Cenovus boosts oil sands production but continues to bleed cash

Cenovus boosts oil sands production but continues to bleed cash

The company reported a net loss of $670 million in the first quarter, the second consecutive quarterly loss for the integrated heavy oil producer. Management plans to get back to black by boosting oil sands production, reducing capital expenditures and deferring pay increases for 2015.

A 50% drop in the price of crude oil continues to take a toll on the bottom line at Cenovus. The heavy oil giant reported a net loss of $668 million this past quarter. This is the second quarterly loss in a row.

The company reported a very strong quarter operationally, increasing oil sands production and reducing operating costs. The company beat all estimates on cash flow, which was up almost 25% from the last quarter. Average operating costs were down an impressive 25% due to big improvements in steam-to-oil ratios (SOR).

Production from its oil sands operations grew by 20%. Good crack spreads helped boost profitability in its downstream refining business. Cenovus jointly owns three midwest refineries (operated by Phillips 66), which collectively have a refining capacity of approximately 460,000 barrels per day (bpd). Cenovus is also a major player in the conventional oil and natural gas market, which have remained relatively steady over the past few years.


Cenovus embarked on a cost cutting program earlier in the year, pledging to trim the fat and cut its workforce by 15%. The company noted most of the staff reductions targets have already been achieved by eliminating contractor positions. Further savings in operating costs are expected to be achieved by:

  • boosting production by 25% over the next 18 months,
  • continuing to improved maintenance scheduling and operating efficiencies,
  • deferring pay raises for staff and management through the end of 2015,
  • cutting all discretionary spending, such as travel, conferences and IT upgrades,
  • reduce 2015 capital expenditures to less than $1.8 to 2.0 billion, 40% lower than 2014.

So far, operating costs on average have dropped on average $5 per barrel, or about 25 to 30%. The company noted it saw a 5 to 10% cost reduction from its suppliers. Lower natural gas prices also helped improve the bottom line.




  • Production at Christina Lake averaged 74,500 bpd net in the first quarter of this year, up 16% from Q1-2014. Improvements in production were attributed to phase E reaching design capacity last year and improved performance from the existing wells.
  • Steam-to-oil ratio (SOR) fell from 1.9 to 1.7 over the last 12 months.
  • Operating costs fell 38% from the same period last year, to $8.22 per barrel. Most of the savings were attributed to lower fuel costs, which declined 55% over the past 12 months. Excluding fuel costs, operating costs at Christina Lake were reported at $6.03 per barrel, a 29% decline year over year.
  • Production is expected to grow to 160,000 bpd by the end of 2015 through continued process improvement initiatives.
  • Construction of phase F is largely complete and is on track to produce oil by the middle of 2016. Construction of phase G is currently on hold due to cash constraints.


  • Foster Creek production averaged 67,900 bpd net in the first quarter, up 24% from Q1-2014. The increase was attributed to phase F performance, which began producing oil late last year and will continue to ramp up through the end of 2015.
  • SOR was reported at 2.4 in Q1-2015, down from 2.7 in Q1-2014. The SOR is expected to rise modestly due to ramp up of phases F and G wells, after which the SOR is expected to fall again.
  • Operating costs fell 24% from the same period last year, to $14.48 per barrel. The savings were attributed to lower fuel costs and higher production. Excluding fuel costs, operating costs at Foster Creek were reported at $11.52 per barrel, a 16% decline year over year.
  • Construction continues on phase G, which was reported at 65% complete. Phase G is expected to begin producing oil in the first half of 2016. Phase H construction remains on hold due to cash constraints.


  • Cenovus continues to operate a SAGD pilot project at its Grand Rapid facility, with 2 producing well pairs. A third well continues to steam with oil production expected to begin by mid-2015.
  • The Grand Rapids lease already has regulatory approval for a total production of 180,000 bpd.


  • Work on Narrows Lake continues to be on hold in light of lower oil prices. The project is expected to have a design capacity of 130,000 bpd and will be the first commercial scale solvent-aided process, using butane and steam to improve oil recovery.


  • Cenovus did not provide an update for Telephone Lake, except to note it was still reviewing its options. Telephone Lake received regulatory approval from Alberta Energy Regulator late last year.

Cenovus is considered a leader in SAGD technology (steam-assisted gravity drainage). Projects in the Christina Lake region (which include Foster Creek and Narrows Lake) are 50/50 joint ventures with ConocoPhillips. These projects currently yield 280,000 bpd of heavy oil and are expected to grow production by 100,000 bpd over the next 18 months. 



Total conventional oil production fell to 73,650 bpd in Q1, a 4% decline from the same time last year. The drop was attributed to divestiture of non-core assets. Operating costs were reported at $16.29 per barrel, a 23% drop from Q1-2014. The 2015 drilling program in Alberta and Saskatchewan has largely been suspended due to low oil prices. Full year production guidance for conventional assets is now reduced to 66,000 to 70,000 bpd.


The company expects oil prices to recover through the end of 2015. Improvements to the bottom line are expected to be realized by the second half of the year. 

Cenovus shares are down about 30% over the last 12 months. The company is committed to maintaining its dividend and instead will be issuing more shares to raise cash. Cenovus is also rumoured to be in the process of spining-off its royalty land assets later this year, in order to generate much needed cash flow for its oil sands operations. 

Cenovus shares trade on both the TSX and NYSE and currently yield a 4.7% dividend (TSX:CVE).

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