Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) continued to deliver
safe and reliable operations in the first quarter of 2020 while
demonstrating its ability to take swift and decisive steps to
enhance its financial resilience and protect its balance sheet in
the face of the global macro-economic challenges caused by the
COVID-19 pandemic. The company’s first-quarter financial results
were impacted by the significant decline in global demand and
pricing for crude oil and refined products caused by COVID-19 and
exacerbated by a dispute between Saudi Arabia and Russia that
resulted in increased oil supply.
“The strength of our balance sheet, the quality of our long-life
oil sands reserves and the flexibility of our business to respond
quickly to the changing external environment have positioned us
well to withstand an extended period of low oil prices,” said Alex
Pourbaix, Cenovus President & Chief Executive Officer. “When
global economic conditions improve, we’ll be ready to contribute to
Canada’s economic recovery in a meaningful way.”
Financial & production summary |
(for the period ended March 31) |
2020Q1 |
2019Q1 |
% change |
|
Financial ($ millions, except per share amounts) |
|
|
|
|
Cash from operating
activities |
125 |
436 |
-71 |
|
Adjusted funds flow1, 2 |
-146 |
1,005 |
|
|
Per share diluted |
-0.12 |
0.82 |
|
|
Free funds flow1, 2 |
-450 |
688 |
|
|
Operating earnings (loss)1 |
-1,187 |
69 |
|
|
Per share diluted |
-0.97 |
0.06 |
|
|
Net earnings (loss) |
-1,797 |
110 |
|
|
Per share diluted |
-1.46 |
0.09 |
|
|
Capital
investment |
304 |
317 |
-4 |
|
Production3 (before
royalties) |
|
|
|
|
Oil sands
(bbls/d) |
387,036 |
342,980 |
13 |
|
Conventional
liquids3,4 (bbls/d) |
29,766 |
28,003 |
6 |
|
Total
liquids3,4 (bbls/d) |
416,802 |
370,983 |
12 |
|
Total natural
gas (MMcf/d) |
395 |
458 |
-14 |
|
Total
production4 (BOE/d) |
482,594 |
447,270 |
8 |
|
1 Adjusted funds flow, free funds flow and operating
earnings/loss are non-GAAP measures. See Advisory. 2 The prior
period has been reclassified to conform with the current period
treatment of non-cash inventory write-downs.3 Includes oil and
natural gas liquids (NGLs).4 Cenovus’s Deep Basin segment has been
renamed the Conventional segment and now includes the company’s
Marten Hills asset. For a description of Cenovus’s operations,
refer to the Reportable Segments section of Management's Discussion
and Analysis.
Response to COVID-19In response to the COVID-19
pandemic, Cenovus took swift action to protect the health and
safety of its staff and ensure the continuity of its business.
Following the guidance of public health officials, the company
directed all staff who are able to do so to work from home,
established mandatory self-isolation protocols and restricted
travel policies as well as implemented active health screening,
physical distancing and advanced cleaning and sanitation measures
at its field operations.
Business flexibility and balance sheet
strengthOver the past two years, Cenovus has worked
diligently to reduce its sustaining capital and operating costs,
maintain capital discipline and strengthen its balance sheet. In
the first quarter of 2020 and in early April, the company
implemented significant additional measures to enhance its
financial resilience in response to the recent decline in commodity
prices and the overall weak business environment. Cenovus announced
the temporary suspension of its crude-by-rail program and, as a
result, updated its production guidance for the year. The company
reduced its 2020 capital spending guidance by $600 million at the
midpoint of the range and lowered its forecast operating costs for
the year by approximately $100 million compared with its original
2020 budget. Cenovus also announced a $50 million reduction in its
general and administrative (G&A) spending guidance for 2020, a
temporary suspension of its dividend and the deferral of investment
decisions on major growth projects.
