Cenovus Energy Inc. (TSX:CVE) (NYSE:CVE) had continued strong
operational performance from its oil sands projects and Deep Basin
natural gas assets in the first quarter of 2018. The company’s
quarterly financial results were impacted by risk management
losses, wider light-heavy oil differentials and planned refinery
maintenance. As previously announced, Cenovus responded to the
wider price differentials and transportation constraints by
temporarily slowing oil sands production in February and March and
storing excess barrels in its reservoirs. The company ramped oil
sands production back up to normal levels after Western Canadian
Select (WCS) prices improved. Cenovus also made good progress with
its drilling program in the Deep Basin in the quarter.
First quarter highlights
- Oil sands volumes nearly doubled compared with the same period
a year earlier as a result of Cenovus’s May 2017 asset
acquisition
- Deep Basin unit operating costs decreased 18% from the third
quarter of 2017, Cenovus’s first full quarter of ownership of the
assets
- Oil sands unit operating costs declined slightly from the first
quarter of 2017
- Major planned turnarounds at the Wood River and Borger
refineries were carried out over several weeks during the quarter
and were completed in April
- The company incurred realized risk management losses of $469
million
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Financial & production
summary |
(for the period ended March 31) |
2018Q1 |
2017Q1 |
Financial ($ millions, except per share
amounts) |
|
|
Cash from
operating activities1 |
-123 |
328 |
Adjusted funds flow1,2 |
-41 |
323 |
Per share diluted |
-0.03 |
0.39 |
Free funds
flow1,2 |
-565 |
10 |
Operating earnings (loss) from continuing
operations2 |
-752 |
-39 |
Per share diluted |
-0.61 |
-0.05 |
Net
earnings (loss) from continuing operations |
-914 |
211 |
Per share diluted |
-0.74 |
0.25 |
Capital investment1 |
524 |
313 |
Production from continuing operations3 (before
royalties) |
|
|
Oil sands (bbls/d) |
359,666 |
181,501 |
Deep Basin liquids4 (bbls/d) |
35,479 |
- |
Total liquids from continuing
operations (bbls/d) |
395,145 |
181,501 |
Total natural gas from continuing operations
(MMcf/d) |
553 |
15 |
Total production from continuing operations
(BOE/d)5 |
487,464 |
184,001 |
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1 Includes results from Cenovus's legacy conventional segment,
which has been classified as a discontinued
operation.2 Adjusted funds flow, free funds flow and operating
earnings/loss are non-GAAP measures. See Advisory. 3 Does
not include production from Cenovus’s legacy conventional oil and
natural gas assets, the last of which was sold as of January 5,
2018. The legacy conventional segment has been classified as a
discontinued operation. 4 Includes oil and natural gas
liquids (NGLs).5 Totals may not add due to rounding.
First quarter overview
Financial highlights
In the first quarter of 2018, Cenovus had a shortfall in cash
from operating activities of $123 million compared with a surplus
of $328 million in the same period a year earlier, and a shortfall
in adjusted funds flow of $41 million, compared with a surplus of
$323 million in 2017. Operating loss from continuing operations was
$752 million compared with a $39 million loss the previous
year.
Financial results were affected by realized risk management
losses, the widest light-heavy oil price differentials experienced
since the fourth quarter of 2013, planned turnarounds at the
company’s two jointly owned U.S. refineries and an impairment on
some assets in the Deep Basin.
“The challenges we experienced in the first quarter had a
significant impact on our financial results, but the underlying
performance of our assets remains very strong,” said Alex Pourbaix,
Cenovus President & Chief Executive Officer. “I want to stress
that these financial challenges are temporary and don’t reflect
Cenovus’s significant potential for funds flow and earnings
growth.”
Cenovus incurred realized risk management losses from continuing
operations of $469 million compared with losses of $79 million in
the same quarter a year earlier. Following the company’s May 2017
asset acquisition, Cenovus had increased leverage and was in the
process of marketing its legacy conventional oil and natural gas
assets to streamline its portfolio and reduce debt. The company
hedged approximately 80% of its forecast oil production for the
first half of 2018 to support financial resilience by establishing
downside protection at a time when commodity prices were lower and
the timing and amount of proceeds from planned divestitures were
uncertain. This was the main contributor to the realized risk
management losses in the quarter as benchmark prices exceeded
Cenovus’s contract prices.
