Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) delivered solid
operating and financial performance in the company’s inaugural
quarter of operations following the acquisition of Husky Energy
Inc. on January 1. With its disciplined and methodical approach to
integrating Husky’s assets, the company has made significant
progress in the first three months of the year and is firmly on
track to deliver on its targeted acquisition synergies and 2021
budget and production guidance. Cenovus produced nearly 770,000
barrels of oil equivalent per day (BOE/d) in the quarter, and
generated adjusted funds flow of more than $1.1 billion, cash from
operating activities of $228 million, free funds flow of $594
million and net earnings of $220 million.
“With the extensive due diligence we undertook prior to the
acquisition of Husky, and our experience since the close of the
acquisition, we’re highly confident we’ll deliver at least $1
billion in synergies this year and reach our planned $1.2 billion
in annual run-rate synergies by the end of 2021,” said Alex
Pourbaix, Cenovus President & Chief Executive Officer. “If the
current commodity price environment is sustained, we expect to
approach our $10 billion net debt target this year, prior to the
benefit of any asset sales.”
Financial, production & throughput
summary |
(For
the period ended March 31) |
2021 Q1 |
2020 Q11 |
% change1 |
Financial ($ millions, except per share
amounts) |
Cash from operating
activities |
228 |
125 |
82 |
Adjusted funds
flow2,3 |
1,141 |
-154 |
|
Per share
(basic) |
0.57 |
-0.13 |
|
Capital
investment |
547 |
304 |
80 |
Free funds
flow2,3 |
594 |
-458 |
|
Net earnings
(loss) |
220 |
-1,797 |
|
Per share
(basic) |
0.10 |
-1.46 |
|
Net debt2 |
13,340 |
7,421 |
80 |
Production and throughput (before
royalties, net to Cenovus) |
Oil and NGLs
(bbls/d) |
620,090 |
416,802 |
49 |
Natural gas
(MMcf/d) |
895 |
395 |
127 |
Total upstream
production (BOE/d) |
769,254 |
482,594 |
59 |
Total
downstream throughput (bbls/d) |
469,100 |
221,100 |
112 |
1 Comparative figures include Cenovus results prior to the
January 1, 2021 closing of the Husky transaction and do not reflect
historical data from Husky.2 Adjusted funds flow, free funds flow
and net debt are non-GAAP measures. See Advisory.3 Prior period has
been restated to conform with the current period definition of
adjusted funds flow.
Q1 overview
Progress on integration and synergies
Cenovus is in the process of reassessing the acquired Husky
assets for synergies above and beyond the company’s original $1.2
billion target. This includes opportunities to apply Cenovus’s in
situ operating expertise to Husky’s legacy in situ assets in
Alberta and Saskatchewan. Application of these operating practices
drove record average daily production in the quarter at Cenovus’s
Lloydminster thermal business, including a single-day production
record of approximately 103,000 barrels per day (bbls/d) in
March.
“I’m extremely pleased with the urgency with which our teams
have pursued integration and synergy capture across all our
operations and functions,” said Pourbaix. “We’re laser focused on
finding and safely executing on the next layer of synergies within
the combined business and we’ve already identified opportunities
that could help us exceed the original target we set when we
announced the Husky transaction.”
Cenovus incurred one-time integration costs of $245 million in
the quarter. This included $22 million in capital and $223 million
in expenses related to consultant and legal fees, transfer of
licensed seismic data, integration of IT systems, severance
associated with workforce reductions as well as payments related to
change of control obligations. Total integration costs for the year
are expected to be within the anticipated $500 million to $550
million range. Cenovus completed two-thirds of its planned
workforce reductions in the first quarter of 2021, with the balance
anticipated later in the year and into 2022 as integration projects
wrap up.
Financial results
Operating margin for the quarter was nearly $1.9 billion,
compared with negative $589 million for the first quarter of 2020,
with the improved result mainly driven by higher average crude oil,
natural gas liquids (NGL) and natural gas sales prices, as well as
increased sales volumes and downstream throughputs from the
addition of assets acquired through the Husky transaction.
