Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) remains committed to
increasing shareholder value through cost leadership, capital
discipline and safe and reliable operations. These commitments, in
combination with the company’s high-quality upstream assets and
joint ownership in strong refining assets, are expected to further
strengthen Cenovus’s ability to generate free funds flow and
continue deleveraging its balance sheet in 2019.
Cenovus plans to invest between $1.2 billion and $1.4 billion in
2019, with the majority of the budget going to sustain base
production at its Foster Creek and Christina Lake oil sands
operations. The company also plans to complete construction of the
Christina Lake phase G expansion. The 4% reduction in total planned
capital spending, compared with Cenovus’s 2018 forecast, is largely
the result of efficiency improvements at the company’s oil sands
operations and reduced development plans for the Deep Basin as a
result of the current commodity price environment.
The structural improvements Cenovus has achieved at its oil
sands operations have resulted in reduced costs for maintaining
base production and adding new production and have positioned the
company to create additional value with more efficient use of
capital. Cenovus expects to continue to realize low per-barrel oil
sands operating and sustaining capital costs in 2019.
“We remain focused on delivering on our commitments to
shareholders,” said Alex Pourbaix, Cenovus President & Chief
Executive Officer. “With our low cost base and strong operations,
we already set the performance standard for the in situ oil sands
industry. And, as a result of our recent efforts to reduce costs
and maintain capital discipline, I believe we are an even stronger
and more resilient company than we were a year ago, and are well
positioned to create additional value and return cash to
shareholders over the long term.”
Highlights: (2019 budget vs. October 30, 2018
guidance)
- Per-barrel operating costs remaining essentially in line
- Per-barrel oil sands sustaining capital costs down 17% due to
efficiency improvements and additional incremental capacity from
Christina Lake phase G
- Industry leading full-cycle capital efficiencies at Christina
Lake phase G of between $15,000 and $16,000 per barrel (bbl) of
capacity
- Crude-by-rail volumes expected to ramp up to approximately
100,000 barrels per day (bbls/d) by the end of 2019
Capital investment by asset ($ millions) |
|
2019 Budget |
2018 Guidance |
Oil sands |
735 – 855 |
865 – 930 |
Deep Basin |
50 – 75 |
195 – 215 |
Refining & marketing |
240 – 275 |
180 – 210 |
Corporate1 |
150 – 175 |
70 – 90 |
Total capital investment |
1,200 – 1,400 |
1,300 – 1,400 |
1 The majority of 2019 corporate capital is for the build-out of
office space at Brookfield Place, for which Cenovus signed a
long-term lease in 2013.
Average production forecast1 |
|
2019 Budget |
2018 Guidance |
% change2 |
Foster Creek (Mbbls/d) |
162 – 170 |
162 – 170 |
- |
Christina Lake (Mbbls/d) |
215 – 225 |
202 – 212 |
6 |
Total oil sands (Mbbls/d) |
377 – 395 |
364 – 382 |
3 |
Deep Basin liquids (Mbbls/d)3 |
23 – 28 |
29 – 35 |
-20 |
Deep Basin natural gas (MMcf/d) |
430 – 460 |
520 – 540 |
-16 |
Total Deep Basin (MBOE/d)3 |
95 – 105 |
116 – 125 |
-17 |
Total production (MBOE/d)3,4 |
472 – 500 |
481 – 509 |
-2 |
1 Oil volume forecasts for 2019 do not currently reflect the
impact of the Government of Alberta’s
mandated production curtailments scheduled to take
effect on January 1, 2019. 2 Percentage change based on the
midpoint of the ranges.3 Includes oil and natural gas liquids
(NGLs). See Advisory for information on conversion to barrels of
oil equivalent (BOE).4 Totals may not add due to
rounding.
Market accessCenovus made significant progress
in strengthening its long-term market access position in 2018
through previously announced three-year strategic agreements with
major rail companies to transport approximately 100,000 bbls/d of
heavy crude oil from northern Alberta to various destinations on
the U.S. Gulf Coast. The company has already begun shipping under
these contracts and anticipates ramping up to 100,000 bbls/d
through 2019 using Cenovus’s wholly-owned Bruderheim Energy
Terminal near Edmonton, Alberta as well as existing contracted
capacity at USD Partners’ oil-loading terminal in Hardisty,
Alberta. The Bruderheim facility, which Cenovus purchased in 2015
to increase its transportation options, has current gross capacity
of approximately 100,000 bbls/d, the majority of which supports
third-party shipping. Cenovus plans to spend a moderate amount of
capital in early 2019 to increase Bruderheim’s gross capacity to
120,000 bbls/d.
