Cenovus Energy, Inc. (CVE)
Q4 2012 Earnings Call
February 14, 2013 11:00 AM ET
Jim Campbell – VP, Government Affairs and Corporate Responsibility
Brian Ferguson – President and CEO
John Brannan – EVP and COO
Don Swystun – EVP, Refining, Marketing, Transportation & Development
Ivor Ruste – EVP and CFO
Arjun Murti – Goldman Sachs
Greg Pardy – RBC Capital Markets
Dave McColl – Morningstar
George Toriola – UBS
Matt Portillo – Tudor Pickering Holt
Kate Minyard – JPMorgan
Jeff Jones – Reuters
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I would now like to turn the conference call over to Jim Campbell, Vice President, Government Affairs and Corporate Responsibility. Please go ahead, Mr. Campbell.
Thank you, operator. Good morning and welcome, everyone, to our fourth quarter and year-end 2012 results conference call.
I would like to refer you to the advisories located at the end of today’s news release. These advisories describe the non-GAAP measures and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion. Additional information will be available in our annual information form and annual report. The quarterly and annual results have been presented in Canadian dollars and on a before-royalties basis.
Brian Ferguson, President and Chief Executive Officer, will begin with an overview of our results; and then turn the call over to John Brannan, Executive Vice President and Chief Operating Officer, who will provide an overview of our operating performance and our reserves and resources information. Don Swystun, Executive Vice President, Refining Marketing, Transportation and Development, will highlight results from refining. Following that, Ivor Ruste, Executive Vice President and Chief Financial Officer, will discuss our financial performance. Brian will then provide closing comments before we begin the Q&A portion of the call.
Please go ahead, Brian.
Thanks, Jim. Good morning. Our fourth quarter concluded another strong year for Cenovus. Our integrated oil growth strategy is working well, and we continue to deliver on our overarching goal of increasing net asset value. We maintained strong operating performance throughout the year, highlighted by robust oil sands production growth at our Foster Creek and Christina Lake assets, where annual production volumes grew by 35%. We brought on our 9th phase of SAGD growth, that’s Christina Lake D, which contributed to overall oil growth of 14% in 2012.
Our upstream performance in 2012 was complimented by record operating cash flow from our refining business. However, during the fourth quarter, lower market cracks in December and a LIFO to FIFO inventory adjustment in December reduced operating cash flow by about $50 million compared to our Q4 guidance.
We had a onetime non-cash write down of goodwill related to natural gas prices, which reduced operating earnings by $0.52 per share and resulted in operating earnings falling short of consensus estimates.
We continue to make significant progress on our oil growth plans; production growth from Christina Lake continues to exceed our expectations, and in January we reached nameplate production capacity, just over six months from first production, from Phase D, another operational achievement. Foster Creek also continues to demonstrate strong performance, averaging 96% of nameplate capacity during 2012.
During the fourth quarter we also received sanctioning for Narrows Lake Phase A, our third oil sands project and first commercial use of solvent aided process, or SAP, using butane in combination with steam. We also continue to advance pilots within our emerging Grand Rapids and Telephone Lake projects.
In 2012, we booked significant increases in our reserves and resources. We achieved a 12% increase in total proved reserves and an 18% increase in proved bitumen reserves, driven primarily by sanctioning of Narrows Lake Phase A and increased recovery factors at Foster Creek and Christina Lake.
These results were achieved at a finding and development cost of $9.04 per barrel of oil equivalent. We generated a recycle ratio of 3.2 times, which demonstrates the low cost nature and overall profitability of our operations.
In addition, our independent qualified reserves evaluator has estimated the future development costs for our total proved reserves at $5.90 per BOE or $7.20 per BOE on an escalated basis. 2012 has been a year of challenging price volatility on the upstream side of the business, driven primarily by ongoing pipeline congestion.
The volatile and wide price differentials have squeezed our upstream margins, but they also continue to benefit our refining business. Our 50% ownership in two high quality Mid-Continent refineries is expected to continue to generate strong operating cash flow.
On an integrated basis our overall cash flow remains strong, and our outlook for 2013 is on track. January is off to a great start. We have concluded another year of predictable, reliable performance, and we continue to build net asset value. We are executing on the controllable aspects of our business.
Our integrated strategy has helped mitigate the pricing volatility inherent in our business, and we are well-positioned for future performance. These attributes that contributed to the Board of Directors to approve a dividend increase of 10% to $0.242 per share, starting in the first quarter of 2013. We remain dedicated to increasing total shareholder return and dividend increases are a part of that commitment.