6-K
CENOVUS ENERGY INC. (CVE)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For November 2022
Commission File Number: 1-34513
CENOVUS ENERGY INC.
(Translation of registrant’s name into English)
4100, 225 6 Avenue S.W.
Calgary, Alberta, Canada T2P 1N2
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☐ Form 40-F ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
Exhibit 99.2, 99.3 and 99.4 to this report, furnished on Form 6-K, shall be incorporated by reference into or as an exhibit to, as applicable, each of the registrant’s Registration Statements under the Securities Act of 1933, as amended: Form F-10 (File No. 333-259814), Form S-8 (File Nos. 333-163397 and 333-251886), Form F-3D (File No. 333-202165).
DOCUMENTS FILED AS PART OF THIS FORM 6-K
See the Exhibit Index to this Form 6-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 2, 2022
| CENOVUS ENERGY INC. | ||
|---|---|---|
| (Registrant) | ||
| By: | /s/ Natasha L.S. Dhillon-Penner | |
| --- | --- | --- |
| Name: | Natasha L.S. Dhillon-Penner | |
| Title: | Assistant Corporate Secretary |
Form 6-K Exhibit Index
| Exhibit No. | |
|---|---|
| 99.1 | News Release dated November 2, 2022 |
| 99.2 | Management’s Discussion and Analysis dated November 1, 2022 for the period ended September 30, 2022 |
| 99.3 | Interim Consolidated Financial Statements (unaudited) for the period ended September 30, 2022 |
| 99.4 | Supplemental Financial Information (unaudited) – Consolidated Interest Coverage Ratios Exhibit to September 30, 2022 Interim Consolidated Financial Statements |
| 99.5 | Form 52-109F2 Full Certificate, dated November 2, 2022, of Alex J. Pourbaix, President & Chief Executive Officer |
| 99.6 | Form 52-109F2 Full Certificate, dated November 2, 2022, of Jeffrey R. Hart, Executive Vice-President & Chief Financial Officer |
Document
| Exhibit 99.1 | |
|---|---|
| News release |  |
Cenovus announces 2022 third-quarter financial and operating results
Calgary, Alberta (November 2, 2022) – Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) generated more than $4.0 billion in cash from operating activities, approximately $3.0 billion in adjusted funds flow and nearly $2.1 billion in free funds flow in the third quarter of 2022, driven by continued strong operations. Total upstream production was approximately 778,000 barrels of oil equivalent per day (BOE/d)1 and downstream throughput averaged 533,500 barrels per day (bbls/d). As part of Cenovus’s commitment to increasing shareholder returns, in addition to its base dividend, the Board of Directors declared a variable dividend payable on December 2, 2022 and approved filing an application with the TSX to renew its normal course issuer bid (NCIB) for another year.
“Solid operating performance at our upstream assets drove another strong quarter for Cenovus, even with increased commodity price volatility,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “We are delivering on our shareholder returns framework, reducing our net debt and providing enhanced value through continued share buybacks and dividends, including declaring our first variable dividend.”
Third-quarter highlights
•Reduced long-term debt to less than $8.8 billion and net debt to about $5.3 billion.
•Delivered $659 million to shareholders through share buybacks and declared a variable dividend of $219 million or $0.114 per common share.
•Closed acquisition of remaining 50% stake in Sunrise oil sands project, which included a cash payment (net of closing adjustments) of $394 million and a variable payment up to a maximum of $600 million.
•Completed sale of the retail fuels network for net cash proceeds of $404 million.
| Financial, production & throughput summary | ||||
|---|---|---|---|---|
| (For the period ended September 30) | 2022 Q2 | % change | 2021 Q3 | % change |
| Financial ( millions, except per share amounts) | ||||
| Cash from operating activities | 2,979 | 37 | 2,138 | 91 |
| Adjusted funds flow2 | 3,098 | (5) | 2,342 | 26 |
| Per share (basic)2 | 1.57 | 1.16 | ||
| Per share (diluted)2 | 1.53 | 1.15 | ||
| Capital investment | 822 | 5 | 647 | 34 |
| Free funds flow2 | 2,276 | (8) | 1,695 | 23 |
| Excess free funds flow2 | 2,020 | (13) | 1,626 | 8 |
| Net earnings (loss) | 2,432 | (34) | 551 | 192 |
| Per share (basic) | 1.23 | 0.27 | ||
| Per share (diluted) | 1.19 | 0.27 | ||
| Long-term debt, including current portion | 11,228 | (22) | 12,986 | (32) |
| Net debt | 7,535 | (30) | 11,024 | (52) |
| Production and throughput (before royalties, net to Cenovus) | ||||
| Oil and NGLs (bbls/d)1 | 614,200 | 3 | 655,100 | (3) |
| Conventional natural gas (MMcf/d) | 882 | (1) | 898 | (3) |
| Total upstream production (BOE/d)1 | 761,500 | 2 | 804,800 | (3) |
| Total downstream throughput (bbls/d) | 457,300 | 17 | 554,100 | (4) |
All values are in US Dollars.
1 See Advisory for production by product type.
2 Non-GAAP financial measure or contains a non-GAAP financial measure. See Advisory.
Corporate developments
In August, the company announced an agreement to acquire bp’s 50% working interest in the Toledo Refinery, with Cenovus to become 100% owner and assume operatorship upon transaction close. On September 20, a fire occurred at the facility, tragically resulting in the deaths of two workers. Investigations into the cause of the fire are ongoing and the refinery remains shut down in a safe state. Cenovus continues to assess the status and timing of closing of the transaction.
Third-quarter results
Cenovus again delivered solid operating and financial results in the quarter, driven by the company’s continued reliable operating performance and low cost structure.
Operating results1
Cenovus’s total revenues were $17.5 billion, down from $19.2 billion in the second quarter, mainly due to lower benchmark commodity prices, which drove reduced prices for the company’s products across the upstream and downstream businesses. Upstream revenues were $9.0 billion, compared with $10.1 billion in the previous quarter. Downstream revenues were $11.1 billion, compared with $10.8 billion in the second quarter.
Total operating margin3 was $3.3 billion, compared with more than $4.6 billion in the second quarter. Upstream operating margin4 was $2.8 billion, compared with $3.8 billion in the second quarter. The quarter-over-quarter reduction was driven by lower Brent and West Texas Intermediate benchmark prices and a wider light-heavy differential. Downstream operating margin4 was $490 million, compared with $847 million in the second quarter, as third-quarter results were impacted by lower market crack spreads, turnaround activity in the U.S. Manufacturing segment and the incident at the Toledo Refinery. In addition, processing crude oil purchased in prior periods at higher prices had an estimated impact of about $420 million on U.S. Manufacturing operating margin.
Total Upstream production was 777,900 BOE/d, an increase from second quarter production of 761,500 BOE/d. Christina Lake production was 252,800 bbls/d, an increase from 228,800 bbls/d in the previous quarter, with the quarter-over-quarter difference mainly due to planned maintenance in the second quarter. Foster Creek production declined to 182,400 bbls/d, compared with 187,800 bbls/d in the second quarter, reflecting the impact of planned maintenance and an unplanned outage in August. Production at Foster Creek returned to normal rates in September and the facility is currently operating in excess of 200,000 bbls/d. Sunrise production was 30,900 bbls/d in the quarter, up 5,600 bbls/d from the second quarter, with the increase reflecting the acquisition of the remaining 50% working interest, which closed on August 31, 2022. At the Lloydminster thermal projects, production increased 3,700 bbls/d over the previous quarter to 102,100 bbls/d, as the Spruce Lake North project achieved first oil, ramping up during the quarter and now operating above its nameplate capacity of 10,000 bbls/d.
Conventional production was 126,200 BOE/d, compared with 132,600 BOE/d in the second quarter, with the reduction driven by planned maintenance at the Elmworth gas plant. The company invested $67 million in the Conventional business during the quarter as part of the normal ramp up of its seasonal development program and to tie in remaining infrastructure and production from the previous development program.
Offshore production was 64,600 BOE/d compared with 70,100 BOE/d in the second quarter, with the reduction mainly due to changes in the working interest in the White Rose fields during the quarter and a planned turnaround at the SeaRose floating production, storage and offloading (FPSO) vessel in the Atlantic region. Work is
3 Non-GAAP financial measure. Total operating margin is the total of Upstream operating margin plus Downstream operating margin. See Advisory.
4 Specified financial measure. See Advisory.
CENOVUS ENERGY NEWS RELEASE | 2
progressing on the Terra Nova FPSO’s asset life extension program and it is expected to return to offshore Newfoundland and Labrador before the end of 2022. In the Asia Pacific region, the company drilled and completed the remaining three of five development wells planned in 2022 for the MDA field offshore Indonesia.
The Canadian Manufacturing segment achieved crude utilization of 89% and throughput of 98,500 bbls/d, up from 73% and 80,900 bbls/d in the second quarter. Utilization in the second quarter was impacted by planned turnaround activity at both the Lloydminster Upgrader and Lloydminster Refinery, which was completed in June. Canadian Manufacturing delivered a third-quarter operating margin of $249 million compared with $47 million in the second quarter, with the difference mainly due to a wider Canadian light-heavy crude differential, resulting in lower feedstock costs and increased crude throughput.