In addition to its rail agreements, Cenovus has firm capacity to
the West Coast of 11,500 bbls/d on the existing Trans Mountain
pipeline and 75,000 bbls/d of capacity to the U.S. Gulf Coast on
the Flanagan South system. The company is also well positioned for
future market access through its committed capacity on the proposed
Keystone XL pipeline project and the Trans Mountain Expansion
Project.
Including Cenovus’s net share of processing capacity at its
jointly owned Wood River and Borger refineries in the U.S.,
existing pipeline commitments and plans to ramp up its
crude-by-rail capacity, the company has the potential to protect
between 55% and 60% of its forecast blended heavy oil volumes
against the impact of low Western Canadian Select (WCS) prices.
DifferentialsOn December 2, 2018, the
Government of Alberta mandated a temporary 8.7% oil production
curtailment in the province, effective January 1, 2019. This
measure is necessary to help reduce the relatively small oversupply
of oil that led to record-high light-heavy oil price differentials
and a collapse in the price of WCS in late 2018.
The full-year impact of the government-mandated production cuts
is not currently reflected in Cenovus’s 2019 Guidance, which was
published today. Based on preliminary estimates, the company
expects combined January crude bitumen and crude oil production to
be approximately 347,000 bbls/d. Once Cenovus has additional
details about the implementation and duration of the curtailment
plan, the company will provide an update on its production outlook
for the year. Cenovus anticipates that the expected improvement in
WCS prices as a result of the industry wide production curtailments
will have a significant positive impact on its adjusted funds flow
in 2019.
Over the past year, Cenovus has demonstrated its ability to
respond to low commodity prices by safely slowing production while
continuing to inject steam and storing mobilized barrels of oil in
its reservoirs. As a result, the company is confident that it can
achieve the government-mandated production curtailment levels in
2019 without impacting the integrity of its reservoirs.
Cenovus also has the ability to store produced oil in salt
caverns located at its Foster Creek oil sands and Bruderheim
rail-loading facilities. The Foster Creek cavern is already
operational and the Bruderheim cavern is expected to become
operational by the end of the first quarter of 2019. Cenovus has
capacity to store nearly 3 million barrels of sales oil at the two
facilities combined.
With the expected start-up of Enbridge’s Line 3 Replacement
project and the ramp-up of incremental rail takeaway capacity in
Alberta through late 2019 and into 2020, the company expects
differentials to be at more historical levels through the balance
of next year.
Oil sandsCenovus benefits from having
best-in-class in situ oil sands assets, with top-tier resources and
industry-leading steam to oil ratios and low operating costs. As a
result of improvements achieved over the past few years, the
company’s oil sands facilities continue to demonstrate the ability
to deliver safe and reliable operational performance at reduced
cost, which will continue to be a focus in 2019.
Cenovus plans to spend 2019 sustaining capital of $575 million
to $650 million, or $3.50/bbl to $4.00/bbl of installed capacity,
to maintain base production at Foster Creek and Christina Lake.
Approximately $100 million to $125 million has been allocated to
complete construction of Christina Lake phase G, which has approved
capacity of 50,000 bbls/d. Phase G is proceeding very well and is
expected to be completed with full-cycle capital efficiencies of
between $15,000 and $16,000 per barrel of capacity, which is
industry leading. Phase G remains on track to begin production in
the second half of 2019, assuming mandated production curtailments
have been lifted. This coincides with the expected ramp-up of
significant crude-by-rail takeaway capacity in Alberta and the
potential start-up of Enbridge’s Line 3 Replacement project.
Cenovus will continue to monitor oil price differentials and
takeaway capacity to determine the optimal timing for the start-up
of phase G. The company also plans to spend a minimal amount of
capital on Foster Creek phase H, Christina Lake phase H and Narrows
Lake to continue to advance each one to sanction-ready status.
Cenovus will continue to focus on maintaining its position as an
in situ cost leader. In 2019, the company expects total per-barrel
oil sands operating costs to increase slightly compared with its
2018 forecast. The increase is mainly associated with the expected
start-up of Christina Lake phase G, including higher initial steam
rates, and planned maintenance at Christina Lake in early 2019.
Companywide per-barrel operating costs are expected to remain
essentially in line with Cenovus’s 2018 forecast.
