheet.

And so when I came in the company had targeted sort of one to two times debt to adjusted EBITDA as a goal I think that is still ultimately an appropriate goal for this business and I would probably say – I would probably like to see it more towards the lower end of that range, but I think once we get the debt into that two times range it starts to give us options rather than just debt reduction.

We have the ability to start thinking about returning capital to our shareholders or looking at growth initiatives and what I can say on go forward basis, every dollar, spare dollar that we have on our balance sheet when we think about how we're going to spend it.

We're going to spend it on those initiatives that we believe will create the most value for our shareholders over the long term..

Thank you. I just had one final comment and one request. One request is that I think it’s always a great idea for companies in their possible ways to – are there we point to give a table to show on the one of non-recurring item or special item both on the pretax and after tax, as well as that one sentiment that they are hating.

I think that will help everyone tremendously especially in the hit of the earning season. You guys used to have to I don't know why that we could sign not to have that this quarter. So that just a request.

And secondly, just want to echo what you said that earlier, I think hedging over the years that what I have seen is that – we need to make money constantly go and hopefully that you guys will abandon that idea..

Thanks Paul. I would also add another observation that no one ever remembers the good hedging decisions, they only remember the ones that they didn't work out and the company did significantly improve its financial performance as oil prices were falling.

But no, I very much agree that – I think that, as I said, the best protection for a company in our business is that a very strong balance sheet which allows us to weather the commodity cycle and that's really where my focus is on and as we do that I would expect to see our hedging activity reduced commensurately..

Your next question comes from Phil Skolnick, Eight Capital. Your line is open..

Yes. Thanks. Just back on the crude by rail, because I want to focus on the cost side. Can you just give some comments just on the revenue side getting down to the Gulf Coast, you had discussions with your fires down there in light of what's going on with Maya, with Venezuela and crude on a high decline.

Are they willing to take on some of those costs in at least to get in a better price, I would think that will help offset a lot of that cost, could you provide some clarity on that? Thanks..

Yes. Thanks for the question Phil. As you can imagine, anytime we can get our crude to coastal markets, we are seeing stronger price for that crude, so no different in this scenario. Crude by rail that gets us to the U.S. Gulf Coast or for that matter to the West Coast we’re realizing better pricing..

So are you seeing like a heightened discussion with the refiners on the Gulf coast that are basically almost begging you to get crude down by rail?.

It’s a good problem to have if someone’s begging, but I wouldn’t say begging but there’s definitely an interest. And yes, we are starting to see some declines in the Venezuelan on their crude. So definitely an interest to get Western Canadian crude to those markets..

All right. Thanks a lot..

Thanks, Phil..

Your next question comes from Mike Dunn, GMP FirstEnergy. Your line is open..

Thanks. Good morning everyone. I just had a question on the exploration expense impairment for Borealis region. In the financial notes, there was a mention of regulatory changes to the oil sands royalty application process impacting the economics viability of those projects. This project already has regulatory approval at least for some capacity.

What specifically is meant by those changes and how they are impacting economics?.

Sure. Thanks Mike, Ivor speaking. The government did change the royalty rules around that. We’re effectively not allowed to claim those costs that we have incurred to date for that project, so therefore that impacts the economics. So that’s just one part of why we wrote off those costs.

Again the accounting centers are to look at all the assets on their balance sheet, so we go through that process and looking at Telephone Lake again, there is a – as Harbir has mentioned we like the asset a lot but we have not been spending money on the past three years, we don’t have in our business plans for the next three years.

The royalty rules changed to the impact commercial liability and it’s likely that we need to redo some of the design work et cetera going forward when we do get to that project. So all in all, we thought it appropriate to take that non-cash exploration expense at this point in time..

Okay.

So if I understand correctly Ivor, previously, you were allowed to deduct pre-sanction costs and now you not?.

That’s correct..

Okay. Thank you very much..

If I could just add something to that Mike. When Foster Creek and Christina Lake were expanding, the capital we were spending that rolled into the royalty PL account. But what’s happened in Telephone Lake in the Borealis area as we have been spending many over 10, 15 year period.

