Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) remained focused on
financial resilience in the second quarter of 2020 and used the
flexibility of its assets and marketing strategy to adapt quickly
to the changing external environment. This positioned the company
to weather the sharp decline in benchmark crude oil prices in April
by reducing volumes at its oil sands operations and storing the
mobilized oil in its reservoirs for production in an improved price
environment. While Cenovus’s financial results were impacted by the
weak prices early in the quarter, the company captured value by
quickly ramping up production when Western Canadian Select (WCS)
prices increased almost tenfold from April to an average of C$46.03
per barrel (bbl) in June. As a result of this decision, Cenovus
reached record volumes at its Christina Lake oil sands project in
June and achieved free funds flow for the month of more than $290
million.
“We view the second quarter as a period of transition, with
April as the low point of the downturn and the first signs of
recovery taking hold in May and June,” said Alex Pourbaix, Cenovus
President & Chief Executive Officer. “That said, we expect the
commodity price environment to remain volatile for some time. We
believe the flexibility of our assets and our low cost structure
position us to withstand a continued period of low prices if
necessary. And we’re ready to play a significant role in helping to
lead Canada’s economic recovery.”
Financial & production summary |
(for the period ended June 30) |
2020Q2 |
2019Q2 |
|
Financial ($ millions, except per share amounts) |
|
|
|
Cash from (used in) operating
activities |
-834 |
1,275 |
|
Adjusted funds flow1, 2 |
-462 |
1,082 |
|
Per share diluted |
-0.38 |
0.88 |
|
Free funds flow1, 2 |
-609 |
834 |
|
Operating earnings (loss)1 |
-414 |
267 |
|
Per share diluted |
-0.34 |
0.22 |
|
Net earnings (loss) |
-235 |
1,784 |
|
Per share diluted |
-0.19 |
1.45 |
|
Capital
investment |
147 |
248 |
|
|
|
|
% change |
Production3 (before
royalties) |
|
|
|
Oil sands
(bbls/d) |
373,189 |
344,973 |
8 |
Conventional
liquids3,4 (bbls/d) |
26,861 |
26,417 |
2 |
Total
liquids3,4 (bbls/d) |
400,050 |
371,390 |
8 |
Total natural
gas (MMcf/d) |
392 |
432 |
-9 |
Total
production4 (BOE/d) |
465,415 |
443,318 |
5 |
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 the first quarter of
2020, Cenovus responded quickly to the COVID-19 pandemic to protect
the health and safety of its workforce and ensure the continuity of
its business. In mid-March, the company moved to essential staffing
levels at its field operations and directed the vast majority of
its office staff to work from home. Cenovus continues to implement
special measures and protocols to protect its workers. Some
additional staff have recently started returning to field locations
to address work that needs to be performed over the summer and fall
while the return to offices is happening at a slower rate. Cenovus
is monitoring the COVID-19 situation closely and will not
compromise on the health and safety of its workers.
Business flexibility and balance sheet
strengthIn the second quarter of 2020, Cenovus remained
focused on disciplined spending, maintaining its low cost structure
and protecting its balance sheet. Capital investment in its oil
sands and conventional segments decreased on a quarterly and
year-over-year basis as a result of the decisive steps the company
took in the first quarter of 2020 and in early April to respond to
declining commodity prices and the rapid weakening of the business
environment. During the second quarter, the company completed the
previously announced temporary ramp-down of its crude-by-rail
program.
In response to a 45% drop in the average price of West Texas
Intermediate (WTI), to US$16.70/bbl, and a more than 70% decline in
the average price of WCS, to C$4.92/bbl in April compared with
March of 2020, Cenovus took additional steps to preserve value and
protect its balance sheet by proactively managing its oil sands
volumes. In April, the company voluntarily reduced oil sands
production to just under 344,000 barrels per day (bbls/d), down 11%
or approximately 44,000 bbls/d compared with March volumes. When
WCS prices rebounded to C$46.03/bbl in June, Cenovus used the
flexibility of its oil sands assets to quickly ramp up production
and leveraged its range of transportation and marketing options,
including storage and pipeline capabilities, to capture value from
the higher prices. The company achieved average oil sands
production of 405,658 bbls/d in June, which included a production
record at Christina Lake.
“We made the strategic decision to use the flexibility of our
business and relied on the collaboration of our upstream and
marketing teams to manage the timing, storage and sales approach
for our oil production,” said Pourbaix. “We are maximizing value
for our shareholders even in this challenging economic
environment.”
Second-quarter financial resultsCenovus’s
second-quarter adjusted funds flow shortfall of $462 million and
free funds flow shortfall of $609 million were significantly
impacted by losses of $529 million related to product sold in the
quarter that was written down at the end of March. During the
second quarter, essentially all the inventory that Cenovus wrote
down in March was sold, and the company realized the inventory
write-downs. The recovery in benchmark commodity prices and the
ramp-up of production during the second quarter resulted in Cenovus
achieving free funds flow of more than $290 million for the month
of June.
