Cenovus navigates challenging Q1 conditions
Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) continued to deliver safe and reliable operations in the first quarter of 2020 while demonstrating its ability to take swift and decisive steps to enhance its financial resilience and protect its balance sheet in the face of the global macro-economic challenges caused by the COVID-19 pandemic.
The company's first-quarter financial results were impacted by the significant decline in global demand and pricing for crude oil and refined products caused by COVID-19 and exacerbated by a dispute between Saudi Arabia and Russia that resulted in increased oil supply.
"The strength of our balance sheet, the quality of our long-life oil sands reserves and the flexibility of our business to respond quickly to the changing external environment have positioned us well to withstand an extended period of low oil prices," said Alex Pourbaix, Cenovus President & Chief Executive Officer. "When global economic conditions improve, we'll be ready to contribute to Canada's economic recovery in a meaningful way."
Financial & production summary
(for the period ended March 31)
Financial ($ millions, except per share amounts)
Cash from operating activities
Adjusted funds flow1, 2
Per share diluted
Free funds flow1, 2
Operating earnings (loss)1
Per share diluted
Net earnings (loss)
Per share diluted
Production3 (before royalties)
Oil sands (bbls/d)
Conventional liquids3,4 (bbls/d)
Total liquids3,4 (bbls/d)
Total natural gas (MMcf/d)
Total production4 (BOE/d)
1 Adjusted funds flow, free funds flow and operating earnings/loss are non-GAAP measures. See Advisory.
2 The prior period has been reclassified to conform with the current period treatment of non-cash inventory write-downs.
3 Includes oil and natural gas liquids (NGLs).
4 Cenovus's Deep Basin segment has been renamed the Conventional segment and now includes the company's Marten Hills asset. For a description of Cenovus's operations, refer to the Reportable Segments section of Management's Discussion and Analysis.
Response to COVID-19
In response to the COVID-19 pandemic, Cenovus took swift action to protect the health and safety of its staff and ensure the continuity of its business. Following the guidance of public health officials, the company directed all staff who are able to do so to work from home, established mandatory self-isolation protocols and restricted travel policies as well as implemented active health screening, physical distancing and advanced cleaning and sanitation measures at its field operations.
Business flexibility and balance sheet strength
Over the past two years, Cenovus has worked diligently to reduce its sustaining capital and operating costs, maintain capital discipline and strengthen its balance sheet. In the first quarter of 2020 and in early April, the company implemented significant additional measures to enhance its financial resilience in response to the recent decline in commodity prices and the overall weak business environment. Cenovus announced the temporary suspension of its crude-by-rail program and, as a result, updated its production guidance for the year. The company reduced its 2020 capital spending guidance by $600 million at the midpoint of the range and lowered its forecast operating costs for the year by approximately $100 million compared with its original 2020 budget. Cenovus also announced a $50 million reduction in its general and administrative (G&A) spending guidance for 2020, a temporary suspension of its dividend and the deferral of investment decisions on major growth projects.
Cenovus is actively managing its production levels as market conditions change to optimize the value it receives for its products. Currently, Cenovus's oil sands production has been ramped down by approximately 60,000 barrels per day (bbls/d), and the company has flexibility to quickly ramp up production when market conditions improve. Based on analysis conducted during past production ramp-downs, the company is confident in its ability to safely reduce production even further without impacting the integrity of its reservoirs. Through its experience operating under voluntary and mandatory production curtailments, Cenovus has demonstrated ability to manage volume reductions of nearly 100,000 bbls/d.
Cenovus believes its revised capital spending and business plans will ensure ongoing safe and reliable operations and adherence to regulatory commitments as well as enable it to proceed with necessary maintenance at its operations.
"We've built a solid financial framework and flexible business plan that provide us with multiple options to continue to manage our balance sheet prudently," said Pourbaix. "We've adjusted our 2020 business plan to navigate this period of volatile commodity prices and remain focused on preserving the strength of our balance sheet."
Cenovus has a $4.5 billion committed credit facility, with no maturities until late 2022 and late 2023. In April, to further strengthen its liquidity position, the company secured commitments from several of its existing Canadian lenders for an additional $1.1 billion committed credit facility.
"Our ability to secure a significant new credit facility in this challenging market gives us even more financial flexibility to withstand a prolonged period of low oil prices," said Pourbaix. "And it is a testament to the confidence our lenders have in our company."
In addition to its committed credit facilities, Cenovus has a further $1.6 billion of uncommitted bilateral credit lines and no bond maturities until late 2022. As of March 31, 2020, Cenovus had drawn approximately $550 million from its committed credit facilities and its uncommitted bilateral credit lines. The company's jointly-owned non-operated refining business has further uncommitted bilateral credit lines, of which Cenovus's share is approximately US$138 million. Cenovus's share of short-term borrowings against these lines was approximately US$103 million as of March 31, 2020. This portfolio of facilities and longer-term maturities provides ample liquidity and runway to sustain the company's operations through the current market downturn.
Cenovus's net debt was approximately $7.4 billion at the end of the first quarter, compared with net debt of about $6.5 billion at the end of 2019. The increase in net debt was primarily due to unrealized foreign exchange losses associated with U.S. dollar denominated debt, the draws against the company's credit lines and Cenovus's proportional share of borrowing by its refining partnership during the quarter. Cenovus remains committed to its long-term net debt target of $5 billion; however, the timeline for reaching this target depends on the duration of the current commodity price environment.
