Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) delivered strong
operating and financial performance in the first quarter of 2019,
generating more than $1 billion of adjusted funds flow, $731
million of free funds flow and cash from operating activities of
$436 million. The company’s excellent financial results were driven
by strong operating performance, a significant narrowing of
light-heavy oil price differentials in early 2019 and Cenovus’s
low-cost structure and continued commitment to capital discipline.
Over the first four months of this year, the company further
reduced its total debt outstanding by repurchasing US$515 million
of unsecured notes at a discount. Cenovus managed its first-quarter
oil sands production to comply with the Government of Alberta’s
mandatory curtailment program, producing approximately 343,000
barrels per day (bbls/d). The company completed construction of the
Christina Lake phase G expansion project ahead of schedule and 25%
under budget.
Financial & production
summary1 |
(for the period
ended March 31) |
|
2019Q1 |
|
2018Q1 |
% change |
Financial
($ millions, except per share amounts) |
|
|
|
|
|
Cash from operating
activities |
|
436 |
|
-123 |
|
Adjusted funds flow2 |
|
1,048 |
|
-41 |
|
Per share diluted |
|
0.85 |
|
-0.03 |
|
Free funds flow2 |
|
731 |
|
-565 |
|
Operating earnings (loss) from continuing operations2 |
|
69 |
|
-752 |
|
Per share diluted |
|
0.06 |
|
-0.61 |
|
Net earnings (loss)
from continuing operations |
|
110 |
|
-914 |
|
Per share diluted |
|
0.09 |
|
-0.74 |
|
Capital
investment |
|
317 |
|
524 |
-40 |
Production from
continuing operations (before royalties) |
|
|
|
|
|
Oil sands (bbls/d) |
|
342,980 |
|
359,666 |
-5 |
Deep Basin liquids3
(bbls/d) |
|
28,003 |
|
35,479 |
-21 |
Total
liquids from continuing operations3
(bbls/d) |
|
370,983 |
|
395,145 |
-6 |
Total natural gas
from continuing operations (MMcf/d) |
|
458 |
|
553 |
-17 |
Total production
from continuing operations3 (BOE/d) |
|
447,270 |
|
487,464 |
-8 |
1 Cenovus adopted International Financial Reporting Standard 16,
“Leases,” effective January 1, 2019 using the
modified retrospective approach; therefore, 2018 comparative
information has not been restated. 2 Adjusted funds flow, free
funds flow and operating earnings/loss are non-GAAP measures. See
Advisory. 3 Includes oil and natural gas liquids (NGLs).
First-quarter overview
Financial highlightsCenovus’s financial
performance in the first quarter of 2019 was driven by stronger
Western Canadian Select (WCS) prices. Following the implementation
of mandatory oil production curtailment in Alberta on January 1,
2019, the price differential between West Texas Intermediate (WTI)
and WCS narrowed to an average of US$12.37 per barrel (bbl) in the
first quarter from record highs reached in the fourth quarter of
2018. There was a corresponding increase in the price of WCS to an
average of US$42.53/bbl, more than double the average price in the
fourth quarter of 2018 and up 10% from the first quarter of that
year. Cenovus’s safe and reliable operating performance, low cost
structure and continued focus on capital discipline and
deleveraging also drove the company’s financial results.
In the first quarter, Cenovus generated cash from
operating activities and adjusted funds flow of $436 million and
more than $1 billion respectively, compared with a shortfall in
cash from operating activities of $123 million and an adjusted
funds flow shortfall of $41 million in the same quarter of 2018.
The company had free funds flow of $731 million compared with a
$565 million shortfall in the same period a year earlier. Cenovus
generated net earnings from continuing operations of $110 million
in the first quarter, compared with a net loss of $914 million in
the same period in 2018, and operating earnings from continuing
operations of $69 million compared with a $752 million operating
loss in the first quarter a year earlier.
“These results emphasize the true potential of our company,”
said Alex Pourbaix, Cenovus President & Chief Executive
Officer. “All of the positive momentum we’ve been building over the
past few years through focusing on safe and reliable operations,
deleveraging our balance sheet, maintaining capital discipline and
firmly establishing our position as an in-situ cost leader is
translating into strong cash flow generation and shareholder value.
