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Cenovus Energy Q3 Net Earnings Drop But Cash Flow Soars Above Expectations

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CENOVUS Q3 RESULTS
The Calgary-based oil producer and refiner says its net income fell by 43 per cent from a year ago to $289 million or 38 cents per share before adjustments — missing analyst estimates by a wide margin. (CP) | CP

CALGARY - Oilsands developer Cenovus Energy Inc. reported big jumps in operating earnings, cash flow and production for the third quarter and says it foresees a "strong finish" to 2012.

The Calgary-based company (TSX:CVE) said operating earnings improved to $432 million, or 57 cents per share, compared to $303 million, or 40 cents per share. That beat the average analyst estimate of 53 cents per adjusted share, according to Thomson Reuters.

Cash flow rose by 41 per cent to $1.12 billion, or $1.47 per share — well ahead of the $1.22 per share analysts predicted.

Total 2012 cash flow is expected to be 22 per cent higher than last year, and 11 per cent higher than the midpoint of Cenovus's previously forecast range.

"Our team remains on pace for a strong finish for this year and we look forward to achieving the remaining 2012 milestones that we had set for ourselves to continue building value for our shareholders," CEO Brian Ferguson told a conference call with analysts Thursday.

Ferguson said in an interview he's happy with how Cenovus has performed since splitting off from natural gas producer Encana Corp. (TSX:ECA) three years ago, "but what I'm really excited about is the future. I think we're only just getting started."

Cenovus has brought on nine phases of oilsands development so far and has another nine phases with regulatory approval in front of it.

"We've got a clear line of sight for the next five or six years of growth in front of us, and we've got all the benefits of having done this for 15 years now" — most of that while the assets were still controlled by Encana.

Average oilsands production for the quarter surpassed 95,000 barrels per day — a 44 per cent increase from a year earlier.

Net income — which includes factors unrelated to Cenovus's underlying performance, such as foreign exchange swings or hedging — fell by 43 per cent from a year earlier to $289 million, or 38 cents per share.

Cenovus's Christina Lake and Foster Creek developments are part of a 50-50 joint venture with Houston energy giant ConocoPhillips. The partnership also includes interests in two U.S. refineries.

All Cenovus oilsands developments use steam to liquefy the sticky bitumen deep underground so it can be more easily drawn to the surface — a process called steam assisted gravity drainage, or SAGD.

Foster Creek is currently producing five per cent more oil than it was designed to churn out and the third phase of Christina Lake is sustaining full capacity.

"I believe we are raising the bar for what SAGD projects are capable of and our performance at Foster Creek and Christina Lake confirms this," said Ferguson on the call.

Earlier this month, Cenovus inked a deal to buy the remaining assets of struggling oilsands developer Oilsands Quest for $10 million.

Oilsands Quest, which has been operating under the Companies' Creditors Arrangement Act, has been selling off its assets over the last year.

The deal includes three oilsands leases, covering approximately 59,000 hectares in Alberta and Saskatchewan that are adjacent to Cenovus's Telephone Lake oilsands project in northern Alberta.

The acquisition also includes a 34,000 hectare oil shale lease in east-central Saskatchewan.

Cenovus has filed a joint regulatory application and environmental impact assessment for a 90,000-barrel-per-day project at Telephone Lake.

Ferguson said not to expect anything bigger on the acquisition front.

"We have absolutely no intention and absolutely no need to do any acquisitions of any size other than to continue to optimize on a tuck-in basis to continue to improve on our already existing very strong land base," he said.

"Do not, in any way, expect us to be active in the acquisition market."

Don Swystun, the executive in charge of marketing the oil the company produces, said Cenovus is taking a "portfolio approach" to getting its crude to market.

It has committed to send volumes on West Coast and U.S.-bound pipelines and is keen on an early-stage TransCanada Corp. (TSX:TRP) proposal to convert part of its eastbound natural gas mainline to oil service.

"One of the reasons we can do that is because we literally have decades of growth opportunities ahead of us and we've got a very strong balance sheet and so we've got the financial capacity to able to make those kind of commitments," said Ferguson in the interview.

"I look forward to competing in a global market, not just a North American market."

Cenovus is currently moving 4,000 or 5,000 barrels by rail, mostly out of Saskatchewan and southern Alberta oil fields, and could potentially double that next year, depending on how many railcars are available.

For six or seven years, Cenovus has brought condensate — used to think out thick oilsands bitumen so it can flow through pipelines — by rail from the port of Kitimat, B.C. It's possible rail may play a bigger role in the oilsands down the road, Ferguson said in the interview.

"We haven't actually shipped bitumen yet but we are certainly looking at that and how that might work. That would certainly entail additional offloading facilities, but you've seen some of the midstream providers talking about adding railcar loading facilities in Alberta."

Cenovus shares rose 18 cents to $34.18 in afternoon trading on the Toronto Stock Exchange Thursday.

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