Cenovus Energy remained focused on financial resilience in the second quarter of 2020 and used the flexibility of its assets and marketing strategy to adapt quickly to the changing external environment. This positioned the company to weather the sharp decline in benchmark crude oil prices in April by reducing volumes at its oil sands operations and storing the mobilized oil in its reservoirs for production in an improved price environment. While Cenovus’s financial results were impacted by the weak prices early in the quarter, the company captured value by quickly ramping up production when Western Canadian Select (WCS) prices increased almost tenfold from April to an average of C$46.03 per barrel (bbl) in June. As a result of this decision, Cenovus reached record volumes at its Christina Lake oil sands project in June and achieved free funds flow for the month of more than $290 million. 

“We view the second quarter as a period of transition, with April as the low point of the downturn and the first signs of recovery taking hold in May and June,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “That said, we expect the commodity price environment to remain volatile for some time. We believe the flexibility of our assets and our low cost structure position us to withstand a continued period of low prices if necessary. And we’re ready to play a significant role in helping to lead Canada’s economic recovery.”

Response to COVID-19

In the first quarter of 2020, Cenovus responded quickly to the COVID-19 pandemic to protect the health and safety of its workforce and ensure the continuity of its business. In mid-March, the company moved to essential staffing levels at its field operations and directed the vast majority of its office staff to work from home. Cenovus continues to implement special measures and protocols to protect its workers. Some additional staff have recently started returning to field locations to address work that needs to be performed over the summer and fall while the return to offices is happening at a slower rate. Cenovus is monitoring the COVID-19 situation closely and will not compromise on the health and safety of its workers.

Business flexibility and balance sheet strength

In the second quarter of 2020, Cenovus remained focused on disciplined spending, maintaining its low cost structure and protecting its balance sheet. Capital investment in its oil sands and conventional segments decreased on a quarterly and year-over-year basis as a result of the decisive steps the company took in the first quarter of 2020 and in early April to respond to declining commodity prices and the rapid weakening of the business environment. During the second quarter, the company completed the previously announced temporary ramp-down of its crude-by-rail program.

In response to a 45% drop in the average price of West Texas Intermediate (WTI), to US$16.70/bbl, and a more than 70% decline in the average price of WCS, to C$4.92/bbl in April compared with March of 2020, Cenovus took additional steps to preserve value and protect its balance sheet by proactively managing its oil sands volumes. In April, the company voluntarily reduced oil sands production to just under 344,000 barrels per day (bbls/d), down 11% or approximately 44,000 bbls/d compared with March volumes. When WCS prices rebounded to C$46.03/bbl in June, Cenovus used the flexibility of its oil sands assets to quickly ramp up production and leveraged its range of transportation and marketing options, including storage and pipeline capabilities, to capture value from the higher prices. The company achieved average oil sands production of 405,658 bbls/d in June, which included a production record at Christina Lake.

“We made the strategic decision to use the flexibility of our business and relied on the collaboration of our upstream and marketing teams to manage the timing, storage and sales approach for our oil production,” said Pourbaix. “We are maximizing value for our shareholders even in this challenging economic environment.”

Second-quarter financial results

Cenovus’s second-quarter adjusted funds flow shortfall of $462 million and free funds flow shortfall of $609 million were significantly impacted by losses of $529 million related to product sold in the quarter that was written down at the end of March. During the second quarter, essentially all the inventory that Cenovus wrote down in March was sold, and the company realized the inventory write-downs. The recovery in benchmark commodity prices and the ramp-up of production during the second quarter resulted in Cenovus achieving free funds flow of more than $290 million for the month of June.

quarter of 2019. Cenovus had a second-quarter operating loss of $414 million and net loss of $235 million compared with operating earnings of $267 million and net earnings of almost $1.8 billion in the same period in 2019. The net loss was due to the lower operating earnings and unrealized risk management losses of $120 million, partially offset by non-operating unrealized foreign exchange gains of $273 million and a deferred income tax recovery of $131 million.

