Cenovus Energy Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: Cenovus Energy, (CVE)
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Cenovus Energy (NYSE:CVE) Q3 2012 Earnings Call October 25, 2012 11:00 AM ET


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

Donald T. Swystun - Executive Vice President of Refining, Marketing, Transportation and Development


George Toriola - UBS Investment Bank, Research Division

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

Barbara Betanski - Addenda Capital Inc.


Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's Third Quarter 2012 Financial and Operating 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 Susan Grey, Director, Investor Relations.

Please go ahead, Ms. Grey.

Susan Grey

Thank you, operator, and welcome, everyone, to our third quarter 2012 results conference call. I would like to refer you to the advisories located at the end of today's news release. In particular, I draw your attention to the risk factors and assumptions. Additional information is available in our Annual Information Form and quarterly report. Today's quarterly 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 of our results. John Brannan, Executive Vice President and Chief Operating Officer, will then discuss our operating performance. And Ivor Ruste, Executive Vice President and Chief Financial Officer, will discuss our financial performance. Brian will provide closing comments before we begin the Q&A portion of the call. Please go ahead, Brian.

Brian C. Ferguson

Thanks, Susan. Good morning. I am pleased to share with you today some of the highlights of Cenovus' third quarter performance and our outlook for the remainder of the year.

We have delivered another strong quarter, highlighted by production growth across all of our oil sands operations combined with refining results that affirm the value of our integrated strategy.

This has all resulted in the strongest quarterly financial performance in our 3-year history. We continue to develop oil sands resources responsibly, on time and at industry-leading cost structures.

Once we bring on a new SAGD phase, we are ramping up quickly and sustaining production at or above design capacity. This is operational excellence, and it contributes to increased project returns and building net asset value.

This quarter, at Foster Creek, our production averaged 5% above design capacity. We also sustained full capacity at Christina Lake Phase C and we are quickly ramping up Phase D. John Brannan will provide more detail on our operations, but I believe we are raising the bar for what SAGD projects are capable of and our op [ph] and our performance at Christina Lake, and Foster Creek confirms these. Overall, we are continuing to meet our commitments and we remain on track with our development plans that will see expected oil production grow to 500,000 barrels per day, net to Cenovus by the end of 2021.

As I said, operational performance has translated into financial performance. Our integrated oil strategy gives us confidence to continue to invest in our oil sands assets despite fluctuations and light-heavy differentials. We expect continued volatility in Canadian crude prices over the next few years.

To help mitigate this volatility, we continue to pursue new markets and support pipeline projects through long-term commitments in addition to our strategic investment in refining.

This quarter, we enhanced our financial position with some additional liquidity through a debt offering which provides flexibility and further supports our growth plans at attractive long-term fixed rates. Additionally, we extended the term of our existing credit facility to 2016. Ivor Ruste will provide more details about this.

We've also provided an update to our guidance as noted in our news release. Changes include increased production estimates at Foster Creek and Christina Lake and higher operating cash flow expectations from refining for the year.

The guidance now reflects actual production and commodity prices for the first 9 months of the year, as well as projections for the fourth quarter. Overall, we now expect that cash flow will be about 20% higher than last year. Our low-cost oil sands projects, strong balance sheet, flexible conventional capital programs and downstream integration allow us to be resilient in times of commodity price volatility. We are well-positioned for future growth in both net asset value and our dividend. We are focused on total shareholder return.

I'm now going to turn the call over to our Chief Operating Officer, John Brannan.

John K. Brannan

Thank you Bryan, and good morning. We had another great quarter across our operating areas as the teams continued to execute on our development plans. Our oil sands operations posted strong production volumes with net production at Foster Creek and Christina Lake averaging more than 95,000 barrels per day at an average steam-to-oil ratio of 2.0.

At Foster Creek, we averaged over 126,000 barrels per day gross during the quarter, well above design capacity.

Operating performance by our teams, plant optimization and ongoing success of our wedge well technology have all contributed to this result.

Construction of the expansion phases at Foster Creek continued during the quarter. We are now just over 60% complete at the Phase F facility with pipe rack and module assembly progressing well.

Phase F contains a significant amount of common infrastructure for Phases G and H. As we continue to advance Phase F towards completion, we increase confidence in our ability to bring on Phases G and H on schedule and within budget.

At Phase G, we are 27% complete with facility construction, piling work, steel fabrication and major equipment procurement continuing. Phase H engineering and procurement is under way and facility work will start next year.

