Oil sands production at Christina Lake up 63%
"Stronger realized crude prices and higher oil production led to a solid increase in operating cash flow from our oil assets in the third quarter," said Brian Ferguson, Cenovus President & Chief Executive Officer. "That helped offset most of the impact from a significant drop in market crack spreads and higher feedstock costs which led to a large year-over-year decrease in operating cash flow from our refining assets."
Production & financial summary | ||||||||||||
(for the period ended September 30) Production (before royalties) |
2013 Q3 |
2012 Q3 |
% change | |||||||||
Oil sands total (bbls/d) | 101,824 | 95,625 | 6 | |||||||||
Conventional oil1 (bbls/d) | 75,114 | 75,725 | -1 | |||||||||
Total oil (bbls/d) | 176,938 | 171,350 | 3 | |||||||||
Natural gas (MMcf/d) | 523 | 577 | -9 | |||||||||
Financial ($ millions, except per share amounts) |
||||||||||||
Cash flow2 Per share diluted |
932 1.23 |
1,117 1.47 |
-17 | |||||||||
Operating earnings2 | 313 | 432 | -28 | |||||||||
Per share diluted | 0.41 | 0.57 | ||||||||||
Net earnings | 370 | 289 | 28 | |||||||||
Per share diluted | 0.49 | 0.38 | ||||||||||
Capital investment | 743 | 830 | -10 |
1 Includes natural gas liquids (NGLs) and Pelican Lake production. |
2 Cash flow and operating earnings are non-GAAP measures as defined in the Advisory. See also the earnings reconciliation summary in the operating earnings table. |
CALGARY, Oct. 24, 2013 /CNW/ - Cenovus Energy Inc. (TSX, NYSE: CVE) continued to expand its oil production in the third quarter as the company remains on track to achieve its goal of reaching more than 500,000 bbls/d of net oil production by 2023. The increased production, combined with stronger crude prices, contributed to solid growth in operating cash flow from oil in the quarter.
Operating cash flow from oil production was $915 million, 40% higher than in the same period a year earlier. The increase was driven primarily by a 56% increase in operating cash flow from oil sands. Cenovus's oil sands operations benefited from a $13.61 per barrel (bbl) increase in the average price of benchmark West Texas Intermediate (WTI), a 20% narrowing of the WTI to Western Canadian Select (WCS) differential to an average of US$17.48/bbl and a 6% increase in volumes compared with the third quarter of 2012.
Strong performance from Cenovus's oil operations helped reduce the impact of a 75% year-over-year decline in third quarter operating cash flow from its refining operations to $133 million. The commodity price changes that led to higher realized prices for the company's oil in the third quarter also resulted in higher feedstock costs for its refineries. At the same time, market crack spreads fell by more than half from near-record highs reached in the third quarter of 2012.
The gross margin from refining was also negatively affected by costs for renewable identification numbers (RINs), which increased to $55 million, net to Cenovus, in the third quarter compared with $10 million in the same period a year earlier. Refineries that do not blend renewable fuels such as ethanol into their gasoline and diesel are required to purchase RINs in the open market to comply with the Renewable Fuel Standards set by the U.S. Environmental Protection Agency (EPA). The EPA is reported to be considering a reduction to biofuel blending requirements next year, which has led to a significant drop in the cost of RINs recently.
Operationally, the Wood River and Borger refineries performed extremely well in the quarter, processing more oil, including record levels of heavy crude, and producing more refined products than in the third quarter of 2012. The company anticipates fourth quarter refining operating cash flow of $100 million to $200 million excluding inventory adjustments, based on a crack spread assumption of US$10.50 per barrel.
Solid growth at Christina Lake
The stronger results from oil operations were largely driven by a significant increase in production at the company's Christina Lake oil sands project. Christina Lake volumes increased 63% in the quarter compared with the same period a year earlier as a result of phase D reaching full capacity in the first quarter of 2013 and phase E commencing production in mid-July. The Christina Lake increase helped push combined average oil sands production to nearly 102,000 bbls/d net in the third quarter, a 6% improvement over the same period in 2012.
