Cenovus Energy (CVE)

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Cenovus Energy Inc TSE:CVE, NYSE:CVE is a Canadian integrated oil company. Originally part of Encana, the company was spun off on November 30, 2009 when Encana decided to separate its pure play natural gas operations from those dealing with integrated oil. The division left Cenovus with a stake in 2 high quality refineries (Wood River near St. Louis and Borger in Borger, Texas) and major oil and natural gas projects in the Athabascan region of northern Alberta (Foster Creek, Christina Lake, Pelican Lake and other emerging projects) and Saskatchewan (Weyburn is also the world's largest CO2 sequestration project). Its 2 largest projects and refining businesses are run through subsidiaries FCCL, and WRB Refining which are jointly owned with ConocoPhillips. The partnership with ConocoPhillips was made in 2006 when Encana gave up half of its control of Foster Creek and Christina Lake in exchange for 50% interest in the 2 refineries.^[1] Production from its share of Alberta's oil sands is estimated to be 5 times higher in 2019 than in 2010 due to progress in phase developments.^[2] The company's commitment to developing SAGD (steam assisted gravity drainage) and associated technologies gives it an advantage over competitors in that it allows it to make increasing use of bitumin resources (56 billion barrels of 'discovered bitumen intitially in place').^[2] In 2008 the company's production of natural gas and crude oil was 900 million cubic feet and 110,000 barrels of oil per day, respectively. It could amount to 230,000 in 2010.^[1] Cenovus Energy has also shown a lot of interest in patents. Recently Cenovus used patents as a bargainin tool in negotiations.^[3] December 2011 total proved reserves were 1.9 billion boe (up 17% yoy) and contingent resources 8.2 billion (up 34%). December 2010 total proved reserves were 1.7 billion boe (up 19% yoy) and contingent resources 6.1 billion (up 13%). Oil sands growth was funded using $1.3 billion in excess cash flow generated by conventional oil operations.^[4]

Contents 1 Company overview 1.1 Production and refining 1.1.1 2011 Fiscal Year 1.1.2 3QFY11 Oil 1.2 2012 budget forecast production 1.3 Financial information 2 Trends and Forces 2.1 Recent scientific developments and new technologies make bitumen more attractive 2.2 New race on for patents featuring Canadian petroleum producers 2.3 Unusually high gas prices prompt Tony Clement to call parliamentary hearings 2.4 Growing interest in reaching Asian Markets (heavy oil command a higher price) 2.5 Alberta Energy Board's estimate of oil sands reserves only assume 20% recovery rate but companies have been producing at more than 60% 2.6 Oil Sands accounted for 40% of Alberta's carbon release in 2007 but that will grow by magnitudes in the near future 3 References

Reserves mil BOE[5]	Bitumen	heavy oil	light oil	nat.gas	total
Jan 2011 proved	1,154	169	111	231.7	1,665.7
Jan 2011 probable[6]	523	97	49	68.3	737.3
Jan 2012 proved	1,455	175	115	200.5	1,945.5
Jan 2012 probable	490	109	51	65.2	715.2

Cenovus owns land in key bituminous bearing regions of Alberta which is notable since the oil sands (unconventional oil) is on track to account for 88% of Alberta's oil production by 2017, up from 64% in 2007. Including both conventional and unconventional sources Alberta is the location of 98% of Canada's reserves.^[7]

Company overview

Cenovus has 2 divisions, Integrated Oil and Canadian Plains. Integrated oil operates the company's Athabascan natural gas assets as well as all operations shared with ConocoPhillips. Canadian Plains owns the 6.7 million acres of land in southern Alberta and Saskatchewan that encompass the Pelican Lake, Weyburn, and Suffield projects. Of its largest crude oil developments only oil sands operations Foster Creek and Christina Lake and those in Weyburn, Saskatchewan are currently producing.

