Cenovus reports solid performance in 2019 summary
Company generates $2.5 billion of free funds flow; reduces net debt
Cenovus Energy Inc. continued to gain momentum in 2019, generating free funds flow of $361 million in the fourth quarter and approximately $2.5 billion for the year, reducing net debt by 22% year-over-year and completing construction on its Christina Lake phase G oil sands expansion in March.
In the fourth quarter of 2019, Cenovus increased its dividend by 25% and reached full ramp-up of its crude-by-rail shipping capacity.
"We continued to deliver on our commitments to shareholders last year," said Alex Pourbaix, Cenovus President & Chief Executive Officer. "While running safe and reliable operations, we maintained our industry-leading low cost structure, exercised capital discipline and enhanced shareholder value. And through increased rail capacity, we further improved our market access position, providing greater exposure to global oil pricing."
Key fourth-quarter and 2019 developments
- Reduced net debt by a further $289 million to $6.5 billion in the fourth quarter
- Generated cash from operating activities of $740 million in the fourth quarter and $3.3 billion for the full year as well as adjusted funds flow of $678 million in the fourth quarter and $3.7 billion for the full year
- Reduced year-over-year upstream operating expenses through focused cost leadership
- Exceeded crude-by-rail shipping target, achieving 106,000 barrels per day (bbls/d) loaded in December
- Achieved fourth-quarter oil sands production of more than 374,000 bbls/d, up from 355,000 bbls/d in the third quarter of 2019 mainly due to reduced curtailment levels
In 2019, Cenovus increased cash from operating activities to approximately $3.3 billion from $2.2 billion the previous year and adjusted funds flow to about $3.7 billion from $1.7 billion in 2018. Cenovus had free funds flow of approximately $2.5 billion in 2019, an eight-fold increase from a year earlier, driven by higher adjusted funds flow and disciplined capital spending. Fourth-quarter free funds flow was $361 million compared with a shortfall of $312 million in the same period of 2018.
The company's full-year upstream results benefited from a 52% narrowing of the differential between West Texas Intermediate (WTI) and Western Canadian Select (WCS) crude oil prices in 2019 compared with 2018 as well as increased sales at locations outside of Alberta, where the company was able to achieve higher realized prices. Refining margins were lower compared with 2018 primarily due to reduced realized crack spreads.
"With our low cost structure, continued focus on capital discipline and our diversified transportation portfolio to get more of our product to U.S. markets, we were able to generate very strong free funds flow in 2019," said Pourbaix. "And we put that cash to good use, further deleveraging our balance sheet and increasing our dividend in the fourth quarter of the year."
Operating earnings from continuing operations were $456 million in 2019, compared with an operating loss from continuing operations of nearly $2.8 billion in 2018. The year-ago results included a significant realized hedging loss, as well as a number of significant non-cash items. Full-year 2019 net earnings from continuing operations were approximately $2.2 billion compared with a net loss from continuing operations of $2.9 billion a year earlier. The year-over-year increase in net earnings was driven by higher operating earnings relative to 2018, non-operating foreign exchange gains of $787 million in 2019 compared with losses of $593 million in 2018 and a deferred income tax recovery in 2019, including $671 million related to the reduction of Alberta's corporate income tax rate and $387 million due to an internal restructuring of the company's U.S. operations resulting in an increased tax basis of its U.S. refining assets.
Further information on the company's financial results are included in its 2019 Management Discussion & Analysis (MD&A) available in the Investors section at cenovus.com.
Balance sheet strength and capital discipline
Cenovus continued to make significant progress on its deleveraging plans through the past year, repaying approximately US$1.8 billion of its unsecured notes and reducing net debt to $6.5 billion by year end, compared with net debt of approximately $8.4 billion at the start of 2019. Cenovus's net debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio was 1.6 times at the end of 2019, down from 1.9 times at the end of the third quarter and 5.9 times at the end of 2018. Deleveraging remains a top priority for Cenovus as the company continues to pursue its net debt target of $5 billion. At net debt of $5 billion, Cenovus anticipates being in a position to maintain a target ratio of less than two times net debt to adjusted EBITDA, at bottom-of-the-cycle commodity prices.
