Net debt down $1.6 billion from previous
quarter
Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) generated more than $700
million of free funds flow and nearly $1 billion in adjusted funds
flow in the third quarter, driven by exceptional operating
performance in its oil sands and refining and marketing businesses.
Oil sands production exceeded 376,000 barrels per day (bbls/d) with
record-low operating costs for the second straight quarter.
Cenovus’s 50%-owned refineries, operated by Phillips 66, processed
record oil volumes for the quarter. The company also benefited from
a year-over-year increase in the price of Western Canadian Select
(WCS), even as the price differential between WCS and West Texas
Intermediate (WTI) more than doubled. While the wider differential
impacted upstream cash generation, it created a feedstock cost
advantage for the refining business which contributed strong
operating margin. Cash from operations, together with $625 million
in proceeds from the sale of Cenovus’s Pipestone Partnership,
helped reduce net debt to below $8.0 billion, down about $1.6
billion from the end of the second quarter. Cenovus also signed
deals to move significant quantities of oil by rail over the next
three years. Due to strong operational performance and efficient
use of capital, the company has reduced forecast 2018 capital
spending by about $250 million with essentially no change to its
production guidance.
Key developments
- Generated cash from operating activities of nearly $1.3
billion, compared with $592 million in the third quarter of
2017
- Achieved free funds flow of more than $700 million, up 30% from
the third quarter of 2017
- Reduced oil sands per-unit operating costs to $6.59/bbl, down
13% year over year
- Redeemed US$800 million in unsecured notes on October 29,
2018
- Signed contracts to move up to 100,000 bbls/d of oil by rail,
ramping up through 2019
- Received corporate credit rating upgrade from Moody’s to Ba1,
stable
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|
|
Financial & production summary |
(for
the period ended September 30) |
2018Q3 |
2017Q3 |
%change |
Financial ($ millions, except per share amounts) |
|
|
|
Cash from
operating activities |
1,259 |
592 |
113% |
Adjusted funds flow1 |
977 |
980 |
- |
Per share diluted |
0.79 |
0.80 |
|
Free funds
flow1 |
706 |
542 |
30% |
Operating earnings (loss) from continuing
operations1 |
-41 |
240 |
|
Per share diluted |
-0.03 |
0.20 |
|
Net
earnings (loss) from continuing operations |
-242 |
275 |
|
Per share diluted |
-0.20 |
0.22 |
|
Capital investment |
271 |
438 |
-38% |
Production from continuing operations (before
royalties) |
|
|
|
Oil sands (bbls/d) |
376,672 |
362,494 |
4% |
Deep Basin liquids2 (bbls/d) |
32,269 |
32,864 |
-2% |
Total liquids from continuing
operations (bbls/d) |
408,941 |
395,358 |
3% |
Total natural gas from continuing operations
(MMcf/d) |
520 |
501 |
4% |
Total production from continuing operations
(BOE/d) |
495,592 |
478,817 |
4% |
|
|
|
|
1 Adjusted
funds flow, free funds flow and operating earnings/loss are
non-GAAP measures. See Advisory |
2 Includes
oil and natural gas liquids (NGLs) |
|
|
|
|
Third-quarter overview
Financial highlights
In the third quarter of 2018, Cenovus recorded cash from
operating activities of nearly $1.3 billion compared with $592
million in the same period a year earlier. The company generated
adjusted funds flow of nearly $1 billion, in line with the third
quarter of 2017. Adjusted funds flow in the quarter reflected
realized risk management losses of $325 million, largely related to
Cenovus’s remaining hedging activity, which was significantly
reduced at the end of the second quarter. Cenovus had free funds
flow of $706 million in the third quarter of 2018, a 30% increase
year over year. Benchmark WTI prices increased almost 45% from the
third quarter of 2017, while WCS prices increased 23%. The WTI-WCS
price differential widened to an average of US$22.25/bbl in the
quarter compared with US$9.94/bbl a year earlier. While the wider
differential impacted cash generation from Cenovus’s upstream
operations, the lower cost of WCS relative to WTI provided a
feedstock cost advantage for the company’s refineries as did the
wider price differential between WTI and West Texas Sour (WTS).
