Cenovus Energy Inc. responded to extreme oil price volatility in 2020 by quickly reducing capital spending as well as strategically managing oil sands production and purchasing curtailment credits to achieve increased output when prices were more favourable. The company generated positive free funds flow in the fourth quarter, partially offsetting the impact of low oil prices on its full-year results. Cenovus’s planned combination with Husky Energy, announced in the fourth quarter, closed January 1, 2021. The company exited 2020 with net debt of $7.2 billion.
“In a year of unprecedented challenges for our industry, we demonstrated the flexibility, strength and reliability of our operations by adapting our capital and operating plans, including leveraging the dynamic storage capabilities of our oil sands reservoirs, transportation optionality and marketing activities to help preserve liquidity,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “We believe our compelling combination with Husky will provide even greater ability to reduce free funds flow volatility and accelerate debt reduction and returns to shareholders.”
Cenovus released its 2021 budget in late January. The budget includes sustaining capital of approximately $2.1 billion to deliver upstream production of approximately 755,000 barrels of oil equivalent per day (BOE/d) and downstream throughput of approximately 525,000 barrels per day (bbls/d). The company also expects to achieve nearly $1 billion of synergies this year as a result of the recent transaction with Husky, putting Cenovus firmly on track to reach its planned $1.2 billion in annual run-rate synergies by the end of 2021.
Health and safety performance
In response to the COVID-19 pandemic in 2020, Cenovus moved to essential staffing at its field sites and gave office staff the flexibility to work remotely, followed by mandatory workfrom-home measures for its office staff based on evolving guidance from public health officials. The company also established comprehensive COVID-19 protocols, including enhanced cleaning and physical distancing measures. Staffing levels have now largely returned to normal at Cenovus’s field operations and the company continues to evolve COVID-19 measures at all its worksites based on the direction of government, public health officials and the company’s internal health and safety experts.
In 2020, Cenovus continued to deliver industry-leading safety performance through its culture of continuous improvement and focus on risk management and asset integrity. The company achieved year-over-year improvements at its operations for significant incident frequency (SIF) and process safety events. The company recorded a SIF of 0.01 compared with 0.14 in the previous year and two process safety events compared with eight in 2019.
Business flexibility and financial discipline
With significantly reduced global oil demand due to the COVID-19 pandemic, benchmark oil prices faced unprecedented volatility in 2020, resulting in the company’s average realized crude oil sales price of $28.82 per barrel (bbl) compared with $53.95/bbl the previous year.
To preserve its financial resilience, in March and April Cenovus reduced its planned 2020 capital spending by a total of about 43%. Anticipating the beginning of a recovery in commodity prices during the second quarter, the company proactively acquired curtailment credits to increase output above the Government of Alberta’s mandatory production limits and leveraged the flexibility of its business to ramp production back up. This included reaching peak production rates at the company’s oil sands operations in June and restarting its crude-by-rail program to maximize cash flows in response to tighter Alberta light-heavy oil differentials and the further strengthening of commodity prices later in the year.
Cenovus recorded cash from operating activities of $273 million in 2020 compared with $3.3 billion in 2019. The company generated full-year adjusted funds flow of $147 million compared with $3.7 billion a year earlier. It reported a free funds flow shortfall of $694 million in 2020, largely driven by the collapse in crude oil prices, compared with free funds flow of $2.5 billion in 2019. Cenovus generated free funds flow of $99 million in the fourth quarter of 2020, which included a $100 million ($0.08 per share) non-cash provision related to the Keystone XL pipeline project.
The company had a full-year operating loss of $2.6 billion and a net loss of $2.4 billion compared with operating earnings of $456 million and net earnings of $2.2 billion in 2019. The operating loss was due, in part, to higher depreciation, depletion, and amortization (DD&A) that included impairment charges of $555 million in the Conventional business due to lower forward commodity prices and changes to future development plans as well as an impairment charge of $450 million associated with the Borger Refinery, which the company co-owns with the operator, Phillips 66. In the fourth-quarter of 2020 compared with the same period a year earlier, Cenovus had an operating loss of $551 million compared with an operating loss of $164 million and a net loss of $153 million compared with net earnings of $113 million.
