Company targets $4 billion to $5 billion in asset sale agreements by year end
Cenovus Energy Inc. (TSX:CVE) (NYSE:CVE) today put forward a five-year plan that the company expects will generate 14% annualized free funds flow growth through 2021 at a West Texas Intermediate (WTI) price of US$55 per barrel (bbl) while increasing production at a 6% compound annual growth rate and reducing its debt. The plan entails disciplined capital investment to maintain the company’s current oil sands production and add barrels from expansion phase G at Christina Lake as well as grow volumes at its newly acquired Deep Basin assets. As part of its continued commitment to cost leadership, Cenovus also plans to achieve an additional $1 billion of cumulative capital, operating and general and administrative cost reductions over the next three years.
Cenovus is progressing its plan to divest non-core assets and is targeting between $4 billion and $5 billion in announced sales agreements by the end of the year, which is expected to more than satisfy the $3.6 billion asset sale bridge facility used to help fund the acquisition from ConocoPhillips. The company is now targeting to reach divestiture agreements by the end of 2017 for its entire legacy conventional portfolio. The divestiture processes for the Pelican Lake and Suffield assets are already well underway, and the company is now in the process of preparing data rooms for its Palliser asset in southern Alberta and its Weyburn CO2 enhanced oil operation in southern Saskatchewan. Combined, all of these assets are expected to produce approximately 112,000 barrels of oil equivalent per day (BOE/d) in 2017.
“We’ve had significant interest in our assets by a variety of potential purchasers and we’re confident we can achieve our divestiture target,” said Brian Ferguson, Cenovus President & Chief Executive Officer. “Reducing our debt position is our number one priority and we remain committed to strengthening our balance sheet and maintaining investment grade credit ratings. By taking these actions, we believe we’re poised to deliver significant value to shareholders over the coming years.”
Cenovus is focused on returning to its target of being below two times net debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in 2019. Once the targeted asset divestitures are complete and the company has made substantial progress on its deleveraging plan, it will consider options to increase returns to shareholders, including potential dividend growth and share repurchases.
The integration of Cenovus’s newly acquired short-cycle, high-return-potential Deep Basin assets in Alberta and British Columbia is proceeding well. The company plans to double production from those assets to an average of 240,000 BOE/d in 2021 and has identified approximately 1,500 net drilling opportunities in the Deep Basin that have the potential to generate strong returns. Cenovus expects to increase production at its best-in-class oil sands operations to more than 440,000 barrels per day (bbls/d) over the next five years, including the addition of 50,000 bbls/d of production capacity at Christina Lake phase G, which is expected to start producing in 2019. The company also has the option to add an additional 40,000 bbls/d of capacity at Foster Creek and 65,000 bbls/d through its proposed Narrows Lake phase A project. Decisions about those expansions will be considered once Cenovus’s planned asset sales are complete and the balance sheet is deleveraged.
“We’re now a larger, stronger and more resilient company with a track record of execution that positions us well to provide sustainable returns-focused growth and withstand commodity price volatility,” Ferguson said. “We remain committed to cost and margin leadership and capital discipline to help generate free funds flow growth. Our estimated corporate break-even price now sits at US$41 WTI a barrel and we will continue our drive to reduce costs further by leveraging our added size and scale as well as through the advancement of technologies and enhancement of our base business.”
Cenovus plans to undertake a more robust approach to its hedging strategy in the near-term to help maintain financial resilience while the asset sale process is underway. While the underlying strategy of using hedging to help manage targeted cash outflows remains unchanged, the company now has approval from its Board of Directors to hedge up to 75% of forecast crude oil volumes this year and in 2018. This is up from 50% prior to the acquisition. As of June 15, 2017, the company had hedges in place on approximately 143,000 bbls/d of crude oil for the remainder of this year at an average floor price of about US$51.50/bbl and 50,000 bbls/d of crude oil hedged for the first half of 2018 with an average floor price of approximately US$49.70/bbl.
The company completed its acquisition of assets in Alberta and British Columbia from ConocoPhillips on May 17, 2017. The transaction included ConocoPhillips’ 50% interest in the FCCL Partnership, which was the companies’ jointly owned oil sands venture, as well as the Deep Basin assets and doubled Cenovus’s current crude oil and natural gas production and reserves base.
Cenovus has updated its 2017 full-year guidance to reflect the company’s outlook for the remainder of the year following the completion of the acquisition as well as the projected impact of planned asset divestitures. Updated guidance can be found at cenovus.com under “Invest in us”.by