Adjusted funds flow of more than $1.1 billion included the
impact of the integration costs incurred in the quarter. Cash from
operating activities was $228 million. Free funds flow of $594
million included total capital investment of $547 million in the
quarter. The company continues to expect full year total capital
expenditures in the range of $2.3 billion to $2.7 billion.
Cenovus generated net earnings of $220 million compared
with a net loss of $1.8 billion in the same period in 2020.
The improvement in net earnings was driven by higher operating
margin, unrealized foreign exchange gains and risk management gains
compared with losses in the first quarter of 2020. First quarter
earnings were also impacted by the $223 million of integration
costs expensed in the period.
The company recorded a realized loss on risk management of $342
million in the first quarter of 2021, largely related to inventory
risk management which was offset by physical gains and included $89
million associated with the settlement of legacy Husky inventory
risk management programs. Risk management gains and losses are a
result of both inventory risk management and corporate hedging.
Inventory risk management is undertaken to ensure that as decisions
are made to transport or store barrels, the margin on this
transaction is captured. Resulting inventory risk management gains
or losses are designed to mirror physical losses or gains on the
transaction. It should be expected that in periods of rising price
environments, the company will report inventory risk management
losses that are offset by physical positions and vice versa.
Debt repayment
Net debt at the end of the first quarter was $13.3 billion,
compared with $13.1 billion at January 1, 2021, with the increase
primarily due to a net change in non-cash working capital of $902
million, partially offset by free funds flow of $594 million. The
increase in non-cash working capital related to an increase in
inventories and accounts receivable, partially offset by an
increase in accounts payable. The increase in inventories and
accounts receivable was mainly due to increases in commodity and
refined product prices, as well as a build in inventory related to
the turnaround activities at the Wood River and Borger refineries.
The increase in accounts payable was mainly due to higher commodity
prices, offset by the settlement of the integration costs, as well
as the payment of LTI liabilities related to the Husky
transaction.
Deleveraging will remain a top priority for Cenovus in 2021. The
company will continue to allocate virtually all free funds flow to
its balance sheet in pursuit of its net debt target of $10 billion.
At current commodity prices, Cenovus expects to approach its net
debt target by year end. The company will continue to prioritize
the balance sheet even after reducing net debt below $10 billion,
with a longer-term target of $8 billion. While it will apply the
bulk of free funds flow to the balance sheet towards the $8 billion
target, the company believes there will also be opportunity to
consider incremental shareholder returns and investment in the
business.
Strong operating performance
Cenovus’s upstream production of 769,254 BOE/d included record
production at the company’s Lloydminster thermal projects and the
Liwan natural gas project. Total upstream operating margin was $1.7
billion. The combination of higher global oil prices and narrow
light-heavy differentials resulted in strong netbacks across the
upstream business.
At its downstream operations, Cenovus initially reduced refinery
throughput in the quarter to align with market conditions and later
increased throughput towards historical levels, as refined product
demand continued to recover. Total crude oil throughput was 469,100
bbls/d, net to Cenovus. Total downstream operating margin of $184
million was impacted by planned and unplanned maintenance and
severe winter weather in parts of the U.S. The rebuild work at the
Superior Refinery in Wisconsin is progressing well and remains on
track with our original targets and costs, with several key
milestones reached in the first quarter, including the installation
of a number of critical process towers.
Health and safety
Cenovus continues to prioritize the health and safety of its
staff and the communities where it operates. The company is
managing the ongoing COVID-19 pandemic by following the direction
of local governments, public health officials and the company’s
internal health and safety experts. Office and non-essential staff
at its Western Canada locations continue to work from home, and
staff at field operations continue to adhere to comprehensive
COVID-19 protocols, including enhanced cleaning, use of masks and
physical distancing measures.
