Suncor Energy Inc (SU) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Petro-Canada second-quarter earnings results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR GIVES CALLER INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, July 31, 2003. I would now like to turn the conference over to Mr. Gordon Ritchie, Senior Director of Investor Relations.

Thank you, operator, and good afternoon, everyone, and thank you for joining us on this very busy day. With me today are Ron Brenneman, Petro-Canada's Chief Executive Officer, and Harry Roberts, the Company's Chief Financial Officer.

Before we jump into the quarter results, I'd like to make a note about disclosure. Reflecting our commitment to continuous improvement in disclosure, we continue to advance our quarterly reporting standards. In the first quarter this year, we introduced segmented financial information for each of the major businesses. In this quarter, we've expanded the MD&A section of the report to include both additional information and more a detailed discussion. So with that broad note, I'd now like to hand over the call to Ron Brenneman, who will provide his comments on Petro-Canada's second quarter. Then, before opening up the lines for questions, Harry Roberts will explain, in greater detail, some of the nonoperating factors that you need to have in hand for the quarter. Ron?

Thanks, Gordon. I'd just like to take a few minutes to share with you my observations on the second-quarter results and the progress that we're making against our strategies. Our financial results for the second quarter did indeed meet our expectations, so I'm pleased with the bottom line. But our operational results, quite frankly, are a bit mixed, less than stellar in some areas. So, the message I want you to take away is that these results demonstrate the value of the well-balanced portfolio that we are building. Petro-Canada is reaching a point as a corporation that even with the setbacks in some parts of the business, we still have the assets and the capability to deliver solid overall performance. An example of this is our annual production outlook, which you'll see we've revised downward slightly to 461,000 barrels equivalent a day. Of course, we're disappointed to be down 10,000 barrels, but the diversity of the portfolio gives us mitigating offsets. In this case, our startup problems at MacKay River Oil Sands plant are offset by higher-than-expected output on the East Coast. Unfortunately, those East Coast barrels are highly profitable. So, with the balanced portfolio as a theme, I will now move on to review each of the five core businesses.

I will start with the East Coast, where we continue to be very pleased with the operational performance. Excellent reliability and strong oil prices delivered outstanding results. Both Terra Nova and Hibernia continue to perform very well, producing 151,00 and 207,00 barrels a day respectively in the quarter. Thanks to continued reliable operations, we revised our 2003 outlook for Petro-Canada's share of production up to 86,000 barrels a day. That outlook concludes a two-week maintenance shutdown planned in August at Terra Nova.

We also made progress on the White Rose project. They've completed work on the turrett (ph) and Avadavey (ph), and it is now on its way to Korea to be installed on the FPSO. In Newfoundland, excavation of the (indiscernible) Glory Hole and modifications to the Glomar drilling rig are complete. That allows development drilling to get underway late in the third quarter.

Continuing with the good news, I will move onto our International business. As I mentioned last quarter, we've been working on our International growth strategy. As we see it, that strategy has three main components. First, we are pursuing growth within our existing portfolio. Second, we are seeking to add new areas of operations; third, we are emphasizing international exploration. Let me elaborate on each of these with the news items from the quarter in context.

The first component of the strategy and our top priority is to build on our existing base of operations. The assets and capability that we acquired when we bought Veba have led to attractive internal opportunities, so for example, in Syria, we reached an agreement that extends our rights to deeper and lateral production zones on existing acreage. This is important because we're starting to see declines from existing production. Another example comes from Trinidad, where Train 3 of the LNG facility came onsteam ahead of schedule, boosting Petro-Canada's share of production to over 60 million cubic feet a day. There's now agreement to build a fourth Train, ensuring that our share of production should remain over 60 million for the longer-term.We are also building on the existing base in the North Sea, where development is on track to bring the Clapham and L5b fields on stream by the first quarter of 2004. The L5b platform has been installed and the first production well is complete at Clapham.