In the U.S. Manufacturing segment, the third quarter was affected by planned turnaround activity at the bp-operated Toledo Refinery, with the impacts extending into August, and the Toledo Refinery being fully shut in following the September fire. Third-quarter results were also impacted by planned turnaround activity at the Phillips 66-operated Wood River Refinery. Overall, crude utilization of 87% and throughput of 435,000 bbls/d were higher compared with the previous quarter, as the second quarter was impacted by planned turnaround activity at the Toledo, Borger and Wood River refineries. Additionally, strong operating performance at Cenovus’s Lima Refinery in the third quarter contributed to the improved utilization rate. Per-unit operating expenses declined in the third quarter, primarily driven by the conclusion of significant turnaround activities that had started in the second quarter. Given the developments at Toledo, Cenovus now expects downstream throughput and operating expenses for the year to fall modestly outside the ranges indicated in the company’s 2022 Guidance dated July 27, 2022.
Financial results
Cash from operating activities, which includes changes in non-cash working capital, was more than $4.0 billion and adjusted funds flow was about $3.0 billion in the third quarter. Free funds flow of about $2.1 billion reflects capital investment of $866 million, primarily to sustain production and throughput levels, as well as work to complete the Superior Refinery rebuild and preliminary work to restart construction of the West White Rose project. Cash flows were impacted by lower overall commodity pricing when compared to the second quarter, which drove lower realized pricing in the upstream business and lower refined product pricing in the downstream. In the U.S. Manufacturing segment, the cost of processing crude oil purchased in prior periods at higher prices, as well as other impacts of pricing changes on inventory values, reduced operating margin by approximately $420 million.
Long-term debt, including the current portion, was reduced to $8.8 billion as of September 30, 2022, from $11.2 billion at the end of the second quarter. Net debt was approximately $5.3 billion as at September 30, 2022, down more than $2.2 billion from June 30, 2022 and $4.3 billion since January 1, 2022. The reduction of long-term debt in the quarter was primarily due to the company’s purchase of US$2.2 billion of notes that were due between 2025 and 2043. Net debt decreased due to free funds flow of about $2.1 billion, a draw in non-cash working capital of $1.2 billion in the third quarter, partially offset by base dividends of $205 million, the repurchase of common shares and foreign exchange losses on the company’s long-term debt. The working capital draw was mainly attributable to a decrease in accounts receivable and the impact of lower commodity prices on product inventory.
CENOVUS ENERGY NEWS RELEASE | 3
The company recorded a current tax expense of $76 million in the third quarter. The lower current tax expense, compared with the second quarter, was due to lower overall commodity and product prices.
Net earnings were $1.6 billion, compared with $2.4 billion in the previous quarter. The decline in net earnings was primarily due to lower operating margin and a foreign exchange loss as a result of a weaker Canadian dollar, partially offset by a revaluation gain on the Sunrise acquisition, a remeasurement gain on the variable payment and lower general and administrative costs reflecting share price impact on long-term incentive costs.
On August 31, 2022, Cenovus closed the previously announced acquisition of the 50% working interest in Sunrise owned by bp, with an effective date of May 1, 2022. Total consideration included a cash payment of $394 million (net of closing adjustments) and a variable payment, to be made quarterly and expiring after two years, with a maximum cumulative value of $600 million. As well, bp assumed Cenovus’s 35% working interest in the undeveloped Bay du Nord field offshore Newfoundland and Labrador. The sale of Cenovus’s retail fuels network also closed during the third quarter, for net cash proceeds of $404 million. The company continues to own and operate its commercial fuels business, which includes cardlock, bulk plant and travel centre locations.
Dividend declarations and share purchases
Cenovus continues to execute its share repurchase program, which allows the company to purchase up to 146.5 million of its common shares. In the third quarter, the company purchased approximately 29 million shares, delivering $659 million in returns to shareholders through its NCIB program. Subsequent to the end of the third quarter, as of November 1, 2022 the company had purchased an additional 4 million shares, for approximately $94 million.
Since the share buyback program began in November 2021, Cenovus has purchased approximately 118 million common shares, delivering $2.5 billion in returns to shareholders. The current NCIB will expire on November 8, 2022. Cenovus has received approval from the Board of Directors to make an application for another NCIB program. The company will apply for approval to repurchase up to 137 million of the company’s common shares, representing approximately 10% of its public float, as defined by the TSX.
In accordance with Cenovus’s shareholder returns framework, which has a target of returning 50% of excess free funds flow to shareholders when net debt is between $9 billion and $4 billion, on November 1, 2022 the Board declared a variable dividend of $0.114 per common share to shareholders of record on November 18, 2022, payable on December 2, 2022, which will deliver a total of $219 million to shareholders.
The Board has also declared a base dividend of $0.105 per common share, payable on December 30, 2022 to shareholders of record as of December 15, 2022.
CENOVUS ENERGY NEWS RELEASE | 4
In addition, the Board declared a third-quarter dividend on each of the Cumulative Redeemable First Preferred Shares – Series 1, Series 2, Series 3, Series 5 and Series 7 – payable on January 3, 2023 to shareholders of record as of December 15, 2022 as follows:
| Preferred shares dividend summary | ||
|---|---|---|
| Rate (%) | Amount ($/share) | |
| Share series | ||
| Series 1 | 2.577 | 0.16106 |
| Series 2 | 5.048 | 0.31809 |
| Series 3 | 4.689 | 0.29306 |
| Series 5 | 4.591 | 0.28694 |
| Series 7 | 3.935 | 0.24594 |
All dividends paid on Cenovus’s common and preferred shares will be designated as “eligible dividends” for Canadian federal income tax purposes. Declaration of dividends is at the sole discretion of the Board and will continue to be evaluated on a quarterly basis.
Sustainability
Cenovus and its Pathways Alliance peers continue to advance the early work necessary to build one of the world’s largest carbon capture and storage (CCS) facilities. The Alliance has progressed engagement with more than 20 Indigenous communities along the proposed CO2 storage network corridor, completed pre-engineering for the CO2 pipeline and is conducting field programs to support regulatory applications and engineering studies related to the CO2 capture facilities. Together the Pathways Alliance companies have identified $24.1 billion in investments in carbon capture and storage projects by 2030 and other emissions reductions projects as part of the first phase of its goal to reach net zero emissions from Canada’s oil sands by 2050.
Pathways continues to discuss with the federal and Alberta governments the mechanisms for co-investment, beyond the planned federal Investment Tax Credit, needed to kickstart major CCS projects. Canada faces intense competition for global capital for CCS projects from the U.S., Norway and the Netherlands, which all provide significant investment in CCS technology in cooperation with industry.
During the third quarter, Cenovus became a member of the First Nations Major Projects Coalition (FNMPC) Sustaining Partners Program, with the goal of advancing relationships between FNMPC members and industry, and supporting Indigenous reconciliation. As a Sustaining Partner, Cenovus will help advance stronger relationships between the business community and Indigenous communities in Canada.
| Conference call today<br><br>9 a.m. Mountain Time (11 a.m. Eastern Time)<br><br>Cenovus will host a conference call today, November 2, 2022, starting at 9 a.m. MT (11 a.m. ET).<br><br>To participate, please dial 888-394-8218 (toll-free in North America) or 647-794-4605 approximately 10 minutes prior to the conference call. A live audio webcast will also be available and will be archived for approximately 90 days. |
|---|
CENOVUS ENERGY NEWS RELEASE | 5
Advisory
Basis of Presentation
Cenovus reports financial results in Canadian dollars and presents production volumes on a net to Cenovus before royalties basis, unless otherwise stated. Cenovus prepares its financial statements in accordance with International Financial Reporting Standards (IFRS).
Barrels of Oil Equivalent
Natural gas volumes have been converted to barrels of oil equivalent (BOE) on the basis of six thousand cubic feet (Mcf) to one barrel (bbl). BOE may be misleading, particularly if used in isolation. A conversion ratio of one bbl to six Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil compared with natural gas is significantly different from the energy equivalency conversion ratio of 6:1, utilizing a conversion on a 6:1 basis is not an accurate reflection of value.
Product types
| Product type by operating segment | |
|---|---|
| Three months ended<br><br>Sept. 30, 2022 | |
| Oil Sands | |
| Bitumen (Mbbls/d) | 568.2 |
| Heavy crude oil (Mbbls/d) | 16.8 |
| Conventional natural gas (MMcf/d) | 12.6 |
| Total Oil Sands segment production (MBOE/d) | 587.1 |
| Conventional | |
| Light crude oil (Mbbls/d) | 6.9 |
| Natural gas liquids (Mbbls/d) | 19.9 |
| Conventional natural gas (MMcf/d) | 596.1 |
| Total Conventional segment production (MBOE/d) | 126.2 |
| Offshore | |
| Light crude oil (Mbbls/d) | 9.1 |
| Natural gas liquids (Mbbls/d) | 12.2 |
| Conventional natural gas (MMcf/d) | 260.0 |
| Total Offshore segment production (MBOE/d) | 64.6 |
| Total upstream production (MBOE/d) | 777.9 |
CENOVUS ENERGY NEWS RELEASE | 6
Forward‐looking Information
This news release contains certain forward‐looking statements and forward‐looking information (collectively referred to as “forward‐looking information”) within the meaning of applicable securities legislation, including the U.S. Private Securities Litigation Reform Act of 1995, about Cenovus’s current expectations, estimates and projections about the future of the company, based on certain assumptions made in light of experiences and perceptions of historical trends. Although Cenovus believes that the expectations represented by such forward‐looking information are reasonable, there can be no assurance that such expectations will prove to be correct.