As part of the integration of Cenovus’s systems and processes,
the company is advancing work on the Cenovus Operations Integrity
Management System, a framework of safety requirements leveraging
best practices of both Cenovus and Husky to be used at all sites
and facilities.
Operating highlights
Oil Sands
The Oil Sands segment generated operating margin of $1.1
billion, compared with negative $272 million in the first quarter
of 2020, mainly due to higher average realized prices, lower
transportation costs and additional volumes contributed by the
acquired assets and inventory write-downs in 2020, partially offset
by a higher realized loss on inventory price risk management.
Cenovus achieved first-quarter transportation costs of
$10.98/bbl at its Foster Creek operations and $6.65/bbl at the
Christina Lake operations by optimizing the company’s combined
pipeline capacity out of Alberta to ship and sell heavy oil
production to U.S. destinations, with less reliance on rail. This
is a reduction of 24% for Foster Creek and 19% for Christina Lake
compared with the first quarter of 2020 when Cenovus shipped and
sold about the same proportion of heavy oil volumes at U.S.
destinations.
Total Oil Sands crude oil production averaged 553,396 bbls/d,
with sales volumes of 565,289 BOE/d compared with production of
387,036 bbls/d and sales of 397,971 BOE/d a year earlier. At Foster
Creek and Christina Lake, first-quarter crude oil production
averaged 163,090 bbls/d and 222,888 bbls/d respectively, largely in
line with production levels in the first quarter of 2020. Cenovus
continues to optimize production in 2021 to take advantage of
strong market conditions.
At the company’s Lloydminster thermal operations, the
application of Cenovus’s best practices, including its proven
operating strategy and improved production and well delivery
techniques, helped demonstrate the synergies of the company’s
combined operations. The assets delivered record average daily
production of more than 96,000 bbls/d in the quarter, including a
single day peak production rate of approximately 103,000
bbls/d.
Oil Sands average netbacks were $26.56/BOE in the quarter,
excluding risk management activities, compared with $2.58/BOE in
the same period in 2020. Netbacks at Foster Creek were $25.60/bbl
compared with $1.93/bbl in the first quarter of 2020, and netbacks
at Christina Lake were $27.28/bbl compared with $3.06/bbl a year
earlier.
Per-barrel operating costs for the segment were $11.40, compared
with $7.75 in the first quarter of 2020. The increase in Oil Sands
segment operating costs was mainly due to higher average operating
costs on assets acquired from Husky and higher natural gas fuel
costs. With the continued application of Cenovus operating
techniques on the new assets, the company expects to be able to
further reduce these costs in future quarters.
Conventional
Production from the Conventional segment was 135,933 BOE/d
compared with 95,558 BOE/d in the first quarter of 2020. The
segment generated operating margin of $210 million, up from $51
million in the first quarter of 2020, reflecting stronger natural
gas market prices as well as the benefit of pipeline and storage
assets and inventory acquired in the Husky transaction. Cenovus
drilled nine net wells in the segment in the first three months of
2021, positioning the company to take advantage of the stronger
natural gas price outlook.
Per-barrel operating costs increased to $11.09 from $9.01 in the
first quarter of 2020, primarily due to higher average operating
costs on assets acquired in the Husky transaction, while the
average netback increased to $15.80/BOE from $5.32/BOE in the same
period a year ago, largely driven by the higher sales price and
sales volume in the segment.
Offshore
In the first quarter of 2021, Cenovus’s Offshore segment
generated operating margin of $344 million, with a per-barrel
operating cost of $9.37.
A record quarterly production rate at the Liwan Gas Project
offshore China contributed to Asia Pacific production of 60,832
BOE/d in the first three months of 2021. The total realized sales
price in the quarter was $68.08/BOE, based on long-term contracted
pricing for natural gas and NGLs. Asia Pacific operating netbacks
averaged $58.53/BOE during the quarter.
Production in the Atlantic region of 16,920 bbls/d received
Brent-like pricing and generated a realized sales price of
$81.37/bbl in the first quarter. Netbacks for Atlantic production
averaged $46.27/bbl.
