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Cenovus Energy, Inc. (NYSE:CVE)

CIBC Whistler Institutional Investor Conference Call

January 23, 2014 10:35 ET

Executives

Paul Reimer - Senior Vice President, Marketing, Transportation, and Power

Analysts

Arthur Grayfer - CIBC

Arthur Grayfer - CIBC

Okay, so good morning everyone. My name is Arthur Grayfer. And I have the pleasure of introducing Paul Reimer, who is SVP of Marketing, Transportation, and Power for Cenovus.

Paul Reimer - Senior Vice President, Marketing, Transportation, and Power

Thanks. Thank you very much, Arthur. Yes, Paul Reimer, I am Senior Vice President of Marketing, Transportation and Power. And quite simply put, that just means that I am out there optimizing the revenue side of the equation. This includes maximizing our field netbacks, accessing new markets and new market development as well as securing lower cost secure supply, a diluent that we used to blend with our bitumen.

So my goal here today is really to outline why I believe Cenovus is a compelling investment. Driven by our top tier oil sands portfolio, our strong culture for execution and innovation, we benefit from upstream and downstream integration and solid financial position, but most importantly, we focus on total shareholder return, which by definition includes building net asset value and providing meaningful and growing dividend.

So before I don’t get if that works, before we begin, I’d ask you to refer to the advisory on forward-looking information and on oil and gas financial information, which I encourage you to review. A different kind of oil sands company, so what makes Cenovus a different kind of oil sands company? Well, to start with, we have an industry leading portfolio of oil sands assets. We translate this into exceptional resource and predictable, reliable performance. We are leader in innovation through technology and our manufacturing approach provides us with a competitive advantage. We have a 15-year track record of steam-assisted gravity drainage or SAGD to develop the oil sands and we have no mining assets, no tailing ponds and no mega projects. With our ownership in two U.S. refineries, we are integrated. This strategic integration provides the stability of our overall cash flow.

And finally, we have a strong balance sheet that provides the financial flexibility to fund our oil growth. So here is our vital statistics, our metrics, if you will. We are a very large reserves company with a base of 13 billion barrels of oil equivalent, BOE. 98% of which is oil. All of our producing assets are in Western Canada. We own 50% of two refineries, as I mentioned one in Illinois and the other in Texas both operated by our partner, Phillips 66. We offer good liquidity with an enterprise value of about $28 billion. We produce about 260,000 BOE net of bitumen, conventional oil and natural gas.

So this slide shows the outcome of our 10-year plan and highlights our growth strategy. We will be bringing on a new 50,000 barrel a day phase every 12 to 18 months for years to come. We anticipate production from oil sands and conventional oil will reach about 0.5 million barrels net to Cenovus by 2021. Now, one important point that I want to stress is that our growth rate is an outcome of our ability to execute. It is not a target. Our focus is on growing net asset value.

If you are familiar with SAGD, you will know that the steam oil ratio, SOR, is the key measure of performance in energy intensity. A low SOR reduces overall project costs as the majority of capital and operating costs go and are related to steam generation and water handling. It provides a significant environmental benefit as noted in the chart. Low SOR is really a benchmark for our industry. Our industry-leading SORs at Foster Creek and Christina Lake that you see on the far right hand side of the chart are due to our high quality of the reservoir, operating our projects efficiently and relentless pursuit to become even more effective at our efficiency targets.

We’ve also shown on this chart, our expected SORs from emerging plays, Grand Rapids, Telephone Lake, and Narrows Lake. Narrows Lake in particular will benefit from our solvent-aided process, a patented technology that uses butane mixed with steam and this technology is expected to lower SOR even further. Innovation is a hallmark and a focus area for our company. It is part of our culture.

Research and development is an important part of that component. Many of the technologies that we are working on are aimed at reducing steam and energy requirements and as I said earlier those are very important in our industry. Technology and ultimately - will ultimately reduce our environmental footprint and our costs. We have over 100 technology projects on the goal at various stages of development with the goal of reducing the environmental footprint, reducing SORs, and lowering operating costs.

We are excited about many of these new things, many of the things that we have already come to bear fruit and we look forward to sharing our progress on all of these as we implement new technologies in commercial facilities over coming years. Cenovus is considered a leader in SAGD, but we also have a large conventional oil and gas portfolio. This portfolio is underappreciated, Jim, in our oil sands story. About 70% of our conventional leases are in freelance, where we maintain a competitive advantage and the significant cash flow helps fund the development of our oil sands projects. The chart on the left shows the split of operating cash flows between our upstream at for both or all of our upstream assets and as you can see a significant portion of our upstream operating cash flow is generated from these conventional assets.