Production and refining

2012 production forecast: To grow 21% in 2012 to the range of 255 and 271 thousand bpd. The increase is due to a boost in capex of 23% ($3.1-$3.4 billion).^[8] The company's low production costs can be credited to measures taken to improve efficiency such as using construction projects at older development phases to learn more about them and applying that knowledge to new ones, progressively increasing efficiency. It also assembles its own pipe rack nodules and other components. Production growth should be higher in 2010 due to high capital investment (cash and equivalents rose 164 % in just the first half of 2010) allowing for phase expansion of projects (the first quarter of 2009 saw bitumen production doubling at Foster Creek due to such expansion). Regulatory approvals at the Wood River refinery paved the way for a $1.8 billion expansion that will double heavy crude refining in 2011.^[9][10] Total Oil/Liquid Production (nat. gas not incl.)

(000 b/d)	2012 forecast[8]	4QFY11[11]	2011	4QFY10[4]	2010[4]	9M10[12]	4QFY09	4QFY08	Prov-Prob Reserves
Foster Creek oil sands	53-57,000	55,000	55,000	52,183	51,147	51,000	45,035	28,955	0.7 bil
Christina Lake oil sands	26-29,000	20,000	12,000	8,606	7,898	7,800	7,022	6,113	0.7 bil
Canadian Plains	76-85,000	69,000	69,000	68,804	70,142	70,000	60,512	66,116	resource only
Other	incl	incl	incl	incl	incl	1,921	2,133	incl CdnPlains	resource only
Total	155-171,000	144,000	134,000	129,593	129,187	128,800	114,590	103,317	1.4 bil (1.7in'11) 1.9 in '12

Profits from refining operations have been affected by the low price of oil (traditionally the difference between the price of crude and the cost of refined products has been much wider).^[13]

2011 Fiscal Year

In 2011 Cenovus's net asset value per share increased 32% to $37, operating income +55% to $1.64/share, eps +37% to $1.95 ($1.478 billion, the last time profit was higher was 2008 $2.487 billion). Bitumen reserves up 26% to 1.5 billion barrels, total 2P reserves 1.9 billion barrels. capex was $2.7B $400M went to the Wood River Refiner, $900M to advancing Christina Lake where output averaged 12,000 bpd (+50% on the year, +150% in the 4Q). Oil sands output averaged 75,000 bpd in 4Q +14% vs 3Q. Natural Gas reserves down 13%, natural gas production down 10.99% to 109,000 boe/d (long term goal is to lower it to 67,000 boe/d).^[14]

2011 Christina Lake production of 12,000 bpd was slightly higher than the 3Q2011 estimate (11,000 bpd) due to 4Q output being much higher than anticipated (20,000 bpd). The $400M in capex spent on the Wood River refinery added 65,000 bpd in refining capacity at a part of the plant known as CORE.

11% of Foster Creek production (55,000 bpd 2011 avg down from 58,000 bpd avg in 1Q2011) came from 41 wells which utilize Wedge Well technology. The technology works around other wells already using SAGD; It lowers the steam to oil ratio (SOR) and increases the amount of oil recoverable by as much as 10%.

3QFY11 Oil

For the quarter Foster Creek and Pelican Lake production increased 13.8% to 66,000 bpd attibutable mostly to the startup of Christina Lake phase C and 12% production increase from Foster Creek (new wells at Foster Creek are utilizing Wedge WellTM Technology - 12% of all production (38 wells with 13 more coming on tap in the 4th qtr), horizontal SAGD well pairs which reach oil otherwise unreachable). Christina Lake production was up 28% in the qtr (phase D of CL is 65% complete, when phase D enters production Christina Lake will have a capacity of 98,000 bpd). Christina Lake + Foster Creek required $227M in capex 49% more than in 2010. Operating costs at CL and FC were 13% higher to $12.60/bbl.^[15] The company's other conventional oil assets in Southern Alberta & Saskatchewan produced 4.3% less oil (down to 67,000 bpd) due to wells at Weyburn temporarily shutdown (flooding); the shutdown affected 150 wells in the 2nd qtr but they were slow to recover and so that affected production into the 3Q. Lower Shaunavon: 2,600 bpd from 43 wells (42 horizontal, 1 vertical) in addtion 36 new wells were drilled. Bakken produced 1,441 bpd. Bakken + Shaunavon forecast production at 7,200 by December 2011 which is lower than anticipated (flooding). Operating costs for all operations outside of Pelican Lake rose 17% to $13.41/bbl (more trucking, workover activity + higher salaries).

