Brian Zinchuk is editor and owner of Pipeline Online
Cenovus Lloydminster Upgrader. Photo by Brian Zinchuk
CALGARY – In announcing its year-end financials, Cenovus also announced a change in leadership. Alex Pourbaix, who has held the president and CEO position since 2017, will become executive chairman, and Jon McKenzie, the company’s current executive vice-president a chief operating officer, will become president and chief executive officer. These changes will take effect at the conclusion of the company’s annual general meeting (AGM) scheduled for April 26, 2023. At the AGM, McKenzie will be nominated for election to the Board of Directors
Under Pourbaix, Cenovus exited Saskatchewan when it sold its majority operating stake in the Weyburn Unit to Whitecap Resources in November, 2017. But a few years later, Cenovus re-entered Saskatchewan in a big way, buy acquiring Husky, this province’s largest oil company. The combination was announced in October, 2020, and closed in January, 2021.
The acquisition of Husky meant several more refineries, what Cenovus refers to as “manufacturing,” including the Lloydminster Upgrader and Lloydminster Refinery. It also meant picking up hundreds of service stations which have been subsequently sold off to Federated Co-operatives Limited and Parkland.
“Under Alex’s exceptional direction, Cenovus has transformed into a resilient, integrated energy leader. Externally, Alex goes above and beyond as a tireless advocate for the Canadian energy industry,” said Keith MacPhail, chair of the board, in a release. “The board has dedicated significant time to ensuring Cenovus has a strong internal succession plan and Alex has guided the development of excellent CEO candidates. We are confident that Jon’s breadth of experience, together with Alex’s ongoing commitment to the company, position Cenovus well to deliver on the strategy that’s been established and achieve continued success.”
“One of Cenovus’s greatest strengths is the company’s exceptionally talented people and I’m very proud of what we’ve been able to achieve together,” said Pourbaix. “Jon – with his leadership strength, strategic vision, financial discipline, commercial acumen and knowledge of the business – is more than ready for the president and CEO role. I’m excited to continue working closely with Jon to support Cenovus and our industry as executive chair.”
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McKenzie has more than three decades of finance and operations experience, primarily in the Canadian oil and natural gas industry. He joined Cenovus in 2018 as chief financial officer, and was instrumental in Cenovus’s strategic merger with Husky Energy, where he served as chief financial officer from 2015 to 2018.
“I am moving to this role at a time when the company is well positioned to thrive through any cycle,” said McKenzie. “That’s a credit to Alex’s leadership and his vision for Cenovus. His decision to move to the Executive Chair role shows his dedication to the company’s long-term success.”
In the Feb. 16 Cenovus conference call, Pourbaix said, “I won’t say it’s all been a walk in the park. The reality is that we’ve worked through some incredible challenges along the way. But I can say, with complete honesty, that Jon and I have never been misaligned on what we believe is best for the company. I think it’s fair to say we come at problems from differing perspectives. And I think this diversity has actually made us a really successful team. Since the Husky acquisition we’ve achieved many milestones together.
“We delivered above and beyond our targeted synergies from Husky deal. We continue to aggressively reduce debt, and we implement it in our executing on our shareholder returns framework. We’ve also evolved the asset portfolio with opportunistic A&D (acquisition and divestiture) transactions. These have better position the company to maximize the heavy oil value chain, which will support further growth in cash flow and shareholder returns. But I think most importantly, we’ve been able to create a low cost resilient integrated energy company that is profitable at all parts of the commodity cycle.”
The conference call which announced the year-end financials and the change in leadership saw both Pourbaix and McKenzie note how Pourbaix’s attention has been increasingly external, especially when it comes to the company’s greenhouse gas emissions strategy and its involvement with the Pathways Alliance. In the meantime, McKenzie has been focused on the day-to-day operations.
To a certain extent, that dynamic will continue. The release noted, “As Executive Chair, Pourbaix will be responsible for providing leadership to the board and ensuring ongoing strong governance, while supporting management’s execution of the company’s strategy. Pourbaix will also remain focused on external matters relevant to Cenovus and the industry, including advancement of policy that supports a competitive Canadian energy sector and ongoing leadership with the Pathways Alliance.”
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2022 year end financials
Cenovus said it delivered strong operating and financial performance in 2022, with $11.4 billion in cash from operating activities, $11.0 billion in adjusted funds flow and $7.3 billion in free funds flow, enabling more than $3.4 billion in shareholder returns. In the fourth quarter, reliable upstream operating performance drove nearly $3.0 billion in cash from operating activities, $2.3 billion in adjusted funds flow and $1.1 billion in free funds flow. Production was 806,900 barrels of oil equivalent per day (boepd) and downstream throughput was 473,500 barrels per day (bpd) as the company’s operated downstream assets performed well in the fourth quarter.
