Cenovus Energy Inc. (TSX:CVE) (NYSE:CVE) plans to invest between
$1.5 billion and $1.7 billion in 2018, with the majority of the
budget allocated to sustain base production at the company’s oil
sands operations. The remaining capital will primarily support
continued construction at the phase G oil sands expansion at
Christina Lake, where costs are coming in below original
expectations, and a targeted drilling program in the Deep Basin.
This budget reflects Cenovus’s focus on capital discipline, cost
reduction and deleveraging.
Highlights: (2018 budget vs. Nov. 1, 2017
guidance)
- Per-barrel oil sands operating costs – down 8%
- Per-barrel Deep Basin operating costs – down 11%
- Per-barrel oil sands sustaining capital costs – down 12%
- Christina Lake phase G go-forward capital efficiencies – a 21%
improvement (vs. previous estimate)
- Total oil sands production – up 26%
“Our priorities for 2018 are to reduce costs and deleverage our
balance sheet while maintaining capital discipline. The sooner we
can achieve our long-term debt ratio goal, the sooner we can move
to balance returning cash to shareholders with disciplined
investments in high-return growth,” said Alex Pourbaix, Cenovus
President & Chief Executive Officer. “We will build on the
success of our divestiture program and work to exceed the goal,
established in June of this year, of achieving $1 billion in
cumulative capital, operating and general and administrative cost
reductions with the aim of accelerating these reductions over the
next two years instead of three.”
Capital investment by asset ($ millions) |
|
2018 Budget |
2017 Guidance |
Oil sands1 |
1,040 - 1,155 |
945 - 1,015 |
Deep Basin1 |
175 - 195 |
160 - 180 |
Legacy conventional oil & natural gas2 |
- |
210 - 225 |
Refining & marketing |
180 - 210 |
180 - 200 |
Corporate3 |
100 - 120 |
35 - 50 |
Total capital investment4 |
1,500 - 1,700 |
1,550 - 1,650 |
1 Figures for 2018 reflect 12 months of full ownership of
Cenovus’s oil sands assets and 12 months of ownership of the Deep
Basin assets compared with approximately seven months for both sets
of assets in 2017.2 Cenovus expects to have completed the sale of
its legacy conventional oil and natural gas assets prior to the end
of 2017.3 The majority of 2018 corporate capital is for the
build-out of office space at Brookfield Place for which Cenovus
signed a long-term lease in 2013.4 Totals may not add due to
rounding.
Deleveraging the balance sheetOver the last
three months, Cenovus has executed sale agreements for its four
legacy conventional oil and natural gas operations, with
anticipated gross proceeds of more than $3.7 billion. The Pelican
Lake asset sale closed in the third quarter of 2017 and the
Palliser transaction closed on December 7, 2017. Cenovus
anticipates the closing of the Weyburn asset sale today and the
Suffield divestiture near the end of this year. The combined net
proceeds from these asset sales will be used to fully retire the
outstanding amount on Cenovus’s asset-sale bridge facility. The
company is also currently marketing a package of non-core assets in
the Deep Basin to further streamline its portfolio and reduce
leverage.
Cenovus continues to target a long-term debt ratio of less than
two times net debt to adjusted earnings before interest, taxes,
depreciation and amortization (EBITDA).
Reducing costsCenovus has significantly reduced
its cost structure since the downturn in oil prices began more than
three years ago and remains focused on driving costs even lower
across its operations. In 2018, the company expects to reduce its
per-barrel oil sands operating costs by 8% and per-barrel oil sands
sustaining capital costs by 12% compared with its 2017 forecast.
Cenovus is also planning additional workforce reductions of
approximately 15% and expects to achieve further cost efficiencies
through continued improvements in areas such as drilling
performance, development planning and optimized scheduling of oil
sands well start-ups.
