Imperial Oil Limited (IMO) CEO Brad Corson on Q2 2022 Results - Earnings Call Transcript

Jul. 29, 2022 2:51 PM ETImperial Oil Limited (IMO), IMO:CA
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Imperial Oil Limited (NYSE:IMO) Q2 2022 Earnings Conference Call July 29, 2022 11:00 AM ET

Company Participants

David Hughes - Vice President, Investor Relations

Brad Corson - Chairman, President and CEO

Dan Lyons - Senior Vice President, Finance and Administration

Simon Younger - Senior Vice President of the Upstream

Sherri Evers - Vice President of Commercial and Corporate Development

Jon Wetmore - Vice President of Downstream

Conference Call Participants

Dennis Fong - CIBC

Manav Gupta - Credit Suisse

Neil Mehta - Goldman Sachs

Patrick O'Rourke - ATB Capital

Greg Pardy - RBC Capital Markets

Operator

Good day, and thank you for standing by. Welcome to the Imperial Oil's Second Quarter 2022 Earnings Conference Call [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, David Hughes, Vice President, Investor Relations. Please go ahead.

David Hughes

Thank you, Michelle. Good morning, everybody. Welcome to our second quarter earnings conference call. I'm joined this morning by Imperial's senior management team, including Brad Corson, Chairman, President and CEO; and Dan Lyons, Senior Vice President, Finance and Administration; Simon Younger, Senior Vice President of the Upstream; Sherri Evers, Vice President of Commercial and Corporate Development; and Jon Wetmore, Vice President of the Downstream. Today's comments include reference to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in Attachment six of our most recent press release and are available on our Web site with a link to this conference call. Today's comments may also contain forward-looking information.

Any forward-looking information is not a guarantee of future performance and actual future performance and operating results can vary materially depending on a number of factors and assumptions. Forward-looking information and the risk factors and assumptions are described in further detail in our second quarter earnings release that we issued this morning as well as our most recent Form 10-K. All of these documents are available on SEDAR, EDGAR and on our Web site. So I would ask you to refer to those. Brad is going to start with some opening remarks and then hand it over to Dan, who's going to provide a financial update and then Brad will provide an operations update. Once that's done, we'll follow with the Q&A session. So with that, I'll turn it over to Brad for his opening remarks.

Brad Corson

Thanks, Dave. Well, good morning, everybody, and welcome to our second quarter earnings call. I hope you're all doing well. After a challenging start to 2022 with some significant weather impacts, I'm very pleased to say that our operations returned to normal in the second quarter, which underpinned the outstanding results that we reported earlier today. The high price environment continued through the quarter and the focus we put on reliability and strong operating performance allowed us to take advantage of this environment. I think it's also important to note that this performance comes when Canadians need it most, as global challenges have resulted in supply disruptions and subsequent price escalations. With our strong operational performance, we are doing everything we can to increase production and ensure a stable ongoing supply of the products that fuel our day-to-day lives. These economic conditions have so far continued into the third quarter. And with all of our major planned downtime for our operated assets behind us for the year, we remain well positioned to continue to maximize our production in a very tight environment.

Over the next few minutes, Dan and I will detail the results of what was a very strong quarter. So now let's review the second quarter results, and we have a lot of positive highlights to talk about. To start, earnings for the quarter were just over $2.4 billion and our cash from operating activities was almost $2.7 billion. These results continue to reflect the strong commodity fundamentals we are currently experiencing, as well as strong operating performance in the quarter. They are also reflected in the increased royalty and tax contributions that we make to the government and that go to support the communities in which we operate. We achieved total Upstream production of 413,000 barrels per day, which represents the highest second quarter production in over 30 years, and this includes the annual planned turnaround at Kearl, which was completed on time and on budget. With the first half of the year behind us, we are updating our annual production guidance for Kearl to reflect the challenging first quarter we experienced, which I will talk about in a minute. But as mentioned, our operations are back to normal after the planned turnaround work, and we look forward to a strong second half of the year.

