Oil sands per-unit operating costs decline 31%
"We had very strong operational performance in the first quarter, with solid production increases and significantly lower operating costs across our assets," said Brian Ferguson, Cenovus President & Chief Executive Officer. "We also took decisive steps during the quarter to help preserve our financial resilience in this challenging oil price environment without compromising our future."
Production & financial summary |
|||||||||||
(For the period ended March 31) Production (before royalties) |
2015 Q1 |
2014 Q1 |
% change |
||||||||
Oil sands (bbls/d) |
144,372 |
120,444 |
20 |
||||||||
Conventional oil1 (bbls/d) |
73,648 |
76,410 |
-4 |
||||||||
Total oil (bbls/d) |
218,020 |
196,854 |
11 |
||||||||
Natural gas (MMcf/d) |
462 |
476 |
-3 |
||||||||
Financial ($ millions, except per share amounts) |
|||||||||||
Cash flow2 |
495 |
904 |
-45 |
||||||||
Per share diluted |
0.64 |
1.19 |
|||||||||
Operating earnings2 (loss) |
(88) |
378 |
-123 |
||||||||
Per share diluted |
(0.11) |
0.50 |
|||||||||
Net earnings (loss) |
(668) |
247 |
-370 |
||||||||
Per share diluted |
(0.86) |
0.33 |
|||||||||
Capital investment |
529 |
829 |
-36 |
1 Includes natural gas liquids (NGLs). |
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, April 29, 2015 /CNW/ - Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) achieved solid production growth in the first quarter compared with the same period in 2014, driven by 20% higher production at the company's oil sands operations. Oil sands per-unit operating costs were 31% lower than in the first quarter of 2014, primarily due to higher production and a decrease in fuel costs. Cash flow in the quarter declined 45% as a result of lower crude oil and natural gas sales prices and lower average market crack spreads.
Production from Cenovus's jointly owned Christina Lake and Foster Creek oil sands operations averaged more than 144,000 bbls/d net in the first quarter. During the quarter, Christina Lake production increased 16% compared with the same period a year earlier, averaging more than 76,000 bbls/d net. The increase was primarily due to phase E reaching design capacity in the second quarter of 2014, the start-up of new wells, including those using the company's Wedge WellTM technology, and improved facilities performance, all of which contributed to a lower steam to oil ratio (SOR). The current full-year outlook at Christina Lake is for production to be above the mid-point of the company's annual guidance of between 67,000 bbls/d and 74,000 bbls/d net.
Foster Creek production volumes averaged almost 68,000 bbls/d net in the first quarter, up 24% from the same period in 2014. After six months of ramp-up, phase F wells were contributing approximately 5,400 bbls/d net in incremental production in the first quarter. The phase F ramp-up is proceeding on schedule and is expected to be complete in the first quarter of 2016, approximately 18 months after first production. The start-up of new wells, including those using Cenovus's Wedge WellTM technology, also contributed to the production gain. In addition, last year's well workovers led to some flush production, which is starting to taper off, as expected. The company anticipates full-year production at Foster Creek to be above the mid-point of its guidance of between 62,000 bbls/d and 68,000 bbls/d net.
In the first quarter, oil sands operating expenses declined $4.99 per barrel (bbl), or 31%, compared with the same period in 2014. This was due, in part, to lower natural gas prices, which reduced fuel costs at Foster Creek and Christina Lake. Non-fuel per-unit operating costs declined primarily as a result of stronger production and high plant operating efficiencies. The company's efforts to improve productivity and further prioritize work also contributed to the decrease. For example, savings were achieved by reducing workover costs and lowering fluid, waste handling and trucking costs related to the optimization of the chemical application process. Lower repair and maintenance costs resulting from improved scheduling of less time-sensitive work also contributed to the savings. In addition, Cenovus is starting to see results from its efforts to reduce supplier costs. In general, the company is seeing cost reductions from its suppliers of between 5% and 10%.
