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Executives

John M. Rogers – Vice President-Investor Relations and External Communications

William J. McCaffrey – Chairman, President and Chief Executive Officer

Don Moe – Vice President-Supply and Marketing

Analysts

Mark J. Friesen – RBC Capital Markets LLC

David C. McColl – Morningstar Research

Menno Hulshof – TD Securities

Chris Feltin – Macquarie Capital Markets Canada Ltd.

Phil Skolnick – Canaccord Genuity, Inc

Barbara A. Betanski – Addenda Capital, Inc.

MEG Energy Corp. (OTCPK:MEGEF) Q4 2013 Earnings Conference Call February 6, 2014 9:30 AM ET

Operator

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy Corp. Fourth Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After presenter’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. John Rogers, you may begin your conference.

John M. Rogers

Great, thank you, Rob and welcome everybody on the line to MEG’s fourth quarter conference call. With us of course on the room today we have our CEO, Bill McCaffrey, our CFO, Eric Toews, Don Moe our VP of Supply and Marketing and Jen Briggs who is with us from Investor Relations.

I do have to remind you today, that we will be discussing some forward-looking information. So please refer to our quarterly results and our documents on CEDAR and our website for cautionary assumptions around these forward-looking statements. I am glad to get that out of the way.

Of course having said that we are very excited about what it is we are seeing going forward in 2014 and beyond, so I think you’ll see a lot of these kind of statements. So with that Bill, I’ll turn it over to you for your comments on the quarter.

William J. McCaffrey

Well, thanks John and welcome everyone. Going into 2013 a little bit more than a year ago, we described it as a transformational year and I believe that turned out to be just that. We targeted a 20% increase in annual production with the continuing improvement in already low non-energy operating costs. We committed to completion and start-up of Christina Lake’s Phase 2B which would more than double our production capacity. And we said we would complete our 900,000 barrels Stonefell Terminal, the hub of our hub and spoke marketing strategy. And I am pleased to report that we reached or exceeded all of these goals.

Full-year production averaged 35,300 barrels a day in that 23% increase over 2012 level of above 29,000 barrels a day. And just above the high end of our annual guidance. That performance was also supported by very strong fourth quarter production of more than 42,000 barrels a day. These are record numbers for MEG on both accounts and support our near-term goal of reaching 80,000 barrels a day by 2015. Record production levels were driven by the ongoing implementation of our RISER initiative and the successful completion and start-up of Phase 2B in the fourth quarter.

Now come back to both of these key points when we look forward to 2014, but the impact of 2013 is clear in our exit production rate of 48,500 barrels a day for December. That’s above 13% above the top end of our 2013 targeted exit rate and is a strong indication that the company has begun in the next major production ramp up phase of its development. You also see from our results that the overall steam-oil ratio was 2.9 for the fourth quarter of 2013. That’s a temporary increase resulting from the higher steam to oil ratios that are typically associated with the ramp up of a new phase.

What’s interesting is by December the monthly average had decreased to 2.6%, we expect that downward trends to continue over time. With the higher production related non-energy cost for the full-year were $9 right at the low end of our guidance of $9 to $11.

Full-year net operating costs came in at about $10 a barrel with the benefit of power sales from our Cogen operations recovering about 80% of energy costs. These results maintain MEGs position as a low operating cost producer. Together record high production rates and record low operating costs contributed to cash flows from operations of $250 million for the year, although 20% above 2012 levels despite the volatility in differentials that we are seeing throughout the year.

I believe that our success in 2013 has set the stage for another year of record performance in 2014. This year we are targeting an 80% increase in annual production from our 2013 average volumes with a 10% increase in our per barrel non-energy operating costs from our 2013 target. At the same time further investments to nearly triple our production from 2013 levels by 2017 and we’ll build on our hub and spoke marketing strategy as we take greater control over the value chain for each and every barrel we produce with the goal of maximizing our netbacks.

In summary, after several years of putting the operational and strategic pieces in place, MEG is now well positioned to continue its strong performance over the near, medium and longer term. I’ll now take a moment to talk about the first part of these plans before turning it over to Don Moe for some color on our marketing strategy. To recap, in 2013, we continued our focus on demonstrating the benefits of the RISER initiative, by expanding the program throughout the Phase 1 and 2 areas at Christina Lake.