The second component of the strategy is to seek to add -- possibly by acquisition -- new areas of operation. As I talked about in Q1, we have a study underway that we started after integrating Veba to really look at where the growth opportunities are, opportunities not only in countries where we currently operate, but in new theaters as well. Our approach will be disciplined and strategic, so we're seeking opportunities that are a good fit with our existing asset base. But of course, we can't predict the timing because an ever-changing market will require us also to be opportunistic. Patience is definitely a virtue in this business.

The final and longer-term component of the International growth strategy is an enhanced emphasis on exploration. We've confirmed for ourselves the significance of global exploration opportunities to our future International strategy and as a consequence, we are increasing our organizational focus on that aspect. We've created a new officer position, VP of International and Offshore Exploration, that will be filled by Nick Mayden (ph), who has 20 years of Veba and ARCO (ph) experiments. Nick will report to Norm McIntyre in London. This will strengthen our international focus, and it will also allow our Canadian-based exploration team under Francois Langois (ph) to do what it does best, finding that highly profitable continental natural gas. The bottom line in International is that we continue to be very pleased with the platform for long-term growth that we've established there.

Now, I will come back to Canada and talk about Oil Sands, where we didn't exactly have our best quarter. The good news is that Syncrude successfully completed a major coker turnaround in mid-May and production has been nicely back on track since them. Syncrude is now well positioned for a good round of production. On the other hand, our MacKay River (indiscernible) project experienced some operational problems as we continue the startup there. More specifically, we've had difficulties with the water treatment system. Bear in mind that we set a very high environmental standard for this plant. We recycle almost all the water we use in a closed loop system, so the challenge we have is that any trace of bitumen or impurity remaining in the water after treatment builds up over time and can foul up the steam generators. This is what caused the shutdown of steam generation for about six weeks in the second quarter. The important aspect, from my perspective, is that the reservoir is performing very well. In fact, given that we unexpectedly cooled the fuel down for six weeks, we were very pleased at how well it responded when we started it up again. We were up to the 10,000 barrels a day range in June, about three-quarters of the way back to where we were before the outage. Even so, we weren't at all satisfied with MacKay performance, so we've completed a thorough root-cause analysis and laid out an action plan. To improve reliability, we're taking advantage of a scheduled turnaround this month to invest about $10 million in upgraded plant equipment. We are also implementing new monitoring procedures. We are now expecting to reach plateau production in mid 2004, not year-end as originally planned. Construction of the Cogen (ph) plant at MacKay is on schedule for startup around year-end, and that will add steam capacity and reduce gas consumption.

I should also mention progress on the climate change file that should help us as we develop our future Oil Sands plan. Last week, the federal government confirmed a list of principles that will govern the longer-term regulatory framework as it applies to large projects in the oil and gas sector. The list came out of some fairly intense discussions that some of us have been having with senior people in Ottawa, and I'm really quite pleased with the results. The government is taking seriously its commitment that climate change action will not jeopardize economic growth, and that's certainly good to see.

Returning to the business review, our North American Gas business saw excellent profits in Q2, reflecting continued strong gas prices. Volume dipped in the quarter due to scheduled plant turnarounds and facilities maintenance, but we're still on track to meet our annual target of 690 million cubic feet a day of production. As you've heard me say many times, our goal for that business is profitability and as you can see from the numbers, we are certainly meeting that objective.

Now, I will move from Upstream to Downstream. Refining margins have come back down to earth in recent months, even dipping below mid-cycle levels. Despite the margin trend and some operating issues in refining, we still had a decent quarter financially. Our marketing business also faced a tough environment. The SARS scare reduced travel in Toronto, our most important market, and problems in the lumber and beef industries impacted the distillate market. And of course, retail competition is always tough. Nonetheless, our retail model is working. Overall retail sales remain ahead of 2002 and convenience stores sales are tracking 20 percent higher than last year.