At Christina Lake, we averaged about 65,000 barrels per day on a gross basis during the quarter. We continue to ramp up production at Phase D, achieving a new daily production record of just over 87,000 barrels per day gross in September.

We're also encouraged by overall well productivity at Christina Lake and are seeing SAGD well rates among the highest in the industry. We expect ramp-up profiles for future growth [ph] phases at Christina Lake to be similar to Phases C and D since we are now in the better parts of the reservoir.

Christina Lake Phase E is currently about 60% complete and we have initiated site preparation, engineering and major equipment fabrication on Phase F.

We are executing well in all aspects of our oil sands operation and we intend to sustain that momentum throughout the fourth quarter.

Operating cost at Foster Creek declined from the second quarter, averaging approximately $11.50 per barrel, well within our full year guidance range.

At Christina Lake, operating cost averaged $13.59 per barrel, also within guidance, but higher relative to the second quarter as we continued to staff up for future phases and incurred cost associated with the start up of Christina Lake Phase D.

We expect operating cost for the year to be within or below our original expectations. Turning to our merging oil sands projects, we have started site preparations at Narrows Lake. Detailed engineering for the first phase is ongoing, and we anticipate sanctioning of Phase A later this year.

At Telephone Lake, our dewatering pilot has been commissioned, and we have initiated water removal and air injection.

We are encouraged by what we have seen so far in our dewatering pilot and last winter's strat well joint program.

Based on our current assessment of the project area, we believe that Telephone Lake will support over 300,000 barrels per day of production capacity. In addition, we have been actively consolidating new land positions around the Borealis region over the past year.

These assets are still under evaluation but could further improve future potential for that area.

At Pelican Lake, we are seeing incremental volumes associated with our infill well and polymer flood programs. Some of our production growth has been offset by a planned reduction in operating pressures temporarily required to safely complete infill drilling between existing wells.

We are currently running 4 rigs at Pelican Lake and our plan to grow production to approximately 55,000 barrels per day remains unchanged. During the third quarter, we maintained steady reliable performance from our extensive conventional oil and gas properties in Alberta and Saskatchewan.

In Southern Alberta, we are encouraged by early successes on some of our emerging tight oil plays as we have shifted our focus in these areas from natural gas to oil. We have added over 4,000 barrels per day of light oil production so far this year, predominantly from our fee lands in the area. In Saskatchewan, we have completed our centralized gathering facility work in both the Lower Shaunavon and Bakken as we continue to develop these tight oil plays.

Production volumes from these areas have increased 56% over the same period last year. Although this is somewhat lower than we anticipate, we anticipate tight oil production in Saskatchewan to be in the 5,500 barrel per day range for the remainder of the year.

In terms of overall capital expenditures, we remain on track to complete our 2012 program. We aren't seeing significant changes in inflation and still forecast a 5% increase in oil sands and conventional costs. We have experienced some pressure on labor rates and delivery dates for long lead equipment but we had built this into our plans. We are focused on developing and operating our projects efficiently and maintaining our low cost structures. Our manufacturing approach helps us manage inflationary pressures to assist us in achieving our project returns.

So let's turn to refining. Our refining performance benefited from strong margins, higher throughput and increased yields during the quarter and continues to showcase the value of our integrated strategy. Wood River demonstrated consistent rates between 200,000 and 220,000 barrels per day of gross heavy oil processing capacity, and improved overall clean product yield.

We are well positioned at our top tier Wood River and Borger refineries and expect to generate between $260,000 million and $360 million of operating cash flow for the fourth quarter.

Earlier this month, we initiated a full turnaround at Borger and a partial turnaround at Wood River. The impact of both of these scheduled turnarounds has been built in our guidance expectations. In closing, Cenovus posted another operationally strong quarter. We continued to show predictable oil production growth and we are focused on safe and reliable execution of our capital programs for the remainder of this year.

I will now turn the call over to Ivor.

Ivor Melvin Ruste

Thanks, John, and good morning, everyone. Our strong operating performance has resulted in very strong financial performance for the quarter. Cenovus reported cash flow per share of $1.47, compared with consensus estimates of $1.23 per share.

Increased oil sands production levels combined with strong refining margins and higher throughput contributed to the quarterly performance in cash flow exceeding consensus expectations. Our reported operating earnings of $0.57 per share were in line with consensus expectations.

