Tight oil writeoffs trigger Cenovus miss
CEO mum on certain expenses
A series of unfortunate onetime events in its conventional oil business waylaid secondquarter results at Cenovus Energy Inc., the company reported Wednesday.
The stock market was quick to react, knocking $1.76 or 5.5 per cent off its shares to close at $30.49.
The company known for its industry-leading thermal oilsands operations in northern Alberta missed analyst expectations and left many of them scratching their heads over one-time balance sheet hits.
On a conference call, president and chief executive Brian Ferguson refused to explain a $63-million “pre-exploration expense” related to a “con- ventional oil opportunity,” nor would he describe the circumstances, location or parties involved, citing a confidentiality agreement.
“We have fully written off in the quarter the entire obligation,” he said in response to analysts’ questions. “It is related to a farm-in in our conventional oil operations.”
The writedown, combined with a $46-million exploration expense from an unnamed tight oil play in Saskatchewan and a $57-million impairment from its $240-million Saskatchewan Shaunavon tight oil asset sale to Calgary junior Surge Energy Inc. last month, led to Cenovus posting operating earnings of 34 cents per share, well below analyst consensus of 51 cents.
Chief operating officer John Brannan said the company is diverting $35 million in extra spending in the second half of the year to a southern Alberta tight oil play based on results to date, without giving details.
The company reported second-quarter conventional oil production in Alberta of 32,150 barrels per day, up seven per cent from a year ago.
Cenovus reported declines on several financial measures in the three months ended June 30 versus the same period of 2012.
Cash flow fell six per cent to $871 million or $1.15 per share from $925 million or $1.22; operating earnings were down 10 per cent at $255 million or 34 cents from $284 or 37 cents; and net earnings fell 55 per cent to $179 million or 24 cents from $397 million or 52 cents.
Overall oil production rose 10 per cent to 171,000 bpd as oilsands output jumped 17 per cent to 93,800 bpd and conventional oil inched up three per cent to 77,000.
Natural gas production fell 10 per cent to 536 million cubic feet per day.
Christina Lake Phase E — the 10th expansion at the steam-assisted gravity drainage oilsands projects Cenovus co-owns with ConocoPhillips — started steam injection in June and first production was achieved last week, the company said.
Cenovus completed its first full-scale turnaround at Christina Lake during the quarter in a slightly longer than expected 11 days, it said.
Greg Pardy of RBC Capital Markets said in a note that Cenovus missed his expectations because of the onetime impairment charges, as well as higher oilsands and upstream operating costs and lower natural gas price realizations.
He pointed out the company has cut its production guidance by two per cent or 5,000 barrels of oil equivalent per day this year due to a fall turnaround at the Foster Creek oilsands project and lower spending at its Pelican Lake enhanced heavy oil project.
Analyst Michael Dunn of FirstEnergy Capital said in a note the jump in oilsands operating costs is “concerning,” although some of the increase is temporary.
“Downstream results also missed our expectations,” he wrote, noting an unplanned outage at the Phillips 66 operated Wood River, Ill., refinery in June. Cenovus owns 50 per cent of the refinery.
“The company saw higherthan-expected unit operating costs in Q2 at Foster Creek and Christina Lake as a result of higher workover costs, higher prices for fuel and electricity, higher repairs and maintenance associated with the Christina Lake turnaround, and increased costs for waste fluid handling and trucking,” pointed out Canaccord Genuity analyst Phil Skolnick, noting Cenovus has increased its operating cost guidance.