Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) continued to deliver strong operational performance in the first quarter of 2017, increasing oil sands production by almost one-third while further reducing per-barrel crude oil operating costs compared with the same period in 2016. As a result of its reduced cost structure, significant liquidity and strong financial position, the company was also able to pursue the agreement, announced March 29, 2017, to acquire assets in Alberta and British Columbia from ConocoPhillips for approximately $17.7 billion. The agreement includes ConocoPhillips' 50% interest in the FCCL Partnership, the companies' jointly owned oil sands venture, as well as its Deep Basin assets. The transaction, which will be immediately accretive to key performance measures, is expected to close in the second quarter.
Key first quarter developments
Asset acquisition update
Since announcing its agreement to purchase the ConocoPhillips assets, Cenovus has made significant progress in executing its acquisition plan. To reduce debt associated with the transaction and strengthen its balance sheet, the company has been marketing its legacy Pelican Lake and Suffield conventional assets with data rooms open to prospective buyers.
"These assets have attracted strong initial interest from a wide variety of potential purchasers," said Brian Ferguson, Cenovus President & Chief Executive Officer. "Our data rooms have been very busy, and that bodes well as we look to successfully conclude transactions to further streamline our asset portfolio, help preserve our financial resilience and deleverage our balance sheet."
Asset sale proceeds are expected to be applied against anticipated draws on Cenovus's asset-sale bridge facility and existing credit facility, which are part of the company's acquisition financing plan. On April 6, 2017, Cenovus successfully closed a bought-deal offering of common shares with gross proceeds of $3.0 billion. In addition, on April 7, 2017, the company completed a US$2.9 billion long-term debt offering of 4.9% (weighted average) senior unsecured notes. Cenovus has also obtained commitments from its lending syndicate to extend the maturities of its existing credit facility tranches to 2020 and 2021 and increase the total capacity from $4.0 billion to $4.5 billion. The company expects this credit facility transaction to close later this week.
Upon closing, the acquisition will give Cenovus two attractive growth platforms in Western Canada, providing the company with enhanced opportunities to increase total shareholder return, including assessing the optimal level of its dividend once the company's divestiture of legacy assets is complete. If the acquisition had closed on the January 1, 2017 effective date, the transaction would have been expected to more than double the company's production, increasing 2017 forecast volumes by approximately 298,000 barrels of oil equivalent per day (BOE/d). After completing the transaction, Cenovus will have total combined regulatory approval for 735,000 barrels per day (bbls/d) of production capacity at its FCCL assets, including existing operating capacity and potential capacity additions. Cenovus will also gain 1,500 potential drilling opportunities in the Deep Basin. The acquisition is expected to be immediately accretive to key performance measures and to give Cenovus capacity to generate forecast 2018 free funds flow of approximately $500 million, net of planned asset divestitures, with West Texas Intermediate (WTI) oil prices at US$50/bbl and New York Mercantile Exchange (NYMEX) natural gas prices at US$3 per million British thermal units (MMBtu).
If the acquisition had closed on the January 1, 2017 effective date, forecast capital investment for the year in the acquired Deep Basin assets would have been anticipated to be approximately $170 million, with plans for increased investment levels in the following two years. The company believes these properties, which will continue to be operated by staff joining Cenovus from ConocoPhillips, have the potential to achieve a more than 40% increase in production to average approximately 170,000 BOE/d in 2019. With this moderate amount of capital investment, these assets are expected to make a significant contribution to increased adjusted funds flow.
Additionally, the Deep Basin is expected to offset Cenovus's demand for natural gas as oil sands production increases, as well as provide NGLs that could be used as solvents. The company plans to implement a solvent-aided process at its oil sands operations to potentially enhance in-situ recovery and improve environmental and economic performance.
"With the successful completion of this transaction, we'll have a combined portfolio of long-cycle oil sands development, complemented by the short-cycle opportunities in the Deep Basin, which we believe will provide us with a clear line of sight to a decade of growth and value creation for our company and shareholders," said Ferguson. "We are focused on completing this acquisition and executing our transition plan to help ensure a smooth and timely transfer of staff and facilities to Cenovus."
At its Investor Day in June 2017, Cenovus intends to provide an update on its plans for Foster Creek phase H and Narrows Lake phase A, including expectations for capital efficiencies and timing for each project. Foster Creek phase H has an expected design capacity of 30,000 bbls/d and Narrows Lake phase A has an expected design capacity of 45,000 bbls/d. The company continues to advance engineering work on the two deferred expansion projects using the same rigour that was applied to Christina Lake phase G. Cenovus also expects to provide additional information on its plans for the new Deep Basin assets and on technologies being developed to potentially enhance operating performance across its oil sands projects.
From 2014 to 2016, Cenovus's focus on cost efficiency and innovation led to a 30% reduction in its per-barrel oil sands non-fuel operating costs as well as a 50% reduction in oil sands sustaining capital costs. In that same period, the company has also reduced general and administrative (G&A) expenses per BOE by about one-third, excluding charges related to severance and office building leases in Calgary that exceed Cenovus's current and near-term requirements. With anticipated future cost reductions, opportunities to improve reservoir performance and the potential to develop its large portfolio of emerging assets, Cenovus expects to be well positioned at the close of the acquisition to create significant value across a substantially larger oil sands resource and production base.
