KEYFACT Energy
Cenovus Energy is implementing additional measures to enhance its financial resilience in response to the low global oil price environment that is expected to continue for an unknown period. The company’s financial framework and flexible business plan provide it with multiple options to prudently manage its balance sheet. Cenovus has decided to reduce its planned 2020 capital spending by an additional $150 million which, combined with the $450 million reduction announced March 9, 2020, is a $600 million decrease from the budget released in December. The company is also forecasting operating cost reductions of about $100 million and general and administrative (G&A) cost reductions of about $50 million compared with the initial December budget. In addition, Cenovus is temporarily suspending its dividend.
“We are taking proactive steps to address the current business environment while continuing to focus on the safety of our people and assets and maintaining reliable performance at our operations,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “It is challenging to predict the duration and depth of these unprecedented low commodity prices. We have positioned the company with ample liquidity and a strong balance sheet to manage through this unpredictable global downturn.”
Dividend suspension
Cenovus had based its ability to provide a sustainable dividend from free funds flow on a West Texas Intermediate (WTI) price environment of US$45/bbl. In the context of recent commodity price forecasts and economic, market and business conditions in the oil and gas industry, Cenovus has decided to suspend its quarterly dividend.
Strong liquidity
Besides having top-tier assets and one of the lowest cost structures in its industry, Cenovus has a strong balance sheet, which places it in a solid position to weather the current market environment. The company has $4.5 billion of undrawn committed credit facilities, with renewals in late 2022 and late 2023, a further $1.6 billion of demand lines and no bond maturities until late 2022. These provide ample liquidity and runway to sustain its operations through a prolonged market downturn.
Additional cost reductions
The new capital expenditure guidance of $750 million to $850 million is a 43% reduction from the budget released in December 2019 and an incremental $150 million reduction from the capital guidance update provided March 9, 2020. The remaining capital budget is focused on sustaining oil sands production and refining operations. Cenovus is confident the revised capital spend will be sufficient to ensure ongoing safe and reliable operations and adherence to regulatory commitments and will enable the company to proceed with necessary maintenance.
The nature of Cenovus’s oil sands and conventional assets enables the company to safely ramp production up and down quickly to respond to market conditions and maximize returns, as has been demonstrated over the past couple of years. When the company announced initial capital expenditure reductions and a ramp down of its rail business on March 9, 2020, it also reduced its forecast oil sands production by 6% to between 350,000 and 400,000 barrels per day (bbls/d), and total production by 5% to between 432,000 and 486,000 barrels of oil equivalent per day (BOE/d), while maintaining its Deep Basin production forecast. Cenovus expects those updated production ranges can still be achieved with the additional capital expenditure reductions announced today. The company has managed its assets through similar commodity price events in the recent past and is confident in its operating practices.
Teams from across the company have identified cost-saving measures, resulting in a reduction to G&A expenses of $50 million, or 17%, compared with the December budget, as well as additional operating efficiencies of $100 million across Cenovus’s operations. Although production volumes will be lower than initially anticipated, Cenovus is maintaining its forecast per-barrel oil sands operating costs within the guidance range provided in December due to additional oil sands operating cost efficiencies. As a result of the measures it is currently taking and the quality of its assets, sustaining costs at its oil sands operations have dropped to about $2.60/bbl for the year. The company anticipates per-barrel sustaining costs will return to more normal levels over the longer term.
A decision has been made to roll back salaries across the company, with an emphasis on Board, executive and senior leader compensation. Effective May 1, 2020, Board members will receive a 25% compensation reduction. The President & CEO will have his annual base salary reduced by 25%, other executive team members will take a 15% annual base salary reduction, Vice-Presidents and their equivalents in technical positions will receive a 12% annual base salary rollback and employees at other levels will experience a graduated smaller salary impact.
“Our compensation philosophy is focused on alignment with shareholders, which is why we have a mandatory share ownership policy for senior leaders and an annual incentive program based on the company achieving its goals,” said Pourbaix. “The salary rollback, which will have the greatest impact on senior leaders, is a way to demonstrate the entire company is committed to addressing the challenges we face.”
COVID-19 response
In addition to these decisive measures Cenovus is taking to maintain its financial resilience in the current challenging commodity price environment, the company has also been taking proactive steps to protect the health and safety of its staff and the continuity of its business in response to the COVID-19 pandemic. To deter COVID-19 from spreading in any of its workplaces, Cenovus has implemented social distancing measures, including directing the vast majority of its office staff and certain non-essential field staff to work from home. Following the guidance of health officials, mandatory self-quarantine policies, travel restrictions, screening and enhanced cleaning and sanitation measures have been put in place. Cenovus staff have been committed to adhering to the new procedures and there have been no positive tests of COVID-19 with any of its workforce. Cenovus also has a comprehensive Business Continuity Plan to ensure continued safe and reliable operations in the event of a COVID-19 outbreak at any of its workplaces.