At the end of the second quarter, a portion of Cenovus’s 2018
risk management contracts will expire, reducing the company’s hedge
position to approximately 37% of forecast oil production for the
second half of the year. As of March 31, 2018, the company had
19,000 barrels per day (bbls/d) of West Texas Intermediate (WTI)
hedged for 2019 using collars that provide downside price
protection while allowing Cenovus opportunity to capture some of
the benefit in a rising price environment.
During the first quarter of 2018, transportation constraints
resulted in light-heavy oil price differentials averaging
US$24.28/bbl, 67% wider compared with the same period in 2017. This
contributed to reduced netbacks at the company’s oil sands
operations. Companywide netbacks from continuing operations, before
realized risk management losses, averaged $16.80 per barrel of oil
equivalent (BOE) in the first quarter of 2018 compared with $21.25
in the same period a year earlier. Cenovus continues to mitigate
its exposure to heavy oil price discounts through its downstream
integration, pipeline commitments to the U.S. Gulf Coast and
Canadian West Coast and rail optionality including the company’s
Bruderheim crude-by-rail terminal as well as through financial
contracts on the WCS differential.
At Cenovus’s jointly owned Wood River and Borger refineries in
the U.S., the operator carried out major planned turnarounds over
several weeks during the first quarter. As a result, Cenovus
recorded a shortfall in refining and marketing operating margin of
$48 million for the quarter, compared with operating margin of $53
million in the same period of 2017. 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, the
shortfall in operating margin from refining and marketing would
have been $69 million in the first quarter of 2018.
As at the end of the first quarter, Cenovus determined that the
carrying value of its Clearwater assets in the Deep Basin exceeded
their recoverable amount due to a decline in forward natural gas
prices. This resulted in a non-cash impairment charge of $100
million in the quarter.
Cost reductionsCenovus continues to make
progress in reducing the company’s capital investment costs and
operating and general and administrative (G&A) expenses. This
includes the company’s previously announced plan to reduce its
workforce by approximately 15% from 2017 levels, which is now
largely complete.
Cenovus continues to achieve greater operational and capital
efficiencies by drilling longer horizontal wells in the oil sands
and using multi-well pad development in the Deep Basin. Previous
improvements to electric submersible pumps at the company’s oil
sands operations have resulted in longer pump life and reduced
workover costs. Lower decline rates and better performance from new
well pads at Cenovus’s oil sands facilities have allowed the
company to optimize timing of wells and capital investment, further
reducing costs. In the Deep Basin, optimization of maintenance and
integrity programs lowered repair and maintenance expenses.
Additional per-barrel operating cost reductions are expected to
come with further optimization of maintenance scheduling.
Cenovus had first quarter G&A costs of $179 million,
compared with $43 million in the same period in 2017. The increase
was primarily due to one-time severance costs of $43 million and a
$59 million non-cash expense for Calgary office space that exceeds
current needs. Cenovus continues to pursue an active subleasing
program to offset some of its real estate costs.
Divestitures and deleveragingIn January 2018,
Cenovus closed the sale of its Suffield assets for gross cash
proceeds of $512 million. With the closing of the Suffield sale,
the company completed its plan, announced in 2017, to divest its
legacy conventional business.
To further streamline its portfolio, reduce debt and increase
shareholder value, the company continues to review potential
divestitures of non-core assets in the Deep Basin. Cenovus has one
of the largest land positions in the Deep Basin, with
approximately three million net acres, providing more opportunities
than the company can efficiently develop within a reasonable
timeframe. The company continues to make progress with its
previously announced plan to sell assets with current production of
approximately 15,000 BOE/d of natural gas and liquids in the
Clearwater area of the Deep Basin.
