CVE Cenovus Energy Inc

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 

under the Securities Exchange Act of 1934

 

For February 2021

Commission File Number:  1-34513

 

CENOVUS ENERGY INC.

(Translation of registrant’s name into English)

4100, 225 6 Avenue S.W.

Calgary, Alberta, Canada T2P 1N2

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  ☐    Form 40-F  ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):   ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):   ☐

DOCUMENTS FILED AS PART OF THIS FORM 6-K

See the Exhibit Index to this Form 6-K.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:  February 9, 2021

 

 

 

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Form 6-K Exhibit Index

 

 

Exhibit 99.1

 

 

 

 

Cenovus reports 2020 fourth-quarter and full-year results

 

Calgary, Alberta (February 9, 2021) – Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) responded to extreme oil price volatility in 2020 by quickly reducing capital spending as well as strategically managing oil sands production and purchasing curtailment credits to achieve increased output when prices were more favourable. The company generated positive free funds flow in the fourth quarter, partially offsetting the impact of low oil prices on its full-year results. Cenovus’s planned combination with Husky Energy, announced in the fourth quarter, closed January 1, 2021. The company exited 2020 with net debt of $7.2 billion.

“In a year of unprecedented challenges for our industry, we demonstrated the flexibility, strength and reliability of our operations by adapting our capital and operating plans, including leveraging the dynamic storage capabilities of our oil sands reservoirs, transportation optionality and marketing activities to help preserve liquidity,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “We believe our compelling combination with Husky will provide even greater ability to reduce free funds flow volatility and accelerate debt reduction and returns to shareholders.”

Cenovus released its 2021 budget in late January. The budget includes sustaining capital of approximately $2.1 billion to deliver upstream production of approximately 755,000 barrels of oil equivalent per day (BOE/d) and downstream throughput of approximately 525,000 barrels per day (bbls/d). The company also expects to achieve nearly $1 billion of synergies this year as a result of the recent transaction with Husky, putting Cenovus firmly on track to reach its planned $1.2 billion in annual run-rate synergies by the end of 2021.

 

 

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Health and safety performance

In response to the COVID-19 pandemic in 2020, Cenovus moved to essential staffing at its field sites and gave office staff the flexibility to work remotely, followed by mandatory work-from-home measures for its office staff based on evolving guidance from public health officials. The company also established comprehensive COVID-19 protocols, including enhanced cleaning and physical distancing measures. Staffing levels have now largely returned to normal at Cenovus’s field operations and the company continues to evolve COVID-19 measures at all its worksites based on the direction of government, public health officials and the company’s internal health and safety experts.

 

In 2020, Cenovus continued to deliver industry-leading safety performance through its culture of continuous improvement and focus on risk management and asset integrity. The company achieved year-over-year improvements at its operations for significant incident frequency (SIF) and process safety events. The company recorded a SIF of 0.01 compared with 0.14 in the previous year and two process safety events compared with eight in 2019.

 

Business flexibility and financial discipline

With significantly reduced global oil demand due to the COVID-19 pandemic, benchmark oil prices faced unprecedented volatility in 2020, resulting in the company’s average realized crude oil sales price of $28.82 per barrel (bbl) compared with $53.95/bbl the previous year.

 

To preserve its financial resilience, in March and April Cenovus reduced its planned 2020 capital spending by a total of about 43%. Anticipating the beginning of a recovery in commodity prices during the second quarter, the company proactively acquired curtailment credits to increase output above the Government of Alberta’s mandatory production limits and leveraged the flexibility of its business to ramp production back up. This included reaching peak production rates at the company’s oil sands operations in June and restarting its crude-by-rail program to maximize cash flows in response to tighter Alberta light-heavy oil differentials and the further strengthening of commodity prices later in the year.

 

Financial results

Cenovus recorded cash from operating activities of $273 million in 2020 compared with $3.3 billion in 2019. The company generated full-year adjusted funds flow of $147 million compared with $3.7 billion a year earlier. It reported a free funds flow shortfall of $694 million in 2020, largely driven by the collapse in crude oil prices, compared with free funds flow of $2.5 billion in 2019. Cenovus generated free funds flow of $99 million in the fourth quarter of 2020, which included a $100 million ($0.08 per share) non-cash provision related to the Keystone XL pipeline project.

 

The company had a full-year operating loss of $2.6 billion and a net loss of $2.4 billion compared with operating earnings of $456 million and net earnings of $2.2 billion in 2019. The operating loss was due, in part, to higher depreciation, depletion, and amortization (DD&A) that included impairment charges of $555 million in the Conventional business due to lower forward commodity prices and changes to future development plans as well as an impairment charge of $450 million associated with the Borger Refinery, which the company co-owns with the operator, Phillips 66. In the fourth-quarter of 2020 compared with the

 

 

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same period a year earlier, Cenovus had an operating loss of $551 million compared with an operating loss of $164 million and a net loss of $153 million compared with net earnings of $113 million.

 

Cenovus exited 2020 with net debt of $7.2 billion and $4.5 billion of available committed credit facilities. Following the close of the Husky transaction on January 1, 2021, the company had net debt of approximately $13.1 billion, including the fair valuation of Husky’s debt upon close, as well as $8.2 billion in available committed credit facilities with no maturities on its long-term bonds until April 2022.

 

Following the completion of the transaction with Husky, Cenovus received credit rating upgrades. Moody’s Investors Service upgraded Cenovus to investment grade Baa3 with a ‘negative’ outlook from Ba2 with a ‘negative’ outlook, while DBRS Limited upgraded the company to BBB from BBB (low), with a ‘stable’ trend. At S&P Global Ratings, Cenovus’s BBB- rating was confirmed and the outlook revised to ‘stable’ from ‘negative’. Fitch Ratings maintained its BB+ rating with a return to a ‘positive’ outlook.

 

Operating highlights

Cenovus’s upstream and refining assets continued to deliver safe and reliable operational performance throughout 2020. Planned maintenance and repair work at the company’s oil sands operations partially offset production increases. Cenovus expanded the original planned scope for its Conventional drilling program, while remaining within the range of its reduced 2020 budget. The company’s refining assets ran at reduced crude oil run rates due to lower refined product demand and pricing resulting from the COVID-19 pandemic.

 

Oil sands

In 2020, Cenovus achieved average oil sands production of 381,723 bbls/d for the year, up 8% from 354,257 bbls/d in 2019 when Cenovus volumes were reduced to match limits under the Government of Alberta’s curtailment program. Fourth quarter production increased 2% to 380,693 bbls/d from the same period a year earlier as the company purchased production curtailment credits to produce above the government’s output limits before mandatory curtailment ended in early December.

 

Oil sands operating margin declined in 2020 to $1.1 billion from $3.5 billion in 2019, largely due to lower average realized crude oil sales prices, the use of higher priced condensate when the market was declining early in the year and realized risk management losses of $268 million compared with $23 million in 2019.

 

Non-fuel per-unit operating costs in 2020 declined 13% at Christina Lake and 4% at Foster Creek compared with 2019. Combined full-year oil sands per-unit operating costs were $7.84/bbl, down 4% from the previous year. The year-over-year reduction in per-barrel costs was primarily due to increased volumes, lower turnaround costs at Christina Lake in 2020 compared with the previous year and reduced repairs and maintenance activity at Foster Creek with the implementation of COVID-19 safety measures that limited site personnel numbers to help curb potential spread of the virus. Total oil sands per-unit operating costs were $8.70/bbl in the fourth quarter, up 8% from the same quarter in 2019, driven largely by higher natural gas prices and increased repairs and maintenance costs,

 

 

 

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primarily related to a planned turnaround at Christina Lake and planned maintenance and operational outages at Foster Creek.

 

After suspending its crude-by-rail program in early 2020, Cenovus ramped up activity in the fourth quarter to take advantage of improving market conditions. With resumption of the rail program, Cenovus exited December with average loading of nearly 28,000 bbls/d of its own crude oil for transport by rail for the month plus nearly 10,000 bbls/d for third parties. For the full year, the company loaded an average of more than 30,000 bbls/d of which more than 29,000 bbls/d were Cenovus volumes.

 

Cenovus’s oil sands facilities continue to operate at industry-leading steam-to-oil ratios (SORs). At Christina Lake, the full-year 2020 SOR was approximately 2.0, unchanged from 2019. The SOR at Foster Creek was 2.8, consistent with the previous year. The company continues to optimize steam use across its oil sands operations to minimize SORs and greenhouse gas emissions intensity through continuous improvement in operational practices and the application of technology.

