Cenovus oil production climbs 28% in second quarter
Christina Lake phase D achieves first steam ahead of schedule
CALGARY, Alberta -- July 25, 2012
Cenovus Energy Inc. (TSX, NYSE: CVE):
Aerial view of Cenovus's Christina Lake plant site. (Photo: Cenovus)
Aerial view of Cenovus's Christina Lake plant site. (Photo: Cenovus)
*Total oil production averaged more than 155,000 barrels per day (bbls/d),
a 28% increase compared with the same period a year earlier.
*Oil sands production at Foster Creek and Christina Lake averaged more than
80,000 bbls/d in the second quarter, a 38% increase compared with 2011.
*Cenovus began injecting steam at Christina Lake phase D, with production
anticipated in the third quarter.
*Refining operations generated $344 million in operating cash flow, up $22
million from the second quarter in 2011.
*Cash flow was $925 million in the second quarter, a slight decrease
compared with the same period a year earlier due to weaker commodity
prices during the quarter.
*Capital investment in the quarter increased 39% to $660 million compared
with the same period in 2011 as the company continued to expand the
development of its oil assets.
*Cenovus received regulatory approval for its Narrows Lake oil sands
development, which is expected to have a gross production capacity of
“Cenovus has a clearly defined 10-year growth plan, which is expected to
deliver predictable, reliable performance,” said Brian Ferguson, Cenovus
President & Chief Executive Officer. “We’re consistently growing oil
production while maintaining our focus on low-cost operations and continuing
to demonstrate the value of our integrated approach with strong refining
Financial & Production Summary
(for the period ended
June 30) 2012 2011
($ millions, except per Q2 Q2 % change
Cash flow^1 925 939
Per share diluted 1.22 1.24
Operating earnings^1 283 395
Per share diluted 0.37 0.52
Net earnings 396 655
Per share diluted 0.52 0.86
Capital investment^2 660 476 39
Foster Creek (bbls/d) 51,740 50,373 3
Christina Lake (bbls/d) 28,577 7,880 263
Total Foster Creek & 80,317 58,253 38
Christina Lake (bbls/d)
Pelican Lake (bbls/d) 22,410 19,427 15
Other conventional oil^3 52,839 44,082 20
Total oil production 155,566 121,762 28
Natural gas (MMcf/d) 596 654 -9
^1 Cash flow and operating earnings are non-GAAP measures as defined in the
Advisory. See also the Earnings Reconciliation Summary.
^2 Includes expenditures on property, plant and equipment and exploration and
evaluation assets, excluding acquisitions and divestitures.
^3 Includes natural gas liquids (NGLs) production.
Cenovus Energy Inc. (TSX, NYSE: CVE) delivered strong performance during the
second quarter, led by significant increases in oil production and favourable
refining results. The company increased capital spending in the quarter and
remained focused on expanding the development of its oil sands properties, as
well as investing in the growth of its conventional oil assets in Alberta and
Combined production in the second quarter from Foster Creek and Christina Lake
was more than 80,000 bbls/d net (160,000 bbls/d gross), a 38% increase
compared with the same quarter in 2011. Christina Lake averaged more than
28,000 bbls/d net (57,000 bbls/d gross), more than tripling production from
the same period a year earlier due to the industry-leading start-up of phase
C. The company also achieved a new daily gross production high at Christina
Lake of 64,000 bbls/d, 10% higher than its current gross capacity of 58,000
bbls/d. Cenovus began injecting steam at phase D in the second quarter and
anticipates first production in the third quarter, approximately three months
ahead of schedule. Once phase D is fully commissioned, it is expected to bring
the gross production capacity at Christina Lake to 98,000 bbls/d.
Production from Foster Creek increased 3% to almost 52,000 bbls/d (nearly
104,000 bbls/d gross) in the second quarter, which included a scheduled
turnaround. The full plant turnaround was completed safely, on time and within
budget. The plant continues to demonstrate excellent performance and produced
more than 126,000 bbls/d gross on several days in the quarter, exceeding its
current capacity of 120,000 bbls/d gross. There are currently five phases
producing at Foster Creek, with three more under construction. Cenovus has
also started conducting public consultation for an additional phase that is
planned to produce 50,000 bbls/d gross. In total, Cenovus plans to have nine
phases at Foster Creek eventually producing 295,000 bbls/d gross and expects
that, with optimization, the total gross production capacity at Foster Creek
will be as much as 310,000 bbls/d.
“It’s important to have the right people working on the right resources,”
Ferguson said. “The expansion of our oil sands assets is going well, thanks to
the dedication of our teams and the quality of our assets. We’re striving to
find innovative ways to bring these expansion phases on even more efficiently
and we’re seeing strong results.”