Downstream
Cenovus’s Downstream business, which includes its Canadian
Manufacturing and U.S. Manufacturing segments, added 365,500 bbls/d
in throughput capacity as a result of the Husky transaction.
Canadian Manufacturing
Reliable performance at the upgrader and asphalt refinery
contributed to Canadian Manufacturing operating margin of $82
million in the first quarter, with a refining margin of $18.40/bbl.
The facilities operated near capacity, with an average crude
utilization rate of 96% in the quarter. The Canadian Manufacturing
segment had operating expense of $9.69/bbl in the quarter,
reflecting workforce, repairs and maintenance, and energy costs.
The Lloydminster Upgrader delivered throughput of about 78,400
bbls/d, with refining margin of $16.64/bbl and operating expense of
$7.53/bbl. Throughput at the Lloydminster Asphalt Refinery was
about 27,800 bbls/d, with refining margin of $12.43/bbl and
operating expense of $7.75/bbl.
U.S. Manufacturing
The company’s U.S. Manufacturing assets continue to be optimized
to align with the ongoing rebound in demand for refined products.
U.S. Manufacturing operating margin was $91 million in the first
quarter, and was impacted by higher operating costs and throughput
reductions at the Wood River, Borger and Lima refineries. The cost
of Renewable Identification Numbers, which increased by 58% from
the fourth quarter of 2020, also partially offset improved refining
margins.
Throughput at the Wood River and Borger refineries, which are
jointly owned with and operated by Phillips 66, was 51,000 bbls/d
lower compared with the first quarter of 2020. Lower throughput was
primarily due to reduced run rates in response to weak market
conditions, and planned maintenance turnarounds beginning in early
March at Wood River and late February at Borger, which lasted past
the end of the quarter. In addition, operations at Borger were
impacted by winter storm Uri in February. Operations at Lima ran
below capacity during the quarter due to weak market conditions, an
unplanned outage in February and winter storm Uri, which caused a
temporary shutdown of a key pipeline that supplies feedstock to the
refinery.
First-quarter operating expense for U.S. Manufacturing was
$12.40/bbl, consisting primarily of repairs and maintenance,
workforce and utilities costs. In the first quarter of 2021,
operating expenses increased $196 million compared with the first
quarter of 2020. The increase was due to assets acquired in the
transaction, combined with turnaround activities at the Wood River
and Borger refineries, and higher utility pricing at the Lima and
Borger refineries associated with the impacts of winter storm
Uri.
Sustainability
Following a robust environmental, social and governance (ESG)
materiality assessment, Cenovus has established climate &
greenhouse gas emissions (GHGs), Indigenous reconciliation, water
stewardship, biodiversity and inclusion & diversity as its ESG
focus areas.
“We’ll be setting meaningful targets for these areas and plans
to achieve them later this year, and we remain committed to our
ambition of achieving net zero emissions by 2050,” said Pourbaix.
“As well, delivering safe and reliable operations and continuing to
demonstrate strong governance will remain foundational to how we
manage our business.”
Cenovus believes collaboration is essential to achieving its ESG
ambitions. On April 19, the winners of the five-year US$20 million
NRG COSIA Carbon XPRIZE were announced. As a member of Canada’s Oil
Sands Innovation Alliance (COSIA), Cenovus supported the
competition, which was focused on developing technologies that will
recycle carbon emissions into valuable products. Both winners are
using carbon dioxide captured from natural gas and coal plants to
produce advanced concrete products, one of the most abundantly used
materials on earth.
