Cenovus reported its oil sands operations produced about 390,000 barrels per day b/d, or 49 per cent higher than the same period of 2017, at record low oil sands operating costs.  Company photo.

Cenovus oil sands assets achieved record low operating costs of $7.32/barrel in Q2

Cenovus Energy Inc. released its second quarter results on Thursday, highlighting record production and solid financial performance.

The company reported adjusted funds flow of $774 million, even after a realized risk management loss of $697 million, and generated free funds flow of $482 million.

The Calgary-based company ramped up its oil sands operations in the second quarter and achieved record high production volumes and record low per-barrel oil sands operating costs after using the dynamic storage capability of its reservoirs to strategically slow oil sands production in the first quarter due to market conditions.

According to the report, following major planned turnarounds in the first quarter, Cenovus’s Refining and Marketing segment also performed very well.

Second quarter highlights

Adjusted funds flow of $0.63 per share compared with a shortfall of $0.03 per share in the first quarter of 2018. Adjusted funds flow was $0.67 per share in the second quarter of 2017.

Cash from operating activities of $533 million, compared with a shortfall of $123 million in the first quarter of 2018. Cash from operating activities was $1.2 billion in the second quarter of 2017.

Oil sands production of almost 390,000 barrels per day (b/d), 49 per cent higher than the same period of 2017, and record low oil sands operating costs of $7.32/barrel.

Refining and marketing operating margin of $357 million, compared with $20 million in the second quarter of 2017

Corporate hedge positions reduced to 37 per cent of forecast liquids production for the rest of 2018

Financial & production summary
(for the period ended June 30) 2018
% change
($ millions, except per share amounts)    
Cash from operating activities1 533 1,239 -57
Adjusted funds flow1,2 774 745 4
Per share diluted 0.63 0.67
Free funds flow1,2 482 418 15
Operating earnings (loss)  from continuing operations2 -292 298
Per share diluted -0.24 0.27
Net earnings (loss) from continuing operations -410 2,558
Per share diluted -0.33 2.30
Capital investment1 292 327 -11
Production from continuing operations3 (before royalties)  
Oil sands (bbls/d) 389,378 261,812 49
Deep Basin liquids4 (bbls/d) 34,041 16,894 101
Total liquids from continuing operations (bbls/d) 423,419 278,706 52
Total natural gas from continuing operations (MMcf/d) 571 265 115
Total production from continuing operations (BOE/d)5 518,530 322,792 61
1 2017 Q2 includes results from Cenovus’s legacy conventional segment, which is classified as a discontinued operation.
2 Adjusted funds flow, free funds flow and operating earnings/loss are non-GAAP measures. See Advisory.
3 Does not include production from Cenovus’s legacy conventional oil and natural gas assets, the last of which was sold as of January 5, 2018. The legacy conventional segment has been classified as a discontinued operation.
4 Includes oil and natural gas liquids (NGLs).
5 Totals may not add due to rounding.

Second quarter overview

Financial highlights

In the second quarter of 2018, Cenovus recorded cash from operating activities of $533 million compared with $1.2 billion in the same period a year earlier.

The company generated adjusted funds flow of $774 million, slightly higher than the second quarter of 2017, and had an operating loss from continuing operations of $292 million compared with operating earnings of $298 million the previous year.

Adjusted funds flow in the second quarter reflected realized risk management losses of $697 million, largely as a result of hedging contracts established in 2017 to provide downside oil price protection and support financial resilience based on market conditions at the time.

At the close of the second quarter, corporate hedge positions had decreased from 80 per cent of forecast liquids production for the first half of 2018 to 37 per cent of forecast liquids production for the second half of the year.

“Our assets have been performing extremely well, and with our hedging exposure now significantly reduced, we’re well-positioned to realize the benefits of higher oil prices as well as our cumulative cost reductions,” said Alex Pourbaix, Cenovus President & Chief Executive Officer.

“Based on forward strip prices, we expect to generate significant free funds flow in the second half of the year, and we have a clear plan to use that to help deleverage our balance sheet. We believe that’s the best defence against commodity price volatility.”

Reducing debt through asset sales, capital discipline and free funds flow remains Cenovus’s top priority. The company continues to target a net debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of less than two times.

Market access

Cenovus believes that it is critical to the future success and growth of the Canadian oil and gas industry that Alberta achieve improved market access. The company remains supportive of new pipelines and pipeline expansions and has committed capacity on the Keystone XL project and Trans Mountain Expansion project.

Cenovus continues to work with rail providers to resolve a shortage of locomotive hauling capacity, so the company can more fully realize the benefits of its Bruderheim crude-by-rail facility. The company is beginning to see increased activity at its Bruderheim facility as well as across other rail loading facilities in the province.

Operating highlights

Oil sands
In the second quarter, Cenovus’s results benefited from the decision to strategically slow oil sands production in the first quarter, while maintaining steam injection rates, in order to store a portion of its mobilized oil in its reservoirs while takeaway capacity was constrained and light-heavy oil price differentials were very wide.

As Western Canadian Select (WCS) prices improved into the second quarter, the company ramped up its oil sands production to above normal operating levels to recover the stored barrels in a higher pricing environment.