Forward‐looking information in this document is identified by words such as “achieve”, “anticipate”, “continue”, “deliver”, “expect”, “focus”, “positioned”, “target”, and “will” or similar expressions and includes suggestions of future outcomes, including, but not limited to, statements about: general and 2022 priorities; performance in the second half of 2022; achieving production capacity and first oil at the Spruce Lake North thermal project; timing of turnarounds and maintenance; status and timing of closing of the Toledo transaction; timing of Terra Nova asset life extension program; upstream production, downstream throughput, and downstream operations and performance; restart of the West White Rose Project; cash taxes; delivering total shareholder returns beyond the base dividend through share buybacks under the NCIB and variable dividends in accordance with the shareholder returns framework; emission reduction goals and ambitions for the company and through the Pathways Alliance; and investments in carbon capture and storage projects and other emissions reductions projects.
Developing forward‐looking information involves reliance on a number of assumptions and consideration of certain risks and uncertainties, some of which are specific to Cenovus and others that apply to the industry generally. The factors or assumptions on which the forward‐looking information in this news release are based include, but are not limited to: the allocation of free funds flow to reducing net debt; commodity prices, inflation and supply chain constraints; Cenovus’s ability to produce on an unconstrained basis; Cenovus’s ability to access sufficient insurance coverage to pursue development plans; Cenovus’s ability to deliver safe and reliable operations and demonstrate strong governance; and the assumptions inherent in Cenovus’s updated 2022 Guidance available on cenovus.com.
The risk factors and uncertainties that could cause actual results to differ materially from the forward‐looking information in this news release include, but are not limited to: the accuracy of estimates regarding commodity prices, inflation, operating and capital costs and currency and interest rates; risks inherent in the operation of Cenovus’s business; and risks associated with climate change and Cenovus’s assumptions relating thereto.
Except as required by applicable securities laws, Cenovus disclaims any intention or obligation to publicly update or revise any forward‐looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that the foregoing lists are not exhaustive and are made as at the date hereof. Events or circumstances could cause actual results to differ materially from those estimated or projected and expressed in, or implied by, the forward‐looking information. For additional information regarding Cenovus’s material risk factors, the assumptions made, and risks and uncertainties which could cause actual results to differ from the anticipated results, refer to “Risk Management and Risk Factors” and “Advisory” in Cenovus’s Management Discussion and Analysis (MD&A) for the periods ended December 31, 2021 and September 30, 2022, and to the risk factors, assumptions and uncertainties described in other documents Cenovus files from time to time with securities regulatory authorities in Canada (available on SEDAR at sedar.com, on EDGAR at sec.gov and Cenovus’s website at cenovus.com).
CENOVUS ENERGY NEWS RELEASE | 7
Specified Financial Measures
This news release contains references to certain specified financial measures that do not have standardized meanings prescribed by IFRS. Readers should not consider these measures in isolation or as a substitute for analysis of the company’s results as reported under IFRS. These measures are defined differently by different companies and, therefore, might not be comparable to similar measures presented by other issuers. For information on the composition of these measures, as well as an explanation of how the company uses these measures, refer to the Specified Financial Measures Advisory located in Cenovus’s MD&A for the period ended September 30, 2022, (available on SEDAR at sedar.com, on EDGAR at sec.gov and on Cenovus's website at cenovus.com) which is incorporated by reference into this news release.
Upstream Operating Margin and Downstream Operating Margin
Upstream Operating Margin and Downstream Operating Margin, and the individual components thereof, are included in Note 1 to the interim Consolidated Financial Statements.
Total Operating Margin
Total Operating Margin is the total of Upstream Operating Margin plus Downstream Operating Margin.
| Upstream | Downstream | Total | ||||
|---|---|---|---|---|---|---|
| Three Months Ended ($ millions) | Sept. 30, <br>2022 (1) | June 30, 2022(1) | Sept. 30, 2022 (1) | June 30, 2022(1) | Sept. 30, 2022 | June 30, 2022 |
| Revenues | ||||||
| Gross Sales | 10,238 | 11,685 | 11,078 | 10,844 | 21,316 | 22,529 |
| Less: Royalties | 1,226 | 1,582 | - | - | 1,226 | 1,582 |
| 9,012 | 10,103 | 11,078 | 10,844 | 20,090 | 20,947 | |
| Expenses | ||||||
| Purchased Product | 2,397 | 1,461 | 9,882 | 9,046 | 12,279 | 10,507 |
| Transportation and Blending | 2,800 | 3,238 | 3 | (2) | 2,803 | 3,236 |
| Operating | 915 | 1,010 | 780 | 866 | 1,695 | 1,876 |
| Realized (Gain) Loss on Risk Management | 51 | 563 | (77) | 87 | (26) | 650 |
| Operating Margin | 2,849 | 3,831 | 490 | 847 | 3,339 | 4,678 |
(1)Found in Note 1 of the September 30, 2022, or June 30, 2022, interim Consolidated Financial Statements.
CENOVUS ENERGY NEWS RELEASE | 8
Adjusted Funds Flow, Free Funds Flow and Excess Free Funds Flow
The following table provides a reconciliation of cash from (used in) operating activities found in Cenovus’s Consolidated Financial Statements to Adjusted Funds Flow, Free Funds Flow and Excess Free Funds Flow. Adjusted Funds Flow per share is calculated by dividing Adjusted Funds Flow by the weighted average number of common shares outstanding during the period and may be useful to evaluate a company’s ability to generate cash.
| Three Months Ended ($ millions) | Sept. 30,<br><br>2022 | June 30, 2022 | Sept. 30, 2021 |
|---|---|---|---|
| Cash From (Used in) Operating Activities (1) | 4,089 | 2,979 | 2,138 |
| (Add) Deduct: | |||
| Settlement of Decommissioning Liabilities | (55) | (27) | (38) |
| Net Change in Non-Cash Working Capital | 1,193 | (92) | (166) |
| Adjusted Funds Flow | 2,951 | 3,098 | 2,342 |
| Capital Investment | 866 | 822 | 647 |
| Free Funds Flow | 2,085 | 2,276 | 1,695 |
| Add (Deduct): | |||
| Base Dividends Paid on Common Shares | (205) | (207) | (35) |
| Dividends Paid on Preferred Shares | (9) | (8) | (9) |
| Settlement of Decommissioning Liabilities | (55) | (27) | (38) |
| Principal Repayment of Leases | (78) | (75) | (70) |
| Acquisitions, Net of Cash Acquired | (389) | (1) | - |
| Proceeds From Divestitures, Net of Cash Paid | 407 | 62 | 83 |
| Excess Free Funds Flow | 1,756 | 2,020 | 1,626 |
(1)Found in the September 30, 2022, or June 30, 2022, interim Consolidated Financial Statements.
Cenovus Energy Inc.
Cenovus Energy Inc. is an integrated energy company with oil and natural gas production operations in Canada and the Asia Pacific region, and upgrading, refining and marketing operations in Canada and the United States. The company is focused on managing its assets in a safe, innovative and cost-efficient manner, integrating environmental, social and governance considerations into its business plans. Cenovus common shares and warrants are listed on the Toronto and New York stock exchanges, and the company’s preferred shares are listed on the Toronto Stock Exchange. For more information, visit cenovus.com.
Find Cenovus on Facebook, Twitter, LinkedIn, YouTube and Instagram.
Cenovus contacts
| Investors | Media |
|---|---|
| Investor Relations general line<br><br>403-766-7711 | Media Relations general line<br><br>403-766-7751 |
CENOVUS ENERGY NEWS RELEASE | 9
Document
Exhibit 99.2
Cenovus Energy Inc.