The company is beginning to see production increases at its Pelican Lake heavy
oil operation, due to the infill drilling program to expand the polymer flood.
Production averaged more than 22,000 bbls/d in the second quarter, a 15%
increase from the same period in 2011 when wild fires in the Slave Lake region
curtailed production by approximately 2,100 bbls/d. The production increase
continues to be partially offset by reduced operating pressures and shut-ins
that are temporarily required to complete infill drilling between existing
wells. Cenovus plans to drill between 1,200 and 1,300 production and injection
wells in the next five to seven years to expand the polymer flood, with
production expected to reach 55,000 bbls/d.
Cenovus also saw growth in its conventional oil assets in Alberta and
Saskatchewan in the second quarter, partly due to better operating conditions
after poor weather limited access to locations in both areas in the second
quarter of 2011. Oil production in Alberta increased 14% to more than 29,000
bbls/d in the quarter as the company continued to focus on developing new
tight oil plays on its existing lands in southern Alberta. Average oil
production from the Lower Shaunavon and Bakken tight oil plays more than
tripled compared with the same period last year to about 6,200 bbls/d due to a
successful drilling program, although production continues to be impacted by
delays in facility construction. Cenovus completed battery construction for
the Bakken area in the second quarter, while construction continues on
facilities to support the Lower Shaunavon. These are scheduled to be complete
in the third quarter of 2012 and are expected to reduce trucking needs.
Cash flow in the second quarter was $925 million, a slight decrease from $939
million in 2011. Weaker commodity prices for both oil and natural gas were
somewhat offset by the company’s significant increase in oil production. In
addition, Cenovus’s refining business contributed $344 million to operating
cash flow, an increase of $22 million compared with the same period a year
earlier. This increase is primarily due to strong refining margins, as well as
higher throughput and increased heavy oil processing associated with the
start-up of the coker at the Coker and Refinery Expansion (CORE) project at
the Wood River Refinery.
Operating earnings in the second quarter were $283 million, a 28% decrease
from the same period a year earlier partly due to the company recognizing an
exploration expense of $68 million. This is primarily attributed to a decision
not to carry out further work at a small exploration play called Roncott, an
area outside of Cenovus’s core Bakken area. Operating earnings were also
impacted by higher depreciation, depletion & amortization (DD&A) costs due to
higher production volumes and CORE capital costs now being subject to
Investing in oil development
Capital investment in the second quarter totaled $660 million, a 39% increase
from the same period in 2011, as the company continued to advance development
of its oil opportunities. Cenovus invested $307 million to develop expansion
phases at Foster Creek and Christina Lake, a 55% increase compared with the
same period a year earlier, and continues to pursue ways to achieve
industry-leading capital efficiencies at its oil sands operations. The company
expects to build expansion phases at Foster Creek and Christina Lake in the
range of $22,000 to $25,000 per flowing barrel.
Cenovus continues to work on growing conventional oil production with capital
investment at its conventional assets, excluding Pelican Lake, reaching $122
million in the second quarter, an 85% increase from the same period in 2011.
The increase is mainly due to facility and infrastructure construction in the
company’s Lower Shaunavon and Bakken operations, as well as drilling and
completions across Saskatchewan and Alberta. Cenovus continues to explore oil
opportunities on its existing fee lands in Alberta.
Capital investment at Pelican Lake more than tripled to $104 million in the
second quarter from the same period in 2011. Spending was primarily related to
infill drilling activities to advance the polymer flood, as well as minor
facility expansions and pipeline construction to support higher volumes.
Benefit of integration and low supply costs
Heavy oil differentials between Western Canadian Select (WCS) and West Texas
Intermediate (WTI) increased in the quarter. Cenovus’s strategy of integrating
its oil sands production with its refining assets continued to prove valuable
in this environment, as wider heavy oil differentials and increased volumes of
heavy oil processed resulted in lower cost feedstock for the company’s
refining operations, which influenced refining margins. The strength of the
refining business also helped to provide stable cash flow as oil prices
decreased in the quarter.
In addition to its integration strategy, Cenovus continues to focus on
achieving low supply costs at its oil sands operations to offer stability in a
low-price environment. Supply costs are calculated as the long-term average
WTI price required to achieve a 9% after-tax return after all capital,
operating and maintenance costs are considered. Supply costs are approximately
US$35 to $45 per barrel at both Foster Creek and Christina Lake.
“One of Cenovus’s key strengths is that we can generate positive returns at
lower prices,” said Ferguson. “We anticipate fluctuations in commodity prices
and we have the financial stability to deal with those. Our integrated
strategy, strong balance sheet and position as a low-cost operator mean we can
generate shareholder value in a variety of price environments.”