Refining and Marketing operating margin was very strong in the
third quarter, more than doubling to $436 million compared with the
same period in 2017.
During the quarter, the company sold the Cenovus Pipestone
Partnership in the Deep Basin for cash proceeds of $625 million
before closing adjustments. The company realized a non-cash
before-tax loss of $795 million on the sale. Including the proceeds
of the sale and cash from operations, the company reduced net debt
to below $8.0 billion at the end of the third quarter, down from
$9.6 billion in the second quarter and $11.5 billion in the third
quarter of 2017. On October 29, 2018, the company used cash on hand
to redeem US$800 million of its US$1.3 billion unsecured notes due
October 2019. The early redemption is expected to result in net
interest savings of US$23 million. Reducing debt through free funds
flow and asset sales 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.
“We continue to make excellent progress on the commitments we’ve
made to shareholders,” said Alex Pourbaix, Cenovus President &
Chief Executive Officer. “In the third quarter, we further reduced
our net debt and took a significant step forward in streamlining
our Deep Basin business while advancing our market access
objectives through strategic rail commitments. We also continued to
lower our cost structure, which has substantially improved over the
past three years.”
Citing Cenovus’s improving leverage, reduced oil sands cost
structure, substantial oil sands production and ability to generate
strong annual free cash flow from its assets, Moody’s Investors
Service recently upgraded the company’s corporate credit rating to
Ba1 from Ba2. Moody’s left the company’s outlook unchanged at
stable. Cenovus continues to maintain three investment grade credit
ratings with other rating agencies.
Cenovus also made significant progress during the quarter in
reducing its long-term fixed real estate costs by subleasing an
additional eight floors of The Bow. With a portion of its excess
real estate space now under sublease and plans to move staff into
Brookfield Place being finalized, Cenovus has reassessed the value
of its overall real estate portfolio at current market conditions
and has recorded a non-cash expense of $630 million.
Maximizing value
Cenovus expects the wide differentials Western Canadian oil
producers have been experiencing will begin to ease in the coming
months with major North American refineries returning to normal
operations following scheduled maintenance, the planned ramp-up of
Canadian oil-by-rail activity and the anticipated start-up next
year of Enbridge’s Line 3 Replacement project. The company has been
positioning itself to generate significant free funds flow as
market conditions improve and price differentials return to more
historic levels.
In the third quarter of 2018, Cenovus executed three-year deals
with major rail companies to transport up to 100,000 bbls/d of
heavy crude oil from northern Alberta to various destinations on
the U.S. Gulf Coast, where the company has been receiving robust
pricing for its oil shipments. The rail agreements involve moving
oil with CN from Cenovus’s Bruderheim Energy Terminal, which has
already started, and with CP through USD Partners’ terminal in
Hardisty, Alberta beginning in the second quarter of next year.
Over the past few months, Cenovus has added resources at Bruderheim
and increased shipments from the terminal and expects to continue
ramping up its rail loading operations and railcar capacity through
the end of 2019.
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 also has committed capacity
on the proposed Keystone XL pipeline project and the Trans Mountain
Expansion Project of 175,000 bbls/d combined, and Cenovus will
consider adding committed capacity on future pipeline projects over
time.
“With our rail contracts, pipeline commitments and existing
refining capacity, our long-term market access position is strong,”
said Pourbaix. “In the short term, as takeaway capacity out of
Alberta remains constrained, Canadian producers will continue to be
disproportionately exposed to WCS pricing. To further mitigate the
impact of wider differentials and improve long-term shareholder
value, we’re taking action on a number of fronts to optimize the
margin on every barrel of oil we produce.”
Through its 50% ownership in the Wood River and Borger
refineries, the company gains a feedstock cost advantage when WCS
prices are relatively low compared with WTI. This reduces Cenovus’s
exposure to crude oil price differentials. In the near-term,
including its refining capacity, existing pipeline commitments and
plans to ramp-up crude-by-rail loading capacity to 100,000 bbls/d,
approximately 55% to 60% of Cenovus’s blended heavy oil volumes can
be partially mitigated against wider differentials.