Canadian Plains Production[5]	Pelican Lake Heavy	Southern Alberta Heavy Light		Weyburn Light	Other
9M09	25,228	13,983	10,568	18,251	6,866
9M10	23,380	12,790	10,363	17,795	6,266
9M11	20,000	(other)	(other)	16,000	31,000

• 3QFY11 Gas - natural gas production down 11% qoq half of which is due to the divestment of properties (36 mmcf in 3q10), the rest of the decline is the due to the company spending less capex on gas assets (& more on oil assets), 3Q capex on gas assets amounted to $22 million (operating cash flow resulting from that was $200 million). The long term production level targeted by Cenovus is 400-500 mmcf/d
• 3Q10 Oil Sands Foster Creek production was up 25% in the third quarter of 2010 compared to a year before due to more production from the D and E expansion phases (as well as plant and well improvements including wedge wells which is reponsible for 13% of Foster Creek production) though 2 power outages and a disruption in water handling negatively affected production by about 2% compared to the first half of 2010. Christina Lake was up 24% the result of an increased use of wedge wells (1) and phase expansion (B) similar to Foster Creek. Also during the third quarter the Alberta Energy Resources Conservation Board gave the company the green light to expand Foster Creek operations by three phases (F,G and H) or 90,000 barrels per day (to 210,000 bbls/d by 2014).^[12]. Cenovus plans on boosting oil sands ouput up to 300,000 by 2019.^[5]

Total Foster Creek production shared with Conoco Phillips reached 119,000 bbl/d in the third quarter.

• 3QFY10 Conventional Oil and NGL's at Pelican Lake, Weyburn, Lower Shaunavon (new production in Saskatchewan with 12 wells that contributed 585 bbls/d) and others in Alberta and Saskatchewan, down 12% compared to the same period in 2009 to about 70,000 barrels per day. The change was caused by natural declines and pipeline limitations which were counteracted by new production in Lower Shaunavon and well optimization.^[12]
• 2010 year Cenovus' interest in Foster Creek and Christina Lake netted the company a combined 59,045 bbl/d of oil production, 33% more than the year before.^[4]
• 3QFY10 Refining Wood River (Illinois) and Borger (Texas), both 50% owned, refined 409,000 bbls/d (9% decrease compared to a year ago), had a gross coking capacity of 108,000 bbls/d (83,000 at Wood River, 65,000 of that was added by the CORE coker and refinery expansion, the expansion which improves the quality and increases the variety of product produced there, when completed (87% complete by September 2010) it will give Cenovus Energy an additional $200 million in annual cash flow).^[12]

2012 budget forecast production

Natural Gas MMcf/d[5]	Southern Alberta	Canadian Plains	Integrated Oil	Total
3QFY09	741	37	52	830
3QFY10	665	31	41	738
4QFY10				688
2010				737
2011Q3				656
9M2011				655
2011				656
2012 forecast				575-600

Natural gas in the range of 575-600 Mmcf/d (down 7.7-11.5%), oil liquid production in the range of 155-171,000 bpd (up 14.8-26.75 yoy) with 18,000 bpd of new production coming from Christina Lake and 11,000 bpd new from conventional oil and natural gas liquids. In 2013 total production is expected to reach 290,000 bpd.^[8]

Financial information

2011 9 Months Revenue Divisional Data[16]								2010 9 Months Revenue Divisional Data[5]
(mil $ Cdn)	oil sands oil	conv oil	nat. gas	oth upstrm	Refining (page 16)	mktg	Total 9M11 [17]	Integrated Oil conv. excl.refin	Integrated Oil Nat.Gas	Integrated Oil oil sands	Canadian Plains (page 32) oil	Canadian Plains gas	Canadian Plains oil sands	Refining (page 28)	Total 9M10[5]
Gross Revenue	2,286	1,076	680	15	6,293	1,405	11,705	1,457	72	10	1.426	1,010	1,219	4,712	10,142
Royalties	189	139	10	na	146	na	338	115	6	2	204	14	na	na	341
Operating Cash Flow	867	635	589	9	735	8	2,321	570	49	4	805	779	18	(62)	2,163
Net Earnings					695	8	1,212								920