Continuing to advance Telephone Lake
Cenovus has concluded its process to identify a potential strategic partner
for its Telephone Lake oil sands project. The goal of the process was to
identify an arrangement that would provide strategic benefit to Cenovus and
bring forward the value of the project, which is not included in the company’s
“We only wanted a deal if it would add compelling value for our shareholders,”
said Ferguson. “There was never a financial need to do a transaction. Our
drilling results indicate that Telephone Lake is a world-class resource and
has the potential to be a cornerstone project like Foster Creek or Christina
Lake. We look forward to developing the asset on our own.”
Cenovus continues to advance the dewatering pilot project at Telephone Lake,
which is designed to test the efficiency of removing the non-potable water
sitting on top of the bitumen in the reservoir. Removing this water is
expected to reduce the steam to oil ratio (SOR) and operating costs for the
commercial project. The company commissioned the pilot facilities in the
second quarter and expects to start water production and air injection in the
next couple of months.
Regulatory approval for Narrows Lake
Cenovus received approval from the Alberta Energy Resources Conservation Board
for its Narrows Lake development in the second quarter. The approval included
the option to use a combination of steam-assisted gravity drainage (SAGD) and
solvent aided process (SAP). SAP involves the addition of a solvent to the
steam injected into the reservoir to help thin the oil and allow it to flow
more freely to the producing well. This would be the industry’s first use of
SAP with butane on a commercial scale.
The project is anticipated to have a gross production capacity of 130,000
bbls/d and be developed in three phases. Narrows Lake is located just north of
the company’s Christina Lake property and is jointly owned with
ConocoPhillips. Project sanctioning from Cenovus and ConocoPhillips is
expected by the end of this year, with ground work for the initial phase of
45,000 bbls/d gross expected to begin this fall.
“Receiving regulatory approval for Narrows Lake was a significant
achievement,” said Ferguson. “This is an important milestone along the path to
developing our next major oil sands project, which will be the first to use
our solvent aided process on a commercial scale. We’re excited about this
technology, as it has the potential to significantly improve recovery while
continuing to reduce the environmental impact.”
IMPORTANT NOTE: Cenovus reports financial results in Canadian dollars and
presents production volumes on a net to Cenovus before royalties basis, unless
otherwise stated. Cenovus prepares its financial statements in accordance with
International Financial Reporting Standards (IFRS). See the Advisory for
definitions of non-GAAP measures used in this news release.
(Before 2012 2011 2010
(Mbbls/d) Full Full
YTD Q2 Q1 Year Q4 Q3 Q2 Q1 Year
Foster Creek 54 52 57 55 55 56 50 58 51
Christina Lake 27 29 25 12 20 10 8 9 8
Oil sands total 81 80 82 67 75 66 58 67 59
Pelican Lake 22 22 21 20 21 20 19 21 23
Weyburn 17 16 17 16 17 16 15 17 17
conventional 37 36 38 31 32 31 29 32 31
Conventional 75 75 75 68 70 67 64 71 70
Total oil 156 156 157 134 144 133 122 137 129
^1 Totals may not add due to rounding.
^2 Includes NGLs production.
Foster Creek and Christina Lake
Cenovus’s oil sands properties in northern Alberta offer opportunities for
substantial production growth. The Foster Creek and Christina Lake operations,
which are operated by Cenovus and jointly owned with ConocoPhillips, use SAGD
to drill and pump the oil to the surface.
*Production at Foster Creek and Christina Lake increased 38% in the second
quarter from the same period a year earlier.
*Christina Lake production averaged more than 28,000 bbls/d in the quarter,
more than tripling production from the same period a year earlier. The
substantial increase is due to high reservoir quality and the
industry-leading start-up of phase C in the third quarter of 2011.
*About 70% of the Christina Lake production in the quarter was sold as a
new bitumen blend stream, Christina Dilbit Blend (CDB), which is currently
priced at a discount to the WCS benchmark. Cenovus expects the CDB
differential to WCS will narrow as it continues to gain acceptance with a
wider base of refining customers.
*Foster Creek production averaged nearly 52,000 bbls/d net in the quarter,
a 3% increase compared with 2011. The quarter included a scheduled full
plant turnaround, which was completed safely, on time and within budget.
The turnaround reduced production by approximately 7,400 bbls/d in the
quarter, which was less than expected.
*About 13% of current production at Foster Creek comes from 47 wells using
Cenovus’s Wedge Well™ technology. These single horizontal wells, drilled
between existing SAGD well pairs, have the potential to increase overall
recovery from the reservoir by as much as 10% to 15%, while reducing the
SOR. Twelve additional wells using this technology are waiting to be
brought on production later this year and the company plans to drill
another eight at Foster Creek by the end of 2012. Christina Lake is also
beginning to see results from four producing wells which use the company’s
Wedge Well™ technology.
