Mr. Brian Ferguson reports
CENOVUS OIL PRODUCTION CLIMBS 15% IN FIRST QUARTER
Cenovus Energy Inc. had strong first-quarter performance, benefiting from its
integrated business plan. The company delivered excellent results from
its U.S. refining operations and continued growth in its oil
production. Cenovus achieved cash flow of $971-million, 7 per cent higher than
the first quarter of 2012. Increased crude oil production was offset by
a 27-per-cent decline in the average crude oil sales price the company received
compared with the same period a year ago.
Highlights:
- Refining operating cash flow increases 97 per cent to $524-million.
-
Cash flow was $971-million, or $1.28 per share in the first quarter, an
increase of 7 per cent from the same period in 2012, mainly due to strong
performance from the company's refining business.
-
Operating cash flow from refining almost doubled to $524-million
compared with the same quarter a year earlier.
-
Combined oil sands production at Foster Creek and Christina Lake
averaged more than 100,000 barrels per day net in the first
quarter, up 22 per cent from a year earlier. Production at Christina Lake
increased 79 per cent to an average of more than 44,000 barrels per day net.
-
Conventional oil production, including Pelican Lake, averaged almost
80,000 barrels per day in the quarter, a 7-per-cent increase from the same period a year
ago.
-
Regulatory applications and environmental impact assessments were
submitted for new phases at Christina Lake and Foster Creek.
- Cenovus drilled 315 gross stratigraphic test wells in the first quarter,
primarily to support the expansion and development of the company's oil
sands projects.
"Our refining business continues to deliver excellent results, clearly
demonstrating the benefit of our integrated strategy. When our cash
flow from heavy oil production is affected by low commodity prices, our
refineries give us a financial advantage by turning that discounted
crude into higher-value refined products," said Brian Ferguson,
president and chief executive officer of Cenovus. "We also delivered
another quarter of strong oil production growth, mainly due to our oil
sands assets."
FINANCIAL AND PRODUCTION SUMMARY
(in millions of dollars, except per share amounts and where noted)
First quarter
ended March 31,
2013 2012
Operating earnings $ 391 $ 340
Per share diluted $ 0.52 $ 0.45
------- -------
Net earnings $ 171 $ 426
======= =======
Per share diluted $ 0.23 $ 0.56
Capital investment $ 915 $ 900
Production (before royalties)
Oil sands total (bbl/d) 100,347 81,947
Conventional oil (bbl/d) 79,878 74,903
Total oil (bbl/d) 180,225 156,850
Natural gas (mmcf/d) 545 636
While lower oil prices had a negative impact on cash flow from the
company's oil producing assets, they benefited Cenovus's refining
operations. This is due to the company's ability to process discounted
heavy oil and at the same time receive elevated prices for its refined
products. Operating cash flow from refining increased to $524-million
in the first quarter, 97 per cent higher than the year before.
During the first quarter, the price of Western Canadian Select,
the benchmark Canadian heavy oil blend, fell against the price of West
Texas Intermediate, the North American benchmark. The
differential averaged $31.96 (U.S.) per barrel in the first quarter, widening 49 per cent
from the same period in 2012. The company's refineries, one in Illinois
and the second in Texas, have access to WCS and other discounted oil
feedstock.
Steady oil production growth
Average daily oil production in the quarter was 15 per cent higher compared with
the same period in 2012, primarily led by growth at the company's
Christina Lake oil sands project. Combined output from Foster Creek and
Christina Lake averaged 100,347 barrels per day net in the first quarter, up 22 per cent
from the same period in 2012. Production at Christina Lake averaged
44,351 barrels per day net, an increase of 79 per cent from a year earlier, resulting
mainly from the successful ramp-up of the phase D expansion. Foster
Creek output averaged about 56,000 barrels per day net, down 2 per cent from the same
period a year earlier due to higher than expected downtime on some
production wells.
There are now five phases operating at Foster Creek and four at
Christina Lake. Expansions continue at each of these projects, with a
combined 85,000 barrels per day of gross production capacity expected to be
added before the end of 2014, helping to advance Cenovus's long-term
oil growth strategy.