The lubricants business also faced a difficult sales environment. Softness in some key export markets and a rising Canadian dollar impacted total sales. But with solid operating performance and good price management, they managed to turn in strong financial results.

The most significant area where we fell short in the Downstream was in refinery reliability. Unplanned events in the quarter extended a turnaround at Montreal and caused the temporary unit shut-in at Oakville. As you know, I regard reliability as a critical component of success in this business, so we're refocusing our efforts to improve the performance. Also on the refining side, we are on track to supply low sulfur gasoline by 2005 as required by law. Construction projects are well underway at both Edmondson and Montreal. In Ontario, we're still looking at a couple of different ways to supply low-sulfur products. One possibility would be to convert the (indiscernible) refinery to a terminal and supply products from a debottlenecked Montreal refinery. We're still evaluating all the options and we should know more later this year.

So, in conclusion there was room for improvement in some areas of our operations, but we know where those are and we're working on. Nonetheless, the overall strength and diversity of the portfolio came through in the second quarter. I am pleased that we overcame a number of challenges to turn in a solid financial performance. Thanks for your attention. I will now pass it over to Harry for his coverage of important financial details. Harry?

I only have a couple of items this quarter. First, on comparable earnings, net earnings for the quarter of 588 million include gains for income tax rate changes, foreign currency translation and sales of noncore Upstream properties in western Canada. When you back out these factors, earnings of 359 million, or $1.36 a share, compare with 276 million, or $1.05 a share last year.

Turning to cash flow, tax deferrals resulting from our Canadian Upstream partnership increased cash flow by approximately $45 million in the quarter. This compares to a decrease of 20 million in the second quarter of 2002. The LIFO/FIFO effect in the Downstream raised cash flow by about $60 million in the quarter, and that compares to a reduction of $20 million a year ago.

On the balance sheet, during the quarter, we converted over 800 million of short-term, floating-rate debt into long-term, fixed-rate debt in the U.S. bond market. That leaves us about 500 million of short-term floating-rate debt which must be repaid by April, 2005. Back to you, Gordon.

Thank you, Harry. Operator, that concludes our prepared remarks and we are now ready to open up the lines for questions.

Thank you. (OPERATOR GIVES CALLER INSTRUCTIONS). Martin Molyneaux with FirstEnergy Capital Corp.

Good afternoon, gentlemen. I guess I was very surprised how strong results were in refining and marketing in the second quarter, especially in the marketing side. It looks like the marketing aspect alone contributed 48 million and then versus 19 million last year. I'm just wondering how you were able to achieve that.

Martin, it's Ron. This is really the result of the kind of programs that we have been building over time in the marketing part of our business. I think I've talked in the past about strategically where we're trying to go here, building our network out with the re-imaging of sites, increasing the size and number of our Sea (ph) stores, generating a lot more income from the back-court as opposed to gasoline sales. As I suggested in my remarks, all of that appears to be working for us. We've got increased throughput in our retail sites and we are generating quarter-over-quarter increases in our Sea (ph) stores sales, so the system seems to be working; the whole program seems to be working for us. I think -- and Gordon could answer this a little better -- your 48 for the quarter may also include some tax advantage.

That's right. Martin, if you want to back out the income tax change effect, as you know, that added 45 million to the Downstream in the quarter. You could say approximately 20 of that million is in marketing and some 25 or so is in refining and supply. So, you would still need to back those numbers to get to the net numbers. That doesn't take away from the strong operating performance that we have underneath.

That gets me a lot closer. Thank you very much.

Brian Dunton (ph) with UBS, please proceed with your question.

Just falling along on those Downstream results -- you mentioned about the convenience (indiscernible). I think you said it was up 20 percent. Was that a same-store sales number?

No, that's the gross number, Brian. I actually don't have the same-store number. I think, last time we looked at that, our gross was up 30 percent and our same-store sales were up about 20 percent, so I would expect about the same ratio in that 20 percent number.

