Cenovus puts shareholders first, as it works towards reducing its debt load

Cenovus puts shareholders first, as it works towards reducing its debt load

At its investor day meeting in Toronto today, Cenovus Energy unveiled its updated corporate strategy and five year business plan, focused primarily on reducing debt and maximizing returns to shareholders. At a WTI price of about US$60 a barrel, the company expects to generate about $11 billion in free cash flow through 2024.

Less capital spending planned this year 

Since its last budget forecast in April, Cenovus trimmed its capital spending plans by $150 million for 2019, reducing this year’s budget to between $1.1 and $1.2 billion.

The company calls its capital spending profile "very modest," likely not exceeding $1.9 billion for any given year, despite planned expansions at its two SAGD facilities — Foster Creek and Christina Lake.

Details on expansion plans

Despite the capex cutbacks, the company still plans to grow output up to 3% annually, reaching an estimated 550,000 boe/day by the end of 2024, subject to "improved" market access.

Cenovus currently has regulatory approvals in place for phase H expansions at both of its SAGD operations. The company says it continues to progress development work on each project, working towards potential sanctioning sometime next year. 

Desperately seeking more takeaway capacity

The heavy oil producer stressed that the timing of any investment and growth of its oil sands production capacity will depend heavily on getting "more certainty around takeaway capacity." 

Aside from booking pipeline space, the company continues to diversify its marketing strategy, with an eye to getting its heavy oil to the US Gulf Coast (USGC). 

 

GRAPHIC COURTESY CENOVUS ENERGY

 

Why the USGC matters

Cenovus sells a portion of its diluted bitumen into the Western Canadian Select (WCS) blend, Canada's largest heavy oil benchmark. WCS prices in the USGC are presently about US$8 higher than in Alberta, and even US$2 higher than prices at the Cushing storage hub in the US Midwest.

Cenovus says it has 133,000 bbl/day of pipeline takeaway capacity to the USGC, US Midwest and Canadian West Coast, with another 275,000 bbl/day of volumes booked on the planned Keystone XL and Trans Mountain Expansion lines.

According to the Energy Information Administration (EIA), the USGC (PADD 3) imported over 580,000 bbl/day of Canadian crude in July, with about 200,000 bbl/day delivered by rail. The region took in a record 646,000 bbl/day of Canadian crude last October, when the heavy oil discount blew-out to unprecedented levels. 

GRAPH COURTESY CENOVUS ENERGY

Crude-by-rail still important, at least until new pipelines are built

The company says it plans to boost its crude-by-rail capacity to about 100,000 bbl/day by the end of this year.

If pipeline expansions continue to stall, Cenovus says it is considering building a diluent recovery unit (DRU) at its rail loading terminal in Bruderheim, Alberta. 

Bitumen from the oil sands is blended with diluent, typically condensate, in order to meet pipeline specifications. Although diluted bitumen shipped by pipeline can contain as much as 40% condensate, dilution requirements for railed bitumen is considerably lower, increasing bitumen transport volumes in the railcar.

A decision on whether or not to build a DRU is not expected until the latter half of next year.

 

INVESTMENT TIMELINE COURTESY CENOVUS ENERGY

 

More money for shareholders

The company also announced a 25% increase in its quarterly dividend, rising to $0.0625 per share. Even at a WTI price of US$45 a barrel, Cenovus says it has the capacity to grow its dividend by 5% to 10% annually. 

CEO Alex Pourbaix also says the company's balance sheet may be robust enough to begin "opportunistic" share repurchases at some point over the next five years, which may include buying back some its shares from ConocoPhillips. ConocoPhillips owns almost 17% of all CVE shares outstanding, acquired during the sale of its 50% stake in its jointly-owned oil sands assets.

Cenovus says it continues to progress towards its target of reducing long term debt to $5 billion, which it believes is achievable over next 12 to 18 months.

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