Cenovus Energy Inc. (NYSE:CVE) Q3 2023 Earnings Call Transcript

Cenovus Energy Inc. (NYSE:CVE) Q3 2023 Earnings Call Transcript November 2, 2023

Cenovus Energy Inc. beats earnings expectations. Reported EPS is $0.97, expectations were $0.59.

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy’s Third Quarter 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 expressed consent of Cenovus Energy. I would now like to turn the conference call over to Mr. Jason Abbate, Senior Vice President, Investor Relations. Please go ahead, Mr. Abbate.

Jason Abbate: Thank you, operator, and welcome everyone to Cenovus’s 2023 third quarter results conference call. Please refer to the advisories located at the end of today’s news release. These describe the forward-looking information, non-GAAP measures and oil and gas terms referred to today. They also outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus’ annual MD&A and our most recent AIF and Form 40-F. All figures are presented in Canadian dollars and before royalties unless otherwise stated. We have also posted our results on our website at cenovus.com. Jon McKenzie, our President and Chief Executive Officer will provide brief comments and then will take your questions.

We ask that you hold off on any detailed modeling questions. You can follow-up with those directly with our Investor Relations team after the call. And please also keep to one question with a maximum of one follow-up. You’re welcome to rejoin the queue for any other follow-up questions you may have. Jon, please go ahead.

Jonathan McKenzie: Great, and thank you, Jason, and good morning everybody. I’ll start this call with our top priority, which is always health and safety. At our offshore China operations, Liwan 3-1 recently achieved a significant milestone of producing 1 trillion standard cubic feet of natural gas sales with no serious incidents or safety events. This is truly an impressive record of safety, and the comprehensive pre-startup safety reviews conducted at our Toledo and Superior refineries resulted in strong process safety performance throughout the restart of these assets. These achievements underscore the importance of our values and safety commitments in the work that we do every day. And I’m proud of our staff for the hard work and effort, uh, that they put into achieving these milestones.

Now, we forecasted earlier this year that we would see strength of our operations and the value of our integrated strategy in the back half of the year. Our third quarter results are a demonstration of that with both upstream and downstream businesses delivering strong operational and financial results. Our upstream business saw an increase of production to nearly 800,000 BOE per day in the third quarter, and combined with higher commodity prices. We generated an operating margin of about $3.4 billion. In the conventional business, production volumes were impacted by wildfire activity in Q2, but returned to normal rates in the third quarter. Our production increased over 127,000 barrels per day versus a second quarter number of 105,000 BOE per day.

So, I’d again like to thank our staff and contractors that played an integral role in our ability to resume or safely resume our operations following the unprecedented wildfire events. As our oil sands assets continue to perform exceptionally while following the execution of redevelopment programs and the startup with new well pads, both of which support short and long-term production growth. Production increased over 600,000 barrels per day versus the second quarter number of 300 or 572,000 barrels per day. At our sunrise oil sands production, third quarter production row, 17% to about 55,000 barrels per day. The asset continues to perform well, as we apply Cenovus operating processes, including the implementation of redevelopment wells, adjusting well designs and operating parameters.

Now, I expect the oil sands assets to continue their positive performance through the remainder of 2023 and beyond. We’ll remain focused on operational reliability in the safe and efficient execution of our growth capital and optimization projects with the Narrows Lake tie-back, Foster Creek Steam Edition, and New well pads at Sunrise being a few key examples that support short to medium-term growth plans. In our offshore segment, our Asia Pacific assets performed extremely well. The company achieved first gas from the MAC Field in Indonesia in September. In the Atlantic, the Terra Nova FPSO has now returned to offshore Newfoundland and is expected to produce for first oil in the fourth quarter, while our West White Rose project is also progressing as planned with approximately 75% of the work completed to date.

And we’ll continue to advance the work for the regulatory dry dock of the CROs FPSO that will commence in January in preparation for the startup of the West White Rose project. So now, turning to the downstream business, the third quarter results generated much healthier operating margins from the refining and upgrading assets in our portfolio. Overall, our downstream business contributed over $900 million in operating margin with favorable crack spreads and five-foot tailwinds. Following a challenging first half of the year, the US manufacturing segment, we delivered on our expectations of getting the last of the refining assets online and running reliably. Following the purchase and startup of Toledo and the commissioning and startup of superior, crude utilization increased significantly from 70% in the prior quarter to 88% in this quarter.