*Combined capital investment at Foster Creek and Christina Lake in the
second quarter was $307 million, an increase of 55% compared with the same
period a year earlier. This included work to advance expansion phases, as
well as increased capital related to maintaining and increasing production
*Cenovus has commissioned about 90% of the phase D plant at Christina Lake
and expects production in the third quarter of 2012. Construction of phase
E is more than 50% complete, with initial production anticipated for the
fourth quarter of 2013. Site preparation also continues for phase F.
*Cenovus has increased the expected gross production capacity for Christina
Lake phase H from 40,000 bbls/d to 50,000 bbls/d due to the addition of a
fifth steam generator that will incorporate blowdown boiler technology.
This will increase steam capacity and is expected to enhance efficiency by
increasing the water recycle rate, leading to fuel savings and a reduction
in water use. Cenovus commercialized blowdown boiler technology in 2011
after testing it at Foster Creek.
*At Foster Creek, the fabrication and facility construction for phase F is
more than 50% complete. The company is also working on earthworks and site
preparation for phase G and design engineering for phase H.
Operating costs and royalties
*Operating costs at Christina Lake were $12.52/bbl in the second quarter, a
47% decrease from $23.41/bbl in the same period a year earlier due to the
significant increase in production. Cenovus expects operating costs at
Christina Lake to be within the guidance range of $13.00/bbl to $14.35/bbl
over the year. Non-fuel operating costs at Christina Lake were $10.83/bbl
in the quarter, a 46% decrease from $19.93/bbl in the second quarter of
*Operating costs at Foster Creek averaged $12.49/bbl in the second quarter,
an 8% increase from $11.57/bbl in the same period last year.The increase
is primarily due to higher staffing levels to support phase F and
increased fluid and waste trucking costs. The company expects operating
costs at Foster Creek to be within the guidance range of $11.25/bbl to
$12.45/bbl over the year. Non-fuel operating costs at Foster Creek were
$10.89/bbl in the second quarter compared with $10.10/bbl in the same
period a year earlier, an 8% increase.
*Christina Lake’s average royalty rate in the quarter was 7.2%, compared
with an average royalty rate of 6.3% for the same period a year earlier.
The increase was primarily due to the company receiving lower realized
prices for Christina Lake production, partially offset by lower WTI
*Foster Creek’s average royalty rate was 4.6% in the second quarter of
2012, an increase compared to the average royalty rate of 3.3% in the same
period in 2011. Royalties were lower in 2011 due to the Alberta Department
of Energy’s approval to include the capital investment for expansion
phases F, G and H as part of the royalty calculation.
Steam to oil ratios (SORs)
*Cenovus continues to achieve some of the best SORs in the industry with a
second quarter average ratio of approximately 1.8 at Christina Lake and
2.1 at Foster Creek for a combined SOR of around 2.0. This means
approximately two barrels of steam are needed for every barrel of oil
produced. A lower SOR requires less steam, which means less natural gas is
used. This results in reduced capital and operating costs, fewer emissions
and lower water usage.
Cenovus has an enormous opportunity to deliver increased shareholder value
through production growth from its oil sands assets in the Athabasca region of
northern Alberta, most of which are undeveloped. The company has identified 10
emerging projects and continues to assess its resources to prioritize
development plans and support regulatory applications.
*Cenovus received regulatory approval for Narrows Lake, which is jointly
owned with ConocoPhillips, in the second quarter. Narrows Lake is expected
to have gross production capacity of 130,000 bbls/d and be developed in
three phases. Ground work for the initial phase of 45,000 bbls/d gross is
expected to begin this fall, with project sanctioning from Cenovus and
ConocoPhillips expected by the end of this year.
*The Narrows Lake approval included the option to use a combination of SAGD
and SAP for oil production. Based on test results at other locations,
Cenovus expects SAP to improve the SOR and oil production rate by as much
as 30% compared to SAGD alone. Cenovus also expects SAP to increase total
oil recovery by as much as 15%.
*The joint regulatory application and environmental impact assessment for a
commercial SAGD project at Grand Rapids in the Greater Pelican Region is
being reviewed by the regulators. First production from the commercial
project is anticipated in 2017, if approvals are received as expected. The
company believes Grand Rapids has the potential to reach production
capacity of 180,000 bbls/d.
*Cenovus is continuing to develop a pilot project in the Grand Rapids area.
Construction for the installation of a third mobile steam generator is
progressing and the company anticipates steam injection at the second well
pair to start in the third quarter of 2012.
*The revised joint regulatory application and environmental impact
assessment for the Telephone Lake project in the Borealis Region is also
being reviewed by the regulators. The application updates the expected
production capacity to 90,000 bbls/d from the original 35,000 bbls/d
application that was filed in 2007.
