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Cenovus Energy (NYSE:CVE)

Q4 2013 Earnings Call

February 13, 2014 11:00 am ET

Executives

Susan Grey - Former Manager Of Investor Relations

Brian C. Ferguson - Chief Executive Officer, President and Non-independent Director

John K. Brannan - Chief Operating Officer and Executive Vice-President

Ivor Melvin Ruste - Chief Financial Officer and Executive Vice President

Harbir S. Chhina - Executive Vice-President of Oil Sands

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

Analysts

Menno Hulshof - TD Securities Equity Research

Mohit Bhardwaj - Citigroup Inc, Research Division

Christopher Cox - Raymond James Ltd., Research Division

Michael P. Dunn - FirstEnergy Capital Corp., Research Division

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Philip R. Skolnick - Canaccord Genuity, Research Division

David McColl - Morningstar Inc., Research Division

Arthur Grayfer - CIBC World Markets Inc., Research Division

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's Fourth Quarter and Year-End 2013 Results. As a reminder, today's call is being recorded. [Operator Instructions] Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Cenovus Energy.

I would now like to turn the conference call over to Ms. Susan Grey, Director Investor Relations. Please go ahead, Ms. Grey.

Susan Grey

Thank you, operator, and welcome, everyone, to our fourth quarter and year-end 2013 results conference call.

I would like to refer you to the advisories located at the end of today's news release. These advisories describes the forward-looking information, non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion. Additional information will be available in our Annual Information Form. The quarterly and annual results have been presented in Canadian dollars and on a before-royalties basis.

Brian Ferguson, President and Chief Executive Officer, will begin with an overview; and then turn the call over to John Brannan, Executive Vice President and Chief Operating Officer, who'll provide an overview of our operating performance; following that Ivor Ruste, Executive Vice President and Chief Financial Officer, will discuss our financial performance and our reserves and resources information. Brian will then provide closing comments before we begin the Q&A portion of the call.

Please go ahead, Brian.

Brian C. Ferguson

Thanks, Susan. Good morning. Over all, we had a solid finish to 2013, highlighted by ongoing growth at Christina Lake. Our oil growth in 2013 was supported by our integrated operations as our refining business generated more than $1 billion of free cash flow.

Our Conventional business also generated meaningful free cash flow to support our overall Oil Sands development. This quarter, we have updated our reserves and resource information highlighted by an 8% increase in our proved bitumen reserves.

We continue to effectively execute our long-term business plan. Our growth strategy remains consistent and on track. The Board of Directors has affirmed the sustainability of our business model by approving a dividend increase of 10% to $0.2662 per share starting with the first quarter of 2014. I'm going to leave the majority of the quarterly review to John and Ivor.

Today, I would like to focus my discussion on Christina Lake and Foster Creek. Our 2 cornerstone assets. Over the past 3 years, the majority of Cenovus' growth has been driven from Christina Lake Phases C, D and E. From first oil on phase C in the summer of 2011, to reaching nameplate capacity at phase E earlier this year, we have grown production sevenfold. Christina Lake is truly an exceptional asset. It is our thickest and most continuous reservoir and has among the highest well productivity in industry.

We are proactively managing the Christina Lake reservoir to sustain our SOR performance, production levels and operating cost performance over the long term. Our overall outlook for Christina Lake is unchanged and we have full confidence in our current and long-term expectations. In 2014, we have entered a new chapter of growth at Cenovus as we bring on Phase F at Foster Creek, the first of a trio of expansion phases. Foster Creek is a premier SAGD project. It has among the best thermal net pads in the industry and it was the first SAGD project to reach payout for royalty purposes. A milestone for profitability.

Foster Creek is a great reservoir and we believe it is capable of supporting production of over 300,000 barrels per day. As with all our projects, our objective at Foster Creek is to achieve the best returns possible for our shareholders.

Steam to oil ratio trended higher than we expected last year due primarily to the formation of common steam chambers. This is a natural evolution of SAGD and it has led us to change some of the ways in which we start up wells and manage the reservoir. Today, John will share some of what we've learned.