Operating costs |
|
2018 Budget |
2017 Guidance |
% change1 |
Foster Creek ($/bbl) Fuel Non-fuel
Subtotal |
2.00 -
2.506.50 -
7.508.50 -
10.00 |
2.25 - 2.757.50 - 8.509.75 - 11.25 |
-10-13-12 |
Christina Lake ($/bbl) Fuel Non-fuel
Subtotal |
1.75 -
2.254.25 -
5.256.00 -
7.50 |
2.00 - 2.504.25 - 5.256.25 - 7.75 |
-11--4 |
Total oil sands2 ($/bbl) Fuel
Non-fuel Subtotal |
1.85 -
2.355.25 -
6.257.10
- 8.60 |
2.10 - 2.605.65 - 6.657.75 - 9.25 |
-11-7-8 |
Deep Basin3 ($/BOE) |
7.50 - 8.50 |
8.50 - 9.50 |
-11 |
1 Percentage change based on the midpoint of the ranges.2
Based on a volume-weighted average.3 Includes oil, natural
gas liquids and natural gas.
Oil sands sustaining capital costs |
|
2018 Budget |
2017 Guidance |
% change |
Total ($ millions) |
780 |
724 |
8 |
Per-unit ($/bbl)1 |
5.50 |
6.25 |
-12 |
1 Based on total installed capacity.
General & administrative costs |
|
2018 Budget |
2017 Guidance |
% change |
Non-rent ($ millions)1 |
136 |
182 |
-25 |
Rent & office ($
millions)2 |
164 |
118 |
39 |
Total (incl. rent & office)($
millions)1,2 |
300 |
300 |
- |
Total per-unit ($/BOE) |
1.65 |
1.75 |
-6 |
1 Excludes anticipated 2018 severance charges related to
workforce reductions. 2 Excludes one-time transaction costs and
one-time costs associated with Deep Basin operations.
In 2018, Cenovus anticipates general and administrative
(G&A) costs of $1.65 per barrel of oil equivalent (BOE), down
6% compared with the company’s 2017 forecast. Total G&A costs
for 2018 are expected to be relatively unchanged compared with
Cenovus’s 2017 forecast, largely due to leasing costs for
pre-contracted office space at Brookfield Place. Non-rent G&A
is expected to be 25% lower in 2018 than in 2017.
Cenovus remains focused on reducing its real estate costs
through an active subleasing program and is not renewing existing
leases as they expire. The company continues to advance its plan to
reduce the number of buildings occupied by its Calgary staff.
Cenovus signed a long-term lease at Brookfield Place in 2013 when
commodity prices were higher and the company’s operations were
growing at a faster pace. The company has allocated capital in 2018
for the build-out of the Brookfield Place office space, with
occupancy currently planned for 2019.
Oil sandsThe 2018 capital budget includes
sustaining capital of approximately $780 million, or $5.50 per
barrel (bbl) of installed capacity to maintain base production at
Cenovus’s Foster Creek and Christina Lake oil sands operations.
This represents significant progress towards the company’s
long-term target of reducing oil sands sustaining capital to about
$5.00/bbl of installed capacity.
Approximately $270 million has been allocated for continued
construction of the phase G expansion at Christina Lake. The
project is proceeding very well with capital costs for both the
plant and wells coming in lower than expected. Cenovus now
anticipates phase G will be completed with go-forward capital
investment of between $13,000 and $14,000 per flowing barrel, about
21% lower than the company’s previous estimate of between $16,000
and $18,000 per flowing barrel. Phase G has an approved design
capacity of 50,000 barrels per day (bbls/d) with first oil
anticipated in the second half of 2019 and ramp-up to full
production expected over a period of up to 12 months.
Cenovus is forecasting average oil sands production of 373,000
bbls/d in 2018, a 26% increase compared with its forecast 2017
production, largely due to the impact of owning 100% of its oil
sands assets for a full year, compared with approximately seven
months in 2017.
