Cenovus delivers "disciplined" capital budget for 2021 in wake of Husky merger
Cenovus Energy Inc. has delivered what the company states is a disciplined 2021 capital budget focused on maintaining safe and reliable operations while positioning the company to drive enhanced shareholder value. The budget includes sustaining capital of approximately $2.1 billion to deliver upstream production of approximately 755,000 barrels of oil equivalent per day (BOE/d) and downstream throughput of approximately 525,000 barrels per day (bbls/d).
The budget anticipates Cenovus achieving nearly $1 billion of synergies in 2021 as a result of its recent transaction with Husky Energy, putting the company firmly on track to reach its planned $1.2 billion in annual run-rate synergies by the end of 2021. The budget also includes $520 million to $570 million for the Superior Refinery rebuild, with a substantial portion of the go-forward costs expected to be recovered through insurance proceeds.
"With this budget we're delivering on the commitments we made when we announced the Husky transaction," said Alex Pourbaix, Cenovus President & Chief Executive Officer. "In 2021 we'll remain focused on disciplined capital allocation, investing selectively in the highest return opportunities available in our expanded asset portfolio, and we expect to make significant progress towards achieving our synergy targets."
2021 budget highlights
- Total upstream production of 730,000 BOE/d to 780,000 BOE/d
- Total downstream throughput of 500,000 bbls/d to 550,000 bbls/d
- Total capital expenditures of $2.3 billion to $2.7 billion, including
- Sustaining capital of approximately $2.1 billion, compared to the $2.4 billion annual average estimated at transaction announcement
- Superior Refinery rebuild costs of $520 million to $570 million (excluding insurance proceeds)
Cenovus's $1.2 billion synergy target from its combination with Husky includes $600 million in estimated annual corporate and operating synergies and $600 million in estimated capital allocation synergies. The 2021 budget positions the company to achieve about $400 million of the estimated annual corporate and operating synergies and all of the estimated capital allocation synergies this year.
Work to achieve these synergies in 2021 is well underway. This includes consolidating information technology (IT) systems and eliminating other service overlaps, applying Cenovus's industry-leading practices and processes, including sub-surface optimization techniques, across Husky's legacy oil sands assets and standardizing field operating models. At the time the transaction with Husky was announced, Cenovus said it would reduce the combined company's workforce by 20 percent to 25 percent to eliminate role duplication and increase efficiency, and the company has already made significant progress towards that target.
"Our 2021 budget puts us firmly on track to achieve the $1.2 billion in annual run-rate synergies we identified, with nearly $1 billion of that total expected to be achieved this year," said Pourbaix. "I'm highly confident we will meet or even exceed our target."
Cenovus remains committed to maintaining and improving its current investment-grade credit ratings. This includes the company's continued focus on allocating free funds flow to reduce its net debt to less than $10 billion and targeting a longer-term net debt level at or below $8 billion.
Both Cenovus and Husky have demonstrated meaningful improvements in process safety events and total recordable injury frequency over the past three years, and the 2021 budget maintains the combined company's focus on enhancing safety and asset integrity. A key priority for Cenovus this year is to harmonize safety management systems across the combined business.
The company expects between $500 million and $550 million of one-time integration-related costs such as consultation and legal fees, transfer of licensed seismic data, integration of IT systems, severance associated with workforce reductions and change of control obligations.
Cenovus's Oil Sands segment has six producing assets located in Alberta and Saskatchewan — the Christina Lake, Foster Creek, Sunrise and Tucker oil sands projects as well as the Lloydminster thermal projects and Cold/Enhanced Oil Recovery.
In 2021, the company plans to spend $850 million to $950 million on its Oil Sands segment. Oil Sands capital is primarily for sustaining production with the vast majority intended for Christina Lake, Foster Creek and the Lloydminster thermal assets. This reflects the company's philosophy of disciplined investment focused on higher-return opportunities.
The company continues to evaluate the application of operating strategies successfully employed at Foster Creek and Christina Lake across all of its oil sands assets.
Oil sands operating costs are expected to be in the range of $9.50/bbl to $11.50/bbl. This reflects presentation differences between Cenovus and legacy Husky as well as the inclusion of certain turnaround costs in operating expense.
Average oil sands production in 2021 is expected to be in the range of 524,000 bbls/d to 586,000 bbls/d. Christina Lake and Foster Creek expected production ranges are 220,000 bbls/d to 240,000 bbls/d and 165,000 bbls/d to 185,000 bbls/d, respectively. Foster Creek production estimates reflect incremental production anticipated from three new well pads scheduled to come online in the first half of the year. Cenovus expects production in the range of 80,000 bbls/d to 90,000 bbls/d at the Lloydminster thermal assets.