During the fourth quarter of 2019, Moody's Investors Service affirmed Cenovus's Ba1 credit rating and improved its outlook from ‘stable' to ‘positive,' citing the significant amount of debt reduction the company has achieved. In addition to making progress towards re-establishing an investment grade credit rating at Moody's, Cenovus remains committed to maintaining its investment grade credit ratings at S&P Global Ratings, DBRS Limited and Fitch Ratings.
Market access and integration
Cenovus successfully ramped up its crude-by-rail shipping capacity in 2019 and in December exceeded its target by achieving average rail loading volumes of nearly 106,000 bbls/d.
While pipelines remain the cornerstone of Cenovus's transportation strategy, rail continues to be an important option to bridge the gap until expansion pipelines are completed. Pipelines and rail are part of the company's integrated business model designed to maximize exposure to global oil prices and mitigate pipeline congestion through a range of options to increase margins and reduce cash flow volatility.
Cenovus's 2019 oil sands production averaged 354,257 bbls/d, approximately 2% lower than in 2018 primarily due to the Government of Alberta's mandated curtailment program. Fourth-quarter oil sands volumes averaged 374,132 bbls/d, 15% higher than the same quarter in 2018. In December 2019, the Alberta government introduced the Special Production Allowance (SPA) program, which allows crude oil producers to exceed mandated curtailment levels if those volumes are transported using incremental crude-by-rail capacity. In the fourth quarter of 2018, volumes were impacted by Cenovus's voluntary decision to restrict oil sands production rates in response to pipeline constraints and wide light-heavy oil differentials. Cenovus anticipates higher oil production levels overall this year compared with 2019 due to the return to unconstrained production with the SPA program and the ramp-up of Christina Lake phase G over the next six to 12 months.
"While mandatory curtailment reduced our overall production volumes in 2019, it helped keep light-heavy oil price differentials from reaching the record highs we saw at the end of 2018, contributing to a significant overall benefit for the province and for our industry," said Pourbaix. "Compared with 2018, our royalty payments to the province of Alberta increased significantly, more than doubling to $1.1 billion in 2019."
Cenovus continues to deliver equally strong operational, financial and environmental, social and governance (ESG) performance with a continued focus on being an ESG leader within its industry. In January, Cenovus announced its four ESG focus areas and set bold targets to guide its performance related to climate and greenhouse gas (GHG) emissions, Indigenous engagement, land and wildlife and water stewardship. The company also announced last month it plans to invest $10 million per year for at least five years to build much-needed new homes in six Indigenous communities near Cenovus's oil sands operations in northern Alberta.
As part of its commitment to strong ESG performance, Cenovus is committed to rigorous governance practices and industry-leading safety performance. In 2019, the company's overall health and safety performance improved from the previous year due to Cenovus's focus on risk management and asset integrity. The company also achieved the second-lowest recordable injury frequency in its history.
Fourth-quarter oil sands production at Cenovus's Christina Lake and Foster Creek oil sands projects was more than 374,000 bbls/d, up from 355,000 bbls/d in the third quarter of 2019 mainly driven by the easing of mandatory curtailment levels. Full-year 2019 production declined slightly from a year earlier primarily due to curtailment. As a result of the SPA program and increased rail shipping capacity, Cenovus has returned to unconstrained production, and the company expects to ramp up its Christina Lake phase G expansion over the next six to 12 months.
Fourth-quarter oil sands operating costs were $8.06 per barrel (bbl) essentially flat with the same period a year earlier. Full-year oil sands operating costs were $8.15/bbl, up 7% from $7.65/bbl in 2018 primarily due to lower volumes as a result of mandated curtailment. Per-barrel oil sands operating costs also increased as a result of higher repairs and maintenance activity and related costs due to a turnaround at Christina Lake during the second quarter, and higher fuel costs. Fuel costs increased year over year due to higher natural gas prices and fuel consumption as Cenovus maintained normal steam injection rates at its oil sands operations while reducing production volumes to meet mandated curtailment levels. Cenovus continued to achieve further reductions in its oil sands sustaining capital costs in 2019, which declined 10% to $567 million, or approximately $4.00 per barrel of capacity from the previous year.
At Christina Lake, the steam to oil ratio (SOR) was 2.0 in 2019, compared with 1.9 in 2018. At Foster Creek, the SOR was unchanged at 2.8 from a year earlier.
