Morningstar | Best Idea Cenovus Energy Limits Impact of Record-High Heavy Oil Discount
No-moat Cenovus Energy’s fourth-quarter upstream production averaged 432.7 thousand barrels of oil equivalent per day, down 13% sequentially and below our expectations. The lower-than-expected production was driven by voluntary curtailment of the company’s oil sands production, which we applaud amid the historical lows in heavy oil pricing. More important, Cenovus was able to reduce its production while maintaining its steam injection into its oil sands reservoirs. This process allowed the company to safely store barrels in its reservoirs for future sale.Cenovus increased its Keystone XL pipeline commitments by 100 mb/d to 150 mb/d. Combined with the proposed Trans Mountain expansion, the company expects to bring on 275 mb/d of committed pipeline capacity. We expect the Keystone XL to be placed into service in 2021 and the Trans Mountain expansion to be placed into service by the end of 2022. Both of these projects will greatly improve the company’s upstream economics.
Cenovus’ refining operations helped offset the negative impact of the heavy oil discount on the company’s upstream production. The company reported fourth-quarter EBITDA from its refining operations of CAD 251 million, down significantly from the third quarter and below our expectations. The lower refining EBITDA was affected by CAD 198 million of last in/first out inventory accounting. Using first in/first out, downstream results would have exceeded our expectations. Accordingly, we expect the company’s first-quarter 2019 refining results to benefit from its fourth-quarter 2018 inventory purchases.
For a detailed look into Canadian crude market and pipeline trends, please refer to our January Energy Observer, "Pipelines Are Canada’s Lifelines.â€
For a deeper look into Cenovus and its upside, please see our October 2017 report "The King in the North: Cenovus Energy."
Cenovus Energy is in the business of development, production and marketing of crude oil, natural gas and natural gas liquids ("NGLs") in Canada with refining operations in the U.S. Co. operates in two business segments: Upstream, which includes Co.'s development and production of crude oil, NGLs in Canada, is organized into two operations: Oil sands and conventional; and Refining and Marketing, which is focused on the refining of crude oil products into petroleum and chemical products at two refineries located in the U.S. This segment also markets Co.'s crude oil and natural gas, as well as third-party purchases and sales of product.
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