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Cenovus’s 2018 budget continues focus on deleveraging

CALGARY, Alberta, Dec. 14, 2017 (GLOBE NEWSWIRE) — Cenovus Energy Inc. (TSX:CVE) (NYSE:CVE) plans to invest between $1.5 billion and $1.7 billion in 2018, with the majority of the budget allocated to sustain base production at the company’s oil sands operations. The remaining capital will primarily support continued construction at the phase G oil sands expansion at Christina Lake, where costs are coming in below original expectations, and a targeted drilling program in the Deep Basin. This budget reflects Cenovus’s focus on capital discipline, cost reduction and deleveraging.

Highlights: (2018 budget vs. Nov. 1, 2017 guidance)

  • Per-barrel oil sands operating costs – down 8%
  • Per-barrel Deep Basin operating costs – down 11%
  • Per-barrel oil sands sustaining capital costs – down 12%
  • Christina Lake phase G go-forward capital efficiencies – a 21% improvement (vs. previous estimate)
  • Total oil sands production – up 26%

“Our priorities for 2018 are to reduce costs and deleverage our balance sheet while maintaining capital discipline. The sooner we can achieve our long-term debt ratio goal, the sooner we can move to balance returning cash to shareholders with disciplined investments in high-return growth,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “We will build on the success of our divestiture program and work to exceed the goal, established in June of this year, of achieving $1 billion in cumulative capital, operating and general and administrative cost reductions with the aim of accelerating these reductions over the next two years instead of three.”

Capital investment by asset ($ millions)
  2018 Budget 2017 Guidance
Oil sands1 1,040  1,155 945 – 1,015
Deep Basin1 175  195 160 – 180
Legacy conventional oil & natural gas2 210 – 225
Refining & marketing 180  210 180 – 200
Corporate3 100  120 35 – 50
Total capital investment4 1,500  1,700 1,550 – 1,650

Figures for 2018 reflect 12 months of full ownership of Cenovus’s oil sands assets and 12 months of ownership of the Deep Basin assets compared with approximately seven months for both sets of assets in 2017.
Cenovus expects to have completed the sale of its legacy conventional oil and natural gas assets prior to the end of 2017.
The majority of 2018 corporate capital is for the build-out of office space at Brookfield Place for which Cenovus signed a long-term lease in 2013.
Totals may not add due to rounding.


Deleveraging the balance sheet
Over the last three months, Cenovus has executed sale agreements for its four legacy conventional oil and natural gas operations, with anticipated gross proceeds of more than $3.7 billion. The Pelican Lake asset sale closed in the third quarter of 2017 and the Palliser transaction closed on December 7, 2017. Cenovus anticipates the closing of the Weyburn asset sale today and the Suffield divestiture near the end of this year. The combined net proceeds from these asset sales will be used to fully retire the outstanding amount on Cenovus’s asset-sale bridge facility. The company is also currently marketing a package of non-core assets in the Deep Basin to further streamline its portfolio and reduce leverage.

Cenovus continues to target a long-term debt ratio of less than two times net debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).

Reducing costs
Cenovus has significantly reduced its cost structure since the downturn in oil prices began more than three years ago and remains focused on driving costs even lower across its operations. In 2018, the company expects to reduce its per-barrel oil sands operating costs by 8% and per-barrel oil sands sustaining capital costs by 12% compared with its 2017 forecast. Cenovus is also planning additional workforce reductions of approximately 15% and expects to achieve further cost efficiencies through continued improvements in areas such as drilling performance, development planning and optimized scheduling of oil sands well start-ups.

  Operating costs
  2018 Budget 2017 Guidance % change1
Foster Creek ($/bbl)
 2.00  2.50
6.50  7.50
8.50  10.00
2.25 – 2.75
7.50 – 8.50
9.75 – 11.25
Christina Lake ($/bbl)
 1.75  2.25
4.25  5.25
6.00  7.50
2.00 – 2.50
4.25 – 5.25
6.25 – 7.75

Total oil sands($/bbl)
 1.85  2.35
5.25  6.25
7.10  8.60
2.10 – 2.60
5.65 – 6.65
7.75 – 9.25
Deep Basin($/BOE) 7.50  8.50 8.50 – 9.50 -11

1 Percentage change based on the midpoint of the ranges.
2  Based on a volume-weighted average.
3  Includes oil, natural gas liquids and natural gas.

  Oil sands sustaining capital costs
  2018 Budget 2017 Guidance % change
Total ($ millions) 780 724 8
Per-unit ($/bbl)1 5.50 6.25 -12

Based on total installed capacity.

  General & administrative costs
  2018 Budget 2017 Guidance % change
Non-rent ($ millions)1 136 182 -25
Rent & office ($ millions)2 164 118 39
Total (incl. rent & office)
($ millions)1,2
300 300
Total per-unit ($/BOE) 1.65 1.75 -6

Excludes anticipated 2018 severance charges related to workforce reductions.
Excludes one-time transaction costs and one-time costs associated with Deep Basin operations.

In 2018, Cenovus anticipates general and administrative (G&A) costs of $1.65 per barrel of oil equivalent (BOE), down 6% compared with the company’s 2017 forecast. Total G&A costs for 2018 are expected to be relatively unchanged compared with Cenovus’s 2017 forecast, largely due to leasing costs for pre-contracted office space at Brookfield Place. Non-rent G&A is expected to be 25% lower in 2018 than in 2017.

