Mr. Brian Ferguson reports

CENOVUS HAS STRONG THIRD-QUARTER OPERATIONAL PERFORMANCE

Cenovus Energy Inc. continues to deliver safe and reliable operating performance. In 2016, the company achieved consistent quarter-over-quarter increases in its oil sands production and steadily reduced total per-barrel oil operating costs. Compared with the same period in 2015, third quarter oil sands volumes grew 5 per cent, while total oil operating costs declined 14 per cent per barrel.

"We continue to deliver on our commitments, including significantly lowering our costs, bringing on new oil sands production capacity and maintaining one of the best balance sheets in the business," said Brian Ferguson, Cenovus president and chief executive officer. "While I'm encouraged by the recent increase in oil prices, we remain firmly committed to pursuing additional cost reductions to position us to add shareholder value regardless of the commodity price environment."

Key developments

• Achieved first oil at Foster Creek phase G, began start-up of Christina Lake phase F and completed the Wood River refinery debottlenecking project;
• Reached oil sands production of almost 74,000 barrels per day net at Foster Creek, 3 per cent higher than in the third quarter of 2015;
• Increased production at Christina Lake to almost 80,000 bbl/d net, 6 per cent higher than in the third quarter of 2015;
• Decreased total per-barrel oil operating costs by 14 per cent, including a 9-per-cent reduction in oil sands per-barrel operating costs, compared with the third quarter of 2015;
• Achieved target of reducing capital, operating, and general and administrative (G&A) costs by $500-million for the year compared with original 2016 budget;
• Exited the quarter with nearly $8-billion in liquidity, including $4-billion in unused credit facilities and almost $3.9-billion in cash, with net debt to capitalization of 17 per cent.

                    PRODUCTION AND FINANCIAL SUMMARY

                                                 Q3 2016       Q3 2015
Production (before royalties)
Oil sands (bbl/d)                                153,591       146,743
Conventional oil (bbl/d)(1)                       54,481        63,679
Total oil (bbl/d)                                208,072       210,422
Natural gas (MMcf/d)                                 392           430
Financial
(In millions, except per-share amounts)
Cash flow                                            422           444
Per share diluted                                   0.51          0.53
Operating earnings/(loss)                           (236)          (28)
Per share diluted                                  (0.28)        (0.03)
Net earnings/(loss)(2)                              (251)        1,801
Per share diluted                                  (0.30)         2.16
Capital investment                                   208           400

(1) Includes natural gas liquids (NGLs).
(2) Net earnings in the third quarter of 2015 included a $1.9-billion
after-tax gain related to an asset divestiture.

Overview

Cenovus remains focused on delivering safe and reliable operating performance. In the third quarter of 2016, the company achieved a 14-per-cent decrease in total per-barrel oil operating costs as well as a 5-per-cent increase in production at its oil sands business compared with the same quarter of 2015. While benchmark crude oil prices and Cenovus's netbacks have somewhat recovered from the multiyear lows seen in the first quarter of 2016, Cenovus intends to remain disciplined in its approach to capital spending and will look for further opportunities to reduce its cost structures and provide growth.

Oil production

In 2016, Foster Creek has achieved steady production increases with oil sands volumes growing 21 per cent from the first quarter through the third quarter. Production in the third quarter averaged approximately 74,000 bbl/d net, 3 per cent higher than in the same period of 2015. The year-over-year increase was primarily due to incremental volumes from the start-up of processing facilities for the phase G expansion as well as additional sustaining wells being brought on line. Phase G, which adds 30,000 bbl/d gross in incremental production capacity, is expected to continue ramping up over an 18-month period. Foster Creek remains on track to meet its full-year production guidance.

Christina Lake production has also increased consistently in 2016, growing 4 per cent from the first quarter through the third quarter. Volumes averaged approximately 80,000 bbl/d net in the third quarter, a 6-per-cent increase from the same period in 2015. The increase was largely due to additional wells being brought on line and the strong performance of Christina Lake's facilities, which operated near design capacity through the third quarter. Commissioning and start-up of the phase F expansion continue, with first oil anticipated in November, followed by an expected ramp-up period of about 12 months. With the progression of phase F, Cenovus is on track to add 50,000 bbl/d gross in incremental production capacity at Christina Lake. As part of the expansion, the company continues to commission its new 100-megawatt Christina Lake co-generation plant, which is anticipated to be on line shortly.

"By continuing to invest in our top-tier oil sands assets during an extremely challenging period for our industry, we are now on track to increase combined oil sands production capacity to 390,000 barrels per day gross," said Mr. Ferguson.

Cenovus is spending a small amount of capital to complete detailed engineering on the Christina Lake phase G expansion and has rebid work on the project. The company expects to provide more information about future oil sands investment at the time of its 2017 budget announcement in December.