 

Conventional

Conventional production averaged 89,932 BOE/d in 2020, an 8% decrease from full-year 2019. The year-over-year decrease was due to natural declines from reduced capital investment, partially offset by production from the Marten Hills heavy oil asset. Cenovus successfully divested Marten Hills in the fourth quarter of 2020 and has maintained an interest in the asset through its investment in Headwater Exploration Inc., which acquired the property, as well as a gross overriding royalty that allows Cenovus to benefit from future development.

 

Cenovus increased capital investment for Conventional by $30 million in the fourth quarter, relative to its revised 2020 guidance issued in April, to conduct a two-rig drilling program. The program is targeting low-risk, high-return development wells near natural gas plants owned and operated by the company, to take advantage of higher commodity prices during the winter heating season. Notwithstanding the increase, full-year capital investment in the company’s Conventional segment of $78 million was 24% lower than in 2019, primarily due to reduced expenditures for facilities as well as lower overall drilling and completions. The company continues to take a disciplined approach to the development of its Conventional assets.

 

Total Conventional operating costs decreased 6% to $318 million in 2020 compared with 2019. Per-barrel operating costs averaged $8.99/BOE compared with $8.79/BOE in 2019, primarily due to an 8% decrease in sales volumes, partially offset by optimizing operations, focusing on critical repairs and maintenance activities and leveraging the company’s processing and pipeline infrastructure.

 

Refining and marketing

At Cenovus’s Wood River, Illinois and Borger, Texas refineries, which are co-owned with the operator Phillips 66, crude oil runs were reduced compared with 2019 in response to lower product demand and pricing due to the COVID-19 pandemic. Crude runs averaged 372,000 bbls/d in 2020, a decrease of 16% from 2019.

 

 

 

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Cenovus had a full-year refining and marketing operating margin shortfall of $388 million, compared with an operating margin of $737 million in 2019. The decrease was primarily due to reduced market crack spreads, lower crude oil runs and crude advantage, partially offset by lower operating costs. The fourth quarter refining and marketing operating margin shortfall was $73 million, compared with an operating margin of $109 million in the same quarter of 2019.

 

Cenovus’s refining operating margin is calculated on a first-in, first-out (FIFO) inventory accounting basis. Using the last-in, first-out (LIFO) accounting method employed by most U.S. refiners, operating margin from refining and marketing would have been $124 million lower in 2020, compared with $140 million lower in 2019.

 

Sustainability

Cenovus remains committed to world-class safety performance and environmental, social and governance (ESG) leadership. This includes an ongoing commitment to transparent performance reporting, an ambition to achieve net zero emissions by 2050 and a plan to set ambitious new ESG targets for the combined company later in 2021.

 

Reserves

Cenovus’s proved and probable reserves are evaluated each year by independent qualified reserves evaluators (IQREs). At the end of 2020, Cenovus’s proved reserves decreased 1% to approximately 5.0 billion BOE, while proved plus probable reserves decreased 3% to about 6.7 billion BOE. Proved bitumen reserves were approximately 4.8 billion barrels, largely unchanged from 2019, while proved plus probable bitumen reserves decreased 1% to approximately 6.3 billion barrels. Cenovus’s reserve life index (RLI) for proved reserves is approximately 29 years, and its RLI for proved plus probable reserves is approximately 39 years.

 

Cenovus’s 2020 proved reserves finding and development (F&D) costs were $4.82/BOE, excluding changes in future development costs, down 36% from 2019 and reflect decreased capital spending. Three-year average proved reserves F&D costs were $5.16/BOE, excluding changes in future development costs.

 

More details about Cenovus’s reserves and other oil and gas information is available in the Advisory, the company’s Management’s Discussion & Analysis (MD&A), Annual Information Form (AIF) and Annual Report on Form 40-F for the year ended December 31, 2020, which are available on SEDAR at sedar.com, EDGAR at sec.gov and Cenovus’s website at cenovus.com.

 

Dividend

For the first quarter of 2021, the Board of Directors declared a dividend of $0.0175 per share, payable on March 31, 2021 to common shareholders of record as of March 15, 2021. The Board also declared a first quarter dividend on each of the Cumulative Redeemable First Preferred Shares – Series 1, Series 2, Series 3, Series 5 and Series 7 – payable on March 31, 2021, to shareholders of record as of March 15, 2021 as follows:

 

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All dividends paid on Cenovus’s common and preferred shares will be designated as "eligible dividends" for Canadian federal income tax purposes. Declaration of dividends to common shareholders is at the sole discretion of the Board and will continue to be evaluated on a quarterly basis.

 

Cenovus year-end disclosure documents

Today, Cenovus is filing its audited Consolidated Financial Statements, MD&A and AIF with Canadian securities regulatory authorities. The company is also filing its Annual Report on Form 40-F for the year ended December 31, 2020 with the U.S. Securities and Exchange Commission. Copies of these documents will be available today on SEDAR at sedar.com, EDGAR at sec.gov (for the Form 40-F) and the company's website at cenovus.com under Investors. They can also be requested free of charge by email at investor.relations@cenovus.com.

 

Husky year-end disclosure documents

Today, Husky Energy Inc., which became a wholly owned subsidiary of Cenovus on January 1, 2021, is filing its audited Consolidated Financial Statements, MD&A and AIF with Canadian securities regulatory authorities. Husky is also filing its Annual Report on Form 40-F for the year ended December 31, 2020 with the U.S. Securities and Exchange Commission. Copies of these documents will be available today on SEDAR at sedar.com, EDGAR at sec.gov (for the Form 40-F) and Husky's website at huskyenergy.com under Investors.

 

ADVISORY

Basis of Presentation
Cenovus reports financial results in Canadian dollars and presents production volumes on a net to Cenovus before royalties basis, unless otherwise stated. Cenovus prepares its financial statements in accordance with International Financial Reporting Standards (IFRS).

Barrels of Oil Equivalent
Natural gas volumes have been converted to barrels of oil equivalent (BOE) on the basis of six thousand cubic feet (Mcf) to one barrel (bbl). BOE may be misleading, particularly if used in isolation. A conversion ratio of one bbl to six Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil compared with natural gas is significantly different from the energy equivalency

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conversion ratio of 6:1, utilizing a conversion on a 6:1 basis is not an accurate reflection of value.

Finding and Development Costs
Finding and development (F&D) costs are calculated by dividing the sum of total exploration and development costs incurred in 2020 in respect of the relevant product types by the sum of total additions and revisions for the applicable category of reserves in the same period. The additions and revisions for the applicable category of reserves for the period are determined by Cenovus’s IQREs, effective December 31, 2020, and for purposes of determining F&D costs, exclude changes resulting from acquisitions, dispositions and production. F&D costs provide an indication of the unit cost of finding and developing new reserves. F&D costs do not have a standardized meaning and are defined differently by different companies and as such are not comparable to similar measures presented by other issuers.

Reserves Estimates
Estimates of reserves referenced in this release were prepared effective December 31, 2020 by IQREs, based on the Canadian Oil and Gas Evaluation Handbook and in compliance with the requirements of National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. Estimates are presented using an average of the January 1, 2021 price forecasts from three IQREs. For additional information about Cenovus’s reserves and other oil and gas information, see “Reserves Data and Other Oil and Gas Information” in Cenovus’s AIF and Annual Report on Form 40-F for the year ended December 31, 2020 (available on SEDAR at sedar.com, on EDGAR at sec.gov and Cenovus’s website at cenovus.com).

 

Non-GAAP Measures and Additional Subtotal
This news release contains references to adjusted funds flow, free funds flow, operating earnings (loss) and net debt, which are non-GAAP measures, and operating margin, which is an additional subtotal found in Note 1 of Cenovus’s Audited Consolidated Financial Statements for the year ended December 31, 2020 (available on SEDAR at sedar.com, on EDGAR at sec.gov and Cenovus’s website at cenovus.com). These measures do not have a standardized meaning as prescribed by IFRS. Readers should not consider these measures in isolation or as a substitute for analysis of the company’s results as reported under IFRS. These measures are defined differently by different companies and therefore are not comparable to similar measures presented by other issuers. For definitions, as well as reconciliations to GAAP measures, and more information on these and other non-GAAP measures and additional subtotals, refer to “Non-GAAP Measures and Additional Subtotals” on page 1 of Cenovus’s MD&A for the period ended December 31, 2020 (available on SEDAR at sedar.com, on EDGAR at sec.gov and Cenovus’s website at cenovus.com).

