Mr. Brian Ferguson reports
CENOVUS TOTAL PROVED RESERVES UP 12% TO 2.2 BILLION BOE; OIL SANDS PRODUCTION INCREASES 35% IN 2012
Cenovus Energy Inc. has released is financial results for the year ended Dec. 31, 2012.
- Proved bitumen reserves at the end of 2012 were more than 1.7 billion
barrels, up 18 per cent from 2011.
- Economic bitumen best estimate contingent resources at year-end were 9.6
billion barrels, a 17-per-cent increase over 2011.
- Combined oil sands production at Foster Creek and Christina Lake averaged nearly 90,000 barrels per day net in 2012, up 35 per cent
from 2011. Average production at Christina Lake nearly tripled in 2012 to almost 32,000 barrels per day net.
- Christina Lake phase D reached full capacity about six months after first production.
- Cash flow increased to about $3.6-billion in 2012, up 11 per cent from 2011.
- The board of directors approved a dividend increase of 10 per cent for the first
quarter of 2013 resulting in a quarterly dividend of 24.2 cents per share.
- Cenovus recorded a $393-million non-cash goodwill impairment in the
fourth quarter which resulted in lower 2012 operating earnings and a
fourth-quarter earnings loss. This impairment related to the company's
Suffield assets, principally natural gas.
"We had another strong year in 2012, achieving the milestones we set for
ourselves," said Brian Ferguson, president and chief executive officer of
Cenovus. "We added significant new reserves and resources, increased
our oil production, enhanced our net asset value and generated record
cash flow. We remain committed to delivering a growing total
shareholder return and have again increased our dividend by 10 per cent."
FINANCIAL AND PRODUCTION SUMMARY
(in millions of dollars, except per share amounts)
Quarter ended Year ended
Dec. 31, Dec. 31,
2012 2011 2012 2011
Operating earnings (loss)1 $ (189) $ 332 $ 866 $1,239
Per share diluted $(0.25) $ 0.44 $1.14 $ 1.64
------- ------ ----- ------
Net earnings (loss) $ (118) $ 266 $ 993 $1,478
======= ====== ===== ======
Per share diluted $(0.16) $ 0.35 $1.31 $ 1.95
Production (before royalties)
Oil sands total (bbl/d) 100,867 74,576 89,736 66,533
Conventional oil(2) (bbl/d) 76,779 69,697 75,667 67,706
------- ------- ------- -------
Total oil (bbl/d) 177,646 144,273 165,403 134,239
------- ------- ------- -------
Natural gas(3) (MMcf/d) 566 660 594 656
1. Operating earnings are a non-generally accepted accounting principles
2. Includes natural gas liquids production and production from Pelican
3. Reflects the divestiture of a non-core property in the first quarter
Cenovus Energy delivered another year of predictable, reliable performance in 2012. In
addition to growing its reserves and resources base, the company
recorded solid operational results driven by significant production
growth and a strong contribution from its downstream refining business.
Those results offset the impact of a reduction in average realized
prices for crude oil and natural gas when compared with 2011. Average daily oil production grew 23 per cent in 2012
while total cash flow rose 11 per cent compared with the previous year. The
company's Christina Lake oil sands project led the growth in production, nearly tripling its
average daily output from 2011. Christina Lake phase D achieved one of the fastest ramp-ups in the steam-assisted
gravity drainage industry, demonstrating full production capacity about six months
after first oil production. At Cenovus's U.S. refineries, strong
margins and increased heavy oil processing capacity led to a 29-per-cent increase in operating cash flow from refining.
"Our integrated approach continues to support our bottom line," Mr. Ferguson
said. "When our heavy oil producing assets are affected by low
commodity prices, we make up that value at our refineries. For 2013, we
have supply agreements and firm transportation and hedging contracts
that, together with our refining capacity, will enable us to offset
almost all of our volume exposure to discounted Canadian heavy crude
Strong additions to reserves and contingent resources
Cenovus continues to strengthen its reserves and resources base.