Cost reductions

During the third quarter, Cenovus achieved its 2016 target of reducing planned capital, operating and G&A spending by $500-million this year compared with its original 2016 budget. The company continues to pursue additional cost reductions across its business to help position it to be competitive with oil producers across North America.

"With the significant improvements we've made in our cost structures, we forecast that we can cover all of our operating and capital costs as well as our dividend with a West Texas Intermediate price in the $45 (U.S.) to $50 (U.S.) range," said Mr. Ferguson. "As prices move beyond that range, we expect to generate free cash flow, giving us more capacity to further invest in growth."

In 2016, Cenovus has achieved a steady reduction in its total per-barrel oil operating costs. Non-fuel oil operating costs averaged $8.02/bbl in the third quarter compared with $9.46/bbl in the first quarter of the year. Compared with the same period in 2015, third quarter oil operating costs declined 14 per cent, including a 9-per-cent reduction in oil sands operating costs. Oil sands non-fuel operating costs were $6.37/bbl in the third quarter compared with $6.99/bbl in the same period a year ago. Year to date in 2016, Cenovus's non-fuel oil sands operating costs are almost 30 per cent lower per barrel than they were for full-year 2014.

Financial performance

Crude oil sales prices and volumes remained relatively consistent in the third quarter of 2016 compared with the same period a year earlier. Third quarter operating cash flow declined to $487-million, down 19 per cent year over year, primarily due to smaller realized hedging gains at Cenovus's oil and natural gas production assets compared with the same quarter in 2015. The company had realized hedging gains, excluding refining and marketing, of $42-million in the third quarter of 2016 compared with gains of $206-million a year earlier. The decline was partially offset by higher operating cash flow from refining and marketing, as well as lower crude oil operating, transportation and blending expenses.

The company's refineries had strong operating performance in the third quarter. Operating cash flow from refining and marketing was $68-million compared with $30-million in the same period of 2015. The increase was primarily due to wider heavy and medium oil price differentials, which contributed to a feedstock cost advantage, higher crude utilization rates and a decline in operating expenses compared with 2015. This was partially offset by lower average market crack spreads compared with the year-earlier period. The successful completion of the Wood River debottlenecking project has increased available heavy oil processing capability by 18,000 bbl/d gross.

Cenovus had a net loss of $251-million in the third quarter of 2016. This compares with net earnings of $1.8-billion in the same period of 2015 when the company recorded an after-tax gain of approximately $1.9-billion from the sale of its royalty interest and mineral fee title lands business. Cenovus's third quarter 2016 results were negatively impacted by asset impairments of $292-million primarily due to the decline in long-term forward heavy oil and natural gas prices. This includes a $210-million impairment associated with the company's Northern Alberta conventional assets and a $65-million impairment related to its Suffield conventional oil and natural gas assets in Southern Alberta.

Cenovus ended the third quarter of 2016 with cash and cash equivalents of approximately $3.9-billion. Including $4-billion in undrawn capacity under its committed credit facility, the company has nearly $8-billion in liquidity available, with no debt maturing until the fourth quarter of 2019. At the end of the third quarter, the company's net debt to capitalization was 17 per cent compared with 13 per cent a year earlier. Cenovus's net debt to adjusted earnings before interest, taxes, depreciation and amortization was 2.0 times on a trailing 12-month basis, compared with 0.8 times at the end of the third quarter of 2015.

Cenovus has an active hedging program to support financial resilience and stabilize cash flow. As of Oct. 25, 2016, the company has hedges in place on approximately 64,000 bbl/d for 2017. About 37 per cent of these barrels is hedged using costless collars, which set an average minimum price of $44.78 (U.S.)/bbl and average maximum price of $56.24 (U.S.)/bbl that the company will receive for its hedged oil. This limits downside risk on the hedged barrels while giving the company some ability to benefit in a rising price environment. Cenovus will continue to evaluate additional hedging opportunities.

Guidance update and outlook

Cenovus has updated its 2016 guidance to reflect actual results for the first nine months of the year and the company's estimates for the full year. The revised guidance is available at the company's website under investors. Cenovus will provide details of its plans for the coming year on Dec. 8 when it releases its 2017 budget.

Third quarter details

Oil sands

Foster Creek

• Production averaged 73,798 bbl/d net in the third quarter of 2016, a 3-per-cent increase from the same period of 2015.
• Operating costs declined 15 per cent to $9.63/bbl in the quarter. Non-fuel operating costs were $7.19/bbl, a 17-per-cent decrease from a year earlier.
• The steam-to-oil ratio (SOR), the amount of steam needed to produce one barrel of oil, was 2.6 for the third quarter compared with 2.4 in the same period of 2015.