Cenovus has started moving wells at Foster Creek into the final phase of
production, called blowdown. This is a first at a major commercial
steam-assisted gravity drainage project. As SAGD wells are
prepared for blowdown, steam injection is reduced and pressure is
maintained with the co-injection of methane. In full blowdown, the well
continues to produce without steam, which lowers operating costs. The
steam is then redirected to a newer well pad. One well pad at Foster
Creek entered full blowdown mode in the first quarter and two more are
being converted.
Addressing market access challenges
The predictability of Cenovus's oil production growth, combined with its
financial strength, gives the company the confidence to consider
support for all proposed major pipeline projects that would open up
additional access to existing markets and potentially add new ones.
"It's vital to the economy that Canadian oil companies continue to
expand market access for their production," Mr. Ferguson said. "Without
pipelines to new markets, Canada's oil industry will continue to leave
billions of dollars in lost revenues on the table every year to the
detriment of all Canadians. With the third-largest oil reserves in the
world, Canada has a tremendous opportunity to meet the growing global
demand for energy."
Cenovus continues to examine ways to mitigate the negative impact of
market access constraints on pricing for Canadian oil producers. The
company takes a portfolio approach to market access and continues to
pro-actively assess various options to transport its oil. Cenovus is
receiving higher international prices on about 40,000 barrels per day of oil
production through a combination of pipeline, barge and rail options
that provide access to ocean transport. For example, in early 2012,
Cenovus started shipping 11,500 barrels per day of oil under a firm service
agreement on the Trans Mountain pipeline that runs from Edmonton to the
west coast. This enables Cenovus to receive a premium for its Foster
Creek production relative to the WCS heavy oil benchmark. In addition
to pipelines, Cenovus is now shipping about 6,000 barrels per day of
conventional oil to market by rail and is looking to increase that to
about 10,000 barrels per day by the end of this year.
OIL PROJECTS -- DAILY PRODUCTION
(before royalties)(mbbl/d)
2013 2012 2011
Q1 Year Q4 Q3 Q2 Q1 year
Oil sands
Foster Creek 56 58 59 63 52 57 55
Christina Lake 44 32 42 32 29 25 12
--- -- --- --- --- --- ---
Oil sands total 100 90 101 96 80 82 67
Conventional oil
Pelican Lake 24 23 24 24 22 21 20
Weyburn 17 16 16 16 16 17 16
Other conventional 39 37 37 36 36 38 31
--- -- --- --- --- --- ---
Conventional total 80 76 77 76 75 75 68
--- -- --- --- --- --- ---
Total oil 180 165 178 171 156 157 134
Oil sands
Cenovus has a substantial portfolio of oil sands assets in Northern
Alberta with the potential to provide decades of growth. The two
currently producing operations, Foster Creek and Christina Lake, use
SAGD, which involves drilling into the reservoir and pumping the oil to
the surface. Cenovus has begun work on its third project, Narrows Lake,
which is part of the Christina Lake region. These projects are operated
by Cenovus and are jointly owned with ConocoPhillips. Cenovus also has an 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
Combined production at Foster Creek and Christina Lake increased 22 per cent to
more than 100,000 barrels per day net in the first quarter of 2013 compared with
the same period a year earlier.
Christina Lake production increased 79 per cent to an average of 44,351 barrels per day
net in the first quarter, compared with the same period a year earlier.
The substantial increase in production at Christina Lake was due to the
ramp-up of two new expansion phases. Phase C reached full capacity in
the first quarter of 2012, while phase D began producing in July, 2012,
about three months ahead of schedule. Phase D demonstrated full
production capacity in January, 2013, approximately six months after
first production.
Foster Creek produced an average of about 56,000 barrels per day net in the first
quarter, a 2-per-cent decline from the average production rate in the same
period a year earlier. The slight decline was mainly due to increased
downtime on some production wells. Work is being done on the wells and
the company anticipates production to once again be at the higher end
of its current expected range of 110,000 barrels per day to 120,000 barrels per day in
the third quarter.