How many more sites are still in your reworking plan here for the next couple of years? What I'm getting at is, can we continue to see that kind of growth for the next year or so?

For the next year or so, I would expect so. We are either rebuilding, or building from scratch, something in the order of 50 to 60 sites a year. That's essentially the same pattern that we've been on for the last couple of years.

I see. I guess one last question -- I noticed the tremendous amount of cash you have sitting on the balance sheet at the end of the quarter. Any plans for that? Are you keeping some powder dry here if Venezuela is coming along that you can purchase?

I'll pass that one over to Harry.

Good afternoon, Brian. That's a question that we were anticipating today. We're trying to manage the cash through the second half of the year. Ron has alluded to positioning ourselves to be opportunistic. We continue to have the offer outstanding on Cerra Negra (ph). If that does resolve itself, we do have to deal with that. Behind that, though we're comfortable with our current long-term deposition, but as we go into the latter half of the year, we do start to look at our plans for next year. We wanted to have some of that information in place before we decided what to do with the cash that we have on the balance sheet.

Will you be using any of that to buy back shares?

We certainly don't have any plans in place at this point. As I just alluded to, the fact that as we go through the balance of the year, we will have a look at what the (indiscernible) cash is for next year. At that particular point in time, that would certainly be one of the things we would look at. As you know, the three priorities we have for cash is first, to look for investment opportunities in the business, second was to deal with debt repayment program and then the third priority, which quite honestly we haven't paid a lot of attention to was the dividends and the share buybacks.

Thank you.

Wilf Gobert with Peters & Company.

Thank you. Could you give us a little information on Hibernia and Terra Nova as to where the allowed production limits are now? I read somewhere that both Hibernia and Terra Nova were -- you were applying for expanded annual production volumes. Secondly, could you identify, between those two projects, which accounts for the revised upward guidance on production for the year?

Gordon I think has some numbers on the production allowances?

On the annual allowables, Hibernia now sits at 220,000 barrels a day. For Terra Nova, the annual allowable is 180,000 barrels a day. So those are both -- are above the capabilities of the two projects to produce, which -- from a regulatory perspective -- is a good one, as far as we can see.

Then do we apply a 90 percent factor to that for reliability to those numbers?

No. I think a more appropriate approach is to look at what the projects were designed for and what they can do and then as we learn and evolve those projects as to what they are capable of doing. As you remember, Terra Nova was originally a 125,000 barrels a day facility, and we're starting to see that it can produce well above that, averaging above that year-to-date. Similarly, Hibernia is improving its performance over time, but we don't start with the allowable regulatory; we start with what the project can do.

I guess what I meant there was, are these numbers that you think can be achieved net of downtime, or do we have to reduce them for downtime?

Those maximum allowables -- I wouldn't pay too much attention to those at this stage, Wilf, because our whole objective in setting those was to ensure that we weren't constrained artificially because of regulatory considerations. I mean, we want to be in a position where we can basically run these platforms flat out from a reliability, from a safety and from a reservoir management point of view. So the numbers, at this stage, are set at a point where they don't become a constraint to us in any way.

To answer the second part of your question, the uptick from 79 to 86,000 barrels a day is a result of better performance on both those platforms, so I think if you assume that it was more or less pro rata, you would be pretty close. We don't try to separate them out because there are some shared facilities between the two like Shuttle Tankering, for example, that can impact one from the others.

Thank you.

Tom (indiscernible) with Tri Stone (ph) Capital.

Good afternoon. I'm wondering if you could give us some guidance in terms of your current taxes, going forward, vis-a-vis the partnership. Can we expect sort of Q4, Q3 and Q4 to be similar current tax rates as we saw in the Q2?

The current tax rate, of course, in Q2 is adjusted to reflect some of the income tax changes. Tom, in the past what we've done is when we look at the International, we would say that the tax rate there would be in the 60 to 65 percent range. Going forward on the Canadian side, I think, in the past, we've talked about rates in the kind of the 40 percent range, and I think with the adjustments, that would probably come down just underneath that. But I can't talk to the effect of the partnership because there are a number of factors that go into how that moves each quarter.