The company is forecasting average oil sands production of
377,000 bbls/d to 395,000 bbls/d in 2019, a 3% increase at the
midpoint compared with the midpoint of its forecast for 2018,
largely due to the expected start-up of Christina Lake phase G,
offset by planned turnaround activity at Christina Lake. Cenovus
conducted minimal turnaround activity in its oil sands business in
2018. Forecast production for 2019 does not currently include the
impact of mandated production curtailments scheduled to take effect
on January 1, 2019.
Oil sands operating costs |
|
2019 Budget |
2018 Guidance |
% change1 |
Foster Creek ($/bbl) Fuel Non-fuel
Subtotal |
1.50 – 2.006.50 –
7.508.00 – 9.50 |
2.00 – 2.256.50 – 7.008.50 – 9.25 |
-18+4-1 |
Christina Lake ($/bbl) Fuel Non-fuel
Subtotal |
1.50 – 2.004.50 –
5.506.00 – 7.50 |
1.75 – 2.004.25 – 4.756.00 – 6.75 |
-7116 |
Total oil sands2 ($/bbl) Fuel Non-fuel
Subtotal |
1.50 – 2.005.35 –
6.356.85 – 8.35 |
1.85 – 2.105.25 – 5.757.10 – 7.85 |
-1162 |
1 Percentage change based on the midpoint of the ranges.2
Based on a volume-weighted average.
Oil sands sustaining capital costs |
|
2019 Budget |
2018 Guidance |
% change1 |
Total ($ millions) |
575 – 650 |
600 – 675 |
-4 |
Per-unit ($/bbl)2 |
3.50 – 4.00 |
4.25 – 4.75 |
-17 |
1 Percentage change based on the midpoint of the ranges.2 Based
on total installed capacity.
Deep BasinCenovus has a large land base in the
Deep Basin fairway in northwestern Alberta and northeastern British
Columbia with high-quality producing and development assets.
Initial well results following the company’s modest 2018 drilling
and development program have been very encouraging. However, in
response to the current commodity price environment and the
company’s continued focus on near-term debt reduction, Cenovus has
reduced its investment and drilling plans for the Deep Basin in
2019. Over the course of the year, the company will be working to
optimize its operating model in the Deep Basin, with the goal of
reducing costs, improving efficiency and maximizing value.
Cenovus plans to invest between $50 million and $75 million in
the Deep Basin next year, with minimal capital allocated to
drilling and completions activities. Production is expected to be
between 95,000 barrels of oil equivalent per day (BOE/d) and
105,000 BOE/d in 2019, down 17% from forecast 2018 levels, mainly
due to asset divestitures in 2018 and natural production declines
that reflect the reduced capital spend in late 2018 and 2019. The
company made good progress in reducing operating costs in the Deep
Basin in 2018 and expects to make further improvements to hold
per-barrel operating costs essentially flat next year compared with
its 2018 forecast, even as production declines.
Deep Basin operating costs |
|
2019 Budget |
2018 Guidance |
% change1 |
Deep Basin2 ($/BOE) |
7.75 - 8.75 |
7.50 – 8.50 |
3 |
1 Percentage change based on the midpoint of the ranges.2
Includes oil, natural gas liquids and natural gas.
DownstreamAs a result of consistently strong
operating performance and high utilization rates at Cenovus’s
jointly owned Wood River and Borger refineries in the U.S., which
are operated by Phillips 66, the refineries have each been rerated
to reflect higher processing capacity. Crude capacity at Wood River
was rerated to 333,000 bbls/d from 314,000 bbls/d, while capacity
at Borger was rerated to 149,000 bbls/d from 146,000 bbls/d. The
new capacity ratings take effect January 1, 2019.
Through its 50% ownership in the Wood River and Borger
refineries, approximately 25% of Cenovus’s blended oil production
is mitigated against the impact of light-heavy oil differentials.
When differentials are wide and Canadian heavy oil prices are
discounted, the company’s refineries benefit from a feedstock cost
advantage. Because refined product pricing is correlated to Brent
Crude, the company also benefits when Brent is priced at a premium
to West Texas Intermediate (WTI). Cenovus’s refining assets have
consistently demonstrated value through their ability to generate
significant free funds flow when Canadian heavy oil prices are low,
helping to offset the pricing impact on the company’s upstream
assets.
In 2019, Cenovus plans to spend $240 million to $275 million on
its Refining and Marketing segment, with approximately half of the
capital going towards base maintenance, reliability, and safety
projects and the remainder going towards projects focused on
improving yield and profitability.
CorporateCenovus anticipates 2019 general and
administrative (G&A) costs of $1.91/BOE compared with its 2018
forecast of $1.87/BOE. Total G&A costs for 2019 are expected to
be between $325 million and $350 million, consistent with the 2018
forecast.