At current commodity price levels, I’m optimistic we will generate
material free funds flow over the remainder of the year.”
Deleveraging and capital disciplineCenovus
continues to make progress in deleveraging its balance sheet. In
the first quarter, the company paid US$419 million to repurchase
unsecured notes with a principal amount of US$449 million, a
discount of almost US$30 million. In April, Cenovus repurchased an
additional US$66 million of unsecured notes outstanding for US$63
million. Combined with other recent deleveraging activity, this
brings the total debt repurchased in the last six months to almost
US$1.4 billion. Net debt at the end of the first quarter was C$8.1
billion, compared with C$8.4 billion at the end of 2018.
Deleveraging continues to be a top financial priority for
Cenovus in 2019 after funding its sustaining capital requirements
and maintaining its current dividend level. If commodity prices
remain at current levels, Cenovus expects to be in a position to
make significant progress this year towards its long-term target of
reducing net debt to approximately $5 billion. At that level, the
company anticipates being in a position to achieve and maintain a
target ratio of less than two times net debt to adjusted earnings
before interest, taxes, depreciation and amortization (EBITDA) at
low-cycle commodity prices.
Cenovus expects to provide investors with an update on its
strategy and five-year business plan at its planned Investor Day in
Toronto on October 2, 2019.
Production curtailmentWhile Cenovus’s oil sands
operations continue to produce at lower rates to comply with the
government-mandated curtailment program, the company has made the
decision to maintain normal steam injection levels. While this has
contributed to a modest, temporary increase in per-barrel operating
costs and steam-to-oil ratios (SORs), it has allowed Cenovus to
continue mobilizing and storing production-ready barrels in its
reservoirs for sale at a later date when curtailment is eased.
As a result of higher WCS prices, Cenovus paid $191 million in
royalties to the province of Alberta during the first quarter. In
the fourth quarter of 2018, when price differentials reached record
levels, Cenovus had a royalty credit of $29 million.
“It should now be crystal clear that the government’s temporary
curtailment program is doing what it was intended to do and has had
an immediate, positive impact not only for our industry, but for
all Albertans, in the form of improved royalty revenue,” said
Pourbaix. “To put it in context, when price differentials reached
record highs in the fourth quarter of 2018 due to a lack of
takeaway capacity, our company was in a royalty credit position
with the provincial government. Over the last three months, we paid
nearly $200 million, and we only account for about 10% of Alberta’s
total oil production. This has been a big win for Alberta.”
GuidanceThe significant improvement in WCS
pricing resulting from the government’s mandatory
curtailment program more than offset the impact of reduced oil
production and increased oil sands operating costs during the first
quarter.
Based on production levels and operating costs experienced
during the quarter, Cenovus has adjusted its 2019
Guidance to reflect the anticipated impact of curtailment
across the full year. The company now expects total oil sands
production to average between 350,000 bbls/d and 370,000 bbls/d in
2019, a 7% reduction at the midpoint of the range compared with the
company’s December 10, 2018 Guidance. Cenovus has increased its
guidance for the fuel portion of its per-barrel oil sands operating
costs to reflect its decision to maintain normal steam levels while
reducing production volumes. Fuel costs are now expected to range
between $1.75/bbl and $2.25/bbl in 2019 at both Foster Creek and
Christina Lake, compared with $1.50/bbl to $2.00/bbl in the
December 10, 2018 Guidance. The company expects operating costs to
return to more normalized levels once mandatory curtailment has
been lifted. Cenovus’s guidance for 2019 capital investment remains
unchanged.
Including the anticipated impact of curtailment, Cenovus expects
its second-quarter 2019 bitumen and crude oil production will be a
maximum of 355,000 bbls/d.
Cenovus’s updated Guidance document is available under Investors
on cenovus.com. Guidance reflects the adoption of International
Financial Reporting Standards 16, “Leases.”
Market accessCenovus is on track with its
previously announced plan to ramp up to approximately 100,000
bbls/d of rail shipping capacity over the balance of this year.