 

Forward-looking Information
This news release contains certain forward-looking statements and forward-looking information (collectively referred to as “forward-looking information”) within the meaning of applicable securities legislation, including the U.S. Private Securities Litigation Reform Act of 1995, about Cenovus’s current expectations, estimates and projections about the future of the combined company, based on certain assumptions made in light of experiences and perceptions of historical trends. Although Cenovus believes that the expectations represented by such forward-looking information are reasonable, there can be no assurance that such expectations will prove to be correct.

 

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Forward-looking information in this document is identified by words such as “achieve”, “ambition”, “ambitious”, “committed”, “commitment”, “continue”, “deliver”, “expect”, “on track”, “plan”, “remain”, “target” and “will” or similar expressions and includes suggestions of future outcomes, including, but not limited to statements about: Cenovus’s positioning to reduce free funds flow volatility, strengthen its balance sheet, accelerate the pace of deleveraging and returns to shareholders; upstream production and downstream throughput; achieving synergies as a result of the Husky transaction by the end of 2021; continued development of COVID-19 pandemic measures at Cenovus’s worksites; Cenovus’s approach to operations of its oil sands assets and the development of its Conventional assets; commitments to world-class safety performance and ESG leadership, including Cenovus’s commitment to transparent performance reporting, its ambition to achieve net zero emissions by 2050 and plans to set new ESG targets for the combined company; and all statements related to the company’s 2021 guidance.

 

Statements relating to “reserves” are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated, and can be profitably produced in the future. Readers are cautioned that the term “reserves life index” may be misleading, particularly if used in isolation. This measure is used for consistency with other oil and gas companies and does not reflect the actual life of the reserves.

 

Developing forward-looking information involves reliance on a number of assumptions and consideration of certain risks and uncertainties, some of which are specific to Cenovus and others that apply to the industry generally. The factors or assumptions on which the forward-looking information is based include, but are not limited to: Cenovus’s ability to realize the anticipated benefits of the Husky transaction and to successfully integrate the business of Husky, including new business activities, assets, operating areas, regulatory jurisdictions, personnel and business partners for Cenovus; the accuracy of any assessments undertaken in connection with the Husky transaction and any resulting pro forma information; forecast oil and natural gas, NGLs, condensate and refined products prices, and light-heavy crude oil price differentials; projected capital investment levels and associated sources of funding; applicable royalty regimes, including expected royalty rates; future improvements in availability of product transportation capacity; increase to Cenovus’s share price and market capitalization over the long term; the sufficiency of existing cash balances, internally generated cash flows, existing credit facilities, management of Cenovus’s asset portfolio and access to capital markets to fund current and future obligations; production from Cenovus’s Conventional segment will provide an economic hedge for the natural gas required as a fuel source at both Cenovus’s oil sands and refining operations; future narrowing of crude oil differentials; the ability of Cenovus’s refining capacity, dynamic storage, existing pipeline commitments, financial hedge transactions and plans to ramp up crude-by-rail loading capacity to partially mitigate a portion of Cenovus’s Western Canadian Select (WCS) crude oil volumes against wider differentials; Cenovus’s ability to produce from oil sands facilities on an unconstrained basis; estimates of quantities from properties and other sources not currently classified as proved; the accuracy of accounting estimates and judgments; Cenovus’s ability to obtain necessary regulatory and partner approvals; the successful, timely and cost effective implementation of capital projects, development programs or stages thereof; estimated abandonment and

 

 

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reclamation costs, including associated levies and regulations applicable thereto; Cenovus’s ability to obtain and retain qualified staff and equipment in a timely and cost-efficient manner; Cenovus’s ability to access sufficient capital and insurance coverage to pursue development plans; the political, economic and social stability of jurisdictions in which Cenovus operates; the absence of significant disruption of operations, including as a result of harsh weather, natural disaster, accident, civil unrest or other similar events; forecast inflation and other assumptions inherent in Cenovus’s 2021 guidance available on cenovus.com; Cenovus’s ability to access and implement all technology and equipment necessary to achieve expected future results, and that such results are realized.

 

The risk factors and uncertainties that could cause actual results to differ materially from the forward-looking information, include, but are not limited to: the effect of the COVID-19 pandemic on Cenovus’s business, including any related restrictions, containment, and treatment measures taken by varying levels of government in the jurisdictions in which we operate; the success of Cenovus’s COVID-19 pandemic workplace policies; Cenovus’s ability to realize the anticipated benefits of the Husky transaction and to successfully integrate Husky’s business with its own in a timely manner and cost effective manner or at all; unforeseen or undisclosed liabilities associated with, and accuracy of any assessments undertaken in connection with, the Husky transaction and any resulting pro forma information; the accuracy of historical information provided by Husky; the effect of the Husky transaction on relationships with customers, suppliers and other third parties; Cenovus’s ability to access or implement some or all of the technology necessary to efficiently and effectively operate its assets and achieve expected future results; the impact of production agreements among OPEC and non-OPEC members; foreign exchange risk, including related to agreements denominated in foreign currencies; the effectiveness of

 

Cenovus’s risk management program, including the impact of derivative financial instruments, the success of hedging strategies and the sufficiency of Cenovus’s liquidity position; the accuracy of estimates regarding commodity prices, operating and capital costs, currency and interest rates; lack of alignment of realized WCS prices and WCS prices used to calculate the contingent payment to ConocoPhillips; product supply and demand; the accuracy of Cenovus’s share price and market capitalization assumptions; market competition, including from alternative energy sources; risks inherent in Cenovus’s marketing operations; risks inherent in the operation of Cenovus’s crude-by-rail terminal, including health, safety and environmental risks; Cenovus’s ability to maintain desirable ratios of net debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and net debt to capitalization; Cenovus’s ability to access various sources of insurance coverage and debt and equity capital, generally, and on acceptable terms; Cenovus’s ability to finance growth, capital expenditures and dividends, including any increases thereto; changes in credit ratings applicable to Cenovus or any of its securities; the accuracy of reserves estimates, future production and future net revenue estimates; the accuracy of accounting estimates and judgments; Cenovus’s ability to replace and expand oil and gas reserves; the costs to acquire exploration rights, undertake geological studies, appraisal drilling and project development; Cenovus’s ability to maintain relationships with its partners and to successfully manage and operate its integrated operations and businesses; reliability of Cenovus’s assets ability to successfully complete development programs; refining and marketing margins; the cost and availability of equipment necessary to Cenovus’s operations; potential failure of products to achieve or maintain acceptance in

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the market; risks associated with the energy industry’s and Cenovus’s reputation, social licence to operate and litigation related thereto; unexpected cost increases or technical difficulties in operating, constructing or modifying production or refining facilities; unexpected difficulties in producing, transporting or refining of bitumen and/or crude oil into petroleum and chemical products; risks associated with technology and equipment and its application to Cenovus’s business, including potential cyberattacks; risks associated with climate change and Cenovus’s assumptions relating thereto; Cenovus’s ability to access markets and secure adequate and cost effective product transportation including sufficient pipeline, crude-by-rail, marine or alternate transportation, including to address any gaps caused by constraints in the pipeline system; availability of, and Cenovus’s ability to attract and retain, critical talent; changes in labour demographics and relationships; government actions to curtail energy operations or pursue broader climate change agendas; adverse changes to, or interpretation of, applicable laws or regulatory frameworks and the impact thereof and the costs associated with compliance; the political, social and economic conditions in the jurisdictions in which Cenovus operates or supplies; the occurrence of unexpected events resulting in operational interruptions, including blowouts, fires, explosions, railcar incidents or derailments, aviation incidents, gaseous leaks, migration of harmful substances, loss of containment, releases or spills, including releases or spills from offshore facilities and shipping vessels at terminals or hubs and as a result of pipeline or other leaks, corrosion, epidemics, pandemics, and catastrophic events, including, but not limited to, war, extreme weather events, natural disasters, iceberg incidents, acts of vandalism and terrorism, and other accidents or hazards that may occur at or during transport to or from commercial or industrial sites and other accidents or similar events; and risks associated with existing and potential future lawsuits, shareholder proposals and regulatory actions against Cenovus.