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’s
managed as part of Cenovus’s oil sands segment. Since 2006, polymer has been
injected along with the waterflood to enhance production from the reservoir.
Based on reservoir performance of the polymer flood, the company has initiated
a multi-year growth plan for Pelican Lake with production expected to reach
*Production averaged more than 22,000 bbls/d in the quarter, a 15% increase
from the same period in 2011 when wild fires in the Slave Lake region
curtailed production by approximately 2,100 bbls/d. Cenovus is beginning
to see production increases from the infill drilling program to expand the
polymer flood, although production was partially offset by reduced
operating pressures and shut-ins, which are required to complete infill
drilling between existing wells.
*Cenovus plans to build on the success at Pelican Lake by drilling between
1,200 and 1,300 production and injection wells in the next five to seven
years to expand the polymer flood and is also planning to build a new
battery to support the expansion, with construction slated to begin in
*Operating costs at Pelican Lake averaged $17.71/bbl in the quarter, a 32%
increase from $13.40/bbl in the second quarter of 2011 due to the
increased use of polymer, workovers and higher staffing levels to support
the expansion. Cenovus expects operating costs at Pelican Lake to be
within the guidance range of $14.55/bbl to $16.10/bbl over the year.
*Pelican Lake’s average royalty rate was 4.2% in the second quarter of 2012
compared with an average royalty rate of 9.7% in the same period of 2011.
The reduction was primarily due to the increase in capital investment to
expand the polymer flood and a lower WTI price forecast for 2012.
In addition to Pelican Lake, Cenovus has extensive oil operations in Alberta
and Saskatchewan. These include the established Weyburn operation that uses
carbon dioxide (CO) to enhance oil recovery, the emerging Bakken and Lower
Shaunavon tight oil assets in southern Saskatchewan as well as established
properties in southern Alberta. Cenovus is targeting oil production from these
properties to reach between 65,000 bbls/d and 75,000 bbls/d by the end of
*Second quarter production from the company’s conventional oil assets in
Alberta increased 14% over the same period in 2011 to more than 29,000
bbls/d, primarily due to successful drilling programs and fewer weather
and access issues than in 2011.
*The Weyburn operation produced about 16,500 bbls/d net in the second
quarter. This is a 7% increase compared with the same period a year
earlier, which reflects a recovery from flooding that impacted operations
in the second quarter of 2011.
*Lower Shaunavon production averaged approximately 4,100 bbls/d in the
second quarter, a six-fold increase compared with the same period a year
earlier. The large increase is due to a successful drilling program and
better weather conditions, which improved access to lease locations.
Cenovus has 109 horizontal wells producing in Lower Shaunavon.
*The company’s Bakken operation hadaverage oil production of more than
2,000 bbls/d in the quarter, including royalty interest volumes, compared
with about 1,400 bbls/d in the same period a year earlier. Cenovus was
operating 27 wells in the Bakken area at the end of the second quarter.
*Cenovus continues to work on developing infrastructure to support the
Lower Shaunavon and Bakken plays. The company completed construction on a
battery for the Bakken area in the second quarter and expects facilities
construction for the Lower Shaunavon to be complete in the third quarter
*Operating costs for Cenovus’s conventional oil operations, excluding
Pelican Lake, increased 12% to $14.85/bbl in the second quarter compared
with the same period a year earlier. This was mainly due to higher
workover activity, increased trucking and waste-handling costs, higher
repairs and maintenance and increased labour costs.
(Before Daily Production
(MMcf/d) 2012 2011 2010
YTD Q2 Q1 Full Q4 Q3 Q2 Q1 Full
Natural 616 596 636 656 660 656 654 652 737
^1 2010 production includes a contribution from non-core assets sold in the
third quarter of 2010.
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 ongoing capital
investment requirements. The natural gas business also acts as an economic
hedge against price fluctuations because natural gas fuels the company’s oil
sands and refining operations.
*Natural gas production in the second quarter was approximately 596 million
cubic feet per day (MMcf/d), a 9% decline from the same period in the
previous year. The decline is partly due to the divestiture of a non-core
property early in the first quarter of 2012, as well as expected natural
declines, but is partially offset by better weather conditions compared
*Cenovus’s average realized sales price for natural gas, including hedges,
was $3.31 per thousand cubic feet (Mcf) in the quarter compared with $4.45
per Mcf in the same period a year earlier.
*Cenovus anticipates managing an annual decline rate of 10% to 15% for its
natural gas production, targeting a long-term production level of between
400 MMcf/d and 500 MMcf/d to match Cenovus’s future anticipated natural
gas internal consumption at its oil sands and refining facilities.