"I'm pleased with the performance of both of our oil sands projects in the quarter," said John Brannan, Executive Vice-President & Chief Operating Officer. "We've made progress in significantly reducing our operating costs, and further cost-cutting measures are underway. We expect many of these savings to be sustainable and to make our oil sands assets even more efficient and productive."
Commodity price impact
Production increases and lower operating costs and royalties during the first quarter were more than offset by a sharp decline in benchmark prices resulting from a global supply-demand imbalance that accelerated through 2014 and into the first quarter of 2015. Average Brent, West Texas Intermediate (WTI) and Western Canadian Select (WCS) prices decreased 49%, 51% and 55%, respectively, from the same period a year earlier. In addition, the timing of condensate inventory drawdown affected Cenovus's realized pricing for its heavy oil. Condensate purchased at higher prices at the end of 2014 was blended into product sold in the first quarter of 2015. These factors negatively impacted operating cash flow at Cenovus's upstream operations.
Operating cash flow from the refining and marketing segment declined to $95 million in the first quarter, down 61% from the same period in 2014. Cenovus's refining margins were impacted by lower average market crack spreads due to narrower Brent-WTI differentials and higher heavy oil feedstock costs relative to WTI. This was partially offset by improved margins on the sale of secondary products such as coke and asphalt, an increase in refined product output and the weakening of the Canadian dollar.
These factors contributed to a decline in Cenovus's operating cash flow to $549 million, 53% below the same period a year earlier. Cash flow was down 45% in the quarter to $495 million. After investing $529 million in the first quarter, Cenovus had a free cash flow shortfall of $34 million, compared with free cash flow of $75 million in the same period of 2014.
Since the first quarter of 2015, benchmark prices have improved somewhat. At current strip pricing and market crack spreads, Cenovus expects its 2015 cash flow would essentially cover its capital expenditures and its current level of dividends for the year.
Cost management and financial resilience
Over the next 18 months, Cenovus expects to add approximately 100,000 bbls/d of gross incremental oil sands production capacity from its phase F expansion and optimization work at Christina Lake as well as the phase G expansion at Foster Creek. That would bring total expected oil sands production capacity to 390,000 bbls/d gross in 2016. To help ensure that it has the financial resilience to carry out these expansions and continue to focus on strong operational performance in this low oil price environment, Cenovus has adjusted its business plan for the next three years. This includes taking steps to cut costs and strengthen the company's balance sheet.
During the first quarter, the company conserved cash by:
For 2015, Cenovus expects to be near the low end of its guidance range for operating expenses. Compared with the previous year, general and administrative (G&A) expenses were 34% lower in the first quarter of 2015. The decrease was primarily due to lower employee long-term incentive costs. The company anticipates its G&A expenses will also be near the low end of guidance for the year.
As a result of initiatives already underway, Cenovus expects to realize approximately $200 million in G&A and upstream operating and capital cost savings in 2015. The company continues to look for additional cost savings for the year and is pursuing opportunities it has identified to potentially achieve hundreds of millions of dollars in additional sustainable annual cost reductions in the years ahead.
After careful consideration and lengthy discussion with its board of directors, Cenovus's management decided to issue 67.5 million common shares during the first quarter. The net proceeds of approximately $1.4 billion are expected to be used to fund any potential shortfall in the company's capital expenditure program for 2015 and for general corporate purposes. Part of the proceeds was used to repay commercial paper outstanding as it matured.
"We examined a number of alternatives, including issuing debt, lowering the dividend, further reducing capital and issuing preferred shares," said Ferguson. "In the end, we believed that issuing common shares was the best option to strengthen our balance sheet, provide greater certainty of funding for our planned capital program and reinforce our strong investment-grade credit rating over our three-year planning horizon. This should also position us well to be able to take advantage of opportunities that only come about in market conditions like these."
To further conserve cash, the company exercised its ability under Cenovus's Dividend Reinvestment Plan (DRIP) to offer shareholders the opportunity to reinvest their dividends in Cenovus common shares issued from the company's treasury at a 3% discount to current market prices. For the first quarter, more than one-third of Cenovus shareholders participated in the discounted DRIP, resulting in cash savings for the company of approximately $81 million. The 3% discount on the DRIP will remain in effect for the second quarter and will be reassessed by the company on a quarterly basis thereafter.
