Cenovus reports new CEO, Q1 profit down, lowers production guidance and raises dividend

Brian Zinchuk

Brian Zinchuk is editor and owner of Pipeline Online

Cenovus Lloydminster Upgrader. Photo by Brian Zinchuk

CALGARY– Cenovus Energy Inc., Saskatchewan’s largest oil producer with significant operations in the Lloydminste rarea, delivered upstream production in the first quarter of 779,000 barrels of oil equivalent per day (BOE/d)¹ and downstream throughput of 457,900 barrels per day (bbls/d). The company generated $1.4 billion in adjusted funds flow and cash used in operating activities was $286 million. First-quarter results reflect lower commodity prices, reduced production in the upstream business and lower operating throughput in the downstream compared with the fourth quarter. Consistent with Cenovus’s commitment to shareholders, the Board of Directors approved a 33% increase in the company’s base dividend, to $0.56 per share annually starting in the second quarter of 2023.

“We are committed to demonstrating stronger performance across our business, and reaching our $4 billion net debt target,” said Alex Pourbaix, who moves from his role as Cenovus’s President & Chief Executive Officer to Executive Chair of the Board following today’s Annual Meeting of Shareholders. “As the year progresses, we expect improved production and a fully operating downstream business. The increase in our base dividend underscores our confidence in the long-term success of the company.”

Cenovus CEO Alex Pourbaix THE CANADIAN PRESS/Jeff McIntosh

Corporate developments

• Achieved the safe and successful restart of the Superior Refinery, with crude oil introduced mid-March. The refinery is currently running barrels in preparation for expected second-quarter refined product sales.
• Closed the Toledo Refinery transaction for approximately US$370 million and assumed operatorship.
• Oil sands production expected to be stronger in the second half of the year due to pad timing, as the company continues to optimize the business for future production growth.
• Revised 2023 corporate guidance to reflect updated outlook for commodity prices, upstream production and operating costs for the remainder of the year.
• U.S. Manufacturing throughput has been revised to 480,000 bbls/d to 500,000 bbls/d.

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¹ See Advisory for production by product type.
² Non-GAAP financial measure or contains a non-GAAP financial measure. See Advisory.

First-quarter results
Operating results¹
Cenovus’s total revenues were approximately $12.3 billion in the first quarter, a decrease from $14.1 billion in the fourth quarter of 2022, mainly due to lower benchmark commodity prices. Upstream revenues were $6.8 billion, compared with $7.4 billion in the previous quarter and downstream revenues were about $7.4 billion, compared with nearly $8.4 billion in the fourth quarter.

Total operating margin³ was $2.1 billion, compared with about $2.8 billion in the fourth quarter. Upstream operating margin⁴ was $1.7 billion, down from $2.2 billion in the prior quarter, primarily driven by lower Brent and West Texas Intermediate (WTI) crude oil prices, a wider light-heavy differential, as well as slightly lower production volumes. Downstream operating margin⁴ was $391 million, compared with $558 million in the fourth quarter. U.S. Manufacturing operating margin was impacted by higher operating costs at the Superior Refinery, associated with the continued commissioning of the facility as well as assuming full ownership of the Toledo Refinery following the close of Cenovus’s acquisition from bp. Downstream operating margin was further impacted by a unit outage at the Wood River Refinery that occurred in the fourth quarter of 2022, which reduced utilization as well as refining margin capture. In addition, the cost of processing crude oil purchased in prior periods at higher prices negatively impacted operating margin in U.S. Manufacturing by approximately $255 million.

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“The company has achieved major milestones with the safe startups of the Superior and Toledo refineries under way,” said Jon McKenzie, who moves from his role as Cenovus’s Executive Vice-President & Chief Operating Officer to President & Chief Executive Officer following today’s Annual Meeting of Shareholders. “While the Lima Refinery continues to operate well, the U.S. Manufacturing business as a whole has not performed to our expectations. We are actively taking steps to improve performance and expect meaningfully better results through this year and beyond as we start demonstrating the full operating and financial capabilities of our integrated business.”

McKenzie will be speaking at the Williston Basin Petroleum Conference in Regina the morning of May 2.