At the end of the second quarter, Cenovus had net debt of approximately $8.2 billion compared with net debt of about $7.4 billion at the end of the first quarter of 2020. The company continues to aim for a net debt level in the range of $5 billion or lower over the longer term.

Cenovus has $5.6 billion in committed credit facilities, a further $1.6 billion of uncommitted demand facilities and no bond maturities until late 2022. As of June 30, 2020, the company had drawn almost $1.5 billion against the committed credit facilities, $299 million against the uncommitted demand facilities, and there were outstanding letters of credit totaling $434 million. As at June 30, 2020 no amounts were drawn against the uncommitted demand facilities available to Cenovus’s refining partnership co-owned with Phillips 66.

The company recorded cash used in operating activities of $834 million in the second quarter compared with nearly $1.3 billion in cash from operating activities in the same.

Operating highlights

Oil sands
For the second quarter, Christina Lake had average production of 207,157 bbls/d, while Foster Creek had average production of 166,032 bbls/d. The company achieved combined oil sands production of 373,189 bbls/d in the second quarter, compared with 344,973 bbls/d in the same period a year earlier. In May and June, Cenovus was able to produce above the government of Alberta’s mandatory production curtailment limit for industry due to the purchase of low-cost production credits from other companies. As a result, Christina Lake volumes increased from an average of 175,957 bbls/d for the month of April to an average of 242,964 bbls/d for the month of June, a record, underscoring Cenovus’s flexibility in managing through the volatile price environment.

Second-quarter oil sands operating costs were $7.36/bbl, down 15% from the same period a year earlier and 5% below the first quarter of 2020. The year-over-year decrease in oil sands operating costs was primarily due to higher sales volumes and the deferral of activity to manage costs in the low-price environment and limit field personnel due to COVID-19. The decrease in second-quarter operating costs from a year earlier was partially offset by higher fuel costs related to an increase in natural gas prices. In addition, Cenovus benefited from a nearly 60% decrease in overall second-quarter transportation and blending costs compared with the first three months of 2020. The reduction was due to the suspension of the crude-by-rail program and associated variable costs as well as lower-priced condensate used for blending compared with the first three months of the year.

While Cenovus’s oil sands facilities were producing at reduced rates early in the second quarter, the company maintained normal steam production levels. This allowed Cenovus to continue operating the reservoirs effectively but also contributed to temporarily higher steam-to-oil ratios (SOR). At Christina Lake, the SOR was 2.1 in the second quarter, compared with 2.0 in the same period a year earlier. The SOR at Foster Creek was 2.8, up slightly from 2.7 a year earlier. The SORs are expected to track lower again as production increases.

Conventional
Cenovus’s conventional segment was previously referred to as the Deep Basin segment and now includes the Marten Hills asset. The comparative period has been restated to reflect this change.

Conventional production averaged approximately 92,000 barrels of oil equivalent per day (BOE/d) in the second quarter, a 6% decrease from the same period in 2019. The year-over-year decrease was due to natural declines from limited capital investment, partially offset by lower turnaround activity and fewer shut-ins in response to natural gas pricing compared with the same period in 2019 as well as the addition of Marten Hills heavy oil production starting in 2020. As previously announced, Cenovus has deferred the remainder of its 2020 drilling program in the conventional segment.

Total conventional operating costs declined 7% to $81 million in the second quarter of 2020 compared with the same period in the previous year. These cost savings are a result of the continued optimization of operations, focusing on critical repair and maintenance activities and increased use of Cenovus’s infrastructure. Per-barrel operating costs remained relatively flat at an average of $9.05/BOE compared with $9.01/BOE in the second quarter of 2019, as lower sales volumes and higher seasonal chemical purchases were offset by decreased property tax and lease costs as well as lower costs for repairs and maintenance. Second-quarter per-barrel operating costs remained flat from a year earlier even as production declined 6% over the same period.

KeyFacts Energy: Cenovus Canada country profile