Our Downstream continued to perform at a very high level with second quarter utilization of 96%, which notably is the fourth consecutive quarter of utilization above 90%. This is particularly important in the current tight product supply environment and demonstrates we are doing all we can to bring as much product supply as possible to the market. While we saw the last of the provincial pandemic related restrictions lifted in the second quarter, both motor gasoline and diesel demands have leveled off close to pre-pandemic levels. In addition, we are also seeing jet demands continue to strengthen as the public resumes traveling, which is very encouraging as jet demand has been lagging in its recovery up until now. With respect to delivering on our commitment of increasing shareholder returns, we successfully executed a substantial issuer bid, only the second in our company's history, returning $2.5 billion in cash to our shareholders. Including our quarterly dividend, we returned $2.7 billion in the quarter. And we recently announced the renewal of our normal course issuer bid at 5% with the expectation that we will accelerate the purchases and complete the NCIB by the end of October. And finally, this morning, we declared a dividend of $0.34 per share payable October 1st. All of this leaves us well positioned to return more cash to shareholders this year than we did in our record setting 2021.

Just before I pass things over to Dan to go through our financial performance for the quarter in more detail, I would also like to highlight the successful marketing efforts related to our XTO assets. Together with ExxonMobil Canada, we announced that we have entered into an agreement with Whitecap Resources for the proposed sale of these assets for a total cash consideration of $1.9 billion, which equates to $940 million Imperial's share. We are extremely pleased with this result and expect the sale to close before the end of the third quarter. We have talked a lot recently about focusing our efforts on optimizing our existing core assets and feel we still have plenty of opportunity there. This divestment is consistent with this strategy and continues to support our commitment to maximize shareholder value.

And with that, I'll pass things over to Dan.

Dan Lyons

Thanks, Brad. Getting into the financial results for the second quarter, our net income of $2.409 billion was up just over $2 billion from the second quarter of 2021, primarily driven by improved prices in the Upstream and higher margins in the Downstream, partially offset by higher operating expenses driven by higher energy costs. Now if we look sequentially, our second quarter net income of $2.409 billion is up about $1.2 billion from the first quarter, supported by continued strong market conditions throughout the quarter. Looking at each business line. The Upstream, which recorded net income of $1.346 billion is up about $560 million from the first quarter's net income of $782 million, driven by higher realizations and higher volumes as Kearl recovered from the cold weather impacts in the first quarter, partially offset by higher royalties and operating expenses reflecting increases in energy costs. This quarter, the Downstream recorded net income of $1.033 billion, up about $640 million from net income of $389 million in the first quarter, reflecting continued high utilization levels and higher margins, partly offset again by the impact of higher expenses from increased energy costs. Finally, our Chemicals business continued to perform well this quarter with net income of $53 million, essentially flat with the first quarter.

Moving on to cash flow. We ended the second quarter with just under $2.9 billion of cash on hand. In the quarter, we generated nearly $2.7 billion in cash flows from operating activities, an improvement of almost $800 million from the first quarter, bringing our year-to-date cash flows from operating activities to almost $4.6 billion, up about $2.7 billion from last year. Free cash flow for the quarter was $2.452 billion, up about $800 million higher than the first quarter. Excluding an increase of $101 million in working capital, our cash flow in the second quarter was almost $2.8 billion, up around $1.5 billion from the first quarter. The $101 million increase in working capital was largely driven by an increase in accounts receivable of $1.4 billion due to substantial increases in Downstream product prices in the quarter. Also in working capital, there was an increase in income taxes payable of about $850 million that will only be payable in the first quarter of next year. As we discussed in previous calls, we expect actual cash tax payments in 2022 to total around $400 million, including $225 million already paid in the first quarter of this year and about $50 million paid in the second quarter.