Operating earnings were impacted by higher effective taxes during the quarter. This resulted from a higher proportion of income from U.S. refining operations, which attracts tax at a significantly higher statutory rate.

Refining operating cash flow was $530 million in the quarter. Using a LIFO inventory method as is done in the U.S., our operating cash flow would've been $6 million lower, not a significant difference this quarter.

While current market crack spreads remain strong, our plant turnarounds have been built into our expectations for refining operating cash flow for the remainder of the year.

Turning to the upstream business.

I want to comment specifically on the Foster Creek royalties which are calculated on a post-payout basis, since these royalties were higher during the quarter compared to the second quarter. Post-payout royalties are based on an initial annual estimate of net profits, using forecast information for capital spending, WTI price levels in Canadian dollars and allowable costs. Each quarter, we update the forecast information for the remainder of the year so there can be fluctuations in quarterly royalty rates as those estimates change. Our annual expectations for Foster Creek royalties remain in line with our guidance.

General and administrative expenses were $4.28 per barrel of oil equivalent in the third quarter compared with $1.70 per barrel for the same period last year. Long-term incentive costs had the largest impact on the change in G&A as we recognized an expense this quarter versus a substantial recovery during the same period in 2011.

This impact represented about $1.90 of the increase in G&A expense. Higher office rent cost also contributed to the increase. But again, we expect G&A to remain in line with our full year expectations.

Our balance sheet metrics remain strong, exiting the quarter with a debt-to-capitalization ratio of 31% and a debt-to-adjusted-EBITDA of 1.1x, both at the bottom end of our long-term target ranges.

This quarter, we took advantage of attractive long-term rates to complete a debt offering for USD $1.25 billion in 10- and 30-year notes.

We believe that the fixed rate offering supports Cenovus' already strong financial position. In addition, we extended our $3 billion credit facility to November 30, 2016, reducing both standby fees and the cost of any future borrowings against this facility. It is our view that the debt offering combined with our credit facilities, provides the company with tremendous financial flexibility as we continue to execute our growth plan. We have a well-defined 10-year plan and decades of organic growth opportunities within our portfolio. Our financial strength supports our growth plans while also providing a dividend to our shareholders.

I'll now turn the call back to Brian.

Brian C. Ferguson

Thanks, Ivor. We have delivered another strong quarter, highlighted by 28% overall oil growth from the same period last year.

We have the resource base, the financial strength and an integrated approach that positions us well in the current environment and for the long term. Our integrated strategy provides stability to our cash flow and gives us confidence in our long-term growth objectives. We are focused on increasing total shareholder return, that's driven, of course, by growth in net asset value, and also providing a growing income stream via dividends. Cenovus has brought on 9 phases of oil sands production to date between phases under construction and regulatory approved, we have an additional 9 phases in hand. We are on track to bring on an additional 40,000 to 50,000 barrels per day every day -- every year for the next several years. This represents another 200,000 barrels per day of planned production, net to Cenovus, and gives us flexibility in our growth plans. Our repeatable design philosophy and manufacturing approach is a key element of our success. We have demonstrated great execution and we are focusing on building on our track record of performance. Our team remains on pace for a strong finish for this year, and we look forward to achieving the remaining 2012 milestones that we have set for ourselves to continue building value for our shareholders.

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

Question-and-Answer Session


[Operator Instructions] Your first question comes from George Toriola from UBS.

George Toriola - UBS Investment Bank, Research Division

My question is around the production performance we saw at Foster Creek. You talked about well performance and the facility optimization. Can you dig into that a little bit and explain what actually happened there?

Brian C. Ferguson

Yes, I'll ask Harbir to respond to that question, George.

Harbir S. Chhina

George, so first of all, it's mainly due to the wedge wells. We're producing about 15,000 barrels a day from there. The other thing is we are -- we continue to optimize our plants each quarter in terms of on time. And if you notice, if you were to see our daily plot for Foster Creek, you would notice that this a very exceptional year in terms of we have a really flat profile, very consistent production from Foster Creek and we're going to continue to optimize Foster Creek. And as you know last year, we increased our future phases from 90,000 barrels a day to 125,000. So some of that optimization is going to go into the other phases. Because physically, we're reaching a limit on our plot space at the facility. So overall, pretty good and we expect to continue to maintain that type of production into 2013.

George Toriola - UBS Investment Bank, Research Division

That's helpful. And maybe just a quick follow-up. The X, the wedge wells, what would be the SOR from Foster Creek?