In terms of the lower guidance volumes for North Africa, it looks like specifically Syria -- could you give us a bit more color as to the lower expectation?

A couple of things are happening there, Tom. In the early part of this year, we had some power outages that were weather-related in Syria. They had quite a severe series a thunderstorms go through. Production in Syria in the mature state that it's at depends a lot on high-volume electric submersible pumps, so we lost a number of those high producing wells for a period of time. So to some extent, it was temporary outages, but we're also seeing that the development drilling program that's been ongoing there for some period of time with infills and stepouts has been less successful than it has in the past. The success rates in that program are down to about 60 percent. So, we've -- in conjunction with Shell, who is the operator there -- undertaken a fairly major study early this year to better understand some of the more recent performance issues and what we can do about the infill drilling aspect of it.

What will help us a bit is the agreement that I referenced for being able to access deeper and lateral zones within the concession boundaries that we currently have for those pools. So, that will give us a broader range of drilling opportunities that we can slot into our program for the latter part of this year and into next year.

Would you expect to see sort of volume responses from that deeper and lateral program (indiscernible) into the first half, second half next year?

We will probably start drilling some of those opportunities later this year, so the way I would expect that to impact is in arresting some of the decline that we're currently seeing in Syria. Until we actually finish the study and see how all of these opportunities fit in, it's difficult to say what the absolute number might be.

Would the higher capital spending that's been forecast for international -- would some of that be for Syria? What would be -- I think it's all in about $140 million. Can you give us an idea where that money is going?

I think -- do we have it split out, Gordon, in that table?

I think the single factor, Tom, is the acquisition of assets that we made in the UK North Sea when we announced that at the end of the last quarter. We bought assets from (indiscernible) and Shell and that's the biggest single chunk of the increase.

There's not much difference in either Libya or Syria because they tend to be programs that are put in place at the beginning of the year and committed to by the partners.

Good. I think your corporate spending is up about $75 million. Is that for a specific project?

Tom, that actually relates to the capitalizing of costs associated with the U.S. 600 million bond issue. Included in those -- and it's primarily related to out-of-the-money positions on some an interest rate hedges that we put in place as we were getting close to doing the offering. Those costs are capitalized and then will be amortized in over the life of the debt. So if you look at Note 8 in the quarterly financial statements, we talk about the rate that the -- when we take these hedges into account versus the actual coupon rates.

Thank you.

Andrew Fairbanks with Merrill Lynch.

Good afternoon, guys. In looking at your International growth strategy, I wonder if you could provide a little bit more color on where the long-term exploration areas you're interested in going into are. I mean, we thought were with a very strong team (indiscernible) potential bidding in Kuwait. Do you have any more clarity on exactly what general regions or countries, ect., will be the areas you want to play in as yet, or is it still under study?

It's premature, Andrew, to suggest that. What we've done, as I indicated, is strengthened that team internationally, provided them with a mandate and some guidance in terms of where we might be interested, but for the most part, we are expecting them to come forward with the opportunities suite. It's the type of thing we would be looking at initially in our business plan this year, although I don't expect we will see too much specific in that one.

But I must say that there are some opportunities that we are pursuing within the countries that we're currently operating. For example, there's an exploration round coming up in Trinidad that we are interested in. We are looking at some blocks in Libya. So, this will probably just unfold over time without some sort of a big starburst that says, here's where we're going to be and here's where we are at. It's a function of how quickly our team can start to develop and pull together some of these opportunities for us.

That's great. Do you also have any initial read on the future of the integrated Meadow Creek project? Have you had enough time to at least generate any additional clarity on the prospects there?