About 14 per cent of production at Foster Creek comes from 52 wells using
Cenovus's Wedge Well technology. These single horizontal wells, drilled between existing
SAGD well pairs, reach oil that would otherwise be unrecoverable. The
company's Wedge Well technology has the potential to increase overall recovery from the
reservoir between 10 per cent and 15 per cent, while reducing the steam to oil ratio. Cenovus anticipates having an additional 11 wells at Foster
Creek using Wedge Well technology on production by the end of 2013.
Christina Lake is also benefiting from the use of Wedge Well technology with seven of these wells now producing and another three
drilled wells expected to be on line in the second quarter of this
year.
Expansions
The Christina Lake phase E project is about 90 per cent complete. First
production is expected in the third quarter of 2013. Procurement, plant
construction and major equipment fabrication continue for phase F.
Engineering work continues for phase G.
At Foster Creek, overall progress of the combined F, G and H expansion
is approximately 46 per cent complete, while the phase F central plant is about
73 per cent complete. First production at phase F is expected in the third
quarter of 2014. Module assembly and piling work continues at phase G,
while site preparation, piling work and major equipment procurement are
under way for phase H.
Combined capital investment at Foster Creek and Christina Lake was $385-million in the first quarter, up 30 per cent from the same period in 2012. This
includes spending on the expansion phases, stratigraphic test wells and
maintenance capital.
During the first quarter, Cenovus submitted regulatory applications and
environmental impact assessments for Christina Lake phase H and Foster
Creek phase J, with regulatory approvals anticipated in the fourth
quarter of 2014 and the first quarter of 2015, respectively.
Operating costs
Operating costs at Foster Creek averaged $14.03 per barrel in the first
quarter, about 9 per cent higher than $12.85 per barrel a year earlier. The increase
came mostly from higher fuel prices and work force costs, partially
offset by lower repair and maintenance expenses. Non-fuel operating
costs were $11.12 per barrel in the quarter compared with $10.72 per barrel in the
same period of 2012, a 4-per-cent increase.
Operating costs at Christina Lake were $12.93 per barrel in the first quarter,
a 16-per-cent decrease from $15.33 per barrel in the same period a year ago. Non-fuel
operating costs at Christina Lake were $9.24 per barrel in the quarter
compared with $12.86 per barrel in 2012, a 28-per-cent decrease. The cost declines
were primarily due to significantly higher production and lower repair
and maintenance expenses compared with the first quarter in 2012. These
were partially offset by an increase in fuel prices and volume, waste
fluid handling and trucking costs.
Steam to oil ratio
SOR measures the number of barrels of steam needed for every barrel of
oil produced. A lower SOR means less natural gas is used to generate
the steam, which results in reduced capital and operating costs, fewer
emissions and lower water use.
Cenovus continues to achieve among the lowest SORs in the industry. The
first-quarter SOR at Christina Lake was 1.9, down from 2.1 in the same
period a year ago, due to increased production. Foster Creek's SOR was
2.4, compared with 2.1 in the first quarter of 2012, due to slightly
lower production. The SOR at Foster Creek is expected to decrease once
production returns to anticipated rates and the company sees the
benefits that are anticipated from moving to blowdown. The combined SOR
for Cenovus's oil sands operations was 2.2 in the first quarter of
2013.
Christina Dilbit blend
CDB is a heavy oil blend stream launched in the fourth quarter of 2011.
While CDB is priced at a discount to WCS, it continues to gain
acceptance with a wide base of refiners, which has resulted in a
narrowing of the discount for the first quarter of 2013 compared with
the same period a year earlier.
The Wood River refinery ran approximately 103,000 barrels per day gross of CDB or
equivalent high-TAN crudes during the first quarter of 2013. These
crudes represented approximately 60 per cent of the total heavy crude volumes
processed at Wood River in the quarter, up from about 30 per cent in the first
quarter of 2012.
