Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) reduced net debt to $7.1
billion in the second quarter after generating over $830 million in
free funds flow. The company’s excellent financial performance was
driven by higher realized oil prices, which contributed to oil
sands operating margin of more than $1.0 billion.
“Through focused operations and disciplined capital allocation,
we have materially improved our balance sheet and achieved a very
important milestone,” said Alex Pourbaix, Cenovus President &
Chief Executive Officer. “As we relentlessly pursue getting our net
debt even lower, to $5.0 billion, our balance sheet strength
positions us to also consider opportunities for increasing
shareholder returns and disciplined investments in our
business.”
Cenovus remains on track to increase its crude-by-rail capacity
to approximately 100,000 barrels per day (bbls/d) by the end of
2019. In June, the company transported nearly 36,000 bbls/d of its
oil by rail to the U.S. Gulf Coast. In the first quarter, Cenovus
transported approximately 16,000 bbls/d of its oil by rail to the
U.S. Gulf Coast, where the company can achieve higher pricing than
by selling it in Alberta.
Financial & production summary1 |
(for the period ended June 30) |
2019Q2 |
2018Q2 |
% change |
Financial ($ millions, except per share amounts) |
|
|
|
Cash from operating
activities |
1,275 |
533 |
139 |
Adjusted funds flow2 |
1,082 |
774 |
40 |
Per share diluted |
0.88 |
0.63 |
|
Free funds flow2 |
834 |
482 |
73 |
Operating earnings (loss) from continuing operations2 |
267 |
-292 |
|
Per share diluted |
0.22 |
-0.24 |
|
Net earnings (loss) from
continuing operations |
1,784 |
-410 |
|
Per share diluted |
1.45 |
-0.33 |
|
Capital
investment |
248 |
292 |
-15 |
Production from
continuing operations (before royalties) |
|
|
|
Oil sands
(bbls/d) |
344,973 |
389,378 |
-11 |
Deep Basin liquids3
(bbls/d) |
26,417 |
34,041 |
-22 |
Total
liquids from continuing operations3
(bbls/d) |
371,390 |
423,419 |
-12 |
Total natural
gas from continuing operations (MMcf/d) |
432 |
571 |
-24 |
Total
production from continuing operations3 (BOE/d) |
443,318 |
518,530 |
-15 |
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). |
|
|
|
Second-quarter overview
Balance sheet strength and capital
disciplineDuring the first six months of 2019, Cenovus
repurchased US$1.3 billion of unsecured notes for cash
consideration of US$1.2 billion, including US$814 million in the
second quarter. Net debt at the end of the second quarter was $7.1
billion. At current commodity prices, Cenovus expects to continue
to make substantial progress towards its long-term net debt target
of approximately $5.0 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
bottom-of-the-cycle commodity prices. At the end of the second
quarter, Cenovus had net debt to adjusted EBITDA of 2.4 times.
Cenovus plans to provide investors with an update on its
corporate strategy and five-year business plan, including future
capital allocation priorities, at its scheduled Investor Day in
Toronto on October 2, 2019.
Financial highlightsCenovus’s strong
second-quarter results were largely driven by a higher average
realized crude oil price of $62.75 per barrel (bbl), up 22% from
the same period in 2018. The company’s oil sands business had an
excellent quarter focused on personal and process safety, cost
control and production. Oil sands operating margin doubled to over
$1.0 billion compared with the second quarter of 2018, even after
accounting for the impact of a nearly month-long planned turnaround
at Christina Lake, higher royalty payments and mandated production
curtailments. The company’s safe and reliable operations, low cost
structure and continued focus on capital discipline also
contributed to its financial performance in the second quarter.
Cenovus generated second-quarter free funds flow of
$834 million, up 73% from a year earlier, adjusted funds flow of
approximately $1.1 billion, a 40% year-over-year increase, and cash
from operating activities of nearly $1.3 billion, up 139% from the
same period in 2018. In the first six months of the year, the
company generated almost $1.6 billion in free funds flow,
approximately $2.1 billion in adjusted funds flow and $1.7 billion
in cash from operating activities.
“In late 2017, we implemented a plan to improve the resilience
and competitiveness of our company,” said Pourbaix. “Our excellent
second-quarter results are a continuation and a reflection of our
disciplined approach to operations, cost control and capital
allocation. We continue to position ourselves to generate
significant free funds flow in almost any commodity price
environment.”
Cenovus’s operating earnings from continuing operations were
$267 million compared with an operating loss of $292 million in the
year-earlier period. Net earnings from continuing operations were
approximately $1.8 billion in the second quarter compared with a
net loss of $410 million in the same period in 2018. Net earnings
included one-time deferred income tax recoveries of $658 million
related to a reduction in Alberta’s corporate income tax rate
and $387 million due to an increase in the tax basis of
Cenovus’s U.S. refining assets. Non-operating unrealized foreign
exchange gains of $407 million compared with losses of $205 million
in the second quarter of 2018, and higher operating earnings also
contributed to the year-over-year net earnings increase.