As part of its plan to increase workspace efficiency while
reducing overall real estate costs, Cenovus expects to move all of
its Calgary based staff into Brookfield Place over the course of
2019, starting in January. The company has allocated approximately
$100 million next year to essentially complete the build out of the
Brookfield Place office space. Cenovus remains focused on reducing
its real estate costs through an active subleasing program and is
not renewing existing Calgary office leases as they expire. The
company recently made significant progress in reducing its
long-term fixed real estate costs by subleasing additional floors
of The Bow. To date, the company has subleased approximately 40% of
its space at The Bow and will focus on subleasing additional excess
office space as staff transfer to Brookfield Place.
Technology While the budget for technology
development in 2019 remains modest, Cenovus continues to advance
key strategic initiatives that are expected to provide both cost
and environmental benefits and are aligned with the company’s
long-term goals. This includes ongoing work on solvents, partial
upgrading and advancing Cenovus’s new oil sands facility design.
Initial progress on these initiatives has shown promising results,
and if implemented commercially, the technologies have the
potential to significantly reduce Cenovus’s costs and greenhouse
gas (GHG) emissions intensity. The company expects to be able to
more fully pursue these advancements once the balance sheet
improves and there are funds available to invest in these value-add
projects. In addition, Cenovus is investing in upgrades to the
company’s information technology systems to improve productivity
and reliability and take full advantage of data analytics and
automation opportunities.
Cenovus remains committed to reducing its GHG emissions
intensity over time and is tracking emissions on its corporate
scorecard to encourage continuous improvement. Since the company’s
ability to make meaningful strides towards reducing its GHG
emissions intensity is largely dependent on future capital
investment in technology, Cenovus is not setting a specific target
or timeline for additional emissions reductions at this time.
Deleveraging the balance sheetCenovus has made
significant progress in deleveraging its balance sheet in 2018
using free funds flow and proceeds from the sale of its Pipestone
business in the Deep Basin in September for $625 million, before
closing adjustments. As part of its continued focus on deleveraging
in 2019, the company will continue to prioritize reducing debt
through free funds flow from its low-cost operations and proceeds
from potential additional sales of non-core Deep Basin assets.
Given the challenging commodity price environment, Cenovus does not
have a specific timeline for achieving additional divestitures and
will pursue transactions in 2019 only if they generate strong value
for the assets involved.
S&P Global Ratings recently affirmed Cenovus’s credit rating
at BBB and improved its outlook to stable from negative, citing the
company’s consistently strong operating performance, competitive
cost structure in its heavy oil focused upstream segment and the
strong cash flow from its joint-venture ownership of the Wood River
and Borger refineries. Cenovus continues to maintain three
investment grade credit ratings and is targeting a long-term net
debt to adjusted earnings before interest, taxes, depreciation and
amortization ratio of less than two times.
HedgingCenovus has not added any new corporate
commodity hedges during the fourth quarter. As of December 10, 2018
the company had 19,000 bbls/d of WTI collars in place for 2019,
with a floor price of US$50.00/bbl and upside participation to
US$62.08/bbl.
GuidanceCenovus has made its 2019 guidance
available at cenovus.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.
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
conversion ratio of 6:1, utilizing a conversion on a 6:1 basis is
not an accurate reflection of value.
Non-GAAP Measures and Additional Subtotal. This
news release contains references to adjusted funds flow, free funds
flow, and net debt to adjusted EBITDA, which are non-GAAP measures
that do not have a standardized meaning as prescribed by
International Financial Reporting Standards (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
companies. 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” and the Advisory section of Cenovus's
Management's Discussion & Analysis (MD&A) for the period
ended September 30, 2018 (available on SEDAR at sedar.com, on EDGAR
at sec.gov and Cenovus's website at cenovus.com).
Forward-looking InformationThis 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 United States Private Securities
Litigation Reform Act of 1995, about our current expectations,
estimates and projections about the future, based on certain
assumptions made by us in light of our experience and perception 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. Readers are cautioned not to place undue reliance on
forward-looking information as actual results may differ materially
from those expressed or implied. Cenovus undertakes no obligation
to update or revise any forward-looking information except as
required by law.
