Cenovus is advancing development of its vast oil assets and bringing forward the value of its resource for shareholders. The company has approved a 2011 strategic plan that builds upon its original strategy created in 2010 and establishes new timelines and significant oil production increases for the next decade.
The plan targets:
"Based on the strong performance delivered by our teams over the past year, we believe we can bring on substantially more oil production earlier than initially planned," said Brian Ferguson, President & Chief Executive Officer of Cenovus. "We plan to expand current conventional oil and oil sands opportunities and bring on new projects. Our industry-leading oil sands capital efficiencies and low operating costs will help us achieve even greater total shareholder return."
The company expects to be producing 500,000 bbls/d net oil production by the end of 2021; with more than 400,000 bbls/d from its oil sands operations. Foster Creek and Christina Lake are expected to contribute about two-thirds of that oil sands production. The company now expects to reach approximately 350,000 bbls/d of oil sands production by the end of 2019, compared with the 300,000 bbls/d milestone it had set in its 2010 strategic plan. To achieve its production growth, Cenovus is working to have 400,000 bbls/d to 500,000 bbls/d net of oil sands projects approved by regulators by 2015.
The strong resource base at Foster Creek has prompted the company to increase expected total gross production capacity to between 270,000 bbls/d and 290,000 bbls/d, from the previous expectation of 235,000 bbls/d gross. Foster Creek phases F, G and H are now each planned to have production capacity of 35,000 bbls/d, which is 5,000 bbls/d more than initially anticipated at each phase. Cenovus is also moving up the anticipated timelines for first production from phases G and H as well as future phases. Steaming at Christina Lake phase C is underway, about six weeks ahead of schedule. Construction of phase D is more than half complete and is three to six months ahead of schedule. Cenovus is assessing whether it will be able to increase the production capacity of future phases at Christina Lake and accelerate the timing of those projects. The Narrows Lake project is still expected to begin producing in 2016 and Grand Rapids in 2017. Foster Creek, Christina Lake and Narrows Lake are jointly owned with ConocoPhillips and project timing is subject to partner approval.
"We're able to proceed with our growth plans thanks to our strong balance sheet and our anticipated cash flow being well in excess of what's needed for approved projects," Ferguson said. "We're continuing down the path created by our strategic plan last year - just moving a little faster."
Cenovus remains committed to bringing forward value from oil sands holdings not currently included in near-term development plans by entering into a strategic transaction by the end of 2011. This could include a potential partnership, farm out, swap or divestiture. Companies from around the world have shown interest in this opportunity and Cenovus is assessing which potential transaction would provide the best value for the company.
Capital investment will be focused on growing the company's oil assets with a total average annual investment of about $3.0 billion to $3.5 billion planned over the next decade. Cenovus is committed to maintaining its cost-efficient manufacturing approach with all its oil sands expansions, allowing it to implement improvements with each new phase and deliver expansions on time and on budget. The company expects to continue achieving industry-leading low steam to oil ratios (SORs) and capital efficiencies of between $22,000 and $23,000 per flowing barrel at Christina Lake phases C, D and E and between $25,000 and $28,000 per flowing barrel at Foster Creek phases F, G and H. There is considerable flexibility built into Cenovus' capital plan since most of the investment is discretionary with only $1.1 billion of the 2012 plan considered to be committed capital needed to maintain current operations and construct currently approved oil sands expansions. Cenovus anticipates an average of $0.8 billion to $1.0 billion in committed capital for each of the remaining years of the next decade.
Cenovus plans to take a balanced approach to its use of cash flow in excess of committed capital. A priority is expected to be placed on using excess cash flow to grow the dividend after 2011. Organic growth opportunities will be funded with the balance of free cash flow and the prudent use of balance sheet capacity. If necessary, additional debt financing will be used to support capital investment for the first half of the 10-year plan. The company is committed to maintaining strong investment grade status and anticipates its debt to capitalization and debt to adjusted EBITDA ratios will track to the low end of its targeted ranges.
While the bulk of Cenovus' future growth will be in the oil sands, the company also expects significant near-term growth in conventional oil production. The strategic plan anticipates oil production from operations such as Pelican Lake, Weyburn, southern Alberta, Saskatchewan Bakken and Lower Shaunavon will increase to between 120,000 bbls/d and 130,000 bbls/d by the end of 2016 from about 70,000 bbls/d currently. Additionally, the company plans to assess the potential of new oil projects on its existing properties and new regions, especially tight oil opportunities.
Cenovus will continue to steward its natural gas operations as financial assets that contribute significantly to its oil growth projects. Over the next decade, the managed decline of natural gas production, combined with expected production increases from oil properties, should result in an even greater percentage of cash flow coming from oil operations. Natural gas is expected to provide only 5% of the company's operating cash flow in 2021 compared with about 20% in 2011. Cenovus plans to continue to protect its cash flow and capital program by hedging as much as 75% of its natural gas production although the company expects to reduce the amount of oil it hedges in the coming years.
A key enabler for the company's long-term plan is access to attractive markets for its heavy oil production. Heavy refining capacity will increase when the coker and refinery expansion (CORE) project at the company's Wood River Refinery is complete, expected later this year. However, Cenovus' oil sands growth plans will eventually result in more heavy production than the company has the capacity to refine at its two U.S. refineries, both jointly owned with ConocoPhillips. Over the coming years, Cenovus will look at opportunities to protect a greater percentage of its future heavy volumes from the light-heavy differential.
Cenovus expects to maintain industry-leading low operating costs at its oil sands projects and remains committed to the goal of doubling its net asset value between 2010 and 2015. It plans to accomplish this by growing production internally with no acquisitions required. The company also plans to continue developing innovative techniques to improve recovery and unlock development opportunities on its expansive oil sands resource.
"We are fostering a culture at Cenovus that encourages innovative thinking," Ferguson said. "The technology modifications and breakthroughs being developed by our staff are expected to result in improved project economics, more resources being placed in the contingent category and a reduced impact on the environment."
The company will maintain its goal of commercializing at least one new research and development (R&D) technology every year and plans to continue to have more than 60 projects in various stages at all times. Cenovus has 10 field pilots underway or planned to help understand recovery schemes and demonstrate commercial potential. Technology development at Cenovus will continue to focus on increasing recovery factors while enhancing environmental performance, with three-quarters of current R&D projects offering potential environmental benefits.
NOTE: Between 2012 and 2021, Cenovus' strategic plan assumes WTI oil prices that range from US $85.00/bbl to US $105.00/bbl, NYMEX natural gas prices that range from US $4.00/Mcf to US $6.00/Mcf and a Chicago 3-2-1 crack spread of US $9.00/bbl.
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