Cenovus Energy Inc. (NYSE:CVE) Q1 2024 Earnings Call Transcript May 1, 2024
Cenovus Energy Inc. beats earnings expectations. Reported EPS is $0.46, expectations were $0.35. Cenovus Energy Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day ladies and gentlemen and thank you for standing by. Welcome to Cenovus Energy’s First Quarter Results. As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Cenovus Energy. I would now like to turn the conference call over to Mr. Jason Abbate, Senior Vice President, Investor Relations. Please go ahead, Mr. Abbate.
Jason Abbate: Thank you, operator. Good morning everyone and welcome to Cenovus’ 2024 first quarter results conference call. On the call this morning, our CEO, Jon McKenzie, will take you through our results. Then we’ll open the line for Jon and members of the Cenovus management team to take your questions. Before getting started, I refer you to our advisories located at the end of today’s news release. These describe the forward-looking information, non-GAAP measures and oil and gas terms referred to today. They also outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus’ annual MD&A and our most recent AIF and Form 40-F. All figures are presented in Canadian dollars and before royalties unless otherwise stated.
You can view our results on our website at cenovus.com. I’d ask that you keep the one question with a maximum of one follow-up. You’re welcome to rejoin the queue for any other follow-up questions you may have. Jon, please go ahead.
Jon McKenzie: Great and thank you very much, Jason and good morning everybody. Safety is at the forefront of everything we do at Cenovus, and I’d like to take a moment to acknowledge an important accomplishment in the first quarter. In our Atlantic region, we safely and successfully took the SeaRose FPSO off station, which is a once in 10 year or more activity, a job well done by everybody involved. Now, at our Investor Day, we outlined our strategic objectives, the low-cost organic growth opportunities with our high-quality assets and how we’ll leverage our integrated value chain. We also talked about our disciplined financial framework, which includes growing shareholder returns. Our first quarter results are a reflection of our disciplined approach to managing this business.
We continue to be pleased with the performance of our upstream business while driving focused improvement in downstream operations and increasing margin capture with the quarter achieving the highest throughput to-date. Our upstream business delivered strong operating results in line with the prior quarter with production of around 800,000 barrels equivalent per day. This was slightly lower than Q4 with planned maintenance having started at the SeaRose FPSO. I’d like to highlight that the Lloydminster thermals produced over 114,000 barrels per day the highest quarterly average in the history of the asset, reflecting higher operating efficiency and improved downhole pump reliability. Our oil sands and thermal assets continue to produce exceptional results.
We remain on track to deliver future production growth from Narrows Lake tieback to Christina Lake. The pipeline is now 67% constructed with hydro testing in line and plan to be completed by the end of the year. And at Foster Creek optimization project, this is on schedule for our targeted 2026 start-up. We’ll also be starting up two additional well pads at Sunrise later this year, supporting the base production and the start of production growth in 2025. We also continue to optimize our turnaround schedule. And as such, we have advanced some of the work out of our planned Q3 turnaround at Christina Lake into Q2. The impact of our planned outages can be found in the maintenance table in the news release. We’re also looking forward to the important milestone for our industry with the imminent startup of the TMX pipeline.
This critical piece of — with this critical piece of infrastructure now complete, we anticipate light-heavy differentials will remain narrow for years, while excess egress capacity exists. And in our conventional gas business, production volumes remained relatively consistent around 121,000 BOE per day. And as a reminder, we test all opportunities at the bottom of the pricing cycle and we continue to progress our capital program with a focus on safe execution and cost reductions. First quarter production in our offshore business segments remained steady at approximately 65,000 BOE per day. The Asia-Pacific assets continued to operate reliably generating about CAD263 million of operating margin. In the Atlantic region, turnover returned to production and contributed about 7,200 barrels per day in the first quarter.
The SeaRose FPSO is a dry dock with regulatory maintenance work progressing as planned in preparation for the startup of the West White Rose project in 2026. Now, as we previously communicated, we anticipate the SeaRose will return to production late in the third quarter of 2024. The progression of the White Rose project continues as planned and is now approximately 80% complete. Overall, our capital spend remains on track for this project. In the first quarter, the company spent just over CAD1 billion in capital, and we expect to be well within our guidance range for total capital spend this year. It was another strong quarter for upstream business, and we look forward to continuing to execute our plans as the year progresses. Now, moving to our downstream segment.
