Cenovus swings to profitability but frets over Kenney’s oil-by-rail cancellation threat

CALGARY — Cenovus Energy Inc. is concerned the domestic market’s fragile balance and lift from higher heavy oil prices could be jeopardized if Alberta’s new government cancels oil-by-rail contracts.

Cenovus pulled in $110 million in net earnings in the first quarter of this year, compared with a $914 million loss in the same period a year earlier and a $1.35-billion loss in the fourth quarter of 2018.

The debt-laden company’s fortunes turned around in Dec. 2018 when the previous Alberta government under Premier Rachel Notley announced a historic intervention in the market, supported by opposition parties, and ordered oil companies to reduce their output in the face of record-setting $50 discounts for Canadian crude amid a lack of pipeline infrastructure. She also announced a $3.7-billion plan to buy railway cars to pull crude out of the province using trains.

Cenovus president and CEO Alex Pourbaix said on an earnings call Wednesday that before the production-limiting order, his company had a royalty credit with the government of $29 million because of rock-bottom prices within Alberta.

Since then, and with the rebound in prices, the company has paid $200 million in royalties, and Cenovus “only accounts for about 10 per cent of Alberta’s total oil production,” Pourbaix said.

“This curtailment order is contributing between $8 billion or $10 billion or even higher in increased royalty revenue (over the course of the year) for the government,” Pourbaix said.

But United Conservative leader Jason Kenney, who is preparing to enter the legislature, has vowed to cancel the oil-by-rail contracts, which many domestic oil companies including Cenovus believe is needed amid a lack of new export pipelines. Kenney has expressed support for curtailments.

“There’s no doubt in my mind that we need oil-by-rail in this province if we ever hope to get away from curtailment and get back to a point where we can add production,” said Pourbaix in an interview.

The executive was an early and vocal supporter of the province’s curtailment order and said he hopes the oil industry and government can reach an agreement where those contracts are not cancelled but transferred to the private sector.

“It would be a more efficient outcome since they’re needed anyway, moving them to the private sector,” Pourbaix said, adding that his company has already signed oil-by-rail deals but “if there was an opportunity for us to participate in those discussions and potentially be helpful then I’d certainly be willing to do that.”

Cenovus moved 20,000 barrels of oil per day on railway cars at the beginning of April, but Pourbaix said new tank cars were arriving and the company would be ramping up shipments to 100,000 bpd by the end of the year.

But rail shipments of oil out of Western Canada have dropped since the government imposed its curtailment order because the discount for heavy oil has shrunk to the point where producers can’t justify the cost of shipping by rail.

Data released by the National Energy Board on Wednesday showed oil-by-rail movements declined 60 per cent to 130,564 bpd in February, from 325,499 bpd in January.

Another downside of the curtailment order was that large oil producers such as Cenovus are expected to post higher costs as they report first quarter earnings this year because per-barrel operating costs are now being spread over fewer barrels of production. Pourbaix said this was a temporary problem and a small negative compared with the upside of significantly higher realized prices.

“We are honestly talking about really, really modest changes to our operating costs. These are temporary,” he said.

Cenovus’ earnings were below analyst expectations but the company announced that it had been able to pay off US$515 million worth of debt since the beginning of January and, thanks to higher oil prices, would be able to “make significant progress” to reaching its net-debt target of $5 billion this year.

The company’s net debt stood at $8.1 billion at the end of the first quarter.

“One time or not, the good news is that these windfalls are allowing the company to more aggressively pay down debt, which remains a key catalyst driving sentiment in the name,” Raymond James analyst Chris Cox said in a note.

Cenovus was down 2.14 per cent on the Toronto Stock Exchange on Wednesday, but is up 46 per cent for the year.

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