Market access and sustainable oil
productionCenovus continues to pursue a diversified
transportation strategy to get its oil to markets where it can
achieve the highest price. This includes the company’s plan to ramp
up its rail capacity to approximately 100,000 bbls/d in 2019, which
remains on schedule.
“We view rail as a structural element of our market access
strategy, but we cannot emphasize enough the importance of getting
additional pipeline capacity out of Western Canada built,” said
Pourbaix. “The unfounded attacks on our industry that have stalled
new pipelines must be addressed for the benefit of all Canadians.
Canadian oil is among the most responsibly produced in the world,
and it makes no sense to stop it from reaching global
customers.”
Cenovus and its peers continue to work on solutions to further
reduce environmental impact, including water use, land footprint
and greenhouse gas emissions. In addition to the significant
results Cenovus and its peers have achieved to date, work is
underway by companies individually and through collaborative
efforts such as Canada’s Oil Sands Innovation Alliance (COSIA) and
Evok Innovations, both of which Cenovus helped found.
Advances in technology and operational efficiency have
contributed to about a 30% reduction in Cenovus’s oil sands
emissions intensity over the past 15 years. A barrel of oil
produced at the company’s oil sands operations now has a lower
emissions intensity than the average global barrel. Getting
meaningful volumes of lower-emissions oil from Canada to global
markets would provide an opportunity to replace more
carbon-intensive barrels from other jurisdictions, helping to lower
average global emissions. Further information about Cenovus’s
approach to responsible development can be found in the company’s
2018 environmental, social & governance (ESG) report, which was
published on July 23, 2019.
Production curtailmentCenovus’s oil production
continued to be limited by the Alberta government’s mandated
production curtailment program in the second quarter, with oil
sands volumes averaging 344,973 bbls/d, 11% lower than in the same
period a year earlier. Based on mandated production volumes for
July and August, the company anticipates average bitumen and crude
oil production will be a maximum of 360,000 bbls/d for the third
quarter. Production guidance for 2019 remains unchanged, with oil
sands volumes expected to average between 350,000 bbls/d and
370,000 bbls/d for the year.
As a result of Alberta’s mandatory curtailment program,
differentials between Western Canadian Select (WCS) and light oil
benchmark prices have remained relatively narrow in 2019,
contributing to improved financial performance for the Canadian oil
industry and increased royalty payments. In Alberta, royalties on
Cenovus’s production for the first six months of this year amount
to more than $500 million. These royalties support the delivery of
services and infrastructure such as health care, education, schools
and roads.
“While curtailment was always meant to be a temporary measure,
it’s doing what it was designed to do, and we expect the Alberta
government will continue to use it as a tool while there is an
inadequate balance between takeaway and production capacity in the
province,” said Pourbaix. “In the near term, I’m optimistic that
we’re beginning to see improved market access through the ramp-up
of rail capacity and, over the longer term, through progress on
pipeline solutions such as the Trans Mountain Expansion Project,
Keystone XL and Enbridge’s Line 3 Replacement Program.”Cenovus sees
opportunity for the Alberta government to encourage increased
movement of crude by rail by allowing producers to ship barrels in
excess of mandated curtailment levels if those barrels are
transported by rail. The company would also be supportive of the
Government of Alberta divesting its contracted crude-by-rail
capacity to industry.
Operating highlights
Safety Following the previously announced safe
completion of Cenovus’s winter delineation drilling and seismic
work in the oil sands, the company successfully completed a nearly
month-long planned turnaround at Christina Lake during April and
May with no significant injury incidents and no process safety
events. Company-wide, Cenovus continues to work towards achieving
the internal safety targets it established for itself this year.
The safety of Cenovus’s people, assets and the environment
continues to be a top priority.
Oil sandsSecond-quarter production at Christina
Lake was 179,020 bbls/d, an 18% decrease compared with the same
period in 2018, while Foster Creek averaged 165,953 bbls/d, 3%
lower year-over-year. The decrease in volumes at both operations
was primarily due to mandatory production curtailments. In
addition, volumes at Christina Lake were reduced by 7,665 bbls/d
during the second quarter due to the planned turnaround.
On July 10, 2019, Foster Creek and Christina Lake, which have
been operating since 1997 and 2002 respectively, reached one
billion barrels of cumulative oil sands production. Cenovus is the
first oil sands operator to achieve one billion barrels of
production using steam-assisted gravity drainage (SAGD) technology.
The success of SAGD has resulted in over $25 billion in investment
in the Canadian economy by Cenovus and its predecessor companies,
and substantially more by the oil sands industry as a whole, for
the benefit of all Canadians.