Full-year 2019 oil sands operating margin increased more than three-fold year over year to approximately $3.5 billion due to higher average realized sales prices, decreased transportation and blending costs and realized risk management losses of $23 million compared with losses of approximately $1.6 billion in 2018, partially offset by lower sales volumes and higher royalties.
Cenovus has largely completed work to optimize its Deep Basin operating model to reduce costs, improve efficiency and maximize value. The company continues to take a disciplined approach in the Deep Basin and is driving the business to be resilient at bottom-of-the-cycle commodity prices of US$45/bbl WTI and Alberta Energy Company (AECO) pricing of $1.50 per gigajoule. The Deep Basin generated operating margin in excess of capital investment of $64 million in the fourth quarter of 2019, up 45% from the same period a year earlier. Operating margin in excess of capital investment was $189 million for the full year.
Deep Basin production averaged 97,423 barrels of oil equivalent per day (BOE/d) in 2019, a 19% decrease from 2018 levels, due to natural declines from lower sustaining capital investment, the divestiture of Cenovus's Pipestone Partnership in 2018 and temporary well shut-ins in response to low natural gas prices.
Total Deep Basin operating costs decreased 16% in 2019 compared with the previous year as a result of the Pipestone divestiture, lower third-party processing costs due to lower throughput and Cenovus focusing on optimizing operations. This optimization work included well interventions, repair and maintenance activities and leveraging the company's processing infrastructure to lower the cost structure. Despite the 2019 year-over-year production decrease on a full-year basis, operating costs increased a modest 2% to $8.79/BOE from $8.58/BOE in 2018.
Refining and marketing
Cenovus's Wood River, Illinois and Borger, Texas refineries, which are co-owned with the operator, Phillips 66, had solid operational performance in 2019. Crude oil runs and refined product output in 2019 were consistent with the previous year.
Refining and marketing operating margin for the fourth quarter was $109 million, compared with $251 million in the same quarter of 2018. Full-year refining and marketing operating margin was $737 million, compared with operating margin of $996 million in the year-earlier period. The year-over-year decrease was primarily due to reduced crude cost advantage as heavy and medium sour crude oil differentials narrowed.
Effective January 2020, the Wood River refinery was re-rated to reflect higher processing capacity of 346,000 gross bbls/d, an increase of 13,000 bbls/d from 2019.
Cenovus's refining operating margin is calculated on a first-in, first-out (FIFO) inventory accounting basis. Using the last-in, first-out (LIFO) accounting method employed by most U.S. refiners, operating margin from refining and marketing would have been $140 million lower in 2019, compared with $118 million higher in 2018.
Cenovus's proved and probable reserves are evaluated each year by independent qualified reserves evaluators (IQREs). At the end of 2019, Cenovus had total proved reserves of approximately 5.1 billion BOE, essentially unchanged from 2018, while total proved plus probable reserves decreased 2% to about 6.9 billion BOE. Proved bitumen reserves were approximately 4.8 billion barrels, while proved plus probable bitumen reserves were about 6.4 billion barrels, both relatively unchanged from 2018. Cenovus's reserve life index (RLI) for proved reserves is in excess of 30 years, with proved plus probable reserves having an RLI in excess of 40 years.
Cenovus's 2019 proved reserves finding and development (F&D) costs were $7.57/BOE, excluding changes in future development costs, up 74% from 2018, reflecting lower proved reserves additions, partially offset by decreased capital spending. Three-year average proved reserves F&D costs were $5.97/BOE, excluding changes in future development costs.
Cenovus, which primarily holds long-life bitumen reserves, believes another meaningful measure of efficiency is F&D costs for proved developed reserves, excluding changes in future development costs. For 2019, Cenovus's bitumen proved developed reserves F&D costs were $2.49/bbl, excluding changes in future development costs, a decrease of more than 50% from 2018, mainly as a result of lower capital expenditure on Christina Lake phase G, deferral of oil sands sustaining capital expenditure and the company's focus on maximizing value.
More details about Cenovus's reserves and other oil and gas information is available in the Advisory, the company's Annual Information Form (AIF) and Annual Report on Form 40-F for the year ended December 31, 2019, which are available on SEDAR at, EDGAR at and Cenovus's website at .