At the plant we debottleneck the processing equipment to allow for a throughput capacity of 35,000 to 40,000 barrels a day. And this work was completed in September with the last modifications to the water treating systems. For the field, we expanded our eMSAGP technology to demonstrate its commercial feasibility following the success of our pilot and are currently producing between 35,000 and 40,000 barrels a day from Phase 1 and 2 wells at a Steam-oil ratio of about 2.

To put that into perspective at 40,000 barrels a day, production levels are 60% above the initial design of the combined phases. Now overall we are very proud to say that we’ve achieved our goals of 2013. And with some elements of RISER already pre-built into Phase 2B, we are now advancing the next components of RISER 2B program. This is one of the key focuses of our 2014, capital investment. RISER 2B represents the refinement of our long-term gross strategy with the focus now being on relatively low cost brownfield expansions of existing assets and that’s going to be ahead of our new Greenfield expansion phases. And the reason for this is simple. We see a compelling economic case for this approach, based on what we have achieved thus far by investing in RISER 2B in the RISER 2B project. We are anticipating production growth similar to what we would expect from a Greenfield expansion, but add about two-thirds to capital cost. In addition, we expect a faster path to cash flows from our investment, which supports future growth and reduces our need for external capital.

Now although plant modifications were key part of the initial RISER initiative. This isn’t a typical debottlenecking exercise. RISER 2B is effectively a phase within a phase with production from 2B ultimately anticipated to reach 75,000 to 85,000 barrels a day and that’s nearly a 130% over Phase 2B design capacity. And as we execute on RISER 2B, we anticipate that the combined plant capacity of Phase 1, 2 and 2B will ultimately reach a 115,000 to 125,000 barrels a day by 2017, and this represents a compounded annual growth rate of about 45% over the next few years. And as is normally the case with any major expansion, we will continue to evaluate the scope of the project to ensure that we optimize the economics and operational efficiencies as we go.

Our growth plans in the upstream part of our business are pretty exciting for all of us at MEG, but as I mentioned earlier our strategy also includes driving to get to the highest value, get the highest value added every barrel that we produce, which is also an important part of our plans to significantly grow our cash flows.

I’ll now turn it over to Don to talk about some of the highlights of our marketing strategy.

Don Moe

Thank you, Bill. As you know we have seen a lot of volatility on Western Canadian heavy oil prices over the last 18 months with particularly wide differentials in the fourth quarter of 2013. A major goal of our marketing strategy is to bypass pipeline and market congestion that causes those price swings. So that we can maximize our netbacks and reduce the volatility of our cash flows.

So let me look first at some broad market fundamentals. In the short-term we’ve seen some positive movements with the recent start-up of TransCanadas Gulf Coast pipeline and an increased appetite or heavy oil in the U.S. Mid West, as a result of the start-up of the new cokers at BP Whiting refinery and the returns to full operations of the Citgo Lemont refinery following an unplanned outage late last year.

These and other factors are helping to drive the narrowing of differentials in the first quarter of 2014. And there are other positive signs on the horizon, including the planned mid-year start-up of the Flanagan/Seaway pipeline to the U.S. Gulf Coast on which MEG has secured long-term capacity. While these developments are all pointing in a positive direction, we are continuing our efforts to strengthen MEGs direct control over the value chain.

Central to these efforts is our proprietary Stonefell Terminal which became operational in Q4 of last year. The Stonefell Terminal is directly tied to Christina Lake by MEGs Access Pipeline providing a launch point for blended product shipments, as well as a gathering point for diluent supplies all at a relatively low transportation cost. The Stonefell Terminal was build to capacity of its first month of operations as the industry became subject to unscheduled pipeline apportionment. If this had happened in the past we would have had to curtail production or sell these barrels at a lower price. With the terminal operations MEG have the ability to avoid distress sales and to begin to redirect these volumes to higher price markets at a later date.

During the quarter approximately 6,300 barrels of production remained unsold. The majority of this volume was placed in storage for later sale with the balance used as line fill or capitalized in association with the commissioning of Phase 2B. I am also pleased to report that the Stonefell Terminal was tied in to the Canexus, the unit-train loading facility at Bruderheim in the fourth quarter which along with the Access Pipeline completes the first direct well-head unit-train connection by pipeline in Canada.