We are in some fairly intense studies at this point, along with some selected number of the engineering people that we're working on the original, larger-scale integrated project for us. At this stage, we're sort of gradually eliminating some possibilities, which we started out with about -- I don't know -- seven or eight different combinations of technology and location and scope and size -- but really haven't narrowed it down to the point where we can be very definitive at this point.

Thank you.

John Mosley (ph) with Raymond James Limited.

Good afternoon. A couple of questions on the Oil Sands, maybe just to follow up on the previous question. How big a difference does that assurance -- if you want to call it that -- that the federal government put out last week on Kyoto and the promises that they made for long-term projects -- does that make much of a difference for your refinery conversion?

Well, it's very important to us, John, in the sense that -- as you've seen from our own plans and revisions of our plans and some of the comments that others have made that these projects are not walk away, barn-burner economics. A lot of these are fairly marginal; they have to be very carefully designed and very carefully engineered and very carefully executed. So, when you're in that situation, you certainly can't afford to have some extraneous exposure hanging over your head that might be related to the Kyoto Accord, for example, which was up, from our perspective without the kind of assurances we got, pretty much an open-ended liability. So what this provides us is the certainty that we were looking for that once we lock into a project, at least for the payout period and up to ten years, for example, we have -- basically a fixed commitment in terms of our greenhouse gas obligations for that particular project. That's the essence of what was provided; there's some other assurances to go around that, but that's probably the most important aspect of what was provided.

Okay, great. The other question on the Oil Sands side -- just MacKay River -- were you getting to the point where you had a good feel for what your steam-oil ratio was going to be and your non-gas operating costs as well?

Yes. As I indicated in my remarks, the early performance there, John, was actually quite good. I mean, we were pleased. We got up to 15, 16,000 barrels a day and it was essentially right on track with the projection that we had made for planning purposes in our budget for this year before we encountered that unfortunate incident with the steam generators. So, in terms of reservoir performance -- and I would include in that the steam/oil ratio -- although it's still early days because we haven't reached full production, the performance of both the steam and reservoir we are really quite pleased with.

Thank you.

(OPERATOR GIVES CALLER INSTRUCTIONS). Mark Gillman (ph) with first Albany Corp.

Ron, good afternoon. I've got a couple of things. Where do you stand on the Flemish Pass in the wake of the drilling experience?

We're still evaluating the results of those two wells, Mark. The first one, Mezzen (ph), you may recall, did encounter reservoir and some gas, which was encouraging. The second one, Tuckamore, was basically a dry hole, which was pretty disappointing. So we're still trying to integrate those results into our overall picture in that basin to decide where we might go from here. We do have a couple of other prospects, but it's unlikely that we would undertake any activity up out there earlier than 2005, and even that would be quite speculative.

Okay. Back to the integrated Edmonton/Meadow Creek, I'm sure you noticed with interest what Exxon-Imperial now appear to be proposing. I wonder whether there's anything there that might be applicable/transferable to what you're looking at.

Well, from what I understand -- and it was pretty short on specifics -- the information that I saw, anyway, Mark -- they are looking at a concept not dissimilar to the one that we had on the table originally. So, I'm not sure that there's a lot for us to learn from that. I suspect that we may be a little father down the path of understanding what all that implies, having taken our project as far as we did. I'm not sure if I'm getting at your question or not, but --.

To a degree, yes. In terms of the alternatives that you've looked at, hydrogenation -- is that one that's on the list of being ruled out, or still being evaluated?

There's still one configuration of adding hydrogen that is still on the list, but I have to say that the coking alternative, if you're talking about technology selection, looks to be more attractive from our point of view from what we see so far, and it's mainly capital cost-related.

Okay. Trinidad -- with respect to Train 4, do you believe you need participation within that Train to secure options in terms of additional resource and field development?

The arrangement we have in Trinidad allows us to operate independently of not owning anything in the LNG facility, so we are quite free to basically go ahead on the Upstream of that. If you're thinking about participation in the expiration venture, for example, we don't have any real issues with proceeding on that basis that we would ultimately be able to get access to subsequent LNG capacity if we were successful. Is that what you're getting at there, Mark?

