Cenovus cuts staff by 25% in 2015 and doesn't rule out more cuts next year
Calgary-based Cenovus energy reported third quarter earnings of $1.8 billion today, thanks to over $3 billion in assets sold to the Ontario Teachers Pension Plan. Excluding the asset sale, the company reported a small operating loss of $28 million in Q3. The company has aggressively cut staff and capital projects in an effort to remain cost competitive with US light oil producers. Cenovus is positioning itself to survive in the long term even if oil prices remain at the current US$45 a barrel level.
The company is expecting to realize cost savings of as much as $400 million by the end of 2015. These reductions include savings related to improved drilling efficiency, optimized scheduling and maintenance and lower chemical costs. Some of the savings are the result of work that has been deferred. But the company expects at least 60% of the savings would still be viable at US$65 a barrel West Texas Intermediate (WTI).
Cash flow in the third quarter declined 55% to $444 million due to the near 50% decline in oil prices. Cenovus sold its royalty interest and fee land business in July for gross cash proceeds of $3.3 billion, netting $1.9 to the company's bottom line. Earlier in the year, the Cenovus also raised capital by issuing $1.5 billion in common shares and reduced its quarterly dividend, all in an effort to improve the company’s long-term financial resilience.
OIL SANDS OPERATIONS
Oil sands production from Cenovus’s Foster Creek and Christina Lake steam-assisted gravity drainage (SAGD) projects increased 17% in the third quarter of 2015 compared with the same period a year earlier.
Total operating costs were $9.55 per barrel for the SAGD facilities, a 23% decrease from the third quarter of 2014. The decline was thanks to increased production, workforce reductions and lower fuel and electricity expenses. Year to date, Cenovus has also achieved operating cost reductions from improved prioritization of its repair and maintenance activities as well as lower workover costs due to fewer electric submersible pump (ESP) replacements.
Three expansion projects currently underway at Christina Lake and Foster Creek are expected to add approximately 100,000 barrels per day (bpd) of incremental gross production capacity (50,000 bpd net to Cenovus), a 35% increase to the company’s current oil sands production capacity.
Production averaged 75,329 bpd (net to Cenovus) in the third quarter of 2015, 10% higher than the same period last year. The Christina Lake optimization project was completed on time and below budget, with incremental oil production expected to ramp up over a period of 12 months. The project is designed to increase steam generating capacity and optimize oil treating.
Operating costs were $7.87 a barrel in the third quarter, down 24% from $10.40 for the same period last year. Non-fuel operating costs were $5.57 a barrel, down 21% from the third quarter of 2014.
The steam-to-oil ratio (SOR) was 1.7, unchanged from the third quarter of 2014.
Netbacks for each barrel produced, including royalties and transportation, were $13.76 a barrel in the third quarter, down 72% from the same period a year ago.
Christina Lake’s phase F expansion is nearing completion, with first oil expected in the second half of 2016.
Production averaged 71,414 bpd (net to Cenovus) in the third quarter, 26% higher than in the third quarter of 2014. The increase is attributed to recent addition of new wells at phase F of Foster Creek, which continue to ramp up to full production.
Operating costs were $11.37 a barrel, a 23% decline compared with the prior year quarter. Non-fuel operating costs were $8.72 a barrel, a 17% decline from last year.
The SOR was 2.4 in Q3, down from 2.8 in the same period of 2014.
Netbacks were $13.28 a barrel in the third quarter, 76% lower than a year earlier.
The phase G expansion remains on track for expected production late in the first half of 2016.
Currently, Cenovus anticipates capital spending of between $1.5 billion and $2.0 billion in 2016. The minimum amount will go towards the completion of ongoing Christina Lake and Foster Creek expansion projects, that are already well advanced. Should the fiscal outlook improve, the company will consider resuming work at Christina Lake phase G and Foster Creek phase H, which were deferred earlier this year.
Both Christina Lake and Foster Creek are 50/50 joint ventures with ConocoPhillips.
Total conventional oil production was 63,679 bpd in the third quarter, down 14% from 74,000 bpd for the same period last year, primarily due to expected natural declines and the sale of conventional assets. Operating costs for Cenovus’ conventional oil operations were reported at $15.61 a barrel, down 15% from $18.45 in the third quarter of 2014.
FEWER STAFF BUT NICER OFFICE
In addition to its $400 million overall cost-reduction target for 2015, Cenovus expects to achieve significant additional structural cost savings from its workforce reduction program. Cenovus de-staffed an estimated 1,200 employees, reducing its head count to 4,000 by year end. The job cuts are expected to translate into $100 million a year in savings starting in 2016. The company also expects to make more job cuts in the new year.
In 2013, Cenovus signed a lease agreement with Brookfield to move its employees out of The Bow, which it currently shares with Encana employees, and into the brand new Brookfield Place Calgary by the first quarter of 2018. The company has agreed to lease a minimum of 1 million square feet in the swanky new 56 story building, set to be the tallest tower outside of Toronto.
Cenovus is the only North American oil and gas producer to be included in this year’s Dow Jones Sustainability (DJSI) World Index, which recognizes organizations for strong performance in corporate responsibility.
Cenovus stock trades on the TSX and NYSE (ticker:CVE) and currently yields a 3% dividend.