CALGARY, AB–(Marketwired – December 08, 2016) – Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) plans to invest between $1.2 billion and $1.4 billion in 2017, a 24% increase compared with the company’s forecast capital spending for 2016. The 2017 budget includes capital to resume construction of the phase G expansion at Cenovus’s Christina Lake oil sands project and to invest in attractive conventional oil drilling opportunities with high-return potential in southern Alberta. The company plans to increase its total oil production in 2017 by 14% compared with its forecast average production for 2016. Cenovus also intends to hold the line on total per-barrel oil operating costs in 2017 and now expects its long-term oil sands sustaining capital to be close to $7.00 per barrel (bbl), about 50% lower than in 2014.
“With the tremendous progress we’ve made over the last two years in reducing operating costs and sustaining capital, we’re confident we can move forward with projects that have strong potential to drive shareholder value,” said Brian Ferguson, Cenovus President & Chief Executive Officer. “As we resume investing in growth projects in the year ahead, Cenovus will continue to focus on maximizing cost efficiencies and maintaining financial resilience while delivering safe and reliable operations.”
Cenovus continues to maintain one of the strongest balance sheets in the industry, with almost $3.9 billion in cash and $4 billion in unused credit facilities as at September 30, 2016. As of that date, the company’s net debt to capitalization ratio was 17% and its net debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was 2.0 times, on a trailing 12-month basis.
Cenovus plans to direct approximately 70% of its 2017 capital budget towards sustaining its oil sands production and base production at its other operations. The remaining 30% is primarily planned for growth projects at the company’s existing and emerging oil sands assets as well as at its tight oil assets in southern Alberta.
|Capital investment by asset ($ millions)1|
|2017 Budget||2016 Guidance|
|Oil sands2||685 – 815||555 – 610|
|Conventional oil3||275 – 325||150 – 175|
|Natural gas||10 -15||10 – 20|
|Refining & marketing4||210 – 240||230 – 255|
|Total capital investment5||1,200 – 1,400||1,000 – 1,100|
|1 Based on Brent of US$48.75/bbl, WTI of US$47.25/bbl, a WTI/WCS differential of US$15.75/bbl, NYMEX gas of US$3.00/MMBtu, US$/C$ exchange rate at $0.74 and a Chicago 3-2-1 crack spread of US$11.25/bbl.|
|2 Includes Foster Creek, Christina Lake, Narrows Lake, Grand Rapids, Telephone Lake and other emerging assets.|
|3 Includes Pelican Lake as well as oil assets in Alberta and Saskatchewan.|
|4 Refining capital investment is reported in C$ but incurred in US$ and is impacted by foreign exchange.|
|5 Total capital investment includes additional investment not represented above.|
In the first half of 2017, Cenovus plans to resume work on its phase G expansion at Christina Lake, which was deferred in late 2014 due to declining oil prices. Since deferring phase G, Cenovus has successfully reworked the construction plan and rebid contracts for the project to reduce costs. After realizing more than $500 million in project cost savings, the company anticipates the expansion can be completed with go-forward capital investment of between $16,000 and $18,000 per flowing barrel. Phase G is about 20% complete and has an approved design capacity of 50,000 barrels per day (bbls/d) gross. First oil from the expansion is expected in the second half of 2019.
Cenovus also continues to advance its large portfolio of regulatory-approved emerging oil sands projects. In 2017, the company plans to spend capital to progress engineering work on deferred projects at Foster Creek and Narrows Lake. Cenovus expects to provide an update on its plans for these projects in the middle of 2017. The total oil sands capital budget for the year ahead includes between $300 million and $350 million for Christina Lake, between $325 million and $375 million for Foster Creek and between $60 million and $90 million for emerging oil sands projects.
In 2017, Cenovus is planning a targeted drilling program on the Palliser Block in southern Alberta where it has a large inventory of highly attractive short-cycle tight oil opportunities. To date, the company has identified approximately 700 drilling locations with high-return potential. Cenovus plans to spend approximately $160 million in the year ahead to drill about 50 horizontal development wells and 60 stratigraphic wells at Palliser.
“We intend to pursue some exciting opportunities on the Palliser Block to generate short-cycle cash flow to support continued growth in our oil sands assets, which is consistent with our long-standing conventional strategy,” said Ferguson. “Our investment plans for Palliser and Christina Lake phase G far exceed our internal rate of return threshold.”
With integration remaining an important part of the company’s overall strategy, Cenovus plans to invest between $210 million and $240 million in its refining and marketing business in 2017. The planned capital is primarily for scheduled maintenance and reliability work at the Wood River and Borger refineries in the U.S. that Cenovus jointly owns with the operator, Phillips66.
In 2016, Cenovus completed work on two new expansion projects, increasing its oil sands production capacity by 26% to 390,000 bbls/d gross (195,000 bbls/d net to Cenovus). Christina Lake phase F, which includes a new 100 megawatt cogeneration plant, achieved first oil early last month, with ramp-up expected over 12 months. Foster Creek phase G achieved first oil early in the third quarter and is also expected to ramp up over 12 months.
“The ramp-up of production at Christina Lake phase F and Foster Creek phase G is proceeding very well and has exceeded our expectations to date,” said Ferguson. “With incremental volumes from these expansions and strong execution at our facilities, our oil sands operations are demonstrating exceptional performance.”