Narrows Lake
Cenovus's next major oil sands development, a three-phase project at
Narrows Lake in Northern Alberta, received regulatory approval in 2012
as well as partner approval for the first phase. Narrows Lake is
expected to be the industry's first project to demonstrate solvent-aided process, using butane, on a commercial scale.
Site preparation, which began in the third quarter of 2012, engineering
and procurement, are progressing as expected. Construction of the phase
A plant is scheduled to start in the third quarter of 2013. The first
phase of the project is anticipated to have production capacity of
45,000 barrels per day, with first oil expected in 2017.
Cenovus invested $25-million to advance the Narrows Lake project in the
first quarter of this year compared with $9-million in the same period
in 2012.
Emerging projects
Grand Rapids
At the company's 100-per-cent-owned Grand Rapids project, located within the
Greater Pelican region, an SAGD pilot project is under way. The pilot
project is progressing and first production from a second well pair was
achieved in February.
A regulatory application and EIA for a 180,000-barrel-per-day commercial project
have been submitted and are proceeding on schedule. Cenovus anticipates
regulatory approval for Grand Rapids by the end of 2013.
Capital investment at Grand Rapids was $18-million in the first quarter
of 2013, down from $34-million a year ago. This was primarily due to
stratigraphic test well drilling initially scheduled for the first
quarter of this year being advanced into the fourth quarter of 2012.
Telephone Lake
Cenovus's 100-per-cent-owned Telephone Lake property is located within the
Borealis region of Northern Alberta. A revised application and EIA
submitted in December, 2011, are advancing through the regulatory process
and approval is anticipated in 2014.
Cenovus is continuing its dewatering pilot project designed to remove a
layer of non-potable water that is sitting on top of the oil sands
deposit at Telephone Lake. The dewatering operations have been running
well. While dewatering is not essential to the development of Telephone
Lake, Cenovus believes it could improve the project's SORs by up to
30 per cent, enhancing its economics and reducing its impact on the
environment.
Consistent with the development plan, capital spending in the first
quarter was $53-million, down from $91-million a year earlier.
Conventional oil
Pelican Lake
Cenovus produces heavy oil from the Wabiskaw formation at its 100-per-cent-owned
Pelican Lake operation in the Greater Pelican region, about 300
kilometres north of Edmonton. While this property produces conventional
heavy oil, it is 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. Based on reservoir
performance of the polymer program, the company has a multiyear growth
plan for Pelican Lake with production expected to reach 55,000 barrels per day.
Pelican Lake produced 23,687 barrels per day in the first quarter of 2013, a 14-per-cent
increase in production compared with the same period in 2012 due to the
expansion of infill drilling and polymer injection. In the first
quarter, production response from the company's infill drilling and
polymer flood program was slower than expected for some of the well
pads as it is taking longer to build reservoir pressure. Stronger
production growth is expected later this year and in 2014 in response
to the polymer injection.
Cenovus invested $143-million at Pelican Lake in the first quarter to
increase infill drilling for the polymer flood program and on facility
expansion, up from $139-million in the same period of 2012. This
investment not only helps to grow production, but also to offset
natural declines.
The company has decided to delay some capital investment originally
planned for 2013 to align spending with the current response it is
receiving from the polymer flood program. A second oil battery
scheduled for construction this year has been delayed until 2014. The
move should allow Cenovus to optimize the battery design and
installation, which is expected to reduce overall costs. Work will
continue as planned on project engineering and long-lead items. In
addition, the company is reducing the number of drilling rigs to two
from the four that have been at site.
Cenovus still plans to drill about 1,000 additional production and
injection wells in the next five to seven years to expand the polymer
flood at Pelican Lake.
Operating costs at Pelican Lake averaged $19.23 per barrel in the first
quarter, a 20-per-cent increase from $16.05 per barrel in the same quarter a year
earlier. Per barrel operating costs have been impacted by the expanded
polymer injection program and workover activities. Production growth
expected later this year will help to reduce per barrel operating
costs.
Other conventional oil
In addition to Pelican Lake, Cenovus has conventional and tight oil
assets in Alberta as well as the established Weyburn operation in
Saskatchewan that uses carbon dioxide injection to enhance oil
recovery.
