Capital investment reduced; focus remains on oil sands
CALGARY, Dec. 12, 2013 /CNW/ – Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) expects to invest between $2.8 billion and $3.1 billion in 2014, a 13% decrease when compared with the previous year. The company is focusing its capital on oil projects that are anticipated to provide production growth over the next four years.
“Since our launch in late 2009, Cenovus has concentrated on gaining regulatory approvals for our robust inventory of oil sands opportunities while also growing oil reserves,” said Brian Ferguson, Cenovus President & Chief Executive Officer. “In 2014, we will focus on investment that will achieve cash flow and earnings growth from our approved projects in order to create the greatest value possible for shareholders.”
The company’s business strategy, which plans for 525,000 barrels per day (bbls/d) of net oil production within the next decade, remains unchanged. Since its inception four years ago, Cenovus has grown oil production by approximately 50% and expects to deliver continued profitable oil production and reserves growth over the next year. Production growth is primarily driven by added volumes from Christina Lake phase E and the planned start-up of Foster Creek phase F in the third quarter of 2014.
Cenovus anticipates its conventional oil, natural gas and refining operations will continue to generate strong operating cash flow to support the growth of its oil sands projects. The company’s two producing oil sands operations, Christina Lake and Foster Creek, are also expected to generate operating cash flow in excess of capital investment in 2014. The company expects overall cash flow in 2014 to be between $3.0 billion and $3.7 billion.
“Cenovus is well-positioned as we head into our fifth year as a company,” said Ferguson. “Our strong financial position allows us to continue our focus on delivering solid total shareholder return. That includes our plans to increase our dividend over time as the company grows.”
|2014 budget||2013 guidance||% change3|
|Cash flow1,2 ($ billions)
Per share diluted ($/share)
|3.0 – 3.7
3.95 – 4.90
|3.6 – 3.7
4.75 – 4.85
|Operating cash flow1,2 ($ billions)||3.7 – 4.5||4.4 – 4.6||-9|
|Total capital investment ($ billions)||2.8 – 3.1||3.3 – 3.5||-13|
|Total oil production (Mbbls/d)4||190 – 208||181||10|
|1||2014 based on WTI of US$102.00/bbl, a WTI/WCS differential of US$26.00/bbl, NYMEX gas of US$4.00/MMBtu, US$/C$ exchange rate at $0.98 and a Chicago 3-2-1 crack spread of US$13.50/bbl.|
|2||Cash flow and operating cash flow are non-GAAP measures as defined in the Advisory.|
|3||Percentage change based on the midpoints of the ranges.|
|4||Includes NGLs production.|
Investing in oil production growth
About 90% of Cenovus’s planned $2.8 billion to $3.1 billion capital program in 2014 will be invested in its upstream oil assets. Cenovus plans to invest between $680 million and $760 million to expand Foster Creek, a 12% decrease when compared with the 2013 forecast. Investment at Christina Lake is expected to be between $750 million and $820 million, an increase of 15% when compared with the previous year. Together the two assets make up about 50% of the company’s 2014 projected capital budget.
At Narrows Lake, Cenovus plans to invest between $210 million and $230 million, a 42% increase when compared with the previous year. Engineering, procurement and construction continues, with first production expected in 2017. Foster Creek, Christina Lake and Narrows Lake are jointly owned with ConocoPhillips and operated by Cenovus.
Approximately two-thirds of Cenovus’s capital investment is committed capital, which is used to support existing business operations and progress approved expansions at Christina Lake, Foster Creek and Narrows Lake. The remaining third is discretionary capital for activities that include further developing the company’s tight oil opportunities, advancing future oil sands expansions through the regulatory process and investing in technology development. In 2014, Cenovus plans to use the flexibility of discretionary capital to maintain its disciplined approach of aligning capital investment with anticipated cash flow.
Cenovus expects to spend between $140 million and $160 million on its emerging oil sands assets over the next year, nearly a 40% decrease when compared with the previous year. The company anticipates receiving regulatory approval for its Grand Rapids oil sands project within the next few months, and approval for its Telephone Lake project in the second quarter of 2014.