This combination provides us with a number of distinct benefits, avoids trucking costs to the rail terminal, provides low cost transportation and efficient access to existing and new market opportunities as they arise, bypasses pipeline congestion provides relief from unscheduled downstream outages, mitigates downside price volatility and avoid shutting their production. In December, we loaded and shipped the first unit-train of MEGs product might have since continued to increase our rail shipped volumes. We anticipate that with this new market connection will offer us valuable pricing protection as operations and sales ramp up through 2014 and beyond.

The other components of our marketing strategy, we recently announced plans to construct the diluent removal facility to be located near the Stonefell Terminal. As the name implies the facility will remove diluent from bitumen blends that will then be shipped by rail, which I will call rail bit. The diluent will be recycled back to Christina Lake on our Access Pipeline, and the rail bit will be transported by unit-train to refining markets throughout North America. With lower input costs resulting from diluent requirements and an effective increase in rail shipping capacity, our rail transportation costs are expected to be reduced by about one-third on the rail bit sales.

Collectively these marketing spokes with choices on how we move our production on new pipelines like Flanagan/Seaway on unit-train through the Canexus rail facility or for option to use barges on the U.S. Inland Waterway system are all part of applying MEG’s strategy, we are achieving world pricing for its sales. And now we are somewhere close to the price of mine crudes, minus directly managed transportation costs. This is a strategy that we planned to continue to build on in 2014.

William J. McCaffrey

Thanks Don. To tie Don comments back to my early remarks, I would underline that our marketing strategy is a key point of our long-term plans. We are looking at a full value chain that includes a constant focus on higher production volumes, produced at the lowest cost and sold at the highest prices; this is a combination that we believe will maximize netbacks and enhance cash flows. As I said earlier 2013 was a transformational year, where major milestones were accomplished that positioned us to advance our growth strategies.

And in 2014, we are looking forward to realizing the value from this work and we’ll continue to build on the strong foundation we put in place. And by the time of our Q4 call, next year, we anticipate being at more than twice our 2013 average production. And it’s important to note that we’ve already made the capital investment to reach that goal. New capital investments in 2014 we will focus on our medium-term plans to more than triple 2013 production levels by 2017. Developing our longer-term gross strategies post RISER 2B and advancing various strategies to get the best market value for every barrel.

I think it will be a very exciting year, and I look forward to updating you on our progress over the course of 2014. And on that note, John I think we can open the lines up for questions.

John M. Rogers

Great. Thanks Bill and Don for your comments on the quarter. Rob, we will open the lines for Q&A right now. I would like to remind people that Jen and I will be available after the call to handle any of your detailed modeling questions. So during the conference call if we could keep the Q&A to high level strategic, I think everybody would appreciate that. So Rob, why don’t we open up the lines for questions?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Mark Friesen from RBC Capital Markets. Your line is open.

Mark J. Friesen – RBC Capital Markets LLC

Thanks, good morning everyone.

William J. McCaffrey

Good morning, Mark.

Mark J. Friesen – RBC Capital Markets LLC

So to drill in a little bit on 2B first if I could, I was wondering if you could be a little bit more specific in terms of how the project is currently operating maybe you mentioned, the December average rates through January or even that our current production rates from Phase 2B?

William J. McCaffrey

Sure, thanks, Mark. Yes, December was – we really started producing production from 2B, were early actually that was in November. And then by December I think we averaged somewhere around 9 to 9,000 barrels plus, maybe closer to 10. That continues to ramp up in January.

And so we are very excited by the phase of the ramp up for Phase 2B right now. I guess the other thing we are really excited about is the reliability of the plant. What we are tending to do right now is share the production volume between Phase 1 and 2 and 2B other words we have put interconnections between those plants which will allow for greater reliability down the road, but it also allows us to test that plant at much higher rates than the new Phase 2B wells we are currently at. And we are seeing nothing, but excitement as we look at what goes through that plant right now, we have put large, large volumes through that plant approaching the initial design and we are seeing and operate very reliably.

Mark Friesen – RBC Capital Markets

And what about current rates now, from Phase 2B?