Cenovus has made all required regulatory filings in connection with the acquisition and is awaiting the required approvals. In addition, on March 31, 2017, the Toronto Stock Exchange approved the listing of 208 million common shares to be issued to ConocoPhillips upon closing of the acquisition, subject to customary closing conditions. The New York Stock Exchange approved the listing of such shares on April 11, 2017.
First quarter overview
In the first quarter of 2017, the ramp-up of the Christina Lake phase F and Foster Creek phase G expansion projects continued as expected. Incremental volumes from the new phases contributed to first quarter oil sands production, net to Cenovus, of more than 181,000 bbls/d, a 32% increase from the same period in 2016. The expansions increased the company's total oil sands production capacity by 26%, or 80,000 bbls/d gross, to 390,000 bbls/d gross. The new 100-megawatt natural gas fired cogeneration plant at Christina Lake, which provides reliable, energy-efficient power to the project, completed its start up in the first quarter.
Field construction has resumed at Christina Lake phase G and is expected to ramp up through the remainder of the second quarter. The company anticipates the expansion can be completed with go-forward capital investment of between $16,000 and $18,000 per flowing barrel. Phase G has an expected design capacity of 50,000 bbls/d gross. First oil is anticipated in the second half of 2019. At its oil sands business, Cenovus drilled 206 gross stratigraphic test wells in the first quarter of 2017. These wells are drilled to help identify pad locations for sustaining wells and near-term expansion phases as well as to further evaluate emerging assets.
Cenovus's conventional oil and natural gas portfolio remains the most flexible part of its capital investment program and with moderate spending is expected to be able to generate significant free funds flow to invest in growth opportunities. In the first quarter of 2017, the conventional portfolio generated $57 million in free funds flow. Cenovus more than doubled capital investment in its conventional portfolio to $88 million in the first quarter of 2017 compared with a year earlier, mostly due to the company's targeted drilling program on the Palliser Block, which is proceeding as expected. Cenovus drilled 20 horizontal oil wells and 26 stratigraphic test wells during the first three months of the year. The completion of wells drilled in late 2016, combined with drilling in the first quarter, resulted in the addition of approximately 1,300 bbls/d of crude oil production from the Palliser Block for the period, with incremental volumes reaching 3,300 bbls/d as of March 31. Overall, conventional oil production in the first quarter of 2017 was 53,413 bbls/d, a 10% decrease from the same period a year earlier, largely due to expected natural declines. Cenovus plans to sell a significant portion of its legacy conventional properties to help finance the company's acquisition of the Deep Basin and FCCL assets.
Cenovus continued to achieve additional operating cost and sustaining capital reductions in the first quarter of 2017. Oil sands operating costs were $8.97/bbl in the first quarter, a 6% decrease from the same period a year earlier, while non-fuel oil sands operating costs were $6.23/bbl, a 15% decline. At Cenovus's conventional assets, despite expected production declines, per-unit liquids operating costs continued to improve, declining 2% to $14.47/bbl compared with the first quarter of 2016. G&A costs declined 28% compared with the first quarter of 2016, mostly as a result of lower expenses associated with Cenovus's employee long-term incentives and its Calgary real estate commitments.
Financial performance and resilience
In the first quarter of 2017, Cenovus generated adjusted funds flow of $323 million, compared with $26 million in 2016. Adjusted funds flow improved due to the nearly three-fold increase in Cenovus's crude oil sales price and higher refining and marketing operating margins compared with 2016. This was partially offset by about $90 million in realized hedging losses, $29 million in transaction costs related to the acquisition and approximately $20 million related to linefill inventory for additional pipeline takeaway capacity from Christina Lake and oil held in storage. Cash from operating activities increased 80% to $328 million from the same period in 2016. Cenovus's average crude oil sales price was $41.41/bbl in the first quarter, up from $15.97/bbl in the same period of 2016.
Cenovus had a companywide netback of $19.11/BOE on its crude oil and natural gas production in the first quarter of 2017 compared with a loss of $0.12/BOE in the year earlier period.
Cenovus has an active hedging program to support cash outflows and to help maintain financial resilience. As of April 25, 2017, the company had hedges in place on approximately 87,500 bbls/d of crude oil for the remainder of this year at an average floor price of US$49.20/bbl and 50,000 bbls/d of crude oil hedged for the first half of 2018 with an average floor price of US$49.74/bbl. To further support Cenovus's financial resilience while the asset sale bridge loan remains outstanding, the company plans to hedge a greater percentage of forecast liquids and natural gas volumes, allowing increased certainty on a greater portion of expected cash outflows.
First quarter details
Corporate and financial information
Conference Call Today
9 a.m. Mountain Time (11 a.m. Eastern Time)
Cenovus will host a conference call today, April 26, 2017, starting at 9 a.m. MT (11 a.m. ET). To participate, please dial 888-231-8191 (toll-free in North America) or 647-427-7450 approximately 10 minutes prior to the conference call. A live audio webcast of the conference call will also be available via cenovus.com. The webcast will be archived for approximately 90 days.
Cenovus Energy Inc.
Cenovus Energy Inc. is a Canadian integrated oil company. It is committed to applying fresh, progressive thinking to safely and responsibly unlock energy resources the world needs. Operations include oil sands projects in northern Alberta, which use specialized methods to drill and pump the oil to the surface, and established natural gas and oil production in Alberta and Saskatchewan. The company also has 50% ownership in two U.S. refineries. Cenovus shares trade under the symbol CVE, and are listed on the Toronto and New York stock exchanges. For more information, visit cenovus.com.
SOURCE: Cenovus Energy Inc.
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