Cenovus is actively managing its production levels as market
conditions change to optimize the value it receives for its
products. Currently, Cenovus’s oil sands production has been ramped
down by approximately 60,000 barrels per day (bbls/d), and the
company has flexibility to quickly ramp up production when market
conditions improve. Based on analysis conducted during past
production ramp-downs, the company is confident in its ability to
safely reduce production even further without impacting the
integrity of its reservoirs. Through its experience operating under
voluntary and mandatory production curtailments, Cenovus has
demonstrated ability to manage volume reductions of nearly 100,000
bbls/d.
Cenovus believes its revised capital spending and business plans
will ensure ongoing safe and reliable operations and adherence to
regulatory commitments as well as enable it to proceed with
necessary maintenance at its operations.
“We’ve built a solid financial framework and flexible business
plan that provide us with multiple options to continue to manage
our balance sheet prudently,” said Pourbaix. “We’ve adjusted our
2020 business plan to navigate this period of volatile commodity
prices and remain focused on preserving the strength of our balance
sheet.”
LiquidityCenovus has a $4.5 billion committed
credit facility, with no maturities until late 2022 and late 2023.
In April, to further strengthen its liquidity position, the company
secured commitments from several of its existing Canadian lenders
for an additional $1.1 billion committed credit facility.
“Our ability to secure a significant new credit facility in this
challenging market gives us even more financial flexibility to
withstand a prolonged period of low oil prices,” said Pourbaix.
“And it is a testament to the confidence our lenders have in our
company.”
In addition to its committed credit facilities, Cenovus has a
further $1.6 billion of uncommitted bilateral credit lines and no
bond maturities until late 2022. As of March 31, 2020, Cenovus had
drawn approximately $550 million from its committed credit
facilities and its uncommitted bilateral credit lines. The
company’s jointly-owned non-operated refining business has further
uncommitted bilateral credit lines, of which Cenovus’s share is
approximately US$138 million. Cenovus’s share of short-term
borrowings against these lines was approximately US$103 million as
of March 31, 2020. This portfolio of facilities and longer-term
maturities provides ample liquidity and runway to sustain the
company’s operations through the current market downturn.
Cenovus’s net debt was approximately $7.4 billion at the end of
the first quarter, compared with net debt of about $6.5 billion at
the end of 2019. The increase in net debt was primarily due to
unrealized foreign exchange losses associated with U.S. dollar
denominated debt, the draws against the company’s credit lines and
Cenovus’s proportional share of borrowing by its refining
partnership during the quarter. Cenovus remains committed to its
long-term net debt target of $5 billion; however, the timeline for
reaching this target depends on the duration of the current
commodity price environment.
First-quarter financial resultsIn the first
quarter of 2020, the average price of West Texas Intermediate (WTI)
declined 16% compared with the same period a year earlier. High
crude oil inventory levels and takeaway constraints caused the
average differential between WTI and Western Canadian Select (WCS)
prices to widen 66% in the first quarter compared with the same
period in 2019. This contributed to a 54% decline in realized
pricing for Cenovus’s crude oil in the first quarter from a year
earlier, to $22.74 per barrel (bbl).
First-quarter cash from operating activities was
$125 million compared with $436 million the previous year, while
adjusted funds flow declined to a shortfall of $146 million
compared with adjusted funds flow of more than $1 billion in the
same period of 2019. The company had a free funds flow shortfall of
approximately $450 million in the quarter compared with free funds
flow of $688 million a year earlier.
Cenovus had a first-quarter operating margin
shortfall of $589 million compared with operating margin of more
than $1.2 billion in the same period in 2019. The decrease was
primarily due to lower average realized oil prices, a refining and
marketing operating margin shortfall that included $253 million in
non-cash inventory write-downs, non-cash inventory write-downs of
$335 million related to the company’s upstream business, increased
transportation and blending costs, and upstream realized risk
management losses compared with gains in 2019. First-quarter
results were negatively impacted by the timing of condensate and
refinery inventory use in a falling commodity price environment.
Condensate blended to produce heavy oil and refinery feedstock used
in the first quarter were purchased when prices were higher.
