Brian Zinchuk is editor and owner of Pipeline Online
CALGARY – By lowering its debt, and with strong free funds coming in, Cenovus Energy Inc. is continuing the trend of large Canadian oil producers in increasing dividends and share buybacks.
On Nov. 3 the company, Saskatchewan’s largest oil producer after its acquisition of Husky last year, announced its third quarter earnings. Its thermal projects in the Lloydminster area produced 98,000 bpd, which, alone, account for just over a fifth of Saskatchewan oil production, which was 444,460 bpd in August.
The company said in a release that total upstream production of almost 805,000 barrels of oil equivalent per day (boepd)i drove solid financial results. Cenovus generated third-quarter cash from operating activities of $2.1 billion and adjusted funds flow of $2.3 billion. Free funds flow of $1.7 billion and strategic refinancing transactions resulted in a reduction in net debt to about $11 billion at the end of the third quarter. The company expects to achieve its interim net debt target of below $10 billion imminently as a result of continued strong cash generation at current commodity prices and receipt of proceeds from announced asset sales. This will pave the way for Cenovus to increase investor returns by commencing a share buyback program of up to 146.5 million of the company’s common shares, representing approximately 10 per cent of its public float, as defined by the Toronto Stock Exchange (TSX). To facilitate the buyback, Cenovus’s board of directors has approved filing an application with the TSX for a normal course issuer bid (NCIB). In addition, the board has approved doubling Cenovus’s common share dividend effective in the fourth quarter of 2021.
“Our outstanding operating and financial results this quarter showcase the strength of our business and demonstrate that we deliver on our commitments,” said Alex Pourbaix, Cenovus president and CEO in a release. “With our $10 billion net debt target largely achieved, we’re able to take these important steps to increase returns for our shareholders. Our free funds flow capacity will support swiftly advancing toward our longer-term net debt target of less than $8 billion, while balancing growth in shareholder returns.”
Cenovus achieved total production of 804,800 boepd in the quarter, driven by record quarterly average daily oil sands production of more than 242,500 barrels per day (bpd) at Christina Lake and more than 187,000 bpd at Foster Creek. Total upstream operating margin was $2.4 billion, up from $1.9 billion in the second quarter. Cenovus continues to expect 2021 total upstream production volumes to range between 750,000 boepd and 790,000 boepd.
Operating highlights
Lloydminster Upgrader and Refinery
In the company’s downstream operations, the Lloydminster Upgrader and Lloydminster Refinery achieved an average third-quarter crude oil utilization rate of 98 per cent. The U.S. refineries, with a crude oil utilization rate of 89 per cent, continued to ramp up throughput to 445,800 bpd, in line with modest increases in refined product demand and improving market crack spreads, partially offset by planned and unplanned outages. Total downstream operating margin was $268 million in the third quarter.
The Lloydminster Upgrader and Lloydminster Asphalt Refinery contributed to total Canadian manufacturing operating margin of $130 million. The facilities continue to operate safely, reliably and at near capacity, with throughput in the third quarter of 108,300 bpd. The Canadian manufacturing segment had operating expense of $9.83/bbl in the quarter compared with $9.89/bbl in the second quarter.
Conventional
The conventional assets generated operating margin of $191 million in the quarter compared with $142 million in the second quarter, due to higher average realized sales prices on total production of 131,400 boepd, down from 141,300 boepd in the second quarter. Total production was lower compared with the first two quarters of 2021 primarily due to asset sales and an unplanned outage at a third-party processing plant.
Operating costs were flat at $10.41/BOE, compared with the second quarter. The segment had netbacks of $15.91/BOE in the quarter, compared with $10.00/BOE in the previous quarter.
