Cenovus Energy Inc. (TSX:CVE) (NYSE:CVE) achieved record production
and delivered solid financial performance in the second quarter of
2018. The company had adjusted funds flow of $774 million, even
after a realized risk management loss of $697 million, and
generated free funds flow of $482 million. Cenovus ramped up its
oil sands operations in the second quarter and achieved record high
production volumes and record low per-barrel oil sands operating
costs after using the dynamic storage capability of its
reservoirs to strategically slow oil sands production in the first
quarter due to market conditions. Following major planned
turnarounds in the first quarter, Cenovus’s Refining and Marketing
segment also performed very well.
Second quarter highlights
- Adjusted funds flow of $0.63 per share compared with a
shortfall of $0.03 per share in the first quarter of 2018. Adjusted
funds flow was $0.67 per share in the second quarter of 2017.
- Cash from operating activities of $533 million, compared with a
shortfall of $123 million in the first quarter of 2018. Cash from
operating activities was $1.2 billion in the second quarter of
2017.
- Oil sands production of almost 390,000 barrels per day
(bbls/d), 49% higher than the same period of 2017, and record low
oil sands operating costs of $7.32/bbl
- Refining and marketing operating margin of $357 million,
compared with $20 million in the second quarter of 2017
- Corporate hedge positions reduced to 37% of forecast liquids
production for the rest of 2018
|
Financial & production
summary |
(for the period ended June 30) |
2018Q2 |
2017Q2 |
% change |
Financial |
|
|
|
($ millions, except per share amounts) |
|
|
|
Cash from
operating activities1 |
533 |
1,239 |
-57 |
Adjusted funds flow1,2 |
774 |
745 |
4 |
Per share diluted |
0.63 |
0.67 |
|
Free funds
flow1,2 |
482 |
418 |
15 |
Operating earnings (loss) from continuing
operations2 |
-292 |
298 |
|
Per share diluted |
-0.24 |
0.27 |
|
Net
earnings (loss) from continuing operations |
-410 |
2,558 |
|
Per share diluted |
-0.33 |
2.30 |
|
Capital investment1 |
292 |
327 |
-11 |
Production from continuing operations3 (before
royalties) |
|
|
|
Oil sands (bbls/d) |
389,378 |
261,812 |
49 |
Deep Basin liquids4 (bbls/d) |
34,041 |
16,894 |
101 |
Total liquids from continuing
operations (bbls/d) |
423,419 |
278,706 |
52 |
Total natural gas from continuing operations
(MMcf/d) |
571 |
265 |
115 |
Total production from continuing operations
(BOE/d)5 |
518,530 |
322,792 |
61 |
1 |
2017 Q2 includes
results from Cenovus’s legacy conventional segment, which is
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. |
|
Second quarter overview
Financial highlights
In the second quarter of 2018, Cenovus recorded cash from
operating activities of $533 million compared with $1.2 billion in
the same period a year earlier. The company generated adjusted
funds flow of $774 million, slightly higher than the second quarter
of 2017, and had an operating loss from continuing operations of
$292 million compared with operating earnings of $298 million the
previous year.
Adjusted funds flow in the second quarter reflected realized
risk management losses of $697 million, largely as a result of
hedging contracts established in 2017 to provide downside oil price
protection and support financial resilience based on market
conditions at the time. At the close of the second quarter,
corporate hedge positions had decreased from 80% of forecast
liquids production for the first half of 2018 to 37% of forecast
liquids production for the second half of the year.
“Our assets have been performing extremely well, and with our
hedging exposure now significantly reduced, we’re well-positioned
to realize the benefits of higher oil prices as well as our
cumulative cost reductions,” said Alex Pourbaix, Cenovus President
& Chief Executive Officer. “Based on forward strip prices, we
expect to generate significant free funds flow in the second half
of the year, and we have a clear plan to use that to help
deleverage our balance sheet. We believe that’s the best defence
against commodity price volatility.”
Reducing debt through asset sales, capital discipline and free
funds flow remains Cenovus’s top priority. The company continues to
target a net debt to adjusted earnings before interest, taxes,
depreciation and amortization (EBITDA) ratio of less than two
times.