Royalty production and fee lands
The company has been evaluating opportunities to crystalize value for shareholders from its existing portfolio of assets. Cenovus is pursuing various potential options with respect to its royalty production and fee lands, including a possible sale or initial public offering, so that the company is market-ready when an appropriate opportunity presents itself.
Oil Projects |
|||||||||||||||||||||
Daily production1 |
|||||||||||||||||||||
(Before royalties) (Mbbls/d) |
2015 |
2014 |
2013 |
||||||||||||||||||
Q1 |
Full Year |
Q4 |
Q3 |
Q2 |
Q1 |
Full Year |
|||||||||||||||
Oil sands |
|||||||||||||||||||||
Christina Lake |
76 |
69 |
74 |
68 |
68 |
66 |
49 |
||||||||||||||
Foster Creek |
68 |
59 |
68 |
57 |
57 |
55 |
53 |
||||||||||||||
Oil sands total |
144 |
128 |
142 |
125 |
125 |
120 |
103 |
||||||||||||||
Conventional oil2 |
74 |
75 |
74 |
74 |
77 |
76 |
77 |
||||||||||||||
Total oil2 |
218 |
203 |
216 |
199 |
202 |
197 |
179 |
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 production growth. The two operations currently producing, Christina Lake and Foster Creek, use steam-assisted gravity drainage (SAGD), which involves drilling into the reservoir and injecting steam at low pressures to soften the thick oil, so it can be pumped to the surface. Cenovus has a third major oil sands project under initial development at Narrows Lake, which is part of the Christina Lake region. These projects are operated by Cenovus and jointly owned with ConocoPhillips. Cenovus has a significant opportunity to deliver increased shareholder value over the long term through production growth from several identified emerging projects and additional future developments.
Christina Lake
Production
Expansions
Foster Creek
Production
Expansions
Narrows Lake
Emerging projects
Grand Rapids
Telephone Lake
Conventional oil
Cenovus has tight oil opportunities in Alberta as well as the established Weyburn operation in Saskatchewan that uses carbon dioxide injection to enhance oil recovery. Cenovus also produces conventional heavy oil from the Wabiskaw formation at its 100%-owned Pelican Lake operation in northern Alberta. Cenovus has been injecting polymer since 2006 to enhance production from the reservoir, which is also under waterflood.
Natural Gas |
||||||||||||||||||||||
Daily production |
||||||||||||||||||||||
(Before royalties) (MMcf/d) |
2015 |
2014 |
2013 |
|||||||||||||||||||
Q1 |
Full Year |
Q4 |
Q3 |
Q2 |
Q1 |
Full Year |
||||||||||||||||
Natural gas |
462 |
488 |
479 |
489 |
507 |
476 |
529 |
Cenovus has a solid base of established, reliable natural gas properties in Alberta. These properties are managed as financial assets, not production assets, 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.
Markets, Products and Transportation
To capture the highest value for its oil, Cenovus takes an integrated approach to production, transportation and refining. The company is focused on finding new customers in North America and around the world where it expects to receive the best prices, and on ensuring it has the ability to move oil to those customers. Cenovus is also working to create a variety of oil blends that it expects will help maximize its transportation and refining options.
Cenovus has ownership in the Wood River Refinery in Illinois and the Borger Refinery in Texas. These Midwest refineries, which are jointly-owned with the operator, Phillips 66, produce high-quality end products like diesel, gasoline and jet fuel. On an integrated basis, Cenovus's refining business provides an economic hedge against heavy crude oil discounts to WTI.
The company continues to support proposed pipelines to Canada's east and west coasts as well as to the U.S. to help secure additional shipping capacity for its expected production growth. To complement this approach and access markets not served by pipeline, the company has also been pursuing a strategy to expand its capacity to transport oil by rail.