According to the company's independent reserves and contingent
resources evaluation, total proved reserves were nearly 2.2 billion barrels of oil equivalent at the end of 2012, up 12 per cent from the
Proved bitumen reserves increased 18 per cent to more than 1.7 billion barrels,
compared with 2011, while proved plus probable bitumen reserves
increased approximately 23 per cent to nearly 2.4 billion barrels. Economic
bitumen best estimate contingent resources increased 17 per cent from 2011 to
9.6 billion barrels. Proved light and medium oil reserves remained
unchanged, while proved heavy oil reserves increased approximately 5 per cent
and proved natural gas reserves declined about 21 per cent compared with 2011. Cenovus's 2012 proved
finding and development costs, excluding changes in future
development costs, were a competitive $9.04 per barrel of oil equivalent. The three-year average
was $6.10 per barrel of oil equivalent. The 2012 recycle ratio was 3.2 times.
"Cenovus's stratigraphic well program continues to add significant new
resources to our already strong portfolio of oil sands assets,"
Mr. Ferguson said. "This gives us even greater opportunity to develop new
projects, move them through the regulatory approvals process and create
decades of solid growth ahead."
Integrated operations contribute to solid financial performance
Cenovus achieved cash flow of more than $3.6-billion, an 11-per-cent increase
from the previous year. Operating cash flow from refining benefited
from the fact that the Wood River refinery was able to process higher
volumes of heavy oil as a result of the completion of the coker and
refinery expansion project in late 2011. While lower commodity
prices had a negative impact on cash flow from the company's oil
producing assets, the price volatility provided a double
benefit to Cenovus's refining operations. Compared with 2011, 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 wider WTI-WCS differential resulted in
lower feedstock costs for the company's refineries. At the same time,
there was a favourable appreciation in the price of Brent crude, the
global benchmark, against the price of WTI, which allowed Cenovus's
refineries to capture higher prices for their finished products. Those
lower feedstock costs and higher finished product prices led to
stronger refining margins, which also contributed to the 29-per-cent
improvement in operating cash flow from refining when compared with
Goodwill impairment impacts earnings
A one-time non-cash goodwill writedown of $393-million in the company's
conventional operations contributed to lower full-year operating
earnings in 2012 and to an operating loss of $189-million in the fourth
quarter. For the full year, the company had operating earnings of $866-million, down 30 per cent from 2011. The full-year decrease and quarterly loss
were primarily due to the goodwill impairment related to the company's
Suffield conventional assets, located on the Canadian Forces Base in
southeast Alberta. Estimated future cash flows for the assets have
declined, largely as the result of a drop in forecast natural gas prices over the long term. As a result, the carrying amount of goodwill
related to the property has exceeded its fair value and was written
off. The goodwill in question arose from the 2002 merger between
Alberta Energy Company and PanCanadian Energy Corp.
Continued focus on operating costs
Managing operating costs is an important focus for Cenovus.
Operating costs per barrel of oil equivalent at the company's oil sands and natural gas operations were largely in line with Cenovus's 2012 forecasts, while
operating costs at its Pelican Lake heavy oil operations were slightly above guidance. Cenovus anticipates
more pressure on operating costs in 2013 as a result of expected higher
prices for natural gas and electricity needed to fuel the company's operations. Operating
costs at Pelican Lake are expected to rise again this year with the expansion of the polymer
flood as temporarily reduced reservoir pressure required to safely
complete infill drilling limits 2013 production growth. Stronger
production growth is expected in late 2013 and into 2014, which should
help reduce per barrel operating costs.
"Cenovus is working diligently to maintain our reputation as a low cost
producer," said John Brannan, Cenovus's executive vice-president and
chief operating officer. "We will continue to focus on reducing our
costs per barrel and increasing efficiency across all of our
Growing net asset value
Cenovus measures its success in a number of ways with a key metric being
growth in net asset value. The company remains on track to reach
its goal of doubling its December, 2009, baseline illustrative NAV of $28
by the end of 2015. Despite weaker oil and gas prices, Cenovus's
operational and financial performance and consistent production growth
allowed the company to increase its NAV to approximately $40 in 2012, a
43-per-cent increase from the end of 2009.