Deep BasinThe Deep Basin assets are the most
flexible component of Cenovus’s capital program. In response to the
current commodity price environment, as well as the company’s focus
on near-term debt reduction and capital discipline, Cenovus has
reduced its investment and drilling plans for the Deep Basin in
2018 compared with its original plans.
“The advantage of our Deep Basin assets is their significant
long-term growth potential coupled with the flexibility they
provide to quickly ramp up or down our capital investment according
to our business needs and market conditions,” said Pourbaix. “This
year, we will take a disciplined and more moderate approach to
investing in the Deep Basin to focus on achieving our deleveraging
goals.”
Cenovus expects to invest between $175 million and $195 million
in the Deep Basin in 2018. This includes plans to drill 15 net
wells and to complete and tie them in along with additional wells
drilled in 2017. The drilling program will focus on high-return
opportunities in areas rich with natural gas liquids such as
condensate for which the company would expect to receive higher
prices than for natural gas alone. While reducing planned capital
spending in the Deep Basin in 2018, the company also expects to
achieve an 11% reduction in per-barrel operating costs compared
with its 2017 Deep Basin forecast.
Average production forecast |
|
|
2018 Budget |
2017 Guidance |
% change1 |
|
Foster Creek (Mbbls/d)2 |
162 - 170 |
123 - 131 |
31 |
|
Christina Lake (Mbbls/d)2 |
202 - 212 |
164 - 174 |
22 |
|
Total oil sands (Mbbls/d)2 |
364 - 382 |
287 - 305 |
26 |
|
Deep Basin liquids (Mbbls/d)2,3 |
29 - 35 |
18 - 21 |
64 |
|
Deep Basin natural gas (MMcf/d)2 |
530 - 550 |
315 - 335 |
66 |
|
Total Deep Basin (MBOE/d)2,3 |
117 - 127 |
71 - 77 |
65 |
|
Conventional total (MBOE/d)3,4 |
- |
102 - 110 |
-100 |
|
Total production (MBOE/d)5 |
483 - 510 |
459 - 492 |
4 |
1 Percentage change based on the midpoint of the ranges.2
Figures for 2018 reflect 12 months of full ownership of Cenovus’s
oil sands assets and 12 months of ownership of the Deep Basin
assets compared with approximately seven months for both sets of
assets in 2017.3 Includes oil and natural gas liquids (NGLs).4
Cenovus expects to have completed the sale of its legacy
conventional oil and natural gas assets prior to the end of 2017.5
Includes nominal volumes from Cenovus’s Athabasca natural gas
asset. The Athabasca asset is not being marketed for sale. Totals
may not add due to rounding.
Cenovus has made its 2018 guidance available at cenovus.com
under ‘Investors.’
Organizational changesAs Cenovus continues to
identify new ways to increase efficiencies and ensure a keen focus
on accountability and results, organizational changes are underway.
This includes changes at the executive level.
Kieron McFadyen, Executive Vice-President & President,
Upstream Oil & Gas is leaving the company on January 15, 2018.
Drew Zieglgansberger will expand his executive responsibilities to
become Executive Vice-President Upstream, overseeing operations at
Cenovus’s two core platforms – the oil sands and Deep Basin.
Bob Pease is leaving his position of President, Downstream, at
Cenovus Energy US LLC immediately and Director U.S. Operations at
Cenovus Energy US LLC on January 15, 2018. Keith Chiasson has moved
from leading the company’s oil sands production operations to
joining the Cenovus Leadership Team as Senior Vice-President,
Downstream. He is responsible for optimizing the price the company
receives for its products through marketing and transportation, as
well as Cenovus’s refining joint venture and Bruderheim rail
terminal. Chiasson is also responsible for Supply Chain Management
across the company’s operations.
Ivor Ruste, the company’s Chief Financial Officer, will retire
on April 30, 2018. An executive search will be conducted for the
role and will consider both internal and external candidates.