Initially, designed capacity at Foster Creek Phases F, G and H is 90,000 gross barrels per day this is 30,000 barrels per day for each Phase at a base level consistent with our regulatory filings. Our ultimate capacity, which includes planned debottleneck and SOR optimization takes us up to 125,000 barrels per day. The timing to achieve the 125,000 barrels per day of capacity at F, G and H will be dependent primarily on our long-term SOR performance. We are initiating optimization efforts that will help improve project SOR.

Once F, G and H are all online, we also expect to layer in plant optimization for the entire A through H facility. This includes the de-bottlenecking of facilities to improve overall fluid handling capability at the plant. The F, G and H expansion at Foster Creek will drive a large portion of our oil sands growth over the next few years, and the update today reflects our near-term production expectations. Project economics at Foster Creek are robust in the 20% to 25% range after-tax.

Looking back at 2013, we exited the year on a strong note at Foster Creek. Our focus through the fourth quarter was to maintain steady performance. There's still work ahead of us but I am pleased with the progress we have made to date. Foster Creek has averaged 110,000 barrels per day for the last 3 months, the top end of our expected operating range.

Overall, Cenovus’ oil growth strategy remains consistent. We have an enviable portfolio of approved SAGD projects, a proven execution strategy and integrated approach that reduces the volatility of our cash flow and the financial position that supports our growth plans.

I'll now turn the call over to John Brannan, who will provide more detail on our operational performance.

John K. Brannan

Thank you, Brian, and good morning, everyone. Our fourth quarter was highlighted by steady production growth from Christina Lake Phase E, as it continued its ramp up. We are currently approaching gross nameplate capacity of 138,000 barrels per day. Our goal this year is to maintain steady overall performance, running at about 95% utilization of nameplate capacity.

Our conventional liquids business, which now includes Pelican Lake, averaged just below 75,000 barrels per day during the fourth quarter. Our Conventional oil business provide stable cash flow to support our oil sands growth.

In 2014, we have focused investments in the conventional areas that will best optimize free cash flow. Natural gas continues to be a financial asset that also funds oil sands development. In 2013, our natural gas business generated $410 million of free cash flow.

We continue to make significant progress on our oil growth plans. Overall, the Foster Creek FGH expansions are progressing well. Phase F is 90% complete and is expected to come online in the third quarter. I would like to remind you that we typically build our SAGD projects in sets of 3 with the first phase containing the majority of the infrastructure required to support the remaining 2. Having Phase F nearing completion, substantially derisks Phases G and H, which are coming on production in 2015 and 2016 respectively.

We are also progressing well with the Christina Lake Phase F and G expansions. Narrows Lake has met all of it's year-end targets for site construction, engineering and procurement.

We also advanced pilots at our emerging projects during the quarter. Most notably, we successfully concluded our Telephone Lake pilot, demonstrating we could effectively dewater the reservoir. We are currently working with the regulator to receive approvals at both Telephone Lake and Grand Rapids, which were anticipated over the next few months.

Our focus over the next few years will to be to develop our inventory of regulatory approved projects, one that can provide meaningful near-term value for our shareholders.

Our upstream performance was complemented by another good quarter from our refining business. Both refineries operated at high utilization rates and had good overall operating performance during the quarter, despite weak seasonal product demand and lower market cracks. We generated $151 million of operating cash flow from our refining business during the fourth quarter in line with our guidance expectations. So far in 2014, we have benefited from the lower price crudes that we purchased in late 2013.

From a market access perspective, we are pleased with the recent announcement related to the environmental impact assessment for Keystone XL. And we are looking forward to a timely decision. Cenovus has taken a portfolio approach to accessing global markets for our crude oil, which include 150,000 barrels per day of firm service to the U.S. Gulf Coast split evenly between Enbridge's expansion project and TransCanada's Keystone XL.

Our rail strategy is also progressing. We transported our first unit train of oil in January and will be loading our second this month. We expect to exit 2014 with 30,000 barrels per day of rail capacity.