“When we started out, I told investors we wanted to build a portfolio of regulator approved projects that would represent between 400,000 and 500,000 barrels per day net to Cenovus by the end of 2015,” said Ferguson. “We’re on track to achieve that. In 2014, we will be more focused on developing our existing portfolio of approved projects. We have a huge opportunity to create value in the oil sands over the next few years.”
Cenovus’s conventional oil and gas assets, including Pelican Lake, are expected to generate about $825 million in operating cash flow in excess of capital investment over the next year. Cenovus plans to invest between $230 million and $250 million at Pelican Lake in 2014, about 50% lower when compared with the previous year’s forecast, due to the company’s decision to align investment with the more moderate production ramp-up associated with the initial results of the polymer flood program.
Cenovus plans to spend between $540 million and $590 million on its other conventional oil assets in 2014, a 22% decrease when compared with the previous year as part of the company’s continued efforts to align capital investment with expected cash flow in 2014.
Cenovus’s refining operations are anticipated to continue generating significant operating cash flow in excess of capital investment in 2014, despite anticipated lower market crack spreads. The company plans to invest between $150 million and $160 million at its U.S. refineries, which are jointly owned with Phillips 66. This is a 41% increase when compared with 2013, mainly due to routine safety intiatives, meeting new low sulphur (Tier III) gasoline regulatory requirements, and additonal capital investments expected to enhance returns at the Wood River Refinery in Illinois. Cenovus expects to sanction a debottlenecking project at the Wood River Refinery in the first quarter of 2014.
|Capital investment by asset ($ millions)|
|2014 Budget||2013 Guidance||% change1|
|Foster Creek||680 – 760||810 – 830||-12|
|Christina Lake||750 – 820||675 – 690||15|
|Narrows Lake||210 – 230||150 – 160||42|
|Emerging oil sands assets2||140 – 160||240 – 250||-39|
|Pelican Lake||230 – 250||480 – 500||-51|
|Other conventional oil3||540 – 590||710 – 730||-22|
|Natural gas||40 – 50||40 – 45||6|
|Refining||150 – 160||100 – 120||41|
|Total capital investment||2,800 – 3,100||3,300 – 3,500||-13|
|1||Percentage change based on the midpoints of the ranges.|
|2||Includes assets such as Grand Rapids and Telephone Lake projects.|
|3||Includes NGLs production.|
Over the long-term, Cenovus continues to target a debt to capitalization ratio of between 30% and 40% and a debt to adjusted EBITDA ratio of between 1.0 and 2.0 times. In 2014, the company expects its debt to capitalization ratio to average between 31% and 35% and debt to adjusted EBITDA, on a trailing 12-month basis, to be between 1.2 and 1.7 times.
Attacking cost structures
Cenovus continues to take aim at cost structures across the organization. The company has centralized some of its functions, such as drilling, and is actively identifying opportunities in supply chain management to reduce capital and operating costs. Cenovus is also working on cost saving initiatives at its oil sands operations, which include improving waste treatment processes and optimizing chemical usage.
“As we start to see costs creeping higher, it’s important that we focus even more attention on attacking them,” said Ferguson. “We’ve worked hard to gain a reputation as a low-cost operator and we intend to keep it that way.”
The company expects operating costs at Foster Creek to average between $16.00 and $17.40 per barrel over the next year, 7% higher than the 2013 forecast due to costs associated with the start-up of phase F, as well as expected higher fuel prices. Operating costs at Christina Lake are expected to drop slightly, averaging between $11.60 and $12.90 per barrel as the company continues to ramp-up production from phase E.
The company’s cost reduction strategy also includes reducing the number of new hires and reallocating staff to support projects that are anticipated to add production growth in the next four years. Cenovus is also working on initiatives to improve the productivity of the organization.
“We have a lot of talent at Cenovus,” said Ferguson. “Over the next year, we’re going to continue to direct our staff to work as efficiently as possible by ensuring we have the right organizational structure in place to support our focus on developing current and near-term oil growth opportunities.”