Well, I'm trying to understand what the limitation on growth potential is, Ron. Is it resource? Is it access to LNG capacity? Some of both?

At this stage, I'd have to say it's resource. It's interesting how quickly these LNG Trains have been committed to and are coming along. Train 1 only started up, I think, a couple of years ago. I just started up Train 3 and made a commitment to Train 4, so the LNG facility is only a limitation in terms of how long does it take to build a train and what sort of leadtime do you require. It's more on the resource end at this stage and again, this is -- from our point of view -- a very underexplored basin. There's a large, undiscovered potential in Trinidad that is of great interest to us, primarily because of its location.

Just one final one for Harry. I'm curious why, Harry, you didn't choose to fix either all or at least a greater portion of the short-term floating debt. The interest rate environment is pretty low these days.

I would certainly agree with that. Well we've always said that we would take sort of an even-based approach to this, Mark. When we do have that 500 million left -- and as I mentioned earlier, there may be some other calls for cash. So if we're looking at refinancing that second piece, we will do it once we've identified what the full amount is. Right now, that short-term debt, of course, is carrying a very low rate of interest by itself, and so the bulk of our portfolio is fixed and we have a small floating portion; that seems to be just the right balance in the current interest rate environment.

Thank you.

Robert Plexman with CIBC World Markets.

The swap with Shell in the North Sea -- it wasn't a big transaction but it looked like a smart transaction for the Company. Are there any other bargaining chips in the UK portfolio that you can use? A related question -- with the fallow (ph) discoveries included on block 21, are the anywhere near infrastructure? Any plans to develop those reserves?

The other fallow (ph), other than Grebe, which was something in the order of a 15 million barrel undeveloped field, was the cornerstone of that swap. The other fields are quite small but they are within reasonable reach of the Triton FBSO or the other subsea developments that we have in that area, so we will certainly be looking at those. There is a couple of more that are in that area that are a bit smaller as well that are owned by other operators, undeveloped, that we will also be taking a look at. So, you know, this strategy has a bit of leg left to it that we will keep chasing.

Also, a second question here -- you mentioned that you're looking into converting to Oakville refinery into a terminal. I know the NEB was conducting a hearing on the reversal of the pipeline, which I guess is a prerequisite for that event. Where does the regulatory process stand right now with that?

The hearings were held in early June, I think the second week of June. We expect that they will be issuing their decision here shortly. I'm hoping some time in the month of August, but one never knows in the summer months; it may take a little longer. That's certainly a very key element in our decision-making process of how does this strategy really unfold for us, so that's the key piece that we're waiting for at this point.

Thank you.

Terry Peters (ph) with Cannacord Capital Corporation.

I'm not sure if you addressed this in your opening remarks, but I'm just -- would wonder if you would comment on the status your (indiscernible) Oil Sands project? In particular, are the issues you're trying to resolve at MacKay River -- do they have any impact on your desire or timing to proceed, or are you really just focused on cost, scale and technology as far as the Oil Sands project? In other words, they are not connected, are they?

No, they are not connected at all. The incident that we had at MacKay River is certainly fixable from our point of view really doesn't impact our thinking at all from a long-term strategy perspective. The issues that we're dealing with in the bigger strategy are the ones that we've referenced in our first quarter conference call, which have to do with capital costs. The choices that we're looking at are technology, location, scale, scope -- that sort of thing -- which, when you apply that to a strategy of the magnitude we're talking about, you can imagine it gives you quite a few permutations and combinations. That's what we're trying to sort through at this stage.

Do you have a timeline on that? I know you indicated towards the end of the year, but is there a timeline that's dictated more by meeting fuel requirements and being actually able to execute that project, or is that not going to be a constraint?