Now turning back to Foster Creek. The deferral of maintenance in 2012 resulted in higher than usual well work in 2013 and negatively impacted both production levels and operating costs. Since early 2013, we have invested an increased well instrumentation, which allows for better monitoring and contributing -- and contributed to a significant reduction in unplanned well maintenance activities in the second half of 2013.

We have also built in preventive maintenance for 2014, which is reflected in operating cost expectations for this year. As Brian mentioned, production levels have been consistent over the past few months averaging 110,000 barrels per day gross. We intend to maintain steady performance from Foster Creek Phases A to E throughout 2014. Our steam to oil ratio performance tracked higher than we planned in 2013. This reflects a coalescing of steam chambers that we discussed in our third quarter results. We have learned that better well conformance, which means distributing steam across the full length of the well pair will mitigate the effect that the natural formation of common steam chambers has on SOR.

Our priority for all new wells of Foster Creek is to ensure we achieve a high level of well conformance. As a result, we have made a few changes to our startup operating procedures to improve SOR over the long term. First, we plan to steam new wells at Foster Creek for a longer period prior to initial production using steam circulation. We expect the long-term benefits of achieving well conformance will outweigh the costs of the additional steaming during start up. Next, we are investing in more instrumentation, which we believe supports better well performance. We intend to maintain our well instrumentation at about 95%, which will help us better manage steam and well maintenance, reducing liner plugging and improve overall well performance.

Finally, we intend to accelerate the drilling of additional sustaining pads. Historically, our pads have been drilled just in time. But we believe accelerating some sustaining capital can provide more flexibility to reallocate steam to new areas and move pads to blow down faster. This will take some time but we believe it will help lower overall steam to oil ratios.

We also invest in technology to improve SAGD performance. Innovations such as our Wedge Well technology will help lower steam to oil ratio by adding production with essentially no associated steam. This year, we expect to bring on over 40 new Wedge Wells at Foster Creek. Because of the ramp-up of Phase F, we expect to see some variability in steam to oil ratio levels. However, we believe that we can effectively manage Foster Creek at a 2.6 to 3.0 steam to oil ratio level on a full year basis in 2014.

As in all SAGD projects, the initial months of a new phase requires steam circulation in the new wells in advance of production. Steam to oil ratios will be higher until the production ramps up. Our ability to reach ultimate production capacity of 125,000 barrels per day gross from these new phases will be based on lowering steam to oil ratios and de-bottlenecking the Phases A through H facilities.

Overall, I share Brian's sentiment that we finished 2013 on a positive note despite some operational challenges throughout the year. The teams are working hard to maintain consistent and steady operations at Foster Creek and we are on our way to improving our performance throughout 2014.

I will now pass the call to Ivor, to discuss our financial performance.

Ivor Melvin Ruste

Thanks, John, and good morning, everyone. We exited 2013 with a solid financial position. Our balance sheet strength provides the foundation for our oil growth strategy and supports the growth of our dividend, which was increased again by our Board. Our focus is on total shareholder return and dividends are a key component of that.

For the fourth quarter, Cenovus reported cash flow of $1.10 per diluted share in line with our guidance. Operating earnings were $0.28 per share. Our fourth quarter concluded another strong year from refining and marketing business, which generate about $1.1 billion in operating cash flow for the full year. Refining operating cash flow was $151 million for the quarter. Using the last-in, first-out accounting method employed by most U.S. refineries, Cenovus' fourth quarter operating cash flow could have been $91 million higher.

Operating cash flow from our producing Oil Sands assets: Foster Creek and Christina Lake is $383 million in the fourth quarter. Roughly in line with capital expenditures of these projects. 2014 marks the first year that both Foster Creek and Christina Lake are expected to become self-funding.

Operating cash flow from conventional liquids including Pelican Lake was $324 million in the quarter, slightly lower than the same period in 2012. Production volumes increased 1% year-over-year due to growth from our drilling programs, offset by the impact of the Shaunavon divestiture. For 2014, we focused our conventional spending on the highest return investments in order to optimize free cash flow.

Our natural gas business generated $110 million of operating cash flow in the fourth quarter compared with $134 million a year ago. This reflects reduced investment on natural gas activities and expected natural declines.

