CALGARY, Alberta – Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) continued to deliver safe and reliable operations and strong financial performance in the second quarter of 2022. Upstream production of 762,000 barrels of oil equivalent per day (BOE/d)1 and downstream throughput of more than 457,000 barrels per day (bbls/d) included the impact of significant planned turnaround and maintenance activities during the quarter. Aligned with the company’s shareholder returns framework, Cenovus delivered more than $1 billion to shareholders in common share purchases under its Normal Course Issuer Bid (NCIB) for the second quarter, in addition to the company’s base dividend.
“We executed on our commitment of returning 50% of excess free funds flow to shareholders in the quarter while maintaining strong operational and financial performance during a period of significant planned turnarounds and maintenance,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “And we’re well positioned for even better performance in the second half of the year as our assets return to operating at normal rates across the portfolio.”
Second-quarter results highlights
- Generated cash from operating activities of nearly $3.0 billion, adjusted funds flow of $3.1 billion, free funds flow of $2.3 billion and excess free funds flow of approximately $2.0 billion.
- Reduced long-term debt, including current portion, to $11.2 billion and net debt to $7.5 billion at quarter end.
- Released Cenovus’s 2021 environmental, social and governance (ESG) report today, detailing overall sustainability performance and progress on the company’s ESG targets.
|Financial, production & throughput summary|
|(For the period ended June 30)||2022 Q2||2022 Q1||% change||2021 Q2||% change|
|Financial ($ millions, except per share amounts)|
|Cash from operating activities||2,979||1,365||118||1,369||118|
|Adjusted funds flow2||3,098||2,583||20||1,817||71|
|Per share (basic)2||1.57||1.30||0.90|
|Per share (diluted)2||1.53||1.27||0.89|
|Free funds flow2||2,276||1,837||24||1,283||77|
|Excess free funds flow2||2,020||2,615||(23)||1,244||62|
|Net earnings (loss)||2,432||1,625||50||224||986|
|Per share (basic)||1.23||0.81||0.11|
|Per share (diluted)||1.19||0.79||0.11|
|Long-term debt, including current portion||11,228||11,744||(4)||13,380||(16)|
|Production and throughput (before royalties, net to Cenovus)|
|Oil and NGLs (bbls/d)1||614,200||654,500||(6)||614,900|
|Conventional natural gas (MMcf/d)||882||865||2||906||(3)|
|Total upstream production (BOE/d)1||761,500||798,600||(5)||765,900|
|Total downstream throughput (bbls/d)||457,300||501,800||(9)||539,000||(15)|
1 See Advisory for production by product type.
2 Non-GAAP financial measure or contains a non-GAAP financial measure. See Advisory.
2022 capital budget and guidance update
Cenovus has updated its 2022 corporate guidance, mainly to reflect changes in the commodity price environment, the restart of the West White Rose Project, the Sunrise oil sands acquisition, accelerated upstream development activity and increased downstream operating costs. The updated guidance is available on Cenovus’s website under Investors.
Changes to the company’s 2022 guidance include:
- Increased total capital investments for the year by $400 million at the mid-point to an updated range of $3.3 billion to $3.7 billion.
- Oil Sands capital guidance has increased by $200 million at the mid-point, related to higher planned investments at Sunrise following the anticipated third-quarter closing of the previously announced acquisition of the remaining 50% partnership interest as well as incremental capital at Foster Creek, Christina Lake and Lloydminster thermals to support continued optimization of the assets, including adding shorter-cycle production opportunities and increased delineation drilling to speed well pad development.
- Capital guidance for the Offshore segment has increased by about $100 million to include preliminary work on the West White Rose Project restart.
- Capital guidance for the Conventional segment has increased by $100 million at the mid-point to account for inflation of labour and equipment costs, increased scope of drilling activity in the second half of 2022 as well as for asset integrity and emissions reduction initiatives.
- Updated total upstream production guidance to between 780,000 BOE/d and 810,000 BOE/d, an increase of 15,000 BOE/d at the midpoint, to reflect the expected closing of the agreement to purchase the remaining 50% partnership interest in the Sunrise oil sands project.
- Increased unit operating expenses across the Downstream business to capture the outlook for strong natural gas prices, extended turnaround activity at the non-operated Wood River, Borger and Toledo refineries, and inflationary pressures on labour costs, and chemical and electricity prices in the U.S. and Canada.
- Revised the range for expected cash taxes to between $2.3 billion and $2.6 billion for the year, reflecting higher commodity price assumptions and increased profitability across Cenovus’s businesses.
In the second quarter of 2022, Cenovus again delivered strong operating and financial results, driven by the company’s continued safe and reliable operating performance and low cost structure, as well as stronger commodity prices.