“In 2022, we further fortified our balance sheet, reducing our net debt by more than half. As a result, we delivered substantial shareholder returns and executed strategic and opportunistic acquisitions and divestitures,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “As we restart our wholly-owned Superior Refinery, and complete the Toledo Refinery acquisition, we will substantially increase our pipeline-connected heavy oil refining capacity and generate expanded margins in our U.S. Manufacturing business.”
That Superior Refinery was hit by a major fire in 2018, and its taken until this February for it to finally start circulating hydrocarbons, with throughput expected to start mid-March. “he refinery remains on schedule to ramp up to full operations. In the second quarter of 2023,” Pourbaix said.
As for the Toledo Refinery, Pourbaix said, “The acquisition of the remaining 50 per cent of the refinery remains on track to close by the end of February. The repair estimate stemming from the September fire is not significant, and the refinery is expected to get up to full rates by around mid-Q2 this year.”
Indeed, Cenovus reported that almost all their downstream assets were up and running at a normal rates. “The exception is the Wood River Refinery where an incident in December reduced throughput modestly. The refineries utilization has steadily increased since the first week of January.
Lloydminster
As for the Lloydminster Upgrader and Refinery, he noted, “The Lloydminster Upgrader and Refinery continued to demonstrate strong utilization through the year, even with turnarounds at each asset. The upgrader was able to take advantage of a wide synthetic to heavy oil dip, while the refinery continued to capture strong asphalt margins. Together, these two assets delivered almost $700 million in operating margin in the year.”
Keith Chiasson said, “We’re also pretty excited about what we’re seeing, even at our Lloyd Refinery and Lloyd Upgrader, and being able to integrate our oil sands production into those two assets. So, you know, that integrated value chain is pretty valuable for us, and we will utilize both the conversion assets but also our marketing activities to maximize that value.”
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Keystone outage
There were several references in the call to coping with the Keystone Pipeline outage in December, the result of a pipeline rupture and spill in Kansas. Cenovus had to quickly turn to ramping up its crude-by-rail shipments. The company does continuously move some crude-by-rail, but this was an exception.
Chiasson said, “It was a pretty interesting time in December, obviously, with the weather with the weather impacts, but that also coupled with our third party pipeline going down., I actually think the team’s responded pretty aggressively and pretty well, we were actually able to ramp up our rail program in a matter of a couple of weeks. And start shipping crude by rail to alleviate some of the concerns that we’re starting to see in Alberta. We were able to store some barrels. That’s why you saw some of the inventory growth in the fourth quarter, and resell those later on at a higher market. So, I think from a marketing commercial capability standpoint, really happy with what the team was able to do.”
They shipped nine unit trains of crude-by-rail, and are now ramping that down as Keystone is flowing again. Differentials have been reduced as a result.
All of these measures meant that they were able to sell oil at higher values compared to if they had to sell in a distressed market.
He noted Toledo and Superior are served by the mainline system.
McKenzie noted, “Those downstream assets really give us the flexibility and optionality to perform differently in times like we saw in December when the Keystone Pipeline went down, and more broadly, with the wider differentials. Those assets, particularly our operated assets, have performed really well. I think one of the reinforcing thoughts that we would have going through December, and we’ve talked about this before, is that we still have a strong desire to own and operate those assets that we’re participating in. So we see the US downstream is absolutely core to our strategy. And we really look forward to putting Superior and Toledo into our stable refineries and bringing those up over the next few weeks.”
Pourbaix said, “If we had not done the Husky transaction, we would not be remotely in the position to manage these kinds of circumstances.”
He pointed out previously Cenovus did not have the storage resources and pipeline takeaway opportunities. “When we did that deal, the goal was creating a much more resilient company. And I think the response of the company during what was really a pretty significant incident was really good.”
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Fourth Quarter results with Lloyd outage impact
Total upstream production was 806,900 boepd in the fourth quarter, an increase of nearly 30,000 boepd compared with the third quarter. Christina Lake production was 250,300 bpd, in line with third-quarter production of 252,800 bpd. Foster Creek production increased to 195,900 bpd, compared with 182,400 bpd in the previous quarter, reflecting increased utilization and improved reliability as the third quarter was impacted by planned and unplanned maintenance. Sunrise production was 44,800 bpd, compared with 30,900 bpd in the third quarter, mainly as a result of the acquisition of the remaining 50 per cent working interest, which closed in August.
At the Lloydminster thermal projects, production was 102,500 bpd, in line with the previous quarter of 102,100 bpd. Conventional production was 125,500 boepd, in line with third-quarter production of 126,200 boepd.