General and administrative expenses for the year came in at $349 million compared with guidance of about $430 million. The main driver to lower G&A was the impact of share price on the long-term incentive expense.

Net earnings, which includes unrealized mark-to-market and nonoperating foreign exchange amounts were a loss of $0.08 per share in the quarter. And earnings included a realized after-tax foreign exchange loss of $146 million related to the receipt of the remaining principal on the FCCL partnership contribution receivable.

During the fourth quarter, our partner elected to pay the remaining principal on the partnership contribution receivable in the amount of $1.4 billion on a net basis. We're currently working on the most tax efficient means of repatriating these funds.

We've also reported our reserves bookings and resource additions for 2013. Our proved bitumen reserves of 1.8 billion barrels represents an 8% increase from year-end 2012. Reserves associated with expanded development areas at Foster Creek and Christina Lake along with overall improvements in recoveries lead to higher reserve bookings. Company-wide proved and probable reserves at 3.2 billion barrels of oil equivalent represent an increase of 4% year-over-year. These results were achieved at competitive finding and development costs.

We ended 2013 with the strong balance sheet and good liquidity. Our debt-to-capitalization ratio of 33% and debt-to-adjusted EBITDA of 1.2x remain at the low end of our targeted ranges of 30% to 40% and 1x to 2x respectively.

I'll now turn the call back to Brian.

Brian C. Ferguson

Thanks, Ivor. Since the inception of Cenovus, one of the principles of our business has been to maintain operating and capital cost discipline by focusing on developing projects, strong returns and material net present value.

The foundation of our business, Christina Lake and Foster Creek, are both premier SAGD assets and we anticipate decades of strong returns from both.

Today, you've heard that Cenovus has a wealth of growth opportunities. However, I want to assure you that growth is not the driver. It is the outcome of our ability to execute. 2013 was a year of learning for us. In 2014, our focus is on delivering reliable, predictable performance and executing with excellence. Our focus is increasing total shareholder return. This quarter, we have demonstrated our commitment to returning cash to shareholders with our third consecutive 10% annual increase in our dividend.

With that, the Cenovus team is now ready to respond to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first caller is Menno Hulshof with TD Securities.

Menno Hulshof - TD Securities Equity Research

So you mentioned new startup protocols for Foster Creek, which look to include a longer soak periods. I've got 2 questions. Would these protocols be applied to expansions for other projects and then as a follow-up to that, are you expecting the ramp-up profile to look like for Foster Creek F?

Brian C. Ferguson

Thanks for the question, Menno. I'll ask Harbir to respond to that.

Harbir S. Chhina

Okay, Menno, the -- what we're doing with the -- due to the steam coalescence, we've reached the conclusion that what we need to do is improve the well conformance along the length of the well, and we believe the best way to do that is to do steam circulation similar to what we've done at Christina Lake all the time. We have not done that at Foster because Foster had mobility and so we're going to sacrifice early production, which means were going to wait 3 months with steam circulation and then the production will kick in. With respect to it being applied to other projects, generally steam circulation is required for almost every other project except Foster Creek, and now we're going to start to do that at Foster Creek to improve the performance.

Menno Hulshof - TD Securities Equity Research

And the ramp-up?

Harbir S. Chhina

It's expected to take from production a gain about 12 to 18 months, similar to what we've said all along.

Operator

The next question comes from Mohit Bhardwaj with Citigroup.

Mohit Bhardwaj - Citigroup Inc, Research Division

Brian, as you said, 2013 has been a year were there has been a lot of learning as far as Foster Creek is concerned. My question is on the updated operating cost guidance, since December and how much of that is because you guys have realized that you have to do more maintenance work versus how much of that is because you think that now you require additional instrumentation to monitor the well performance over there.

Brian C. Ferguson

So thanks Mohit. The increase in per barrel costs, which is approximately $0.40 per barrel at Foster Creek is entirely due to the decision to steam for an additional month before we begin producing oil at Foster Creek. There's no other change in that and I'd observed that, that results overall in 2014 in a $10 million increase in operating costs. So it's really quite minor in the overall scheme of things.