This is largely due to Toledo having performed well at 90% utilization through the quarter. You also would’ve seen a sizable reduction in the unit operating costs in our US manufacturing segment with the majority of our refining assets running at or near full rates in the third quarter, and a reduction in the overall operating costs associated with the startup of Toledo and superior. At the superior refinery, we achieved a safe startup of the fluid cat cracker in early October, while the startup with this unit was delayed. The business unit completed this complex work without compromising the safety of our staff and assets. And you will know that the Borger refinery is now undergoing planned maintenance, which will impact Q4 throughput. We were really pleased with the Canadian manufacturing segment.

Crew utilization was 98% in the quarter with the Lloydminster upgrader and Refinery demonstrating strong and stable performance in the ability to capture margins as heavy oil differentials widen. With the seasonally weaker crack spreads in the recent weakness in gasoline cracks, we’re focused on optimizing our assets to maximize the economic result. We will continue to build on solid operational execution and reliability. We’ve demonstrated this quarter going through year end. And I’d like to highlight our corporate and financial performance. In the third quarter, Cenovus delivered approximately $3.4 billion of adjusted funds flow with both upstream and downstream, businesses demonstrating strong performance and contributions to operating margin.

Through our base dividend share buybacks and partial payment of common share warrant obligation we distribute over $1.2 billion directly to shareholders. In addition, the company’s net debt was approximately $6 billion at the end of the third quarter. Long-term debt decreased to $7.2 billion after we purchased $1 billion of notes that were due between 2029 and 2047. We did see an increase in our working capital as compared to Q2. Although this was driven by largely higher commodity prices. Looking forward, we remain focused on achieving our $4 billion net debt target and delivering a hundred percent of excess free funds flow to shareholders at that time. So, in closing, we believe we’ve delivered a stronger third quarter in line with our expectations.

We’re focused on furthering the operational successes that we’ve achieved in the quarter and continuing to progress both short and long-term goals of the company. And with that, we’re happy to take your questions.

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Q&A Session

Operator: [Operator Instructions]. Your first question is from Dennis Fong from CIBC.

Dennis Fong : Hi, good morning, and thank you, for taking my question. My first one is just around the, I guess the pay down of the warrant obligation. So, in the quarter as you highlighted, you did about $600 million. When you think about what’s remaining for that, that obligation, as well as your cash returns back going into the fourth quarter, how should we be thinking about I guess share buyback cadence, as well as any other considerations you’re taking into going into the end of the year around the buyback? Thanks.

Jonathan McKenzie: Yes, I’ll turn that question over to Kam to answer, but you remember we did those warrant buybacks, I think around $22 and we did take the opportunity in the quarter to pay down about $600 million of that. So, I think there’s about $111 million left that we need to pay. I think the deadline is early January, but maybe Kam you could talk a little bit about our thinking around share buybacks.

Kam Sandhar: Thanks, Jon. Hey, Dennis. So, I think, a couple things I would highlight. First off, Jon alluded to this, but the price at which we had transacted on those warrants that obviously a lot lower than where our share prices today. So, we made a very conscious decision to proactively pay that warrant obligation down in Q3 in relative to continue to buy back stock. So, I’d say the principles around that aren’t going to change, we’ll continue to look at probably paying down that warrant liability in the fourth quarter. I think given where, even our share price sits today, I think it’s not an unreasonable assumption to assume that we would pay the rest of that obligation in Q4. And then when you think about the rest of the buyback program and potential for variables, the approach for us has not changed.

We’re going to continue to test intrinsic value of the share price at a sort of flat $60 WTI price. If we continue to see opportunity in buying back stock, you should see us active in the market, and the goal is always to fulfill that 50% of excess refunds flow in any particular quarter, either through buybacks or through variable dividends. But we’ve been continuing to buy back stock through Q3. You’re continue to see us active in Q4, and I think part of that will also include payment of that warrant obligation.

Dennis Fong: Great. I appreciate that color, Kam and Jon. My second question here or just follow-up is shifting gears a little bit more to the operations side. Appreciate the color that you provided Jon on the flexibility of your downstream operations. I just wanted to ask a quick question about superior in the FCC unit. As I recall that FCC unit is generally used to help finish gasoline. And that through the third quarter, you were building some intermediate product. How should we be thinking about the opportunity set or how you’re going to manage that inventory again, just given where gasoline cracks happen to sit at and your ability to maintain flexibility within that particular refinery? Thanks.

Jonathan McKenzie : Yes, I’ll let Keith give you a fuller picture on that, but you’re exactly right. The FCC, and it is a big gasoline-producing asset and one of the things we always look at is the forward markets and our ability to move the sales of that gasoline into higher netback periods. And so, we’re always watching sort of the winter-summer spreads and looking at that with an eye on containment as well. But maybe Keith, you got some additional thoughts on how we’re managing gasoline at Superior in particular.