 

Readers are cautioned that the foregoing lists are not exhaustive and are made as at the date hereof. Events or circumstances could cause actual results to differ materially from those estimated or projected and expressed in, or implied by, the forward-looking information. For a full discussion of Cenovus’s material risk factors, refer to “Risk Management and Risk Factors” in Cenovus’s MD&A and to the risk factors described in other documents Cenovus files from time to time with securities regulatory authorities in Canada (available on SEDAR at sedar.com, on EDGAR at sec.gov and Cenovus’s website at cenovus.com). Additional information concerning Husky’s business and assets as of December 31, 2020 may be found in Husky’s MD&A and AIF (available on SEDAR at sedar.com and on EDGAR at sec.gov).

Cenovus Energy Inc.

Cenovus Energy Inc. is an integrated energy company with oil and natural gas production operations in Canada and the Asia Pacific region, and upgrading, refining and marketing operations in Canada and the United States. The company is focused on managing its assets in a safe, innovative and cost-efficient manner, integrating environmental, social and governance considerations into its business plans. Cenovus common shares and warrants are listed on the Toronto and New York stock exchanges, and the company’s preferred shares are listed on the Toronto Stock Exchange. For more information, visit cenovus.com.

 

Find Cenovus on Facebook, Twitter, LinkedIn, YouTube and Instagram.

 

 

 

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Exhibit 99.2

 

 

 

Cenovus Energy Inc.

Interim Consolidated Financial Statements (unaudited)

For the Periods Ended December 31, 2020

(Canadian Dollars)

 

 

 

 

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

For the periods ended December 31, 2020

 

 

TABLE OF CONTENTS

 

 

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CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (unaudited)

 

For the periods ended December 31,

($ millions, except per share amounts)

 

See accompanying Notes to Consolidated Financial Statements (unaudited).

 

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

For the periods ended December 31,

($ millions)

 

See accompanying Notes to Consolidated Financial Statements (unaudited).

 

 

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CONSOLIDATED BALANCE SHEETS (unaudited)

As at December 31,

($ millions)

 

See accompanying Notes to Consolidated Financial Statements (unaudited).

 

 

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

($ millions)

 

See accompanying Notes to Consolidated Financial Statements (unaudited).

 

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the periods ended December 31,

($ millions)

 

See accompanying Notes to Consolidated Financial Statements (unaudited).

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

 

1. DESCRIPTION OF BUSINESS AND SEGMENTED DISCLOSURES

Cenovus Energy Inc. and its subsidiaries, (together “Cenovus” or the “Company”) are in the business of developing, producing and marketing crude oil, natural gas liquids (“NGLs”) and natural gas in Canada with marketing activities and refining operations in the United States (“U.S.”).

Cenovus is incorporated under the “Canada Business Corporations Act” and its shares are listed on the Toronto (“TSX”) and New York (“NYSE”) stock exchanges. The executive and registered office is located at 4100, 225 6 Avenue S.W., Calgary, Alberta, Canada, T2P 1N2. Information on the Company’s basis of preparation for these interim Consolidated Financial Statements is found in Note 2.

On October 25, 2020, Cenovus announced that it had entered into a definitive agreement to combine with Husky Energy Inc. (“Husky”). The transaction was accomplished through a plan of arrangement (the “Arrangement”) pursuant to which Cenovus acquired all the issued and outstanding common shares of Husky in exchange for common shares and common share purchase warrants of Cenovus. In addition, all of the issued and outstanding Husky preferred shares were exchanged for Cenovus preferred shares with substantially identical terms. The Arrangement closed on January 1, 2021 (see Note 31).

The Arrangement will combine oil sands and heavy oil assets with extensive transportation, storage and logistics and downstream infrastructure, creating opportunities to optimize the margin captured across the heavy oil value chain. The combined company will be largely integrated, reducing exposure to Alberta heavy oil price differentials while maintaining exposure to global commodity prices.

Management has determined the operating segments based on information regularly reviewed for the purposes of decision making, allocating resources and assessing operational performance by Cenovus’s chief operating decision makers. The Company evaluates the financial performance of its operating segments primarily based on operating margin. The Company’s reportable segments at December 31, 2020 are:

The following tabular financial information presents the segmented information first by segment, then by product and geographic location.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

A) Results of Operations – Segment and Operational Information

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

B) Revenues by Product

 

C) Geographical Information

 

 

D) Assets by Segment

 

 

E) Capital Expenditures ⁽¹⁾

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

2. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE

In these interim Consolidated Financial Statements, unless otherwise indicated, all dollars are expressed in Canadian dollars. All references to C$ or $ are to Canadian dollars and references to US$ are to U.S. dollars.

These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of interim financial statements, including International Accounting Standard 34, “Interim Financial Reporting” (“IAS 34”), and have been prepared following the same accounting policies and methods of computation as the annual Consolidated Financial Statements for the year ended December 31, 2019, except as disclosed in Note 3.

Certain information provided for the prior year has been reclassified to conform to the presentation adopted for the period ended December 31, 2020. Certain information and disclosures normally included in the notes to the annual Consolidated Financial Statements have been condensed or have been disclosed on an annual basis only. Accordingly, these interim Consolidated Financial Statements should be read in conjunction with the annual Consolidated Financial Statements for the year ended December 31, 2019, which have been prepared in accordance with IFRS as issued by the IASB.

These interim Consolidated Financial Statements were approved by the Board of Directors effective February 8, 2021.

3. UPDATE TO SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

A) Update to Significant Accounting Policies

Principles of Consolidation

The interim Consolidated Financial Statements include the accounts of Cenovus and its subsidiaries. Subsidiaries are entities over which the Company has control. Subsidiaries are consolidated from the date of acquisition of control and continue to be consolidated until the date that there is a loss of control. All intercompany transactions, balances, and unrealized gains and losses from intercompany transactions are eliminated on consolidation.

Interests in joint arrangements are classified as either joint operations or joint ventures, depending on the rights and obligations of the parties to the arrangement. Joint operations arise when the Company has rights to the assets and obligations for the liabilities of the arrangement. The Company’s refining activities are conducted through the joint operation WRB Refining LP (“WRB”) and, accordingly, the accounts reflect the Company’s share of the assets, liabilities, revenues and expenses.

An associate is an entity for which the Company has significant influence over but does not control or jointly control the investee. Investments in associates are accounted for using the equity method of accounting and are recognized at cost and adjusted thereafter to recognize the Company’s share of the investee’s profit or loss and other comprehensive income (“OCI”).

Government Grants

Government grants are recognized when there is reasonable assurance that the grant will be received, and all conditions associated with the grant are met. Grants related to assets are recorded as a reduction to the asset’s carrying value and are depreciated over the useful life of the asset. Claims under government grant programs related to income are recorded as other income in the period in which eligible expenses were incurred or when the services have been performed.

B) Recent Accounting Pronouncements

New Accounting Standards and Interpretations not yet Adopted

There are new accounting standards, amendments to accounting standards and interpretations that are effective for annual periods beginning on or after January 1, 2021 and have not been applied in preparing the Consolidated Financial Statements for the year ended December 31, 2020. These standards and interpretations are not expected to have a material impact on the Company’s Consolidated Financial Statements. The standard applicable to Cenovus is as follows and will be adopted on its effective date:

Interest Rate Benchmark Reform

On August 27, 2020, the IASB published Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, “Financial Instruments”, IAS 39, “Financial Instruments: Recognition and Measurement”, IFRS 7, “Financial Instruments: Disclosures”, IFRS 4, “Insurance Contracts” and IFRS 16, “Leases”) (“IBOR Phase 2 Amendments”), which provides clarity on the changes after the reform of an interest rate benchmark. The amendments are effective for annual periods beginning on or after January 1, 2021, with early application permitted. The IBOR Phase 2 Amendments primarily relate to the modification of financial instruments, allowing for a practical expedient for modifications required by the reform. The practical expedient for modifications is accounted for by updating the effective interest rate without modification of the financial instrument and is subject to satisfying all qualifying criteria.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

The Company expects the IBOR Phase 2 Amendments will not have a significant impact on the Consolidated Financial Statements.

4. RECENT DEVELOPMENTS AND IMPACT ON ESTIMATION UNCERTAINTY

In March 2020, the World Health Organization declared a global pandemic following the emergence and rapid spread of a novel strain of the coronavirus (“COVID-19”). The outbreak and subsequent measures intended to limit the pandemic contributed to significant declines and volatility in financial markets. The pandemic has adversely impacted global commercial activity, including significantly reducing worldwide demand for crude oil.