The company had a first-quarter operating loss of
approximately $1.2 billion compared with operating earnings of $69
million in the same quarter in 2019, primarily due to the operating
margin shortfall and higher depreciation, depletion, and
amortization (DD&A) in its conventional segment that included a
non-cash impairment charge of $315 million related to the decline
in forward crude oil and natural gas prices. Cenovus had a net loss
of approximately $1.8 billion compared with net earnings of $110
million a year earlier. The net loss was primarily due to the
operating loss and non-operating foreign exchange losses of
$589 million compared with gains of $209 million in the
first quarter of 2019. The net loss was partially offset by a
deferred income tax recovery of $348 million compared with an
expense of $41 million in the first quarter of 2019 and lower
unrealized risk management losses in the first quarter compared
with a year earlier.
Operating highlights
Oil sandsFirst-quarter production at Cenovus’s
Christina Lake and Foster Creek oil sands projects was
approximately 387,000 bbls/d, up from nearly 343,000 bbls/d in the
same period in 2019. The increase was mainly driven by the
company’s use of Alberta’s Special Production Allowance (SPA)
program for incremental barrels shipped by rail and by reduced
mandatory curtailment levels compared with the first quarter of
2019.
In the first quarter, Cenovus loaded an average of almost 91,000
bbls/d of its own crude oil for transport by rail, up from about
89,000 bbls/d in the fourth quarter of 2019. First-quarter
transportation and blending costs reflected the fact that Cenovus’s
crude-by-rail program continued to operate at normal capacity
levels through most of the period. With the wind-down of the rail
program now essentially completed, Cenovus does not anticipate
taking advantage of the SPA program for the foreseeable future. As
a result, the company’s oil sands production is now forecast to be
between 350,000 bbls/d and 400,000 bbls/d for 2020, a 6% reduction
at the mid-point of the range compared with its original 2020
forecast announced in its December 2019 budget.
First-quarter oil sands operating costs were $7.75/bbl, down 14%
from the same period a year earlier, primarily due to higher
year-over-year sales volumes and lower natural gas prices,
partially offset by higher gas consumption.
At Christina Lake, the steam to oil ratio (SOR) was 2.0 in the
first quarter, unchanged from a year earlier. The SOR at Foster
Creek was 2.8, down slightly from 2.9 a year earlier.
Conventional Cenovus’s conventional segment was
previously referred to as the Deep Basin segment and now includes
the Marten Hills asset. The comparative period has been restated to
reflect this change.
Conventional production averaged almost 96,000 barrels of oil
equivalent per day (BOE/d) in the first quarter, an 8% decrease
from the same period in 2019, due to natural declines from lower
sustaining capital investment, partially offset by production of
3,600 bbls/d from Marten Hills and reduced downtime related to
third-party pipeline outages compared with the first quarter of
2019. As part of the recently announced 2020 budget update, Cenovus
has suspended the majority of its remaining planned capital spend
in the conventional segment.
Total conventional operating costs declined 2% to $9.01/BOE in
the first quarter of 2020 compared with the previous year, driven
by decreased workforce costs, property tax and lease costs as well
as lower repairs and maintenance activity. The decrease was
partially offset by lower sales volumes and higher waste fluid
handling and trucking costs for Marten Hills.
Refining and marketingCenovus’s Wood River,
Illinois and Borger, Texas refineries, which are co-owned with the
operator, Phillips 66, performed well in the first quarter,
including a year-over-year increase in crude oil runs and refined
product output. Planned turnaround work, maintenance activity and
unplanned outages during the quarter had less of an impact on
operations than in the first three months of 2019. Average crude
runs increased 18% to 442,000 bbls/d in the first quarter compared
with the same period in 2019. Late in the first quarter of 2020,
Wood River and Borger began to reduce crude rates in response to
the economic slowdown caused by COVID-19.
Cenovus had a refining and marketing operating margin shortfall
of $375 million in the first quarter, compared with operating
margin of $304 million in the same period of 2019. The decrease was
due to lower market crack spreads and reduced crude advantage.
Refining and marketing recorded first-quarter non-cash inventory
write-downs of $253 million due to lower refined product and crude
oil prices.
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 $87 million higher in the first quarter, compared with
$143 million lower in the same period in 2019.
