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Cenovus Energy Inc
Symbol C : CVE
Shares Issued 754,961,677
Close 2013-02-13 C$ 32.60
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Cenovus Energy earns $993-million in 2012

2013-02-14 06:34 ET - News Release

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.

Highlights include:

  • 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

Notes:
1. Operating earnings are a non-generally accepted accounting principles
measure.
2. Includes natural gas liquids production and production from Pelican 
Lake.
3. Reflects the divestiture of a non-core property in the first quarter 
of 2012.

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 prices."

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 previous year.

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 2011.

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 operations."

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 this quarter.

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 2011.

"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.

Oil sands

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

Production

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.

Expansions

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

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.

Emerging projects

Narrows Lake

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.

Grand Rapids

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.

Telephone Lake

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.

Conventional oil

Pelican Lake

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 injection.

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 Bakken property.

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.

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 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 in Alberta.

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 costs.

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 years.

Dividend

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.

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 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 natural hedge.

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.

Financial highlights:

  • 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 reserves.
  • 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 company.
  • 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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