At Foster Creek, quarterly production decreased 22% year over year due to a variety of factors. A planned major turnaround reduced production by approximately 4,400 bbls/d net during the quarter. The turnaround is now complete and Foster Creek is producing about 54,000 bbls/d net. Cenovus has also been catching up on a backlog of well maintenance that was deferred from 2012. Most of the deferred maintenance is now complete, although the facility experienced minor treating issues when some wells were being brought back on in July, which had a slight impact on production.
In addition, Cenovus is developing new operating procedures to address changes to the steam chambers as they mature in the initial areas of the project. Foster Creek is the first commercial project of its kind in the oil sands industry and the initial wells at the operation are entering a new stage of development. The company is assessing how best to manage this change in order to optimize production.
"Foster Creek is a high-quality reservoir that will continue to play a key role in our oil growth strategy," said Ferguson. "The lessons we've learned there over the years have made Cenovus a leader in steam-assisted gravity drainage. As we move into the next stage of reservoir management for the initial phases at Foster Creek, we will continue to test and implement new techniques to maintain our position as one of the most efficient, low-cost producers in the oil sands industry."
The company anticipates gross production at Foster Creek to be between 100,000 and 110,000 bbls/d for the first half of 2014 and steam to oil ratios (SORs) in the range of 2.4 to 2.5 as the company continues to optimize its operating procedures.
Total conventional oil production, including Pelican Lake, averaged more than 75,000 bbls/d in the quarter, essentially flat compared with the third quarter of 2012. This reflects the July sale of the company's Shaunavon tight oil assets in Saskatchewan, partially offset by increased production from the company's horizontal well program in southern Alberta. Cenovus's heavy oil operations at Pelican Lake increased production by 5% in the quarter, compared with the same period a year ago, as the company brought on more infill wells and saw increased response from its polymer flood program.
In the third quarter, Cenovus generated $189 million in free cash flow, above what it invested in its operations. Cenovus invested $743 million during the quarter, nearly half of which went towards expansion phases at Christina Lake and Foster Creek. In August, the company also began plant construction for the first phase of Narrows Lake, its next major oil sands development in northeastern Alberta. First oil production from Narrows Lake is expected in 2017.
"We are expanding our oil sands operations with some of the best capital efficiencies in the industry," said John Brannan, Cenovus Executive Vice-President & Chief Operating Officer. "Over the next decade, we expect to more than quadruple our current oil sands production to about 435,000 barrels per day net to Cenovus."
New market access a top priority
Cenovus continues to pursue a portfolio approach to getting its oil to market with a key focus on finding new customers in North America and overseas. The company successfully participated in the open season for the Energy East project earlier this year and in the third quarter committed to moving up to 200,000 bbls/d on the proposed pipeline to Quebec and New Brunswick. This would give Cenovus the opportunity to sell its oil to refineries in the East and provide options for sending oil to offshore markets where it could receive higher prices.
"Our predictable, reliable oil sands growth gives us the confidence to make these kinds of long-term transportation commitments," said Ferguson. "In addition to Energy East, we've committed to ship another 175,000 barrels per day on proposed pipelines to the West Coast and 150,000 barrels per day on proposed lines to the U.S. Gulf Coast. We also expect to expand rail capacity to move up to 10% of our marketable oil over the long term."
Cenovus markets gross oil production from its oil sands operations, including its partner's volumes.
Recognition for corporate responsibility
In September, Cenovus was named to the Dow Jones Sustainability World Index for the second year in a row and was the only North American oil and gas company to make the index this year. The company was also named to the Dow Jones Sustainability North America Index for the fourth consecutive year. The Dow Jones Sustainability Indexes recognize companies around the world for leadership in corporate responsibility. Cenovus was also recently named to the Canada 200 Climate Disclosure Leadership Index for the fourth consecutive year. The index, published by CDP (formerly known as the Carbon Disclosure Project), recognizes companies for their open and transparent disclosure of greenhouse gas emissions.