No, the timeline is basically our own. I indicated towards the end of the year as the time that we expect that we would be able expect to kind of narrow down the options and perhaps be able to describe a little more what it is we're aiming at. Again, I'm not sure how specific we will be able to be at that point in time, but we will certainly have eliminated a number of options that are currently being looked at.

That's it for me. Thanks.

Paul Cheng with Lehman Brothers.

Ron, several quick questions -- do you have a production outlook for 2004?

Paul, we generally put that out along with our fourth-quarter conference call, which we have towards the end of January. (indiscernible due to multiple speakers). The reason for that is that we -- basically, we need to go through our own internal planning process and see what the outlook looks like, obviously, before we are in a position to disclose anything.

For the International exploration, you're saying that this is (indiscernible) '04 strategy there. Do you feel (indiscernible) have the whole team (indiscernible) you may still need to have some additional (indiscernible) from the outside (indiscernible)?

We have been building the organization since the acquisition, Paul. Nick Mayden (ph) was actually part of the Veba organization at that time, but underneath Nick we have been adding through a hiring program, particularly in the G&F side, but also on the engineering side, to strengthen our technical ability in London. So, we've kind of been anticipating this and we probably still need to do a little more beefing up of the organization, but we're in pretty good shape to do what we want to do.

Can you tell us then -- I mean, how big is the team now?

We've got about a dozen G&G folks working this in London, but the other thing that we're doing -- and you have to appreciate that we have certainly wound down some of our activity on the East Coast with the lack of success there, -- so we have some people that are coming available from that program that are located either in St. John's or in Calgary that will form part of our international team, not necessarily locating in London but at least working as part of that organization. So, it could be about twice that size by the time you piece it all together.

I see. Also, do you have -- have you guys been able to establish any contact with (indiscernible) related to (indiscernible) or that is still sort of up in the air?

We have. We have reconnected with Betavesa (ph) on this whole question of the process to resolve the right of first refusal on Cerra Negro (ph), so we've at least got communication links down there and are starting to make some progress, albeit quite slow up to this point.

So we should not expect anything would be designed until maybe next year at the earliest?

It's pretty hard to say.

Also, maybe this is for Harry. Harry, do you have a rate of return for the rebranding program in retail? I mean, you've been doing this for a while now, so do you have any benchmark or any number you can share with us?

The target that we have there is a 15 percent return, sort of mid-teens to return. Essentially, we do a look-back every year on the kind of success we have against that benchmark. We tend to look at the site's performance about two years after they've actually started up, because it does take a little time for them to sort of break in and mature. Essentially, we are on track with that, so these are pretty good return projects for us.

Those that have been more than two years that you feel like (indiscernible) they've been on track?

No.

Two final questions -- one, I don't know (indiscernible) -- I joined in a little bit late so tell me if you already said that -- the outage that you have seen in the second quarter for the Downstream operation -- what is the actual repair costs associated with those outages? What will be your estimated loss of the opportunity profits?

The repair cost was not that significant, Paul. In the case of Montreal, it was a longer shutdown than we had anticipated, so it was slower coming back up. In the case of Hopeville (ph), it was some fouling that occurred in one of our distillation towers that caused us to take one portion of one train down for a short period of time. It's more the opportunity cost of not having that production on time, and the number that you could use is -- for every one percent that we suffer in reliability, we figure that between costs and opportunity loss, business represents about $2.5 million on the bottom line. So when you heard me talk about reliability as a very important success factor in our business, primarily our Downstream but all of our business is really, and it's because of that kind of leverage that we can get in just having our facilities onstream longer, or at least according to plan and up to our own expectations.

This last on is simple for Gordon. Gordon, do you have the fully diluted share count?

Yes. It's 267.4 million shares.

Thank you.

There are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Well, thank you, everyone, for taking the time to join us today. We appreciate your input and interests and we wish you the very best. Good bye for now.

Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation and ask that you please disconnect your lines. (CONFERENCE CALL CONCLUDED)