The full extent of the impact of COVID-19 on the Company’s operations and future financial performance is currently unknown. It will depend on future developments that are uncertain and unpredictable, including the duration and spread of COVID-19, its continued impact on capital and financial markets on a macro-scale and any new information that may emerge concerning the severity of the virus. These uncertainties may persist beyond when it is determined how to contain the virus or treat its impact. The outbreak presents uncertainty and risk with respect to the Company, its performance, and estimates and assumptions used by Management in the preparation of its financial results.

A full list of the key sources of estimation uncertainty can be found in the Company’s annual Consolidated Financial Statements for the year ended December 31, 2019. The outbreak and current market conditions have increased the complexity of estimates and assumptions used to prepare the interim Consolidated Financial Statements, particularly related to recoverable amounts.

Determining the recoverable amount of a cash-generating unit (“CGU”) or an individual asset requires the use of estimates and assumptions, which are subject to change as new information becomes available. The severe drop in commodity prices, including prices for refined products, the decline in market crack spreads due to reasons noted above, and the decrease in demand for refined products have increased the risk of measurement uncertainty in determining the recoverable amounts, especially estimating economic crude oil and natural gas reserves and estimating forward commodity prices.

In addition, the evolving worldwide demand for energy and global advancement of alternative sources of energy that are not sourced from fossil fuels could result in a change in assumptions used in determining the recoverable amount and could affect the carrying value of the related assets. The timing in which global energy markets transition from carbon-based sources to alternative energy is highly uncertain.

Changes to assumptions could result in a material adjustment to the carrying amount of assets and liabilities within the next financial year.

5. GENERAL AND ADMINISTRATIVE

6. FINANCE COSTS

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

7. FOREIGN EXCHANGE (GAIN) LOSS, NET

8. DIVESTITURES

On December 2, 2020, the Company sold its Marten Hills assets in northern Alberta to Headwater Exploration Inc. (“Headwater”) for total consideration of $138 million, excluding the retained gross overriding royalty interest (“GORR”). A before-tax gain of $79 million was recorded on the sale (after-tax gain – $65 million). Total consideration received consists of $33 million in cash, 50 million common shares valued at $97 million and 15 million share purchase warrants valued at $8 million at the date of close. The share purchase warrants have a three-year term and an exercise price of $2.00 per share. The Company retained a GORR in the Marten Hills assets which was reclassified from E&E to PP&E for $41 million on the date of close. The investment in Headwater is held in other assets (see Note 17).

9. OTHER (INCOME) LOSS, NET

For the twelve months ended December 31, 2020, the Company recorded a $100 million loss related to the Keystone XL pipeline project.

The Government of Canada passed the Canada Emergency Wage Subsidy (“CEWS”) as part of its COVID-19 Economic Response Plan. The program is effective from March 15, 2020 to June 2021. For the twelve months ended December 31, 2020, the Company recorded $40 million in other income from the CEWS program.

In 2020, the Company recognized $24 million of lease income (2019 – $17 million). Lease income is earned on tank subleases, operating leases related to the Company’s real estate ROU assets in which Cenovus is the lessor, and from the recovery of non-lease components for operating costs and unreserved parking related to the Company’s net investment in finance leases. Finance leases are included in other assets as net investment in finance leases.

10. IMPAIRMENT CHARGES

A) Cash-Generating Unit Impairments

On a quarterly basis, the Company assesses its CGUs for indicators of impairment or when facts and circumstances suggest the carrying amount may exceed its recoverable amount. Goodwill is tested for impairment at least annually.

2020 Upstream Impairments

During the three months ended March 31, 2020, the Company tested its upstream CGUs and CGUs with associated goodwill for impairment. As a result, the Company recorded an impairment loss of $315 million as additional DD&A in the Conventional segment due to the decline in forward crude oil and natural gas prices. As at March 31, 2020, there was no impairment of goodwill or Oil Sands CGUs.

As at December 31, 2020, indicators of impairment were noted for the Company’s Conventional assets due to a change in future development plans since the Company last tested for impairment as at March 31, 2020. Therefore, the Company tested its Conventional CGUs for impairment and determined that the carrying amount was greater than the recoverable amount for certain CGUs and recorded an additional impairment loss of $240 million as DD&A.

For the purpose of impairment testing, goodwill is allocated to the CGU of which it relates. There was no impairment of goodwill as at December 31, 2020.

The following table summarizes the twelve months ended December 31, 2020 impairment losses and estimated recoverable amounts as at December 31, 2020 by CGU:

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

Key Assumptions

The recoverable amounts (Level 3) of Cenovus’s upstream CGUs were determined based on fair value less costs of disposal (“FVLCOD”). Key assumptions in the determination of future cash flows from reserves include crude oil, NGLs and natural gas prices, costs to develop and the discount rate. The fair values for producing properties were calculated based on discounted after-tax cash flows of proved and probable reserves using forward prices and cost estimates at December 31, 2020. All reserves have been evaluated as at December 31, 2020 by the Company’s independent qualified reserves evaluators.

Crude Oil, NGLs and Natural Gas Prices

The forward prices as at December 31, 2020 used to determine future cash flows from crude oil, NGLs and natural gas reserves were:

 

Discount and Inflation Rates

Discounted future cash flows are determined by applying a discount rate between 10 percent and 15 percent based on the individual characteristics of the CGU, and other economic and operating factors. Inflation was estimated at approximately two percent.

Sensitivities

The sensitivity analysis below shows the impact that a change in the discount rate or forward commodity prices would have had on the calculated recoverable amount in the impairment testing completed as at December 31, 2020 for the following CGUs:

 

2020 Refining Impairments

As at September 30, 2020, the recovery in demand for refined products from the impact of COVID-19 lagged expectations resulting in higher than anticipated inventory levels. These factors, along with low market crack spreads and crude oil processing runs for North American refineries, were identified as potential indicators of impairment for the Wood River and Borger CGUs. As at September 30, 2020, the carrying amount of the Borger CGU was determined to be greater than the recoverable amount and an impairment charge of $450 million was recorded as additional DD&A in the Refining and Marketing segment. The recoverable amount of the Borger CGU was estimated at $692 million, using a discounted cash flow method in accordance with IFRS. As at September 30, 2020, no impairment of the Wood River CGU was identified. As at December 31, 2020, there were no further indicators of impairment noted since the Company last tested as at September 30, 2020.

Key Assumptions

The recoverable amount (Level 3) of the Borger CGU was determined using FVLCOD. The FVLCOD was calculated based on discounted after-tax cash flows using forward prices and cost estimates. Key assumptions in the determination of future cash flows included forward crude oil prices, forward crack spreads, future capital expenditures, operating costs, terminal values and the discount rate. Forward crack spreads were based on quoted near-month contracts for WTI and spot prices for gasoline and diesel.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

Crude Oil and Forward Crack Spreads

Forward prices are based on Management’s best estimate and corroborated with third-party data. As at September 30, 2020, the forward prices used to determine future cash flows were:

Discount Rates

Discounted future cash flows were determined by applying a discount rate of 10 percent based on the individual characteristics of the CGU, and other economic and operating factors.

Sensitivities

The sensitivity analysis below shows the impact that a change in the discount rate or forward commodity prices would have had on the calculated recoverable amount in the impairment testing completed as at September 30, 2020 for the following CGU:

 

2020 ROU Asset Impairments

As at March 31, 2020, the temporary suspension of the Company’s crude-by-rail program was considered to be an indicator of impairment for the railcar CGU. As a result, the CGU was tested for impairment and an impairment expense of $3 million was recorded as additional DD&A in the Refining and Marketing segment.

2019 Upstream Impairments

As at December 31, 2019, the Company tested its Conventional CGUs for impairment as there were indicators of impairment due to a decline in forward natural gas prices. As at December 31, 2019, there were no impairments of goodwill or the Company’s CGUs.

B) Asset Impairments and Write-downs

Exploration and Evaluation Assets

For the twelve months ended December 31, 2020, $9 million and $82 million of previously capitalized E&E costs were written off in the Oil Sands segment and Conventional segment, respectively, as the carrying value was not considered to be recoverable and recorded as exploration expense.

For the twelve months ended December 31, 2019, $18 million and $64 million of previously capitalized E&E costs were written off in the Oil Sands and Conventional segments, respectively, as the carrying value was not considered to be recoverable and recorded as exploration expense.