Management’s Discussion and Analysis (unaudited)
For the Periods Ended September 30, 2022
(Canadian Dollars)
MANAGEMENT’S DISCUSSION AND ANALYSIS
| For the periods ended September 30, 2022 | |
|---|---|
| OVERVIEW OF CENOVUS | 3 |
| --- | --- |
| QUARTERLY RESULTS OVERVIEW | 6 |
| OPERATING AND FINANCIAL RESULTS | 9 |
| COMMODITY PRICES UNDERLYING OUR FINANCIAL RESULTS | 16 |
| COMMODITY PRICE OUTLOOK | 19 |
| REPORTABLE SEGMENTS | 20 |
| UPSTREAM | 20 |
| OIL SANDS | 20 |
| CONVENTIONAL | 25 |
| OFFSHORE | 28 |
| DOWNSTREAM | 33 |
| CANADIAN MANUFACTURING | 33 |
| U.S. MANUFACTURING | 34 |
| RETAIL | 37 |
| CORPORATE AND ELIMINATIONS | 37 |
| LIQUIDITY AND CAPITAL RESOURCES | 40 |
| RISK MANAGEMENT AND RISK FACTORS | 45 |
| CRITICAL ACCOUNTING JUDGMENTS, ESTIMATION UNCERTAINTIES AND ACCOUNTING POLICIES | 47 |
| CONTROL ENVIRONMENT | 47 |
| ADVISORY | 47 |
| ABBREVIATIONS | 51 |
| SPECIFIED FINANCIAL MEASURES | 51 |
| ADJUSTMENTS TO THE INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) | 66 |
This Management’s Discussion and Analysis (“MD&A”) for Cenovus Energy Inc. (which includes references to “we”, “our”, “us”, “its”, the “Company”, or “Cenovus”, and means Cenovus Energy Inc., the subsidiaries of, and partnership interests held by, Cenovus Energy Inc. and its subsidiaries) dated November 1, 2022 should be read in conjunction with our September 30, 2022 unaudited interim Consolidated Financial Statements and accompanying notes (“interim Consolidated Financial Statements”), the December 31, 2021 audited Consolidated Financial Statements and accompanying notes (“Consolidated Financial Statements”) and the December 31, 2021 MD&A (“annual MD&A”). All of the information and statements contained in this MD&A are made as of November 1, 2022 unless otherwise indicated. This MD&A contains forward-looking information about our current expectations, estimates, projections and assumptions. See the Advisory for information on the risk factors that could cause actual results to differ materially and the assumptions underlying our forward-looking information. Cenovus management (“Management”) prepared the MD&A. The interim MD&As and the annual MD&A are reviewed by the Audit Committee and recommended for approval by the Cenovus Board of Directors (“the Board”). Additional information about Cenovus, including our annual reports, the Annual Information Form (“AIF”) and Form 40-F, is available on SEDAR at sedar.com, on EDGAR at sec.gov, and on our website at cenovus.com. Information on or connected to our website, even if referred to in this MD&A, does not constitute part of this MD&A.
Basis of Presentation
This MD&A and the interim Consolidated Financial Statements and comparative information have been prepared in Canadian dollars, (which includes references to “dollar” or “$”), except where another currency has been indicated, and in accordance with International Financial Reporting Standards (“IFRS” or “GAAP”) as issued by the International Accounting Standards Board. Production volumes are presented on a before royalties basis. Refer to the Abbreviations section for commonly used oil and gas terms.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 2 |
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| OVERVIEW OF CENOVUS | |
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We are a Canadian-based integrated energy company headquartered in Calgary, Alberta. Our common shares and common share purchase warrants (“Cenovus Warrants”) are listed on the Toronto Stock Exchange (“TSX”) and New York Stock Exchange. Our cumulative redeemable preferred shares series 1, 2, 3, 5 and 7 are listed on the TSX. We are the second largest Canadian-based crude oil and natural gas producer, with upstream operations in Canada and the Asia Pacific region, and the second largest Canadian-based refiner and upgrader, with downstream operations in Canada and the United States (“U.S.”). On January 1, 2021, Cenovus and Husky Energy Inc. (“Husky”) closed a transaction to combine the two companies through a plan of arrangement (the “Arrangement”).
Our upstream operations include oil sands projects in northern Alberta, thermal and conventional crude oil, natural gas and natural gas liquids (“NGLs”) projects across Western Canada, crude oil production offshore Newfoundland and Labrador and natural gas and NGLs production offshore China and Indonesia. Our downstream operations include upgrading and refining operations in Canada and the U.S., and commercial fuel operations across Canada.
Our operations involve activities across the full value chain to develop, produce, transport and market crude oil and natural gas in Canada and internationally. Our physically integrated upstream and downstream operations help us mitigate the impact of volatility in light-heavy crude oil differentials and contribute to our net earnings by capturing value from crude oil and natural gas production through to the sale of finished products such as transportation fuels.
During the nine months ended September 30, 2022, crude oil production from our Oil Sands assets averaged 578.9 thousand barrels per day and total upstream production averaged 779.2 thousand BOE per day. Downstream crude oil throughput was 497.8 thousand barrels per day. Refer to the Operating and Financial Results section of this MD&A for a summary of production by product type.
Our Strategy
Our strategy is focused on maximizing shareholder value through competitive cost structures and optimizing margins, while delivering top-tier safety performance and environmental, social and governance (“ESG”) leadership. The Company prioritizes Free Funds Flow generation that enables debt reduction, shareholder returns through a combination of base dividend growth and flexible return mechanisms, reinvestment in the business and diversification.
Shareholder Returns and Capital Allocation Framework
Maintaining a strong balance sheet with the resilience to withstand price volatility and capitalize on opportunities throughout the commodity cycle is a key element of Cenovus’s capital allocation framework. On April 27, 2022, we announced our updated capital allocation framework to continue to strengthen our balance sheet, which enable flexibility in both high and low commodity price environments and improve our shareholder value proposition.
We have set an ultimate Net Debt Target of $4 billion, which serves as a floor on Net Debt. We plan to return incremental value to shareholders, through share buybacks and/or variable dividends, as follows:
•When Net Debt is less than $9 billion and above $4 billion at quarter-end, we will target to allocate 50 percent of the Excess Free Funds Flow achieved in the following quarter to shareholder returns, while still continuing to deleverage the balance sheet until we reach the Net Debt Target of $4 billion.
•When Net Debt is above $9 billion at quarter-end, we plan to allocate all of the following quarter’s Excess Free Funds Flow to deleveraging the balance sheet.
•When Net Debt is at the $4 billion floor at quarter-end, we will target to return 100 percent of the following quarter’s Excess Free Funds Flow to shareholder returns.
Excess Free Funds Flow is defined as Free Funds Flow(1):
•Minus base dividends paid on common shares in the quarter.
•Minus dividends paid on preferred shares in the quarter.
•Minus other uses of cash, including decommissioning liabilities and principal repayment of leases, in the quarter.
•Minus any net acquisition costs from acquisition activities closing in the quarter.
•Plus any proceeds from or less any payments related to divestiture activities closing in the quarter.
The Company’s capital allocation framework enables a shift to paying out a higher percentage of Excess Free Funds Flow to common shareholders, with lower leverage and a lower risk profile. Our $4 billion Net Debt Target represents a Net Debt to Adjusted Funds Flow Ratio Target of approximately 1.0 times at the bottom of the cycle.
(1) See the Liquidity and Capital Resources section of this MD&A for the calculation of Free Funds Flow.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 3 |
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Share buybacks will continue to be executed opportunistically, driven by return thresholds. Where the value of share buybacks in a quarter is less than the targeted value of returns, the remainder will be delivered through a variable dividend payable for that quarter. Where the value of share buybacks in a quarter is greater than the targeted value of returns, no variable dividend will be paid for that quarter.
On June 30, 2022, our Net Debt position was $7.5 billion and as a result, our returns to shareholders target for the three months ended September 30, 2022, was 50 percent of that quarter's Excess Free Funds Flow. During the three months ended September 30, 2022, we generated cash from operating activities of $4.1 billion, Excess Free Funds Flow of $1.8 billion and returned $659 million to our shareholders through share buybacks. As such, on November 1, 2022, the Company’s Board of Directors declared a fourth quarter variable dividend of $0.114 per common share, payable on December 2, 2022, to common shareholders of record as at November 18, 2022.
| ( millions) |
| Excess Free Funds Flow (1) |
| Target Return (2) |
| Less: Purchase of Common Shares Under our Normal Course Issuer Bid (“NCIB”) |
| Returns to Shareholders Under Target Before Variable Dividend |
All values are in US Dollars.
(1)Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
(2)Based on our capital allocation framework, as a result of Net Debt as at June 30, 2022, being less than $9 billion and greater than $4 billion, Target Return was determined to be 50 percent of Excess Free Funds Flow for the three months ended September 30, 2022.
On September 30, 2022, our Net Debt position was $5.3 billion and as a result we expect our returns to shareholders target for the three months ended December 31, 2022, to be 50 percent of the fourth quarter’s Excess Free Funds Flow.
Key Priorities for 2022
We aim to deliver on our strategy through five key strategic objectives:
Top Tier Safety Performance and ESG Leadership
Underpinning everything we do is the safety of our people and communities, and the integrity of our assets. We have identified safety and asset integrity, and corporate governance as foundational to our business, providing the backbone for all our operations. We continue to promote a safety culture in all aspects of our work and use a variety of programs to always keep safety top of mind.
A path and program for achieving our targets in each of our five ESG focus areas has been established, including identifying the levers and resources that will be required. Additional information on management’s efforts and performance across ESG topics, including our ESG targets and plans to achieve them, are available in Cenovus’s 2021 ESG report at cenovus.com.