Forward-looking information in this document is identified by
words such as “anticipate”, “believe”, “budget”, “capacity”,
“commitment”, “estimate”, “expect”, “focus”, “forecast”, “goal”,
“guidance”, “opportunity”, “plan”, “position”, “potential”,
“schedule”, “strategy”, “target”, or similar expressions and
includes suggestions of future outcomes, including statements
about: our strategy and related milestones and schedules;
projections for 2019 and future years and our plans to realize such
projections; our priorities and other statements relating to
forecast capital spending, cost reductions, production guidance,
debt reduction, including through free funds flow and asset sales,
capital discipline and free funds flow as well as targeted net debt
to adjusted EBITDA ratio; expected crude oil and crude bitumen
production; expected impacts of our rail commitments and our
timeline and ability to ramp up our oil-by-rail; our expectations
regarding price differentials for Western Canadian oil, including
the impact of mandated and voluntary production curtailments, the
planned ramp-up of Canadian oil-by-rail activity and the
anticipated start-up in the second half of 2019 of Enbridge’s Line
3 Replacement project, and our ability to take steps to mitigate
against such differentials; our positioning to generate significant
free funds flow as market conditions improve and price
differentials return to more historic levels; our pipeline capacity
commitments; the percentage of Cenovus’s blended heavy oil volumes
that can be partially mitigated against wider differentials;
expected outcomes of the company's hedge positions, including
relative to forecast oil production and expected impacts with
respect to the company's light-heavy crude oil differential
exposure; expected impacts of the company's capacity for storage in
its oil sands reservoirs; full-year production volume and steam to
oil ratio forecasts; Christina Lake phase G expansion progress,
including relative to budget and schedule, expected production
capacity and expected capital costs, including relative to previous
estimates; the company’s intention to further focus its portfolio
and reduce debt by divesting more of its Deep Basin assets; and all
statements related to the company’s updated 2018 and 2019
guidance.
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: Brent price
of US$66.50/bbl, WTI price of US$57.00/bbl; WCS price of
US$30.00/bbl; AECO natural gas price of $1.75/Mcf; Chicago 3-2-1
crack spread of US$16.50/bbl; exchange rate of $0.76 US$/C$ and
other assumptions identified in Cenovus’s updated 2019 Guidance
(available at cenovus.com); projected capital investment levels,
the flexibility of capital spending plans and associated sources of
funding; achievement of further cost reductions and sustainability
thereof; future improvements in availability of product
transportation capacity, including that major North American
refineries will return to normal operations following scheduled
maintenance, Canadian oil-by-rail activity will ramp-up as planned,
and the expected impact of mandated and voluntary production
curtailments, as well as available storage capacity, will be
realized, and Enbridge’s Line 3 Replacement project will start up
in late 2019 as announced; future narrowing of crude oil
differentials; estimates of quantities of oil, bitumen, natural gas
and liquids from properties and other sources not currently
classified as proved; accounting estimates and judgments; future
use and development of technology and associated expected future
results; ability to obtain necessary regulatory and partner
approvals; the successful and timely implementation of capital
projects or stages thereof; ability to complete asset sales,
including with desired transaction metrics and expected timelines;
and ability to access and implement all technology necessary to
achieve expected future results.
Additional information about risks, assumptions, uncertainties
and other factors that could influence Cenovus’s actual results is
provided in Cenovus’s MD&A for the period ended September 30,
2018 as well as its MD&A, Annual Information Form (AIF) and
Form 40-F for the year ended December 31, 2017 (all available on
SEDAR at sedar.com, on EDGAR at sec.gov and Cenovus's website at
cenovus.com).
Cenovus Energy Inc.Cenovus Energy Inc. is a
Canadian integrated oil and natural gas company. It is committed to
maximizing value by responsibly developing its assets in a safe,
innovative and efficient way. Operations include oil sands projects
in northern Alberta, which use specialized methods to drill and
pump the oil to the surface, and established natural gas and oil
production in Alberta and British Columbia. The company also has
50% ownership in two U.S. refineries. Cenovus shares trade under
the symbol CVE, and are listed on the Toronto and New York stock
exchanges. For more information, visit cenovus.com.
Find Cenovus on Facebook, Twitter, LinkedIn, YouTube and
Instagram.
CENOVUS
CONTACTS: |
|
Investor
Relations |
Media
Relations |
Sherry Wendt |
Sonja
Franklin |
Director, Investor
Relations |
Senior Media
Advisor |
403-766-5489 |
403-766-7264 |
|
|
Mark Austin |
Media Relations general
line |
Senior Advisor,
Investor Relations |
403-766-7751 |
403-766-3926 |
|
|
|
Investor Relations
general line |
|
403-766-7711 |
|
Photos accompanying this announcement are available at
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