“I want to thank Ivor, Kieron and Bob for their contributions to
Cenovus,” said Pourbaix. “I look forward to working with our
leadership team as we continue to evolve Cenovus into a highly
effective organization focused on delivering strong returns for our
shareholders.”
Harbir Chhina, Executive Vice-President & Chief Technology
Officer, Al Reid, Executive Vice-President Stakeholder Engagement,
Safety, Legal & General Counsel and Sarah Walters, Senior
Vice-President Corporate Services, will remain on the Cenovus
Leadership Team.
ADVISORY
Barrels of Oil Equivalent – Natural gas volumes
have been converted to barrels of oil equivalent (BOE) on the basis
of six Mcf to one barrel (bbl). BOE may be misleading, particularly
if used in isolation. A conversion ratio of one bbl to six Mcf is
based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent value
equivalency at the wellhead. Given that the value ratio based on
the current price of crude oil compared with natural gas is
significantly different from the energy equivalency conversion
ratio of 6:1, utilizing a conversion on a 6:1 basis is not an
accurate reflection of value.
Production Presentation
Basis – Cenovus presents production volumes on a
net to Cenovus before royalties basis, unless otherwise stated.
Non-GAAP Measures This release contains
references to free funds flow and net debt to adjusted EBITDA,
which are non-GAAP measures. These measures do not have a
standardized meaning as prescribed by International Financial
Reporting Standards (IFRS). Readers should not consider these
measures in isolation or as a substitute for analysis of the
company's results as reported under IFRS. These measures are
defined differently by different companies and therefore are not
comparable to similar measures presented by other issuers.
Net debt to adjusted EBITDA is a ratio that management uses to
steward the company’s overall debt position as a measure of the
company’s overall financial strength. Debt is defined as short-term
borrowings and long-term debt, including the current portion. Net
debt is defined as debt net of cash and cash equivalents. Adjusted
EBITDA is defined as earnings before finance costs, interest
income, income tax expense, depreciation, depletion and
amortization, goodwill and asset impairments, unrealized gains or
losses on risk management, foreign exchange gains or losses, gains
or losses on divestiture of assets and other income and loss,
calculated on a trailing 12-month basis. Free Funds Flow is defined
as Adjusted Funds Flow less capital investment, with Adjusted Funds
Flow defined as Cash from Operating Activities excluding net change
in other assets and liabilities and net change in non-cash working
capital. Net change in other assets and liabilities is composed of
site restoration costs and pension funding, and non-cash working
capital is composed of current assets and current liabilities,
excluding cash and cash equivalents, risk management, the company's
contingent payment to ConocoPhillips and asset liabilities held for
sale.
For more information on these and other non-GAAP measures, refer
to "Non-GAAP Measures and Additional Subtotals" in the Advisory
section of Cenovus's Third Quarter Report for the period ended
September 30, 2017 ("Third Quarter Report") available on SEDAR at
sedar.com, on EDGAR at sec.gov and Cenovus's website at
cenovus.com.
Forward-Looking InformationThis news release
contains certain forward-looking statements and forward-looking
information (collectively referred to as “forward-looking
information”) within the meaning of applicable securities
legislation, including the United States Private Securities
Litigation Reform Act of 1995, about our current expectations,
estimates and projections about the future, based on certain
assumptions made by us in light of our experience and perception of
historical trends. Although Cenovus believes that the expectations
represented by such forward-looking information are reasonable,
there can be no assurance that such expectations will prove to be
correct. Readers are cautioned not to place undue reliance on
forward-looking information as actual results may differ materially
from those expressed or implied. Cenovus undertakes no obligation
to update or revise any forward-looking information except as
required by law.