William J. McCaffrey

Well, current rates are I’m not sure with January because we haven’t really finalized the market and the numbers yet on Phase 2B. I can tell you the total for January that’s what’s you are interested in.

Mark Friesen – RBC Capital Markets

Sure, I can divide it, yes.

William J. McCaffrey

Okay, in January we finished, January average is above 55,000 barrels a day.

Mark Friesen – RBC Capital Markets

Okay.

William J. McCaffrey

So that’s pretty exciting and it’s really a combination of two things, it’s the strength of RISER which continues to deliver exceptionally well. And it’s also the strong ramp up of Phase 2B. I want to caution when I throw that number around because our ramp up won’t continue at that accelerated pace that we are seeing which is obviously well ahead of schedule. As we tend to go through waves and start-up of wells as we steam different wells. So we will have periods where it doesn’t ramp up as extreme, but we do believe we are very much on track.

Mark Friesen – RBC Capital Markets

So by that comment I take it there's still more wells to be converted to production?

William J. McCaffrey

Yes, that’s correct.

Mark Friesen – RBC Capital Markets

Okay, and when do you get a declared commerciality on Phase 2B?

William J. McCaffrey

Well, we were thinking if everything went well would be at the end of 2014 with the strong performance, we actually did declare it for December. So we were ahead of schedule on that and I think that’s pretty fast considering first oil in November, but because we are able to see what that plant is capable of that higher volumes and because of the strong performance of the Phase 2B wells we have done that for December.

Mark Friesen – RBC Capital Markets

Okay, is that inline with the performance you saw in 2A or is that little bit quicker?

William J. McCaffrey

I think it’s quicker. Part of the strength of this Phase we’ve got a Phase, we’ve got the production of Phase 1 and 2 and the link that I am talking about and that’s allowing us to accelerate and on the testing and movement of crudes through this area and to worked out any early stage issues that you might have through the plant. So right at this stage, we do see little things, but nothing that troubles us right now.

Mark Friesen – RBC Capital Markets

Okay. Changing gears just a little bit. Obviously, natural gas pricing has been up and we saw that reflected through your energy costs. But at the same time, your power sales revenue decreased during the quarter. I thought there was more of a direct correlation or a natural hedge between the two. Can you talk about why that disconnected?

William J. McCaffrey

I think you’ll see all these variations and numbers in terms of any given amount of time there. Yes, we took the first five days of February, where gas prices have been quite high. If we looked at what we are covering in those five days and it’s a micro look at it, you would see that we are roughly around 75% to 80% coverage of our gas costs at these extreme prices by the cost of the power. So right now it is covering it very well, but you’ll see variations in it. But I think it points to a really good part of our strategy as we have put the co-gen in with the purpose of creating natural hedges, and I got to say I’m pleased with how they are working out.

Mark J. Friesen – RBC Capital Markets LLC

Okay. I know we’re going to get a more detailed reserve report in a little while, but looking at the 2B reserve additions, was that largely driven by the infill on the non-condensable gas co-injection program?

William J. McCaffrey

Yes.

Mark J. Friesen – RBC Capital Markets LLC

And have you received the regulatory approval for rolling out RISER over the rest of Phase 2A and over 2B?

William J. McCaffrey

Yes, we got it for 2A if you want to call that and then on 2B we’ve got all the in-fill approvals and I don’t think we’ve got the approval for the non-condensable gas. But that’s early on in the process still so we’re not really, I don’t even not be replied for it yet.

Mark J. Friesen – RBC Capital Markets LLC

Okay. So we could see similar reserve additions in future years?

William J. McCaffrey

Yes, our reserve reports are independent. So I don’t want to ever predict what our independent reserve reports will come out at, but I mean everything points in that direction.

Mark J. Friesen – RBC Capital Markets LLC

Okay. And just final question for Don, it looks like there might be tentative agreement in place, but what would the possible impact of a CN Rail strike to your marketing strategy?

Don Moe

Yes, Mike right now we’re not very reliant on either one of the – or completely reliant on either one of the rail systems. So the locations that we have, we can access both CP and CN Rail. Obviously we can’t have them both on the strike at the same time, but with either one of them on strike that we can move around that fairly easily.

Mark J. Friesen – RBC Capital Markets LLC

Great, okay. Thanks, very much gentlemen.