In our Canadian refining business, average utilization for the first quarter was about 94%. Our refining and upgrading assets continued to perform very well with high reliability. That said, the refining margin contribution from the Canadian refining segment was impacted by the decline in synthetic crude prices over the quarter and narrow heavy oil differentials in March. In the next few weeks, we’ll be executing a large-scale turnaround at the Lloydminster upgrader that is expected to reduce Q2 throughput by about 45,000 barrels per day for the quarter. This has already been reflected in our corporate guidance for the year. In the U.S. refining segment, combined crude utilization across the assets was 87%, an increase from the prior quarter.
This was primarily driven by lower levels of planned maintenance at our non-operated refineries and improved operating performance across the refining portfolio. The weak Chicago crack environment in the fourth quarter of 2023 was a challenge for our U.S. business that carried into January of 2024. With product inventories rebalancing in the PADD II market, we’ve seen a strong rebound in the Chicago crack spread, which we were able to take advantage with all of our refineries operationally available and running well. This resulted in a meaningful improvement to our U.S. refining margins exiting the first quarter. We anticipate the Chicago crack environment to remain relatively strong with heavy industry turnaround schedule underway and seasonal demand strengthening.
Overall, we had the highest quarterly throughput for our downstream business since the acquisition of our operated refining assets in 2021, demonstrating the continued progress of our plans to improve the reliability profitability and utilization of the business. Now, to our corporate and financial performance. Cenovus generated CAD3.2 billion of operating margin in the first quarter, approximately CAD2.2 billion of adjusted funds flow and CAD1.2 billion of free funds flow which reflects higher refining benchmark prices and about CAD195 million FIFO gain in the U.S. Refining segment that was offset by about CAD250 million for share-based compensation paid in the first quarter. Through our base dividend, we returned CAD262 million to shareholders and the Board of Directors also approved an increase to the quarterly base dividend of 29% to CAD0.72 per share annually, consistent with the company’s commitment to grow shareholder returns.
In alignment with our shareholder returns framework, we returned CAD165 million to shareholders through our share buyback program in Q1, and the Board of Directors declared a variable dividend of CAD251 million, fulfilling our commitment of 50% of excess free funds flow returned to shareholders. Now, subsequent to the end of the quarter, from April 1st to April 26th, the company repurchased approximately CAD250 million worth of shares through our NCIB or about 8.6 million shares. The company’s net debt was approximately CAD4.8 billion at the end of the first quarter, a reduction of CAD233 million from year-end and included a CAD370 million build in non-cash working capital. And this was largely a function of benchmark pricing improvements and steady operations across the value chains.
Since we set our 2024 budget in December, commodity prices have exceeded our expectations and based on the current commodity price complex and our operating plan, we expect to achieve our net debt target at some point in the summer of 2024. As we described in the first quarter news release, we’re also introducing some minor changes to our shareholder returns framework. Once we achieve our net debt threshold, we’ll be targeting — we will target allocating 100% and of each subsequent quarter’s excess free funds flow to shareholder returns. This remains unchanged from our current approach. In the event that net debt exceeds CAD4 billion at a given quarter’s end, we will reduce the 100% target allocation of excess refunds flow by the amount that net debt exceeded CAD4 billion.
In order to efficiently manage working capital and cash, the allocation of excess free funds flow to shareholder returns may be accelerated, deferred, or reallocated between quarters, while maintaining our target to allocate 100% of excess free funds flow over time to shareholder returns and sustained net debt at CAD4 billion. This new framework will become effective once we reach CAD4 billion net debt target and until then, there will be no change to the current target allocation of 50% of excess free funds flow to shareholder returns and 50% of excess refunds flow to deleveraging the balance sheet. Ultimately, the goal of the revised framework is to improve flexibility while continuing to strive towards paying 100% shareholder returns over time and sustain net debt of CAD4 billion.
Now, before closing, I’m pleased to share that during the quarter of — first quarter of 2024, the company received a credit rating upgraded from S&P Global to BBB with a stable outlook. With this target achieved, we have received mid-BBB ratings from all rating agencies. As we said at our Investor Day, we’re focused on achieving our CAD4 billion net debt target, progressing our high-return growth projects in the upstream and continuing to run the downstream business reliably, profitably and safely showing improvements quarter-over-quarter. And with that, I think we’re all ready to answer your questions.
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