Dividend
For the second quarter of 2021, the Board of Directors declared
a dividend of $0.0175 per share, payable on June 30, 2021 to common
shareholders of record as of June 15, 2021. The Board also declared
a second-quarter dividend on each of the Cumulative Redeemable
First Preferred Shares – Series 1, Series 2, Series 3, Series 5 and
Series 7 – payable on June 30, 2021, to shareholders of record
as of June 15, 2021 as follows:
Preferred shares dividend summary |
(for the period ended March 31) |
Rate (%) |
Amount ($/share) |
Share
series |
Series
1 |
2.577 |
0.16106 |
Series
2 |
1.803 |
0.11238 |
Series
3 |
4.689 |
0.29306 |
Series
5 |
4.591 |
0.28694 |
Series
7 |
3.935 |
0.24594 |
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 is at the sole discretion of
the Board and will continue to be evaluated on a quarterly
basis.
Conference call today 9
a.m. Mountain Time (11 a.m. Eastern Time) Cenovus will
host a conference call today, May 7, 2021, starting at 9 a.m. MT
(11 a.m. ET). To participate, please dial 888-390-0605 (toll-free
in North America) or 416-764-8609 approximately 10 minutes prior to
the conference call. A live audio webcast of the conference call
will also be available via cenovus.com. The webcast will be
archived for approximately 90 days.
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
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, which are non-GAAP measures. 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 Management’s
Discussion and Analysis (MD&A) for the period ended March 31,
2021 (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.
Forward-looking information in this document is identified by
words such as “achieve”, “ambition”, “anticipate”, “believe”,
“committed”, “confident”, “continue”, “deliver”, “exceed”,
“expect”, “future”, “opportunity”, “on track”, “outlook”, “plan”,
“position”, “priority”, “remain”, “target” and “will” or similar
expressions and includes suggestions of future outcomes, including,
but not limited to statements about: general and 2021 priorities;
delivering at least $1 billion in synergies in 2021 and reaching
$1.2 billion in annual run-rate synergies by the end of 2021;
approaching $10 billion net debt in 2021 and a longer term net debt
target of $8 billion; allocation of free cash flow; capturing
additional synergies from the acquisition of Husky; status of
expected one-time integration-related costs; workforce reductions;
full year inventory risk management and corporate hedging programs
to manage inventory positions and improve certainty; opportunity
for incremental shareholder returns and investment in the business;
status of the Superior Refinery rebuild; future reductions of
per-barrel operating costs in the Oil Sands segment; our expected
results for the remainder of 2021; Cenovus’s ambition to achieve
net zero emissions by 2050 and plans to set new ESG targets;
quarterly evaluation of declaring dividends; and all statements
related to the company’s 2021 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 in this news release are
based include, but are not limited to: Cenovus’s ability to realize
the anticipated benefits of the Husky transaction; the allocation
of free cash flow to Cenovus’s balance sheet; commodity prices;
future narrowing of crude oil differentials; Cenovus’s ability to
produce from oil sands facilities on an unconstrained basis;
Cenovus’s ability to access sufficient insurance coverage to pursue
development plans; Cenovus’s ability to deliver safe and reliable
operations and demonstrate strong governance; and the assumptions
inherent in Cenovus’s 2021 guidance available on cenovus.com.
The risk factors and uncertainties that could cause actual
results to differ materially from the forward-looking information
in this news release include, but are not limited to: Cenovus’s
ability to realize the anticipated benefits of the Husky
transaction; the effectiveness of Cenovus’s risk management
program; the accuracy of estimates regarding commodity prices,
operating and capital costs and currency and interest rates; risks
inherent in the operation of Cenovus’s business; ability to
successfully complete development plans; and risks associated with
climate change and Cenovus’s assumptions relating thereto.
Except as required by applicable securities laws, Cenovus
disclaims any intention or obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. 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 additional
information regarding Cenovus’s material risk factors, the
assumptions made, and risks and uncertainties which could cause
actual results to differ from the anticipated results, refer to
“Risk Management and Risk Factors” and “Advisory” in Cenovus’s
MD&A for the period ended March 31, 2021 and to the risk
factors, assumptions and uncertainties 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 Annual Information
Form, each of which is filed and available on SEDAR
under Husky's profile at sedar.com.
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.
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