Now looking forward, there are obviously a number of factors that will impact our final income tax payment for the 2022 tax year that will occur in the first quarter of 2023. But under current market conditions, we would anticipate that this first quarter 2023 cash tax payment would be on the order of $2.5 billion. Moving on to CapEx. Capital expenditures in the second quarter totaled $314 million, up from $259 million in the second quarter of 2021 and in line with our full year guidance of $1.4 billion. Spending in the second quarter was primarily in the Upstream with spent at our in-pit tailings project at Kearl and volume sustainment spending at Cold Lake. We also progressed spending on our Grand Rapids project at Cold Lake and on a renewable diesel project at Strathcona.

Shifting to shareholder distributions. Given our robust cash flow and our outlook for continued strong cash flow going forward, we returned over $2.7 billion to shareholders in the second quarter with the completion of our $2.5 billion SIB and payments of $228 million in dividends. This brings our year-to-date distributions to over $3.3 billion, already exceeding our total shareholder distributions in 2021 of around $3 billion. Now looking forward, our next step is to complete the 5% NCIB we announced on June 27th. As Brad noted, we plan to execute share repurchases under the NCIB on an accelerated basis and finish the program by the end of October. We remain committed to returning surplus cash to shareholders and will consider further actions following completion of our NCIB. Lastly, as Brad noted this morning, we announced the third quarter dividend of $0.34 per share, consistent with our second quarter dividend.

Now I'll turn it back to Brad to discuss our operational performance.

Brad Corson

Thanks, Dan. So now let's talk about our operating results for the quarter. Upstream production for the quarter, as I mentioned earlier, was 413,000 oil equivalent barrels per day, which is up 33,000 barrels per day versus the first quarter and up 12,000 barrels per day versus the second quarter of 2021. This increase reflects a return to normal operating conditions at Kearl after the severe weather challenges of the first quarter. And as I mentioned earlier, represents the highest second quarter Upstream production in over 30 years. The ongoing strength in commodity prices continues to be a key part of the story. WTI prices continued to increase in the quarter as did WCS prices. The WTI to WCS differential remained fairly steady in the quarter, although we have seen some widening in the third quarter so far. But even with the wider differential, WCS prices remain very strong. Syncrude synthetic product continues to command a strong premium in the current environment as well, given its quality and desirability in the tight refining market. From a capital allocation point of view, we are continuing the development of Grand Rapids Phase 1 and our lending redevelopment as we talked about at our Investor Day earlier this year. Both of these projects are not only key to sustaining and even growing our production at Cold Lake, but also further improved profitability and lower greenhouse gas intensity at these core assets.

So now let's move on and talk about Kearl. After a challenging start to 2022 related to extreme cold weather conditions and unplanned downtime in the first quarter, production at Kearl in the second quarter fully recovered to normal levels at 224,000 barrels per day gross, which was up 38,000 barrels per day versus the first quarter and down 31,000 barrels per day versus the second quarter of 2021. And just as a reminder, the second quarter also reflects the impacts of the annual Kearl turnaround, which was completed in June on time and on budget. Subsequent to the completion of the turnaround, I'm pleased to say that our operations have been strong and stable, with July gross production estimated at 280,000 barrels per day. And now that we are through our major planned maintenance for the year, we have reflected on what we see as the overall impact of the first quarter challenges on our full year guidance for Kearl. As such, we are updating annual guidance for Kearl to around 245,000 barrels per day gross.

As mentioned, Kearl's performance is back to normal heading into the third quarter, and we expect production levels to exceed 280,000 barrels per day for the remainder of the year. And finally, turning to operating costs. We did see a reduction in unit operating costs at Kearl in the quarter of around $3.50 per barrel versus the first quarter to just over $31 per barrel. The first quarter saw higher unit operating costs due to lower volumes, but we saw this come down in the second quarter as operations returned to more normal levels. Although second quarter results do reflect the cost of our planned turnaround as well as higher energy costs. We are still working towards and committed to achieving sustainable unit operating costs at or below $20 per barrel at Kearl.