Harbir S. Chhina

It would be approximately about 10% to 15% higher if you -- 5, 7 years ago, when we told you about Foster Creek we said we were designing it at a steam oil ratio of 2.5. And with blowdown, we would go down to steam oil ratio of 2. So we're sitting at 2 but we still have not -- well, we've got 1 pad on ramp down, but really nothing on blowdown until 2013. So a lot of that is related to the wedge well improvement. But we're still within what we told you 5, 7 years ago and it's slightly better.


Your next question comes from Mike Dunn from FirstEnergy Capital.

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

Just a question on your revised guidance. A couple of questions I guess. I'll start with the conventional oil outside of Pelican Lake. Production guidance now at the low end of the previous range, and CapEx is up. I think the midpoint is up by about $90 million. Can you just walk me through why production is disappointing to date? And why you've increased the spending there? And then just some color on Foster Creek, Christina Lake, the CapEx guidance for the year has gone up a bit on both those projects. I assume that entails more work than you previously thought. And potentially some good news on timing of some of those projects in the future.

Brian C. Ferguson

Thanks, Michael. I'll ask John Brannan to respond to that.

John K. Brannan

In the conventional areas that compromises our Alberta business unit and our Saskatchewan business unit, we've had some pretty strong results with the wells that we've drilled in the Albert business unit and we've got -- allocated some additional cost or some additional capital to that area. We have a few wells that are not on production yet, so you haven't seen the results from those wells, so the capital has been spent and the production is not there yet. In Saskatchewan, our Bakken and Shaunavon wells have performed very similar to the rest of the industry out there but a little less than our overall expectations. So that's a piece of why the volumes are down a little bit there. We also had some weather and hookup delays earlier in the year. On the Bakken and Shaunavon wells, we had some weather issues with trucking and some of that stuff. But we now have built a number of batteries to bring in that production. So our trucking cost should come down and with that production will probably stay pretty flat for the rest of the year. At Foster Creek and Christina Lake, the capital spending is up a little bit, primarily at Christina Lake and that's mostly associated with the acceleration of Phase D and the work that we're doing on Phase E to move those projects ahead a little bit. Harbir, anything you want to add to those Foster Creek or Christina?

Harbir S. Chhina



[Operator Instructions] Your first question comes from Barbara Betanski from Addenda Capital.

Barbara Betanski - Addenda Capital Inc.

I just wanted to ask regarding the acquisition market at the moment, there may be some opportunities out there. And I wanted to ask you how you view the market at this point and whether -- what acquisitions play as part of your upcoming strategy?

Brian C. Ferguson

The only acquisitions that we have done are ones that are tuck-in acquisitions in and around existing plays. For example, our Borealis in Telephone Lake where we acquired some of the assets from Oilsands Quest through bankruptcy. We've continued to add or swap other areas in around Narrows Lake and also in the Telephone Lake region. We have absolutely no intention and absolutely no need to do any acquisitions of any size other than to continue to optimize on a tuck-in basis to continue to improve on our already-existing very strong land base. So do not, in anyway, expect us to be active in the acquisition market.

Barbara Betanski - Addenda Capital Inc.

Okay. If I could ask one more just regarding access to market. So if you could just update us in terms of your views on pipeline plans, your commitments on various plans and maybe what role rail might play in terms of your commitments or plans?

Brian C. Ferguson

Sure. I'll ask Don Swystun to respond to that.

Donald T. Swystun

So overall for transportation, I think the key for us is we try to maintain a portfolio approach. So we already have considerable access in a lot of different areas, selling into Hardisty in Edmonton. We have made commitments on Northern Gateway, on Trans Mountain express, Enbridge expansion. We're also going to be looking at East Coast opportunity that's coming forward, potentially with TransCanada. We have obvious [ph] commitments on Keystone XL. We have access of about 25,000 barrels a day to the Gulf Coast through Pegasus line. On the rail side, we're moving about 4,000 to 5,000 barrels a day right now related to Saskatchewan production. Primarily, we have some Alberta as well. We're looking potentially for next year to increase that, hopefully to more than potentially double that going forward, depending on opportunities with the rail cars we have available.


There are no further questions at this time. I turn the call back over to Mr. Ferguson.

Brian C. Ferguson

Thank you for joining us this morning. We appreciate your ongoing interest and support. The call is now complete.

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