Competitive Cost Structures and Optimizing Margins
We continue to target additional cost savings and margin enhancements through further physical integration of upstream assets with downstream assets, which is expected to shorten the value chain and reduce condensate costs associated with heavy oil transportation. We continue to look for ways to improve efficiencies across Cenovus to drive incremental capital, operating, and general and administrative cost reductions.
Maintaining and Further Reducing Debt Levels
As at September 30, 2022, our long-term debt, including current portion, was $8.8 billion (December 31, 2021 – $12.4 billion) and our Net Debt position was $5.3 billion (December 31, 2021 – $9.6 billion). As a result of strong cash from operating activities, we redeemed a significant amount of debt and decreased Net Debt during the nine months ended September 30, 2022. Our Net Debt to Adjusted EBITDA Ratio was 0.4 times and our Net Debt to Adjusted Funds Flow Ratio was 0.5 times at September 30, 2022. Maintaining a strong balance sheet provides financial flexibility to manage our business through commodity price volatility.
Returns-focused Capital Allocation
The Company’s sustaining capital program and base dividend are sustainable at US$45 WTI per barrel, and provide opportunities to sustainably grow shareholder returns. On November 1, 2022, the Company’s Board of Directors declared a fourth quarter base dividend of $0.105 per common share and a fourth quarter variable dividend of $0.114 per common share. The base dividend is payable on December 30, 2022, to common shareholders of record as at December 15, 2022. The variable dividend is payable on December 2, 2022, to common shareholders of record as at November 18, 2022. During the three and nine months ended September 30, 2022, we returned $659 million and $2.1 billion, respectively, to our shareholders through share buybacks.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 4 |
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During the quarter, we closed the previously announced purchase of the remaining 50 percent interest in Sunrise and the sales of 337 gas stations within our retail fuels network.
In addition, we announced an agreement with BP Products North America Inc. (“BP”) to acquire BP’s 50 percent interest in the Toledo Refinery in Ohio. The acquisition will provide us full ownership and operatorship and further integrate our heavy oil production and refining capabilities. The transaction is expected to give us an additional 80.0 thousand barrels per day of downstream throughput capacity, including 45.0 thousand barrels per day of heavy oil refining capacity, with opportunities to further optimize our heavy oil value chain through integration with our upstream assets.
On September 20, 2022, a tragic fire occurred at the Toledo Refinery, resulting in two worker fatalities. Investigations into the cause of the incident are ongoing and the refinery remains shut down in a safe state. We continue to assess the status and timing of closing the transaction.
In 2022, we anticipate our total capital expenditures will be between $3.3 billion and $3.7 billion, including $500 million to $550 million (excluding insurance proceeds) for the Superior Refinery rebuild. We will continue to be disciplined with our capital allocation.
Growing Free Funds Flow Through Pricing Cycles
Our top-tier assets and low cost structure position us to grow Free Funds Flow through pricing cycles. Cenovus's diversified asset and product mix generates predictable and stable Free Funds Flow, and reduces risk and cash flow volatility by leveraging pipelines, logistics and marketing to optimize the value chain. We are able to generate strong margins with modest capital investment.
Cenovus has a track record of operational reliability for our upstream assets. We expect our annual upstream production to average between 780 thousand BOE per day and 810 thousand BOE per day. Given the incident at the Toledo Refinery, we now expect our downstream crude oil throughput to fall modestly outside the guidance range of 530 thousand barrels per day to 580 thousand barrels per day in 2022. We continue to monitor the overall market dynamics to assess how we manage our upstream production and downstream throughput levels. Our assets can respond to market signals and ramp production up or down accordingly. Our decisions around production levels and refinery crude run rates will be focused on maximizing the value we receive for our products.
Our 2022 guidance dated July 27, 2022, is available on our website at cenovus.com. For further details see the Operating and Financial Results section of this MD&A.
Our Operations
The Company operates through the following reportable segments:
Upstream Segments
•Oil Sands, includes the development and production of bitumen and heavy oil in northern Alberta and Saskatchewan. Cenovus’s oil sands assets include Foster Creek, Christina Lake, Sunrise, as well as the Lloydminster thermal and Lloydminster conventional heavy oil assets. Cenovus jointly owns and operates pipeline gathering systems and terminals through the equity-accounted investment in Husky Midstream Limited Partnership (“HMLP”). The sale and transportation of Cenovus’s production and third-party commodity trading volumes are managed and marketed through access to capacity on third-party pipelines and storage facilities in both Canada and the U.S. to optimize product mix, delivery points, transportation commitments and customer diversification.
•Conventional, includes assets rich in NGLs and natural gas within the Elmworth-Wapiti, Kaybob‑Edson, Clearwater and Rainbow Lake operating areas in Alberta and British Columbia and interests in numerous natural gas processing facilities. Cenovus’s NGLs and natural gas production is marketed and transported with additional third-party commodity trading volumes through access to capacity on third-party pipelines, export terminals and storage facilities, which provides flexibility for market access to optimize product mix, delivery points, transportation commitments and customer diversification.
•Offshore, includes offshore operations, exploration and development activities in China and the east coast of Canada, as well as the equity-accounted investment in the Husky-CNOOC Madura Ltd. (“HCML”) joint venture in Indonesia.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 5 |
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Downstream Segments
•Canadian Manufacturing, includes the owned and operated Lloydminster upgrading and asphalt refining complex, which upgrades heavy oil and bitumen into synthetic crude oil, diesel, asphalt and other ancillary products. Cenovus seeks to maximize the value per barrel from its heavy oil and bitumen production through its integrated network of assets. In addition, Cenovus owns and operates the Bruderheim crude-by-rail terminal and two ethanol plants. Cenovus also markets its production and third-party commodity trading volumes of synthetic crude oil, asphalt and ancillary products.
•U.S. Manufacturing, includes the refining of crude oil to produce gasoline, diesel, jet fuel, asphalt and other products at the wholly-owned Lima Refinery and Superior Refinery, the jointly-owned Wood River and Borger refineries (jointly owned with operator Phillips 66) and the jointly-owned Toledo Refinery (jointly owned with operator BP). Cenovus also markets some of its own and third-party volumes of refined petroleum products including gasoline, diesel and jet fuel.
•Retail, includes the sale of Cenovus's own and third-party volumes of refined petroleum products, including gasoline and diesel, through retail, cardlock, travel center locations, bulk petroleum outlets, and wholesale channels in Canada. In September 2022, we divested the majority of our retail fuels network.
Corporate and Eliminations
Corporate and Eliminations, primarily includes Cenovus-wide costs for general and administrative, financing activities, gains and losses on risk management for corporate related derivative instruments and foreign exchange. Eliminations include adjustments for internal usage of natural gas production between segments, transloading services provided to the Oil Sands segment by the Company’s crude-by-rail terminal, crude oil production used as feedstock by the Canadian Manufacturing and U.S. Manufacturing segments, the sale of condensate extracted from blended crude oil production at our Canadian Manufacturing operations and sold to the Oil Sands segment, and diesel production in the Canadian Manufacturing segment sold to the Retail segment and unrealized profits in inventory. Eliminations are recorded based on current market prices.
| QUARTERLY RESULTS OVERVIEW |
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During the third quarter of 2022, we continued to deliver solid upstream operating performance and strong financial results. We continued to optimize our portfolio as we closed the previously announced Sunrise acquisition and the retail asset divestiture. These transactions enable us to focus on our core strength in the oil sands, and with 100 percent ownership, apply our operating model at Sunrise. Commodity prices remained high compared with all of 2021 and the first quarter of 2022, despite weakening since the second quarter of 2022. WTI averaged US$91.55, an increase of 30 percent from the third quarter of 2021 and a decrease of 16 percent from the second quarter of 2022. Market crack spreads improved significantly compared with the third quarter of 2021, though weakened compared with historic highs in the second quarter of 2022.
