Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) continued to deliver on
its commitments to shareholders in the third quarter of 2019. The
company generated free funds flow of $622 million while maintaining
its industry-leading low cost structure and meeting mandatory
production curtailment levels set by the Government of Alberta.
Other third-quarter highlights include:
- Adjusted funds flow of $916 million; cash from operating
activities of $834 million
- Oil sands operating costs of $6.90 per barrel (bbl), 21% lower
than in the second quarter of 2019 and 24% lower than in the first
quarter
- Net earnings from continuing operations of $187 million versus
a net loss a year prior
- An 11% year-over-year increase in realized crude oil sales
prices to an average of $55.13/bbl driven by higher U.S. sales and
narrower differentials
- A further reduction in net debt to $6.8 billion with net debt
to adjusted earnings before interest, taxes, depreciation and
amortization (EBITDA) decreasing to 1.9 times
- Crude-by-rail volumes of more than 80,000 barrels per day
(bbls/d) in September
“We’re continuing to do everything we said we would do,” said
Alex Pourbaix, Cenovus President & Chief Executive Officer.
“Through our focus on safe and reliable operations, cost leadership
and capital discipline, we are generating strong results that
support further debt reduction and increased shareholder value. In
addition, our market access strategy is steadily increasing our
exposure to global oil pricing.”
Financial & production summary1 |
(for the period ended September 30) |
2019Q3 |
2018Q3 |
% change |
Financial ($ millions, except per share amounts) |
|
|
|
Cash from operating activities |
834 |
1,259 |
-34 |
Adjusted funds flow2 |
916 |
977 |
-6 |
Per share diluted |
0.75 |
0.79 |
|
Free funds flow2 |
622 |
706 |
-12 |
Operating earnings (loss) from continuing operations2 |
284 |
-41 |
|
Per share diluted |
0.23 |
-0.03 |
|
Net earnings (loss) from
continuing operations |
187 |
-242 |
|
Per share diluted |
0.15 |
-0.20 |
|
Capital investment |
294 |
271 |
8 |
Production from
continuing operations (before royalties) |
|
|
|
Oil sands (bbls/d) |
354,595 |
376,672 |
-6 |
Deep Basin liquids3 (bbls/d) |
26,104 |
32,269 |
-19 |
Total liquids from continuing operations3
(bbls/d) |
380,699 |
408,941 |
-7 |
Total natural gas from continuing operations
(MMcf/d) |
407 |
520 |
-22 |
Total
production from continuing operations3 (BOE/d) |
448,496 |
495,592 |
-10 |
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).
Third-quarter overview
Financial highlights and operating
costsBuilding on its excellent performance in the first
half of 2019, Cenovus continued to benefit from its low cost
structure and ongoing focus on capital discipline as well as from
further progress in improving its market access position. By
reducing its operating, sustaining capital, general and
administrative and financing costs over the past several years,
Cenovus has strongly positioned itself for resilience even at the
bottom of the commodity price cycle at West Texas Intermediate
(WTI) prices of US$45/bbl.
“Maintaining our cost leadership is critical to our competitive
advantage,” said Pourbaix. “Our low cost structure combined with
our top-tier asset base gives us significant capacity to generate
positive earnings and free funds flow through the commodity price
cycle.”
Total revenue in the quarter was $4.7 billion, compared with
$5.9 billion in the same period in 2018. While Cenovus achieved
stronger realized pricing in the third quarter of this year,
upstream revenue was impacted by higher royalties and lower
volumes. Third-quarter revenue from refining and marketing
decreased from the same period a year earlier due to lower refined
product pricing.
Cenovus had third-quarter oil sands operating costs of
$6.90/bbl, down $1.80 from $8.70/bbl in the second quarter and down
$2.16 from $9.06/bbl in the first quarter of 2019. The second
quarter included a planned turnaround that increased costs for
repairs and maintenance, and also had higher energy costs. Year
over year, third-quarter total oil sands operating costs were
essentially unchanged and increased slightly on a per-barrel basis
due to lower production levels and Cenovus’s strategic decision to
fully utilize its steam injection capacity during mandatory
curtailment.