Our refining assets that I mentioned earlier continue to generate a significant operating cash flow well in excess of capital. Our share of ongoing maintenance capital was between $100 million and $125 million per year. In 2012, the refining side of the business generated $1.1 billion of operating cash flow in excess of capital expenditures. And through the third quarter of 2013, we generated $985 million of operating cash flow on capital investment of $70 million. For 2014, we’ve taken a fairly conservative price stack of $13.50 Chicago 3-2-1 crack spread for our budgeting purposes which generates a projected operating cash flow of about $500 million for the refining business.

So to round out the discussion thought I put up a chart here on market access which continues to be a real key focus area for Cenovus. Our strategy on the transportation side is to continue to emphasize the importance of a portfolio approach. Having clear line of sight to decades of oil growth a strong balance sheet along with integration allows us to commit to the firm pipeline capacity which will ensure that our oil will get to market. We are supportive of all major pipeline initiatives to a variety of markets including the U.S. Gulf Coast, Canadian East and West Coasts.

We are currently benefiting from our firm service capacity of 11,500 barrels per day off the West Coast through the Trans Mountain pipeline system. Through that route we’ve opened up new markets in Asia and in California. Most recently we have secured 200,000 barrels per day of firm capacity on TransCanada’s Energy East project that will transport barrels to Saint John, New Brunswick for both domestic and export markets. We look forward this year to the start of Enbridge’s U.S. Gulf Coast access project in Q3. And of course we must talk about rail. We are really looking forward to the start up of several new rail terminals in Alberta. And we will view those as a prospect of accessing 30,000 barrels a day of unit train capacity this year from the Alberta market hubs.

So in closing, Cenovus has a top tier asset base and a manufacturing approach that generates predictable, reliable growth. Our strong track record in oil sands development and our focus on innovation positions us well. Our integrated strategy – integration strategy helps to reduce overall cash flow volatility. And we continue to look at ways to expand our margin through market access. We have the financial strength to support our growth plans and we are committed to safe, reliable, consistent operation. All of these elements contribute to building net asset value and supporting dividend growth. So thank you and I will walk over to the fire and have a fireside chat.

Question-and-Answer Session

Arthur Grayfer - CIBC

It sounds great. So given your role within the company I think I will focus a lot on some macro questions and perhaps some pipeline questions. So on the macro side, can you tell us your thoughts on both light and heavy oil differentials for 2014 and beyond how do you see this situation evolving?

Paul Reimer

So there is couple of differentials that we have really had to focus on over the last while. One differential was the light differential and being the Brent-WTI differential which has in the past really quite exploded because of the congestion within the Cushing congestion if you will. And we see that tightening up considerably. We have opened up the Southern route – they have opened up the Southern route, south of Cushing we see that that tightening considerably back to more normal levels with more of a U.S. Gulf Coast parity. But on light-heavy differential I think which is becoming more important to us as an oil sands company, we have budgeted for 2014 $26 differential of the WTI. We believe that that’s probably reasonable number for this next year and maybe on average, but I expect we will see a fair bit of volatility in 2014, 2015. So in the medium-term we see a $20 to $25 difference with light-heavy spread - light-heavy differential of WTI. And longer term as the market access issues correct we will probably see that narrowing to about $10 to $15 light-heavy differential.

Arthur Grayfer - CIBC

So maybe we can talk a little bit about these various pipeline projects that have been announced and are in various stages of approval, can you discuss what you think has a better opportunity of moving forward both the East Coast, West Coast or to the Gulf and which do you risk of further delays or not even moving forward?

Paul Reimer

Well, first of all, again reinforcing what I commented on earlier Cenovus has the wherewithal to support a number of different projects and so we have taken that portfolio approach and put it down on commitments to all of the major projects that are going out of the Western Canadian Sedimentary Basin or that will serve our production. We have – we are very encouraged by the JRP ruling on Northern Gateway, but we do understand that that’s got some continuing hurdles. We are very encouraged by the progress that is being made on Trans Mountain and the Trans Mountain expansion project as well as the support that the TransCanada Energy East project has received in Canada and all across Canada from various governments. And we are in support of all of those Canadian projects.

On the U.S. side, like I said we are looking forward to the startup of the Enbridge system, the U.S. Gulf Coast access project. We are also supportive of the Keystone XL project. And quite frankly, it’s been talked about so much. I have stopped handicapping that particular project. I firmly believe that a direct link from Hardisty to the U.S. Gulf Coast has an economic advantage for both the producer and the refiner and some project that will look like that will more than likely proceed. So we are – we firmly believe that engagement with stakeholders is important; you have to have a robust and rigorous regulatory undertaking to make sure that everybody’s voice is heard, but at the end of the day I think that decisions need to be made on the basis of science and facts. And I think once that’s done all of these projects will proceed in due course and I might add I think that they all are needed by our industry over the long-term.