Capital investment supports oil production growth
Cenovus is focused on creating value through its oil growth strategy,
which remains on track with plans to achieve 500,000 barrels per day of net
production by the end of 2021. As part of that strategy, the company
invested almost $3.4-billion in its operations in 2012, a planned 24-per-cent increase from the previous year. About half of that capital spending
supported development of the company's oil sands assets. Nearly $1.4-billion went toward expansions at Foster Creek and Christina Lake and the development of Narrows Lake. Capital spending on emerging oil sands projects, including Grand Rapids and Telephone Lake, was approximately $316-million. Capital investment in 2012 included
the drilling of 473 gross stratigraphic test wells. The results of
these stratigraphic test wells will be used to support the expansion
and development of the company's oil sands projects.
Cenovus spent nearly $1.3-billion on its conventional oil assets in
2012. That includes more than $500-million at Pelican Lake to increase infill drilling for the polymer flood programs and facility
expansion. The company invested nearly $850-million in its other
conventional oil assets, including the continued development of its
emerging tight oil plays.
Cenovus's capital program includes investing in innovative technologies
aimed at increasing production, while lowering operating costs per barrel of oil equivalent
and decreasing environmental impacts. In 2012, this led to continued
investment in projects such as Cenovus's enhanced start-up and patented
Wedge Well technologies as well as the development of its new SkyStrat drilling rig, a scaled-down version of a traditional stratigraphic
drilling rig that can be transported to remote sites by helicopter.
Acquisitions and divestitures
While Cenovus does not have a need for major acquisitions or
divestitures, the company is always looking for tuck-in opportunities
that would enhance its current portfolio. Cenovus places value on
maintaining a divestiture program as a form of capital discipline and
will continue to assess the benefits of selling certain non-core
assets. Purchases in 2012 were primarily tuck-in oil sands acquisitions
adjacent to Cenovus's Telephone Lake and Narrows Lake properties as well as tuck-in acquisitions of producing conventional
crude oil properties in Alberta and Saskatchewan, adjacent to existing
production. Divestitures in 2012 were mainly related to the sale of a
non-core natural gas property in Northern Alberta in the first quarter.
Following a portfolio review, Cenovus decided to put its Lower Shaunavon
property and the operated part of its Bakken property in Saskatchewan
up for sale. The company believes these are quality assets. However,
Cenovus is unable to scale the projects up to a size that would be
material to its portfolio due to competitive limitations on increasing
its land base in the area. The sale process is expected to launch later
Addressing market access challenges
Constraints on market access are having a negative impact on realized
pricing for Canadian oil producers. Congestion on pipelines linking oil
fields in Western Canada to U.S. markets contributed to a widening of
the average discount (also known as the light/heavy differential)
between WTI and WCS in 2012. The average WTI-WCS differential was
$30.37 (U.S.) per barrel in December, 2012, compared with $11.72 (U.S.) per barrel in December of
"Widening oil price differentials are becoming an increasingly important
issue, not just for producers, but for all Canadians," Mr. Ferguson said.
"With the third largest oil reserves in the world, we have a tremendous
opportunity to capitalize on the growing global demand for energy.
However, without pipeline access to new markets we will continue to
leave billions of dollars in lost revenues on the table every year, to
the detriment of the entire Canadian economy."
Cenovus takes a portfolio approach to market access and continues to
pro-actively assess various options to transport its oil. The
predictability of the company's oil production growth gives it the
confidence to support all currently proposed pipeline projects that
would open up new markets. Early in 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. The firm
service agreement is beneficial as it gives Cenovus the ability to get
its oil to tidewater where it commands higher prices and it allows the
company to negotiate longer-term arrangements for markets in California
and Asia. In addition to pipelines, Cenovus is now shipping about 6,000
barrels per day of conventional crude volumes to market by rail and is looking
to increase that to about 10,000 barrels per day in 2013.