Cenovus’srefining operations include the Wood River Refinery in Illinois and
the Borger Refinery in Texas, which are jointly owned with the operator,
*The two refineries produced 473,000 bbls/d gross of refined products in
the second quarter, an increase of 51,000 bbls/d compared with the same
period a year ago primarily as a result of increased processing capacities
and utilization, as well as strong refining margins at the Wood River
Refinery following the coker start-up at the CORE project in late 2011.
*Combined total crude oil runs at the Wood River Refinery and Borger
Refinery averaged 451,000 bbls/d gross for the quarter, an increase of 11%
compared with the same period a year earlier.
*Canadianheavy crude processed atthe Wood River Refinery in the
quarteraveraged approximately 203,000 bbls/d gross. Total processing
capability of heavy Canadian crudes will be dependent upon the quality of
available crudes and will be optimized to maximize economic benefit.
*The total gross heavy crude processing capacity at the Wood River Refinery
is expected to be sustainable in the range of 200,000 bbls/d to 220,000
bbls/d. Combined with the 35,000 bbls/d of gross heavy crude refining
capacity at the Borger Refinery, the total heavy crude oil refining
capacity of the two refineries is expected to be approximately 235,000
bbls/d to 255,000 bbls/d gross.
*Second quarter operating cash flow from refining operations was $344
million, an increase of $22 million compared with the same period last
year. This was primarily due to increased throughput and the continuation
of favourable refining margins that reflect a higher proportion of heavy
crude oil processed. Cenovus invested $24 million in its refining
operations in the quarter, resulting in $320 million of operating cash
flow in excess of the capital spent. This cash flow helped to fund
development of the company’s oil assets.
*Cenovus's operating cash flow is calculated on a first-in, first-out
(FIFO) inventory accounting basis.Using the last-in, first-out (LIFO)
accountingmethod employed by most U.S. refiners, Cenovus's refining
operating cash flow in the second quarter wouldhave been$95 million
higher than under FIFO, compared with $74 million lower in 2011.
The Cenovus Board of Directors declared a third quarter dividend of $0.22 per
share, payable on September 28, 2012 to common shareholders of record as of
September 14, 2012. Based on the July 24, 2012 closing share price on the
Toronto Stock Exchange of $32.10, this represents an annualized yield of about
2.7%. Declaration of dividends is at the sole discretion of the Board.
Cenovus’s continued commitment to a meaningful dividend is an important aspect
of the company’s strategy to focus on increasing total shareholder return.
The natural gas and crude oil hedging strategy helps Cenovus achieve more
predictability around cash flow and safeguard its capital program. The
strategy allows the company to financially hedge up to 75% of expected natural
gas production in 2012 and 2013, net of internal fuel use, and up to 50% and
25%, respectively, in the two following years. The company has Board approval
for fixed price hedges on as much as 50% of net liquids production for 2012
and 2013 and 25% of net liquids production for each of the following two
In addition to financial hedges, Cenovus benefits from a natural hedge with
its natural gas production. About 125 MMcf/d of natural gas is currently
consumed at the company’s SAGD and refinery operations, which is offset by the
natural gas Cenovus produces. The company's financial hedging positions are
determined after considering this natural hedge.
Cenovus’s hedge positions as at June 30, 2012 include:
*approximately 30% of expected 2012 oil production hedged; 24,800 bbls/d at
a WTI price of US$98.72/bbl and an additional 24,500 bbls/d at an average
WTI price of C$99.47/bbl
*approximately 65% of expected 2012 natural gas production hedged; 130
MMcf/d at an average NYMEX price of US$5.96/Mcf and 127 MMcf/d at an
average AECO price of C$4.50/Mcf, plus 125 MMcf/d of internal usage
*10,000 bbls/d of oil production hedged for 2013 at an average WTI price of
US$102.62/bbl and an additional 10,000 bbls/d at an average WTI price of
*166 MMcf/d of natural gas hedged for 2013 at an average NYMEX price of
US$4.64/Mcf, plus internal usage
*no fixed commodity hedges in place beyond 2013.
*Cash flow in the second quarter of 2012 was $925 million, or $1.22 per
share diluted, compared with $939 million, or $1.24 per share diluted, for
the same period a year earlier.
*Operating earnings in the quarter were $283 million, or $0.37 per share
diluted, compared with $395 million, or $0.52 per share diluted, for the
same period last year.
*Cenovus’s realized after-tax hedging gains were $84 million in the
quarter. Cenovus received an average realized price, including hedging, of
$65.56/bbl for its oil in the quarter, compared with $72.22/bbl in the
second quarter of 2011. The average realized price, including hedging, for
natural gas was $3.31/Mcf, compared with $4.45/Mcf in the same period a
*Cenovus recorded income tax expense of $238 million in the second quarter,
a $69 million decrease over the previous year, primarily due to a decrease
in income from its upstream operations and lower unrealized risk
management gains, partially offset by an increase in income from the
company’s refining and marketing business and tax adjustments related to
prior year estimates.