Property, Plant and Equipment, Net

For the twelve months ended December 31, 2020, $48 million and $4 million of previously capitalized PP&E costs were written off in the Oil Sands segment and Conventional segment, respectively, as the carrying value was not considered to be recoverable. In addition, $52 million of previously capitalized PP&E costs relating to information technology assets were written off due to synergies identified as a result of the Arrangement. The impairment was recorded as additional DD&A in the Corporate and Eliminations segment.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

11. INCOME TAXES

The provision for income taxes is:

 

For the twelve months ended December 31, 2020, a deferred tax recovery was recorded due to an impairment of the Borger CGU, impairment in the Conventional segment and current period operating losses that will be carried forward, excluding unrealized foreign exchange gains and losses on long-term debt. In 2020, the Government of Alberta accelerated the reduction in the provincial corporate tax rate from 12 percent to eight percent.

In 2019, the Government of Alberta enacted a reduction in the provincial corporate tax rate from 12 percent to eight percent over four years. As a result, the Company recorded a deferred income tax recovery of $671 million for the year ended December 31, 2019. In addition, the Company recorded a deferred income tax recovery of $387 million due to an internal restructuring of the Company’s U.S. operations resulting in a step-up in the tax basis of the Company’s refining assets.

12. PER SHARE AMOUNTS

A) Net Earnings (Loss) Per Share – Basic and Diluted

B) Common Share Dividend

The Company temporarily suspended its common share dividend in response to the low global oil price environment. Prior to the suspension, the Company paid common share dividends of $77 million or $0.0625 per common share in the first quarter of 2020 (year ended December 31, 2019 – $260 million or $0.2125 per common share). The declaration of common share dividends is at the sole discretion of the Company’s Board of Directors and is considered quarterly. The Company’s Board of Directors declared a first quarter dividend of $0.0175 per common share, payable on March 31, 2021, to common shareholders of record as of March 15, 2021.

C) Preferred Share Dividend

Subsequent to the closing of the Arrangement on January 1, 2021, the outstanding Husky preferred shares were exchanged for Cenovus preferred shares (see Note 31). The Company’s Board of Directors declared first quarter dividends for its Cenovus series 1, 2, 3, 5, and 7 first preferred shares, payable on March 31, 2021, in the amount of $8 million.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

13. INVENTORIES

As at March 31, 2020, the Company recorded $588 million in non-cash inventory write-downs of its crude oil blend, condensate and refined product inventory. Subsequently, $547 million of inventory that was written down at the end of March was sold and the loss was realized. For the twelve months ended December 31, 2020, the Company reversed $39 million of the inventory write-downs related to March product inventory that was still on hand due to improved refined product and crude oil prices. As at December 31, 2020, the Company recorded a $6 million write-down in refined product inventory.

As at December 31, 2019, the Company recorded a $25 million write-down in refined product inventory. The inventory write-down was realized in 2020.

14. EXPLORATION AND EVALUATION ASSETS, NET

15. PROPERTY, PLANT AND EQUIPMENT, NET

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

16. RIGHT-OF-USE ASSETS, NET

 

17. OTHER ASSETS

18. SHORT-TERM BORROWINGS

The Company has uncommitted demand facilities of $1.6 billion in place, of which $600 million may be drawn for general purposes, or the full amount can be available to issue letters of credit. As at December 31, 2020, no amount was drawn on these facilities (December 31, 2019 – $nil) and there were outstanding letters of credit aggregating to $441 million (December 31, 2019 – $364 million).

WRB has uncommitted demand facilities of US$300 million (the Company’s proportionate share – US$150 million) available to cover short-term working capital requirements. As at December 31, 2020, US$190 million was drawn on these facilities, of which the Company’s proportionate share was US$95 million (C$121 million) (December 31, 2019 – $nil).

19. LONG-TERM DEBT AND CAPITAL STRUCTURE

 

A) Committed Credit Facilities

Cenovus has in place a committed revolving credit facility that consists of a $1.2 billion tranche and a $3.3 billion tranche with maturity dates of November 30, 2022 and November 30, 2023, respectively. In April 2020, the Company added a

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

committed credit facility with capacity of $1.1 billion to further support the Company’s financial resilience in the current market environment. On December 31, 2020, the Company cancelled the $1.1 billion credit facility.

B) U.S. Dollar Denominated Unsecured Notes

On July 30, 2020, Cenovus completed a public offering in the U.S., under the Company’s U.S. base shelf prospectus, of senior unsecured notes in the aggregate principal of US$1.0 billion due in 2025. As at December 31, 2020, US$3.7 billion is available under the base shelf prospectus for permitted offerings.

In the three months ended March 31, 2020, the Company paid US$81 million to repurchase a portion of its unsecured notes with a principal amount of US$100 million. A gain on the repurchase of $25 million was recorded in finance costs (see Note 6).

As at December 31, 2020, the Company is in compliance with all of the terms of its debt agreements.

C) Capital Structure

Cenovus’s capital structure objectives remain unchanged from previous periods. Cenovus’s capital structure consists of shareholders’ equity plus Net Debt. Net Debt includes the Company’s short-term borrowings, and the current and long-term portions of long-term debt, net of cash and cash equivalents and short-term investments. Cenovus conducts its business and makes decisions consistent with that of an investment grade company. The Company’s objectives when managing its capital structure are to maintain financial flexibility, preserve access to capital markets, ensure its ability to finance internally generated growth and to fund potential acquisitions while maintaining the ability to meet the Company’s financial obligations as they come due. To ensure financial resilience, Cenovus may, among other actions, adjust capital and operating spending, draw down on its credit facilities or repay existing debt, adjust dividends paid to shareholders, repurchase the Company’s common shares for cancellation, issue new debt, or issue new shares.

Cenovus monitors its capital structure and financing requirements using, among other things, non-GAAP financial metrics consisting of Net Debt to Adjusted Earnings Before Interest, Taxes and DD&A (“Adjusted EBITDA”) and Net Debt to Capitalization. These metrics are used to steward Cenovus’s overall debt position as measures of Cenovus’s overall financial strength.

Cenovus targets a Net Debt to Adjusted EBITDA ratio of less than 2.0 times over the long-term. This ratio may periodically be above the target due to factors such as persistently low commodity prices.

Net Debt to Adjusted EBITDA

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

Net Debt to Capitalization

 

Cenovus also manages its Net Debt to Capitalization ratio to ensure compliance with the associated covenant as defined in its committed credit facility agreements. Under the terms of Cenovus’s committed credit facility, the Company is required to maintain a debt to capitalization ratio, as defined in the agreements, not to exceed 65 percent. The Company is well below this limit.

20. LEASE LIABILITIES

 

The Company has lease liabilities for contracts related to office space, railcars, barges, storage assets, drilling and service rigs, and other refining and field equipment. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions.

 

The Company has variable lease payments related to property taxes for real estate contracts. Short-term leases are leases with terms of twelve months or less.

The Company has included extension options in the calculation of lease liabilities where the Company has the right to extend a lease term at its discretion and is reasonably certain to exercise the extension option. The Company does not have any significant termination options and the residual amounts are not material.

21. CONTINGENT PAYMENT

In connection with the acquisition (the “Acquisition in 2017”) from ConocoPhillips Company and certain of its subsidiaries (collectively, “ConocoPhillips”), Cenovus agreed to make quarterly payments to ConocoPhillips during the five years subsequent to May 17, 2017 for quarters in which the average WCS crude oil price exceeds $52.00 per barrel during the quarter. The quarterly payment will be $6 million for each dollar that the WCS price exceeds $52.00 per barrel. The calculation includes an adjustment mechanism related to certain significant production outages at Foster Creek and Christina Lake, which may reduce the amount of a contingent payment. There are no maximum payment terms. As at December 31, 2020, no amount was payable under this agreement (December 31, 2019 – $14 million).

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

22. DECOMMISSIONING LIABILITIES

The decommissioning provision represents the present value of the expected future costs associated with the retirement of upstream crude oil and natural gas assets, refining facilities and the crude-by-rail terminal.

The aggregate carrying amount of the obligation is:

 

The undiscounted amount of the estimated future cash flows required to settle the obligation has been discounted using a credit-adjusted risk-free rate of 5.0 percent as at December 31, 2020 (December 31, 2019 – 4.9 percent).