Cenovus has a substantial portfolio of oil sands assets in Northern
Alberta with the potential to provide decades of future growth. The two
currently producing operations, Foster Creek and Christina Lake, use SAGD to drill and pump the oil to the surface. 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
Combined production at Foster Creek and Christina Lake increased 35 per cent to almost 90,000 barrels per day net in 2012 compared with the
previous year. Fourth-quarter production also rose 35 per cent in 2012 to
nearly 101,000 barrels per day net, compared with the same period in 2011.
Christina Lake production almost tripled to an average of about 32,000 barrels per day net in
2012, compared with the previous year. Christina Lake produced an average of approximately 42,000 barrels per day net in the fourth
quarter, more than double the average production rate in 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. Phase D began producing in
July, 2012, approximately three months ahead of schedule. It
demonstrated full production capacity in January, 2013, approximately
six months after first production.
Foster Creek produced an average of nearly 58,000 barrels per day net in 2012, about 5 per cent more
than the 2011 average due to improved well performance and plant
optimization. Fourth-quarter production at Foster Creek averaged about 59,000 barrels per day net to Cenovus.
Both Christina Lake and Foster Creek achieved new single-day production highs of almost 47,000 and 65,500
barrels per day net, respectively, in 2012.
About 12 per cent of current production at Foster Creek comes from 56 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 by as much as 10 per cent, while reducing the steam to oil ratio. Cenovus plans to drill and complete an additional eight wells at
Foster Creek using Wedge Well technology in 2013.
Christina Lake is also benefiting from the use of Wedge Well technology with six of these wells now producing and another four
drilled wells expected to begin producing in the first half of 2013.
The overall Christina Lake phase E project is about 65 per cent complete, while the central plant is
nearly 87 per cent complete. First production is anticipated in the third
quarter of 2013. Piling and foundation work, engineering and major
equipment fabrication continue for phase F, and design engineering work
is under way for phase G.
At Foster Creek, overall progress of the combined F, G and H expansion is approximately
40 per cent complete, while the phase F central plant is 67 per cent complete.
First production at phase F is expected in the third quarter of 2014.
Spending on piling work, steel fabrication, module assembly and major
equipment procurement is under way at phase G and design engineering
continues at phase H.
Combined capital investment at Foster Creek and Christina Lake was more than $1.3-billion in 2012, a 46-per-cent increase compared with 2011.
This includes spending on the expansion phases, stratigraphic test
wells and maintenance capital.
Operating costs at Foster Creek averaged $11.99 per barrel in 2012, about a 6-per-cent increase from $11.34 per barrel the
previous year. Non-fuel operating costs at Foster Creek were $9.96 per barrel in 2012 compared with $9.14 per barrel in 2011, a 9-per-cent increase.
The increases were mostly due to added costs from hiring additional
staff, as well as higher levels of waste and fluid handling, trucking
and workover activity.
Operating costs at Christina Lake were $12.95 per barrel in 2012, a 36-per-cent decrease from $20.20 per barrel the previous
year. Non-fuel operating costs at Christina Lake were $10.53 per barrel in 2012 compared with $17.02 per barrel in 2011, a 38-per-cent decrease. The decreases were primarily due to the significant increase
in production at Christina Lake in 2012 and lower SORs.
Steam to oil ratios
SOR measures the number of barrels of steam needed for every barrel of
oil produced, with Cenovus having one of the lowest ratios in the
industry. 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 continued to achieve low SORs in 2012 with ratios of
approximately 2.2 at Foster Creek, unchanged from 2011, and 1.9 at Christina Lake, down from 2.3 in 2011. The combined SOR for Cenovus's oil sands
operations was about 2.1 in 2012.
Christina Dilbit blend
Christina Dilbit blend is a heavy bitumen blend stream launched in
the fourth quarter of 2011. Last year, 74 per cent of production from Christina Lake was sold as CDB.
While CDB is priced at a discount to WCS, it is gaining acceptance with
a wider base of refiners. Cenovus continued to add CDB into its
contracts with downstream customers and saw the price differential
narrow last year.