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Product types
| Product type by operating segment | |
| (Production for the period ended September 30) | Volumes (1000s) |
| Oil Sands | |
| Bitumen (Mbbls/d) | 576.5 |
| Heavy crude oil (Mbbls/d) | 19.3 |
| Medium crude oil (Mbbls/d) | 1.2 |
| Conventional natural gas (MMcf/d) | 11.9 |
| Total Oil Sands segment production (boepd) | 599.1 |
| Conventional | |
| Light crude oil (Mbbls/d) | 8.7 |
| Natural gas liquids (Mbbls/d) | 22.8 |
| Conventional natural gas (MMcf/d) | 603.2 |
| Total Conventional segment production (boepd) | 132.0 |
| Offshore | |
| Light crude oil (Mbbls/d) | 13.9 |
| Natural gas liquids (Mbbls/d) | 12.7 |
| Conventional natural gas (MMcf/d) | 282.8 |
| Total Offshore segment production (boepd) | 73.7 |
| Total upstream production (boepd) | 804.8 |
Oil Sands
Total crude oil production was 597,000 bpd for the oil sands segment in the quarter, up from 549,400 bpd in the second quarter, driven by record production at both Christina Lake and Foster Creek. The segment generated operating margin of $1.9 billion, compared with $1.4 billion in the second quarter. The increase was primarily due to the increased volumes at Foster Creek and Christina Lake as well as higher average pricing, partially offset by an increase in operating expense due to natural gas prices, higher royalties and higher blending costs. Oil sands average netbacks were $36.98/BOE in the quarter, compared with $32.53/BOE in the second quarter.
Christina Lake production averaged more than 242,500 bpd in the quarter, an increase of about 12,000 bpd from the second quarter as re-drilled wells came online. Production at Foster Creek was 187,100 bpd, an increase of approximately 30,300 bpd compared with the second quarter, primarily due to the addition of production from two sustaining well pads and the resolution of operational outages. The Lloydminster thermal projects continue to benefit from the application of Cenovus in situ operating techniques, with production of 98,000 bpd in the third quarter.
Oil sands transportation costs were flat at $7.09 per barrel in the quarter compared with the second quarter. Foster Creek per-barrel transportation costs decreased to $10.14 in the third quarter from $12.25 in the second quarter, driven primarily by higher production and sales volumes. The per-barrel transportation costs for Christina Lake production declined to $5.74 from $6.10 in the second quarter, with lower crude volumes sold to the U.S. Gulf Coast market. Blending costs in the quarter were driven by higher condensate prices.
Per-barrel operating costs for the segment were $10.86 compared with $12.00 in the second quarter, largely due to turnarounds at Foster Creek and Sunrise in the second quarter which contributed to increased production in the third quarter. Cenovus continues to focus on applying its operating techniques to Husky assets to enhance performance, including further expected reductions in per-unit operating costs.
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Offshore
The offshore segment had total production of 73,700 boepd, generating operating margin of $328 million, with a netback of $59.20/BOE.
In the Asia Pacific region, Cenovus had production of 59,800 boepd with total realized sales pricing of $71.99/BOE in the quarter, based on long-term contracted pricing for natural gas and annual contracted pricing for NGLs. The operating netback for Asia Pacific production averaged $59.71/BOE.
Atlantic region production was 13,900 bpd with Brent-like realized pricing of $94.26/bbl in the third quarter, and an average netback of $55.23/bbl.
Downstream
Cenovus’s downstream segment, with total crude throughput of 554,100 bpd, generated total operating margin of $268 million in the third quarter compared with $291 million in the second quarter.
U.S Manufacturing
Increasing demand for refined products contributed to an increase in U.S. manufacturing throughput of 445,800 bpd, compared with 435,500 bpd in the previous quarter, despite temporary unplanned outages at the Wood River and Borger refineries.
Utilization in the third quarter averaged 89 per cent. The segment generated operating margin of $122 million compared with $96 million in the second quarter. Renewable Identification Numbers were priced at US$7.32/bbl in the third quarter compared with US$8.12/bbl in the second quarter.
Operating expense in the quarter was $10.03/bbl, consistent with the previous quarter due to higher throughput as product demand recovers.
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Financial results
Total operating margin for the quarter was $2.7 billion, an increase of 24 per cent compared with $2.2 billion in the second quarter of 2021 and 44 per cent higher than $1.9 billion in the first quarter. The increase in third-quarter operating margin, compared with the second quarter, was primarily driven by higher upstream production and sales volumes as well as increased benchmark commodity prices, partially offset by increased transportation blending costs due to higher condensate prices.