The company recorded cash used in operating
activities of $834 million in the second quarter compared with
nearly $1.3 billion in cash from operating activities in the same
quarter of 2019. Cenovus had a second-quarter operating loss of
$414 million and net loss of $235 million compared with operating
earnings of $267 million and net earnings of almost $1.8 billion in
the same period in 2019. The net loss was due to the lower
operating earnings and unrealized risk management losses of $120
million, partially offset by non-operating unrealized foreign
exchange gains of $273 million and a deferred income tax recovery
of $131 million.
At the end of the second quarter, Cenovus had net debt of
approximately $8.2 billion compared with net debt of about $7.4
billion at the end of the first quarter of 2020. The company
continues to aim for a net debt level in the range of $5 billion or
lower over the longer term.
Cenovus has $5.6 billion in committed credit facilities, a
further $1.6 billion of uncommitted demand facilities and no bond
maturities until late 2022. As of June 30, 2020, the company had
drawn almost $1.5 billion against the committed credit facilities,
$299 million against the uncommitted demand facilities, and there
were outstanding letters of credit totaling $434 million. As at
June 30, 2020 no amounts were drawn against the uncommitted demand
facilities available to Cenovus’s refining partnership co-owned
with Phillips 66.
Operating highlightsCenovus’s
upstream and refining assets continued to deliver safe and reliable
operational performance during the second quarter.
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
excellent safety performance in the first half of 2020 with zero
significant incidents and strong results in the prevention of
recordable injuries and process safety events. This included a
significant milestone by the Deep Basin conventional team, which
achieved one year with zero recordable injuries.
Oil sandsFor the second quarter, Christina Lake
had average production of 207,157 bbls/d, while Foster Creek had
average production of 166,032 bbls/d. The company achieved combined
oil sands production of 373,189 bbls/d in the second quarter,
compared with 344,973 bbls/d in the same period a year earlier. In
May and June, Cenovus was able to produce above the government of
Alberta’s mandatory production curtailment limit for industry due
to the purchase of low-cost production credits from other
companies. As a result, Christina Lake volumes increased from an
average of 175,957 bbls/d for the month of April to an average of
242,964 bbls/d for the month of June, a record, underscoring
Cenovus’s flexibility in managing through the volatile price
environment.
Second-quarter oil sands operating costs were $7.36/bbl, down
15% from the same period a year earlier and 5% below the first
quarter of 2020. The year-over-year decrease in oil sands operating
costs was primarily due to higher sales volumes and the deferral of
activity to manage costs in the low-price environment and limit
field personnel due to COVID-19. The decrease in second-quarter
operating costs from a year earlier was partially offset by higher
fuel costs related to an increase in natural gas prices. In
addition, Cenovus benefited from a nearly 60% decrease in overall
second-quarter transportation and blending costs compared with the
first three months of 2020. The reduction was due to the suspension
of the crude-by-rail program and associated variable costs as well
as lower-priced condensate used for blending compared with the
first three months of the year.
While Cenovus’s oil sands facilities were producing at reduced
rates early in the second quarter, the company maintained normal
steam production levels. This allowed Cenovus to continue operating
the reservoirs effectively but also contributed to temporarily
higher steam-to-oil ratios (SOR). At Christina Lake, the SOR was
2.1 in the second quarter, compared with 2.0 in the same period a
year earlier. The SOR at Foster Creek was 2.8, up slightly from 2.7
a year earlier. The SORs are expected to track lower again as
production increases.
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 approximately
92,000 barrels of oil equivalent per day (BOE/d) in the second
quarter, a 6% decrease from the same period in 2019. The
year-over-year decrease was due to natural declines from limited
capital investment, partially offset by lower turnaround activity
and fewer shut-ins in response to natural gas pricing compared with
the same period in 2019 as well as the addition of Marten
Hills heavy oil production starting in 2020. As previously
announced, Cenovus has deferred the remainder of its 2020 drilling
program in the conventional segment.
Total conventional operating costs declined 7% to
$81 million in the second quarter of 2020 compared with the same
period in the previous year. These cost savings are a result of the
continued optimization of operations, focusing on critical repair
and maintenance activities and increased use of Cenovus’s
infrastructure. Per-barrel operating costs remained relatively flat
at an average of $9.05/BOE compared with $9.01/BOE in the second
quarter of 2019, as lower sales volumes and higher seasonal
chemical purchases were offset by decreased property tax and lease
costs as well as lower costs for repairs and maintenance.