Cenovus exited 2020 with net debt of $7.2 billion and $4.5 billion of available committed credit facilities. Following the close of the Husky transaction on January 1, 2021, the company had net debt of approximately $13.1 billion, including the fair valuation of Husky’s debt upon close, as well as $8.2 billion in available committed credit facilities with no maturities on its long-term bonds until April 2022.
Following the completion of the transaction with Husky, Cenovus received credit rating upgrades. Moody’s Investors Service upgraded Cenovus to investment grade Baa3 with a ‘negative’ outlook from Ba2 with a ‘negative’ outlook, while DBRS Limited upgraded the company to BBB from BBB (low), with a ‘stable’ trend. At S&P Global Ratings, Cenovus’s BBB- rating was confirmed and the outlook revised to ‘stable’ from ‘negative’. Fitch Ratings maintained its BB+ rating with a return to a ‘positive’ outlook.
Cenovus’s upstream and refining assets continued to deliver safe and reliable operational performance throughout 2020. Planned maintenance and repair work at the company’s oil sands operations partially offset production increases. Cenovus expanded the original planned scope for its Conventional drilling program, while remaining within the range of its reduced 2020 budget. The company’s refining assets ran at reduced crude oil run rates due to lower refined product demand and pricing resulting from the COVID-19 pandemic.
Oil sands In 2020, Cenovus achieved average oil sands production of 381,723 bbls/d for the year, up 8% from 354,257 bbls/d in 2019 when Cenovus volumes were reduced to match limits under the Government of Alberta’s curtailment program. Fourth quarter production increased 2% to 380,693 bbls/d from the same period a year earlier as the company purchased production curtailment credits to produce above the government’s output limits before mandatory curtailment ended in early December.
Oil sands operating margin declined in 2020 to $1.1 billion from $3.5 billion in 2019, largely due to lower average realized crude oil sales prices, the use of higher priced condensate when the market was declining early in the year and realized risk management losses of $268 million compared with $23 million in 2019. Non-fuel per-unit operating costs in 2020 declined 13% at Christina Lake and 4% at Foster Creek compared with 2019.
Combined full-year oil sands per-unit operating costs were $7.84/bbl, down 4% from the previous year. The year-over-year reduction in per-barrel costs was primarily due to increased volumes, lower turnaround costs at Christina Lake in 2020 compared with the previous year and reduced repairs and maintenance activity at Foster Creek with the implementation of COVID-19 safety measures that limited site personnel numbers to help curb potential spread of the virus. Total oil sands per-unit operating costs were $8.70/bbl in the fourth quarter, up 8% from the same quarter in 2019, driven largely by higher natural gas prices and increased repairs and maintenance costs, primarily related to a planned turnaround at Christina Lake and planned maintenance and operational outages at Foster Creek.
After suspending its crude-by-rail program in early 2020, Cenovus ramped up activity in the fourth quarter to take advantage of improving market conditions. With resumption of the rail program, Cenovus exited December with average loading of nearly 28,000 bbls/d of its own crude oil for transport by rail for the month plus nearly 10,000 bbls/d for third parties. For the full year, the company loaded an average of more than 30,000 bbls/d of which more than 29,000 bbls/d were Cenovus volumes.
Cenovus’s oil sands facilities continue to operate at industry-leading steam-to-oil ratios (SORs). At Christina Lake, the full-year 2020 SOR was approximately 2.0, unchanged from 2019. The SOR at Foster Creek was 2.8, consistent with the previous year. The company continues to optimize steam use across its oil sands operations to minimize SORs and greenhouse gas emissions intensity through continuous improvement in operational practices and the application of technology.
