CALGARY, Alberta, Feb. 15, 2018 — Cenovus Energy Inc. (TSX:CVE) (NYSE:CVE) delivered strong cash from operating activities and adjusted funds flow in 2017. Through its continued focus on capital discipline and reliable operational performance, the company generated almost $1.3 billion in free funds flow last year. Cenovus also completed the divestitures of its legacy conventional oil and natural gas assets within its expected timeframe. Divestiture proceeds and cash on hand were used to repay and retire the companyâ€™s bridge credit facility prior to year-end.Key 2017 highlightsIncreased free funds flow by 216% compared with 2016Increased cash from operating activities and adjusted funds flow by 255% and 105%, respectively, compared with 2016Recorded net earnings of $3.4 billion versus a net loss of $545 million in 2016Repaid and retired the companyâ€™s $3.6 billion bridge credit facilityDoubled proved bitumen reserves to approximately 4.8 billion barrelsReduced general and administrative (G&A) costs by 44% per barrel of oil equivalent (BOE) and oil sands operating costs by 6% per barrel from 20161 Financial information includes results from discontinued operations.
2 Adjusted funds flow, free funds flow and operating earnings/loss are non-GAAP measures. See Advisory.
3 For a description of items included in net earnings, see page 3 of this news release.
4 Includes oil and natural gas liquids (NGLs).
5 All conventional assets other than Athabasca natural gas were sold as of January 5, 2018 and are presented as discontinued operations.2017 OverviewIn 2017, cash from operating activities and adjusted funds flow increased by 255% and 105%, respectively, while free funds flow and production were 216% and 73% higher compared with the previous year. The company benefited from higher average full-year benchmark commodity prices and stronger refining operating margin. Production increased last year largely due to Cenovusâ€™s May 2017 acquisition of the remaining 50% working interest in the companyâ€™s best-in-class oil sands projects in northern Alberta, and assets in the Deep Basin in Alberta and British Columbia.Deleveraging and cost reduction
Paying down debt and reducing costs remain priorities for Cenovus, and the company made significant progress on both in 2017. As part of its strategy to refocus its portfolio and deleverage its balance sheet, Cenovus successfully completed the sale of its four legacy conventional oil and natural gas assets for combined gross cash proceeds of $3.7 billion. The company used the net proceeds from the three asset sales that closed in 2017, plus cash on hand, to repay and retire its $3.6 billion bridge facility prior to the end of the year. The Suffield asset sale, which was announced in the fourth quarter of 2017, closed on January 5, 2018 for gross cash proceeds of $512 million. At the end of 2017, Cenovusâ€™s net debt was $8.9 billion, or 2.8 times adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) on a trailing 12-month basis. Between the end of the second quarter and the end of 2017, the company reduced net debt by approximately $4 billion, or 31%, largely through asset sales and free funds flow generation. Cenovus continues to target a long-term net debt to adjusted EBITDA ratio of less than two times.In 2017, Cenovus had oil sands sustaining capital costs of $6.34 per barrel (bbl), down 12% from $7.24/bbl the previous year. In 2018, the company expects to further reduce its per-barrel oil sands sustaining capital costs by 13%. Oil sands operating costs were $8.40/bbl in 2017, 6% lower than the previous year, and are expected to decline by another 6% per barrel in 2018.Cenovus is also on track to meet its accelerated goal of achieving at least $1 billion in cumulative capital, operating and G&A cost reductions over two years versus an earlier targeted timeline of three years. This includes the companyâ€™s previously-announced plan to further reduce its workforce by approximately 15% this year, which was largely completed in January and February. In 2017, G&A costs per BOE decreased 44% to $1.83 from $3.29 the previous year, primarily as a result of increased production related to the acquisition. G&A costs per BOE were also reduced due to lower long-term employee incentive costs related to a decline in Cenovusâ€™s share price, lower non-cash charges related to the companyâ€™s excess office space compared with 2016 and lower information technology costs.â€œIâ€™m extremely pleased with the progress weâ€™ve made to date in strengthening our balance sheet and lowering our cost structure,â€� said Alex Pourbaix, Cenovus President & Chief Executive Officer. â€œIn the short to medium term, weâ€™ll remain focused on driving additional efficiencies across our business while further reducing debt. This will give us greater flexibility to balance returning cash to shareholders with making disciplined investments in projects that have the potential for high-return growth.â€�Financial performance
In 2017, Cenovus increased cash from operating activities to $3.1 billion from $861 million the previous year and adjusted funds flow to $2.9 billion from $1.4 billion in 2016. Free funds flow rose to nearly $1.3 billion from $397 million in 2016. The company benefited from higher average benchmark crude oil prices, including Western Canadian Select (WCS) which increased 32% compared with 2016. In 2017, the average differential between WCS and West Texas Intermediate (WTI) narrowed from the previous year but widened significantly towards the end of last year and into 2018. Cenovus is actively mitigating wider differentials through its downstream integration, pipeline commitments to the U.S. Gulf Coast and Canadian West Coast, rail optionality including the companyâ€™s Bruderheim crude-by-rail terminal, as well as through financial contracts. Cenovusâ€™s refining and marketing segment benefited from higher average market crack spreads and rising commodity prices. Refining and marketing operating margin rose 73% to $598 million in 2017 from the previous year. Cenovus recorded full-year operating earnings of $126 million compared with an operating loss of $377 million in 2016. Operating earnings included non-cash items such as $2 billion in depreciation, depletion and amortization (DD&A) expense, and $890 million in exploration expense related primarily to Cenovusâ€™s emerging oil sands assets in the Greater Borealis region of northern Alberta. Net earnings of $3.4 billion in 2017 included a before-tax revaluation gain of $2.6 billion related to the deemed disposition of Cenovusâ€™s pre-existing 50% ownership interest in the Foster Creek and Christina Lake oil sands partnership, a before-tax gain on discontinuance of $1.3 billion related to asset sales, unrealized foreign exchange gains of $651 million and unrealized risk management losses of $729 million. Reserves
Cenovusâ€™s proved and probable reserves are evaluated each year by independent qualified reserves evaluators (IQREs).At the end of 2017, Cenovus had total proved reserves of approximately 5.2 billion BOE, an increase of 96% compared with 2016, largely due to the acquisition. Proved bitumen reserves increased 103% to approximately 4.8 billion barrels. Total proved plus probable reserves increased 88% to approximately 7.1 billion BOE. Based on the evaluation of Cenovusâ€™s bitumen reserves by IQREs, estimated future capital costs to develop the companyâ€™s remaining proved undeveloped bitumen reserves declined to approximately $7.00/bbl in 2017 compared with approximately $8.00/bbl the previous year.More details about Cenovusâ€™s reserves are available under Financial Information in the Advisory, the companyâ€™s Annual Information Form (AIF) and Annual Report on Form 40-F for the year ended December 31, 2017, which are available on SEDAR at sedar.com, EDGAR at sec.gov and Cenovusâ€™s website at cenovus.com.Hedging
To support the companyâ€™s financial resilience as it continued to deleverage its balance sheet in 2017, Cenovus hedged a greater percentage of 2018 forecast liquids production than it typically does, establishing a floor on crude oil prices. Approximately 80% of the companyâ€™s forecast oil production is hedged for the first half of the year. Approximately 37% of forecast oil production is hedged for the second half of 2018. There were no natural gas hedges in place as of December 31, 2017. As of the end of 2017, no hedge positions were in place for 2019.Operating highlights
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