Overall, our continued focus on health and safety as well as competitive cost structures, combined with high commodity prices, drove strong financial results. We reduced Total Debt by $2.5 billion and Net Debt by $2.3 billion from June 30, 2022, and returned $864 million to shareholders through share buybacks and common share dividends. On November 1, 2022, the Board declared a variable dividend of $0.114 per common share, payable in the fourth quarter, in addition to the base dividend.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 6 |
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Summary of Quarterly Results
| Nine Months Ended<br><br>September 30, | 2022 | 2021 | 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions, except where indicated) | 2022 | 2021 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | |
| Production Volumes (1) (MBOE/d) | 779.2 | 780.1 | 777.9 | 761.5 | 798.6 | 825.3 | 804.8 | 765.9 | 769.3 | 467.2 | 471.8 | |
| Crude Oil Throughput (2) (Mbbls/d) | 497.8 | 521.0 | 533.5 | 457.3 | 501.8 | 469.9 | 554.1 | 539.0 | 469.1 | 169.0 | 191.1 | |
| Revenues (3) | 52,834 | 32,631 | 17,471 | 19,165 | 16,198 | 13,726 | 12,701 | 10,637 | 9,293 | 3,543 | 3,737 | |
| Operating Margin (4) | 11,481 | 6,773 | 3,339 | 4,678 | 3,464 | 2,600 | 2,710 | 2,184 | 1,879 | 625 | 594 | |
| Cash From Operating Activities | 8,433 | 3,735 | 4,089 | 2,979 | 1,365 | 2,184 | 2,138 | 1,369 | 228 | 250 | 732 | |
| Adjusted Funds Flow (4) | 8,632 | 5,300 | 2,951 | 3,098 | 2,583 | 1,948 | 2,342 | 1,817 | 1,141 | 333 | 407 | |
| Capital Investment | 2,434 | 1,728 | 866 | 822 | 746 | 835 | 647 | 534 | 547 | 242 | 148 | |
| Free Funds Flow (4) | 6,198 | 3,572 | 2,085 | 2,276 | 1,837 | 1,113 | 1,695 | 1,283 | 594 | 91 | 259 | |
| Excess Free Funds Flow (4)(5) | N/A | N/A | 1,756 | 2,020 | 2,615 | 1,169 | 1,626 | 1,244 | 462 | N/A | N/A | |
| Net Earnings (Loss) (6) | 5,666 | 995 | 1,609 | 2,432 | 1,625 | (408) | 551 | 224 | 220 | (153) | (194) | |
| Per Share - Basic ($) | 2.87 | 0.48 | 0.83 | 1.23 | 0.81 | (0.21) | 0.27 | 0.11 | 0.10 | (0.12) | (0.16) | |
| Per Share - Diluted ($) | 2.79 | 0.47 | 0.81 | 1.19 | 0.79 | (0.21) | 0.27 | 0.11 | 0.10 | (0.12) | (0.16) | |
| Total Assets | 55,086 | 54,594 | 55,086 | 55,894 | 55,655 | 54,104 | 54,594 | 53,384 | 53,378 | 32,770 | 32,857 | |
| Total Long-Term Liabilities | 19,378 | 22,929 | 19,378 | 20,742 | 21,889 | 23,191 | 22,929 | 22,972 | 24,266 | 13,704 | 13,889 | |
| Long-Term Debt, Including Current Portion | 8,774 | 12,986 | 8,774 | 11,228 | 11,744 | 12,385 | 12,986 | 13,380 | 13,947 | 7,441 | 7,797 | |
| Net Debt | 5,280 | 11,024 | 5,280 | 7,535 | 8,407 | 9,591 | 11,024 | 12,390 | 13,340 | 7,184 | 7,530 | |
| Cash Returns to Shareholders | ||||||||||||
| Common Shares – Base Dividends | 481 | 106 | 205 | 207 | 69 | 70 | 35 | 36 | 35 | — | — | |
| Base Dividends Per Common Share ($) | 0.245 | 0.053 | 0.105 | 0.105 | 0.035 | 0.035 | 0.018 | 0.018 | 0.018 | — | — | |
| Purchase of Common Shares Under NCIB | 2,143 | — | 659 | 1,018 | 466 | 265 | — | — | — | — | — | |
| Preferred Share Dividends | 26 | 26 | 9 | 8 | 9 | 8 | 9 | 8 | 9 | — | — |
(1)Refer to the Operating and Financial Results section of this MD&A for a summary of total upstream production by product type.
(2)Represents Cenovus’s net interest in refining operations.
(3)Prior period results were revised for a change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending. See the Consolidated Financial Statements and Note 3 of the interim Consolidated Financial Statements for further details.
(4)Non-GAAP financial measure or contains a non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
(5)New metric as of June 30, 2022, used to determine returns to shareholders.
(6)Net earnings (loss) for all periods in the table above is the same as net earnings (loss) from continuing operations.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 7 |
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Operations under management’s control performed well in the third quarter.
•We delivered safe and reliable operations at our operated assets.
•We achieved first oil at our Spruce Lake North thermal plant. Production ramped up to approximately 10.0 thousand barrels per day by the end of the quarter.
•Upstream production averaged 777.9 thousand BOE per day in the third quarter, compared with 761.5 thousand BOE per day in the second quarter of 2022 and 804.8 thousand BOE per day in the third quarter of 2021. See the Operating and Financial Results section of this MD&A for a summary of upstream production by product type.
•Downstream crude oil throughput averaged 533.5 thousand barrels per day in the third quarter, an increase of 76.2 thousand barrels per day compared with the second quarter of 2022, and a decrease of 20.6 thousand barrels per day compared with the third quarter of 2021.
Revenue increased 38 percent to $17.5 billion compared with the third quarter of 2021, and decreased 9 percent from the second quarter of 2022, primarily due to changes in commodity pricing. Our realized sales price from our upstream operations was $83.43 per BOE in the third quarter of 2022, compared with $66.44 per BOE in the third quarter of 2021. We also realized higher refining margins in our downstream operations compared with the third quarter of 2021.
Cash from operating activities increased $2.0 billion and $1.1 billion compared with the third quarter of 2021 and second quarter of 2022, respectively. Operating margin increased $629 million compared with the third quarter of 2021 and decreased $1.3 billion compared with the second quarter of 2022. Adjusted Funds Flow was $3.0 billion in third quarter of 2022, an increase of $609 million compared with the third quarter of 2021, and relatively unchanged from the second quarter of 2022 despite the decrease in operating margin. In the third quarter of 2022, we recorded considerably less cash taxes and paid less cash on the contingent payment than the second quarter of 2022.
We continued to strengthen our balance sheet and focus on our top-tier asset portfolio.
•During the quarter, we continued to deleverage our balance sheet as we purchased US$2.2 billion in principal of notes due between 2025 and 2043. Our Net Debt decreased by $2.3 billion compared with June 30, 2022.
•On August 8, 2022, we announced an agreement to purchase the remaining 50 percent interest in the Toledo Refinery (the “Toledo Acquisition”) from BP giving Cenovus full ownership and further integrating our heavy oil production and refining capabilities. On September 20, 2022, there was an incident at the refinery and it remains shut down in a safe state.
•On August 31, 2022, we closed the acquisition of the remaining 50 percent interest in Sunrise (the “Sunrise Acquisition”) for cash of $394 million, net of closing adjustments, a variable payment with a maximum cumulative value of $600 million expiring in eight quarters subsequent to August 31, 2022, and our 35 percent position in the undeveloped Bay du Nord project offshore Newfoundland and Labrador.
•On September, 13, 2022, we closed the sales of 337 gas stations within our retail fuels network for net cash proceeds of $404 million.
We demonstrated our commitment to returning cash to shareholders.
•Cenovus purchased and cancelled 29 million common shares for $659 million through our NCIB in the third quarter (97 million common shares for $2.1 billion in the first nine months of 2022). Our existing NCIB expires on November 8, 2022.
•On November 1, 2022, the Board approved filing an application with the TSX to renew our NCIB to purchase up to 10 percent of the Company’s public float, or approximately 137 million of the Company’s common shares for twelve months once approved by the TSX.
•On November 1, 2022, the Board declared a fourth quarter base dividend of $0.105 per common share payable on December 30, 2022, to common shareholders of record as at December 15, 2022.
•On November 1, 2022, the Board declared a fourth quarter variable dividend of $0.114 per common share payable on December 2, 2022, to common shareholders of record as at November 18, 2022.
•On November 1, 2022, the Board declared fourth quarter dividends for our preferred shares of $9 million, payable on January 3, 2023, to preferred shareholders of record as at December 15, 2022.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 8 |
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| OPERATING AND FINANCIAL RESULTS | |
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Selected Operating Results — Upstream
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Percent Change | Percent Change | ||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||
| Upstream Production Volumes by Segment (1) (MBOE/d) | |||||||||
| Oil Sands | 587.1 | (2) | 599.1 | 580.9 | 2 | 568.9 | |||
| Conventional | 126.2 | (4) | 132.0 | 128.0 | (6) | 136.4 | |||
| Offshore | 64.6 | (12) | 73.7 | 70.3 | (6) | 74.8 | |||
| Total Production Volumes | 777.9 | (3) | 804.8 | 779.2 | — | 780.1 | |||
| Upstream Production Volumes by Product | |||||||||
| Bitumen (Mbbls/d) | 568.2 | (1) | 576.5 | 562.4 | 3 | 546.2 | |||
| Heavy Crude Oil (Mbbls/d) | 16.8 | (18) | 20.5 | 16.5 | (20) | 20.6 | |||
| Light Crude Oil (Mbbls/d) | 16.0 | (29) | 22.6 | 19.8 | (18) | 24.1 | |||
| NGLs (Mbbls/d) | 32.1 | (10) | 35.5 | 35.4 | (10) | 39.3 | |||
| Conventional Natural Gas (MMcf/d) | 868.7 | (3) | 897.9 | 870.9 | (3) | 899.5 | |||
| Total Production Volumes (MBOE/d) | 777.9 | (3) | 804.8 | 779.2 | — | 780.1 | |||
| Total Upstream Sales Volumes (2) (MBOE/d) | 686.8 | (6) | 728.1 | 698.4 | 1 | 694.5 | |||
| Netback (3)(4) ($/BOE) | 42.14 | 6 | 39.74 | 57.26 | 62 | 35.35 |
(1)Refer to the Oil Sands, Conventional or Offshore Operating Results section of this MD&A for a summary of production by product type.
