Cenovus posts a smaller loss than expected on forex gains despite 95% plunge in cash flow
Calgary-based Cenovus Energy posted slightly better than expected results today, thanks to a hefty paper profit booked on favourable foreign-exchange rates in the first quarter.
Q1 BY THE NUMBERS
- Total cash flow: $26 million versus $462 million in Q1/15 (-95% y/y)
- Cash flow from operations: $144 million (-74% y/y)
- Free cash flow: -$297 million versus -$34 million in Q1/15
- Operating earnings (loss): -$423 million versus -$88 million loss in Q1/15
- Net earnings (loss): -$118 million versus -$668 million in Q1/15
- Capital investments (total): $323 million versus $529 million (-39% y/y)
- Capital investments (oil sands): $227 million (-45% y/y)
The significant drop in cash flow was blamed on a drop in crude and natural gas volumes, much lower selling prices and inventory write-downs. Cenovus' net loss was dramatically improved thanks to a $413 million gain booked on foreign-exchange rates for the company's US denominated debt.
OVERALL PRODUCTION NUMBERS
Cenovus produced 137,975 bbl/day from the oil sands (down 4% y/y) and 59,576 bbl/day of conventional oil (down 19% y/y). In total, oil production for the first quarter averaged 194,550 bbl/day down 12% from the previous year/quarter.
OIL SANDS PERFORMANCE
- Production: 77,093 bbl/day net to Cenovus (+1% y/y)
- Operating Costs: $7.61/bbl (-8% y/y); $5.65/bbl fuel excluded (-7%)
- Steam-to-oil Ratio (SOR): 1.9 versus 1.7 in Q1/15
- Netback (including hedging gains): $3.34/bbl (-80% y/y)
- Production: 60,882 bbl/day net to Cenovus (-10% y/y)
- Operating Costs: $12.05/bbl (-17% y/y); $9.57/bbl fuel excluded (-17%)
- Steam-to-oil Ratio (SOR): 3.0 versus 2.4 in Q1/15
- Netback (including hedging gains): $0.72/bbl (-95% y/y)
The decline in production at Foster Creek was blamed on the deferral of spending for repairs, maintenance and construction of new well pads. However, the company expects to bring more old wells and new wells online in the next quarter, which should bring production closer to 140,000 bbl/day (70,000 bbl/day net to Cenovus) by year end.
Christina Lake phase F and Foster Creek phase G expansions are largely complete. Commissioning and steaming is expected to start over the next few months with first oil slated for the third quarter. The two expansion projects coupled with optimization of Christina Lake will add another 100,000 bbls/day of gross production to the SAGD operation (50,000 bbl/day net to Cenovus).
Overall oil sands operating costs are expected to average about $10.10 per barrel for full year 2016, including fuel charges.
Foster Creek and Christina Lake are thermal in-situ SAGD facilities (steam-assisted gravity drainage). Both are 50/50 joint ventures with ConocoPhillips.
Transportation costs increased in Q1 primarily due to higher pipeline tariffs and higher tariffs from additional sales to the US market. Higher pipeline tariffs were offset by lower crude-by-rail transport costs.
Cenovus transported an average of 4,627 bbl/day of crude oil by rail, consisting of seven unit train shipments (versus 18 unit train shipments @ 11,871 bbl/day in Q1/15). The trains were loaded at the company's rail loading terminal in Bruderheim, Alberta.
To save on condensate costs, the company is considering the construction of a diluent recovery unit (DRU) at Bruderheim. Bitumen produced at the SAGD facilities is diluted with expensive condensate to facilitate shipping. Shipping condensate adds an estimated $2-4/bbl to the total operating costs. The DRU would strip out the diluent and return it to the Christina Lake area. The hot bitumen would then be loaded into insulated rail cars, reducing the need to ship diluent.
MARKETING & REFINING
Cenovus' downstream refining and marketing business reported an operating loss of $23 million in Q1 versus a profit of $95 million for the same time last year. The decline was blamed on a 41% drop in crack spreads.
Cenovus’ Wood River Refinery in Illinois and Borger Refinery in Texas produced an average of 460,000 bbl/day of refined products, down 1% from last year. A dobottlenecking project underway at the Wood Refinery will be online by Q3, increasing capacity by an additional 18,000 bbl/day.
Both refineries are jointly owned with Phillips 66, who is the operator of both facilities.
OPERATING & CAPITAL COST REDUCTIONS
Cenovus continues to reduce its operating costs through operating efficiencies, better maintenance planning and lower chemical costs. The company has moved to a smaller, more efficient well pad design, which is also translating into savings in capital spending.
- Capital spending: $1.2 billion in 2016 (full year), down $300 million from original plan
- Oil sands operating costs: $9.52/bbl in Q1/16 versus $10.99/bbl in Q1/15 (-13%)
CEO Brian Ferguson noted in today's conference call that he wants his company to be a North American cost leader and left the door open to leave some wells offline or defer more capital spending if oil prices don't improve by year end. Ferguson also wants more clarity out of Ottawa on regulatory hurdles and carbon emission caps before embarking on any new expansion plans.
The company previously announced it would be reducing its head count by about 30%, or 440 employees. The job cuts are largely complete. Cenovus has also readjusted its benefits and compensation program, including a 15% drop in compensation for executives (relative to 2013).
DEBT & CREDIT RATINGS
Cenovus has a net debt to capitalization ratio of 16% with $3.9 billion in cash on hand. Two out of three ratings agency maintain an investment grade rating on the company:
- Standard & Poor's: BBB w/stable outlook
- DBRS: BBB (high) w/negative trend
- Moody's: Ba2 (below investment grade) attributed to their forecast that oil prices will not recover meaningfully in the next few years.
About 21% of Cenovus' production is hedged with a floor price of $66.10/bbl. Cenovus stock pays a quarterly dividend of $0.05 a share. Complete details on the company's first quarter results and full year 2016 guidance are available on their website (www.cenovus.com).