In recent weeks, Christina Lake has been reliably producing about 92,000 bbls/d to 98,000 bbls/d net, while Foster Creek has been reliably producing between 80,000 bbls/d and 85,000 bbls/d net. Over the long term, Cenovus continues to target oil sands production at between 90% and 95% of design capacity.
In 2017, as the expansions at Christina Lake and Foster Creek continue to ramp up, Cenovus plans to increase its oil sands production by 20% compared with its forecast 2016 production. Total oil production, including oil sands and conventional combined, is forecast to increase by 14% compared with the company’s 2016 forecast. Conventional oil production is forecast to decrease by 4%, largely due to expected natural declines. Cenovus anticipates incremental production from the Palliser drilling program will offset some of these declines, with the greatest impact expected in 2018.
|Average net production forecast|
|2017 Budget||2016 Guidance||% change1|
|Foster Creek (Mbbls/d)||76 – 82||68 – 70||14|
|Christina Lake (Mbbls/d)||96 – 102||78 – 80||25|
|Total oil sands (Mbbls/d)||172 – 184||146 – 150||20|
|Conventional oil (Mbbls/d)2||51 – 56||55 – 56||-4|
|Total oil (Mbbls/d)||223 – 240||201 – 206||14|
|Natural gas (MMcf/d)||340 – 360||390 – 395||-11|
|1 Percentage change based on the midpoint of the ranges.|
|2 Includes natural gas liquids (NGLs).|
Cenovus continues to achieve meaningful reductions in the capital required to sustain its base business and maintain ongoing production at all of its operations. About 70% of the company’s total 2017 budget — approximately $900 million — is for maintenance and oil sands sustaining capital, with the rest largely planned for growth projects. Even with the recent completion of the new oil sands expansions at Foster Creek and Christina Lake, Cenovus plans to keep its overall oil sands sustaining capital budget for 2017 relatively unchanged from forecast 2016 levels. With the cost efficiencies realized over the last two years, the company expects oil sands sustaining capital costs of approximately $7.00/bbl going forward, about 50% lower than in 2014.
“We’ve achieved substantial structural improvements in our sustaining capital costs over the past two years by changing the way we work, eliminating duplication and finding efficiencies across our operations,” said Ferguson. “While we’ve already made great strides, we believe we can further increase our cost efficiency through additional improvements in our drilling and completion times, well pad designs and well conformance, and also through initiatives such as the use of wider well spacing and longer horizontal well lengths at our oil sands operations.”
Cenovus plans to hold the line on per-barrel oil operating costs in 2017 compared with the company’s forecast operating costs for 2016. The company expects non-fuel operating costs at its oil sands business will decline by 6% compared with its 2016 forecast. Fuel costs are expected to be higher due to an increase in forecast natural gas prices.
|Operating costs ($/bbl)|
|2017 Budget||2016 Guidance||% change1|
|Fuel||2.75 – 3.25||2.25 – 2.75||20|
|Non-fuel||7.75 – 9.25||8.00 – 8.50||3|
|Subtotal||10.50 – 12.50||10.25 – 11.25||7|
|Fuel||2.00 – 2.50||1.75 – 2.25||13|
|Non-fuel||4.50 – 5.50||5.75 – 6.00||-15|
|Subtotal||6.50 – 8.00||7.50 – 8.25||-8|
|Total oil sands2||8.25 – 10.00||8.80 – 9.65||-1|
|Conventional oil||15.00 – 17.00||14.25 – 15.25||8|
|Total oil2||9.85 – 11.60||10.25 – 11.20||–|
|1 Percentage change based on the midpoint of the ranges.|
|2 Based on a volume-weighted average.|
With the significant improvements achieved in its cost structures over the last two years, Cenovus expects to be able to cover all of its 2017 sustaining capital costs as well as its dividend with a West Texas Intermediate (WTI) price in the range of US$45/bbl to US$50/bbl. As prices move above that range, the company expects to generate additional cash flow, supporting its capacity to invest in future growth projects.
Cenovus maintains an active hedging program focused on supporting the company’s cash outflow and maintaining financial resilience. As of December 7, 2016, the company has approximately 30% of its forecast 2017 oil production hedged at a volume-weighted average price of about US$46.29/bbl. Nearly 40% of these barrels are hedged using costless collars, which limits downside risk on the hedged barrels while giving the company some ability to benefit in a rising price environment.
|Current hedge positions for 2017|
|Hedges at Dec. 7, 2016||Volume||Price|
|Crude – WTI Fixed Price||70,000 bbls/d||US$46.35/bbl|
|January – June|
|Crude – Brent Fixed Price||10,000 bbls/d||US$53.09/bbl|
|July – December|
|Crude – WTI Collars||50,000 bbls/d||US$44.84/bbl – US$56.47/bbl|
|July – December|
Through a combination of market access commitments and downstream integration largely provided by the company’s interests in two U.S. refineries, Cenovus has positioned itself to mitigate the impact of swings in the Canadian light-heavy oil price differential for nearly 75% of its forecast 2017 heavy oil production. Together, these mechanisms help to support Cenovus’s financial resilience.
NOTE: Cenovus has made its 2017 guidance available at cenovus.com under ‘Investors.’
2017 Budget Conference Call and Webcast Today
9 a.m. Mountain Time (11 a.m. Eastern Time)
Cenovus will host a conference call today, December 8, 2016, 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.