Second-quarter per-barrel operating costs remained flat from a year
earlier even as production declined 6% over the same period.
Refining and marketingCenovus’s Wood River,
Illinois and Borger, Texas refineries, which are co-owned with the
operator, Phillips 66, had safe and reliable performance in the
second quarter of 2020, while crude runs were affected by the
economic slowdown due to COVID-19. Crude runs averaged 325,000
bbls/d in the second quarter, a 31% decrease from the same period
in 2019.
Cenovus had refining and marketing operating margin of $134
million in the second quarter compared with $198 million in the
same period of 2019, primarily due to reduced market crack spreads,
lower crude oil runs and crude advantage, partially offset by
higher margins on the sale of fixed-price products and lower
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 $139 million lower in the second quarter, compared with
$11 million higher in the same period in 2019.
While access to markets through new pipelines remains uncertain,
Cenovus continues to look for opportunities to add value by finding
new ways to get its products to new customers. In early July, the
company announced its first-ever shipment of oil sands crude to
Irving Oil’s refinery in Saint John, New Brunswick. Cenovus used
its existing capacity on the Trans Mountain pipeline to ship oil to
Burnaby, B.C., where it was loaded onto a tanker for a month-long
voyage of approximately 11,900 kilometres south along the U.S. West
Coast, through the Panama Canal and north to Saint John. Cenovus
will continue to work with industry partners like Irving Oil to
find innovative market-based solutions aimed at refining more
Canadian oil in Canada, providing job opportunities and
strengthening Canada’s economy.
SustainabilityOn July 14, 2020, Cenovus
released its 2019 environmental, social and governance (ESG)
report. With the 2019 report, Cenovus has transitioned its approach
to further align with the recommendations of the Task Force on
Climate-related Financial Disclosure (TCFD) and, new this year, to
follow the standards established by the Sustainability Accounting
Standards Board (SASB). The report also incorporates references to
the United Nations Sustainable Development Goals (SDGs).
Cenovus’s ESG report highlights the work the company has done to
establish bold targets in four key ESG focus areas that are most
impactful to its business: climate & greenhouse gas (GHG)
emissions, Indigenous engagement, land & wildlife, and water
stewardship. Cenovus continues to work on its plan for achieving
its ESG targets over the next decade.
Conference Call Today9
a.m. Mountain Time (11 a.m. Eastern Time)
Cenovus will host a conference call today, July 23,
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, 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 June 30, 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 June 30, 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”, “aim”, “believe”, “committed”,
“continue”, “ensure”, “expect”, “focus”, “opportunities”, “plan”,
“position”, “protect”, “target” and “will” or similar expressions
and includes suggestions of future outcomes, including, but not
limited to, statements about: our expectations regarding the
volatility of commodity prices and our ability to withstand an
extended period of low oil prices; SORs expected to track lower as
production increases; preserving the strength of our balance sheet;
attaining long-term net debt level in the range of $5 billion or
lower; uncertainty surrounding access to markets through new
pipelines; opportunities to add value by finding new ways to get
our products to new customers; working with industry partners to
find innovative market-based solutions to refine more Canadian oil
in Canada; delivering industry-leading safety performance through
our focus on risk management and asset integrity; our four ESG
focus areas and related targets and ambitions; COVID-19-related
special measures and protocols to protect workers and our approach
to increasing staffing levels in the office and at field sites.
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; continued impact of measures implemented to enhance the
company’s resilience; 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 or continued
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
adjust production while maintaining reservoir integrity;
availability of new ways to get our products to new customers;
opportunities to work with industry partners to find innovative
market-based solutions aimed at refining more Canadian oil in
Canada; 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; 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 prices 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:
volatility of and other assumptions regarding commodity prices,
including the extent to which COVID-19 impacts the global economy
and harms commodity prices; the extent to which COVID-19 and
fluctuations in commodity prices associated with COVID-19 impacts
our business, results of operations and financial condition, all of
which will depend on future developments that are highly uncertain
and difficult to predict, including, but not limited to the
duration and spread of the pandemic, its severity, the actions
taken to contain COVID-19 or treat its impact and how quickly
economic activity normalizes; a resurgence in cases of COVID-19,
which has occurred in certain locations and the possibility of
which in other locations remains high and creates ongoing
uncertainty that could result in restrictions to contain the virus
being re-imposed or imposed on a more strict basis, including
restrictions on movement and businesses; the success of our
COVID-19 protocols and safety measures to protect workers;
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 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 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 relationships with our partners and to
successfully manage and operate our integrated business;
reliability of our assets including in order to meet production
targets; 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; unexpected cost
increases or potential disruption or unexpected technical
difficulties in developing new products and manufacturing processes
and in constructing or modifying manufacturing or refining
facilities; 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 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 or storage capacity; 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 June 30, 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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