Arthur Grayfer - CIBC

So, you mentioned you don’t want to handicap excel, but let’s ask you to handicap Gateway and TMX and maybe put some thoughts on timing?

Paul Reimer

Well I think that there is - I think that again I’m going to say that both projects are needed. Both projects in our view position us to slightly different markets. We have a lot of experience now with the shipping off of the Trans Mountain system off of the docks, the Westridge docks. We find that the market that we can best suit us there is the California market it’s suitable for the size of vessel that’s accessible into that dock space. We have shipped to Asia out of our TMX capacity or Trans Mountain capacity and we are finding favorable economics in that. But I believe that the real economics to go international really come about when you can put into the larger cargo carriers the VLCCs. That’s really where you’re going to get the best and most efficient cost of delivery to the international markets. Energy East off the East Coast is - has already got availability or accessibility for VLCCs. So that’s a great opportunity to launching there. And I believe that with the support of the government sets is that would be a strong one. With regard to TMX and Gateway I believe that both of them have different advantages, I believe that the conversations that are taking place are important. TMX is brownfield, Gateway is Greenfield and I think that rather than handicapping them we have taken the portfolio approach and will deliver on whichever one is first to operate.

Arthur Grayfer - CIBC

And do you think that it – you believe that they will move ahead notwithstanding concerns by various stakeholders and there is disputed land claims and so forth and that won’t delay the process indefinitely?

Paul Reimer

No, indefinitely, I think there was a new reality that was set in. And I think the new reality is that you have to be far more engaging with the stakeholders every step of the way. And I believe that we work - and I think you pointed out it use to be that the development of our upstream assets was longer than the development of the takeaway capacity. I think that’s turning around a little that. I think we have to get out of - get out ahead of some of our projects making sure that these market access projects in advance.

Again I think it’s really important and I’m very supportive of the work that Enbridge is doing to try and engage. I believe that that Kinder Morgan has done an exceptional job with their – with the – with all of the stakeholders along with route. I think they’re two different projects from that standpoint. I think that they are going to have to take time to get the stakeholders to support the projects, but ultimately I do believe that the stakeholders if it’s based on science and facts and recognition of the stakeholder engagement that these projects will proceed.

Arthur Grayfer - CIBC

Are there any questions from the audience?

Unidentified Analyst

(Question Inaudible)

Paul Reimer

First of all, we have a very solid and strong relationship with Phillips 66. I think it’s fair to say and there are – we find them a tremendous operator for the refining assets that they’ve got. They of course have a focus on their midstream and chemicals business, the refining business though does attract some management attention. I think they’re committed to the refining business that they have. We are certainly committed to the refining business and the joint venture that we have with them. So, no, I don’t consider that to be any change in the material way that we operate our joint venture or the assets that we own. I think it’s still fairly a very, very positive relationship.

Arthur Grayfer - CIBC

Given your role in transportation can you talk a little bit about how you see the costs for shipping volumes on rail particularly with the new regulatory guidelines implemented by the Canadian government and how does that change the costs and such going forward?

Paul Reimer

Let me talk firstly about regulations, because I saw another article in the paper just recently on this. I think there is a lot of focus on regulations and I think that’s important. We support more new and robust regulation on rail to ensure that they are operated in the most safe and reliable way possible that helps our industry. We – part of that is also adherence to regulation. I think it’s really incumbent to all operators to adhere to the regulations that are in place. So I think that’s just a main point.

We view rail I mean barrel for barrel on a cost basis, barrel for barrel rail is more expensive than pipe. And that’s I think kind of not where that conversation stops. What really is intriguing to us is the opportunity to ship products other than dilbit on rail. We see that rail not just gets through the congestion points, but also opens up new markets for us, opens up refiners that are not otherwise pipeline connected and the opportunities to reduce the costs of the product that is inside a railcar, more than offsets the incremental cost of rail. So if rail costs are incremental to pipe are say $5 to $10, more expensive to any particular location, I can make up that and then some by reducing the amount of diluent by having a special project product that a refiner is willing to pay more for or a premium for or alternatively even having a faster turnaround time with rail. And again turnaround time is really important it takes – pipelines take a while for the product to end up with the final market, rail as long as you have got some tight turnaround times and cycle times, is a lot quicker. So all of those components can really have an advantage for rail and that’s why we put rail as a core part of our transportation portfolio. It will remain a real key component for us.