So now let's talk about Cold Lake. Cold Lake started the year strong and that performance has continued through the second quarter. Production for the second quarter averaged 144,000 barrels per day, which was up 4,000 barrels per day from the first quarter and up 2,000 barrels per day from the second quarter of 2021. These results also reflect some light planned turnaround activity at our Leming plant, which started in late May and finished in late June. The production impact of this activity for the year is around 1,000 barrels per day. Our ongoing focus on production optimization and reliability continues to deliver benefits. As you can see from the fact that year-to-date production is above our full year guidance and is providing a highly cost efficient offset to natural base decline. And the strong performance at Cold Lake has continued into the third quarter so far. July production is estimated at 142,000 barrels per day.

Imperial's share of Syncrude production for the quarter averaged 81,000 barrels per day, which was up 4,000 barrels per day from the first quarter and up 34,000 barrels per day from the second quarter of 2021. The large increase from 2021 reflects the absence of a second quarter turnaround this year. The major coker turnaround at Syncrude is instead happening in the third quarter this year. Also of note, Syncrude continued to build on a strong first quarter and has now delivered best ever first half of the year bitumen production, supported by strong mining and extraction performance, and good utilization of the interconnecting pipelines.

So now let's move on and talk about the Downstream. In the second quarter, we refined an average of 412,000 barrels per day, which was up 13,000 barrels a day versus the first quarter and up 80,000 barrels per day versus the second quarter of 2021, reflecting continued strong operating performance and minimal planned turnaround activity. Refinery utilization was 96%, the fourth straight quarter above 90%. And while up a little versus the first quarter of this year, it represents an increase of 18% in utilization over the second quarter of 2021, reflecting the absence of the large turnaround we had at Strathcona last year, and very strong operating performance this year. As I mentioned last year, and again, back on the first quarter call, we have a relatively light planned maintenance schedule for 2022 in our Downstream and in fact, we completed our turnaround at Sarnia in April. This work had minimal impact on utilization and was completed on schedule and on budget. That also completes our planned turnaround activity in the Downstream for this year and leaves us well positioned to take advantage of the market environment and the ongoing pandemic recovery. The strong utilization we have delivered is playing a key role in providing the energy products that Canadians need and at a time when supply issues are driving overall market shortages. Our intention is to continue to produce at these high utilizations in order to do our part in addressing these current supply challenges.

I would also note that we continue to advance our Strathcona renewable diesel project and expect a final investment decision by the end of this year. In the second quarter, our petroleum product sales were 480,000 barrels per day, which is up 33,000 barrels per day versus the first quarter and up 51,000 barrels per day versus the second quarter of 2021. The increase in sales, in both cases, was driven by increased mobility following the lifting of most of the remaining provincial pandemic related restrictions. Now with respect to product demand, in the quarter, we saw demand for motor gasoline and diesel essentially return to pre-pandemic levels. In addition, with the lifting of many travel related restrictions, jet demand showed rapid improvement and is averaging around 90% of historical levels. We continue to see a positive Downstream margin environment continue in the second quarter due to several factors, including low product inventories and global export constraints. And while we are seeing signs of margin softening a bit, they remain volatile and continue to track well above the five year band.

And that brings us to Chemicals. The business delivered $53 million in earnings in the second quarter, which was down from $109 million in the second quarter of 2021, but essentially flat with the first quarter of this year. As expected, we have seen the all-time high margins of 2021 begin to ease. However, margins still remain quite strong, and we are looking forward to another year of solid results from our Chemical business. Before wrapping up, I'd like to take a minute to talk about a few other items that highlight our ongoing commitment to improving sustainability and reducing our overall environmental footprint. First, during the first quarter, we released our Advancing Climate Solutions report, which provides important disclosures around our continued progress and commitments to lowering greenhouse gas emissions. Second, we announced a strategic collaboration with E3 Lithium to develop a lithium extraction pilot in Alberta, at our historic Le Duke oil field. Combining E3's proprietary lithium extraction technology with our water and reservoir management capabilities, makes this an exciting opportunity to support the potential development of battery-grade products.