*Cenovus’s net earnings for the quarter were $396 million, a decrease
compared with $655 million in the same period a year earlier due to
decreased unrealized risk management gains, an increase in DD&A and an
exploration expense of $68 million, primarily attributed to the company’s
Roncott asset within its Bakken operations.
*Capital investment during the quarter was $660 million as planned, a 39%
increase compared with the same period a year earlier as the company
continues to advance development of its oil opportunities.
*Over the long term, Cenovus targets a debt to capitalization ratio of
between 30% and 40% and a debt to adjusted EBITDA ratio of between 1.0 and
2.0 times. At June 30, 2012, the company’s debt to capitalization ratio
was 27% and debt to adjusted EBITDA, on a trailing 12-month basis, was 1.0
Earnings Reconciliation Summary
(for the period ended June 30) 2012 2011
($ millions, except per share amounts) Q2 Q2
Add back (losses) & deduct gains:
Per share diluted
Unrealized mark-to-market hedging gain (loss), after tax 126 232
Non-operating foreign exchange gain (loss), after tax -14 26
Divestiture gain (loss), after tax 1 2
Operating earnings 283 395
Per share diluted 0.37 0.52
Oil sands project schedule^1
Actual/expected cumulative application First
Project phase gross production gross submissions^2 production
capacity production target^2,3
A-E^5 120,000 120,000 Q1 1999 Q1 2002
F^5 45,000 165,000 Q2 2009 2014
G^5 40,000 205,000 Q2 2009 2015
H^5 40,000 245,000 Q2 2009 2016
J^6 50,000 295,000 2013 2019
Future 15,000 310,000
A-B^5 18,000 18,000 Q3 1998 Q4 2002
C^5 40,000 58,000 Q3 2007 Q3 2011
D^5 40,000 98,000 Q3 2007
E^5 40,000 138,000 Q4 2009 Q4 2013
F^5 50,000 188,000 Q4 2009 2016
G^5 50,000 238,000 Q4 2009 2017
H 2013 2019
Future 12,000 300,000
A-C 130,000 130,000 Q2 2010 2017
A-C 180,000 180,000 Q4 2011 2017
A-B 90,000 90,000 Q4 2011 TBD
^1 Timelines are subject to regulatory and partner approvals.
^2 Future dates are company forecasts, please see the Advisory –
^3 There is an anticipated ramp-up period of approximately 12 to 18 months
following first production although the accelerated start-up process being
tested at Christina Lake is currently showing improvements to that timing.
^4 Properties 50% owned by ConocoPhillips.
^5 Approved by regulator.
^6 There is no phase I.
Conference Call Today
9:00 a.m. Mountain Time (11:00 a.m. Eastern Time)
Cenovus will host a conference call today, July 25, 2012, starting at 9:00
a.m. MT (11:00 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 2:00 p.m. MT on July 25, 2012, until midnight August 1, 2012, by
dialing 855-859-2056 or 416-849-0833 and entering conference passcode
44608636. A live audio webcast of the conference call will also be available
via www.cenovus.com. The webcast will be archived for approximately 90 days.
This news release contains references to non-GAAP measures as follows:
*Operating cash flow is defined as revenues, less purchased product,
transportation and blending, operating expenses, production and mineral
taxes plus realized gains, less losses on risk management activities and
is used to provide a consistent measure of the cash generating performance
of the company’s assets and improves the comparability of Cenovus’s
underlying financial performance between periods.
*Cash flow is defined as cash from operating activities excluding net
change in other assets and liabilities and net change in non-cash working
capital, both of which are defined on the Consolidated Statement of Cash
Flows in Cenovus’s interim consolidated financial statements.
*Operating earnings is defined as net earnings excluding non-operating
items such as the after-tax impacts of a gain/loss on discontinuance, the
gain on asset acquisition, the after-tax gain/loss of unrealized
mark-to-market accounting for derivative instruments, the after-tax
gain/loss on translation of U.S. dollar denominated notes issued from
Canada and the partnership contribution receivable, the after-tax foreign
exchange gain/loss on settlement of intercompany transactions, after-tax
gains or losses on divestiture of assets, deferred income tax on foreign
exchange related to U.S. dollar intercompany debt recognized for tax
purposes only and the effect of changes in statutory income tax rates.
Management views operating earnings as a better measure of performance
than net earnings because the excluded items reduce the comparability of
the company’s underlying financial performance between periods. The
majority of the U.S. dollar debt issued from Canada has maturity dates in
excess of five years.
*Free cash flow is defined as cash flow in excess of capital investment,
excluding net acquisitions and divestitures, and is used to determine the
funds available for other investing and/or financing activities.
