Cenovus Curbs Capex for 2nd Time, Defers Dividend, Up 23.6%

Cenovus Energy Inc. CVE slashes 2020 planned capital spending for the second time amid a weak pricing environment. Following the news, the stock gained 23.6% yesterday.

Capital Budget Cut

The company is planning to curb capital spending by an additional C$150 million. This will lead to a total reduction of C$600 million from its original guidance of C$1.3-C$1.5 billion provided last December. With commodity prices now in the bearish territory since the coronavirus pandemic is hurting global energy demand, the outlook for exploration and production business seems gloomy. Thus, energy players with upstream activities like Cenovus are restricting operations and thereby reducing capital budget.

Other energy players including Pioneer Natural Resources Company PXD, Apache Corporation APA and Cimarex Energy Co. XEC have also resorted to capex cut with the intention of navigating through this tough phase, while sustaining a solid financial footing and strong operational efficiency.

Cost Reduction

The company intends to reduce operating costs by C$100 million, and general and administrative expenses by C$50 million from its initial budget. Notably, the company recorded 2019 operating costs of C$2,088 million, which was lower than the 2018 level of $2,184 million. General and administrative expenses in 2019 were C$336 million, down from C$391 million in 2018. It now expects general and administrative costs in the band of C$230-C$250 million. Its board members are sacrificing 25% of compensations. The company expects to reduce its oil sands operations’ sustaining costs to C$2.60 per barrel in 2020.

Dividend Suspension

The company has decided to temporarily suspend quarterly dividend payout. It paid C$260 million (or 21.25 cents per share) as dividends in 2019. The latest move will release pressure from its cash balance. As of Dec 31, 2019, the Canadian energy player had cash and cash equivalents of C$186 million, and total long-term debt of C$6,699 million.

Production

In its March guidance, the company stated that the temporary suspension of the crude-by-rail program is expected to halt the usage of credits under Alberta’s Special Production Allowance program. This is expected to take a toll on the company’s total production by 5%. The March guidance for 2020 production is expected within 432-486 thousand barrels of oil equivalent per day. Oil sands production is expected in the range of 350-400 thousand barrels per day, indicating 6% fall from the original guidance. The latest capex-curbing efforts are not expected to dent production any further, which is commendable.

Moreover, the company is likely to back any production curtailment move by the government of Alberta in order to prevent crude storage from reaching maximum capacity.

Major Projects to Suffer

Cenovus provided an update regarding its projects in the March outlook, which is not expected to change. The company’s Christina Lake and Foster Creek projects, which were earlier expected to reach sanction-ready status in 2020, are kept on hold. Capital spending in its Deep Basin and Marten Hills operations is also likely to be suspended. The company will avoid making new projects sanctions owing to low oil price environment.

Price Performance

The Zacks Rank #4 (Sell) stock has plunged 76.7% in the past year compared with 58.1% decline of the industry it belongs to.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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