William J. McCaffrey

Thanks, Mark.

Don Moe

Thanks, Mark.

Operator

Your next question comes from the line of David McColl from Morningstar. Your line is open.

David C. McColl – Morningstar Research

Yes, good morning everyone, thanks for taking the questions here. I guess, you commented on past on contracted volumes you’re sending through pipeline such as or you could send through Flanigan. I’m wondering if you’re sending anything right now through the Gulf Coast pipeline and/or if you have any contracted volumes on that?

William J. McCaffrey

Typically, we don’t announce which lines or what the actual amounts are on that, but Flanigan is a ramp up volume and I think it’s fair to say that we vary that, right now we aren’t sending anything through the Gulf Coast pipeline, but that doesn’t mean we can’t in the future?

David C. McColl – Morningstar Research

Okay. Just kind of shifting slightly here. I’m wanting to talk a little bit more about the rail bit. Specifically I guess I'm looking for a clarification. Are you shipping primarily diluted crude by rail in terms of the rail bit, are you removing some of the diluent around Stonefell or the Canexus area?

William J. McCaffrey

Yes, right now we are – the pipeline connected with our Access Pipeline and we would send dilbit right through it, so we aren’t to be moving at this current time. However, that is a project for 2014 and into 2015, the construction of the diluent removal system. So we will be directing and removing diluent, if you want and recirculating it back to our Christina Lake site once that facility is complete. And that speaks to part of our strategy actually, we are targeting going to world prices at last transportation cost. And so these are all part of getting your transportation cost down and keeping your options open in the choice of methods you use.

David C. McColl – Morningstar Research

Obviously, kind of leading ahead on that a little bit. With the diluent removal system - just two other things here and then I'll jump off the line - what's the cost of bringing that online? And what percentage of diluent would be removed?

William J. McCaffrey

We haven't, we’re just doing the early stages of the engineering on it right now, but the thought is all the diluents or the lion share of the diluent, there maybe trace amounts in there, but the majority, vast majority of that diluent will be removed.

David C. McColl – Morningstar Research

Okay. Great, thanks.

William J. McCaffrey

Yep.

Don Moe

Thanks. David.

Operator

Your next question comes from the line of Menno Hulshof of TD Securities. Your line is open.

Menno Hulshof – TD Securities

Thanks and good morning. I'll just start on the rail front. So, can you specify how many unit-trains were shipped out in January? And then what your plans look like for February? And then maybe more generally, how things are going relative to expectation?

William J. McCaffrey

Sure, well in December as we say Canexus Terminal just got up and running, so we did send the first unit-train at that time. And in January we did send six more unit-trains. And then we're just going to continue to move forward each month. And we may send that much or more in future months. We have the flexibility to do more. And it all depends on where we feel that most optimum markets are at the time, but I should say that market, our connection is now fully made on that and we are operational in those areas, that's very exciting for us.

Menno Hulshof – TD Securities

Okay, And then on the barging front, I noticed there was no mention of barging in the press release. Can we assume that you're subleasing barges right now, given tighter differentials?

William J. McCaffrey

Yes, we do use those barges, their workforces for the Mississippi, so sometimes we will use them for our crude, sometimes we’ll use other peoples, send other peoples crudes on them and they are valuable for us. And we’ll continue to use it as a very viable active part of our hub and spoke marketing strategy.

Menno Hulshof – TD Securities

Okay. And then lastly, I noticed the diluent costs for the quarter were quite high. So, maybe you could just, any color on that front. And then did you build your diluent inventories during the quarter?

William J. McCaffrey

We did build a little bit of diluent in that quarter and there is some variations associated with that too, we do have access to the Gulf Coast diluent, so we are well positioned in the longer term on that actually in the current term on that.

Menno Hulshof – TD Securities

So you are back-hauling as we speak, then?

William J. McCaffrey

We do bring it in by rail, but we are also pipeline connected.

Menno Hulshof – TD Securities

Okay, perfect, thank you.

William J. McCaffrey

Thank you.

Don Moe

Thank you, Menno.

Operator

Your next question comes from the line of Chris Feltin from Macquarie. Your line is open.