Mohit Bhardwaj - Citigroup Inc, Research Division

Thanks for clarifying that. And one more question as far as the ramp-up or the optimization is concerned for Foster Creek additional phases and it seems like you guys are looking at the optimization from more holistic A to H Foster Creek Phases versus just looking at F, G and H, is that something that you guys are looking at Christina Lake as well and would the ramp-up for the additional phases at Christina Lake also change like the first design capacity of say 60,000 barrels per day and then ramping up to 80,000 barrels per day, would that be different?

Brian C. Ferguson

Thanks for the question, Mohit. So I would say, that generally we are taking a somewhat more conservative approach to how we are anticipating the deployment of our capital. So the F, G and H is a 90,000 barrel a day expansion done in 3 steps. Our focus now before we spend any capital on optimization for that, is going to be to make sure we got that 90,000 barrels a day up and running efficiently. We don't really -- and that's a focus at Foster Creek. Based on the performance and truly the exceptional performance at Christina Lake, we're not anticipating any fundamental changes there in terms of startup. It truly has been spectacular.

Mohit Bhardwaj - Citigroup Inc, Research Division

And if I could just squeeze one final one here. Is there is -- congratulations on increasing the dividend 10%. Any thoughts on share buybacks here?

Brian C. Ferguson

I had a discussion with the Board of Directors about total shareholder return yesterday. Share buyback was part of that discussion. We decided that we believe the most immediate thing we could do to return cash to shareholders was to increase the dividend again by 10%. And we will continue to look at share buyback over the course of the year as a strategic option.

Operator

The next question comes from Chris Cox with Raymond James.

Christopher Cox - Raymond James Ltd., Research Division

Most of my questions are around [ph] on Foster Creek and I have one question in the end on marketing but the first one on Foster is your reporting says new operating procedures that are reemployed at Foster, can you maybe comment on how the regulatory approvals are progressing for additional well pairs or even Wedge Wells and as well as moving sort of patch to blowdown how is that progressing and can you see any meaningful development on either those over the course of 2014?

Brian C. Ferguson

I'll ask Harbir to respond to that, please.

Harbir S. Chhina

Yes. So Chris, as far as the Wedge Wells go, we've got 40 plants for this year. Currently, we have about 68 producing and so it's a pretty aggressive year. So that approvals are in place for that. In terms of additional wells on blow down, that we have approvals for another pads FNG, which will be coming on towards the end of Q2, start of Q3, that time period. And we're going to continue to put more wells into the hopper in terms of the next pads that should go on blowdown.

Christopher Cox - Raymond James Ltd., Research Division

Great. And then as for the operating pressure, when might we be get some clarity in terms of changes there when might we begin to see the impact of rise steam injection pressure on SOR?

Harbir S. Chhina

I think our first priority is to make sure our instrumentation strings are at 95%. Our second priorities is the Wedge Wells. Third priority is steam circulation on this[ph] . Then we put more wells on blowdown that's a next priority and then get more sustaining pads going. And then we go to drop the reservoir pressure. So we're going to do these 6 items in that order over the bulk of the next year and a half. But definitely, we will be going down. We continue to do test on exactly what the optimum pressure is and we'll give you more insight into that over the next year.

Christopher Cox - Raymond James Ltd., Research Division

Okay. And then finally on the market access initiatives, you've indicated that you've taking delivery of, I think, was 825 rail cars by year-end. What are you seeing right now in the Canadian marketplace in terms of opportunities to expand these volumes perhaps from other rail marketers that might look to sublease some of their rail cars?

Brian C. Ferguson

I'll ask Paul Reimer to respond to that.

Paul Andrew Reimer

Yes, we are seeing some rail cars becoming available. In fact, we are subleasing another 200 rail cars this year for use in unit train service. So we are seeing those coming available, and we're also investigating other opportunities to expand our rail fleet.

Operator

The next question comes from Mike Dunn with FirstEnergy.

Michael P. Dunn - FirstEnergy Capital Corp., Research Division

Just couple of questions for me. Harbir, Brian, I guess, or John, just can you remind me or with the revised sort of initial capacity at Foster Creek, for these expansions, on the 90,000 barrels a day for FGH can you just bring into context what that assumes for a steam oil ratio and also once that gets to 125,000 what's the implied steam oil ratio there? And I have a follow-up question.