Christina Lake

• Production averaged 79,793 bbl/d net in the third quarter of 2016, a 6-per-cent increase from the same period a year earlier.
• Operating costs were $7.72/bbl in the quarter, a slight decline from a year earlier. Non-fuel operating costs were $5.58/bbl, comparable with the same period in 2015.
• The SOR was 1.9 during the third quarter compared with 1.7 a year earlier.

Conventional oil

• Total conventional oil production decreased 14 per cent to 54,481 bbl/d in the third quarter of 2016 compared with the same quarter a year ago, primarily due to natural reservoir declines, and the 2015 sale of Cenovus's royalty interest and mineral fee title lands business. The divested assets contributed an average of 1,250 bbl/d of production in the third quarter of 2015.
• Operating costs were $12.89/bbl in the quarter, 17 per cent lower than in the third quarter of 2015, primarily due to lower work force, chemical, electricity, and repairs and maintenance costs.

Natural gas

• Natural gas production averaged 392 million cubic feet per day in the third quarter of 2016, down 9 per cent from the same period a year earlier, primarily due to expected natural declines and the company's 2015 sale of its royalty interest and mineral fee title lands business.
• Operating costs fell 9 per cent to $1.05 per thousand cubic feet in the quarter compared with the same period a year earlier.

Downstream

• Cenovus's Wood River refinery in Illinois and Borger refinery in Texas, which are jointly owned with the operator, Phillips 66, continued to deliver strong operating performance in the third quarter of 2016, including:
  • Processing a combined average of 463,000 bbl/d gross of oil (101-per-cent utilization) compared with 394,000 bbl/d gross in the same period in 2015 (86-per-cent utilization);
  • Producing a combined average of 494,000 bbl/d gross of refined products compared with 414,000 bbl/d gross a year earlier.
• Cenovus had refining and marketing operating cash flow of $68-million in the quarter compared with $30-million in the third quarter of 2015. The company's refining operating cash flow is calculated on a first-in, first-out (FIFO) inventory-accounting basis. Using the last-in, first-out (LIFO) accounting method employed by most U.S. refiners, Cenovus's operating cash flow from refining and marketing would have been $37-million higher in the third quarter of 2016. In the third quarter of 2015, operating cash flow would have been $130-million higher on a LIFO reporting basis.

Financial

Corporate and financial information

• Operating cash flow was $487-million in the third quarter, down 19 per cent from the same period a year earlier, largely due to gains of $41-million from the company's realized hedges compared with gains of $220-million the same period in 2015.
• Cash flow declined 5 per cent in the third quarter to $422-million compared with the same period in 2015. This was due to lower operating cash flow, partially offset by a current income tax recovery compared with an expense in the same period a year earlier.
• After investing approximately $208-million during the third quarter, Cenovus had free cash flow of $214-million compared with free cash flow of $44-million in the same period a year earlier.
• Cenovus had a third quarter operating loss of $236-million compared with an operating loss of $28-million in the same quarter of 2015. The 2016 third quarter loss was largely the result of asset impairments of $292-million caused by a decline in long-term forward heavy oil and natural gas prices.
• Net loss was $251-million in the third quarter. This compares with net earnings of $1.8-billion in the same period of 2015 when the company recorded an after-tax gain of approximately $1.9-billion from the sale of its royalty interest and mineral fee title lands business. In the third quarter of 2016, Cenovus had unrealized risk management losses of $7-million compared with unrealized gains of $127-million a year earlier and a $111-million deferred income tax recovery in the third quarter of 2016 compared with a $228-million recovery a year earlier. The declines were partially offset by non-operating unrealized foreign exchange losses of $52-million compared with losses of $437-million in the same period a year earlier.
• G&A expenses were $71-million in the quarter, 9 per cent lower than in the same period of 2015. The decrease was primarily due to lower work force expenses as well as reduced information technology costs.
• The board of directors has declared a fourth quarter dividend of five cents per share, payable on Dec. 30, 2016, to common shareholders of record as of Dec. 15, 2016. Based on the Oct. 26, 2016, closing share price on the Toronto Stock Exchange of $20.16, this represents an annualized yield of about 1 per cent. Declaration of dividends is at the sole discretion of the board and will continue to be evaluated on a quarterly basis.

Other developments

• In the third quarter, Cenovus was included in the Dow Jones Sustainability North America Index for the seventh consecutive year. Cenovus is one of only three Canadian oil and gas producers to make the index this year. Areas where the company scored well include corporate governance, stakeholder engagement, social and environmental reporting, biodiversity, climate strategy, and risk and crisis management.

Conference call today, 9 a.m. MT (11 a.m. ET)

Cenovus will host a conference call today, Oct. 27, 2016, 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. A live audio webcast of the conference call will also be available via the company's website. The webcast will be archived for approximately 90 days.

We seek Safe Harbor.