23. OTHER LIABILITIES

24. SHARE CAPITAL

A) Authorized

Cenovus is authorized to issue an unlimited number of common shares, and first and second preferred shares not exceeding, in aggregate, 20 percent of the number of issued and outstanding common shares. The first and second preferred shares may be issued in one or more series with rights and conditions to be determined by the Company’s Board of Directors prior to issuance and subject to the Company’s articles. Prior to the close of the Arrangement, Cenovus’s articles were amended effective December 30, 2020 to create the Cenovus series 1, 2, 3, 4, 5, 6, 7 and 8 first preferred shares.

B) Issued and Outstanding

 

There were no preferred shares outstanding as at December 31, 2020 (December 31, 2019 – nil).

As at December 31, 2020, there were 27 million (December 31, 2019 – 26 million) common shares available for future issuance under the stock option plan.

Subsequent to December 31, 2020, the Company issued common shares and first preferred shares in connection to the Arrangement that closed on January 1, 2021 (see Note 31).

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

25. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

26. STOCK-BASED COMPENSATION PLANS

Cenovus has a number of stock-based compensation plans which include stock options with associated net settlement rights (“NSRs”), performance share units (“PSUs”), restricted share units (“RSUs”) and deferred share units (“DSUs”). The following tables summarize information related to Cenovus’s stock-based compensation plans:

 

The weighted average exercise price of NSRs outstanding as at December 31, 2020 was $18.52.

 

In the twelve months ended December 31, 2020, 42 thousand NSRs, with a weighted average exercise price of $9.48, were exercised and net settled for cash (see Note 24).

The following table summarizes the stock-based compensation expense (recovery) recorded for all plans:

 

The Arrangement resulted in the accelerated vesting of outstanding NSRs, PSUs and RSUs held by non-executive employees and certain non-executive officers of the Company. In accordance with their terms, the PSUs and RSUs were settled in cash subsequent to December 31, 2020 based on the 30-day volume weighted average trading price prior to the date of closing.

In connection with the Arrangement, the termination of a DSU holder that is a Cenovus director or employee will result in the settlement and redemption of DSUs, in cash, based on the five day volume weighted average trading price prior to the date of redemption, in accordance with the terms of the related DSU Plan.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

27. FINANCIAL INSTRUMENTS

Cenovus’s financial assets and financial liabilities consist of cash and cash equivalents, accounts receivable and accrued revenues, net investment in finance leases, accounts payable and accrued liabilities, risk management assets and liabilities, investments in the equity of private companies, long-term receivables, lease liabilities, contingent payment, short-term borrowings and long-term debt. Risk management assets and liabilities arise from the use of derivative financial instruments.

A) Fair Value of Non-Derivative Financial Instruments

The fair values of cash and cash equivalents, accounts receivable and accrued revenues, accounts payable and accrued liabilities, and short-term borrowings approximate their carrying amount due to the short-term maturity of these instruments.

The fair values of long-term receivables and net investment in finance leases approximate their carrying amounts due to the specific non-tradeable nature of these instruments.

Long-term debt is carried at amortized cost. The estimated fair value of long-term debt has been determined based on the period-end trading prices on the secondary market (Level 2). As at December 31, 2020, the carrying value of Cenovus’s long-term debt was $7,441 million and the fair value was $8,608 million (December 31, 2019 carrying value – $6,699 million, fair value – $7,610 million).

Equity investments classified at FVOCI comprise equity investments in private companies. The Company classifies certain private equity instruments at FVOCI as they are not held for trading and fair value changes are not reflective of the Company’s operations. These assets are carried at fair value on the Consolidated Balance Sheets in other assets. Fair value is determined based on recent private placement transactions (Level 3) when available.

There was no change in the fair value of private equity investments classified at FVOCI from December 31, 2019 to December 31, 2020.

B) Fair Value of Risk Management Assets and Liabilities

The Company’s risk management assets and liabilities consist of crude oil swaps, futures, natural gas futures and, if entered into, crude oil options, condensate futures and swaps, foreign exchange swaps, interest rate swaps and cross currency interest rate swaps. Crude oil, condensate and, if entered into, natural gas contracts are recorded at their estimated fair value based on the difference between the contracted price and the period-end forward price for the same commodity, using quoted market prices or the period-end forward price for the same commodity extrapolated to the end of the term of the contract (Level 2). The fair value of foreign exchange swaps are calculated using external valuation models which incorporate observable market data, including foreign exchange forward curves (Level 2) and the fair value of interest rate swaps are calculated using external valuation models which incorporate observable market data, including interest rate yield curves (Level 2). The fair value of cross currency interest rate swaps are calculated using external valuation models which incorporate observable market data, including foreign exchange forward curves (Level 2) and interest rate yield curves (Level 2).

Summary of Unrealized Risk Management Positions

 

The following table presents the Company’s fair value hierarchy for risk management assets and liabilities carried at fair value:

 

Prices sourced from observable data or market corroboration refers to the fair value of contracts valued in part using active quotes and in part using observable, market-corroborated data.

The following table summarizes the changes in the fair value of Cenovus’s risk management assets and liabilities:

 

 

C) Fair Value of Contingent Payment

The contingent payment is carried at fair value on the Consolidated Balance Sheets. Fair value is estimated by calculating the present value of the expected future cash flows using an option pricing model (Level 3), which assumes the probability distribution for WCS is based on the volatility of WTI options, volatility of Canadian to U.S. foreign exchange rate options and both WTI and WCS futures pricing, and discounted at a credit-adjusted risk-free rate of 2.0 percent.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

Fair value of the contingent payment has been calculated by Cenovus’s internal valuation team which consists of individuals who are knowledgeable and have experience in fair value techniques. As at December 31, 2020, the fair value of the contingent payment was estimated to be $63 million (December 31, 2019 – $143 million).

As at December 31, 2020, average WCS forward pricing for the remaining term of the contingent payment is $42.93 per barrel. The average implied volatility of WTI options and the Canadian to U.S. foreign exchange rate options used to value the contingent payment were 35.6 percent and 6.8 percent, respectively. Changes in the following inputs to the option pricing model, with fluctuations in all other variables held constant, could have resulted in an unrealized gain (loss) impacting earnings before income tax as follows:

 

 

D) Earnings Impact of (Gain) Loss From Risk Management Positions

 

28. RISK MANAGEMENT

Cenovus is exposed to financial risks, including market risk related to commodity prices, foreign exchange rates, interest rates as well as credit risk and liquidity risk.

A) Commodity Price, Interest Rate and Foreign Currency Risk

To manage exposure to interest rate volatility, the Company may periodically enter into interest rate swap contracts. To mitigate the Company’s exposure to foreign exchange rate fluctuations, the Company periodically enters into foreign exchange contracts. To manage interest costs on short-term borrowings, the Company periodically enters into cross currency interest rate swaps. As at December 31, 2020, there were no interest rate, foreign exchange or cross currency interest rate swap contracts outstanding.

To manage exposure to commodity price movements between when products are produced or purchased and when sold to the customer or used by Cenovus, the Company may periodically enter into financial positions as a part of ongoing operations to market the Company’s production and physical inventory positions of crude oil and condensate volumes. The Company has entered into risk management positions to help capture the incremental margin expected to be received in future periods at the time products will be sold. To mitigate overall exposure to the fluctuations in commodity prices, the Company may also enter into financial positions to protect the near-term and future cash flows. As at December 31, 2020, the fair value of financial positions was a net liability of $53 million and primarily consisted of crude oil and condensate instruments.

Net Fair Value of Risk Management Positions

Sensitivities

The following table summarizes the sensitivity of the fair value of Cenovus’s risk management positions to independent fluctuations in commodity prices and foreign exchange, with all other variables held constant. Management believes the fluctuations identified in the table below are a reasonable measure of volatility.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

The impact of fluctuating commodity prices and foreign exchange on the Company’s open risk management positions could have resulted in unrealized gains (losses) impacting earnings before income tax as follows:

 

 

B) Credit Risk

Credit risk arises from the potential that the Company may incur a financial loss if a counterparty to a financial instrument fails to meet its financial or performance obligations in accordance with agreed terms. Cenovus has in place a Credit Policy approved by the Audit Committee and the Board of Directors designed to ensure that its credit exposures are within an acceptable risk level as determined by the Company’s Enterprise Risk Management Policy. The Credit Policy outlines the roles and responsibilities related to credit risk, sets a framework for how credit exposures will be measured, monitored and mitigated, and sets parameters around credit concentration limits.