Brian C. Ferguson

I'll ask Harbir to respond to that, please.

Harbir S. Chhina

FGH historically, Mike, what we've done is giving you a blowdown SOR and this time we're being a little bit conservative on FGH with the 30, 30, 30 and so that corresponds to about a steam oil ratio of about 2.2 versus historically, 2.3 versus historical of about 2.

Michael P. Dunn - FirstEnergy Capital Corp., Research Division

Okay, great. And then to 1 25 is that any difference?

Harbir S. Chhina

The 1 25 was supposed to be a combination of reduction in steam oil ratio as well as an optimization. We put that project into place at the -- in the 2012 period when we were experiencing really good SOR's of about 2.1. And so we thought we would get the majority of that with SOR reductions. Today, we need to see if Foster Creek is performing and adjust accordingly. And so it's a question of how much steam capacity, water treatment and oil treating facilities we need. And that we'll know a lot better in the next couple of quarters. So we will not go after production at any price. So we're taking a look at exactly what we need in our facilities to optimize that.

Michael P. Dunn - FirstEnergy Capital Corp., Research Division

Okay so should be determined on the SOR at 1 25?

Harbir S. Chhina

No, not. The SOR we're very comfortable, that Foster Creek will peak in SOR this year and after that it's starts to come down. So part of that 35 will come on the SOR. Exactly the numbers don't know, but probably in that 15,000 to 20,000 out of that 25 is possible with SOR reduction.

Michael P. Dunn - FirstEnergy Capital Corp., Research Division

Okay, great. And second question I have is on Pelican Lake. You've pulled back spending in activity there in 2014. Q4 volumes were under 25,000 barrels a day. Are you still expecting growth due to the, I guess, the lagged response from the Palmera [ph] flood there in 2014 or is this kind of plateauing from here. I know your guidance ,I think is 26,000 to 28,000 for the year?

John K. Brannan

Yes, Mike, this is John Brannan. We do expect to continue to grow production at Pelican Lake although we'll certainly be at a much slower ramp-up that we had talked about for a couple of years ago. We currently do have 3 rigs running there but we do plan on by the end of this quarter getting down to 1 rig. So we're still comfortable with that 26,000 to 27,000-barrel a day kind of numbers for 2014.

Brian C. Ferguson

So just to add to that, Mike, so we are expecting about a 6% increase in production this year from Pelican Lake. And given the reduction in the rigs, it will generate free cash flow for us this year. We still believe that it's a very strong asset overall. There's a tremendous amount of oil in place, over 3 billion barrels in place there.

Operator

The next question comes from Greg Pardy with RBC Capital Markets.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

I just want to come back to Foster, I know that has been a focus. But just in terms of sustaining capital. How should we be thinking about Foster Creek now with some of the changes you've talked about today, and then how would that contrast with Christina Lake?

Brian C. Ferguson

Thanks Greg, I'll ask Harbir to comment on that.

Harbir S. Chhina

Yes. So Mike, we do not see any significant change in our sustaining capital. When it comes to getting more pads going at Foster Creek sustaining pads, that's just a question of moving pads forward. It's still part of our total F&D over a 27-, 30-year period we still expect our projects to have single-digit F&D in that $8 to $10 range for F&D. So that we don't really see a significant change in that number.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Okay. And then just, so it would be still $8 to $10 a barrel for Foster Creek on an annual basis for sustaining?

Harbir S. Chhina

Yes, it's $8 to $10 on a life basis over a 30-year period. Sustaining capital goes in chunks. There'll be years where it will be quite a bit and the years where it's lower, so depends on how many pads are coming on during any one year.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Okay. So Harbir does-- with 2014, 2015 would those be towards the higher end or would those be up the fairway?

Harbir S. Chhina

Yes, I think 2014 would be on the higher end.

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Okay. And then what about Christina?