In the fourth quarter of 2012 the CDB discount to WCS was in the range of $4.50
(U.S.) to $7.50 (U.S.) per barrel. Over the longer term, Cenovus expects a CDB to
WCS discount in the range of $3 (U.S.) per barrel to $5 (U.S.) per barrel.
The Wood River refinery ran approximately 84,000 barrels per day gross of CDB or equivalent crudes
during the fourth quarter of 2012. These crudes represented 55 per cent of
total heavy crude volumes in the fourth quarter, up from 40 per cent in the
third quarter of 2012.
Cenovus's next major oil sands development, a three-phase project at Narrows Lake, received regulatory approval in 2012 as well as partner approval for
the first phase. As a result of the approvals, Cenovus booked more than
200 million barrels of proved reserves last year. The project is 50 per cent owned
with ConocoPhillips and Cenovus is the operator. Narrows Lake is expected to be the industry's first project to demonstrate solvent-aided process, with butane, on a commercial scale.
Site preparation began in the
third quarter of 2012 and phase A construction 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 spent $44-million on Narrows Lake in 2012.
At the company's 100-per-cent-owned Grand Rapids property, located within the Greater Pelican region, a SAGD pilot project is under way. The project is progressing smoothly with
steaming of a second well pair, which is expected to begin producing
this month. A joint regulatory application and environmental impact
assessment for a 180,000-barrel-per-day commercial project has been
submitted and is proceeding on schedule. Cenovus anticipates regulatory
approval for Grand Rapids by the end of 2013.
Cenovus's 100-per-cent-owned Telephone Lake property is located within the Borealis region of Northern Alberta. A
revised joint application and EIA submitted in December, 2011, is
advancing through the regulatory process and approval is anticipated
early in 2014. Cenovus is continuing with 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 smoothly and early results
are encouraging. 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.
Cenovus produces heavy oil from the Wabiskaw formation at its
wholly 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 nearly 23,000 barrels per day in 2012, a 10-per-cent increase in production
compared with 2011 due to the expansion of infill drilling and polymer
Cenovus plans to build on its success at Pelican Lake by drilling about 1,000 additional production and injection wells in
the next five to seven years to expand the polymer flood.
Operating costs at Pelican Lake averaged $17.08 per barrel in 2012, a 15-per-cent increase from $14.86 per barrel in 2011.
Per barrel operating costs have been impacted by lower than expected
production growth due to reduced operating pressures related to
temporary well shut-ins required to complete infill drilling between
existing wells at Pelican Lake.
Operating costs at Pelican Lake were also higher due to additional workover activities, increased
staffing levels and polymer consumption as a result of the expansion of
the polymer flood.
Stronger production growth is expected in late 2013 and into 2014, which
should help reduce per barrel operating costs.
Other conventional oil
In addition to Pelican Lake, Cenovus has extensive oil operations in Alberta and Saskatchewan.
These include conventional and tight oil assets in Alberta and
developing tight oil assets in Southern Saskatchewan, as well as the
established Weyburn operation that uses carbon dioxide injection to enhance oil recovery.
Alberta oil production averaged more than 30,000 barrels per day in 2012, up 10 per cent
from the previous year, primarily due to successful tight oil drilling
programs and fewer weather and access issues than in 2011.
Production at the Weyburn operation was unchanged compared with the previous year at more than
16,000 barrels per day net.
Combined crude oil production from the Bakken and Lower Shaunavon
operations averaged nearly 6,500 barrels per day, a 79-per-cent increase from the
previous year due to increased drilling. Given the limited expansion
opportunities that Cenovus has in these non-core properties in
comparison with its other holdings, the company has determined it will
commence a public process later this quarter to dispose of its
interests in the Lower Shaunavon property and the operated part of its
Operating costs for Cenovus's conventional oil and liquids operations,
excluding Pelican Lake, increased 9 per cent to $15.12 per barrel in 2012 compared with 2011. This was mainly
due to a combination of higher levels of waste and fluid handling,
trucking, workover activities, repairs and maintenance in connection
with single well batteries and higher work force costs.