Refining and marketing
Operations
Financial
Market access
Financial
Dividend
The Cenovus Board of Directors declared a second-quarter dividend of $0.2662 per share, payable on June 30, 2015 to common shareholders of record as of June 15, 2015. Based on the April 28, 2015 closing share price on the Toronto Stock Exchange of $23.13, this represents an annualized yield of about 4.6%. The company has exercised its ability under Cenovus's DRIP to offer shareholders the opportunity to reinvest their dividends in Cenovus common shares issued from the company's treasury at a 3% discount to current market prices. The 3% discount will remain in effect for the second quarter and will be reassessed by the company thereafter. Declaration of dividends is at the sole discretion of the Board and will continue to be evaluated on a quarterly basis. Cenovus's continued commitment to a meaningful dividend is an important aspect of its strategy to focus on increasing total shareholder return.
Cash flow, earnings, capital investment, G&A and debt ratios
Commodity price hedging
Operating earnings1 |
||||||||
(For the period ended March 31) ($ millions, except per share amounts) |
2015 Q1 |
2014 Q1 |
||||||
Earnings (loss) before income tax Add back (deduct): |
(781) |
358 |
||||||
Unrealized risk management (gains) losses2 |
145 |
(26) |
||||||
Non-operating unrealized foreign exchange (gains) losses3 |
514 |
196 |
||||||
(Gains) losses on divestiture of assets |
(16) |
- |
||||||
Operating earnings (loss), before income tax |
(138) |
528 |
||||||
Income tax expense (recovery) |
(50) |
150 |
||||||
Operating earnings (loss) |
(88) |
378 |
1 Operating earnings is a non-GAAP measure as defined in the Advisory. |
2 The unrealized risk management (gains) losses include the reversal of unrealized (gains) losses recognized in prior periods. |
3 Includes unrealized foreign exchange (gains) losses on translation of U.S. dollar denominated notes issued from Canada and foreign exchange (gains) losses on settlement of intercompany transactions. |
Conference Call Today |
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.
OIL AND GAS INFORMATION
Barrels of Oil Equivalent Certain natural gas volumes have been converted to barrels of oil equivalent (BOE) on the basis of six Mcf to one 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.
Netbacks reported in this news release are calculated as set out in the Annual Information Form (AIF). Heavy oil prices and transportation and blending costs exclude the costs of purchased condensate, which is blended with heavy oil. For first quarter 2015, the cost of condensate on a per barrel of unblended crude oil basis was as follows: Christina Lake - $31.60 and Foster Creek - $30.57.
FORWARD-LOOKING INFORMATION
This document contains certain forward-looking statements and other information (collectively "forward-looking information") about Cenovus's current expectations, estimates and projections, made in light of the company's 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", "projected", "future", "could", "should", "focus", "proposed", "schedule", "potential", "capacity", "may", "strategy", "outlook" or similar expressions and includes suggestions of future outcomes, including statements about: the sufficiency of projected 2015 cash flow to cover capital expenditures and the current level of dividends under current strip pricing and market crack spreads; growth strategy and related schedules; projections contained in the company's 2015 guidance; forecast operating and financial results; planned capital expenditures; project capacities; expected future production, including the timing, stability or growth thereof; future cost savings and project costs, including relative to the industry; potential for maximizing the value of the company's royalty fee lands; forecast natural gas use at operations; expected SOR; expected increase in production capacity through optimization activity; potential for optimization of engineering and execution strategy, including related impacts on capital efficiencies; operating cash flow relative to ongoing capital investment requirements for properties; expected future refining capacity; broadening market access; the company's work on a variety of oil blends, including potential related impact on transportation and refining options; improving cost structures, including the expected timing and sustainability thereof and potential impact on efficiency and productivity; dividend plans and dividend strategy, including with respect to the dividend reinvestment plan; anticipated timelines for future regulatory, partner or internal approvals; future impact of regulatory measures; forecasted commodity prices; future use and development of technology; targeted future debt to capitalization and debt to adjusted EBITDA; and projected shareholder value and total shareholder return. Readers are cautioned not to place undue reliance on forward-looking information as the company's 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 Cenovus's current guidance, available at cenovus.com; projected capital investment levels, the flexibility of 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; the company's ability to obtain necessary regulatory and partner approvals; the successful and timely implementation of capital projects or stages thereof; the company's ability to generate sufficient cash flow from operations to meet the company's current and future obligations; and other risks and uncertainties described from time to time in the filings Cenovus makes with securities regulatory authorities.