Harbir S. Chhina

Christina, is -- it's been low for the last few years. It's a significant this year, might be for another year and then it'll drop off and then wait another few years. So, again, it's choppy for both projects and it varies according to the productivity of the wells and when the pads got started.

Operator

The next question comes from Phil Skolnick with Canaccord Genuity.

Philip R. Skolnick - Canaccord Genuity, Research Division

Just one question on rail. Would you be looking at possibly adding into a recovery unit to enhance the economics there?

Brian C. Ferguson

Thanks for the question, Phil. Brian Ferguson, yes, we are looking at several different things along the value chain to improve economics including a DRU[ph]. I might ask Paul Reimer just to add a couple of comments in terms of other [indiscernible] that we've got there.

Paul Andrew Reimer

Yes and further on Brian's comment, we are at the initial engineering phase of facilities not just DRUs but other ideas that we've got exploring to increase the value, along the value chain.

Operator

[Operator Instructions] We will now take questions from the media. Our next question comes from Dave McColl with Morningstar.

David McColl - Morningstar Inc., Research Division

Just follow up a little bit on the DRU there because I guess, it seems like if you're taking 825 cars it indicates that those are coiled and/or I guess, some insulated cars there, which seems to imply that at some point in time you want to move undiluted barrel so just can you maybe get into that a little bit more detail or is the plan really to maybe ship a little bit less diluted bitumen and I'm just trying to think in terms of you're dealing with cost for those barrels going by rail, how we might want to look at it for 2015?

Brian C. Ferguson

Thank you for the follow-up question there, David. Yes, the 825 cars we're bringing on here, on lease towards the end of this year are the coiled and insulated cars and that absolutely gives us the flexibility to look at how we can produce and sell to different markets and different products in particular. Either under blended or even raw bitumen. So we are looking at that and how that enhances economics including the economics of unit train capacity and we are going to have by mid-year this year 30,000 barrels a day of unit train loading capacity here in Alberta. I anticipate that rail will become a permanent component of our transportation network and we are forecasting, as we mentioned in the news release, that we'll have capacity of up to 30,000 barrels a day by the end of 2014. And beyond that we will be looking at the merits of additional expansion.

David McColl - Morningstar Inc., Research Division

So for that, I guess, before that[indiscernible]system come online is that something you'd be looking at maybe having kind of happening asset that connects this facility or could we maybe see a bit of an industry type joint venture here, because obviously, it wouldn't make sense to do that anywhere but at the rail terminal I'm just trying to maybe get an idea as to what looking at what you're thinking in timing is it that 2015 thing and when could maybe hear cost about something like this?

Brian C. Ferguson

Yes, we, as Paul mentioned, we are doing the initial engineering on it, as to specifics regarding who we may be in discussions with and where we might site it, for competitive reasons, I'm not going to that specifics.

Operator

The next question comes from Arthur Grayfer with CIBC.

Arthur Grayfer - CIBC World Markets Inc., Research Division

Just a quick question back on to Foster Creek FGH in regards to the capital efficiencies that you had in the presentation before it, the 125,000 barrels a day was expected to be at about 25,000 of flowing. Now is that expected to change in terms of -- is the first 90,000 going to be higher and then you have something that's relatively low for the incremental amount you can share 1 25? I'm just trying to understand for a capital spent profile.

Brian C. Ferguson

Arthur, it's Brian. Yes, you're quite correct. The initial 90,000 would be somewhat higher capital efficiencies and then the optimization capital, we expect to be very capital efficient, 10,000 or less per flowing barrel.

Arthur Grayfer - CIBC World Markets Inc., Research Division

So what would that put the first 90,000 at ballpark?

Brian C. Ferguson

Yes, one of the things that we're going to do here is before we start throwing out detailed numbers, I want to make sure that we've got everything up and running. So we expect that we were -- we're going to be probably in that 28,000 to 32,000 per flowing barrel initially.

Operator

We have no further questions at this time. I'd like to turn the call back to Mr. Brian Ferguson for closing comments.

Brian C. Ferguson

Thank you for joining us on the call this morning, and that concludes the call.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Cenovus Energy Management Discusses Q4 2013 Results - Earnings Call Transcript
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