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 their 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 2012 was approximately 594 million cubic feet per day, down 9 per cent from the previous year, as expected. The production
drop was driven primarily by expected natural declines and the
divestiture of a non-core property early in the first quarter of 2012.
Excluding the impact of the divestiture, natural gas production would have been 6 per cent lower than in 2011.
Cenovus's average realized sales price for natural gas, including hedges, was $3.56 per thousand cubic feet in 2012
compared with $4.52 per per thousand cubic feet in 2011.
The company invested $51-million in its natural gas properties in 2012. Operating cash flow from natural gas in excess of capital investment was $462-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 production 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.
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 reduced crude oil prices by providing lower
feedstock prices to Cenovus's Wood River refinery in Illinois and Borger refinery in Texas, which are jointly owned with the operator, Phillips 66.
Operating cash flow from refining increased $282-million to nearly $1.3-billion, 29 per cent more than in 2011. This was due to higher benchmark crack
spreads as well as the benefits from the completion of the CORE project
at the Wood River refinery in late 2011, including lower feedstock costs and improved refinery output.
Operating cash flow for 2012 would have been higher if not for planned
fourth-quarter major turnarounds at Wood River and Borger that
continued longer than expected.
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 2012
refining operating cash flow would have been $111-million higher than
reported under FIFO, compared with $95-million lower in 2011.
For the full year, the company's refining business generated $1.14-billion of operating cash flow in excess of the $118-million of capital
invested in it.
Cenovus expects strong first quarter 2013 operating cash flow from its
refineries in the range of $300-million to $400-million.
Both refineries combined processed an average of 412,000 barrels per day of crude
oil in 2012, resulting in 433,000 barrels per day of refined product output,
which was 3 per cent higher than in 2011.
Total combined heavy crude oil processing capacity at the company's
refineries increased to between 235,000 barrels per day and 255,000 barrels per day with
the completion of the CORE project at the Wood River refinery in late 2011. The CORE project has enhanced the company's ability to
further integrate its growing bitumen production.
The amount of Canadian heavy oil processed in 2012 increased 57 per cent to
198,000 barrels per day.
Refinery crude utilization rates averaged 91 per cent in 2012.
Reserves and contingent resources
All of Cenovus's reserves and resources are evaluated each year by
independent qualified reserves evaluators.
At year-end 2012, Cenovus had proved reserves of nearly 2.2 billion barrels of oil equivalent,
an increase of 12 per cent compared with 2011.
Proved bitumen reserves increased 18 per cent in 2012 compared with 2011, to
more than 1.7 billion barrels, while proved plus probable bitumen reserves
grew nearly 23 per cent to approximately 2.4 billion barrels. This increase was
primarily due to regulatory and partner approval of the company's Narrows Lake oil sands project and substantial reserves additions at Foster Creek and Christina Lake. The reserves additions at Christina Lake were due to increased well density and improved SOR performance. At Foster Creek the reserves additions were due to more efficient drainage of oil in
the steam chambers.
Economic bitumen best estimate contingent resources increased to 9.6
billion barrels, up approximately 17 per cent from 2011. This increase is a result
of Cenovus's extensive stratigraphic test well drilling program
converting prospective resources to contingent resources. In addition,
the independent evaluators recognized commercial SAGD feasibility in the Wabiskaw formation within the Greater Foster Creek region and contingent resources on recently acquired oil sands assets
Proved light and medium oil reserves remained unchanged, while proved
heavy oil reserves increased approximately 5 per cent due to the expansion of the waterflood and polymer injection program at Pelican Lake. Natural gas reserves declined about 21 per cent compared with 2011 as Cenovus continued to
redirect capital to its oil assets. As expected, this has resulted in natural gas production outpacing reserves additions. Lower natural gas prices and the divestiture of a non-core property early in 2012 also
contributed to lower natural gas reserves.
Cenovus's 2012 proved finding and development costs, excluding
changes in future development costs, were a competitive $9.04 per barrel of oil equivalent, up
from $5.96 per barrel of oil equivalent in 2011 as capital spending increased and reserves
additions decreased somewhat compared with 2011. The three-year average
F&D costs were $6.10 per barrel of oil equivalent, excluding changes in future development
Cenovus achieved production replacement of nearly 350 per cent in 2012.