Oil sands projects drive production growth
Cenovus expects oil production will average between 190,000 and 208,000 bbls/d net in 2014, an increase of 10% compared with its 2013 production forecast, primarily from the company’s oil sands assets.
Average oil production at Christina Lake is expected to be between 62,000 and 68,000 bbls/d net in 2014, a 30% increase compared with the previous year. The increase is driven primarily by the addition of phase E, which is expected to produce at near capacity early in the first quarter. Cenovus plans to optimize phases C, D and E over the next two years, adding an expected 22,000 bbls/d in gross production capacity by the end of 2015.
The planned start-up of phase F at Foster Creek in the third quarter of 2014 is also anticipated to contribute to the overall increase in production. Foster Creek oil production is expected to average between 54,000 and 59,000 bbls/d net in the coming year, a 7% increase compared with the average production forecast for 2013.
As discussed during the third quarter conference call, Cenovus continues to work on optimizing production performance at Foster Creek. The company is developing new operating procedures to address changes to the steam chambers as they mature in the initial areas of the project. This includes determining the optimal reservoir pressure, drilling more wells using Wedge Well™ technology and moving more well pads to the final stage of production, which is called the blowdown stage. The blowdown stage enables the company to move the steam from those older pads to newer areas of the reservoir, which is expected to lead to reduced steam to oil ratios.
Cenovus expects Pelican Lake production to average between 25,000 and 28,000 bbls/d net in 2014, a 6% increase compared with the average production forecast for 2013. Average production at the company’s other conventional oil assets is expected to be between 49,000 and 53,000 bbls/d net. This is a slight decrease from the average 2013 production forecast, mainly due to the sale of the company’s Shaunavon tight oil asset in July 2013.
|Average net production forecast1|
|2014 Budget||2013 Guidance||% change2|
|Foster Creek (Mbbls/d)||54 – 59||53||7|
|Christina Lake (Mbbls/d)||62 – 68||50||30|
|Total oil sands (Mbbls/d)||116 – 128||103||18|
|Pelican Lake (Mbbls/d)||25 – 28||25||6|
|Other conventional oil (Mbbls/d)3,4||49 – 53||53||-4|
|Total oil (Mbbls/d)||190 – 208||181||10|
|Natural gas (MMcf/d)||450 – 490||525||-10|
|1||Totals may not add due to rounding.|
|2||Percentage change based on the midpoints of the ranges.|
|3||Includes NGLs production.|
|4||2013 volumes include production from the Shaunavon asset sold in the third quarter.|
Managing risk and accessing new markets
Cenovus continues to take steps to manage risks associated with volatile commodity prices. The company’s integrated strategy, which combines upstream oil production with downstream refining capacity, provides the best protection against fluctuating light-heavy oil differentials. Integration provides a natural economic hedge against discounted crude prices by providing lower feedstock costs to the company’s refineries.
Cenovus has also secured supply agreements and has placed financial hedges on a portion of its oil production to reduce risk and ensure a stable stream of cash flow to fund its current operations and growth.
Cenovus will continue its focus on finding new customers in North America and around the world over the next year. The company has committed to move 200,000 bbls/d on the proposed Energy East pipeline, another 175,000 bbls/d on proposed pipelines to the West Coast and 150,000 bbls/d on planned pipelines to the U.S. Gulf Coast.
In addition to pipelines, Cenovus plans to begin using rail to transport some of its oil sands production by mid-2014 and expects to begin taking delivery of 825 coiled and insulated leased rail cars in late 2014. Ultimately, the company expects to have the capacity to move up to 30,000 bbls/d of its blended oil volumes using rail by the end of 2014.
“Our predictable, reliable oil sands growth and financial strength give us the confidence to make long-term transportation commitments,” said Ferguson. “We are targeting to have firm transportation by pipeline and rail for half of our gross forecast marketable production over the medium term.”
Reserves additions expected
Cenovus’s total reserves additions are on track with its long-term plan. The company believes it will b