Company generates free funds flow, reduces net debt
CALGARY, Alberta, Oct. 29, 2020 – Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) continued to deliver strong operational performance and further improved its financial resilience in the third quarter by remaining committed to disciplined capital investment, cost leadership and leveraging the flexibility of its assets and marketing strategy to generate positive free funds flow. The company took advantage of the higher commodity prices by ramping up production from its oil sands assets and selling barrels stored in the preceding quarter. Higher crude oil prices and increased sales volumes allowed the company to achieve free funds flow for the third quarter of $266 million, which contributed to a reduction in net debt to $7.5 billion at the end of the period.
“The third quarter clearly demonstrated the strength and reliability of our operations and our ability to effectively manage production and sales by storing barrels when prices declined and then capitalizing on a price recovery to optimize returns,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “We continue to find ways to optimize our cost structure, expand our market access, and strengthen the balance sheet. We believe the proposed transaction with Husky Energy, announced earlier this week, will address these priorities, positioning us to come through this period more resilient, with increased and stable free funds flow, supporting accelerated deleveraging and returns to shareholders.”
|Financial & production summary|
|(for the period ended September 30)||2020
|Financial ($ millions, except per share amounts)||% change|
|Cash from (used in) operating activities||732||834||-12|
|Adjusted funds flow1, 2||414||928||-55|
|Per share diluted||0.34||0.76|
|Free funds flow1, 2||266||634||-58|
|Operating earnings (loss)1||-452||284|
|Per share diluted||-0.37||0.23|
|Net earnings (loss)||-194||187|
|Per share diluted||-0.16||0.15|
|Production3 (before royalties)|
|Oil sands (bbls/d)||385,937||354,595||9|
|Conventional liquids3,4 (bbls/d)||25,851||26,104||-1|
|Total liquids3,4 (bbls/d)||411,788||380,699||8|
|Total natural gas (MMcf/d)||360||407||-12|
|Total production4 (BOE/d)||471,799||448,496||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.|
Cenovus Husky transaction
Cenovus’s planned transaction with Husky Energy Inc. will create a resilient integrated Canadian energy leader with an advantaged upstream and downstream portfolio that is expected to provide enhanced free funds flow generation and superior return opportunities for investors.
The companies are advancing the arrangement process, with regulatory filings being prepared and filed. The Joint Management Information Circular is being prepared for expected distribution by mid-November and key members of the combined integration teams have been identified.
“Teams from both Cenovus and Husky are moving the process along so that we can be in a position to implement the vision of the new company as soon as possible,” said Pourbaix, who will lead the combined entity as President & Chief Executive Officer following a closing anticipated in the first quarter of 2021. “We’re very excited about the opportunities that the combination of our two companies creates for all of our stakeholders.”
Business flexibility and financial discipline
In the third quarter of 2020, Cenovus increased crude oil production at its oil sands facilities and overall sales in response to higher commodity prices while remaining focused on maintaining its low operating and capital cost structure and deleveraging its balance sheet. The company was able to use the flexibility of its oil sands assets and available production curtailment credits to increase output above the Alberta government’s mandatory limits. Cenovus achieved average oil sands production of almost 386,000 barrels per day (bbls/d) in the third quarter, up from 373,000 bbls/d in the previous quarter and a 9% increase from the same period a year earlier.
The company also employed its suite of transportation and storage assets to capture increased value from the higher prices. During the quarter, Cenovus sold crude oil inventory built up from April to June when crude oil prices were significantly lower. The average benchmark price for Western Canadian Select (WCS) crude oil almost doubled to $42.41 per barrel (bbl) in the third quarter from $22.42/bbl in the second quarter of 2020 and significantly higher than the April benchmark price of $4.92/bbl.
These actions combined with continued capital spending and operating cost discipline contributed to significantly improved financial performance during the third quarter compared with the second quarter of this year. Third quarter capital investment in the company’s oil sands and conventional segments was flat compared with the second quarter of 2020 and approximately 50% lower on a year-over-year basis after the company took decisive action earlier this year to respond to lower commodity prices and the rapid weakening of the business environment.