Cenovus’s total revenues in the second quarter increased to $19.2 billion from $16.2 billion in the first quarter of 2022, driven by higher average commodity and realized sales prices for the company’s products across the Upstream and Downstream businesses. Upstream revenues were $10.1 billion in the second quarter, compared with $9.7 billion in the previous quarter. Downstream revenues were $10.8 billion in the quarter, compared with $8.2 billion in the first quarter.
Total operating margin3 was nearly $4.7 billion, compared with $3.5 billion in the first quarter. Upstream operating margin4 was more than $3.8 billion, compared with about $2.9 billion in the first quarter. Downstream operating margin4 rose to $847 million in the second quarter from $544 million in the first quarter. The increase was due to U.S. Manufacturing operating margin of $793 million in the quarter, compared with $423 million in the first quarter, driven mainly by strong market crack spreads, which more than doubled from the previous quarter.
Cenovus produced 761,500 BOE/d in the second quarter, down from first-quarter production of nearly 800,000 BOE/d due to a planned turnaround at Christina Lake. Christina Lake production was 228,800 bbls/d in the second quarter, down from 254,100 bbls/d in the first quarter. Foster Creek production of 187,800 bbls/d in the second quarter, compared with 197,900 bbls/d in the first quarter, reflected anticipated declines in volumes from wells brought on in late 2021. After a thorough mechanical and safety assessment, a turnaround initially scheduled for the third quarter of 2022 at Foster Creek has been deferred to the second quarter of 2023. At the Lloydminster thermal projects, second-quarter production increased by more than 2,000 bbls/d from the previous quarter to 98,400 bbls/d. The 10,000 bbls/d Spruce Lake North project remains on track for first oil in the third quarter with steam injection already underway. Offshore production was 70,100 BOE/d in the second quarter compared with 76,400 BOE/d in the first quarter, mainly due to planned maintenance and lower contracted sales volumes at the Liwan 3-1 field in China. The sales volume decline is partially offset by the finalization of an agreement to increase natural gas sales at Liuhua 29-1. Cenovus’s Conventional production rose 6% in the second quarter from the previous period to 132,600 BOE/d, due to the company’s successful drilling program, well reactivation and recompletion work done in the first quarter.
The Canadian Manufacturing segment had crude utilization of 73% and throughput of 80,900 bbls/d, compared with 89% and 98,100 bbls/d in the first quarter. The lower utilization rate was due to planned turnaround activity at both the Lloydminster Upgrader and Lloydminster Refinery, which was completed in the second quarter. Canadian Manufacturing had second-quarter operating margin of $47 million compared with $114 million in the first quarter, mainly due to the lower throughput and higher expenses associated with the turnarounds.
In the U.S. Manufacturing segment, crude utilization of 75% and throughput of 376,400 bbls/d were lower than in the first quarter of 2022 as the non-operated Toledo, Wood River and Borger refineries were impacted by planned turnarounds and extended maintenance activities. The lower throughput and higher expenses associated with the turnaround activities were offset by higher market crack spreads, which drove a significantly improved operating margin of $793 million in the second quarter compared with an operating margin of $423 million in the first quarter. The Lima Refinery had strong operating performance in the second quarter, achieving 91% utilization.
The turnaround activity at the Wood River and Borger refineries is done, with work substantially complete in July at Toledo. Cenovus expects to be well positioned for stronger operational momentum in the second half of the year.
3Non-GAAP financial measure. Total operating margin is the total of Upstream operating margin plus Downstream operating margin. See Advisory.
4Specified financial measure. See Advisory.
Cash from operating activities was almost $3.0 billion and adjusted funds flow was nearly $3.1 billion in the quarter. Free funds flow of $2.3 billion included capital investment of $822 million, primarily to sustain production and throughput levels, as well as work to complete the Superior Refinery rebuild. Long-term debt, including the current portion, was reduced to $11.2 billion as at June 30, 2022, down from $11.7 billion at the end of the first quarter. Net debt declined to $7.5 billion as at June 30, 2022, down nearly $900 million from March 31, 2022.
Cash flows were impacted in the second quarter by a realized risk management loss of $664 million related to Cenovus’s risk management program. On April 4, 2022 the company announced its crude oil sales price risk management activity related to West Texas Intermediate (WTI) would no longer be required. By June 30, 2022 all WTI risk management contracts related to crude oil sales were closed.
The company recorded a current tax expense of $902 million in the second quarter, related to taxable income arising in Canada, the U.S. and the Asia Pacific region. The increase is due to higher taxable income from the company’s financial performance largely driven by stronger commodity prices.
During the quarter, Cenovus sold its remaining investment in Headwater Exploration Inc. for cash proceeds of $110 million. The previously announced $420 million sale of Cenovus’s retail fuels network continues to progress through regulatory approvals, with an anticipated close in the third quarter. Cenovus also expects to complete its acquisition of the remaining 50% partnership interest in the Sunrise oil sands asset during the third quarter.