Offshore production was 70,200 boepd compared with 64,600 boepd in the previous quarter, with the increase mainly related to additional volumes from the MBH and MDA fields in Indonesia coming online in the fourth quarter. In the Atlantic region, the drydock program in Spain for the partner-operated Terra Nova floating production, storage and offloading vessel was completed and it is anticipated to return to operations in the second quarter of 2023.
In the fourth quarter, crude utilization in the Canadian Manufacturing segment was 85 per cent, with throughput of 94,300 bpd, a decrease from 89 per cent and 98,500 bpd in the third quarter. The Lloydminster Refinery ran well, however, Canadian Manufacturing utilization in the fourth quarter was impacted in late December by an unplanned outage at the Lloydminster Upgrader and a subsequent unrelated site-wide power outage. The upgrader returned to full rates in mid-January. Canadian Manufacturing delivered operating margin of $278 million compared with $246 million in the third quarter, with the difference mainly due to a wider Canadian light-heavy crude differential, resulting in lower feedstock costs and higher gross margin.
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In U.S. Manufacturing, crude utilization of 75 per cent and throughput of 379,200 bpd were down from 87 per cent and 435,000 bpd in the third quarter. Fourth-quarter results were affected by extreme winter storms and severe cold temperatures in December, coupled with unplanned operational challenges and third-party pipeline outages, which impacted refinery throughput across the U.S. The Lima Refinery and the Borger Refinery returned to full rates in January and continue to operate reliably. At the non-operated Wood River Refinery, repairs are underway related to a December incident that reduced throughput. Wood River utilization has steadily increased since the first week of January, with the refinery currently operating at a substantial proportion of normal throughput and expected to return to normal rates during the second quarter. The acquisition of the remaining 50 per cent of the Toledo Refinery remains on track to close by the end of February, with a plan to ramp to full rates by mid-second quarter. In Superior, the refinery began circulating hydrocarbons in mid-February. Throughput is expected to commence around mid-March and the refinery remains on schedule to ramp up to full operations in the second quarter of 2023.
Full-year results
In 2022, Cenovus total upstream production averaged 786,200 boepd, compared with 791,500 boepd in 2021, which reflects the sales of the Tucker oil sands project and Wembley conventional asset, partially offset by higher Oil Sands production in the year. Oil Sands crude production was 586,600 bpd, including 191,000 bpd at Foster Creek, an increase of 11,100 bpd from 2021, and about 246,500 bpd at Christina Lake, up 9,700 bpd from the previous year. Full-year production from the Lloydminster thermal projects was 99,900 bpd, compared with 97,700 bpd in 2021, which reflects the addition of the Spruce Lake North project in the third quarter of 2022. Production from Sunrise was 31,300 bpd, compared with 25,900 bpd in 2021, with the increase largely driven by the acquisition of the remaining 50 per cent working interest in Sunrise, which closed in August 2022. Conventional production was 127,200 boepd, compared with 133,600 boepd in 2021, with the decrease mainly related to assets divested in the second half of 2021 and in 2022, as well as natural declines. Offshore total production was 70,300 boepd, compared with 74,400 boepd in the prior year, reflecting the restructuring of the White Rose field working interest in the second quarter of 2022, combined with changes to contracts in China. These were partially offset by first gas production at the MBH and MDA fields offshore Indonesia in the fourth quarter of 2022.
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In Canadian Manufacturing, average utilization for the year was 84 per cent and average throughput was 92,900 bpd, compared with 96 per cent and 106,500 bpd in 2021. Crude oil throughput decreased in 2022 compared with 2021 due to planned turnarounds at the upgrader and Lloydminster Refinery. Cold weather impacts and operational outages further reduced throughput at the upgrader in the fourth quarter of 2022. In U.S. Manufacturing, full-year utilization was 80 per cent and average throughput was 400,800 bpd, comparable to 2021.
Total revenues were about $66.9 billion in 2022 and total operating margin was $14.3 billion, compared with revenues of $46.4 billion and total operating margin of $9.4 billion in 2021. Year-over-year increases in both total revenues and total operating margin were largely related to increased commodity prices.
Cash from operating activities was $11.4 billion for the year, compared with $5.9 billion in 2021. Adjusted funds flow was $11.0 billion and free funds flow was about $7.3 billion. Total capital investment for 2022 was approximately $3.7 billion, primarily concentrated on sustaining production at the company’s upstream assets, refining reliability initiatives and yield optimization projects, as well as investment in the Superior Refinery rebuild. Full-year net earnings for 2022 were about $6.5 billion compared to $587 million the previous year.
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