Cenovus generated third-quarter adjusted funds flow
of $916 million and cash from operating activities of $834 million.
The company achieved higher third-quarter upstream operating
netbacks, including realized risk management, compared to the year
prior. Lower finance and general and administrative costs had a
positive impact on adjusted funds flow. Results were negatively
impacted by slightly lower oil production volumes as a result of
curtailment and lower realized margins from refining due to
narrower market crack spreads and higher crude input costs. Cenovus
had free funds flow of $622 million in the third quarter, 12% lower
than a year earlier, driven by lower adjusted funds flow.
Operating earnings from continuing operations were $284 million
in the third quarter, compared with an operating loss from
continuing operations of $41 million in the same period of 2018,
which included a significant provision for onerous contracts
related to real estate. Net earnings from continuing operations
were $187 million compared with a net loss from continuing
operations of $242 million a year earlier. The swing from a net
loss to net earnings was largely driven by higher operating
earnings in the third quarter of 2019 and a before-tax loss of $795
million ($526 million after-tax) recorded in the third quarter of
2018 on the divestiture of the Cenovus Pipestone Partnership. Net
earnings included a deferred income tax expense of $46 million
compared with a deferred tax recovery of $255 million in 2018,
non-operating foreign exchange losses of $87 million compared with
gains of $172 million and unrealized risk management losses of $9
million compared with unrealized gains of $247 million in the
year-earlier quarter.
Balance sheet strength and capital
disciplineCenovus’s net debt at the end of September was
$6.8 billion, compared with $7.1 billion at the end of the second
quarter of 2019. The company’s net debt to adjusted EBITDA ratio
was 1.9 times at the end of September, down from 2.4 times at the
end of the second quarter. In October 2019, Cenovus used cash on
hand and short-term borrowings to repay US$500 million in
outstanding unsecured notes at maturity and repurchase US$13
million of additional notes. Deleveraging remains a top priority
for Cenovus as the company continues to pursue its net debt target
of $5 billion.
On October 21, 2019, Moody’s Investors Service affirmed
Cenovus’s Ba1 credit rating and improved its outlook for Cenovus
from ‘stable’ to ‘positive,’ citing the significant amount of debt
reduction the company has achieved. In addition to making progress
towards re-establishing an investment grade credit rating at
Moody’s, Cenovus remains committed to maintaining its current
investment grade credit ratings at S&P Global Ratings, DBRS
Limited and Fitch Ratings.
Integration and market access Cenovus’s
integrated business model is designed to maximize the company’s
exposure to global oil prices and mitigate pipeline congestion
through a range of options to reduce cash flow volatility and
increase margins. While pipelines remain the cornerstone of
Cenovus’s transportation strategy, the company continues to expand
its transportation options to address takeaway capacity constraints
and get its oil to the highest value markets, particularly the
heavy oil refining complex on the U.S. Gulf Coast.
Rail continues to be an important component of Cenovus’s
transportation strategy to bridge the gap until expansion pipelines
are completed. In September, the company reached an average of more
than 80,000 bbls/d of oil transported by rail for delivery to U.S.
destinations, more than double the volumes in June of 2019. Cenovus
remains on track to reach crude-by-rail shipments of approximately
100,000 bbls/d by the end of 2019.
Including barrels shipped by pipeline, the company is now moving
approximately one-third of its oil sands production to U.S.
markets, compared with less than 20% in 2018. With Cenovus’s net
share of heavy processing capacity at its jointly owned Wood River
and Borger refineries in the U.S. as well as existing pipeline and
crude-by-rail commitments, the company is in a position to protect
approximately 65% of its 2019 blended heavy oil production capacity
against the impact of low Western Canadian Select (WCS)
prices.
With previously announced additions of 22,500 bbls/d of
incremental takeaway capacity from Alberta earlier in 2019, Cenovus
has combined current firm pipeline capacity to the U.S. Gulf Coast,
the U.S. Midwest and the Canadian West Coast of more than 133,000
bbls/d. Cenovus also has committed capacity to ship another 275,000
bbls/d to the U.S. Gulf Coast and Canadian West Coast on expansion
pipeline projects currently under development. The company
continues to explore the potential for additional committed
pipeline capacity to high-value markets.