Cenovus remains focused on reducing its real estate costs through an active subleasing program and is not renewing existing leases as they expire. The company continues to advance its plan to reduce the number of buildings occupied by its Calgary staff. Cenovus signed a long-term lease at Brookfield Place in 2013 when commodity prices were higher and the company’s operations were growing at a faster pace. The company has allocated capital in 2018 for the build-out of the Brookfield Place office space, with occupancy currently planned for 2019.

Oil sands
The 2018 capital budget includes sustaining capital of approximately $780 million, or $5.50 per barrel (bbl) of installed capacity to maintain base production at Cenovus’s Foster Creek and Christina Lake oil sands operations. This represents significant progress towards the company’s long-term target of reducing oil sands sustaining capital to about $5.00/bbl of installed capacity.

Approximately $270 million has been allocated for continued construction of the phase G expansion at Christina Lake. The project is proceeding very well with capital costs for both the plant and wells coming in lower than expected. Cenovus now anticipates phase G will be completed with go-forward capital investment of between $13,000 and $14,000 per flowing barrel, about 21% lower than the company’s previous estimate of between $16,000 and $18,000 per flowing barrel. Phase G has an approved design capacity of 50,000 barrels per day (bbls/d) with first oil anticipated in the second half of 2019 and ramp-up to full production expected over a period of up to 12 months.

Cenovus is forecasting average oil sands production of 373,000 bbls/d in 2018, a 26% increase compared with its forecast 2017 production, largely due to the impact of owning 100% of its oil sands assets for a full year, compared with approximately seven months in 2017.

Deep Basin
The Deep Basin assets are the most flexible component of Cenovus’s capital program. In response to the current commodity price environment, as well as the company’s focus on near-term debt reduction and capital discipline, Cenovus has reduced its investment and drilling plans for the Deep Basin in 2018 compared with its original plans.

“The advantage of our Deep Basin assets is their significant long-term growth potential coupled with the flexibility they provide to quickly ramp up or down our capital investment according to our business needs and market conditions,” said Pourbaix. “This year, we will take a disciplined and more moderate approach to investing in the Deep Basin to focus on achieving our deleveraging goals.”

Cenovus expects to invest between $175 million and $195 million in the Deep Basin in 2018. This includes plans to drill 15 net wells and to complete and tie them in along with additional wells drilled in 2017. The drilling program will focus on high-return opportunities in areas rich with natural gas liquids such as condensate for which the company would expect to receive higher prices than for natural gas alone. While reducing planned capital spending in the Deep Basin in 2018, the company also expects to achieve an 11% reduction in per-barrel operating costs compared with its 2017 Deep Basin forecast.

Average production forecast
  2018 Budget 2017 Guidance % change1
Foster Creek (Mbbls/d)2 162  170 123 – 131 31
Christina Lake (Mbbls/d)2 202  212 164 – 174 22
Total oil sands (Mbbls/d)2 364  382 287 – 305 26
Deep Basin liquids (Mbbls/d)2,3 29  35 18 – 21 64
Deep Basin natural gas (MMcf/d)2 530 – 550 315 – 335 66
Total Deep Basin (MBOE/d)2,3 117  127 71 – 77 65
Conventional total (MBOE/d)3,4 102 – 110 -100
Total production (MBOE/d)5 483  510 459 – 492 4

1 Percentage change based on the midpoint of the ranges.
Figures for 2018 reflect 12 months of full ownership of Cenovus’s oil sands assets and 12 months of ownership of the Deep Basin assets compared with approximately seven months for both sets of assets in 2017.
3 Includes oil and natural gas liquids (NGLs).
4 Cenovus expects to have completed the sale of its legacy conventional oil and natural gas assets prior to the end of 2017.
5 Includes nominal volumes from Cenovus’s Athabasca natural gas asset. The Athabasca asset is not being marketed for sale. Totals may not add due to rounding.

Cenovus has made its 2018 guidance available at under ‘Investors.’

Organizational changes
As Cenovus continues to identify new ways to increase efficiencies and ensure a keen focus on accountability and results, organizational changes are underway. This includes changes at the executive level.

Kieron McFadyen, Executive Vice-President & President, Upstream Oil & Gas is leaving the company on January 15, 2018. Drew Zieglgansberger will expand his executive responsibilities to become Executive Vice-President Upstream, overseeing operations at Cenovus’s two core platforms – the oil sands and Deep Basin.

Bob Pease is leaving his position of President, Downstream, at Cenovus Energy US LLC immediately and Director U.S. Operations at Cenovus Energy US LLC on January 15, 2018. Keith Chiasson has moved from leading the company’s oil sands production operations to joining the Cenovus Leadership Team as Senior Vice-President, Downstream. He is responsible for optimizing the price the company receives for its products through marketing and transportation, as well as Cenovus’s refining joint venture and Bruderheim rail terminal. Chiasson is also responsible for Supply Chain Management across the company’s operations.

Ivor Ruste, the company’s Chief Financial Officer, will retire on April 30, 2018. An executive search will be conducted for the role and will consider both internal and external candidates.

“I want to thank Ivor, Kieron and Bob for their contributions to Cenovus,” said Pourbaix. “I look forward to working with our leadership team as we continue to evolve Cenovus into a highly effective organization focused on delivering strong returns for our shareholders.”

Harbir Chhina, Executive Vice-President & Chief Technology Officer, Al Reid, Executive Vice-President Stakeholder Engagement, Safety, Legal & General Counsel and Sarah Walters, Senior Vice-President Corporate Services, will remain on the Cenovus Leadership Team.

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