With its previously announced positions on Keystone XL and the
Trans Mountain Expansion Project, Cenovus has 275,000 bbls/d of
potential future pipeline capacity to the West Coast and U.S. Gulf
Coast. The company has current firm capacity to the West Coast,
U.S. Gulf Coast and PADD II of 118,000 bbls/d combined.
Operating highlights
Safety Cenovus continued to improve its safety
performance in the first quarter, completing its winter delineation
drilling and seismic work in the oil sands with zero
significant incidents and no recordable injuries
or reportable spills.
Oil sandsIn compliance with government mandated
curtailment levels, Cenovus had first-quarter oil sands production
of 342,980 bbls/d, a 5% reduction compared with the same period of
2018 when the company was voluntarily reducing production in
response to wide WTI-WCS price differentials. The company had
first-quarter oil sands operating costs of $9.06/bbl, up 3% from
$8.78/bbl in the same period a year ago. The increase in operating
costs per barrel was mainly the result of lower sales volumes due
to mandatory curtailment as well as higher natural gas prices and
consumption.
Cenovus achieved oil sands netbacks of $27.88/bbl, excluding
realized hedging impacts, up 63% from the first quarter of
2018.
First-quarter production at Christina Lake was 188,824 bbls/d, a
7% decrease compared with the same period in 2018, while Foster
Creek averaged 154,156 bbls/d, 2% lower year over year.
First-quarter oil sands operating costs at Foster Creek were
relatively flat at $10.44/bbl, while Christina Lake operating costs
rose 6% to $7.84/bbl compared with a year earlier.
At Christina Lake, the SOR was 2.0 in the first quarter,
compared with 1.8 in the first quarter of 2018. At Foster Creek,
the SOR was 2.9 in the first quarter compared with 2.8 a year
earlier.
Cenovus continues to have flexibility on start-up of oil
production at its phase G expansion at Christina Lake and will
consider bringing on the phase once the company has clarity on
market access and the duration of production curtailment.
Deep Basin Production from the Deep Basin
assets averaged 104,290 barrels of oil equivalent per day (BOE/d)
in the first quarter, an 18% decrease from year-earlier levels,
partly due to the September 2018 divestiture of the Pipestone
business, which was producing approximately 8,800 BOE/d prior to
being sold. Production also declined due to lower capital
investment, natural declines and weather-related outages.
Average operating costs in the Deep Basin were $9.24/BOE in the
first quarter, up 26% from $7.36/BOE a year earlier, partly due to
lower sales volumes related to the Pipestone divestiture. In
addition, in order to maintain production levels during a prolonged
cold weather period in the quarter, Cenovus decided to carry out
proactive work at its wells and facilities, leading to additional
chemical and workforce costs. Electricity rates also increased from
the first quarter of 2018 due to the cold weather.
Cenovus continues to work to optimize its Deep Basin operating
model with a view to reducing costs, improving efficiency and
maximizing value.
DownstreamCenovus’s Wood River, Illinois and
Borger, Texas refineries, which are co-owned with the operator,
Phillips 66, delivered solid financial performance in the first
quarter, largely due to lower feedstock prices, as crude oil
purchased at a discount in late 2018 was processed in the first
quarter of 2019. Crude runs were impacted by a fire at a unit at
Wood River in February. Wood River returned to normal operations in
late March.
Refining and marketing operating margin was $304 million in the
first quarter, compared with an operating margin shortfall of $48
million in the year-earlier period, when both refineries underwent
major planned turnarounds. 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, operating
margin from refining and marketing would have been $143 million
lower in the first quarter, compared with $21 million lower in the
same period of 2018.
DividendFor the second quarter of 2019, the
Board of Directors declared a dividend of $0.05 per share, payable
on June 28, 2019 to common shareholders of record as of June 14,
2019. Based on the April 23, 2019 closing share price on the
Toronto Stock Exchange of $14.01, this represents an annualized
yield of approximately 1.4%. 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, April 24, 2019, 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, netback, operating earnings (loss), net debt, and net debt to
adjusted EBITDA, 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, 2019 (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” in the Advisory section of Cenovus's
Management's Discussion & Analysis (MD&A) for the period
ended March 31, 2019 (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.
