Cenovus Energy Inc. achieved solid production growth in 2014, driven by strong performance at its oil sands projects in northern Alberta. In addition, while the average benchmark price for Brent crude and West Texas Intermediate (WTI) decreased year over year, the company’s upstream operations benefited from higher average prices for its heavy crude oil sold as Western Canadian Select (WCS). These factors, along with a weakening in the Canadian dollar versus the U.S. dollar, contributed to 19% higher upstream operating cash flow compared with 2013. This increase was more than offset by a sharp decline in operating cash flow from refining, largely due to lower average market crack spreads and higher heavy crude oil feedstock costs. Cenovus also increased its reserves base in 2014, achieving 193% production replacement.
“These are challenging times for the oil and gas industry,” said Ferguson. “Cenovus is taking steps to ensure we remain strong during this market downturn. We have a solid foundation supported by great assets that provide us with the opportunity to create long-term value for investors.”
In 2014, Cenovus achieved 25% production growth from its Christina Lake and Foster Creek oil sands operations, averaging more than 128 000 bpd net (256 000 bpd gross). Oil sands production volumes exceeded the company’s full-year guidance by approximately 4000 bpd net to Cenovus. Christina Lake production increased 40% to average about 69 000 bpd net after expansion phase E reached design capacity in early 2014. The facility also achieved a consistently high utilisation rate for the year.
Foster Creek production averaged more than 59 000 bpd net in 2014, up 11% from the previous year. The production increase was the result of improved plant performance, continued optimisation efforts and increased production from wells using Cenovus’s Wedge WellTM technology. The company achieved first production from the phase F wells in September. Phase F, which added 30 000 bpd of gross production capacity, was producing approximately 4000 bpd net (8000 bpd gross) at the end of the year.
“We’re pleased with the strong performance of our oil sands projects. Both Christina Lake and Foster Creek delivered reliable production with lower non-fuel operating costs per barrel and improved safety performance compared with 2013,” said John Brannan, Executive VicePresident & Chief Operating Officer. “During this current period of lower oil prices, we’re focusing on achieving additional cost savings to help keep our projects among the most cost efficient in the industry.”
Cash flow was US$3.5 billion in 2014, down 4% from the previous year, primarily due to an 82% decrease in operating cash flow from refining. In the fourth quarter of 2014, benchmark crude oil prices dropped sharply, and a narrowing of the Brent-WTI price differential contributed to lower average market crack spreads for the year. In addition, Cenovus’s refining feedstock cost advantage - the price differential between WCS and WTI - narrowed in 2014 compared with the previous year, which increased heavy crude oil feedstock costs. As well, in the fourth quarter, refining operating cash flow was negatively impacted by an inventory writedown of US$110 million and a US$163 million adjustment related to accounting policy differences between Canada and the U.S. These adjustments were related to the decline in refined product and crude oil prices late in 2014.
Cenovus’s operating and net earnings were negatively affected in 2014 by a US$497 million non-cash goodwill impairment associated with Pelican Lake. The impairment was caused by a decline in forecast crude oil prices as well as a slowing of the development plan at Pelican Lake. There were no goodwill impairments in 2013. Cenovus also had non-cash asset impairments of US$151 million related to tight oil exploration activities as well as to property, plant and equipment.
Cenovus had free cash flow of US$428 million in 2014, 23% higher than in 2013, after capital investment of approximately US$3.1 billion. “We ended 2014 in a solid financial position with approximately US$900 million in cash and cash equivalents on our balance sheet and debt ratios well within our target ranges,” said Ferguson. “In the current challenging oil price environment, we’re reducing capital spending in order to help preserve our financial resilience. As well, we have additional flexibility to further reduce capital spending if oil prices continue to fall or remain low for an extended period.”
Cenovus is undertaking various measures to reduce its costs, including an expected 15% staff reduction, the bulk of which will come from its contract workforce. Employee salary increases have also been suspended for 2015 and the company is significantly reducing its discretionary spending, including spending on travel, conferences, offsite meetings and information technology upgrades.
Adapted from press release by Joe Green