Cenovus assesses the credit risk of new counterparties and continues risk-based monitoring of all counterparties on an ongoing basis. A substantial portion of Cenovus’s accounts receivable are with customers in the oil and gas industry and are subject to normal industry credit risks. Cenovus’s exposure to its counterparties is within credit policy tolerances. The maximum credit risk exposure associated with accounts receivable and accrued revenues, net investment in finance leases, risk management assets and long-term receivables is the total carrying value.

As at December 31, 2020, approximately 98 percent of the Company’s accruals, joint operations, trade receivables and net investment in finance leases were with investment grade counterparties, and substantially all of the Company’s accounts receivable were outstanding for less than 60 days. The average expected credit loss on the Company’s accruals, joint operations, trade receivables and net investment in finance leases was 0.5 percent as at December 31, 2020 (December 31, 2019 – 0.3 percent).

C) Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet all of its financial obligations as they become due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Cenovus manages its liquidity risk through the active management of cash and debt and by maintaining appropriate access to credit, which may be impacted by the Company’s credit ratings. As disclosed in Note 19, over the long term, Cenovus targets a Net Debt to Adjusted EBITDA of less than 2.0 times to manage the Company’s overall debt position.

Cenovus manages its liquidity risk by ensuring that it has access to multiple sources of capital including: cash and cash equivalents, cash from operating activities, undrawn capacity on its committed credit facility and uncommitted demand facilities as well as availability under its base shelf prospectus. As at December 31, 2020, Cenovus had $378 million in cash and cash equivalents, $4.5 billion available on its committed credit facility, $1.1 billion available on its uncommitted demand facilities, of which $600 million may be drawn for general purposes, or the full amount can be available to issue letters of credit. A further US$55 million representing the Company's available proportionate share of the WRB uncommitted demand facilities is available. In addition, Cenovus has unused capacity of US$3.7 billion under its base shelf prospectus, the availability of which is dependent on market conditions.

On January 1, 2021, with the close of the Arrangement, Cenovus obtained access to additional sources of capital (see Note 31).

Undiscounted cash outflows relating to financial liabilities are:

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

29. SUPPLEMENTARY CASH FLOW INFORMATION

The following table provides a reconciliation of liabilities to cash flows arising from financing activities:

 

 

 

30. COMMITMENTS AND CONTINGENCIES

A) Commitments

Cenovus has entered into various commitments in the normal course of operations primarily related to demand charges on firm transportation agreements. In addition, the Company has commitments related to its risk management program and an obligation to fund its defined benefit pension and other post-employment benefit plans. Cenovus’s commitments related to the Arrangement with Husky are disclosed in Note 31. Future payments for the Company’s commitments are below:

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

As at December 31, 2020, there were outstanding letters of credit aggregating to $441 million issued as security for performance under certain contracts (December 31, 2019 – $364 million).

B) Contingencies

Legal Proceedings

Cenovus is involved in a limited number of legal claims associated with the normal course of operations. Cenovus believes that any liabilities that might arise from such matters, to the extent not provided for, are not likely to have a material effect on its Consolidated Financial Statements.

Contingent Payment

In connection with the Acquisition in 2017, Cenovus agreed to make quarterly payments to ConocoPhillips during the five years subsequent to May 17, 2017 for quarters in which the average WCS crude oil price exceeds $52.00 per barrel during the quarter. As at December 31, 2020, the estimated fair value of the contingent payment was $63 million (see Note 21).

31. SUBSEQUENT EVENT

Cenovus and Husky Combine to Create a New Integrated Energy Company

A) Summary of the Acquisition

On October 25, 2020, Cenovus announced that it had entered into a definitive agreement to combine with Husky. The transaction was accomplished through a plan of arrangement pursuant to which Cenovus acquired all the issued and outstanding common shares of Husky in exchange for common shares and common share purchase warrants of Cenovus. In addition, all of the issued and outstanding Husky preferred shares were exchanged for Cenovus preferred shares with substantially identical terms. The Arrangement closed on January 1, 2021.

The Arrangement will combine oil sands and heavy oil assets with extensive transportation, storage and logistics and downstream infrastructure, creating opportunities to optimize the margin captured across the heavy oil value chain. The combined company will be largely integrated, reducing exposure to Alberta heavy oil price differentials while maintaining exposure to global commodity prices.

The Arrangement was accounted for using the acquisition method pursuant to IFRS 3, “Business Combinations”. Under the acquisition method, assets and liabilities are measured at their estimated fair value on the date of acquisition with the exception of income tax, stock-based compensation, lease liabilities and ROU assets. The total consideration was allocated to the tangible and intangible assets acquired and liabilities assumed.

B) Purchase Price Allocation

Cenovus acquired all the issued and outstanding Husky common shares in consideration for the issuance of 0.7845 Cenovus common shares plus 0.0651 Cenovus warrants for each Husky common share. Cenovus issued 788.5 million Cenovus common shares with a fair value of $6.1 billion, based on the December 31, 2020 closing share price of $7.75, as reported on the TSX. In addition, 65.4 million common share purchase warrants were issued. Each whole warrant entitles the holder to acquire one Cenovus common share for a period of five years at an exercise price of $6.54 per share. The fair value of the warrants was estimated to be $216 million. Cenovus also acquired all the issued and outstanding Husky preferred shares in exchange for 36.0 million Cenovus first preferred shares with substantially identical terms and a fair value of $519 million. The outstanding Husky stock options were also exchanged for Cenovus replacement stock options. Each replacement stock option entitles the holder to acquire 0.7845 of a Cenovus common share at an exercise price per share of a Husky stock option divided by 0.7845. The fair value of the replacement stock options was estimated to be $9 million.

The preliminary purchase price allocation is based on Management’s best estimate of the assets acquired and liabilities assumed. Upon finalizing the value of net assets acquired, adjustments may be required.

The following table summarizes the details of the consideration and the recognized amounts of assets acquired and liabilities assumed at the date of the acquisition.

The fair value of trade and other receivables acquired as part of the acquisition is $1.1 billion, with a gross contractual amount of $1.2 billion. As of the acquisition date, the best estimate of the contractual cash flows not expected to be collected is $36 million.

Cenovus incurred $29 million of acquisition related costs, excluding common share, preferred share and warrant issuance costs. These costs have been included in transaction costs in the Consolidated Statements of Earnings (Loss).

C) Liquidity and Commitments

Subsequent to the closing of the Arrangement on January 1, 2021, Cenovus obtained access to additional sources of liquidity including: $735 million in cash, $3.7 billion available on Husky’s committed credit facilities and $508 million available on Husky’s uncommitted demand facilities. Husky’s committed credit facilities have a capacity of $4.0 billion and its uncommitted demand facilities have a capacity of $975 million, of which $850 million may be drawn for general purposes, or the full amount can be available to issue letters of credit.

The Arrangement resulted in the assumption of Husky’s non-cancellable contracts and other commercial commitments. As at January 1, 2021, total commitments assumed by Cenovus were $18.7 billion, of which $7.4 billion were for various transportation and storage commitments. Transportation commitments include $1.7 billion that are subject to regulatory approval or have been approved, but are not yet in service.

D) Segmented Disclosures

Management is in the process of finalizing the determination of the operating and reporting segments for the Company. It is anticipated that the Company’s business will be conducted predominately through an upstream and downstream segment. Management continues to evaluate how the segments may be presented and will make a final determination during the first quarter of 2021.

The upstream business is anticipated to be reported as follows:

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts in $ millions, unless otherwise indicated

For the periods ended December 31, 2020

 

The downstream business is anticipated to be reported as follows:

 

 

 

Exhibit 99.3

 

CENOVUS ENERGY INC.

Supplemental Financial Information (unaudited)

Exhibit to the December 31, 2020 Consolidated Financial Statements

 

 

Consolidated Interest Coverage Ratios

 

The following financial ratios are provided by Cenovus Energy Inc. (the “Company”) in connection with the offering of common shares, debt securities, preferred shares, subscription receipts, warrants, share purchase contracts and/or units of the Company by way of base shelf prospectus dated September 19, 2019. These ratios are based on the Company's consolidated financial statements that are prepared in accordance with International Financial Reporting Standards, which are generally accepted in Canada.

Interest coverage ratios for the year ended December 31, 2020

 

The Company believes the interest coverage ratio based on net earnings available for all interest bearing financial liabilities before unrealized (gains) and losses on risk management activities is a relevant measure for investors as the realization of unrealized (gains) and losses are yet to be determined and will be realized in future periods.

 

This regulatory filing also includes additional resources:
cve-ex991_10.pdf
cve-ex992.pdf