Forward-looking information in this document is identified by
words such as “anticipate”, “believe”, “capacity”, “expect”,
“focus”, “guidance”, “on track”, “plan”, “position”, “priority”,
“target”, “will”, “see”, or similar expressions and includes
suggestions of future outcomes, including statements about:
strategy and related milestones and schedules; projections for 2019
and future years and our plans and strategies to realize such
projections; priorities and other statements relating to forecast
capital discipline and investment, production guidance and debt
reduction; ability to generate substantial cash flow, adjusted
funds flow and free funds flow in the current commodity price
environment; targeted reductions of net debt to $5 billion;
expected ramp-up of rail commitments; the impact of the Alberta
government mandated production curtailment; the planned timeline
for ramping up oil-by-rail movement; pipeline capacity
commitments; Christina Lake phase G expansion start-up
flexibility; and all statements related to the company’s updated
2019 Guidance.
Developing forward-looking information involves reliance on a
number of assumptions and consideration of certain risks and
uncertainties, some of which are specific to Cenovus and others
that apply to the industry generally. The factors or assumptions on
which our forward-looking information is based include: updated
price and sensitivities assumptions as disclosed in the following
table, available in Cenovus’s updated 2019 Guidance (dated
April 23, 2019) at cenovus.com;
PRICE ASSUMPTIONS & ADJUSTED FUNDS FLOW
SENSITIVITIES (1) |
|
|
Independent base case
sensitivities |
Increase |
Decrease |
Brent (US$/bbl) |
$66.00 |
|
(for the full year
2019) |
($
millions) |
($ millions) |
WTI (US$/bbl) |
$59.00 |
|
Crude oil (WTI)* |
80 |
|
(80) |
|
Western Canada Select (US$/bbl) |
$44.50 |
|
Light-heavy
differential (WTI-WCS)* |
(65) |
|
60 |
|
AECO ($/Mcf) |
$1.55 |
|
Chicago 3-2-1 crack
spread* |
60 |
|
(60) |
|
Chicago 3-2-1 Crack Spread (US$/bbl) |
$15.00 |
|
Natural gas
(AECO)* |
60 |
|
(65) |
|
Exchange Rate (US$/C$) |
$0.75 |
|
Exchange rate
(US$/C$)** |
(40) |
|
40 |
|
*US$1.00 change |
** $0.01 change(1) Sensitivities include current hedge
positions applicable to the full year of 2019. Refining results
embedded in the sensitivities are based on unlagged margin changes
and do not include the effect of changes in inventory valuation for
first-in, first-out / lower of cost or net realizable value. |
projected capital investment levels, the flexibility of capital
spending plans and associated sources of funding; achievement of
further operating efficiencies, cost reductions and sustainability
thereof; lower production as a result of the government-mandated
production curtailment contributing to improvement in WCS prices,
narrowing of the price differential between WTI and WCS; future
improvements in availability of product transportation capacity,
including Canadian oil-by-rail activity ramping up as planned;
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 heavy oil
volumes against wider differentials; continued improved Canadian
commodity prices; low-cycle commodity prices of US$45/bbl WTI and
C$43/bbl WCS; 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 year ended December 31, 2018
and its MD&A for the period ended March 31, 2019 as well as its
AIF and Form 40-F for the year ended December 31, 2018 (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. Cenovus undertakes no
obligation to update or revise any forward-looking information
except as required by law.
Cenovus Energy Inc.Cenovus Energy Inc. is a
Canadian integrated oil and natural gas company. It is committed to
maximizing value by responsibly developing its assets in a safe,
innovative and efficient way. Operations include oil sands projects
in northern Alberta, which use specialized methods to drill and
pump the oil to the surface, and established natural gas and oil
production in Alberta and British Columbia. The company also has
50% ownership in two U.S. refineries. Cenovus shares trade under
the symbol CVE, and are listed on the Toronto and New York stock
exchanges. For more information, visit cenovus.com.
Find Cenovus on Facebook, Twitter, LinkedIn, YouTube and
Instagram.
CENOVUS
CONTACTS: |
|
|
|
Investor
RelationsInvestor Relations general
line403-766-7711 |
Media
Sonja Franklin Senior Media Advisor
403-766-7264Media Relations general
line403-766-7751 |
|
|
Photos accompanying this announcement are available at:
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