Earnings season kicks off for oilpatch
Company sees nine-fold jump in Q1 profit
Two other Calgary-based majors reported earnings on Wednesday, with Nexen announcing it was starting to see results from a renewed focus on efficiency, although lower production hit its bottom line. Meanwhile, Cenovus reported earnings that beat analysts’ expectations on higher oil production and prices.
Jitters over current market conditions are challenging Cenovus Energy Inc.’ s ongoing efforts to ink a strategic deal on its Telephone Lake oilsands project, including investor uncertainty about price discounts smacking Canadian crude, Cenovus chief executive Brian Ferguson said on Wednesday.
The integrated Calgarybased producer sidestepped the price differential that gaped wide between Canadian crude and U.S. benchmark West Texas Intermediate oil during the first quarter, which has sharply reduced netbacks on each barrel of crude produced in Western Canada.
Cenovus can make up for lower upstream returns through robust refining margins resulting from the lowercost oil feedstock.
But Canadian crude price discounts are among factors at play causing Cenovus to indefinitely extend its search for a partner, which began in earnest six months ago, Ferguson said, following the release of first quarter results that beat analyst expectations.
“Finding the right strategic arrangement for Cenovus is our top priority and is proving a bit challenging in the current market environment,” Ferguson told a conference call of analysts and media.
“Some of the feedback we’ve been getting, is that in terms of short-term as you’ve certainly seen and the market has seen, there are factors at work that are discounting Canadian crudes, which everyone’s seeing in the headlines.”
Ferguson wouldn’t elaborate on the competitive process, but maintained the company is not time constrained to strike an investment agreement on the future 90,000 barrel-perday Telephone Lake project, about 90 kilometres northeast of Fort Mcmurray.
Telephone Lake, which Ferguson called a “cornerstone” in the Cenovus portfolio, is scheduled to start construction as early as 2014.
“I’m i n absolutely no rush.”
Cash-flush oilsands producer Cenovus has maintained it doesn’t need funds for development but wants a partner that offers a strategic benefit, such as a hedging mechanism to offset volatility in the lightheavy oil price differential.
Analysts have suggested an Asian state-owned firm might want a toehold in the oilsands. Or, a refiner might swap a stake in its refinery operations for a share in production earnings — much like the agreement Cenovus has regarding its Christina Lake and Foster Creek oilsands projects with two of Conocophillips Co.’ s U.S. refineries.
CIBC World Markets research analyst Andrew Potter said the price differential issue might mean the benchmark price of $1 or $1.50 per barrel of bitumen reserves paid to a producer in an oilsands deal might currently be tougher to attain, across the board.
“There are clearly other companies out there exploring other options on oilsands deals,” he said.
Earlier this year, Potter said the so-called “double discount” hitting Canadian crudes — differentials against WTI and North Sea benchmark Brent — could cause producers in Western Canada to forfeit $18 billion in profits annually.
Wide price discounts, which reached a high of about $36 a barrel for Western Canada Select heavy in March and have since come in a bit, are being blamed on pipeline bottlenecks south of the border and growing tight oil output in the Midwest that’s backing up Canadian supply, along with refinery downtime.
Cenovus, though effectively immune now to reduced bitumen pricing due to its integration, will increasingly become exposed to upstream prices as production ramps up.
The fourth phase of its Christina Lake in situ project, at 40,000 barrels per day, is scheduled to start up in the fourth quarter of this year and another 40,000 barrels per day the same time in 2013, Ferguson said.
Plans for new pipeline capacity between the storage hub of Cushing, Okla. and the U.S. Gulf Coast will lift temporarily depressed Canadian crude prices, he predicted.
“It will take the next 12 to 24 months to resolve.”
Cenovus posted a nine-fold jump in first-quarter profit, on higher production. Net income rose to $426 million, or 56 cents per share, from $47 million, or six cents per share for the same period last year. Output of oil and natural gas liquids jumped 14 per cent to about 156,850 barrels per day. Operating earnings, which don’t include one-time and unusual items, rose to $340 million, or 45 cents per share, from $209 million, or 28 cents per share, last year. Cash flow, which indicates a company’s ability to fund new projects, was up more than 30 per cent to $904 million, or $1.19 per share, largely on higher oil prices and production.
Shares closed down 33 cents at $33.80 on Wednesday.
Finding the right strategic arrangement . . . is our top priority
BRIAN FERGUSON