Financial results impacted by hedging and price differentials
CALGARY, Alberta, April 25, 2018 (GLOBE NEWSWIRE) — Cenovus Energy Inc. (TSX:CVE) (NYSE:CVE) had continued strong operational performance from its oil sands projects and Deep Basin natural gas assets in the first quarter of 2018. The company’s quarterly financial results were impacted by risk management losses, wider light-heavy oil differentials and planned refinery maintenance. As previously announced, Cenovus responded to the wider price differentials and transportation constraints by temporarily slowing oil sands production in February and March and storing excess barrels in its reservoirs. The company ramped oil sands production back up to normal levels after Western Canadian Select (WCS) prices improved. Cenovus also made good progress with its drilling program in the Deep Basin in the quarter.
First quarter highlights
- Oil sands volumes nearly doubled compared with the same period a year earlier as a result of Cenovus’s May 2017 asset acquisition
- Deep Basin unit operating costs decreased 18% from the third quarter of 2017, Cenovus’s first full quarter of ownership of the assets
- Oil sands unit operating costs declined slightly from the first quarter of 2017
- Major planned turnarounds at the Wood River and Borger refineries were carried out over several weeks during the quarter and were completed in April
- The company incurred realized risk management losses of $469 million
|Financial & production summary|
|(for the period ended March 31)||2018
($ millions, except per share amounts)
|Cash from operating activities1||-123||328|
|Adjusted funds flow1,2||-41||323|
|Per share diluted||-0.03||0.39|
|Free funds flow1,2||-565||10|
|Operating earnings (loss) from continuing operations2||-752||-39|
|Per share diluted||-0.61||-0.05|
|Net earnings (loss) from continuing operations||-914||211|
|Per share diluted||-0.74||0.25|
|Production from continuing operations3 (before royalties)|
|Oil sands (bbls/d)||359,666||181,501|
|Deep Basin liquids4 (bbls/d)||35,479||–|
|Total liquids from continuing operations (bbls/d)||395,145||181,501|
|Total natural gas from continuing operations (MMcf/d)||553||15|
|Total production from continuing operations (BOE/d)5||487,464||184,001|
1 Includes results from Cenovus’s legacy conventional segment, which has been classified as a discontinued operation.
2 Adjusted funds flow, free funds flow and operating earnings/loss are non-GAAP measures. See Advisory.
3 Does not include production from Cenovus’s legacy conventional oil and natural gas assets, the last of which was sold as of January 5, 2018. The legacy conventional segment has been classified as a discontinued operation.
4 Includes oil and natural gas liquids (NGLs).
5 Totals may not add due to rounding.
First quarter overview
In the first quarter of 2018, Cenovus had a shortfall in cash from operating activities of $123 million compared with a surplus of $328 million in the same period a year earlier, and a shortfall in adjusted funds flow of $41 million, compared with a surplus of $323 million in 2017. Operating loss from continuing operations was $752 million compared with a $39 million loss the previous year.
Financial results were affected by realized risk management losses, the widest light-heavy oil price differentials experienced since the fourth quarter of 2013, planned turnarounds at the company’s two jointly owned U.S. refineries and an impairment on some assets in the Deep Basin.
“The challenges we experienced in the first quarter had a significant impact on our financial results, but the underlying performance of our assets remains very strong,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “I want to stress that these financial challenges are temporary and don’t reflect Cenovus’s significant potential for funds flow and earnings growth.”
Cenovus incurred realized risk management losses from continuing operations of $469 million compared with losses of $79 million in the same quarter a year earlier. Following the company’s May 2017 asset acquisition, Cenovus had increased leverage and was in the process of marketing its legacy conventional oil and natural gas assets to streamline its portfolio and reduce debt. The company hedged approximately 80% of its forecast oil production for the first half of 2018 to support financial resilience by establishing downside protection at a time when commodity prices were lower and the timing and amount of proceeds from planned divestitures were uncertain. This was the main contributor to the realized risk management losses in the quarter as benchmark prices exceeded Cenovus’s contract prices.