Financial Statement key data
(000,000 $ Canadian)	1H09	1H10	2008	2009	1Q10	9M10	2010	9M11
Net Revenue	5,511	6,686	17,393	10,650	3,195	9,801	12,973	11,367
Royalties	96	234	na	na	123	341	449	338
EBIT	819	823	3249	998	183	1,109	1,163	1,853
Net Earnings	675	697	2487	680	172	920	993	1,212

Hedge position - As of September 30, 2011 75% of expected 2011 natural gas production (378 mmcf/d @ US$5.66/mmcf) and 51% of expected 2011 oil production (heavy and light, 34,100 bpd @ US$87.98/bbl & another 34,400 bpd @ C$90.10/bbl). That's a change from the fourth quarter of 2010 when 70% of natural gas production (412 mmcf/d) and 23% of crude oil production (29,100 bbls/d) was hedged at a price of US$6.28/mcf and US$78.91/bbl.^[5] With regards to 2012 production 18,800 bpd of oil is hedged at $98.24/bbl.^[15]

• Earnings disappointed in the first half of 2010 (operating earnings down 72% compared to the same period in 2009) due to lower gas prices and weaker refining. Its hedging strategy also produced weaker results, caused by low 2010 hedge prices (after tax hedging gains were 74.4% lower in the second quarter of 2010). Royalties paid by Integrated Oil during the 6 month period leading to June 30 were about 25 times greater in 2010 than 2009, transportation costs increased in proportion with revenue (nearly doubled).^[10]

Trends and Forces

Recent scientific developments and new technologies make bitumen more attractive

Cenovus Energy has about 135 billion barrels of bitumen, 96 times more than conventional oil (which is significant since its 2P reserves are near 1.4 billion barrels) and so it directly benefits when advancements are made regarding the methods of bitumen extraction and/or refining.^[18] Research and development by domestic competitor Petrobank Energy and Resources (over 80% of its total resource base comes from its HBU heavy oil division which has yet to be significantly utilized) which has 10 Toe to Heel Air Injection extraction technology related patents, and a Japanese group at Hokkaido University, have significantly improved on both the efficiency and costs associated with bitumen production and refining. The Japanese research team developed a cheap catalyst (formed by burning iron with oxides of metals like aluminum) that transforms bitumen into a lighter oil at an accelerated rate (by aiding in decomposition); though the catalyst is cheap and the 90% reduction of coke by product significantly reduces processing costs the cost associated with the vat required to process the bitumen in (at extreme temperature and pressure) remains a stumbling block.^[19] Petrobank's THAI technology already has the capability of extracting 17% more bitumen than steam assisted gravity drainage.^[20]

New race on for patents featuring Canadian petroleum producers

Because of the decreasing amount of conventional oil available to be found in Canada and abroad and because of a greater reliance by Canadian producers on heavy bitumen (synthetic oil) many of them have been shifting their focus over to the technological aspect of the industry. 10% (170 billion barrels) of Canada's oil sands crude is considered recoverable, that means 1.6 trillion barrels of oil could be added to the reserve base of companies that can develop improved extraction technologies, the patents also give the more innovative companies licensing value. So far Petrobank Energy and Resources has led the charge for that kind of technology but others such as Imperial Oil (steel wire rope lubricants), Suncor (conveyor belts and hand railings) and Schlumberger Canada have begun patenting industrial components.^[3]

Unusually high gas prices prompt Tony Clement to call parliamentary hearings

On May 12, 2011 Tony Clement, Canada's industry leader stated his intention of bringing together key executives in the oil refining and retail sectors in Ottawa where they will be subjected to questions regarding gas prices and the method used to determine it. As one of Canada's major refiners Cenovus Energy will be one of the companies directly involved. One of the concerns raised by Tony Clement and other ministers of parliament (MP's) is that although the price of oil is 31% lower (May 2011) than it was the previous year gas prices haven't fallen (remain near or above the Cdn$1.3, $1.4/L level). Even though federal gas taxes are a key component of the price of gas the federal government wouldn't commit to a review of the tax.^[21]

Growing interest in reaching Asian Markets (heavy oil command a higher price)