The Conventional segment includes conventional oil and natural gas production and processing operations in the Deep Basin and other parts of Western Canada. Cenovus also maintains an interest in the Marten Hills area of Alberta through its investment in Headwater Exploration Inc.
Cenovus plans to spend between $170 million and $210 million on its Conventional portfolio in 2021, which includes economic development in various plays to generate strong returns, improve underlying cost structures through volume enhancement and offset declines.
Production is expected to be in the range of 132,000 BOE/d to 151,000 BOE/d, including 590 million cubic feet per day (MMcf/d) to 650 MMcf/d of natural gas.
Per-unit operating costs are forecast to be in the range of $10/BOE to $12/BOE. This reflects a planned increase in turnarounds due to deferral of turnaround activity from 2020. The company continues to reduce absolute costs across its conventional portfolio and evaluate opportunities to improve the overall competitiveness of the assets.
Cenovus's Offshore segment includes operations and exploration prospects in the Asia Pacific region and offshore Newfoundland and Labrador. Assets in Asia include the Liwan Gas Project offshore China and natural gas projects in the Madura Strait offshore Indonesia. In Atlantic Canada, the company operates in the Jeanne d'Arc Basin, home to the White Rose oil field.
In 2021, Cenovus plans to spend between $200 million and $250 million on its Offshore segment. This capital spend includes planned wells in China and continued development of the MDA-MBH and MDK fields in the Madura Strait, as well as baseline preservation capital for the West White Rose Project, which has been deferred for 2021 while the company continues to evaluate its options.
Working interest production from the company's assets in China is expected to range between 43,000 BOE/d and 50,000 BOE/d, and working interest production from the assets in Indonesia is forecast to be between 7,000 BOE/d and 9,000 BOE/d. Working interest production from the company's Atlantic assets is expected to range between 11,000 BOE/d and 13,000 BOE/d in 2021. Overall operating costs for the Offshore segment are expected to average in the range of $12/BOE to $14/BOE.
Cenovus's Downstream segment is comprised of the company's Canadian Manufacturing, Retail and U.S. Manufacturing businesses.
Canadian Manufacturing includes the Cenovus owned and operated upgrader and asphalt refinery in Lloydminster, the company's crude-by-rail terminal and two ethanol plants. The Lloydminster upgrader and asphalt refinery are well positioned to capture heavy oil-to-synthetic, diesel and asphalt margins and are expected to generate strong free funds flow for the company in 2021. The Retail business includes Cenovus's Canadian retail and commercial channels.
U.S. Manufacturing includes wholly owned refineries in Lima, Ohio and Superior, Wisconsin as well as a 50 percent stake in both the Phillips 66-operated Wood River Refinery in Roxana, Illinois and Borger Refinery, in Borger, Texas, and a 50 percent stake in the Toledo Refinery near Toledo, Ohio, which is operated by BP Products North America Inc.
In 2021, Cenovus plans to spend $1.0 billion to $1.2 billion on its Downstream segment. This includes capital for base maintenance, reliability and safety projects, high-return optimization opportunities at the Wood River and Borger refineries, as well as C$520 million to C$570 million in 2021 for the Superior Refinery rebuild project, which will further improve the company's integration while reducing Alberta heavy exposure. The full completion cost for the rebuild is estimated to be approximately US$950 million, with US$324 million already invested. Cenovus has reviewed this project in detail and the revised cost estimate is consistent with the due diligence completed as part of the transaction. The company expects a large portion of the go-forward capital cost of the project to be offset by insurance proceeds. The refinery is expected to restart around the first quarter of 2023, with a nameplate processing capacity of 49,000 bbls/d, including capability to process up to 34,000 bbls/d of heavy oil while producing asphalt, gasoline and diesel.
Operating costs for Canadian refining are expected to be in the range of $8.50/bbl to $10/bbl. U.S. refining operating costs are expected to be in the range of $10/bbl to $12/bbl. Refining and upgrading throughput is expected to be in the range of 500,000 bbls/d to 550,000 bbls/d, with an anticipated utilization rate of approximately 85 percent reflecting all planned turnarounds as well as the expected continuation of a challenging environment for downstream product demand in 2021.
Cenovus remains dedicated to delivering leading environmental, social and governance (ESG) performance. Its expanded portfolio presents additional opportunities for the company to lower greenhouse gas emissions intensity and address other key ESG areas.
The company is now refreshing its ESG materiality assessment to identify priority areas based on stakeholder feedback and analysis of the external sustainability landscape. Cenovus will then develop meaningful, practical climate and other ESG targets, along with plans for achieving them, to align with the company's long-term business plan.