Guidance updated
Cenovus has updated its 2013 full-year guidance to reflect actual numbers for the first nine months of the year and the company's estimates for the fourth quarter. Updated guidance can be found at cenovus.com under "Investors".
2014 budget to be released in December
Cenovus is in the process of compiling its 2014 budget and will present details during a conference call on December 12, 2013. The company anticipates spending less on capital investment in 2014 while at the same time achieving an increase in oil production.
Oil Projects | |||||||||||||||||||||||||||||||||||
Daily production1 | |||||||||||||||||||||||||||||||||||
(Before royalties) (Mbbls/d) |
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||
Q3 | Q2 | Q1 | Full Year | Q4 | Q3 | Q2 | Q1 | Full Year | |||||||||||||||||||||||||||
Oil sands | |||||||||||||||||||||||||||||||||||
Foster Creek | 49 | 55 | 56 | 58 | 59 | 63 | 52 | 57 | 55 | ||||||||||||||||||||||||||
Christina Lake | 53 | 38 | 44 | 32 | 42 | 32 | 29 | 25 | 12 | ||||||||||||||||||||||||||
Oil sands total | 102 | 94 | 100 | 90 | 101 | 96 | 80 | 82 | 67 | ||||||||||||||||||||||||||
Conventional oil | |||||||||||||||||||||||||||||||||||
Pelican Lake | 25 | 24 | 24 | 23 | 24 | 24 | 22 | 21 | 20 | ||||||||||||||||||||||||||
Weyburn | 16 | 16 | 17 | 16 | 16 | 16 | 16 | 17 | 16 | ||||||||||||||||||||||||||
Other conventional2 | 34 | 37 | 39 | 37 | 37 | 36 | 36 | 38 | 31 | ||||||||||||||||||||||||||
Conventional total | 75 | 77 | 80 | 76 | 77 | 76 | 75 | 75 | 68 | ||||||||||||||||||||||||||
Total oil | 177 | 171 | 180 | 165 | 178 | 171 | 156 | 157 | 134 |
1 Totals may not add due to rounding. |
2 Includes NGLs production. |
Oil sands
Cenovus has a substantial portfolio of oil sands assets in northern Alberta with the potential to provide decades of growth. The two operations currently producing, Foster Creek and Christina Lake, use steam-assisted gravity drainage (SAGD), which involves drilling into the reservoir and pumping the oil to the surface. Cenovus is currently building its third major oil sands project at Narrows Lake, which is part of the Christina Lake Region. These projects are operated by Cenovus and jointly owned with ConocoPhillips. Cenovus has enormous opportunity to deliver increased shareholder value through production growth from future developments. The company has identified several emerging projects and continues to assess its resources to prioritize development plans and support regulatory applications for new projects.
Foster Creek and Christina Lake
Production
Wedge Well™ technology
Expansions
Operating costs
Steam to oil ratio (SOR)
Narrows Lake
Emerging projects
Telephone Lake
Grand Rapids
Conventional oil
Pelican Lake
Cenovus produces heavy oil from the Wabiskaw formation at its 100%-owned Pelican Lake operation in the Greater Pelican Region, about 300 kilometres north of Edmonton. While this property produces conventional heavy oil, it's managed as part of Cenovus's oil sands segment. Since 2006, Cenovus has been injecting polymer to enhance production from the reservoir, which is also under waterflood.
Other conventional oil
In addition to Pelican Lake, Cenovus has conventional oil assets in Alberta, including tight oil opportunities, as well as the established Weyburn operation in Saskatchewan that uses carbon dioxide injection to enhance oil recovery.