(2)Total upstream sales volumes exclude natural gas volumes used for internal consumption by the Oil Sands segment of 484 MMcf per day and 506 MMcf per day for the three months and nine months ended September 30, 2022, respectively (504 MMcf per day and 511 MMcf per day for the three and nine months ended September 30, 2021, respectively).
(3)Upstream revenue as found in Note 1 of the interim Consolidated Financial Statements was $9.0 billion and $28.8 billion in the three and nine months ended September 30, 2022, respectively (three and nine months ended September 30, 2021 – $6.6 billion and $18.0 billion, respectively).
(4)Contains a non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
In the third quarter of 2022, production increased 16.4 thousand barrels per day compared with the second quarter of 2022, primarily due to:
•Turnaround activity at Christina Lake in the second quarter of 2022.
•The Sunrise Acquisition on August 31, 2022, adding approximately 8.0 thousand barrels per day in the quarter.
•First oil at the Spruce Lake North thermal plant. Production ramped up to approximately 10.0 thousand barrels per day by the end of the quarter.
The increase was partially offset by:
•Planned maintenance and an unplanned outage at Foster Creek in the third quarter of 2022.
•Planned maintenance in the Offshore segment in the third quarter of 2022.
•The transfer of a 12.5 percent working interest in the West White Rose field and satellite extensions to a partner on May 31, 2022.
In the third quarter of 2022, production decreased 26.9 thousand barrels per day compared with the same period in 2021. The decrease was primarily due to the disposition of the Tucker asset on January 31, 2022, the Wembley asset on February 28, 2022 and the restructuring of our working interest in the White Rose fields on May 31, 2022. Also contributing to the decrease were planned maintenance activities in the Conventional and Offshore segments. The decreases were offset by the Sunrise Acquisition and first oil at the Spruce Lake North thermal plant in the third quarter. Production at Foster Creek and Christina Lake was consistent in the third quarter of 2022 compared with 2021 due to new wells coming online in 2022 and the second half of 2021, offset by planned routine maintenance and operational outages at Foster Creek during the quarter.
Year-to-date, production was relatively consistent compared with 2021 due to the same factors as discussed above, combined with the impacts of a planned turnaround and operational outages at Foster Creek in the second quarter of 2021.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 9 |
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Selected Operating Results — Downstream
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Percent Change | Percent Change | ||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||
| Downstream Manufacturing Crude Oil<br><br>Throughput (Mbbls/d) | |||||||||
| Canadian Manufacturing | 98.5 | (9) | 108.3 | 92.5 | (13) | 106.0 | |||
| U.S. Manufacturing | 435.0 | (2) | 445.8 | 405.3 | (2) | 415.0 | |||
| Total Throughput | 533.5 | (4) | 554.1 | 497.8 | (4) | 521.0 | |||
| Retail (1) (millions of litres/d) | |||||||||
| Fuel Sales, Including Wholesale | 6.9 | (5) | 7.3 | 6.7 | (3) | 6.9 |
(1)On September 13, 2022, we closed the sales of 337 gas stations within our retail fuels network. We retained our commercial fuels business, which includes approximately 170 cardlock, bulk plant and travel centre locations.
In the Canadian Manufacturing segment, throughput increased 17.6 thousand barrels per day in the third quarter of 2022 compared with the second quarter, following completion of planned turnarounds at the Lloydminster Upgrader and Lloydminster Refinery in the second quarter.
Canadian Manufacturing throughput decreased slightly in the three months ended September 30, 2022, compared with 2021 due to temporary unplanned outages at the Lloydminster Upgrader and Lloydminster Refinery in the third quarter of 2022. Year-to-date, throughput decreased 13.5 thousand barrels per day compared with 2021, due to the planned turnarounds in the second quarter and unplanned outages in the third quarter of 2022.
In the U.S. Manufacturing segment, throughput increased 58.6 thousand barrels per day in the third quarter of 2022 compared with the second quarter. The increase was primarily due to planned spring turnarounds at the non-operated Wood River and Borger refineries completed in the second quarter, and a planned turnaround at the non-operated Toledo Refinery starting in the second quarter and completed in early August. The increase was partially offset by a planned fall turnaround at the Wood River Refinery that commenced in September and was completed in October, and the incident at the Toledo Refinery on September 20, 2022.
U.S. Manufacturing throughput was relatively consistent in the third quarter of 2022, compared with 2021. At the Wood River and Borger refineries, throughput increased to 224.2 thousand barrels per day compared with 2021 due to strong operational performance in the quarter. The increase was partially offset by the planned fall turnaround at the Wood River Refinery. Toledo Refinery throughput decreased 24.4 thousand barrels per day compared with 2021 due to the planned turnaround completed in early August, combined with the incident in September. At the Lima Refinery, crude oil throughput was 164.2 thousand barrels per day in the third quarter, an increase compared with 2021 as production slowed at the end of September 2021 as we prepared for a planned turnaround. Year-to-date, throughput was relatively consistent compared with 2021 as favourable market conditions offset the impacts of planned turnarounds at our non-operated facilities at the Wood River, Borger and Toledo refineries in 2022.
Selected Consolidated Financial Results
Operating Margin
Operating Margin is a specified financial measure and is used to provide a consistent measure of the cash generating performance of our assets for comparability of our underlying financial performance between periods.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 | ||||
| Gross Sales (1) | 21,316 | 14,884 | 62,989 | 38,145 | ||||
| Less: Royalties | 1,226 | 733 | 3,993 | 1,639 | ||||
| Revenues | 20,090 | 14,151 | 58,996 | 36,506 | ||||
| Expenses | ||||||||
| Purchased Product (1) | 12,279 | 7,782 | 31,550 | 19,039 | ||||
| Transportation and Blending (1) | 2,803 | 2,137 | 9,235 | 6,115 | ||||
| Operating Expenses | 1,695 | 1,337 | 5,125 | 3,945 | ||||
| Realized (Gain) Loss on Risk Management Activities | (26) | 185 | 1,605 | 634 | ||||
| Operating Margin | 3,339 | 2,710 | 11,481 | 6,773 |
(1) Prior period results were revised for a change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending. See the Consolidated Financial Statements and Note 3 of the interim Consolidated Financial Statements for further details.
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Operating Margin by Segment
Three Months Ended September 30
Operating Margin increased in the three months ended September 30, 2022, compared with the same period in 2021, primarily due to:
•Higher average realized crude oil, NGLs and natural gas sales prices resulting from higher benchmark pricing.
•Increased refining margins from our downstream business resulting from higher market crack spreads, partially offset by the increased cost of feedstock processed in the quarter from inventory at a higher price in the U.S. Manufacturing segment.
•Realized risk management losses in the third quarter of 2021 compared with gains in 2022. The losses in 2021 primarily related WTI crude oil sales price risk management activities. Those activities were suspended earlier this year.
These increases in Operating Margin were partially offset by:
•Increased royalties and fuel costs, both resulting from significantly higher commodity pricing.
•Planned and unplanned outages in our downstream operations, which impacted sales volumes and operating expenses.
•Lower sales volumes from our upstream business.
•Increased blending costs due to higher condensate prices.
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Nine Months Ended September 30
Operating Margin increased in the nine months ended September 30, 2022, compared with the same period in 2021, mainly due to:
•Higher average realized crude oil, NGLs and natural gas sales prices resulting from higher benchmark pricing.
•Increased refining margins from our downstream business resulting from higher market crack spreads.
These increases in Operating Margin were partially offset by:
•Increased royalties and fuel costs, both resulting from significantly higher commodity pricing.
•Planned turnarounds in our downstream operations in the second quarter of 2022, which impacted sales volumes and operating expenses.
•Higher realized risk management losses on the settlement of benchmark prices relative to our risk management contract prices in 2022. In the second quarter of 2022, all WTI risk management contracts related to our crude oil sales price risk management activities were closed.
•Increased blending costs due to higher condensate prices.
Cash From (Used in) Operating Activities and Adjusted Funds Flow
Adjusted Funds Flow is a non-GAAP financial measure commonly used in the oil and gas industry to assist in measuring a company’s ability to finance its capital programs and meet its financial obligations.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 | ||||
| Cash From (Used in) Operating Activities | 4,089 | 2,138 | 8,433 | 3,735 | ||||
| (Add) Deduct: | ||||||||
| Settlement of Decommissioning Liabilities | (55) | (38) | (101) | (67) | ||||
| Net Change in Non-Cash Working Capital | 1,193 | (166) | (98) | (1,498) | ||||
| Adjusted Funds Flow | 2,951 | 2,342 | 8,632 | 5,300 |
Cash From Operating Activities and Adjusted Funds Flow were higher in the three months ended September 30, 2022, compared with 2021 due to increased Operating Margin, as discussed above. The increase was partially offset by a higher quarterly contingent payment in the third quarter of 2022.
The change in non-cash working capital in the third quarter of 2022 was a result of realized accounts receivable and inventory balances from June 30, 2022, when commodity prices were higher and lower accounts payable.