Chris Feltin – Macquarie Capital Markets Canada Ltd

Hey, guys actually Menno, pretty much hit the questions. I just wanted to double check that you are, in fact, potentially backhauling that cheaper cost diluent from the Gulf Coast? But it sounds like the answer to that is yes, correct?

William J. McCaffrey

We are actually bringing condensate in by rail, we don't call it backhauling because we are not, we do have separate cars to bring the rail in, so backhauling you typically would take crude down and then you would clean out those railcars. And then you would bring it back. We have our own cars to bring it up at this stage, because we’ve only shipped in December one unit-train and we’re just getting the process going right now, we’ve been focused on moving the blend down versus cleaning them out and bringing them back that way, we’ve been bringing them even bringing them back by rail, though separate from what we’re doing with the unit-trains thus far.

Chris Feltin – Macquarie Capital Markets Canada Ltd

Okay. And do you see that ramping up over the course of the year, I guess just the quick follow-on question I have, in terms of the condensate you're bringing up from the US?

Don Moe

Yes. I mean we get a lot of our condensate out of the U.S., and we continue to bring it up rail and we’ll continue to bring it up by pipe. We have excellent connections both locally and from the U.S. with respect to condensate. MEG has a strategy; we’ve talked about our hub and spoke strategy and how we’ll move our crudes to market. We have a similar strategy that gathers condensate from around North America, local and afar, that helps to gather in a very efficient manner and relay it back to the field.

Chris Feltin – Macquarie Capital Markets Canada Ltd

Okay. That was all I had. Thanks, guys.

William J. McCaffrey

Yes. Thanks Chris.

Don Moe

Thanks Chris.

Operator

(Operator Instructions) Your next question comes from the line of Phil Skolnick from Canaccord Genuity. Your line is open.

Phil Skolnick – Canaccord Genuity, Inc.

Yes, thanks good morning. Just one questions in terms of your rail. Do you have any West Coast access with rail? Or do you have any future plans to do that, just so that you can have a railway between the West Coast and Gulf Coast? Thanks.

William J. McCaffrey

Yeah. I think Phil, the way I would look at it is, because it is on a rail we could go everywhere. So we can go to the West Coast, we can go to the South, actually Gulf and go to the East. So that’s one of the huge advantages of rail. It allows you to go around congestion and send your crudes there, but it also allows you to draw your condensates from anywhere that rail can reach and it can reach the West Coast and Gulf and the East Coast.

Phil Skolnick – Canaccord Genuity, Inc.

Okay. And how quickly can you make a decision to do that?

William J. McCaffrey

We are doing…

Don Moe

Yes. We’re already drawing condensates and moving crudes in all directions.

Phil Skolnick – Canaccord Genuity, Inc.

Okay. Thanks.

William J. McCaffrey

And so the answer to your question is if you looked at it from a decision point, each month we make a decision on which direction to either send those barrels, if it’s our blend or gather the condensates. So we can turn that fairly quickly.

Phil Skolnick – Canaccord Genuity, Inc.

Okay. Great, thanks.

Don Moe

Thanks, Phil.

Operator

Your next question comes from the line of Barbara Betanski from Addenda Capital. Your line is open.

Barbara A. Betanski – Addenda Capital, Inc.

Hi, folks. Thanks very much. It's just a point of clarification on the unit-trains. I think you said it was six unit-trains in January. And I'm wondering how that translates as a percentage of your production, so your 55,000, I think you said, barrel a day, what percentage of your oil then would you be sending on the unit-trains?

William J. McCaffrey

Probably we’re look at Barbara is each train handles about 60,000 barrels, so 360,000 [ph], so if you took that over our production, that will give a flavor for what we’re doing at the present time.

Barbara A. Betanski – Addenda Capital, Inc.

Okay, that's great, thank you. And just as far as the amounts that got to the Gulf in January, what would you say is roughly the percentage going down to the Gulf versus your traditional markets? And I know it's going to depend on prices going forward, but do you have the possibility to increase that as you go through the year?

William J. McCaffrey

Because of the sensitivity on the marketing end, we won’t be very specific on that, but just let me say that we have the ability to send all of it to the Gulf Coast, if they want or we can send it in another directions. It’s really – what we chase is just the best deals. So if you think about it every month, we have discussions with refiners, they want to buy crude, they want to sell crude, and its where we think we can get the best price, and that’s where we point those trains.