Natural Gas | ||||||||||||||||||||||||||||||||||
Daily production | ||||||||||||||||||||||||||||||||||
(Before royalties) (MMcf/d) |
2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||
Q3 | Q2 | Q1 | Full Year | Q4 | Q3 | Q2 | Q1 | Full Year | ||||||||||||||||||||||||||
Natural gas | 523 | 536 | 545 | 594 | 566 | 577 | 596 | 636 | 656 |
Cenovus has a solid base of established, reliable natural gas properties in Alberta. These assets are important components of the company's financial foundation, generating operating cash flow well in excess of their ongoing capital investment requirements. The natural gas business also acts as an economic hedge against price fluctuations because natural gas fuels the company's oil sands and refining operations.
Refining
Cenovus's refining operations allow the company to capture value from crude oil production through to refined products such as diesel, gasoline and jet fuel. This integrated strategy provides a natural economic hedge when crude oil prices are discounted by providing lower feedstock costs to the Wood River Refinery in Illinois and Borger Refinery in Texas, which Cenovus jointly owns with the operator, Phillips 66.
Financial
Dividend
The Cenovus Board of Directors declared a fourth quarter dividend of $0.242 per share, payable on December 31, 2013 to common shareholders of record as of December 13, 2013. Based on the October 23, 2013 closing share price on the Toronto Stock Exchange of $30.69, this represents an annualized yield of about 3.2%. Declaration of dividends is at the sole discretion of the Board. Cenovus's continued commitment to a meaningful dividend is an important aspect of the company's strategy to focus on increasing total shareholder return.
Hedging strategy
Cenovus's natural gas and crude oil hedging strategy helps it to achieve more predictability around cash flow and safeguard its capital program. The Board-approved risk management policy allows the company to financially hedge up to 75% of this year's and next year's expected natural gas production, net of internal fuel usage, and up to 50% and 25%, respectively, in the following two years. The policy also allows the company to enter fixed price hedges on as much as 50% of net liquids production this year and next, as well as 25% of expected net liquids production for each of the following two years. In addition to financial hedges, Cenovus benefits from a natural hedge with its gas production. About 135 MMcf/d of natural gas is expected to be consumed at the company's SAGD and refinery operations, which is more than offset by the natural gas Cenovus produces. The company's financial hedging positions are determined after considering this natural hedge.
Cenovus's financial hedge positions at September 30, 2013 include:
Financial Highlights
Operating earnings1 | ||||||||||
(for the period ended September 30) ($ millions, except per share amounts) |
2013 Q3 |
2012 Q3 |
||||||||
Net earnings Add back (deduct): |
370 | 289 | ||||||||
Unrealized risk management (gains) losses, after-tax | (5) | 218 | ||||||||
Non-operating unrealized foreign exchange (gains) losses, after-tax | (53) | (76) | ||||||||
Divestiture (gains) losses, after-tax | 1 | 1 | ||||||||
Operating earnings | 313 | 432 | ||||||||
Per share diluted | 0.41 | 0.57 |
1 Operating earnings is a non-GAAP measures as defined in the Advisory. |
Oil sands project schedule | ||||||||||||
Project phase | Regulatory status | First production target |
Expected production capacity (bbls/d) gross |
|||||||||
Foster Creek1 A - E | 120,000 | |||||||||||
F | Approved | Q3-2014F | 45,0002 | |||||||||
G | Approved | 2015F | 40,000 | |||||||||
H | Approved | 2016F | 40,000 | |||||||||
J | Submitted Q1-2013 | 2019F | 50,000 | |||||||||
Future optimization | 15,000 | |||||||||||
Total capacity | 310,000 | |||||||||||
Christina Lake1 A - E | 138,000 | |||||||||||
Optimization (phases CDE) | Approved | 2015F | 22,0003 | |||||||||
F | Approved | 2016F | 50,000 | |||||||||
G | Approved | 2017F | 50,000 | |||||||||
H | Submitted Q1-2013 | 2019F | 50,000 | |||||||||
Total capacity | 310,000 | |||||||||||
Narrows Lake1 | ||||||||||||
A | Approved | 2017F | 45,000 | |||||||||
B-C | Approved | TBD | 85,000 | |||||||||
Total capacity | 130,000 | |||||||||||
Telephone Lake4 | Submitted Q4-2011 | TBD | 90,000 | |||||||||