*Debt to capitalization and debt to adjusted EBITDA are two ratios that
management uses to steward the company’s overall debt position as measures
of the company’s overall financial strength. Debt is defined as short-term
borrowings and long-term debt, including the current portion, excluding
any amounts with respect to the partnership contribution payable and
receivable. Capitalization is a non-GAAP measure defined as debt plus
shareholders’ equity. Adjusted EBITDA is defined as adjusted earnings
before interest income, finance costs, income taxes, depreciation,
depletion and amortization, exploration expense, unrealized gain or loss
on risk management, foreign exchange gains or losses, gains or losses on
divestiture of assets and other income and loss.
These measures have been described and presented in this news release in order
to provide shareholders and potential investors with additional information
regarding Cenovus’s liquidity and its ability to generate funds to finance its
operations. For further information, refer to Cenovus’s most recent
Management’s Discussion & Analysis (MD&A) available at www.cenovus.com.
This news release contains certain forward-looking statements and other
information (collectively “forward-looking information”) about our current
expectations, estimates and projections, made in light of our experience and
perception of historical trends. Forward-looking information in this news
release is identified by words such as “anticipate”, “believe”, “expect”,
“plan”, “forecast”, “target”, “project”, “could”, “focus”, “vision”, “goal”,
“proposed”, “scheduled”, “outlook”, “potential”, “may” or similar expressions
and includes suggestions of future outcomes, including statements about our
growth strategy and related schedules, projected future value or net asset
value, forecast operating and financial results, planned capital expenditures,
expected future production, including the timing, stability or growth thereof,
anticipated finding and development costs, expected reserves and contingent
and prospective resources estimates, potential dividends and dividend growth
strategy, anticipated timelines for future regulatory, partner or internal
approvals, forecasted commodity prices, future use and development of
technology and projected increasing shareholder value. Readers are cautioned
not to place undue reliance on forward-looking information as our actual
results may differ materially from those expressed or implied.
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.
The factors or assumptions on which the forward-looking information is based
include: assumptions inherent in our current guidance, available at
www.cenovus.com; our projected capital investment levels, the flexibility of
capital spending plans and the associated source of funding; estimates of
quantities of oil, bitumen, natural gas and liquids from properties and other
sources not currently classified as proved; ability to obtain necessary
regulatory and partner approvals; the successful and timely implementation of
capital projects; our ability to generate sufficient cash flow from operations
to meet our current and future obligations; and other risks and uncertainties
described from time to time in the filings we make with securities regulatory
The risk factors and uncertainties that could cause our actual results to
differ materially, include: volatility of and assumptions regarding oil and
gas prices; the effectiveness of our risk management program, including the
impact of derivative financial instruments and the success of our hedging
strategies; accuracy of cost estimates; fluctuations in commodity prices,
currency and interest rates; fluctuations in product supply and demand; market
competition, including from alternative energy sources; risks inherent in our
marketing operations, including credit risks; maintaining desirable ratios of
debt to adjusted EBITDA as well as debt to capitalization; our ability to
access various sources of debt and equity capital; success of hedging
strategies; accuracy of our reserves, resources and future production
estimates; our ability to replace and expand oil and gas reserves; our ability
to maintain our relationship with our partners and to successfully manage and
operate our integrated heavy oil business; reliability of our assets;
potential disruption or unexpected technical difficulties in developing new
products and manufacturing processes; refining and marketing margins;
potential failure of new products to achieve acceptance in the market;
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 our
business; the timing and the costs of well and pipeline construction; our
ability to secure adequate product transportation; changes in the regulatory
framework in any of the locations in which we operate, including changes to
the regulatory approval process and land-use designations, royalty, tax,
environmental, greenhouse gas, carbon 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 our business, our financial results and our consolidated
financial statements; changes in the general economic, market and business
conditions; the political and economic conditions in the countries in which we
operate; 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 us.
Readers are cautioned that the foregoing lists are not exhaustive and are made
as at the date hereof. For a full discussion of our material risk factors, see
“Risk Factors” in our most recent annual information form, Form 40-F,
available at www.cenovus.com. Readers should also refer to “Risk Management”
in our annual MD&A for the year ended December 31, 2011, our current MD&A and
to the risk factors described in other documents we file from time to time
with securities regulatory authorities, available at www.sedar.com,
www.sec.gov and www.cenovus.com.
Wedge Well™ technology is a registered trademark of Cenovus Energy Inc.
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
Saskatchewan. 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. Its enterprise value is approximately $28 billion.
For more information, visit www.cenovus.com.
Find Cenovus on Facebook, Twitter, Linkedin and YouTube.
Director, Investor Relations
Senior Analyst, Investor Relations
Senior Analyst, Investor Relations
Director, Media Relations
Advisor, Media Relations
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