And finally, we also signed an agreement with Atura Power to study the potential for hydrogen production at our Nanticoke refinery in Ontario, where we operate our refinery. We will be focusing on the potential to develop a regional hydrogen facility that would support greenhouse gas emissions reductions. In closing now, I would sum up the second quarter as outstanding. We saw our operations fully recover from some challenges in the first quarter, and we successfully completed the majority of our planned maintenance for the year. And these strong operations allowed us to benefit fully from the continued strong business environment and to deliver very strong financial results. With all of our major planned downtime for our operated assets behind us for the year, we look forward to a strong second half of 2022, benefiting further from the very strong commodity price environment we are experiencing. The successful execution of our substantial issuer bid underscored our ongoing commitment to drive shareholder value and our continued commitment to shareholder returns. And the sale of our XTO assets delivers on Imperial's strategy to maximize shareholder value by focusing Upstream resources on our core long life, low decline oil sands assets.

For the remainder of 2022, we will continue to focus on further optimizing our existing asset base and delivering superior shareholder value through enhanced reliability and maximizing performance in a period of strong commodity prices, allowing us to leverage our fully integrated assets and take utmost advantage of the current market conditions. We will also continue to work towards a final investment decision related to our Strathcona renewable diesel project, continue our development of Grand Rapids Phase 1 and our Leming redevelopment at Cold Lake, all key parts of our emission reduction focus, but also key opportunities that provide profitable volume growth for our business. And finally, I'd like to thank you once again for your continued interest and support.

David Hughes

Michelle, we're ready to go to the Q&A line.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Dennis Fong with CIBC.

Dennis Fong

The first one is just around Kearl as well as the application of digital technology. I know kind of at this Investor Day, you kind of -- or at this previous Investor Day in 2022, you discussed items like the surveillance failure analysis and in a previous Investor Day, you talked about Kearl's Digital Twin. I was just curious, and I know, obviously, it's very early in terms of talking about further extending time between turnarounds, because you've already just frankly done that. But I was curious in terms of some of your peers have extended to an every other year turnaround. How is some of the work that you're doing from the digital side or even predicting in terms of timing of failure or time between turnarounds potentially affecting decisions or even analysis around even further extending time between turnarounds at the Kearl facility?

Brad Corson

And you're exactly right. We have a long-standing commitment to technology, and we're bringing that technology to bear at Kearl to continue to improve our operating performance, which is underpinned by strong maintenance and reliability. And as to turnaround timing, you may recall that at Kearl, we have two main trains of operation. And prior to last year, we would conduct a turnaround every year on each of those trains. But through our ongoing application of technology and other initiatives to provide redundancy, we were able to then conclude that we could extend the interval for turnarounds on each train from [two] year to once every two years. And so the turnaround we just completed this year was just on one train, and that train had not undertaken a turnaround for two years. And so it was a very key opportunity for us to not only demonstrate that our ability to extend that duration for two years, but once we got into the turnaround, it was a great opportunity for us to validate the decision we had taken and confirm that this extended duration was viable and did not compromise the maintenance or reliability of our equipment.

So I'm quite pleased to say that we have confirmed that. It does validate. And so going forward, we continue to plan on a two year interval for each of our major trains. And we will continue to explore further opportunities for optimization. And so some of the digital technology that you referenced will also allow us, we believe, to not only extend these turnaround intervals to a two year cycle but at the same time, allow us to reduce the duration of the shutdown once we undertake that work. So several of these technologies around inspection techniques and ongoing surveillance will contribute to that. The other thing I would say about digital technology, it's not directly related to turnaround. But as you know, we've had this ongoing project to convert our our major truck fleet at Kearl to autonomous haul, so driverless trucks. And we've been aggressively pursuing the conversion of that fleet and we've now completed 55 trucks. So we have about 20 more to go, and we'll be progressing those. But those also play a significant role in improving the reliability, the cost structure, but also the safety of our operation.

