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Cenovus returns to profitability and lays out a plan for growing SAGD footprint

Cenovus returns to profitability and lays out a plan for growing SAGD footprint

Cenovus Energy unexpectedly reported a $91 million operating profit for the fourth quarter of last year, much better than analysts were expecting. 

This is the company's first operating profit since the second quarter of 2015. Higher production numbers, lower operating costs and slightly improved oil prices have finally begun to pay dividends for the heavy oil player, now returning its focus to expansion of its oil sands operations.

By the end of 2016, the company added 25,000 bbl/day to its bottom line and reduced operating costs by 13% from the previous year. Cenovus' crown jewels are its thermal in-situ facilities, which use steam-assisted gravity drainage (SAGD) to extract bitumen from oil sands deposits located deep underground, with minimal land disturbance.

CHRISTINA LAKE EXPANSION RESUMES

Christina Lake averaged 165,600 bbl/day in the fourth quarter, bringing the full year average to 158,900 bbl/day. Production continues to ramp up at the phase F expansion, which began operation late last year.

Last year's average steam-to-oil ratio at Christina Lake was 1.9, up from 1.7 the previous year. Operating costs for the full year have declined 7% y/y to $7.48/bbl, or $5.40 excluding energy costs.

A new 100 megawatt cogeneration plant was also commissioned in Q4, adding to the facility's power generation capacity. Any power not used onsite is sold to the Alberta electricity grid.

Construction of phase G, which was shelved in 2015, is expected to restart in the first half of this year. The company reports to have already resumed module assembly for the expansion, which will add another 50,000 bbl/day of gross capacity to the overall facility. Cenovus says it has managed to shave $500 million off the phase G budget, now expected to cost $1.1 billion. First oil out of this latest phase of expansion is expected by the second half of 2019.

Christina Lake has regulatory approvals in place for up to 310,000 bbl/day of gross production.

FOSTER CREEK EXPANSION PENDING

Foster Creek averaged 163,200 bbl/day in the fourth quarter, bringing the full year average to 140,500 bbl/day. Production continues to ramp up at phase G which began operation in the fall of last year.

Steam-to-oil ratios have risen slightly from an average of 2.5 in 2015 to 2.7 last year. Operating costs for the full year have declined 16% to $10.55/bbl, or $8.09 excluding energy costs. 

Foster Creek's latest expansion phase was also paused early last year. The timing of phase H is still up in the air, although the company says it is continuing to advance engineering work. Cenovus plans to provide an update on the Foster Creek expansion during its Investor Day event in June.

The phase H expansion has a design capacity of 30,000 bbl/day. Foster Creek has regulatory approvals in place for up to 295,000 bbl/day of gross production.

COURTESY CENOVUS ENERGY

COURTESY CENOVUS ENERGY

THE RETURN OF NARROWS LAKE, MAYBE

The company is also mulling the revival of its Narrows Lake project. Construction was underway at the site but also halted in early 2015 in order to preserve cash.

Narrows Lake is located adjacent to the Christina Lake property and is the first commercial SAGD facility to incorporate solvent addition (butane) as a process aid.

The first phase of Narrows Lake will have a design capacity of 45,000 bbl/day, potentially expanding to 130,000 bbl/day in the future. More details on timing of the expansion will also be provided in June.

NETBACKS IMPROVING BUT OPEX UNLIKELY TO FALL FURTHER

Total gross production capacity at both Christina Lake and Foster Creek SAGD facilities increased by 80,000 bbl/day last year to 390,000 bbl/day. Oil sands operating costs have declined 12% y/y to $8.91 per barrel. Factoring out natural gas costs, operating costs are down 13% to $6.65.

Diluted bitumen produced at both Foster Creek and Christina Lake sold at an average price of $27.64 per barrel in 2016, resulting in an average netback of almost $13/bbl. Transportation and blending costs were roughly unchanged at about $6.60 per barrel. 

However, fourth quarter netbacks were considerably better, averaging $21.45 on a bitumen realization price of $36.70 and reduced blending and transport costs (falling to $5.70/bbl). 

After hitting a low of $8.00/bbl in Q2/2016, operating costs creeped higher through the end of the year, averaging $9.40 in Q4.

As the company plans for the restart of several expansion projects, Cenovus says it now has "a clear line of sight to five years of growth" that would take oil sands production capacity to more than 500,000 bbl/day.

In 2017, Cenovus hopes to boost oil sands production by almost 20% to about 178,000 bbl/day, up from a 2016 average of 149,700 bbl/day (net to Cenovus).

The company also announced a 5% increase (y/y) in proved oil reserves, now approximately 2.7 billion barrels of oil equivalent (boe). Almost all of those additional barrels come from SAGD expansion projects and improved reservoir performance in the oil sands.

Christina Lake, Foster Creek and Narrows Lake are a 50/50 joint venture with ConocoPhillips.

A SOMETIMES FORGOTTEN INTEGRATED PLAY

Cenovus has a 50% stake in two refineries - The Wood River refinery in Illinois and the Borger Refinery in Texas, both jointly owned with Phillips 66. The company's 230,000 bbl/day of refining capacity provides a hedge when oil prices are depressed.

Cenovus processed 222,000 bbl/day of crude through its two refineries last year, reflecting a utilization rate of 97%. Income from refining and marketing was reported at $135 million for the full year 2016, down 10% from 2015 on a 32% decline in crack spreads.

LOOKING FORWARD TO 2017

2017 will be another year of continued growth for the company. Total production, which includes conventional oil and natural gas, is expected to increase to 290,000 boe/day, up from 271,525 boe/day in 2016. 

Capital spending is expected to rise to $1.3 billion this year, up slightly from $1.2 billion spent in 2016 but still down significantly from $1.7 billion in 2015.

CEO Brian Ferguson says his company has "performed exceptionally well" in 2016, putting Cenovus in an "excellent position to pursue disciplined growth in 2017 and beyond.” Although operating costs are unlikely to fall any further, the company says it plans to "hold the line" on spending in the oil sands.



SOURCES:
CENOVUS ENERGY • Q4/2016 QUARTERLY RESULTS • FEB 2017
CENOVUS ENERGY • CORPORATE PRESENTATION • FEB 2017
CENOVUS ENERGY • UNAUDITED SUPPLEMENTAL INFORMATION• Q4/2016
CENOVUS ENERGY • 2017 CORPORATE GUIDANCE
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