Due to filled up pipelines and storage tanks in Canada and the USA Canadian produced crude oil has been selling at discount prices relative to crude sold abroad. Nearly all of Canada's two million barrels per day production goes to the United States and so when the supply chain there is overwhelmed Canadian companies lose out. To gain greater international exposure, Canadian petroleum companies must first gain access to infrastructure necessary to carry the oil to end terminals in British Columbia. In order to do that new pipeline systems have to be built something that has been put on hold due to opposition from environmentalists and Native Indian groups. Enbridge's recent proposal, the 728 mile Northern Gateway pipeline from Edmonton to Kitimat, British Columbia was filed with the National Energy Board in May 2011; That pipeline would start transporting oil in 2016.^[22]

Alberta Energy Board's estimate of oil sands reserves only assume 20% recovery rate but companies have been producing at more than 60%

Companies using Steam Assisted Gravity Drainage to recover in-situ crude have a recovery rate in excess of 60% meaning that oil sands reserves could be considered much higher than the 173 billion barrel 2007 estimate made by the province's energy board. Since then, other technologies such as Petrobank's Toe To Heel Air Injection method are more even more efficient (THAI 17% more than SAGD)

Oil Sands accounted for 40% of Alberta's carbon release in 2007 but that will grow by magnitudes in the near future

When production was 726,000 bpd in 2007 (60% as much as it was in 2008, 22% as much as it is expected to be by 2020) the oil sands released 1 billion ft3 daily of carbon through the burning of natural gas which is used in various stages of production/upgrading. That accounted for about 40% of Alberta's and 5-8% of Canada's greenhouse emissions. If production triples in the next decade those emissions consequently be higher and given Canada's commitment to the Kyoto Protocol, future oil sands projects could be at risk if a less tolerant government is elected (Canada's current opposition party (2011, NDP) is led by someone who has opposed the oil sands on environmental grounds).^[23] Canada ranked 7th in emissions in 2008 up from 8th for most of the previous decade but it only ranks 15th in per capita emissions (2008).

References

1. ↑ ^{1.0 1.1} RBC outlook cenovus. Retrieved on 2010-07-29.
2. ↑ ^{2.0 2.1} oilsands production expected to reach 300,000 bbl/d by 2019 (2010-07-16).
3. ↑ ^{3.0 3.1} Petroleum patent pending (2011-01-09).
4. ↑ ^{4.0 4.1 4.2 4.3} Cenovus Energy 2010 Annual Report (2011-02-18).
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6} Cenovus Energy 2010 Third Quarter Report Full Report (2010).
6. ↑ page 1/7
7. ↑ NEB Canadian Energy Overview 2007 (2007).
8. ↑ ^{8.0 8.1 8.2} Cenovus 2012 oil production anticipated to grow 21% Large reserve additions expected at Christina Lake (December 7, 2011).
9. ↑ Annual Information Form (2010-02-18).
10. ↑ ^{10.0 10.1} Interim Consolidated Financial Statements (unaudited)For the Period Ended June 30, 2010 balance sheet (2010-06-30).
11. ↑ Cenovus Energy 2011 4th Quarter corporate guidance (October 27, 2011).
12. ↑ ^{12.0 12.1 12.2 12.3} Cenovus Energy 2010 Third Quarter Report (2010-10-28).
13. ↑ Oil Refiners:Cheap for a Reason (2008-05-09).
14. ↑ Cenovus Energy 2011 Fiscal Year Report (February 15, 2012).
15. ↑ ^{15.0 15.1} Cenovus Energy 2011 3Q Report (October 27, 2011).
16. ↑ Cenovus Energy 2011 3Q Consolidated Financial Statement (2011).
17. ↑ 3Q11 (page 10) (2011).
18. ↑ Cenovus total bitumen initially-in-place estimated at 137 billion barrels; 56 billion barrels discovered bitumen initially-in-place Oilsands production (2010-06-16).
19. ↑ New technology for bitumen extraction (2010-08-09).
20. ↑ Petrobank's THAI Technology Expands Exploitable Bitumen In Place (2010-03-12).
21. ↑ Ottawa to grill gas-industry executives over soaring pump prices (2011-05-12).
22. ↑ Analysis: Foes fight Canada pipeline to rich Asia market (2011-02-17).
23. ↑ Layton would slash oilsands subsidies (March 31, 2011).