Cenovus warns against changes to royalties
Increase under NDP could force future investment out of province, CEO warns
CALGARY — As Cenovus Energy Inc. on Wednesday posted its first loss in its short history and faces oilpatch price volatility not seen in almost a decade, the company’s top executive is warning that changes to Alberta’s royalty regime under the New Democratic Party could force future investment to flow out of the province.
“I don’t think there’s any room for any increase in royalties,” Cenovus president and CEO Brian Ferguson told Bloomberg. “If there are changes that make the structure uncompetitive, that will be negative for investment in Alberta.”
Alberta NDP Leader Rachel Notley, whose party is leading the polls ahead of the May 5 election, has said she would review the royalties oil and gas producers pay to the province if her party forms a government. The NDP is also planning to raise taxes on corporations to 12 per cent from 10 per cent.
“You have to expect that companies are going to say, ‘the current royalty regime under which we’ve planned all our investments is the one we’d like to see continue,’” Andrew Leach, a professor of energy policy at the University of Alberta, said in an interview. He added it’s the mandate of the auditor general to periodically review royalties.
Ferguson spoke on royalties after Cenovus, formed in late 2009 when Encana Corp. split into two, revealed a $668 million net loss in the first quarter of 2015, compared with net earnings of $247 million in the same period last year. The company also grew its oilsands production by 24,000 barrels per day in that period, but its profits were hampered by a 50 per cent drop in benchmark oil prices.
“I fully expect we’re going to see a lot of volatility in oil prices, more so than what we’ve seen since 2006,” Ferguson said in an interview.
He said companies have been moving so much oil into storage tanks that there is a “significant risk” to commodity prices, adding, “you’ve got to be able to manage in this kind of volatile environment.”
To that end, Cenovus has been on a cost-cutting mission and is on pace to trim $200 million out of its general, operating and capital costs this year.
Despite posting a loss, Cenovus actually beat analyst expectations as a result of a smaller-thananticipated drop in cash flows for the period. The company recorded cash flows of $495 million in the first quarter, 45 per cent lower than the same period last year.
“Overall, it was a much better quarter than expected as the company appears to be achieving strong operating results while realizing significant cost savings,” National Bank Financial analyst Kyle Preston said in a research note.
The company’s cash flows were buoyed by its refining business, which Ferguson said would help Cenovus weather the period of volatile oil prices.
“If we have a protracted period — so 2015, 2016, 2017 — of lower prices, we’ve got the capacity to continue to invest in our high-return projects regardless of whether the price goes up from January or not,” Ferguson said.