Operating highlights
Oil sandsCenovus’s oil sands projects continued
to deliver strong operational performance in the first quarter of
2018. However, due to market access challenges, the company decided
to temporarily slow production at Christina Lake and Foster Creek
in February and March.
“After a strong operational start to the quarter, we took
prudent steps to reduce production volumes in response to wider
light-heavy differentials, export pipeline capacity constraints and
the slow pace of ramp up in oil-by-rail capacity,” said Pourbaix.
“When Canadian heavy oil is selling at a wide discount to WTI, we
have the ability to slow our oil sands production while maintaining
steam injection to mobilize the oil. We can then store that
mobilized oil in our reservoirs to be produced and sold at a later
date when pipeline capacity improves and differentials narrow.”
To help address these ongoing market access challenges, Cenovus
is working with rail providers to resolve a shortage of locomotive
hauling capacity so that the company can more fully realize the
benefits of its Bruderheim crude-by-rail facility. Cenovus expects
overall industry rail access to improve starting in the second half
of the year. Should rail capacity improvements take longer than
expected, or pipeline capacity tighten again, the company may take
further steps to defer production which could result in fluctuating
production volumes from month to month.
As a result of the temporary oil sands production decrease in
the first quarter, Foster Creek’s steam to oil ratio (SOR) –
the amount of steam needed to produce one barrel of oil – rose to
2.8 for the period. As market access improved in late March and
April, Cenovus ramped oil sands production back up to take
advantage of improved pricing. At Christina Lake, the SOR remained
unchanged year over year at an industry leading 1.8. The company
expects SORs to remain within full-year guidance of 2.6 to 3.0 at
Foster Creek and 1.8 to 2.2 for Christina Lake in 2018.
Combined production at Christina Lake and Foster Creek was
359,666 bbls/d during the quarter, nearly double the volume from
the same period a year earlier. The increase was due to the
company’s May 2017 acquisition, which resulted in Cenovus taking
full ownership of its oil sands assets. Oil sands operating
expenses were $8.78/bbl, 2% lower than in the first quarter of
2017. Cenovus continues to expect full-year oil sands volumes for
2018 to be within its guidance range of 364,000 to 382,000
bbls/d.
Construction at the Christina Lake phase G expansion, which
resumed in the first quarter of 2017, continues to progress on time
and on budget. Cenovus expects the expansion will have go-forward
capital costs, from the time the project was restarted last year
through to completion, of between $13,000 and $14,000 per flowing
barrel compared with the company’s previous estimate of between
$16,000 and $18,000. Phase G has approved capacity of 50,000
bbls/d.
Deep BasinTo date, Cenovus is pleased with its
Deep Basin program and initial well results have met or exceeded
the company’s expectations. First quarter production averaged
127,056 BOE/d, with average operating costs of $7.36/BOE, an 18%
reduction from the third quarter of 2017, Cenovus’s first full
quarter of ownership of the assets. While the company is encouraged
by the drilling and production results, Cenovus continues to take a
disciplined approach to development in the Deep Basin in response
to lower natural gas prices. During the quarter, the company
substantially completed its 2018 Deep Basin capital investment
program, bringing 17 wells on production, completing 16 wells and
adding additional pipeline infrastructure, and drilling 14
horizontal wells targeting liquids-rich natural gas.
DownstreamIn the first quarter of 2018, the
Wood River and Borger refineries, which Cenovus jointly owns with
the operator, underwent planned maintenance activity, including the
first major turnaround at the Wood River Coker and Refinery
Expansion (CORE) project since it was completed in 2011. The
maintenance programs were completed in April and both refineries
have since returned to planned operating levels.
New CFO appointedEarlier this month, Cenovus
announced the appointment of Jon McKenzie as the company’s next
Chief Financial Officer, who in addition to his financial
background brings a broad range of energy industry experience
spanning operations, supply, trading and commercial activities
related to pipelines, rail and terminal operations. He will succeed
Ivor Ruste, who as previously announced, is retiring on April
30.