Conventional production averaged 89,932 BOE/d in 2020, an 8% decrease from full-year 2019. The year-over-year decrease was due to natural declines from reduced capital investment, partially offset by production from the Marten Hills heavy oil asset. Cenovus successfully divested Marten Hills in the fourth quarter of 2020 and has maintained an interest in the asset through its investment in Headwater Exploration Inc., which acquired the property, as well as a gross overriding royalty that allows Cenovus to benefit from future development.
Cenovus increased capital investment for Conventional by $30 million in the fourth quarter, relative to its revised 2020 guidance issued in April, to conduct a two-rig drilling program. The program is targeting low-risk, high-return development wells near natural gas plants owned and operated by the company, to take advantage of higher commodity prices during the winter heating season. Notwithstanding the increase, full-year capital investment in the company’s Conventional segment of $78 million was 24% lower than in 2019, primarily due to reduced expenditures for facilities as well as lower overall drilling and completions. The company continues to take a disciplined approach to the development of its Conventional assets.
Total Conventional operating costs decreased 6% to $318 million in 2020 compared with 2019. Per-barrel operating costs averaged $8.99/BOE compared with $8.79/BOE in 2019, primarily due to an 8% decrease in sales volumes, partially offset by optimizing operations, focusing on critical repairs and maintenance activities and leveraging the company’s processing and pipeline infrastructure.
Refining and marketing
At Cenovus’s Wood River, Illinois and Borger, Texas refineries, which are co-owned with the operator Phillips 66, crude oil runs were reduced compared with 2019 in response to lower product demand and pricing due to the COVID-19 pandemic. Crude runs averaged 372,000 bbls/d in 2020, a decrease of 16% from 2019.
Cenovus had a full-year refining and marketing operating margin shortfall of $388 million, compared with an operating margin of $737 million in 2019. The decrease was primarily due to reduced market crack spreads, lower crude oil runs and crude advantage, partially offset by lower operating costs. The fourth quarter refining and marketing operating margin shortfall was $73 million, compared with an operating margin of $109 million in the same quarter of 2019.
Cenovus’s refining operating margin is calculated on a first-in, first-out (FIFO) inventory accounting basis. Using the last-in, first-out (LIFO) accounting method employed by most U.S. refiners, operating margin from refining and marketing would have been $124 million lower in 2020, compared with $140 million lower in 2019.
Cenovus remains committed to world-class safety performance and environmental, social and governance (ESG) leadership. This includes an ongoing commitment to transparent performance reporting, an ambition to achieve net zero emissions by 2050 and a plan to set ambitious new ESG targets for the combined company later in 2021.
Cenovus’s proved and probable reserves are evaluated each year by independent qualified reserves evaluators (IQREs). At the end of 2020, Cenovus’s proved reserves decreased 1% to approximately 5.0 billion BOE, while proved plus probable reserves decreased 3% to about 6.7 billion BOE. Proved bitumen reserves were approximately 4.8 billion barrels, largely unchanged from 2019, while proved plus probable bitumen reserves decreased 1% to approximately 6.3 billion barrels.
Cenovus’s reserve life index (RLI) for proved reserves is approximately 29 years, and its RLI for proved plus probable reserves is approximately 39 years. Cenovus’s 2020 proved reserves finding and development (F&D) costs were $4.82/BOE, excluding changes in future development costs, down 36% from 2019 and reflect decreased capital spending. Three-year average proved reserves F&D costs were $5.16/BOE, excluding changes in future development costs.
For the first quarter of 2021, the Board of Directors declared a dividend of $0.0175 per share, payable on March 31, 2021 to common shareholders of record as of March 15, 2021. The Board also declared a first quarter dividend on each of the Cumulative Redeemable First Preferred Shares – Series 1, Series 2, Series 3, Series 5 and Series 7 – payable on March 31, 2021, to shareholders of record as of March 15, 2021 as follows:
All dividends paid on Cenovus’s common and preferred shares will be designated as "eligible dividends" for Canadian federal income tax purposes. Declaration of dividends to common shareholders is at the sole discretion of the Board and will continue to be evaluated on a quarterly basis.