While Cenovus’s oil sands facilities are producing at lower
rates to comply with mandated curtailment, the company is
maintaining normal steam injection levels. This allows Cenovus to
continue mobilizing and storing production-ready barrels in its
reservoirs, so it can efficiently increase production volumes when
mandatory curtailment is eased. Maintaining normal steam injection
rates during curtailment has contributed to a modest, temporary
increase in per-barrel operating costs and steam-to-oil ratios
(SORs). SOR is the amount of steam needed to produce one barrel of
oil.
At Christina Lake, the SOR was 2.0 in the second quarter,
compared with 1.8 in the second quarter of 2018. At Foster Creek,
the SOR was 2.7 compared with 2.6 a year earlier.
Cenovus had second-quarter oil sands operating costs of
$8.70/bbl, up 19% from the same period a year ago. The increase in
per-barrel operating costs was mainly the result of lower sales
volumes, increased repairs and maintenance and higher fluid waste
handling and trucking costs related to the planned turnaround at
Christina Lake. Operating cost increases were partially offset by
lower chemical costs. Cenovus achieved second-quarter oil sands
netbacks, excluding realized hedging impacts, of $35.78/bbl, a 10%
increase from the second quarter of 2018.
Cenovus continues to have flexibility on timing with its
newly-completed phase G expansion at Christina Lake and will
consider ramping up incremental oil production once the company has
clarity on market access and the duration of production
curtailments.
Deep Basin Deep Basin production averaged
98,345 barrels of oil equivalent per day (BOE/d) in the second
quarter, a 24% decrease from year-earlier levels, partly due to
lower capital investment, the September 2018 divestiture of the
Pipestone business and expected natural declines. In the latter
part of the second quarter, production was also impacted by
Cenovus’s decision to shut in some volumes due to low natural gas
prices. The vast majority of these wells have since returned to
production.
Average operating costs in the Deep Basin were $9.01/BOE in the
second quarter, up 4% from $8.68/BOE a year earlier. The increase
in per-barrel operating costs was driven by lower sales volumes,
partially offset by reduced repairs and maintenance activity, lower
processing fees due to reduced throughput as well as decreased
chemical, electrical and workforce costs.
Cenovus continues 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 operational performance in the second
quarter, with plant utilization rates of around 98%. Performance at
Wood River was partially impacted by crude pipeline outages and
flooding on the Mississippi River.
Refining and marketing operating margin was $198 million in the
second quarter, compared with operating margin of $357 million in
the year-earlier period, largely due to lower crude advantage from
narrowing heavy and medium sour crude oil differentials as well as
higher operating costs and unplanned maintenance at both
refineries. 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 $10 million higher in the second quarter, compared
with $57 million lower in the same period of 2018.
Board renewal M. George Lewis has been
appointed to Cenovus’s Board of Directors, effective immediately.
Mr. Lewis was with Royal Bank of Canada (RBC) for 30 years,
including serving on the company's Group Executive. Currently, he
is a member of the Board of Directors of the Ontario Teachers’
Pension Plan Board and Legal & General Group plc (UK).
“George Lewis brings strong financial services experience with a
focus on asset and capital management following a 30-year career
with RBC,” said Patrick D. Daniel, Chair of the Board of Directors.
"His expertise and experience will be a substantial benefit to
Cenovus.”
DividendFor the third quarter of 2019, the
Board of Directors declared a dividend of $0.05 per share, payable
on September 30, 2019 to common shareholders of record as of
September 13, 2019. Based on the July 24, 2019 closing share price
on the Toronto Stock Exchange of $12.29, this represents an
annualized yield of approximately 1.6%. 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, July 25, 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 June 30, 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” on page 1 of Cenovus's Management's
Discussion & Analysis (MD&A) for the period ended June 30,
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”, “expect”, “focus”, “guidance”, “on
track”, “plan”, “target”, “will”, “with a view”, “would be”, “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 $5.0 billion; the impact of the Alberta government mandated
production curtailment; expected ramp-up of rail commitments; the
planned timeline for ramping up oil-by-rail movement; pipeline
capacity commitments; Christina Lake phase G expansion start-up
flexibility; and all statements related to the company’s 2019
Guidance.
Developing forward-looking information involves reliance on a
number of assumptions and consideration of certain risks and
uncertainties, some of which are specific to Cenovus and others
that apply to the industry generally. The factors or assumptions on
which our forward-looking information is based include: updated
price and sensitivities assumptions as disclosed in the following
table, available in Cenovus’s 2019 Guidance (dated April 23, 2019)
at cenovus.com;
PRICE ASSUMPTIONS & ADJUSTED FUNDS FLOW SENSITIVITIES (1) |
|
|
Independent base case
sensitivities |
Increase |
Decrease |
Brent (US$/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; bottom-of-the-cycle commodity prices of US$45/bbl
WTI and C$44/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 June 30, 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 Relations |
Media |
Investor Relations general line |
Sonja Franklin |
403-766-7711 |
Senior Media Advisor |
|
403-766-7264 |
|
|
|
Media Relations general line |
|
403-766-7751 |
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