Forward-looking information in this document is identified by
words such as “anticipate”, “believe”, “budget”, “capacity”,
“expect”, “focus”, “forecast” or “F”, “opportunity”, “plan”,
“potential”, “project”, “schedule”, “strategy”, “target”, or
similar expressions and includes suggestions of future outcomes,
including statements about: forecast operating and financial
results, including relative to 2017 forecast; planned and potential
future capital expenditures, including the timing and financing
thereof; expected future production, including the timing,
stability or growth thereof; our priorities for 2018; our balance
sheet deleveraging strategy, target long-term debt ratio and
expected impacts to the company of achieving those targets,
including potential impacts to positioning for returning cash to
shareholders with disciplined investments in high-return growth;
our goals with respect to capital, operating and general and
administrative cost reductions and related timeline and strategy;
expected future cost reductions and the sustainability thereof;
expected timeline for closing of previously announced asset sale
transactions; projections contained in the company's 2017 and 2018
guidance; project and other operating and development plans and
related schedules; and projections related to delivery of strong
shareholder returns.
Developing forward-looking information involves reliance on a
number of assumptions and consideration of certain risks and
uncertainties, some of which are specific to Cenovus and others
that apply to the industry generally. Material factors or
assumptions on which the forward-looking information in this news
release is based include: forecast oil and natural gas prices and
other assumptions disclosed in Cenovus's 2017 (dated November 1,
2017) and 2018 guidance (dated December 13, 2017), available at
cenovus.com, including for 2018: Brent of US$55.00/bbl, WTI of
US$52.00/bbl, WCS of US$37.00/bbl, NYMEX of US$3.00/MMBtu, AECO of
$2.20/GJ, Chicago 3-2-1 Crack Spread of US$15.00/bbl, exchange rate
of $0.78 US$/C$, and for 2017: Brent of US$53.50/bbl, WTI of
US$50.00/bbl, WCS of US$38.25/bbl, NYMEX of US$3.15/MMBtu, AECO of
$2.40/GJ, Chicago 3-2-1 Crack Spread of US$15.50/bbl, exchange rate
of $0.78 US$/C$; forecast oil and natural gas prices; projected
capital investment levels, flexibility of capital spending plans
and associated sources of funding; sustainability of achieved cost
reductions, achievement of future cost reductions and
sustainability thereof; achievement of additional improvements in
drilling and completion times, well pad designs and well
conformance; success of certain initiatives such as use of wider
well spacing and longer horizontal well lengths at oil sands
operations; expected condensate prices; projected supply costs;
estimates of quantities of oil, bitumen, natural gas and liquids
from properties and other sources not currently classified as
proved; expected production decline rates; future development,
success, and use of technology and the impacts thereof; ability to
obtain necessary regulatory and partner approvals; successful and
timely implementation of capital projects or stages thereof; the
company's ability to generate sufficient cash flow from operations
to meet its current and future obligations; estimated abandonment
and reclamation costs, including associated levies and regulations;
and other risks and uncertainties described from time to time in
the filings we make with securities regulatory authorities.