“This clearly demonstrates our ability to proactively use the dynamic storage capability of our oil sands reservoirs as a tool to manage our business in response to price fluctuations,” said Pourbaix.

“Essentially all of the oil we stored during the first quarter has been recovered, allowing us to take advantage of improved pricing to achieve greater value for our barrels, with no detectable impact to our reservoirs.”

Cenovus’s Foster Creek project had production of 171,079 b/d in the second quarter, a 59 per cent increase compared with the same quarter of 2017, while production at Christina Lake was 218,299 b/d, a 42 per cent increase from the previous year, largely due to the 2017 asset acquisition.

At Foster Creek, the steam to oil ratio (SOR), the amount of steam needed to produce one barrel of oil, was 2.6 in the second quarter of 2018, compared with 2.5 in the same period of 2017.

At Christina Lake, the SOR was 1.8 in the second quarter of 2018, compared with 1.7 a year earlier. The company expects SORs to remain within full-year guidance of 2.6 to 3.0 at Foster Creek and 1.8 to 2.2 at Christina Lake in 2018.

The company’s oil sands assets achieved record low operating costs of $7.32/barrel in the second quarter, down from $9.19/barrel in the same quarter last year when there were costs associated with a planned turnaround at Foster Creek.

The low per-barrel operating costs in the second quarter of this year were primarily due to higher sales volumes, a reduction in workforce costs and lower repairs and maintenance costs, partially offset by higher chemical costs.

Oil sands netbacks were $32.65/barrel, an increase of 46 per cent compared with the second quarter of 2017. The increase was primarily due to a higher average realized sales price and a 20 per cent reduction in per-barrel operating costs, partially offset by higher royalties.

Cenovus has determined the full three-week turnaround originally planned at Christina Lake for September 2018 is not required this year and has deferred the majority of the work until 2019.

The company expects its 2018 production to remain within guidance of 202,000 to 212,000 b/d.

Construction at the Christina Lake phase G expansion continues to progress on time and on budget.

Cenovus expects the expansion will have go-forward capital costs, from the time the project was restarted last year through to completion, of between $13,000 and $14,000 per flowing barrel compared with the company’s previous estimate of between $16,000 and $18,000.

Phase G has approved capacity of 50,000 b/d and is anticipated to begin production in the second half of 2019.

Cenovus anticipates that Christina Lake will reach payout for royalty purposes in the second half of 2018 once cumulative project revenue exceeds cumulative project allowable costs.

After payout is achieved, royalties at Christina Lake will follow the post-payout formula described in Cenovus’s Management’s Discussion and Analysis for the period ended June 30, 2018.

Deep Basin
Cenovus participated in the drilling of one net well, completed one net well and brought three net wells on production in the second quarter.

Production for the quarter was 129,066 barrels of oil equivalent per day (boe/d), an 8 per cent increase from the average production during the 45 days that the company owned the assets in the second quarter of 2017.

The increase in production from new wells was partially offset by pipeline and third-party facility constraints, planned turnarounds and some temporary voluntary shut-in volumes. The Deep Basin assets generated operating margin of $78 million in the second quarter.

On a year-to-date basis, the company participated in the drilling of 15 net wells, completed 17 wells and brought 20 wells on production. Cenovus’s 2018 drilling program in the Deep Basin is now largely complete, with results in line or better than expected.

The company has one of the largest land positions in the Deep Basin, with approximately three million net acres, providing more opportunities than it can efficiently develop within a reasonable timeframe.

To further streamline its portfolio and reduce debt, Cenovus continues to evaluate opportunities to divest a portion of its Deep Basin assets. The company is making progress with its previously announced plan to market for sale assets with current production of approximately 15,000 boe/d of natural gas and liquids in the East Clearwater area of the Deep Basin.

Refining and Marketing
In the second quarter of 2018, the Wood River and Borger refineries, which Cenovus jointly owns with the operator, had very strong throughput and financial performance after undergoing major planned maintenance activity in the first quarter of 2018.

Refining and Marketing operating margin was $357 million, compared with $20 million in the second quarter a year earlier, and operating margin net of capital investment was $322 million.

The increase in operating margin was primarily due to higher utilization, wider crude oil price differentials and higher average market crack spreads compared with the same period a year earlier.

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, the operating margin from Refining and Marketing would have been $57 million lower in the second quarter of 2018.

Management update

In early June, Kam Sandhar was appointed to the Cenovus Leadership Team.

He continues in his position as Senior Vice-President, Strategy & Corporate Development and will continue to report to Jon McKenzie, the company’s Chief Financial Officer.

Sandhar oversees areas of the company that include strategy, corporate planning, acquisitions & divestitures, investor relations and reserves governance, which are key to driving shareholder value for Cenovus.


For the third quarter of 2018, the Board of Directors has declared a dividend of $0.05 per share, payable on September 28, 2018 to common shareholders of record as of September 14, 2018.

Based on the July 25, 2018 closing share price on the Toronto Stock Exchange of $13.54, this represents an annualized yield of about 1.5 per cent. Declaration of dividends is at the sole discretion of the Board and will continue to be evaluated on a quarterly basis.