Health and safety Cenovus remains focused on
delivering industry-leading safety performance through its focus on
risk management and asset integrity. The company continued its
strong safety performance in the first quarter of 2020 with zero
significant incidents and solid results in the prevention of
recordable injuries and process safety events.
SustainabilityCenovus remains committed to
achieving the targets it has set in four key environmental, social
and governance (ESG) focus areas. The company continues to work on
the plan for pursuing those targets over the next decade and
anticipates being in a position to provide more detail in late
2020.
Conference Call Today9 a.m. Mountain Time
(11 a.m. Eastern Time) |
Cenovus will host a conference call today, April 29, 2020, 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 PresentationCenovus 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
EquivalentNatural 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
SubtotalThis news release contains references to
adjusted earnings before interest, taxes, depreciation and
amortization (EBITDA), adjusted funds flow, capitalization, free
funds flow, 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 for the period ended March 31, 2020 (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 March 31, 2020 (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 “achieving”, “anticipate”, “believes”, “committed”,
“continue”, “ensure”, “expect”, “focus”, “forecast”, “plan”,
“position”, “protect”, “pursuing”, “provide”, “resilience”,
“support”, “target” and “will” or similar expressions and includes
suggestions of future outcomes, including, but not limited to,
statements about: our ability to withstand an extended period of
low oil prices; our oil sands assets having the flexibility to
support a value-based approach to production; our ability to safely
reduce production further without impacting the integrity of our
reservoirs; our revised capital spending and business plans being
sufficient to ensure safe and reliable operations, adherence to
regulatory commitments and enable proceeding with necessary
maintenance; preserving the strength of our balance sheet; ample
liquidity and runway to sustain operations through a prolonged
market downturn; attaining long-term net debt target of $5 billion;
benefits to results in future periods due to the purchase of low
cost condensate and refinery feedstock at current prices;
delivering industry-leading safety performance through our focus on
risk management and asset integrity; our four ESG focus areas and
related targets and ambitions.
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, but are not
limited to: forecast oil and natural gas, natural gas liquids,
condensate and refined products prices, light-heavy crude oil price
differentials and other assumptions identified in Cenovus’s 2020
guidance (dated April 1, 2020), available at cenovus.com; global
demand for refined products will resume and prices will rise;
continued access to short-term capital such as credit and demand
facilities; impact of measures implemented to enhance the company’s
resilience; achievement of further cost reductions and
sustainability thereof; applicable royalty regimes, including
expected royalty rates; future improvements in availability of
product transportation capacity; increase to our share price and
market capitalization over the long term; future narrowing of crude
oil differentials; the ability of our refining capacity, dynamic
storage, existing pipeline commitments and financial hedge
transactions to partially mitigate a portion of our WCS crude oil
volumes against wider differentials; our ability to decrease
production in our oil sands operations without compromising our
assets; estimates of quantities of oil, bitumen, natural gas and
liquids from properties and other sources not currently classified
as proved; accounting estimates and judgments; our ability to
obtain necessary regulatory and partner approvals; the successful
and timely implementation of capital projects, development programs
or stages thereof; our ability to generate sufficient liquidity to
meet our current and future obligations; our ability to obtain and
retain qualified staff and equipment in a timely and cost-efficient
manner; the availability of Indigenous owned or operated
businesses; our ability to develop, access and implement all
technology and equipment necessary to achieve expected future
results, and that such results are realized.
2020 guidance, dated April 1, 2020, assumes: Brent prices of
US$39.00/bbl, WTI prices of US$34.00/bbl; WCS of US$18.50/bbl;
Differential WTI-WCS of US$15.50/bbl; AECO natural gas prices of
$2.00/Mcf; Chicago 3-2-1 crack spread of US$8.30/bbl; and an
exchange rate of $0.70 US$/C$.
