Cenovus boosts oil sands production but cash flow gets cut in half
Cenovus released its fourth quarter and full year 2014 results today. The company produced a total of 216,000 barrels per day (bpd) in the fourth quarter of 2014, a 15% increase from the previous year. The increase was a result of strong production growth at its Christina Lake and Foster Creek SAGD facilities, which it jointly owns with ConocoPhillips (a 50/50 partnership). However, total cash flow declined by 52% to $401 million in the fourth quarter as compared to the previous quarter. Cenovus remains committed to growing production at both facilities but has tempered expectations for future growth given the uncertainty in oil prices. As part of its efforts to preserve cash flow, the company plans to cut 15% of its staff (primarily contractors), suspend all pay increases for 2015 and limit discretionary spending for employees.
2014 Full Year Results
Cenovus produced 128,000 bpd from their oil sands operation in 2014, a 25% increase from the previous year. Conventional oil production was flat at about 74,000 bpd. Total oil production in 2014 was 203,500 bpd, up 14% from 2013.
Cash flow was $3.5 billion in 2014, 4% lower than the previous year. An increase in oil sands production and higher bitumen prices in 2014 were offset by lower profitability in Cenovus’ refining business.
Net earnings for the year were $744 million, an increase of 12% from the previous year. Total capital expenditures in 2014 was $3.05 billion, slightly lower than the previous year.
Foster Creek Oil Sands Project
The SAGD facility averaged 118,000 bpd in 2014 (50% net to Cenovus), an increase of 11% from the previous year. Phase F began producing oil in September and will add another 30,000 bpd to the total capacity of the plant. Phase F should be up to full production in early 2016.
Steam-to-oil ratio (SOR) was 2.6, up slightly from the previous year. The company warned that higher SOR ratios should be expected while phases F and G are ramping up.
Operating costs rose 5% to $16.55/barrel, but still remained below guidance of $17.50/barrel. Revenues for the facility rose slightly to almost $44.95/bbl.
Construction of phase G is expected to continue through this year and into early 2016. This latest phase of expansion is expected to be producing oil during the first half of 2016. Construction of phase H has been deferred in an effort to preserve cash.
The company received regulatory approval for the phase J expansion of the SAGD facility. Phase J will add another 50,000 bpd of gross capacity to Foster Creek.
Christina Lake Oil Sands Project
Full year production rose 40% to 138,000 bpd (50% net to Cenovus) as the phase E expansion reached its full design capacity. The facility has exceeded design capacity in the fourth quarter of last year and continues to perform exceptionally well.
Steam-to-oil ratio (SOR) remained unchanged at 1.8 for the facility.
Total operating costs for Christina Lake were reported at $11.20/barrel for the year, down 10% from the previous year and below the companies guidance of $12/barrel. Revenue for the heavy oil produced at the facility rose 33% to $42.44/bbl in 2014 due to better benchmark oil prices and lower operating costs.
Construction of phase F continues as planned and remains largely unaffected by the falling oil prices. The company expects phase F to begin producing oil in the middle of 2016. However, construction of phase G has been temporality halted due to insufficient cash flow.
Narrows Lake Oil Sands Project
Engineering, procurement and construction of phase A has already begun for Narrows Lake but the project is currently paused due to declining oil prices. Once fully operational, Narrows Lake is expected to produce an additional 130,000 bpd.
The SAGD facility will be the first commercial solvent-aided process (SAP) in the oil sands, using butane addition to the steam as a process aid. Narrows Lake is also a 50/50 joint venture with ConocoPhillips.
Grand Rapids SAGD Pilot Project
The company continues to operate 2 producing wells at the Grand Rapids SAGD pilot project. A third well is expected to begin steaming early 2015.
The project already has regulatory approval for up to 180,000 bpd but no timeline for development has been provided by the company.
Grand Rapids is 100% owned and operated by Cenovus.
Telephone Lake Oil Sands Project
Cenovus received regulatory approval for Telephone Lake during the fourth quarter of last year.
The company began drilling 45 strategic test wells but future development of the facility has been deferred for now.
Grand Rapids is 100% also owned and operated by Cenovus.
Pelican Lake and Weyburn Conventional Oil Properties
Conventional oil production was reported at 75,000 bpd in 2014, down slightly from 77,000 bpd in 2013.
Operating costs for conventional oil production was reported at $18.81/bbl in 2014, up 7% from the previous year.
In order to preserve cash, the company has suspended its 2015 drilling program in southern Alberta and Saskatchewan. As a results of the drilling suspension, conventional oil production is expected to drop to less than 70,000 bd in 2015.
The company also took a $497 million impairment charge on the deferral of development of the Pelican Lake property.
Transportation & Market Access
Cenovus now has a rail loading capacity of 30,000 bpd. In 2014, the company averaged 10,000 bpd of oil shipment by rail to the US and Canada. Cenovus began receiving delivery of 825 coiled (heated) and insulated rail cars late last year which will help support its crude-by-rail initiatives.
The company signed an agreement with Inter Pipeline (IPL) to ship up to 500,000 bpd of oil blend through its recently completed Cold Lake expansion. Shipments on this newly expanded line began in early 2015.
Cenovus also has an additional 50,000 bpd capacity booked on Enbridge’s Flanagan South line, increasing to 75,000 bpd in 2018. Flanagan South provides access to the US Gulf Coast and began operation in December.
As a results of all these new transportation agreements, the company’s total transportation costs are expected to rise from $3/barrel in 2014 to $8/barrel in 2015. However, better market access should enable Cenovus to get better pricing for its product.
For long term growth, Cenovus also has 200,000 bpd committed on TransCanada’s Energy East pipeline, 75,000 bpd on Keystone XL and another 175,000 bpd to the West Coast.
The company declared a first quarter dividend of $0.2662 per share. Cenovus remains committed to preserving the dividend for now. CVE stock currently yields about 4%.
Full fourth quarter results can be found on the Cenovus website.