Production curtailmentCenovus’s oil sands
production in the third quarter averaged 354,595 bbls/d,
approximately 6% lower than in the same period a year earlier due
to the Alberta government’s mandated curtailment program. Based on
mandated production volumes for the fourth quarter, the company
anticipates average bitumen and crude oil production will be a
maximum of 366,000 bbls/d for the final three months of the
year.
On October 1, 2019, Cenovus updated its 2019 full-year guidance
to reflect the company’s updated outlook for capital investment,
production and operating costs for the remainder of the year. The
company’s guidance can be found at cenovus.com under
“Investors”.
SustainabilityCenovus continues to focus on
delivering leading environmental, social and governance (ESG)
performance. This includes ongoing work to identify meaningful,
practical targets and plans to achieve them for its four ESG focus
areas: climate and GHG emissions, Indigenous engagement, land &
wildlife, and water stewardship. Sustainability considerations have
also been incorporated into Cenovus’s capital allocation framework
to support investment decisions. In addition, the company continues
to be committed to best-in-class safety performance and achieved a
more than 40% reduction in its significant incident frequency in
the first nine months of 2019 compared with the same period in
2018.
Operating highlights
Oil sandsCenovus had an average realized crude
oil sales price from its oil sands operations of $54.94/bbl in the
third quarter of 2019 compared with $49.38/bbl in the same period a
year earlier, partially due to higher crude-by-rail volumes, which
resulted in increased sales to U.S. destinations and improved
exposure to global oil pricing. A 45% year-over-year decrease in
the differential between WTI and WCS prices to an average of
US$12.24/bbl in the third quarter also contributed to the increase
in average realized sales prices compared with the third quarter of
2018.
Third-quarter production at Cenovus’s Christina Lake and Foster
Creek oil sands projects declined from a year earlier primarily as
a result of the mandatory production curtailments. Production at
Christina Lake decreased approximately 7% to 198,068 bbls/d, while
volumes at Foster Creek decreased to 156,527 bbls/d, about 5% lower
year over year.
While Cenovus’s oil sands facilities are producing at lower
rates to comply with mandated volumes, the company is maintaining
normal steam production levels. This allows Cenovus to continue
operating the reservoirs effectively, so it can efficiently manage
volumes when mandatory curtailment is eased. Maintaining normal
steam rates during curtailment contributed to a modest, temporary
increase in per-barrel operating costs compared with the third
quarter of 2018 and has also contributed to temporarily higher
steam-to-oil ratios (SORs). At Christina Lake, the SOR was 2.1 in
the third quarter, compared with 1.8 in the third quarter of 2018.
At Foster Creek, the SOR was 2.7, the same as a year earlier.
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.
Cenovus also has regulatory approval for phase H expansions at both
Foster Creek and Christina Lake.
Third-quarter oil sands operating margin increased 34% year over
year to $917 million as a result of higher average realized sales
prices, decreased transportation and blending costs and realized
risk management gains of $7 million compared with losses of
$323 million in 2018, partially offset by lower sales volumes and
higher royalties.
Deep Basin Cenovus has largely completed work
to optimize its Deep Basin operating model to reduce costs, improve
efficiency and maximize value. The company continues to take a
disciplined approach in the Deep Basin and is driving the business
to be resilient at bottom of the cycle commodity prices of
US$45/bbl WTI and Alberta Energy Company (AECO) pricing of $1.50
per gigajoule.
Deep Basin production averaged 93,901 barrels of oil equivalent
per day (BOE/d) in the third quarter, a 21% decrease from
year-earlier levels, due to natural declines following lower
capital investment, the divestiture of Cenovus’s Pipestone
Partnership in 2018 and temporary well shut-ins in response to low
natural gas prices.
