CALGARY — Cenovus Energy Inc. is preparing to throttle back its oilsands production and cut investment spending in the face of crippling discounts for Canadian heavy oil.
The Calgary-based oilsands producer outlined plans to mitigate the impact of large discounts for Western Canada Select oil prices relative to the West Texas Intermediate benchmark on its third quarter earnings call Wednesday, including plans to scale back the amount of oilsands crude it extracts from its steam-based reservoirs.
The company also said it cut its forecast for 2018 capital spending by about $250 million. It expects oilsands production for the full year to be 364,000 to 382,000 barrels per day. Total oilsands output had already slipped to 376,672 bpd in the current quarter, from 389,378 bpd in the second quarter. It’s also looking at “additional low-cost storage options” for its oil.
The move comes as analysts such as RBC Dominion Securities’ Greg Pardy have speculated that it would take a co-ordinated effort by either oilsands producers or the provincial government to reduce production to clear out a glut of storage amid a pipeline bottleneck.
“We are going to do our part but we are not going to carry the industry on our back,” Cenovus president and CEO Alex Pourbaix said on the company’s earnings call, adding that other oilsands producers would also need to reduce output.
In an interview, Pourbaix said the company had scaled back its production earlier this year between 40,000 barrels per day and 50,000 bpd but would not indicate how far the company planned to scale back production for the remainder of the year.
While it’s scaling back production, the company is also preparing to ramp up its oil-by-rail capacity with upgrades to its crude oil loading facility at Bruderheim, Alta.
“I do believe that a Canadian heavy oil producer, at the end of all the logistics pipeline and rail connections, really does benefit from an integrated strategy,” Pourbaix said.
“Our investment in the downstream will have to wait for us to complete the remediation of our balance sheet. We expect to be in that situation in 2019, where we’ll have the balance sheet where we need it to be,” Pourbaix said, adding that investments in more refining assets would have to compete with investments in new oilsands production.
Cenovus has been paying down debt it took on last year to fund its $17.7-billion acquisition of ConocoPhilips’ oilsands and Deep Basin holdings. The company said Wednesday that net borrowings now stand at $8 billion, down by about $1.6 billion from the end of the second quarter.
We are going to do our part but we are not going to carry the industry on our back
Alex Pourbaix, Cenovus president and CEO
The near-record gap between Western Canadian and U.S. prices will start to ease in the coming months as large North American refineries return to normal operations and the movement of crude via rail ramps up, Pourbaix said. The start-up next year of Enbridge Inc.’s Line 3 Replacement project will further alleviate the shipment crunch.
TransCanada Corp. is also expected to make a final investment decision for the 830,000-bpd Keystone XL pipeline by the end of this year.
Those two factors, plus an industry-wide increase in oil by rail shipments, should narrow discounts to US$20 per barrel for WCS next year, according to the CEO.
Cenovus shares slipped 0.25 per cent to $11.06 in Toronto. Cenovus had fallen 3.4 per cent this year through Tuesday, compared with a 14 per cent drop for the S&P/TSX Energy Index.
The company also reported that free funds flow, a measure of cash flow minus the capital spending required to keep its production flat, was $706 million. That’s up from $482 million in the second quarter and $544 million a year earlier.
Excluding one-time items, the company lost 3 cents per share. All 14 analysts in a TheNewsEditorial survey estimated a profit.
Financial Post with files from TheNewsEditorial