And so the government is only letting us claim the last three to five years max. And so really we’re not able to claim the expenditures that have been invested over the last decade as part of the royalty payout. And so that’s really the issue with Telephone Lake and the greater Borealis area now..

Great. Okay. Thank you that’s all for me..

Excellent..

Your next question comes from Joe Gemino, Morningstar. Your line is open..

Thank you. So one of the things the question on is about your SAP technology that you brought up. In the past you’ve talked about bring it on for your sustaining process with bringing on new well pads.

What is the timeline you see about using this technology on your current operations?.

Hi, Joe. It’s Harbir here. So currently what we’re doing is testing our propane. We started injecting propane in one pad in October and we started another one in January of this year. And so, we are currently in the design of figuring out how to commercialize it.

We feel that commercializing solvents on a pad by pad basis is a way to go in order for us to do it in a fast time cycle.

So our timing right now is to start to have pads on starting in 2019 but right now we are in the engineering phase and we are also on the piloting phase of testing our propane and the initial results for propane are looking very, very good.

Better than we expected and so I think we’re well on our track to changing future pads to solvents but it won’t be until 2019..

Great. And if you think about this from a long-term perspective, is it possible beginning in 2019 that all of your current production at Foster Creek and Christina Lake could be converted to the SAP technology with the change over well pads over a longer period of time..

Yes, we will never convert the whole fleet to solvents. Basically, when the recovery factor reaches to about 30%, we feel that solvents will not be as effective. So we want to apply them on the new pads, not the existing pads.

And today, we have about a third of our production is coming from pads that are 50% recovery factor already and so we don’t want to apply solvents when the recovery factors have gone up..

Okay. That’s sounds great. Thank you..

Your next question comes from Nima Billou of Veritas Investment. Your line is open..

Thank you. Good morning. I guess the main question centers around the WCS spreads, did we hit a 40% peak in January and it’s starting to recover and come back a little bit. Wanted to get your view because you obviously have one with respect to planning, even with certain partitionments on some of bridges and pipelines.

Do you see that improving near term that’s outside of those potential structural improvements in 2019? Or do you guys plan for differentials to remain at the top end of the range or exceeded until those pipeline projects come in? And the second question I had is interesting that you said today, most investors tend to focus on the 25% hedge only for the downstream.

Do you mentioned an additional 30% with logistics and other assets, can you just sort of discuss or expand on how you are able to hedge through your logistics assets?.

Thanks, Nima. I think what I’ll do is I’ll have Keith talk about that sort of – those specific points and then I’m going to just talk more strategically about exposure to differential and some of the other tools that we think we have..

Thanks, Nima. Basically we believe that there is going to be some short term release, the Keystone, which that happened in November resulted in a pressure restriction on that pipeline. Our understanding is that pressure restriction should be removed in the near term, which will increase capacity – takeaway capacity from that.

Also, we believe that through the second quarter, we will start seeing some of the infrastructure that’s already built in Alberta start to be utilized for additional crude by rail, which will help elevate kind of the overall supply and logistical constrains that we have recently seen.

You hit on it, that – yes, we have 25% of our crude is naturally protected through our working interest in our U.S. refiners. And an additional 30% to 35% is approximately mitigated through our various transportational contracts and options that we have both to move by pipeline to the U.S.

Gulf Coast as well as the Canadian West Coast and through rail loading facilities that we have both with Bruderheim and third-party rail combinations, which takes us to that 55% to 60% of our light/heavy differential exposure being mitigated through asset integration..

Thanks, Keith. Nima, it’s Alex again. I just wanted to talk a little about some of the other flexibility that Cenovus has – I really view in my role as CEO of this company, I came in with a real commitment to maximize value in this company.

And I think it’s important to understand that sometimes maximizing value doesn’t mean maximizing production on a week to week or month to month basis. One of the – I just wanted to talk a little bit about some of the flexibility that we have in our oil sands operations.

And one of the things that our great oil sands assets provide us is the option of managing our production by utilizing our reservoir to store barrels on a week to week or month to month basis, depending on market conditions to maximize the value of every barrel that we produce by moving production of some barrels from periods of transportation congestion to periods of lesser congestion.