The risk factors and uncertainties that could cause our actual
results to differ materially include, but are not limited to: our
ability to access or implement some or all of the technology
necessary to efficiently and effectively operate our assets and
achieve expected future results; volatility of and other
assumptions regarding commodity prices; maintaining sufficient
liquidity to sustain operations through a prolonged market
downturn; the duration of the market downturn; excessive widening
of the WTI-WCS differential; unexpected consequences related to the
Government of Alberta’s mandatory production curtailment; the
effectiveness of our risk management program; the accuracy of cost
estimates regarding commodity prices, currency and interest rates;
product supply and demand; accuracy of our share price and market
capitalization assumptions; market competition, including from
alternative energy sources; risks inherent in our marketing
operations, including credit risks, exposure to counterparties and
partners, including ability and willingness of such parties to
satisfy contractual obligations in a timely manner; our ability to
maintain desirable ratios of net debt to adjusted EBITDA as well as
net debt to capitalization; our ability to access various sources
of debt and equity capital, generally, and on terms acceptable to
us; our ability to finance growth and sustaining capital
expenditures; changes in credit ratings applicable to us or any of
our securities; accuracy of our reserves, future production and
future net revenue estimates; accuracy of our accounting estimates
and judgments; our ability to replace and expand oil and gas
reserves; potential requirements under applicable accounting
standards for impairment or reversal of estimated recoverable
amounts of some or all of our assets or goodwill from time to time;
our ability to maintain our relationship with our partners and to
successfully manage and operate our integrated business;
reliability of our assets including in order to meet production
targets; potential disruption or unexpected technical difficulties
in developing new products and manufacturing processes; refining
and marketing margins; cost escalations; potential failure of
products to achieve or maintain acceptance in the market; risks
associated with fossil fuel industry reputation and litigation
related thereto; unexpected cost increases or technical
difficulties in constructing or modifying manufacturing or refining
facilities; unexpected difficulties in producing, transporting or
refining of bitumen and/or crude oil into petroleum and chemical
products; risks associated with technology and equipment and its
application to our business, including potential cyberattacks;
risks associated with climate change and our assumptions relating
thereto; our ability to secure adequate and cost effective product
transportation including sufficient pipeline, crude-by-rail, marine
or alternate transportation, including to address any gaps caused
by constraints in the pipeline system; possible failure to obtain
and retain qualified staff and equipment in a timely and cost
efficient manner; changes in the regulatory framework in any of the
locations in which we operate, including changes to the regulatory
approval process and land-use designations, royalty, tax,
environmental, greenhouse gas, carbon, climate change and other
laws or regulations, or changes to the interpretation of such laws
and regulations, as adopted or proposed, the impact thereof and the
costs associated with compliance; changes in general economic,
market and business conditions; the impact of production agreements
among OPEC and non-OPEC members; the political and economic
conditions in the countries in which we operate or which we supply;
the occurrence of unexpected events, such as pandemics, fires,
severe weather conditions, explosions, blow-outs, equipment
failures, transportation incidents and other accidents or similar
events, and the instability resulting therefrom; and risks
associated with existing and potential future lawsuits, shareholder
proposals and regulatory actions against us.
Statements relating to “reserves” are deemed to be
forward-looking information, as they involve the implied
assessment, based on certain estimates and assumptions, that the
reserves described exist in the quantities predicted or estimated
and can be profitably produced in the future.
Readers are cautioned that the foregoing lists are not
exhaustive and are made as at the date hereof. Events or
circumstances could cause our actual results to differ materially
from those estimated or projected and expressed in, or implied by,
the forward-looking information. For a full discussion of Cenovus’s
material risk factors, refer to “Risk Management and Risk Factors”
in the Corporation’s annual 2019 MD&A and the MD&A for the
period ended March 31, 2020, and to the risk factors described in
other documents Cenovus files from time to time with securities
regulatory authorities in Canada, available on SEDAR at sedar.com,
and with the U.S. Securities and Exchange Commission on EDGAR at
sec.gov, and on the Corporation’s website at cenovus.com.
Cenovus Energy Inc.Cenovus Energy Inc. is a
Canadian integrated oil and natural gas company. It is committed to
maximizing value by sustainably developing its assets in a safe,
innovative and cost-efficient manner, integrating environmental,
social and governance considerations into its business plans.
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
RelationsMedia Relations general
line403-766-7751 |
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