Market access
Cenovus believes that it is critical to the future success and
growth of the Canadian oil and gas industry that Alberta achieve
improved market access. The company remains supportive of new
pipelines and pipeline expansions and has committed capacity on the
Keystone XL project and Trans Mountain Expansion project.
Cenovus continues to work with rail providers to resolve a
shortage of locomotive hauling capacity, so the company can more
fully realize the benefits of its Bruderheim crude-by-rail
facility. The company is beginning to see increased activity at its
Bruderheim facility as well as across other rail loading facilities
in the province.
Operating highlights
Oil sandsIn the second quarter, Cenovus’s
results benefited from the decision to strategically slow oil sands
production in the first quarter, while maintaining steam injection
rates, in order to store a portion of its mobilized oil in its
reservoirs while takeaway capacity was constrained and light-heavy
oil price differentials were very wide. As Western Canadian Select
(WCS) prices improved into the second quarter, the company ramped
up its oil sands production to above normal operating levels to
recover the stored barrels in a higher pricing environment.
“This clearly demonstrates our ability to proactively use the
dynamic storage capability of our oil sands reservoirs as a tool to
manage our business in response to price fluctuations,” said
Pourbaix. “Essentially all of the oil we stored during the first
quarter has been recovered, allowing us to take advantage of
improved pricing to achieve greater value for our barrels, with no
detectable impact to our reservoirs.”
Cenovus’s Foster Creek project had production of 171,079 bbls/d
in the second quarter, a 59% increase compared with the same
quarter of 2017, while production at Christina Lake was 218,299
bbls/d, a 42% increase from the previous year, largely due to the
2017 asset acquisition.
At Foster Creek, the steam to oil ratio (SOR), the amount of
steam needed to produce one barrel of oil, was 2.6 in the second
quarter of 2018, compared with 2.5 in the same period of 2017. At
Christina Lake, the SOR was 1.8 in the second quarter of 2018,
compared with 1.7 a year earlier. 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 at Christina Lake in 2018.
The company’s oil sands assets achieved record low operating
costs of $7.32/bbl in the second quarter, down from $9.19/bbl in
the same quarter last year when there were costs associated with a
planned turnaround at Foster Creek. The low per-barrel operating
costs in the second quarter of this year were primarily due to
higher sales volumes, a reduction in workforce costs and lower
repairs and maintenance costs, partially offset by higher chemical
costs. Oil sands netbacks were $32.65/bbl, an increase of 46%
compared with the second quarter of 2017. The increase was
primarily due to a higher average realized sales price and a 20%
reduction in per-barrel operating costs, partially offset by higher
royalties.
Cenovus has determined the full three-week turnaround originally
planned at Christina Lake for September 2018 is not required this
year and has deferred the majority of the work until 2019. The
company expects its 2018 production to remain within guidance of
202,000 to 212,000 bbls/d.
Construction at the Christina Lake phase G expansion 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 and is anticipated to begin production in
the second half of 2019.
Cenovus anticipates that Christina Lake will reach payout for
royalty purposes in the second half of 2018 once cumulative project
revenue exceeds cumulative project allowable costs. After payout is
achieved, royalties at Christina Lake will follow the post-payout
formula described in Cenovus’s Management’s Discussion and Analysis
for the period ended June 30, 2018.
Deep BasinCenovus participated in the drilling
of one net well, completed one net well and brought three net wells
on production in the second quarter. Production for the quarter was
129,066 barrels of oil equivalent per day (BOE/d), an 8% increase
from the average production during the 45 days that the company
owned the assets in the second quarter of 2017. The increase in
production from new wells was partially offset by pipeline and
third-party facility constraints, planned turnarounds and some
temporary voluntary shut-in volumes. The Deep Basin assets
generated operating margin of $78 million in the second
quarter.
On a year-to-date basis, the company participated in the
drilling of 15 net wells, completed 17 wells and brought 20 wells
on production. Cenovus’s 2018 drilling program in the Deep Basin is
now largely complete, with results in line or better than
expected.