Alberta oil production averaged 32,960 barrels per day in the first quarter, up
8 per cent from the same period in the previous year, primarily due to
increased light and medium crude production as a result of successful
horizontal well performance.
The company invested $190-million in its conventional oil assets, the
majority of which was dedicated to the continued development of its
emerging tight oil plays in Southern Alberta.
Production at the Weyburn operation was about 16,700 barrels per day net compared
with approximately 16,600 barrels per day net in the first quarter of 2012.
Cenovus signed an agreement late last year for a new supply of carbon
dioxide from SaskPower to supplement the supply it already receives from a coal
gasification plant in Beulah, N.D. This new supply agreement
improves the stability of the company's CO2 supply source for its enhanced oil recovery operation.
Combined crude oil production from the Bakken and Lower Shaunavon
operations averaged about 6,500 barrels per day, a 6-per-cent decrease from the same
quarter a year earlier. As previously announced, Cenovus has a process
under way to dispose of its interests in the Lower Shaunavon property
and the operated part of its Bakken property.
Operating costs for Cenovus's conventional oil operations, excluding
Pelican Lake, increased 5 per cent to $16.52 per barrel in the first quarter of 2013
compared with the same period in 2012. This was mainly due to higher
costs for electricity, work force, waste fluid handling and trucking.
Cenovus has a solid base of established, reliable natural gas properties
in Alberta. These assets are an important component of the company's
financial foundation, generating operating cash flow well in excess of
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.
Natural gas production in the first quarter of 2013 was approximately
545 million cubic feet per day, down 14 per cent from the same period
last year, as anticipated. The production drop was driven primarily by
expected natural declines and the decision to direct capital investment
toward the company's oil opportunities.
Cenovus's average realized sales price for natural gas, including
hedges, was $3.64 per thousand cubic feet in the period compared
with $3.53 per thousand cubic feet in the first quarter of 2012.
The company invested $9-million in its natural gas properties in the
first quarter of 2013. Operating cash flow from natural gas in excess
of capital investment was $106-million.
Cenovus anticipates managing an annual decline rate of 10 per cent to 15 per cent for
its natural gas production, targeting a long-term level of between 400
million cubic feet per day and 500 million cubic feet per day to match Cenovus's future anticipated internal
consumption at its oil sands and refining facilities.
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 against discounted crude oil prices 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.
Operating cash flow from refining increased to $524-million, 97 per cent more
than in the first quarter of 2012. This was due to improved refining
margins, mainly attributable to higher benchmark crack spreads as well
as wider heavy oil price differentials, resulting in lower feedstock
costs.
The positive impact of lower feedstock costs was partially offset by
reduced product output due to planned maintenance at both refineries
during the quarter.
Cenovus's refineries processed an average of 416,000 barrels per day of crude oil
in the first quarter, resulting in 439,000 barrels per day of refined product
output. This was about 6 per cent lower than in the same quarter a year ago
primarily due to planned maintenance work at Wood River.
For the second quarter of 2013, Cenovus is expecting operating cash flow
from the company's refining business to range between $250-million and
$350-million, based on a crack spread of $25 per barrel and the recent
narrowing of light-heavy differentials.
The amount of Canadian heavy oil processed in the first quarter of 2013
was 197,000 barrels per day, compared with 199,000 barrels per day in the same period of
2012.
Cenovus's operating cash flow is calculated on a first-in, first-out
inventory accounting basis. Using the last-in, first-out accounting method employed by most U.S. refiners, Cenovus's first-quarter 2013 refining operating cash flow would have been $20-million
lower than reported under FIFO, compared with $4-million lower in the
same quarter of 2012.
The company had refining capital investment of $25-million in the first
quarter of this year.