2015 guidance, available at cenovus.com, is based on an average diluted number of shares outstanding of approximately 760 million. It assumes: Brent US$53.50/bbl, WTI US$50.50/bbl; WCS US$36.25/bbl; NYMEX US$3.00/MMBtu; AECO $2.70/GJ; Chicago 3-2-1 Crack Spread US$11.75/bbl; Exchange Rate of $0.83 US$/C$.
Underlying assumptions in Cenovus's calculation of supply costs include: price forecast and associated royalties, capital costs, operating expenses, reservoir performance and discount rates. The company's supply costs are estimated using these assumptions to generate a long-term WTI price that provides a project-specific after-tax rate of return of at least 9% on future capital investment.
The risk factors and uncertainties that could cause Cenovus's actual results to differ materially include: volatility of and assumptions regarding oil and gas prices; the effectiveness of the company's risk management program, including the impact of derivative financial instruments, the success of the company's hedging strategies and the sufficiency of the company's liquidity position; 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 the company's marketing operations, including credit risks; maintaining desirable ratios of debt to adjusted EBITDA as well as debt to capitalization; the company's ability to access various sources of debt and equity capital, generally, and on terms acceptable to Cenovus; changes in credit ratings applicable to Cenovus or any of its securities; changes to the company's dividend plans or strategy, including the dividend reinvestment plan; accuracy of reserves, resources and future production estimates; Cenovus's ability to replace and expand oil and gas reserves; Cenovus's ability to maintain its relationships with its partners and to successfully manage and operate its integrated heavy oil business; reliability of the company's 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 crude oil into petroleum and chemical products; risks associated with technology and its application to Cenovus's business; the timing and the costs of well and pipeline construction; the company's 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 Cenovus operates, 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 Cenovus's business, financial results and its Consolidated Financial Statements; changes in the general economic, market and business conditions; the political and economic conditions in the countries in which Cenovus operates; 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 Cenovus.
Readers are cautioned that the foregoing lists are not exhaustive and are made as at the date hereof. For a full discussion of the company's material risk factors, see "Risk Factors" in Cenovus's most recent AIF/Form 40-F, "Risk Management" in Cenovus's current and annual MD&A and risk factors described in other documents Cenovus files from time to time with securities regulatory authorities, all of which are available on SEDAR at sedar.com, EDGAR at sec.gov and the company's 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 $25 billion. For more information, visit cenovus.com.
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SOURCE Cenovus Energy Inc.
Image with caption: "Steam generators at Cenovus's Foster Creek project in northern Alberta. The project uses a process called steam-assisted gravity drainage (SAGD) to produce oil, which involves drilling into the reservoir and injecting steam at a low pressure to soften the oil so it can be pumped to the surface. (CNW Group/Cenovus Energy Inc.)". Image available at: http://photos.newswire.ca/images/download/20150429_C4764_PHOTO_EN_15880.jpg
Image with caption: "Cenovus's Christina Lake project in northern Alberta uses steam-assisted gravity drainage (SAGD) technology to produce oil. The process involves drilling into the reservoir and injecting steam at a low pressure to soften the oil so it can be pumped to the surface. (CNW Group/Cenovus Energy Inc.)". Image available at: http://photos.newswire.ca/images/download/20150429_C4764_PHOTO_EN_15881.jpg
CENOVUS CONTACTS: Investor Relations: Susan Grey, Director, Investor Relations, 403-766-4751; Graham Ingram, Senior Analyst, Investor Relations, 403-766-2849; Anna Kozicky, Senior Analyst, Investor Relations, 403-766-4277; Steve Murray, Senior Analyst, Investor Relations, 403-766-3382; Media: Brett Harris, Media Lead, 403-766-3420; Sonja Franklin, Media Advisor, 403-766-7264; General media line: 403-766-7751
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