As I said, this was all from a focus of maximizing value and without changing guidance, but maybe I can ask Harbir to talk a little bit about this capability that we have..

So from a reservoir standpoint, things are very different than they were a couple of years ago. So there's two major things that have happened in the last two years. One, is that are well conformance of – as improved substantially especially a Foster Creek.

And the second one is that now, a third of our production is coming from production is coming from pads that are produce 50% of the oil in place already. And what that means to us is that, when we were to turn down those pads, the oil keeps getting stored downhaul and we will get flush product from those wells.

When you have 0% to 30% recovery factors, you don’t see that flush production, but when you’re above 50% we do. So we’ve got a lot of flexibility in using our reservoir as the storage and in fact we call it dynamic storage.

Because we can turn it on and off on a daily basis or a monthly basis, so I’ll exit we are not production focused, we’re value focused, we’re very committed to our guidance in terms of our full year production. But do expect us to have volumes go up and down during the month or as the differential change. Because we are value focused.

And luckily we have this flexibility now, because of the stage which all are well peers are sitting at. So that gives us lots of flexibility that reacted differentials..

Thanks, Harbir..

Thanks, Nima..

Ladies and gentlemen, we will now be taking media questions. [Operator Instructions] Your next question comes from [indiscernible] your line is open..

Hi, good morning. I had two very big question. So like comes from Guggenheim, could you give me an estimate or just an indication [indiscernible] improved is actually going to the Gulf Coast..

We don’t specifically comment on where we are shipping, product to but we have obviously capability through that facility to get crude to any market..

Okay. And Alex, unless the start of the call you mentioned about increasing your refining footprint.

Is there anything further that you could talk about, please?.

I’ve really think I kind of made my point there and that was – I do think that an integrated strategy for heavy oil producer makes a lot of sense for that business and the business that we’re in and over – I was really just kind of stating directionally my observation that over a longer term, I would probably preferred to be more integrated than less integrated, I think that’s a value maximizing strategy for heavy oil producer, but we do not have any near intermediate term plans to grow the refining business.

It’s more – what I described as a long-term observation that perhaps an aspiration..

Thank you for that..

Your next question comes from Dan Healing, The Canadian Press. Your line is open..

Good morning. Thanks for taking my question. I just was looking real clarity on the job reductions, there was a range between 500 and 700 people. Do you have a better number for that and also I’m wondering about your restructuring charge might be because of the restructuring..

Sure, Dan. It's Alex.

No, I mean the guidance we gave earlier was 500 to 700 people to put that in the ballpark give or take around 15% of our workforce and I would just say that this is something that we take no pleasure in it, it is without a doubt the toughest thing that you need to do is, the toughest things you have to do is an executive, but I'm satisfied that it is very, very important for this company to move to cost leadership in the industry and I think that’s really important for the long-term success for this company and for all our employees.

But we're still at that guidance of 500 to 700. The majority of those reductions have already occurred over the past several weeks and there will be some more, but our plan is to have a largely done with over the next couple of two months or three months..

Okay.

And just as a follow-up, are you looking at reducing the amount of office space you have leased in Downtown Calgary because of this?.

Our leases are, what they are I mean I think one of the benefits of having smaller workforce is I think gets going to give us the opportunity to get our employees more focused in one office space right now were spread over a number, pretty wide geography in Downtown Calgary.

And so I'm looking forward to the ability to get all of our employees into one place and I think that’s going to have lots of benefits long-term for employees and for the organization..

Okay.

Which space is that?.

We're making those decisions over the next months and we'll let everybody know once we're ready to do so..

Okay, thanks..

Thanks a lot, Dan..

There are no further questions at this time. I'll now turn the call back over to Alex Pourbaix for closing remarks..

Hey, from my perspective, on behalf of the leadership team and everybody it's an overstay I just want to thank everybody for listening into us. And we don’t take that for granted. We appreciate it and we look forward to having more opportunities to share the work that the company is doing over the coming quarters. So thanks everyone..

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