Grand Rapids | Submitted Q4-2011 | TBD | 180,000 |
1 Properties 50% owned by ConocoPhillips. Certain phases may be subject to partner approval. |
2 Includes 5,000 bbls/d gross submitted to the regulator in Q1 2013. |
3 Increased from 12,000 bbls/d in Q2 2013 due to the addition of blowdown boilers. |
4 Projected total capacity of more than 300,000 bbls/d. |
Conference Call Today
9:00 a.m. Mountain Time (11:00 a.m. Eastern Time)
Cenovus will host a conference call today, October 24, 2013, starting at 9:00 a.m. MT (11:00 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. An archived recording of the call will be available from approximately 12:00 p.m. MT on October 24, 2013, until 10 p.m. MT on October 31, 2013, by dialing 855-859-2056 or 416-849-0833 and entering conference passcode 24364567. A live audio webcast of the conference call will also be available via cenovus.com. The webcast will be archived for approximately 90 days.
ADVISORY
FINANCIAL INFORMATION
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).
Non-GAAP Measures This news release contains references to non-GAAP measures as follows:
These measures have been described and presented in this news release in order to provide shareholders and potential investors with additional information regarding Cenovus's liquidity and its ability to generate funds to finance its operations. For further information, refer to Cenovus's most recent Management's Discussion & Analysis (MD&A) available at cenovus.com.
FORWARD-LOOKING INFORMATION
This document contains certain forward-looking statements and other information (collectively "forward-looking information") about our current expectations, estimates and projections, made in light of our experience and perception of historical trends. Forward-looking information in this document is identified by words such as "anticipate", "believe", "expect", "plan", "forecast" or "F", "target", "project", "could", "focus", "vision", "goal", "proposed", "scheduled", "outlook", "potential", "may", "objective", "projected", "strategy" or similar expressions and includes suggestions of future outcomes, including statements about our growth strategy and related schedules, projections contained in our updated 2013 guidance, forecast operating and financial results, planned capital expenditures, expected future production, including the timing, stability or growth thereof, expected future refining capacity, broadening market access, improving cost structures, potential dividends and dividend growth strategy, anticipated timelines for future regulatory, partner or internal approvals, future impact of regulatory measures, forecasted commodity prices, future use and development of technology, including to reduce our environmental impact and projected increasing shareholder value. Readers are cautioned not to place undue reliance on forward-looking information as our actual results may differ materially from those expressed or implied.
Developing forward-looking information involves reliance on a number of assumptions and consideration of certain risks and uncertainties, some of which are specific to Cenovus and others that apply to the industry generally.
The factors or assumptions on which the forward-looking information is based include: assumptions disclosed in our current guidance, available at cenovus.com; our projected capital investment levels, the flexibility of our capital spending plans and the associated source of funding; estimates of quantities of oil, bitumen, natural gas and liquids from properties and other sources not currently classified as proved; our ability to obtain necessary regulatory and partner approvals; the successful and timely implementation of capital projects or stages thereof; our ability to generate sufficient cash flow from operations to meet our current and future obligations; and other risks and uncertainties described from time to time in the filings we make with securities regulatory authorities.
For the period 2014 to 2023, assumptions include: Brent US$100.00-US$110.00; WTI of US$96.00-US$106.00/bbl; Western Canada Select of C$71.00-C$91.00/bbl; NYMEX of US$4.50-US$4.75/MMBtu; AECO of C$3.89-C$4.31/GJ; Chicago 3-2-1 crack spread of US$12.00-US$15.00; exchange rate of $1.00 US$/C$; and average diluted number of shares outstanding of approximately 780 million.