Cenovus also has the ability to respond to widening
differentials and the current environment for Canadian producers by
strategically slowing production at Foster Creek and Christina
Lake. The company is currently operating both facilities at reduced
volumes and is managing production levels to avoid any impacts to
its reservoirs. Cenovus will continue to monitor the Canadian price
environment and adjust its oil sands production accordingly. The
company expects oil sands production for the full year to be within
guidance between 364,000 bbls/d and 382,000 bbls/d. In addition,
Cenovus is actively assessing other avenues of production
management to increase shareholder value, including exploring a
variety of additional low-cost storage options for its oil.
Operations highlights
Oil sandsCenovus’s oil sands facilities
continued to demonstrate excellent operational performance in the
third quarter, with total oil sands production increasing 4%
compared with 2017. Cenovus’s Foster Creek project had production
of 163,939 bbls/d in the third quarter, a 6% increase compared with
the same quarter of 2017, while production at Christina Lake was
212,733 bbls/d, up 2% from the previous year.
At Foster Creek, the steam to oil ratio (SOR), the amount of
steam needed to produce one barrel of oil, was 2.7 in the third
quarter of 2018, compared with 2.5 in the same period of 2017. At
Christina Lake, the SOR was 1.8 in the third quarter of 2018, in
line with 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.
For the second consecutive quarter, the company had record-low
per-barrel oil sands operating costs. Combined oil sands operating
costs were $6.59/bbl, down 13% from $7.58/bbl in the third quarter
of 2017. At Foster Creek, non-fuel operating expenses decreased to
$5.88/bbl from $7.43/bbl in the third quarter of 2017, primarily
due to higher sales volumes, a reduction in workforce costs and
fewer workovers, partially offset by higher chemical costs. At
Christina Lake, non-fuel operating expenses increased slightly to
$4.42/bbl from $4.30/bbl in the same period a year ago due to
higher chemical costs, partially offset by lower workforce costs
and reduced workovers.
Field construction of Christina Lake phase G, which has approved
capacity of 50,000 bbls/d, continues on schedule and is expected to
begin production in the second half of 2019. Continuing to benefit
from its capital discipline and improved cost structure, Cenovus
anticipates go-forward capital costs, from the time the project was
restarted last year through to completion, of between $13,000 and
$14,000 per barrel of capacity, 21% lower than the company’s
original cost estimates.
Cenovus’s Christina Lake project achieved a significant
milestone in the quarter, reaching payout for royalty purposes in
August 2018 as cumulative revenues from the project surpassed
cumulative allowable costs. Royalties at Christina Lake now follow
the post-payout formula described in Cenovus’s Management’s
Discussion and Analysis for the period ended September 30, 2018.
The company’s revised royalty forecast for the year is reflected in
its updated Guidance document dated October 30, 2018.
Deep BasinTotal production in the Deep Basin
for the quarter averaged 118,920 barrels of oil equivalent per day
(BOE/d), a 3% increase from the same quarter a year earlier and
down 8% compared with the second quarter of 2018 due, in part, to
the divestiture of the Cenovus Pipestone Partnership. The Deep
Basin assets generated operating margin of $73 million in the third
quarter compared with $64 million in the same period of 2017.
During the quarter, Cenovus completed four net wells and tied in
two net wells. Cenovus’s 2018 drilling program in the Deep Basin
was largely completed in the first half of the year, and results
have been in line or better than expected.
Cenovus intends to further focus its portfolio and reduce debt
by divesting more of its Deep Basin assets. The company is
continuing to advance confidential divestiture processes.
Refining and MarketingCenovus’s Wood River and
Borger refineries, which are jointly owned with Phillips 66,
continue to demonstrate excellent operational performance.