At the end of the second quarter, a portion of Cenovus’s 2018 risk management contracts will expire, reducing the company’s hedge position to approximately 37% of forecast oil production for the second half of the year. As of March 31, 2018, the company had 19,000 barrels per day (bbls/d) of West Texas Intermediate (WTI) hedged for 2019 using collars that provide downside price protection while allowing Cenovus opportunity to capture some of the benefit in a rising price environment.
During the first quarter of 2018, transportation constraints resulted in light-heavy oil price differentials averaging US$24.28/bbl, 67% wider compared with the same period in 2017. This contributed to reduced netbacks at the company’s oil sands operations. Companywide netbacks from continuing operations, before realized risk management losses, averaged $16.80 per barrel of oil equivalent (BOE) in the first quarter of 2018 compared with $21.25 in the same period a year earlier. Cenovus continues to mitigate its exposure to heavy oil price discounts through its downstream integration, pipeline commitments to the U.S. Gulf Coast and Canadian West Coast and rail optionality including the company’s Bruderheim crude-by-rail terminal as well as through financial contracts on the WCS differential.
At Cenovus’s jointly owned Wood River and Borger refineries in the U.S., the operator carried out major planned turnarounds over several weeks during the first quarter. As a result, Cenovus recorded a shortfall in refining and marketing operating margin of $48 million for the quarter, compared with operating margin of $53 million in the same period of 2017. 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, the shortfall in operating margin from refining and marketing would have been $69 million in the first quarter of 2018.
As at the end of the first quarter, Cenovus determined that the carrying value of its Clearwater assets in the Deep Basin exceeded their recoverable amount due to a decline in forward natural gas prices. This resulted in a non-cash impairment charge of $100 million in the quarter.
Cenovus continues to make progress in reducing the company’s capital investment costs and operating and general and administrative (G&A) expenses. This includes the company’s previously announced plan to reduce its workforce by approximately 15% from 2017 levels, which is now largely complete.
Cenovus continues to achieve greater operational and capital efficiencies by drilling longer horizontal wells in the oil sands and using multi-well pad development in the Deep Basin. Previous improvements to electric submersible pumps at the company’s oil sands operations have resulted in longer pump life and reduced workover costs. Lower decline rates and better performance from new well pads at Cenovus’s oil sands facilities have allowed the company to optimize timing of wells and capital investment, further reducing costs. In the Deep Basin, optimization of maintenance and integrity programs lowered repair and maintenance expenses. Additional per-barrel operating cost reductions are expected to come with further optimization of maintenance scheduling.
Cenovus had first quarter G&A costs of $179 million, compared with $43 million in the same period in 2017. The increase was primarily due to one-time severance costs of $43 million and a $59 million non-cash expense for Calgary office space that exceeds current needs. Cenovus continues to pursue an active subleasing program to offset some of its real estate costs.
Divestitures and deleveraging
In January 2018, Cenovus closed the sale of its Suffield assets for gross cash proceeds of $512 million. With the closing of the Suffield sale, the company completed its plan, announced in 2017, to divest its legacy conventional business.
To further streamline its portfolio, reduce debt and increase shareholder value, the company continues to review potential divestitures of non-core assets in the Deep Basin. Cenovus has one of the largest land positions in the Deep Basin, with approximately three million net acres, providing more opportunities than the company can efficiently develop within a reasonable timeframe. The company continues to make progress with its previously announced plan to sell assets with current production of approximately 15,000 BOE/d of natural gas and liquids in the Clearwater area of the Deep Basin.
Cenovus’s oil sands projects continued to deliver strong operational performance in the first quarter of 2018. However, due to market access challenges, the company decided to temporarily slow production at Christina Lake and Foster Creek in February and March.