The company has one of the largest land positions in the Deep
Basin, with approximately three million net acres, providing more
opportunities than it can efficiently develop within a reasonable
timeframe. To further streamline its portfolio and reduce debt,
Cenovus continues to evaluate opportunities to divest a portion of
its Deep Basin assets. The company is making progress with its
previously announced plan to market for sale assets with current
production of approximately 15,000 BOE/d of natural gas and liquids
in the East Clearwater area of the Deep Basin.
Refining and MarketingIn the second quarter of
2018, the Wood River and Borger refineries, which Cenovus jointly
owns with the operator, had very strong throughput and financial
performance after undergoing major planned maintenance activity in
the first quarter of 2018.
Refining and Marketing operating margin was $357 million,
compared with $20 million in the second quarter a year earlier, and
operating margin net of capital investment was $322 million. The
increase in operating margin was primarily due to higher
utilization, wider crude oil price differentials and higher average
market crack spreads compared with the same period a year earlier.
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 operating margin from Refining and Marketing
would have been $57 million lower in the second quarter of
2018.
Management update
In early June, Kam Sandhar was appointed to the Cenovus
Leadership Team. He continues in his position as Senior
Vice-President, Strategy & Corporate Development and will
continue to report to Jon McKenzie, the company’s Chief Financial
Officer. Sandhar oversees areas of the company that include
strategy, corporate planning, acquisitions & divestitures,
investor relations and reserves governance, which are key to
driving shareholder value for Cenovus.
Dividend
For the third quarter of 2018, the Board of Directors has
declared a dividend of $0.05 per share, payable on September 28,
2018 to common shareholders of record as of September 14, 2018.
Based on the July 25, 2018 closing share price on the Toronto Stock
Exchange of $13.54, this represents an annualized yield of about
1.5%. 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, July 26, 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 June 30, 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 June 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 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 “believe”, “budget”, “capacity”, “commitment”,
“estimate”, “expect”, “focus”, “forecast”, “forward”, “future”,
“goal”, “on budget”, “on time”, “plan”, “position”, “potential”,
“priority”, “progress”, “projected”, “range”, “schedule”, “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; the
company’s priorities and other statements relating to debt
reduction, including through asset sales, capital discipline and
free funds flow as well as targeted net debt to adjusted EBITDA
ratio; the company’s positioning to realize the benefits of higher
oil prices and the company’s cumulative cost reductions; expected
free funds flow generation in the second half of the year and
planned use of such funds to help balance sheet deleveraging;
belief regarding effectiveness of balance sheet deleveraging as
defense against commodity price volatility; 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; potential asset
divestitures and projected outcomes; expected impacts of the
company's capacity for storage in its oil sands reservoirs; belief
regarding the relationship of improved Alberta market access and
future success and growth of the Canadian oil and gas industry; the
company’s work with rail providers to resolve a shortage of
locomotive hauling capacity so the company can more fully realize
the benefits of its crude-by-rail facility; 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; and expectations regarding
Christina Lake royalty rate.
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 (dated December 13, 2017)
(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; future narrowing of crude oil
differentials; realization of expected impacts of the company's
storage capacity within its oil sands reservoirs; 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 June 30, 2018
as well as its MD&A, annual information form 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).
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, projected, expressed, or implied
by the forward-looking information. Except as required by
applicable securities laws, Cenovus does not undertake any
obligation to publicly update forward-looking statements.
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
http://www.globenewswire.com/NewsRoom/AttachmentNg/f91d4c79-d551-4fe3-98f8-0ceb0589e604
http://www.globenewswire.com/NewsRoom/AttachmentNg/beca83e2-dcc0-4fd4-938c-b78b5e7f1273
CENOVUS
CONTACTS: |
|
Investor
Relations |
Media
Relations |
Steven Murray |
Brett Harris |
Manager, Investor
Relations |
Manager, External
Communications |
403-766-3382 |
403-766-3420 |
|
|
Investor Relations
general line |
Media Relations general
line |
403-766-7711 |
403-766-7751 |
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