Cenovus had adjusted funds flow of $2.3 billion in the quarter. The company generated cash from operating activities of $2.1 billion, which includes an increase in non-cash working capital of $166 million. Free funds flow of $1.7 billion included capital investment in the quarter of $647 million. The company continues to expect total capital expenditures for the year in the range of $2.3 billion to $2.7 billion.
Cenovus generated net earnings of $551 million in the third quarter, more than doubling second-quarter net earnings of $224 million, with the improvement largely driven by higher operating margin.
Portfolio update
During the third quarter, Cenovus signed an agreement for the sale of its existing equity interest in Headwater Exploration Inc., which acquired the Marten Hills heavy oil asset from Cenovus in late 2020. The sale of Cenovus’s 50 million Headwater common shares closed in October and generated net proceeds of approximately $218 million. Cenovus continues to hold 15 million Headwater common share purchase warrants exercisable at $2.00 per common share, which expire in 2023.
In the third quarter and subsequent to Sept. 30, the company closed previously announced asset sales within the conventional segment located in the East Clearwater and Kaybob areas for combined gross proceeds of approximately $110 million. On a year-to-date basis, the company has achieved approximately $440 million in cumulative gross proceeds from divestitures. Cenovus continues to advance additional divestiture opportunities which will further enhance its deleveraging plan and shareholder return strategy.
Offshore agreements
Cenovus entered into agreements during the third quarter with its partners in the Atlantic region to restructure working interests in the Terra Nova and White Rose projects, providing improved economics for the company’s regional portfolio. These agreements increased Cenovus’s working interest in Terra Nova and, if a decision is taken to restart the West White Rose project, will reduce the company’s working interest in the White Rose fields. In the third quarter, Cenovus received $75 million net from the partners exiting Terra Nova. The Terra Nova asset life extension project is proceeding, extending the life of the field to 2033, with production expected to resume before the end of 2022.
Deleveraging update
In the first nine months of 2021, Cenovus reduced net debt by more than $2 billion to about $11 billion, from $13.1 billion as of Jan. 1. This includes a $1.4 billion decrease in the third quarter, which was primarily due to free funds flow of $1.7 billion and proceeds from asset divestitures that closed in the quarter, partially offset by an increase in non-cash working capital of $166 million and a foreign exchange loss on U.S. denominated debt. The increase in non-cash working capital was related to an increase in inventories, which was primarily due to higher crude oil and refined product prices, higher volumes held in inventory in the Atlantic region due to the timing of liftings and higher volumes held in inventory at the Wood River and Borger refineries.
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In September, Cenovus issued US$1.25 billion of 10-year and 30-year notes and used the proceeds and cash on hand to repurchase approximately US$1.7 billion of its outstanding notes. The company redeemed an additional US$425 million of outstanding notes in October. This reduced total debt by approximately US$900 million, which will result in interest expense savings and extend the maturity profile of the company’s existing debt.
The company expects to achieve its interim net debt target of below $10 billion very soon, which will support commencement of the share buyback program. Instituting a more balanced free cash flow allocation between deleveraging and shareholder returns, at current commodity prices, Cenovus would expect to execute the planned share buyback in 2022, while achieving net debt under $8 billion by mid-year. This also reflects the company’s commitment to achieving mid-BBB investment grade ratings over time.
Progress on integration and synergies from Husky purchase
Reflecting on its recent absorption of Husky, Cenovus said it remains on track to realize at least $1 billion in synergies in 2021 and reach its go-forward annual run-rate of $1.2 billion in synergies by the end of this year. In the third quarter, integration expenditures of $60 million included costs associated with workforce reductions and IT systems. Integration expenditures for the first nine months of 2021 were $351 million, including $49 million in capitalized costs, and are expected to be approximately $400 million for the full year. Cenovus continues to expect total integration costs in the range of $500 million to $550 million, with the balance to be spent in 2022.
Cenovus continues to identify additional synergies, including further opportunities to apply the company’s operating expertise across its expanded asset base, as well as through further optimization of its expanded heavy oil value chain.
Shareholder returns
Given the strengthening of the company’s balance sheet, the Board has declared a dividend of $0.035 per share, payable on Dec. 31 to common shareholders of record as of Dec. 15 and has approved filing an NCIB application with the TSX for a share buyback program up to approximately 146.5 million of its common shares.
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