Cenovus Energy (TSX: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”CVE.TO” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) recently released fourth-quarter results and they weren’t pretty as the company’s financials took a hit on account of weak oil prices in Canada and lower production. The company posted a big loss as compared to the prior-year period, but investors didn’t seem too concerned about that as the stock spiked after positive management commentary.
Cenovus expects Canadian crude oil prices to pick up as the year progresses thanks to a bump in rail transport capacity. This seems to have sparked excitement among investors, but a closer look at the company’s recent performance indicates that a turnaround won’t be easy.
Cenovus’ Operations Show Weak Q4 Results
Cenovus’ fourth-quarter production fell from 480,497 barrels of oil equivalent (BOE) per day in the prior-year period to 432,713 BOE/day during the fourth quarter. Analysts were expecting Cenovus to deliver production of 451,000 BOE/day, but the company took proactive steps to reduce production amid the oil price decline.
More specifically, Cenovus had voluntarily curtailed its oil sands production in the fourth quarter of 2018 by 51,000 barrels per day to 326,000 barrels per day, a decline of 10% from the preceding year. But at the same time, it maintained steam injection so as to store mobilized barrels in a safe and effective manner in reservoirs for sale at a time when the pricing scenario improves.
Additionally, Cenovus’ oil sands operating costs in the fourth quarter dropped 4% annually to $8.03/barrel and it expects to maintain the same this year. However, the drop in costs wasn’t enough to offset the weak pricing scenario and this caused the company’s net loss to increase from C$776 million (C$0.63 per share) in the prior-year period to C$1.35 billion (C$1.10 per share), in the fourth quarter.
However, Cenovus expects an improved pricing scenario and better market access to boost its results this year. But the path to recovery could be a painful one because of the unintended effects of the Alberta production cuts.
Hopeful 2019 Outlook Far From Guaranteed
Cenovus expects 2019 production in the range of 472,000 BOE/day and 500,000 BOE/day, with capital expenses in the range of $1.2 billion and $1.4 billion. The forward-looking production guidance is nearly in line with Cenovus’ 2018 output of 483,458 barrels per day, but it will be achieved at a 4% lower capital budget.
Cenovus has been running a tight ship to mitigate the weak oil pricing environment, such as reducing office staff and cutting salaries of its executives and directors. Additionally, it expects the economics of rail-by-crude to improve as the year progresses, which is why the company has plans to boost crude oil transportation by rail this year.
The Alberta government’s decision to impose mandatory production cuts has narrowed the differential between Western Canadian Select (WCS) and West Texas Intermediate (WTI) crude oil prices, making it uneconomical to ship crude by rail. But Cenovus intends to increase its crude-by-rail shipments from 20,000 barrels per day at present to 100,000 barrels per day by the end of the year.
Cenovus management believes that “the ramp-up of additional rail transport capacity this year and the anticipated start-up of Enbridge’s Line 3 Replacement Project” will lead to an improved pricing scenario this year. However, it remains to be seen if the WCS-WTI differentials are wide enough to make crude-by-rail shipments economical because if that’s not the case, Cenovus’ bottom line could slip deeper into the red.