Combined, the refineries processed a record 492,000 gross bbls/d of
crude oil, compared with 462,000 bbls/d a year earlier, and
produced 518,000 gross bbls/d of refined products, compared with
490,000 bbls/d in the third quarter of 2017. Refining and Marketing
operating margin more than doubled to $436 million compared with
$211 million in the same period a year earlier. The increase was
largely due to lower feedstock costs driven by wider price
differentials between WTI and WCS as well as WTI and WTS, reduced
costs for renewable identification numbers and very high
utilization.
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 $15 million lower in the third quarter of 2018,
compared with $9 million lower in the third quarter of 2017.
Guidance
Continuing to benefit from its focus on capital discipline,
Cenovus is reducing its forecast capital expenditure for 2018 by
approximately $250 million at the midpoint, with essentially no
change to its production guidance. This reduction is due to strong
operational performance and efficient use of capital. Cenovus is
also reducing forecast per-unit oil sands operating costs for 2018
to $7.49/bbl at the midpoint, down 5% from its December 13, 2017
Guidance. Cenovus’s updated Guidance document is available under
Investors on cenovus.com.
Cenovus did not add any new corporate commodity hedges during
the third quarter. As of September 30, 2018, the company had
approximately 150,000 bbls/d or 37% of its forecast oil production
hedged for the fourth quarter of the year using WTI and Brent
contracts. Cenovus has 19,000 bbls/d of forecast oil production
hedged for 2019.
Dividend
For the fourth quarter of 2018, the Board of Directors has
declared a dividend of $0.05 per share, payable on December 31,
2018 to common shareholders of record as of December 14, 2018.
Based on the October 30, 2018 closing share price on the Toronto
Stock Exchange of $11.09, this represents an annualized yield of
about 1.8%. 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, October 31, 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 September 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 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”,
“guidance”, “intention”, “mitigate”, “plan”, “position”,
“priority”, “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 forecast capital spending, 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 net interest
savings from the early redemption of unsecured notes; expected
impacts of our rail commitments; our expectations regarding price
differentials for Western Canadian oil, including that major North
American refineries will return to normal operations following
scheduled maintenance, the planned ramp-up of Canadian oil-by-rail
activity and the anticipated start-up next year of Enbridge’s Line
3 Replacement project, and our ability to take steps to mitigate
against such differentials; the company’s positioning to generate
significant free funds flow as market conditions improve and price
differentials return to more historic levels; the company’s planned
timeline for ramping up its oil-by-rail movement; the company’s
pipeline capacity commitments; the company’s long-term market
access position; expected impacts of the company’s actions to
mitigate the impact of wider differentials, improve long-term
shareholder value and optimize its margin on produced barrels; 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; the company’s ability
to respond to widening differentials by strategically slowing
production; 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 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$74.70/bbl, WTI price of US$68.00/bbl; WCS price of
US$41.60/bbl; NYMEX natural gas price of US$2.95/MMBtu; AECO
natural gas price of $1.50/GJ; Chicago 3-2-1 crack spread of
US$16.30/bbl; exchange rate of $0.78 US$/C$ and other assumptions
identified in Cenovus’s updated 2018 Guidance (dated October 30,
2018) (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 Enbridge’s Line 3 Replacement project will start-up
next year as anticipated; future narrowing of crude oil
differentials; realization of expected impacts of the company's
storage capacity within its oil sands reservoirs; the ability of
our refining capacity, existing pipeline commitments and plans to
ramp up crude-by-rail loading capacity to mitigate a portion of our
heavy oil volumes against wider 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).
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.
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CENOVUS CONTACTS: |
|
Investor RelationsSteven MurrayManager, Investor
Relations403-766-3382 Mark AustinSenior Advisor,
Investor Relations403-766-3926 Investor Relations
general line 403-766-7711 |
Media RelationsBrett HarrisManager, External
Communications403-766-3420
Media Relations general line403-766-7751 |
|
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Photos accompanying this announcement are available at:
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http://www.globenewswire.com/NewsRoom/AttachmentNg/70720fb1-40de-4482-86cd-7c2f26c069ed
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