The risk factors and uncertainties that could cause actual
results to differ materially, include: possible failure to access
or implement some or all of the technology necessary to efficiently
and effectively operate Cenovus’s assets and achieve expected
future results; volatility of and other assumptions regarding
commodity prices; the effectiveness of Cenovus’s risk management
program, including the impact of derivative financial instruments,
the success of hedging strategies and the sufficiency of
Cenovus’s liquidity position; the accuracy of cost estimates;
commodity prices, currency and interest rates; possible lack of
alignment of realized WCS prices and WCS prices used to calculate
the contingent payment from Cenovus to ConocoPhillips; product
supply and demand; market competition, including from alternative
energy sources; risks inherent in marketing operations, including
credit risks; exposure to counterparties and partners, including
ability and willingness of such parties to satisfy contractual
obligations in a timely manner; risks inherent in the operation of
Cenovus’s crude-by-rail terminal, including health, safety and
environmental risks; maintaining desirable ratios of Debt (and Net
Debt) to Adjusted EBITDA as well as Debt (and Net Debt) to
Capitalization; Cenovus’s ability to access various sources of debt
and equity capital, generally, and on terms acceptable to Cenovus;
ability to finance growth and sustaining capital expenditures;
changes in credit ratings applicable to Cenovus or any of its
securities; changes to Cenovus’s dividend plans or strategy,
including the dividend reinvestment plan; accuracy of reserves,
resources, future production and future net revenue estimates;
Cenovus’s ability to replace and expand oil and gas reserves;
Cenovus’s ability to maintain its relationship with its partners
and to successfully manage and operate its integrated business;
reliability of Cenovus’s assets including in order to meet
production targets; potential disruption or unexpected technical
difficulties in developing new products and manufacturing
processes; the occurrence of unexpected events such as fires,
severe weather conditions, explosions, blow-outs, equipment
failures, transportation incidents and other accidents or similar
events; refining and marketing margins; inflationary pressures on
operating costs, including labour, natural gas and other energy
sources used in oil sands processes; potential failure of products
to achieve or maintain acceptance in the market; risks associated
with fossil fuel industry reputation; unexpected cost increases or
technical difficulties in constructing or modifying manufacturing
or refining facilities; unexpected difficulties in producing,
transporting or refining of crude oil into petroleum and chemical
products; risks associated with technology and its application to
Cenovus’s business; risks associated with climate change; the
timing and the costs of well and pipeline construction; Cenovus’s
ability to secure adequate and cost-effective product
transportation including sufficient pipeline, crude-by-rail, marine
or alternate transportation, including to address any gaps caused
by constraints in the pipeline system; availability of, and
Cenovus’s ability to attract and retain, critical talent; possible
failure to obtain and retain qualified staff and equipment in a
timely and cost-efficient manner; changes in labour relationships;
changes in the regulatory framework in any of the locations in
which Cenovus operates, including changes to the regulatory
approval process and land-use designations, royalty, tax,
environmental, greenhouse gas, carbon, climate change and other
laws or regulations, or changes to the interpretation of such laws
and regulations, as adopted or proposed, the impact thereof and the
costs associated with compliance; the expected impact and timing of
various accounting pronouncements, rule changes and standards on
Cenovus’s business, financial results and consolidated financial
statements; changes in general economic, market and business
conditions; the political and economic conditions in the countries
in which Cenovus operates or supplies; the occurrence of unexpected
events such as war, terrorist threats and the instability resulting
therefrom; and risks associated with existing and potential future
lawsuits and regulatory actions against Cenovus.
Additional information about the material risk factors that
could cause Cenovus's actual results to differ materially from
those expressed or implied by its forward-looking statements is
contained under “Risk Factors” in Cenovus's Annual Information Form
(AIF) or Form 40-F for the period ended December 31, 2016,
available on SEDAR at sedar.com, EDGAR at sec.gov and on the
company's website at cenovus.com, as well as in the updates in the
"Risk Management" section of Cenovus’s Management’s Discussion and
Analysis in Cenovus's Third Quarter Report, also available at
cenovus.com.
Cenovus Energy Inc.
Cenovus Energy Inc. is a Canadian integrated oil company. It is
committed to applying fresh, progressive thinking to safely and
responsibly unlock energy resources the world needs. Operations
include oil sands projects in northern Alberta, which use
specialized methods to drill and pump the oil to the surface, and
established natural gas and oil production in Alberta and British
Columbia. The company also has 50% ownership in two U.S.
refineries. Cenovus shares trade under the symbol CVE, and are
listed on the Toronto and New York stock exchanges. For more
information, visit cenovus.com.
Find Cenovus on Facebook, Twitter, LinkedIn, YouTube and
Instagram.
CENOVUS
CONTACTS:Investor RelationsKam
SandharSenior Vice-President, Strategy & Corporate
Development403-766-5883
Steven MurrayManager, Investor
Relations403-766-3382 |
|
MediaBrett HarrisManager, External
Communications403-766-3420
Media Relations general line403-766-7751 |
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