“Our people in the field have done an excellent job of maintaining strong operating performance even as we reduced capital spending due to the lower price environment and the challenges brought on by COVID-19,” said Pourbaix. “Safe and reliable operations will continue to be a priority, along with a commitment to finding ways of further reducing our overall costs to help us maintain our competitive advantage and remain an attractive long-term investment.”
Third-quarter financial results
Cenovus recorded cash from operating activities of $732 million in the third quarter compared with $834 million of cash used in operating activities in the second quarter of 2020. The company generated third-quarter adjusted funds flows of $414 million and free funds flow of $266 million driven by the recovery in benchmark commodity prices, the ramp-up of production in the quarter and increased sales of barrels that were stored in the second quarter and were withdrawn from storage and sold as prices recovered.
The company had a third-quarter operating loss of $452 million and a net loss of $194 million compared with operating earnings of $284 million and net earnings of $187 million in the same period in 2019. The operating loss was due to lower cash from operating activities and adjusted funds flow, and higher depreciation, depletion, and amortization that included an impairment charge of $450 million associated with a refinery Cenovus co-owns with the operator, Phillips 66, at Borger, Texas, partially offset by non-operating realized foreign exchange gains of $30 million. The net loss in the third quarter of this year was due to the operating loss, partially offset by unrealized risk management gains of $135 million, non-operating unrealized foreign exchange gains of $152 million compared with losses of $87 million, and a deferred income tax recovery of $177 million compared with a deferred income tax expense of $46 million in the third quarter of 2019. Overall financial results were negatively impacted compared with the third quarter of 2019 largely due to a one-third decline in benchmark crude oil prices driven by the COVID-19 pandemic.
The impairment charge taken on the Borger refinery reflects current market conditions surrounding reduced demand for refined products, and the expectation of continued lower market crack spreads in the market.
At the end of the third quarter, Cenovus’s net debt declined to approximately $7.5 billion from $8.2 billion at the end of the second quarter of 2020, in part due to directing positive free funds flow towards debt repayment. In July 2020, Cenovus issued US$1.0 billion in 5.375% senior unsecured notes due in 2025 with net proceeds used to repay borrowings on the company’s credit facilities.
Response to COVID-19
Earlier this year, Cenovus responded quickly to the COVID-19 pandemic and in the past several months has implemented special protocols and measures to protect the health and safety of its workforce and to ensure the continuity of its business. With these measures now well established, the company recently lifted its mandatory work from home order that had been in place for most staff since mid-March and is now implementing a gradual return to its Calgary office. Cenovus continues to closely monitor the COVID-19 situation and will not compromise on the health and safety of its workers or on its commitment to safe and reliable operations.
Cenovus’s upstream and refining assets continued to deliver safe and reliable operational performance during the third quarter. Planned maintenance and repair work in the third quarter partially offset production increases at both of the company’s oil sands operations and contributed to lower output at its conventional properties. The work was deferred from earlier in the year due to reduced staffing at our operations as a result of COVID-19.
Health and safety
Cenovus remains focused on delivering industry-leading safety performance through its focus on risk management and asset integrity, delivering very strong results through the first nine months of the year. The company has achieved noteworthy year-over-year improvements in focus areas of Significant Incident Frequency (SIF) and Process Safety Events. The company recorded a Significant Incident Frequency of zero compared with 0.12 in the third quarter of 2019 and no Process Safety Events compared with one in the same period a year earlier. Total Recordable Injury Frequency has largely remained flat compared with the same period in 2019 when Cenovus achieved its best ever performance in this area. These results included significant safety milestones for Drilling Operations as well as Completions and Well Services at our Christina Lake oil sands facility, with both groups achieving one year without a recordable incident during the third quarter. The company’s Conventional operations also continued to deliver strong safety performance, marking a one-year milestone in September since recording a significant process safety event.
For the third quarter, Christina Lake had average production of 220,983 bbls/d, and Foster Creek had average production of 164,954 bbls/d. The company achieved combined oil sands production of 385,937 bbls/d in the third quarter, compared with 354,595 bbls/d in the same period a year earlier. During the third quarter of 2020, Cenovus was able to produce additional barrels of oil, despite curtailment, due to the purchase of low-cost production curtailment credits from other companies.