Cenovus had net earnings of $2.4 billion in the second quarter, compared with $1.6 billion in the first quarter. The increase in net earnings was primarily due to increased operating margin, an unrealized risk management gain and a lower charge for the ConocoPhillips contingent payment, partially offset by a higher income tax expense, an unrealized foreign exchange loss and higher general and administrative costs driven by long-term incentive costs. On May 17, 2022 the contingent payment obligation associated with the 2017 acquisition from ConocoPhillips ended. The final payment of $177 million will be made in July 2022.
2022 planned maintenance
The following table provides details on planned turnaround activities at Cenovus assets in 2022 and anticipated production or throughput impacts.
|2022 planned maintenance|
|Potential quarterly production/throughput impact (Mbbls/d)|
|Lloydminster thermals||1 – 2|
|U.S. Manufacturing||5 – 10||2 – 6|
Dividend declarations and share purchases
The Board has declared a base dividend of $0.105 per share, payable on September 29, 2022 to common shareholders of record as of September 15, 2022.
Cenovus continues to execute its ongoing NCIB program, approved in the fourth quarter of 2021, which allows the company to purchase up to 146.5 million of its common shares. In the second quarter, the company purchased approximately 43 million shares, delivering more than $1 billion to shareholders under the NCIB program. In accordance with Cenovus’s shareholder returns framework, the company met its return to shareholders target for the quarter exclusively through share buybacks. Subsequent to the end of the quarter, as of July 27, 2022, the company had purchased about 19 million shares, for approximately $425 million. Since the NCIB program began in November 2021, Cenovus has purchased approximately 104 million common shares, to deliver $2.2 billion in returns to shareholders.
The Board also declared a second-quarter dividend on each of the Cumulative Redeemable First Preferred Shares – Series 1, Series 2, Series 3, Series 5 and Series 7 – payable on October 3, 2022 to shareholders of record as of September 15, 2022 as follows:
|Preferred shares dividend summary|
|Rate (%)||Amount ($/share)|
All dividends paid on Cenovus’s common and preferred shares will be designated as “eligible dividends” for Canadian federal income tax purposes. Declaration of dividends is at the sole discretion of the Board and will continue to be evaluated on a quarterly basis.
Cenovus released its 2021 ESG report today, which is now available on the company’s website. The report updates progress towards targets in Cenovus’s five ESG focus areas: climate & greenhouse gas emissions, water stewardship, biodiversity, Indigenous reconciliation and inclusion & diversity.
Milestones in 2021 include:
- Reducing methane emissions by 25% from 2020 levels.
- Spending $215 million with Indigenous businesses, with the cumulative amount now more than half way to the company’s target of at least $1.2 billion in expenditures between 2019 and year-end 2025.
- Reclaiming 421 decommissioned well sites.
- Meeting the target of reducing fresh water intensity by 20% in oil sands operations relative to 2019.
In 2021, scope 1 and 2 net-equity emissions remained flat year-over-year, and were down slightly from 2019. Cenovus remains committed to its target to reduce absolute emissions by 35% on a net-equity basis by year-end 2035. The company evaluated the feasibility of carbon capture and storage (CCS) at the Minnedosa Ethanol Plant and Elmworth natural gas processing plant, initiated a technology screening study to determine the optimal carbon capture technology at the Lloydminster Upgrader and completed a feasibility study for the construction of a CCS project at Christina Lake. Further efforts to reduce emissions include plans to scale up methane reduction initiatives across additional conventional oil and natural gas production sites. As Cenovus advances toward its long-term ambition of net zero emissions by 2050, it also continues to work with the Pathways Alliance, including progressing the alliance’s foundational carbon capture project.
|Conference call today
9 a.m. Mountain Time (11 a.m. Eastern Time)
Cenovus will host a conference call today, July 28, 2022, starting at 9 a.m. MT (11 a.m. ET).
Basis of Presentation
Cenovus 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 Equivalent
Natural 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.
|Product type by operating segment|
|Three months ended
June 30, 2022
|Heavy crude oil (Mbbls/d)||16.4|
|Conventional natural gas (MMcf/d)||12.0|
|Total Oil Sands segment production (BOE/d)||558.8|
|Light crude oil (Mbbls/d)||7.5|
|Natural gas liquids (Mbbls/d)||24.7|
|Conventional natural gas (MMcf/d)||601.2|
|Total Conventional segment production (BOE/d)||132.6|
|Light crude oil (Mbbls/d)||13.3|
|Natural gas liquids (Mbbls/d)||12.0|
|Conventional natural gas (MMcf/d)||269.0|
|Total Offshore segment production (BOE/d)||70.1|
|Total upstream production (BOE/d)||761.5|