The overall proved reserves life index is approximately 23 years, a 5-per-cent increase compared with 2011. The magnitude of the company's bitumen
assets is significant with a bitumen proved reserves life index of 52
years, down 13 per cent due to the company's rapidly increasing bitumen
production. The conventional oil and NGLs proved reserves life is 12
The Cenovus board of directors has approved a 10-per-cent increase in the first
quarter 2013 dividend to 24.2 cents per share, payable on March 28, 2013, to
common shareholders of record as of March 15, 2013. Based on the
Feb. 13, 2013, closing share price on the Toronto Stock Exchange of
$32.60, this represents an annualized yield of about 3 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.
Cenovus's natural gas and crude oil hedging strategy helps it to achieve more predictability
around cash flow and safeguard its capital program. The strategy allows
the company to financially hedge up to 75 per cent of this 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 company has board
approval for fixed price hedges on as much as 50 per cent of net liquids
production this year and 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 offset by the gas Cenovus produces. The company's
financial hedging positions are determined after considering this
Cenovus's financial hedge positions at Dec. 31, 2012, 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 approximately 135 million cubic feet per day of natural gas;
- No fixed-price commodity hedges in place beyond 2013;
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 9,400 barrels per day of heavy crude exposure hedged for 2014 at an
average WCS differential to WTI of $20.13 (U.S.) per barrel.
- Cash flow in 2012 was more than $3.6-billion, or $4.80 per share
diluted, compared with nearly $3.3-billion, or $4.32 per share diluted,
a year earlier.
- Operating earnings in 2012 were $866-million, or $1.14 per share
diluted, compared with $1.2-billion, or $1.64 per share diluted, for
the same period last year.
- Earnings in 2012 reflected a non-cash goodwill impairment charge of
approximately 52 cents per share related to the company's Suffield assets
in southeast Alberta. This was primarily due to estimated declines in
future natural gas prices.
- Cenovus had a realized after-tax hedging gain of $250-million in 2012.
Cenovus received an average realized price, including hedging, of
$67.16 per barrel for its oil in 2012, compared with $69.99 per barrel during 2011.
The average realized price, including hedging, for natural gas in 2012 was $3.56 per thousand cubic feet, compared with $4.52 per thousand cubic feet in 2011.
- Cenovus recorded income tax expense of $783-million, giving the company
an effective tax rate of 44 per cent, a substantial increase from the 2011
effective rate of 33 per cent. The increase is primarily due to the goodwill
impairment, which is not deductible, and to a one-time tax charge
related to a U.S. withholding tax of $68-million.
- Cenovus's net earnings for the year were $993-million compared with
approximately $1.5-billion in 2011. Net earnings were negatively
impacted by lower commodity prices, the non-cash goodwill impairment,
increased depreciation, depletion and amortization costs, and
lower unrealized after-tax risk management gains, partly offset by
higher unrealized foreign exchange gains. The increased DD&A rates were
due to higher future development costs associated with total proved
- Capital investment during the year was nearly $3.4-billion, as planned.
That was a 24-per-cent increase from $2.7-billion in 2011 as the company
continued to advance development of its oil opportunities.
- General and administrative expenses were $352-million in 2012,
which was less than the company's corporate guidance for the year. G&A
expenses were 19 per cent higher in 2012, compared with 2011, primarily due to
increases in staffing, salaries and benefits, long-term incentive
expense, and office costs related to the continued growth of the
- 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 Dec. 31, 2012, the company's debt to
capitalization ratio was 32 per cent and debt to adjusted EBITDA, on a trailing
12-month basis, was 1.1 times.
Conference call today -- 9 a.m. Mountain Time (11 a.m. Eastern Time)
Cenovus will host a conference call today, Feb. 14, 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 12 p.m. MT on Feb. 14,
2013, until midnight Feb. 21, 2013, by dialling 855-859-2056 or
416-849-0833, and entering conference passcode 87391969. 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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