Barbara A. Betanski – Addenda Capital, Inc.

Okay, thanks. I appreciate the clarification.

William J. McCaffrey

Yes, no problem.

Don Moe

Thanks, Barbara.

Operator

Your next question comes from the line of Chris Cox from Raymond James. Your line is open.

Chris Cox – Raymond James Ltd.

Hi, guys.

William J. McCaffrey

Hi.

Chris Cox – Raymond James Ltd.

Hi, most of my questions have actually already been answered. But Bill, I just had one question on Phase 3 action. Maybe I was hoping you could just provide some of your preliminary thoughts, in terms of how that expansion can be rescoped or where the timing of that is sitting right now?

William J. McCaffrey

Sure, No problem Chris, what we do right now is the brownfield on Phase 2B, we’re at the very earliest stages of that because we are really, we got two projects that we’re really focused on one is to ramp up to the 80,000 and then as we are doing that, we are beginning to scope out, what are the details of our brownfield’s expansion. And part of that will depend on production test that will do on the Phase 2B plant, once we have sufficient volumes to really test the limits of that plant.

Then what we are going to do is obviously move that forward, the brownfield’s are even though our new phases are very exciting for us the brownfield’s are better. And so obviously that’s our priority is to go that brownfield project. What we are going to do with Phase 3A as we’re going to incorporate the learning’s that we get from those production tests and continue to move that project along, but in a way that sits behind the brownfield project, because it does have a lot of focus and work for us to do over the next little while, but we’ll keep moving it along. But we don’t want to rush it too much until we get comfortable, what it ultimately could be and that’s all the function of the tests and everything that we do on our Phase 2B with that extra production.

Chris Cox – Raymond James Ltd.

Would it be safe to say, then, with the success of RISER, that Phase 3 will likely be rescoped smaller than kind of the original design plan?

William J. McCaffrey

I don’t know that would be smaller, it might have some ability to grow bigger, what we are looking at is how big can we go on a brownfield expansion, and what are the things you need to put in place to be able to step those out. So if you think of Greenfield, and let say Phase 2B for examples, then what we want to do, is to modifications along the way, afterwards that can continue to ramp up volumes beyond what we think it could all initially be capable of. And what we want to do with 3A is think that through or make sure that we have the 3A based case position to be able to do something very similar at the right time. And so it will clearly put 3A behind 2B brownfield expansion, but we think that’s appropriate because of the strength of the economics of the brownfield.

Chris Cox – Raymond James Ltd.

Okay. And then just last question. Could we maybe get some clarity, in terms of where this rescoping or redesign is going to be kind of presented to us on the market? Maybe end of the year with next year's budget or longer?

William J. McCaffrey

In terms of 2B, is that what you are referring?

Chris Cox – Raymond James Ltd.

No, in terms of Phase 3 and any rescoping there, will we have something a little more definitive kind of the end of the year, likely? Or are we pushing this back further?

William J. McCaffrey

I actually don’t know the answer to your question at this stage because we’ve got to do all the production tests and everything and see what we would modify in that area. And obviously, because we are driving future phases forward largely on cash flow and debt in that. We want to bring Phase 2B on get production and the cash flows associated with it get comfortable with that understand the expansion of 2B and what the actual implications on the capital are at that time and the production performance associated with it and all those are factors that will determine the actual timing of 3A. And right now, we think we can get the production that we would have got with 3A by doing brownfield on phase 2B it’s quite a bit less capital and faster to that cash flow associated with it. So, effectively we are coming, we’re moving forward the brownfield that is giving us the performance of the 3A at much cheaper cost.

Chris Cox – Raymond James

All right. Sounds great. Thanks guys.

William J. McCaffrey

Yes, thank you.

Operator

And we have no further questions at this time. I’ll turn the call back to our presenters.

John Rogers

Great, thanks Robin and once again thanks everyone for your interest in listening in to our fourth quarter conference call. Of course Jen and I will be available after the call for any of your detail questions so feel free to call us, going forward. So, other than that, everyone have a good day and we will talk to you soon.

Operator

Ladies and gentlemen thank you for your participation. This concludes today’s conference call. And you may now disconnect.

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