Dennis Fong

And my second question here is just around Cold Lake. Just given the relative performance that we've seen in terms of base level optimization, I know that progress at Grand Rapids is still progressing. But can you maybe provide a little bit of a further update in terms of how you're thinking about the existing optimization of the base at Cold Lake -- and then how you're thinking about the pace of development or the pace of eventual construction or buildout of the Grand Rapids project in that region?

Brad Corson

I mean, we're quite excited about the performance at Cold Lake. It does continue to outperform the guidance that we provided at the end of last year, and we have every reason to believe that's going to continue. And it comes as a result of significant focus by the operating and technical teams around how to optimize our steam floods and water production in those assets, continuing to ensure we've got optimized maintenance plans that are bringing enhanced reliability to the asset, continuing to do kind of workover optimization on the existing wells in the field. So all that's contributing to this higher production that you're seeing. Now with respect to Grand Rapids, we are in the construction mode right now. So we're already drilling wells for that project. I had the great opportunity to visit the site just a couple of weeks ago and spent some time on the rig, and that work is well underway. We have a targeted start-up for Grand Rapids in 2024 at this point, and we're doing everything we can to optimize around that. And once it's online, we're expecting incremental production of around 19,000 barrels a day. So a significant contributor to kind of long life and productive capability of Cold Lake.

And then as mentioned in my earlier remarks, we're also progressing now a redevelopment project at our Leming asset at Cold Lake, which was kind of our original producing asset at Cold Lake, and we see opportunities to further redevelop that asset and capture additional oil resource, and we're going to do that with SAGD technology, which of course is lower greenhouse gas intensity. And when that's online, it will also contribute several thousand barrels a day incremental production as well. So a lot of exciting things going on at at Cold Lake that not only will increase production but also lower our greenhouse gas intensity.

Operator

And our next question comes from the line of Manav Gupta with Credit Suisse.

Manav Gupta

So quick question on Kearl. Under your management, you guys have achieved a product operational reliability, as well as lower OpEx in this project. We view first half has a little bit of a blip here. I just wanted to understand your level of confidence in the project that once we go over 280 again, you can push that cost down towards lower 20s, or are there some cost inflationary pressures there, whereby we should model somewhere from mid-20s? But hopefully, what can happen -- like if you could elaborate on, if you run harder, can you push that cost back towards lower 20s?

Brad Corson

And first, I'd say, thanks for the recognition of the substantial improvements that we've made, and you make reference to under my management, and thank you for that. But I just want to give a big shout out to our entire Imperial Kearl team that are all working quite aggressively and doing great work to achieve those sustained levels of improved performance. And you're right, we had some challenges in the first quarter, attributable primarily to some extreme cold weather. And as I projected on our last earnings call, a high level of confidence that we had that those challenges behind us, and we would recover in the second quarter. And in fact, that's what we did. And I would just say that, that same level of confidence comes to our commitment around our cost structure. We've been working on lowering our unit costs at Kearl for a few years now, and we continue to drive towards that $20 per barrel milestone that we've talked about, you mentioned. And in fact, last year, we had several months where we did achieve that.

This year, of course, we've been impacted by lower volumes, and so that has an effect on the denominator of that calculation. But equally, we are seeing higher energy costs and some other inflationary pressures. And so that has affected us as well. But maybe setting aside the energy costs, which are outside our control, for the other costs that drive that cost structure, our teams are working quite hard to bring additional efficiencies and offset as much of those inflationary pressures as possible. And a key contributor longer term to getting that -- achieving that $20 is, of course, also achieving 280,000 barrels per day. And we are quite committed to that, we're confident in that. We've got very specific work plans that will move us to that 280,000 barrels a day, and hopefully beyond longer term. But as we've said at Investor Day, we plan to achieve 280,000 barrels a day by 2024. So again, laser focused on getting the 280,000, equally focused on getting our cost structure to $20 a barrel.