First-quarter financial results
In the first quarter of 2020, the average price of West Texas Intermediate (WTI) declined 16% compared with the same period a year earlier. High crude oil inventory levels and takeaway constraints caused the average differential between WTI and Western Canadian Select (WCS) prices to widen 66% in the first quarter compared with the same period in 2019. This contributed to a 54% decline in realized pricing for Cenovus's crude oil in the first quarter from a year earlier, to $22.74 per barrel (bbl).
First-quarter cash from operating activities was $125 million compared with $436 million the previous year, while adjusted funds flow declined to a shortfall of $146 million compared with adjusted funds flow of more than $1 billion in the same period of 2019. The company had a free funds flow shortfall of approximately $450 million in the quarter compared with free funds flow of $688 million a year earlier.
Cenovus had a first-quarter operating margin shortfall of $589 million compared with operating margin of more than $1.2 billion in the same period in 2019. The decrease was primarily due to lower average realized oil prices, a refining and marketing operating margin shortfall that included $253 million in non-cash inventory write-downs, non-cash inventory write-downs of $335 million related to the company's upstream business, increased transportation and blending costs, and upstream realized risk management losses compared with gains in 2019. First-quarter results were negatively impacted by the timing of condensate and refinery inventory use in a falling commodity price environment. Condensate blended to produce heavy oil and refinery feedstock used in the first quarter were purchased when prices were higher.
The company had a first-quarter operating loss of approximately $1.2 billion compared with operating earnings of $69 million in the same quarter in 2019, primarily due to the operating margin shortfall and higher depreciation, depletion, and amortization (DD&A) in its conventional segment that included a non-cash impairment charge of $315 million related to the decline in forward crude oil and natural gas prices. Cenovus had a net loss of approximately $1.8 billion compared with net earnings of $110 million a year earlier. The net loss was primarily due to the operating loss and non-operating foreign exchange losses of $589 million compared with gains of $209 million in the first quarter of 2019. The net loss was partially offset by a deferred income tax recovery of $348 million compared with an expense of $41 million in the first quarter of 2019 and lower unrealized risk management losses in the first quarter compared with a year earlier.
First-quarter production at Cenovus's Christina Lake and Foster Creek oil sands projects was approximately 387,000 bbls/d, up from nearly 343,000 bbls/d in the same period in 2019. The increase was mainly driven by the company's use of Alberta's Special Production Allowance (SPA) program for incremental barrels shipped by rail and by reduced mandatory curtailment levels compared with the first quarter of 2019.
In the first quarter, Cenovus loaded an average of almost 91,000 bbls/d of its own crude oil for transport by rail, up from about 89,000 bbls/d in the fourth quarter of 2019. First-quarter transportation and blending costs reflected the fact that Cenovus's crude-by-rail program continued to operate at normal capacity levels through most of the period. With the wind-down of the rail program now essentially completed, Cenovus does not anticipate taking advantage of the SPA program for the foreseeable future. As a result, the company's oil sands production is now forecast to be between 350,000 bbls/d and 400,000 bbls/d for 2020, a 6% reduction at the mid-point of the range compared with its original 2020 forecast announced in its December 2019 budget.
First-quarter oil sands operating costs were $7.75/bbl, down 14% from the same period a year earlier, primarily due to higher year-over-year sales volumes and lower natural gas prices, partially offset by higher gas consumption.
At Christina Lake, the steam to oil ratio (SOR) was 2.0 in the first quarter, unchanged from a year earlier. The SOR at Foster Creek was 2.8, down slightly from 2.9 a year earlier.
Cenovus's conventional segment was previously referred to as the Deep Basin segment and now includes the Marten Hills asset. The comparative period has been restated to reflect this change.
Conventional production averaged almost 96,000 barrels of oil equivalent per day (BOE/d) in the first quarter, an 8% decrease from the same period in 2019, due to natural declines from lower sustaining capital investment, partially offset by production of 3,600 bbls/d from Marten Hills and reduced downtime related to third-party pipeline outages compared with the first quarter of 2019. As part of the recently announced 2020 budget update, Cenovus has suspended the majority of its remaining planned capital spend in the conventional segment.
Total conventional operating costs declined 2% to $9.01/BOE in the first quarter of 2020 compared with the previous year, driven by decreased workforce costs, property tax and lease costs as well as lower repairs and maintenance activity. The decrease was partially offset by lower sales volumes and higher waste fluid handling and trucking costs for Marten Hills.
Refining and marketing
Cenovus's Wood River, Illinois and Borger, Texas refineries, which are co-owned with the operator, Phillips 66, performed well in the first quarter, including a year-over-year increase in crude oil runs and refined product output. Planned turnaround work, maintenance activity and unplanned outages during the quarter had less of an impact on operations than in the first three months of 2019. Average crude runs increased 18% to 442,000 bbls/d in the first quarter compared with the same period in 2019. Late in the first quarter of 2020, Wood River and Borger began to reduce crude rates in response to the economic slowdown caused by COVID-19.
Cenovus had a refining and marketing operating margin shortfall of $375 million in the first quarter, compared with operating margin of $304 million in the same period of 2019. The decrease was due to lower market crack spreads and reduced crude advantage. Refining and marketing recorded first-quarter non-cash inventory write-downs of $253 million due to lower refined product and crude oil prices.
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 $87 million higher in the first quarter, compared with $143 million lower in the same period in 2019.
Health and safety
Cenovus remains focused on delivering industry-leading safety performance through its focus on risk management and asset integrity. The company continued its strong safety performance in the first quarter of 2020 with zero significant incidents and solid results in the prevention of recordable injuries and process safety events.
Cenovus remains committed to achieving theit has set in four key environmental, social and governance (ESG) focus areas. The company continues to work on the plan for pursuing those targets over the next decade and anticipates being in a position to provide more detail in late 2020.