In U.S. Manufacturing, crude utilization was 67% and throughput was 359,200 bbls/d compared with 75% and 379,000 bbls/d in the fourth quarter, due to unplanned outages and as planned turnaround activities began at the non-operated Wood River and Borger refineries. After experiencing impacts from a severe winter storm in late December, the Lima Refinery quickly rebounded with strong operating performance in the first quarter, achieving crude utilization of 94%. The Superior Refinery introduced crude oil in mid-March and remains on track to ramp up to full operations through the second quarter of 2023. The acquisition of the remaining 50% of the Toledo Refinery closed on February 28. In April the Toledo Refinery’s smaller capacity 30,000 bbls/d crude oil unit restarted and is currently producing refined products. The larger capacity 120,000 bbls/d unit is expected to restart in May and ramp up to full rates through the second quarter.

Following an incident in December 2022 at the non-operated Wood River Refinery as well as severe weather around the end of the quarter, crude utilization returned to normal rates in the first quarter. Due to the unplanned downtime of the affected unit, the partnership incurred significant cost associated with fulfilling contractual obligations for finished product, which impacted gross margins during the first quarter. The first phase of a planned turnaround was completed by early April and the second phase, which will also impact throughput, began in mid-April and is expected to be completed in the second quarter.

First-quarter crude utilization in the Canadian Manufacturing segment increased to 89% with throughput of 98,700 bbls/d compared with crude utilization and throughput of 85% and 94,300 bbls/d in Q4 2022. The fourth quarter was impacted by severe winter weather and an unplanned outage at the Lloydminster Upgrader. First-quarter results also reflect strong operating performance at the Lloydminster Refinery, which achieved crude utilization of 99% during the period.

Total upstream production was 779,000 BOE/d in the first quarter, a slight decrease from the fourth quarter. Christina Lake production was 237,200 bbls/d, down from fourth-quarter production of 250,300 bbls/d due to the timing of new sustaining well pads. Foster Creek production of 190,000 bbls/d was largely in line with the previous quarter. Foster Creek and Christina Lake each have three additional well pads coming online in the second half of the year. Sunrise production was 44,500 bbls/d, relatively unchanged from the fourth quarter. At the Lloydminster thermal projects, production was 99,000 bbls/d, down slightly from the previous quarter’s 102,500 bbls/d, as the company took some wells offline for redevelopment and maintenance activity during the first quarter. Conventional production was 123,900 BOE/d, largely in line with the fourth quarter.

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In the Offshore segment, production was 65,600 BOE/d compared with 70,200 BOE/d in the previous quarter. In Asia Pacific, production decreased slightly compared with the fourth quarter due to lower contracted gas sales in China, partially offset by higher sales in Indonesia as the MBH and MDA fields continue to ramp up. In the Atlantic region, the non-operated Terra Nova floating production, storage and offloading vessel remains dockside in Newfoundland and Labrador, undergoing further maintenance as part of its asset life extension program. Cenovus has removed Terra Nova production volumes from its 2023 corporate guidance.

³ Non-GAAP financial measure. Total operating margin is the total of Upstream operating margin plus Downstream operating margin. See Advisory.
⁴ Specified financial measure. See Advisory.

Financial results
First-quarter cash used in operating activities, which includes changes in non-cash working capital, was $286 million compared with almost $3.0 billion of cash from operating activities in the fourth quarter of 2022, while adjusted funds flow was $1.4 billion, down from $2.3 billion in the previous period. Free funds flow fell to $294 million from $1.1 billion in the fourth quarter. First-quarter adjusted funds flow, when compared to the fourth quarter, was impacted by lower overall commodity prices and results in the U.S. Manufacturing segment were lower by approximately $255 million due to the cost of processing crude oil purchased in prior periods at higher prices. In addition, Oil Sands segment sales volumes were lower compared to production by approximately 12,500 BOE/d, as the company built inventory due to the timing of sales, in addition to higher volumes of crude in transit to the U.S. Gulf Coast. Capital investment of $1.1 billion was primarily directed towards sustaining production in the oil sands, the Superior Refinery rebuild and refining reliability initiatives at the jointly-owned Wood River and Borger refineries.

First-quarter net earnings were $636 million, compared with $784 million in the previous quarter. The decline in net earnings was primarily due to lower operating margin and lower foreign exchange gains, partially offset by lower general and administrative costs, as well as a deferred income tax recovery related to the Toledo acquisition.