Financial
Dividend
The Cenovus board of directors declared a second quarter dividend of
24.2 cents per share, payable on June 28, 2013, to common shareholders of
record as of June 14, 2013. Based on the April 23, 2013, closing share
price on the Toronto Stock Exchange of $28.75, this represents an
annualized yield of about 3.4 per cent. Declaration of dividends is at the sole
discretion of the board. Cenovus's continued commitment to the 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 per cent of this year's and next year's expected
natural gas production, net of internal fuel use, and up to 50 per cent and
25 per cent, respectively, in the two following years. The policy also allows
the company to enter fixed-price hedges on as much as 50 per cent of net
liquids production this year and next, as well as 25 per cent of 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 million cubic feet per day of natural gas are expected to be consumed
at the company's SAGD and refinery operations, which is more than
offset by the gas Cenovus produces. The company's financial hedging
positions are determined after considering this natural hedge.
Cenovus's financial hedge positions at March 31, 2013, include:
- Approximately 10 per cent or 18,500 barrels per day of expected oil production hedged for
2013 at an average Brent price of $110.36 (U.S.) per barrel and an additional 10 per cent
or 18,500 barrels per day at an average Brent price of $111.72 per barrel;
-
166 million cubic feet per day or approximately 32 per cent of expected natural gas production
hedged for 2013 at an average Nymex price of $4.64 (U.S.) per thousand cubic feet, plus internal
usage of about 135 million cubic feet per day of natural gas and long-term sales of 29
million cubic feet per day of natural gas;
- Approximately 49,200 barrels per day of heavy crude exposure hedged for 2013 at
an average WCS differential to WTI of $20.74 (U.S.) per barrel;
- Approximately 10,800 barrels per day of heavy crude exposure hedged for 2014 at
an average WCS differential to WTI of $20.27 (U.S.) per barrel.
Financial highlights
Cash flow in the first quarter was $971-million, or $1.28 per share
diluted, compared with $904-million, or $1.19 per share diluted, in the
same period a year earlier.
Operating earnings in the quarter were $391-million, or 52 cents per share
diluted, up 15 per cent from the same quarter in 2012.
Cenovus had a realized after-tax hedging gain of $44-million in the
first quarter. The company received an average realized price,
including hedging, of $56.72 per barrel for its oil in the first quarter,
compared with $72.61 per barrel during the same period in 2012. The average
realized price, including hedging, for natural gas in the first quarter
was $3.64 per thousand cubic feet, compared with $3.53 per thousand cubic feet a year earlier.
Cenovus recorded income tax expense of $123-million in the first quarter
of 2013, giving the company an effective tax rate of 42 per cent, compared with
an effective rate of 28 per cent in the year-earlier period. The increased tax
rate reflects higher income from U.S. refining operations and a loss
from Canadian sources of income due to unrealized risk management
losses. A tax expense arises from the U.S. income, while there is a tax
recovery associated with the Canadian loss, which is calculated at the
lower Canadian rate.
Cenovus's net earnings for the first three months of 2013 were $171-million compared with $426-million in the first quarter of 2012. Net
earnings were negatively impacted by unrealized risk management and
foreign exchange losses in the quarter compared with gains in the same period of 2012.
Capital investment during the quarter was $915-million. That was a 2-per-cent
increase from $900-million in the first quarter of 2012 as the company
continued to advance development of its oil opportunities.
General and administrative expenses were $83-million in the first
quarter of this year. G&A expenses were 11 per cent lower than in the first
quarter of 2012, primarily due to a decline in long-term incentive
expenses.
Over the long term, Cenovus continues to target a debt to capitalization
ratio of between 30 per cent and 40 per cent and a debt to adjusted EBITDA ratio of
between 1.0 and 2.0 times. At March 31, 2013, the company's debt to
capitalization ratio was 33 per cent and debt to adjusted EBITDA, on a trailing
12-month basis, was 1.1 times.
Conference call today at 9 a.m. Mountain Time (11 a.m. Eastern Time)
Cenovus will host a conference call today, April 24, 2013, 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. An archived recording of the call will be
available from approximately 1 p.m. MT on April 24, 2013, until
midnight May 1, 2013, by dialling 855-859-2056 or 416-849-0833 and
entering passcode 23074842. A live audio webcast of the conference call
will also be available on the company's website.
The webcast will be archived for approximately 90 days.
We seek Safe Harbor.
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