DividendFor the second quarter of 2018, the
Board of Directors has declared a dividend of $0.05 per share,
payable on June 29, 2018 to common shareholders of record as of
June 15, 2018. Based on the April 24, 2018 closing share price on
the Toronto Stock Exchange of $12.19, this represents an annualized
yield of about 2%. Declaration of dividends is at the sole
discretion of the Board and will continue to be evaluated on a
quarterly basis.
Conference Call Today9
a.m. Mountain Time (11 a.m. Eastern Time)
Cenovus will host a conference call today, April
25, 2018, starting at 9 a.m. MT (11 a.m. ET). To participate,
please dial 888-231-8191 (toll-free in North America) or
647-427-7450 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, operating earnings (loss), net debt, net debt to adjusted
EBITDA, and netback, which are non-GAAP measures, and operating
margin, which is an additional subtotal found in Note 1 of
Cenovus's Interim Consolidated Financial Statements (unaudited) for
the period ended March 31, 2018 (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” and the Advisory section of Cenovus's
Management's Discussion & Analysis (MD&A) for the period
ended March 31, 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 Cenovus's current
expectations, estimates and projections about the future, based on
certain assumptions made in light of Cenovus's 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.
Forward-looking information in this document is identified by
words such as “budget”, “capacity”, “estimate”, “expect”, “focus”,
“forecast”, “forward”, “mitigate”, “on time”, “position”,
“potential”, “progress”, “target”, “will”, or similar expressions
and includes suggestions of future outcomes, including statements
about: the company's strategy and related milestones and schedules;
projections for 2018 and future years and our plans and strategies
to realize such projections; belief regarding the temporary nature
of financial challenges experienced in the period, and that such
challenges do not reflect the company's significant potential for
funds flow and earnings growth; the expected mitigating impact on
light-heavy crude oil price differentials through the company's
downstream integration, pipeline commitments, rail optionality and
financial contracts; expected outcomes of the company's hedge
positions, including relative to forecast oil production and
expected impacts with respect to the company's downside and upside
commodity price and light-heavy crude oil differential exposure;
expected cost reductions; potential asset divestitures and
projected outcomes, including with respect to debt reduction and
increasing shareholder value; expected impacts of the company's
capacity to slow production through storage in its oil sands
reservoirs, including potential to time production and sales at
later dates when pipeline capacity and crude oil differentials have
improved; expected rail capacity improvements; full-year production
volume and steam to oil ratio forecasts; and expected capital
costs, including relative to previous estimates.
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
prices of US$55.00/bbl, WTI prices of US$52.00/bbl; WCS of
US$37.00/bbl; NYMEX natural gas prices of US$3.00/MMBtu; AECO
natural gas prices of $2.20/GJ; Chicago 3-2-1 crack spread of
US$15.00/bbl; exchange rate of $0.78 US$/C$ and other assumptions
identified in Cenovus’s 2018 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; increasing share price and market capitalization
over the long term; future narrowing of crude oil differentials;
realization of expected impacts of the company's capacity to store
within its oil sands reservoirs barrels not yet produced, including
ability to time production and sales at later dates when pipeline
capacity and crude oil differentials have improved; 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; ability to access and implement all
technology necessary to achieve expected future results; and other
risks and uncertainties described from time to time in the filings
the company makes with securities regulatory authorities.
Readers are cautioned that the foregoing lists are not
exhaustive and are made as at the date hereof. Events or
circumstances could cause Cenovus's actual results to differ
materially from those estimated or projected and expressed in, or
implied by, the forward-looking information. Additional information
about the other assumptions and the material risk factors that
could cause Cenovus's actual results to differ materially from
those expressed or implied by its forward-looking statements is
contained under “Risk Management and Risk Factors” and
"Forward-looking Information" under "Advisory" in Cenovus's
MD&A for the period ended December 31, 2017 (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.
Photos accompanying this announcement are available at
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CENOVUS CONTACTS: |
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Investor RelationsKam SandharSenior
Vice-President, Strategy & Corporate
Development403-766-5883 Steven MurrayManager,
Investor Relations403-766-3382 |
|
Media Reg Curren Senior Media Advisor
403-766-2004 Media Relations general
line403-766-7751 |
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