Long-term debt, including the current portion, was $8.7 billion at March 31, 2023, comparable to December 31, 2022. Net debt was approximately $6.6 billion at March 31, 2023, an increase of about $2.4 billion from December 31, 2022. The increase in net debt is mainly attributable to a change in non-cash working capital of $1.6 billion due to a $1.2 billion cash payment for the company’s 2022 taxes and lower accounts payable, $465 million primarily related to the close of the Toledo acquisition and the first variable payment to bp as part of the 2022 Sunrise transaction, as well as $240 million for shareholder returns. Assuming commodity prices remain around current levels, the company expects net debt to fall below its $4.0 billion floor in the fourth quarter.

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2023 guidance update
Cenovus has revised its 2023 corporate guidance to reflect the company’s updated outlook for commodity prices, production, throughput and operating costs for the remainder of the year. It is available on cenovus.com under Investors.

Changes to the company’s 2023 guidance include:

• Total production guidance of 790,000 BOE/d to 810,000 BOE/d, which includes a reduction of 10,000 bbls/d from the Atlantic production range, reflecting the removal of Terra Nova volumes.
• U.S. Manufacturing throughput of 480,000 bbls/d to 500,000 bbls/d, reflecting lower throughput year-to-date at Cenovus’s non-operated refineries due to unplanned outages early in the first quarter, as well as a longer ramp up period than originally anticipated at Toledo. As a result, guidance for U.S. Manufacturing unit operating expense has increased by $1.00/bbl.

2023 planned maintenance
The following table provides details on planned maintenance activities at Cenovus assets in 2023 and anticipated production or throughput impacts.

Dividend declarations and share purchases
The Board of Directors has declared a quarterly base dividend of $0.14 per common share, an increase of 33%, payable on June 30, 2023 to shareholders of record as of June 15, 2023. On an annual basis, the base dividend will increase to $0.56 per share from $0.42 per share, and will continue to be declared and paid quarterly, at the discretion of the Board. The base dividend continues to be a structural component of the financial framework and is set at a level Cenovus is confident can be sustainably covered at bottom of the cycle pricing of about US$45 WTI, with additional capacity to grow over the next five years.

In addition, the Board declared a quarterly dividend on each of the Cumulative Redeemable First Preferred Shares – Series 1, Series 2, Series 3, Series 5 and Series 7 – payable on June 30, 2023 to shareholders of record as of June 15, 2023 as follows:

All dividends paid on Cenovus’s common and preferred shares will be designated as “eligible dividends” for Canadian federal income tax purposes. Declaration of dividends is at the sole discretion of the Board and will continue to be evaluated on a quarterly basis.

Cenovus’s shareholder returns framework has a target of returning 50% of excess free funds flow to shareholders for quarters where the ending net debt is between $9 billion and $4 billion. In the first quarter, the company bought approximately 2 million shares under its normal course issuer bid, delivering $40 million in returns to shareholders. Subsequent to the end of the quarter, as of April 21, 2023, the company had bought back approximately 2.1 million shares for an additional $51 million.

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Sustainability
In the first quarter of 2023, Cenovus and its Pathways Alliance peers continued to advance work on plans to build one of the world’s largest carbon capture and storage (CCS) projects, which is foundational to the net zero ambitions of Canada’s six largest oil sands companies that comprise the group. The Alliance awarded a contract to a global engineering and consulting company to develop detailed plans for the 400-kilometre CO₂ transportation pipeline that would eventually link more than 20 oil sands facilities to a hub for permanent carbon storage in Alberta’s Cold Lake region. Engineering and field work is progressing rapidly to support an anticipated regulatory application for the CCS network in the fourth quarter of this year. Early engagement with more than 20 Indigenous communities along the proposed CO₂ transportation and storage network corridor is underway, and formal engagement is expected to begin in the second quarter.

Cenovus also continues to progress work towards its own sustainability targets with further updates scheduled to be released mid-year in the company’s 2022 ESG report.

Leadership transition update
In addition to Alex Pourbaix becoming Executive Board Chair and Jon McKenzie stepping into the role of Cenovus’s President & Chief Executive Officer following the close of the company’s Annual Meeting of Shareholders, Claude Mongeau will become Lead Independent Director of the Board. Jane Kinney will assume the position of Chair of the Audit Committee, a role currently filled by Mongeau. Kinney, a Cenovus director since April 2019 and a member of the Audit Committee since June 2019, served in increasingly senior positions with Deloitte LLP Canada until her retirement from the firm.

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