“After a strong operational start to the quarter, we took prudent steps to reduce production volumes in response to wider light-heavy differentials, export pipeline capacity constraints and the slow pace of ramp up in oil-by-rail capacity,” said Pourbaix. “When Canadian heavy oil is selling at a wide discount to WTI, we have the ability to slow our oil sands production while maintaining steam injection to mobilize the oil. We can then store that mobilized oil in our reservoirs to be produced and sold at a later date when pipeline capacity improves and differentials narrow.”
To help address these ongoing market access challenges, Cenovus is working with rail providers to resolve a shortage of locomotive hauling capacity so that the company can more fully realize the benefits of its Bruderheim crude-by-rail facility. Cenovus expects overall industry rail access to improve starting in the second half of the year. Should rail capacity improvements take longer than expected, or pipeline capacity tighten again, the company may take further steps to defer production which could result in fluctuating production volumes from month to month.
As a result of the temporary oil sands production decrease in the first quarter, Foster Creek’s steam to oil ratio (SOR) – the amount of steam needed to produce one barrel of oil – rose to 2.8 for the period. As market access improved in late March and April, Cenovus ramped oil sands production back up to take advantage of improved pricing. At Christina Lake, the SOR remained unchanged year over year at an industry leading 1.8. The company expects SORs to remain within full-year guidance of 2.6 to 3.0 at Foster Creek and 1.8 to 2.2 for Christina Lake in 2018.
Combined production at Christina Lake and Foster Creek was 359,666 bbls/d during the quarter, nearly double the volume from the same period a year earlier. The increase was due to the company’s May 2017 acquisition, which resulted in Cenovus taking full ownership of its oil sands assets. Oil sands operating expenses were $8.78/bbl, 2% lower than in the first quarter of 2017. Cenovus continues to expect full-year oil sands volumes for 2018 to be within its guidance range of 364,000 to 382,000 bbls/d.
Construction at the Christina Lake phase G expansion, which resumed in the first quarter of 2017, continues to progress on time and on budget. Cenovus expects the expansion will have go-forward capital costs, from the time the project was restarted last year through to completion, of between $13,000 and $14,000 per flowing barrel compared with the company’s previous estimate of between $16,000 and $18,000. Phase G has approved capacity of 50,000 bbls/d.
To date, Cenovus is pleased with its Deep Basin program and initial well results have met or exceeded the company’s expectations. First quarter production averaged 127,056 BOE/d, with average operating costs of $7.36/BOE, an 18% reduction from the third quarter of 2017, Cenovus’s first full quarter of ownership of the assets. While the company is encouraged by the drilling and production results, Cenovus continues to take a disciplined approach to development in the Deep Basin in response to lower natural gas prices. During the quarter, the company substantially completed its 2018 Deep Basin capital investment program, bringing 17 wells on production, completing 16 wells and adding additional pipeline infrastructure, and drilling 14 horizontal wells targeting liquids-rich natural gas.
In the first quarter of 2018, the Wood River and Borger refineries, which Cenovus jointly owns with the operator, underwent planned maintenance activity, including the first major turnaround at the Wood River Coker and Refinery Expansion (CORE) project since it was completed in 2011. The maintenance programs were completed in April and both refineries have since returned to planned operating levels.
New CFO appointed
Earlier this month, Cenovus announced the appointment of Jon McKenzie as the company’s next Chief Financial Officer, who in addition to his financial background brings a broad range of energy industry experience spanning operations, supply, trading and commercial activities related to pipelines, rail and terminal operations. He will succeed Ivor Ruste, who as previously announced, is retiring on April 30.
For the second quarter of 2018, the Board of Directors has declared a dividend of $0.05 per share, payable on June 29, 2018 to common shareholders of record as of June 15, 2018. Based on the April 24, 2018 closing share price on the Toronto Stock Exchange of $12.19, this represents an annualized yield of about 2%. 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, April 25, 2018, 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.