Oil sands operating margin in the third quarter increased to $638 million from $125 million in the second quarter of 2020 due to higher average realized crude oil sales price and higher sales volumes, partially offset by increased transportation and blending costs and higher royalties. Non-fuel per-unit operating costs in the third quarter declined 5% at Christina Lake and were relatively flat at Foster Creek compared with the same period a year earlier. Overall, third-quarter oil sands per-unit operating costs were $7.53/bbl, up 9% from the same period a year earlier and 2% from the second quarter of 2020. The year-over-year increase in costs was primarily due to higher per-barrel fuel costs as a result of higher natural gas prices, partially offset by increased sales volumes. Transportation costs were lower due to the suspension of the company’s crude-by-rail program in response to unfavourable pricing fundamentals for shipping by rail.
Cenovus’s oil sands facilities continue to operate at industry-leading steam-to-oil ratios (SOR). At Christina Lake, the SOR was 2.1 in the third quarter, in line with both the second quarter of 2020 and the same period a year earlier. The SOR at Foster Creek was 2.7, level with the preceding quarter of 2020 and the third quarter a year earlier.
Conventional production averaged approximately 85,862 barrels of oil equivalent per day (BOE/d) in the third quarter, a 9% decrease from the same period in 2019. The year-over-year decrease was due to natural declines from limited capital investment and increased downtime due to a planned turnaround at a non-operated natural gas plant, partially offset by the addition of Marten Hills heavy oil production starting in 2020.
Capital investment in the company’s Conventional segment is forecast to range between $75 million and $85 million for full-year 2020. This includes an incremental $30 million of capital investment in the fourth quarter, relative to Deep Basin guidance, for a two-rig drilling program targeting low-risk, high-return development wells near natural gas plants owned and operated by Cenovus to take advantage of an expected strengthening in commodity prices during the winter heating season. We continue to take a disciplined approach to the development of our Conventional assets.
Total conventional operating costs increased 5% to $81 million in the third quarter of 2020 compared with the same period in the previous year and remained flat relative to the second quarter of 2020. Per-barrel operating costs averaged $9.55/BOE compared with $8.21/BOE in the third quarter of 2019 due to lower sales volumes, increased costs for planned repairs and maintenance related to turnaround activities and higher third-party processing fees.
Full-year guidance dated April 1, 2020 is available on our website at cenovus.com.
Refining and marketing
Cenovus’s Wood River, Illinois and Borger refineries, which are co-owned with the operator, Phillips 66, maintained safe and reliable performance in the third quarter of 2020. Crude oil runs at both refineries were reduced in response to the economic slowdown due to COVID-19. Crude runs averaged 382,000 bbls/d in the third quarter, an increase of 18% from the second quarter of 2020 and 18% lower from the same period in 2019.
Cenovus had a refining and marketing operating margin shortfall of $74 million in the third quarter compared with positive operating margin of $126 million in the same period of 2019, primarily due to reduced market crack spreads, lower crude oil runs and crude advantage, partially offset by 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 $39 million lower in the third quarter, compared with $8 million lower in the same period in 2019.
Cenovus is committed to maintaining world-class safety performance and environmental, social and governance (ESG) leadership, including robust ESG disclosure. The company will continue earning its position as a global energy supplier of choice by advancing clean technology and reducing emissions intensity, including maintaining its ambition of achieving net zero emissions by 2050. Advancing environmental stewardship and maintaining strong local community relationships, with a focus on Indigenous economic reconciliation, will continue to be a priority for the company following the close of the Husky transaction. Leading safety practices, strong governance and advancing diversity and inclusion will remain central to the company’s ESG commitments.
“Striking the right balance among environmental, economic and social considerations is core to our strategy of creating long-term value and business resilience for our company,” said Pourbaix. “We will demonstrate ongoing leadership through our support of local communities, caring for the environment and emissions reduction efforts to support the transition to a low-carbon energy future.”
The targets Cenovus released earlier this year for its key ESG focus areas involved a robust process to ensure alignment with the company’s business plan and strategy. The company remains committed to pursuing meaningful, measurable ESG targets and will undertake a thorough analysis of the most meaningful targets to pursue for its expanded portfolio. Once that work is complete in 2021 and approved by the Board, the new targets and plans to achieve them will be disclosed.
|Conference Call Today
9 a.m. Mountain Time (11 a.m. Eastern Time)
|Cenovus will host a conference call today, October 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.|