Operator

And our next question comes from the line of Neil Mehta with Goldman Sachs.

Neil Mehta

First question is just on capital returns. Can you talk about the rationale behind the acceleration of the buyback to complete the NCIB by the October time frame? And then assuming the commodity prices remain elevated, how do you think about potential additional shareholder returns outside of the NCIB? Do you think the tender was a success and is that something that you would do again?

Brad Corson

And as we've said on multiple occasions, we are committed to returning surplus cash to our shareholders. And first of all, the SIB was a key component to contribute to that. We view it as highly successful. We're quite pleased with the results and I hope our shareholders have benefited or participated in that $2.5 billion return feel the same way. And as we completed that and took stock of where we were with continued building cash balances, that drove us to not only renew the NCIB at the 5% level, which is the maximum by the way, but also then drove us to accelerate it. Again, as another key vehicle to now return cash to our shareholders. So that's driving us to complete it by October. And as Dan said, once we complete that, we will then be assessing and determining what other vehicles for returning cash to shareholders are appropriate. And obviously, will be taken into account what's happening in the market for the second half of the year and what are our projections for cash balances. But we maintain that commitment to return cash to shareholders. So I would expect you'll see further actions as the year goes on.

Neil Mehta

And then just to follow-up is on the refining side of the business, would love, Brad, just your perspective on how Q3 is shaping up. Utilization has been tracking very well in refining here as we wrapped up Q2. But how are you thinking about profitability at that business, especially with WCS having widened out? How is that tying back into Downstream earnings?

Brad Corson

We remain quite bullish on the performance of our Downstream. We obviously had a very strong second quarter. We've really had a strong first half of the year. And we see that strength continuing. I mean -- as I mentioned, we've now completed all of our turnaround activity in the Downstream, which was light in the base case. But with that behind us, we would anticipate continued very high utilization rates for the remainder of the year. We have seen a strong recovery in demand. And we still see an opportunity for further improvements there. And so we'll be taking full advantage of that. And while we saw some record high crack spreads in the second quarter that contributed to very strong profitability, we do see a little softening of that now that we've come into the third quarter. But even with that softening, we still are projecting a very strong third quarter at this point. So I'm really encouraged by that. I think it's really important for the role we play in providing important products to our consumers here in Canada that we maintain that high level of utilization and reliability and ensure that those products are available.

Operator

[Operator Instructions] And our next question comes from the line of Patrick O'Rourke with ATB Capital.

Patrick O'Rourke

Maybe just to build upon the last question in terms of Downstream. You guys have been pretty nimble in terms of the product slate here. Just wondering in real time, what sort of demand elasticity you're seeing by specific products, especially with a lot of interplay in the economy that's going on here, potential recessionary forces and how you're responding to that?

Brad Corson

We have seen a fair amount of variability over the last two years through the pandemic. And now as demand has recovered post pandemic, there have been ups and downs in some of those recovery trends. We are seeing broadly a strength in demand, but there are pockets of weakness, I would say. Jet demand has recovered quite strongly. We're now over 90% of where we were prepandemic, and we see those trends continuing to strengthen. Even though globally, there are still some concerns about inflation and recessionary concerns, as well as some pockets of COVID lockdown and what's the recurrence of that. But on balance, jet continues to recover. And so we're obviously responding to that with our product mix. Diesel has continued to be very strong, 95% plus of pre-COVID levels, and we haven't seen really any adverse effects there. Motor gasoline has tempered a bit, as people are kind of mindful of costs at the pump, and that is affecting some behaviors. And so some softening there, but still 90% plus of pre-COVID levels. And the other advantage we have is we can adjust our slates at the margin to optimize around where we see the higher level of demand. And we've got a well integrated refining system and product supply system around the country and so that gives us advantages as well.