Arthur Grayfer - CIBC

And how long before the movement of just bitumen or access to refineries that have the ability to load this product like how long before this scenario builds out that the cost savings from your shipping bitumen is realized?

Paul Reimer

Well, we are – I mean this year, we are part of the project with the Gibson and USD at Hardisty, we are part of the project out of Bruderheim. We are looking forward to those unit train opportunities opening up. Once we start loading and transporting those unit trains we are going start seeing what are the cost pieces that we need to focus on. We will be working with the service providers, with the operators and such to find those out. So I would imagine as we kind of I am going to say walk before we run here, we can see opportunities probably within six months to a year to start ratcheting down costs associated. Key component will be the cycle time, how quickly can we turn cars around from the start to the finish, to the offload and bring them back and to be reloaded.

Now will be a real key component to reducing our overall cost per barrel on the transport of those products. I will go back to some of the things that Cenovus was involved in. Early on we were one of the early companies to import diluent off the West Coast via rail. We did that for a good number of years and we had that cost ratcheted down considerably. It was higher at the start, but as we became more efficient and service providers became more efficient at it, we took a fair amount of money off the cost for that transport. So we would look forward to the same thing within 6 to 12 months.

Arthur Grayfer - CIBC

Interesting. Are there any more questions from the audience? Maybe we can talk a little bit about the downstream operations, there has been discussion about debottlenecking opportunities that were there, can you expand upon those and put some numbers around it?

Paul Reimer

So part of the opportunity that you want to look at, at the refineries is as you run your project and is the core project in particular at Wood River has been up and running. The refinery operations looks for opportunities to sort of quick easy fixes to whatever it is bottlenecking the plant. And again, Phillips 66 and the operation of Wood River has identified an opportunity for us to debottleneck within the refinery some of the light ends handling. What that means is that if the project proceeds, we’d be able to bring in 10% more heavy crude into the plant and back out some of the lighter crude that we would have in our slate right now. So you are looking at a 10% improvement in heavy crude processing capacity, so that would equal about 20,000, 22,000 barrels a day ish. We haven’t talked yet about specifically about costs. It’s not material now. The joint venture partners or the partnership is still considering the engineering work. We are looking at sanctioning that project or looking at the approval process in the first quarter. If we do choose to proceed with that project, it’s probably a couple of years in terms of startup of the project after it’s been approved and permitted. It really is focusing on being able to handle more dilbit and more cheaper heavy crudes. So, it’s bit of a light ends handling project specifically.

Arthur Grayfer - CIBC

And maybe this bring up I guess last question, can you talk about the strategy of matching your production to the product slate in your refineries, I think you are going to be long bitumen this year, your long refining capacity, but your long bitumen processing capacity this year. And so how should we think about that go forward and how do you think about that?

Paul Reimer

Yes, that’s a great question. And we have really enjoyed the benefits of integration. Our heavy oil has been integrated not just with our refineries. We have also enjoyed put together some supply deals. We have had some market access components that have contributed to our integration, bit of hedging also helps. We will be about 85% hedged or 15% long if you will in 2014. We believe that as we go forward we are going to continue to grow our oil sands production. We will continue to be long heavy oil. And we are going to – we see that the way that we are going to – the best way for us to manage that and to manage the volatility and the downside exposure to differentials is by market access. So we are really seeing that market accessible unlock that the value of our production. It will put the floor on our differentials at the international pricing basis. And that’s really how we see that unfolding. We are not right now focusing on more refining capacity, but rather using market access to secure the downside risk on heavy oil.

Arthur Grayfer - CIBC

As in rail to new refiners or?

Paul Reimer

Rail is a real important part. Cargo is off the coast utilizing the access points that we have into the U.S. Gulf Coast and rail off to the East Coast and California markets as well.

Arthur Grayfer - CIBC

Great. Very quick.

Unidentified Analyst

(Question Inaudible)

Paul Reimer

Yes. We are anticipating that our capital program is in that $3 billion to 3.5 billion range and will continue to be in that range as we go forward. Again it’s not like our projects continue to be advanced at a fairly even pace. So for us, it’s the even pace that matters and that will manage our capital expenditures on a go-forward basis.

Arthur Grayfer - CIBC

Well, thank you very much Paul.

Paul Reimer - Senior Vice President, Marketing, Transportation, and Power

Thank you, Arthur. Appreciate it.

Arthur Grayfer - CIBC

Thanks. And then in five minutes, we will have Barrick presenting.

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