Even with the decrease in production, Cenovus teams successfully
worked to continue to reduce operating costs. Average Deep Basin
per-unit operating costs declined 8% in the third quarter compared
with a year ago, to $8.21/BOE. The decline in per-BOE operating
costs was driven by lower third-party processing fees resulting
from reduced throughput and increased use of Cenovus’s
infrastructure. Lower repairs and maintenance activity as well as
reduced workforce and electrical costs also contributed to the
overall decline in operating costs, partially offset by lower sales
volumes.
Refining and marketingCenovus’s Wood River,
Illinois and Borger, Texas refineries, which are co-owned with the
operator, Phillips 66, had lower crude oil runs and refined product
output compared with the third quarter of 2018, due to the start of
planned turnaround activities at both refineries in September 2019
as well as additional unplanned downtime, partially offset by Wood
River achieving a record monthly crude oil run rate of 365,000
bbls/d in July of 2019.
Refining and marketing operating margin was $126 million in the
third quarter, compared with operating margin of $436 million in
the year-earlier period. The decrease was due to reduced crude
advantage, lower market crack spreads, decreased crude oil runs and
higher operating costs.
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 $8 million lower in the third quarter, compared with $15
million lower in the same period of 2018.
DividendAt its Investor Day on October 2, 2019,
Cenovus announced a 25% dividend increase, with the Board of
Directors declaring a dividend of $0.0625 per share for the fourth
quarter, payable on December 31, 2019 to common shareholders of
record as of December 13, 2019. Based on the October 30, 2019
closing share price on the Toronto Stock Exchange of $11.40, this
represents an annualized yield of approximately 2.2%. Cenovus
believes it will have capacity for further dividend increases that
are sustainable in a WTI price environment as low as US$45/bbl with
a potential growth rate of 5% to 10% annually over the next five
years. 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, 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 EBITDA, adjusted funds
flow, debt, free funds flow, netback, operating earnings (loss) and
net debt, 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, 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 September
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”, “believe”, “can”, “capacity”,
“committed”, “continue”, “driving”, “explore”, “focus”, “guidance”,
“on track”, “outlook”, “plan”, “position”, “potential”, “priority”,
“pursue”, “strategy”, “target”, “will”, 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 $5 billion; the
impact of the Alberta government mandated production curtailment;
expected ramp-up of rail commitments; the planned timeline for
ramping up oil-by-rail movement; pipeline capacity commitments;
Christina Lake phase G expansion start-up flexibility; the
potential value added by increased focus on environmental, social
and governance (ESG) performance; sustainable annual dividend
increases over the next five years and all statements related to
the company’s updated 2019 Guidance.
Developing forward-looking information involves reliance on a
number of assumptions and consideration of certain risks and
uncertainties, some of which are specific to Cenovus and others
that apply to the industry generally. The factors or assumptions on
which our forward-looking information is based include: updated
price and sensitivities assumptions as disclosed in the following
table, available in Cenovus’s 2019 Guidance (dated October 1, 2019)
at cenovus.com;
PRICE ASSUMPTIONS & ADJUSTED FUNDS FLOW SENSITIVITIES (1) |
|
|
Independent base case
sensitivities |
Increase |
Decrease |
Brent
(US$/bbl) |
$64.00 |
|
(for the last three months of
2019) |
($ millions) |
($
millions) |
WTI (US$/bbl) |
$57.20 |
|
Crude oil (WTI)* |
25 |
|
(30) |
|
Western
Canada Select (US$/bbl) |
$45.10 |
|
Light-heavy differential
(WTI-WCS)* |
(20) |
|
15 |
|
AECO
($/Mcf) |
$1.55 |
|
Chicago 3-2-1 Crack
Spread* |
25 |
|
(25) |
|
Chicago
3-2-1 Crack Spread (US$/bbl) |
$16.25 |
|
Natural gas (AECO)** |
15 |
|
(20) |
|
Exchange
Rate (US$/C$) |
$0.75 |
|
Exchange rate (US$/C$)*** |
(15) |
|
15 |
|
*US$1.00 change ** C$1.00 change |
*** $0.01 change(1) Sensitivities include current hedge positions
applicable to the remainder 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 will continue to maintain a relatively
narrow 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 about 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 September 30, 2019 as well as
its Annual Information Form 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 |
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