Patrick O'Rourke

And just a quick second question here. With respect to last week, we saw the federal government come out with a proposed potential cap and trade system, I think that the consideration was about a 42% reduction in carbon emissions from the upstream oil and gas industry. Your current plan by 2030 is about 30%. Wondering how you're approaching that in terms of risking capital allocation, obviously, high quality but very long duration assets? And wondering what the technical feasibility is of the 42% reduction, is that something that's possible for Imperial?

Brad Corson

First, I would say, we share the government's objectives to tackle climate change in a very proactive manner. And we share the government's ambition to achieve net zero by 2050. And as you mentioned, we have internal to Imperial, our own stated objectives to reduce our greenhouse gas intensity by 30% by 2030. Similarly, we're a founding member of the Oil Sands Pathways to Net Zero alliance and that alliance also has stated objectives to achieve net zero by 2050. And has laid out a very comprehensive well-thought-out plan to move our industry from where we are today to net zero by 2050. And it also achieves about a third reduction by 2030, 22 megatons of CO2 reduction. And so when I reflect on the report issued from the federal government, I would say I do take concern with it, because it is very aggressive, and I would say stretches the capability of what is technically and economically feasible. We are encouraged that the government has put that out for consultation, so we will be providing our own feedback as Imperial. We'll also be providing feedback as the Pathways alliance as to what we think are appropriate approaches to achieve the overall objectives of that emissions reduction plan.

What I think collectively, as industry, government, society, we need to be very cautious about is ensuring that we bring the right balance to environmental improvements with continued oil supply, which, of course, impacts products to our customers. I very much believe we can achieve both objectives. But we need to make sure we approach it with a view of how do we achieve both, not one at the expense of the other. And I think our Pathways plan does lay out a good road map for that and we'll be continuing to reinforce the benefits of that approach. I think it's also worth noting that all of these projects that will be required to continue to reduce submissions, not only have technical considerations in terms of technology that's available, have physical requirements in terms of just what's involved in executing the project. But they also all have regulatory approval requirements, permits that are required, and that process also takes time. So I think it's important that we get all of us around the table, industry, federal government, provincial government, and we all be working collaboratively on achieving those goals. Thank you for that question.

Operator

And our next question comes from the line of Greg Pardy with RBC Capital Markets.

Greg Pardy

Look, a lot of inflation in the system, everybody seems to be adjusting CapEx, you guys aren't. Just wondering what -- maybe any color around that and then also how you're sort of thinking about sustaining capital next year?

Brad Corson

You're right, we are standing firm by our earlier capital guidance of $1.4 billion for the year. And now that we're halfway through the year, we continue to feel good about that level of CapEx. We're well on track to achieve all of the project objectives we laid out that tie to that $1.4 billion. And while we are experiencing some inflationary pressures like others are, a big credit to our team, their focus on capital discipline, that they are able to identify efficiencies to offset them. And we're also benefiting from just the inherent nature of some of our projects and their time lines. Many of the contractual commitments and the purchase of key materials were already undertaken over the last year or two. And so that also shields us a bit from some of the current inflationary pressures. But we feel quite good about that $1.4 billion. And in terms of looking ahead to next year, we're going through our annual budget and planning process right now. So not yet ready to kind of provide updated guidance. But what we shared at Investor Day last year was a projection for about $1.5 billion as we look to next year and a few years after that. With around $1 billion of that on average being sustaining capital and another $400 million or $500 million of growth capital. And I think we still see it pretty much in line with that, but we will be updating that over the next few months.

Operator

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Dave Hughes for any further remarks.

David Hughes

Thanks, Michelle. On behalf of the management team, I'd like to thank everybody for joining us this morning and for your ongoing interest and support. As always, if anybody has any further questions, please don't hesitate to reach out to anybody on the IR team here. Thanks very much.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

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