The risk factors and uncertainties that could cause our actual results to differ materially, include: volatility of and assumptions regarding oil and gas prices; the effectiveness of our risk management program, including the impact of derivative financial instruments and the success of our hedging strategies; the accuracy of cost estimates; fluctuations in commodity prices, currency and interest rates; fluctuations in product supply and demand; market competition, including from alternative energy sources; risks inherent in our marketing operations, including credit risks; maintaining desirable ratios of debt to adjusted EBITDA as well as debt to capitalization; our ability to access various sources of debt and equity capital; accuracy of our reserves, resources and future production estimates; our ability to replace and expand oil and gas reserves; our ability to maintain our relationships with our partners and to successfully manage and operate our integrated heavy oil business; reliability of our assets; potential disruption or unexpected technical difficulties in developing new products and manufacturing processes; refining and marketing margins; potential failure of new products to achieve acceptance in the market; unexpected cost increases or technical difficulties in constructing or modifying manufacturing or refining facilities; unexpected difficulties in producing, transporting or refining of crude oil into petroleum and chemical products; risks associated with technology and its application to our business; the timing and the costs of well and pipeline construction; our ability to secure adequate product transportation, including sufficient crude-by-rail or other alternate transportation; changes in the regulatory framework in any of the locations in which we operate, including changes to the regulatory approval process and land-use designations, royalty, tax, environmental, greenhouse gas, carbon and other laws or regulations, or changes to the interpretation of such laws and regulations, as adopted or proposed, the impact thereof and the costs associated with compliance; the expected impact and timing of various accounting pronouncements, rule changes and standards on our business, our financial results and our consolidated financial statements; changes in the general economic, market and business conditions; the political and economic conditions in the countries in which we operate; the occurrence of unexpected events such as war, terrorist threats and the instability resulting therefrom; and risks associated with existing and potential future lawsuits and regulatory actions against us.
Readers are cautioned that the foregoing lists are not exhaustive and are made as at the date hereof. For a full discussion of our material risk factors, see "Risk Factors" in our most recent AIF/Form 40-F, "Risk Management" in our current and annual MD&A and risk factors described in other documents we file from time to time with securities regulatory authorities, all of which are available on SEDAR at sedar.com, EDGAR at sec.gov and our website at cenovus.com.
TM denotes a trademark of Cenovus Energy Inc.
Cenovus Energy Inc.
Cenovus Energy Inc. is a Canadian integrated oil company. It is committed to applying fresh, progressive thinking to safely and responsibly unlock energy resources the world needs. Operations include oil sands projects in northern Alberta, which use specialized methods to drill and pump the oil to the surface, and established natural gas and oil production in Alberta and Saskatchewan. The company also has 50% ownership in two U.S. refineries. Cenovus shares trade under the symbol CVE, and are listed on the Toronto and New York stock exchanges. Its enterprise value is approximately $28 billion. For more information, visit cenovus.com.
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Image with caption: "Expansion work continues at Cenovus Energy's Christina Lake oil sands operation. (CNW Group/Cenovus Energy Inc.)". Image available at: http://photos.newswire.ca/images/download/20131024_C6625_PHOTO_EN_32471.jpg
Image with caption: "Cenovus Energy's Christina Lake oil sands operation where production capacity is now 138,000 barrels per day. (CNW Group/Cenovus Energy Inc.)". Image available at: http://photos.newswire.ca/images/download/20131024_C6625_PHOTO_EN_32472.jpg
SOURCE: Cenovus Energy Inc.
CENOVUS CONTACTS:
Investor Relations
Bill Stait
Senior Analyst, Investor Relations
403-766-6348
Graham Ingram
Senior Analyst, Investor Relations
403-766-2849
Media
Rhona DelFrari
Director, Media Relations
403-766-4740
General media line
403-766-7751
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