Cash From Operating Activities and Adjusted Funds Flow were higher in the nine months ended September 30, 2022, compared with 2021 due to increased Operating Margin, as discussed above, combined with lower integration costs. The increase was partially offset by higher cash taxes and higher quarterly contingent payments in the first nine months of 2022.
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The change in non-cash working capital in the first nine months of 2022 was relatively small as higher commodity prices resulted in increased accounts receivable and inventory, offset by higher income tax payable on September 30, 2022, compared with December 31, 2021.
Net Earnings (Loss)
| ($ millions) | Three Months Ended | Nine Months<br><br>Ended |
|---|---|---|
| Net Earnings (Loss) for the Periods Ended September 30, 2021 | 551 | 995 |
| Increase (Decrease) due to: | ||
| Operating Margin | 629 | 4,708 |
| Corporate and Eliminations: | ||
| General and Administrative | 30 | (54) |
| Finance Costs | 153 | 205 |
| Integration Costs | 18 | 223 |
| Unrealized Foreign Exchange Gain (Loss) | (187) | (639) |
| Revaluation Gains | 549 | 549 |
| Re-measurement of Contingent Payments | 244 | 429 |
| Gain (Loss) on Divestiture of Assets | (85) | 147 |
| Other Income (Loss), net | (48) | 259 |
| Other (1) | 101 | 146 |
| Unrealized Risk Management Gain (Loss) (2) | (23) | 316 |
| Depreciation, Depletion and Amortization | 106 | 25 |
| Exploration Expense | (68) | (84) |
| Income Tax Recovery (Expense) | (361) | (1,559) |
| Net Earnings (Loss) for the Periods Ended September 30, 2022 | 1,609 | 5,666 |
(1)Includes Corporate and Eliminations revenues, purchased product, transportation and blending, operating expenses and (gain) loss on risk management, share of income (loss) from equity-accounted affiliates, interest income and realized foreign exchange (gains) losses.
(2)All WTI positions related to crude oil sales price risk management were closed by June 30, 2022.
Net earnings in the third quarter of 2022 improved compared with 2021 due to:
•Increased Operating Margin, as discussed above.
•Revaluation gains of $549 million related to the Sunrise Acquisition.
•A gain on re-measurement of contingent payment of $109 million in 2022 related to the Sunrise Acquisition, compared with a loss of $135 million in 2021 related to the acquisition of the 50 percent interest in the FCCL Partnership.
•Lower DD&A, mainly due to asset write-downs in the Oil Sands segment in the third quarter of 2021.
•Finance costs of $207 million compared with $360 million in 2021. In the third quarter of 2022, finance costs included a $4 million net discount on the redemption of long-term debt, compared with a $115 million net premium in the third quarter of 2021.
Net earnings in the first nine months of 2022 improved compared with 2021 due to:
•Increased Operating Margin, as discussed above.
•Revaluation gains of $549 million related to the Sunrise Acquisition in the third quarter of 2022.
•A loss on re-measurement of the contingent payments of $142 million compared with $571 million in 2021.
•Unrealized risk management gains of $74 million, compared with losses of $242 million in 2021.
•Higher other income primarily due to insurance proceeds related to the Superior Refinery.
•Integration costs of $79 million, compared with $302 million in 2021.
•Finance costs of $631 million compared with $836 million in 2021. In the first nine months of 2022, finance costs included a $29 million net discount on the redemption of long-term debt, compared with a $115 million net premium in 2021. A lower average long-term debt balance in 2022 also contributed to the decrease.
•Net gains on the divestiture of assets of $244 million in 2022, related to the Tucker and Wembley dispositions, and the divestiture of a 12.5 percent interest in the White Rose field and satellite extensions, partially offset by a loss on the retail assets divestiture.
The increase in net earnings for the three months and nine months ended September 30, 2022 was partially offset by higher income tax expense and higher unrealized foreign exchange losses as the Canadian dollar at September 30, 2022, weakened relative to the U.S. dollar.
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Net Debt
| As at ($ millions) | September 30, 2022 | December 31, 2021 |
|---|---|---|
| Short-Term Borrowings | — | 79 |
| Current Portion of Long-Term Debt | — | — |
| Long-Term Debt | 8,774 | 12,385 |
| Total Debt | 8,774 | 12,464 |
| Less: Cash and Cash Equivalents | (3,494) | (2,873) |
| Net Debt | 5,280 | 9,591 |
Long-term debt decreased by $3.6 billion and Net Debt decreased by $4.3 billion from December 31, 2021. During the third quarter, long-term debt decreased by $2.5 billion and Net Debt decreased by $2.3 billion. In the three months ended September 30, 2022, we purchased US$2.2 billion in principal of notes due between 2025 and 2043. In the first six months of 2022, we purchased the remaining US$384 million in principal of outstanding notes due in 2023 and 2024 and the full $750 million in principal of the outstanding 3.55 percent notes due in 2025. The decrease in long-term debt was partially offset as the Canadian dollar weakened relative to the U.S. dollar on September 30, 2022, impacting our U.S. dollar debt.
Capital Investment (1)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 | ||||
| Upstream | ||||||||
| Oil Sands | 360 | 198 | 1,111 | 617 | ||||
| Conventional | 67 | 41 | 188 | 135 | ||||
| Offshore | 81 | 69 | 225 | 130 | ||||
| 508 | 308 | 1,524 | 882 | |||||
| Downstream | ||||||||
| Canadian Manufacturing | 17 | 9 | 67 | 23 | ||||
| U.S. Manufacturing | 300 | 301 | 774 | 743 | ||||
| Retail | 7 | 16 | 10 | 22 | ||||
| 324 | 326 | 851 | 788 | |||||
| Corporate and Eliminations | 34 | 13 | 59 | 58 | ||||
| Capital Investment | 866 | 647 | 2,434 | 1,728 |
(1)Includes expenditures on PP&E, exploration and evaluation (“E&E”) assets, and capitalized interest.
Oil Sands capital investment in the first nine months of 2022 was primarily focused on sustaining activities at Christina Lake, Foster Creek, the Lloydminster thermal assets and Sunrise, and the drilling of stratigraphic test wells as part of our integrated winter program.
Conventional capital investment in the first nine months of 2022 focused on sustaining drilling, completion and tie-in programs.
Offshore capital investment in the first nine months of 2022 was primarily for the Terra Nova asset life extension (“ALE”) project and capital for the West White Rose project in the Atlantic region. On May 31, 2022, Cenovus and our partners announced the restart of the West White Rose project offshore Newfoundland and Labrador.
U.S. Manufacturing capital investment in the first nine months of 2022 focused primarily on the Superior Refinery rebuild, refining reliability initiatives at the Wood River, Borger and Toledo refineries, and yield optimization projects at the Wood River Refinery.
Capital investment in the third quarter of 2022 was impacted by rising costs due to inflation.
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Drilling Activity
| Net Stratigraphic Test Wells<br><br>and Observation Wells | Net Production Wells (1) | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Nine Months Ended September 30, | 2022 | 2021 | 2022 | 2021 | |||||
| Foster Creek | 52 | 17 | 22 | 6 | |||||
| Christina Lake (2) | — | 25 | 21 | 9 | |||||
| Sunrise | 15 | — | 2 | — | |||||
| Lloydminster Thermal | 1 | — | 29 | 21 | |||||
| Tucker | 6 | — | — | — | |||||
| Lloydminster Conventional Heavy Oil | — | — | — | 2 | |||||
| Other (3) | 16 | 17 | — | — | |||||
| 90 | 59 | 74 | 38 |
(1)SAGD well pairs in the Oil Sands segment are counted as a single producing well.
(2)Includes Narrows Lake.
(3)Includes new resource plays.
Stratigraphic test wells were drilled to help identify well pad locations for sustaining wells and to further progress the evaluation of other assets. Observation wells were drilled to gather information and monitor reservoir conditions.
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | |||||
|---|---|---|---|---|---|---|
| (net wells) | Drilled | Completed | Tied-in | Drilled | Completed | Tied-in |
| Conventional | 19 | 28 | 29 | 14 | 17 | 18 |
In the Offshore segment, we drilled and completed seven (2.8 net) planned development wells at the MBH and MDA fields in Indonesia in the first nine months of 2022 (2021 — no wells drilled, completed or tied-in). We achieved first gas production at the MBH field in October and expect first gas production from the MDA field in November 2022.
Future Capital Investment
Our 2022 guidance, as updated on July 27, 2022, is available on our website at cenovus.com.
The following table shows guidance for 2022:
| Capital Investment<br><br>($ millions) | Production<br><br>(MBOE/d) | Throughput<br><br>(Mbbls/d) | |
|---|---|---|---|
| Upstream | |||
| Oil Sands | 1,550 - 1,750 | 574 - 620 | |
| Conventional | 250 - 300 | 124 - 135 | |
| Offshore | 300 - 350 | 64 - 76 | |
| Downstream (1) | 1,150 - 1,250 | 530 - 580 | |
| Corporate and Eliminations | 50 - 70 |
(1)Capital Investment includes between $500 million and $550 million for the Superior Refinery rebuild project.
Given the incident at the Toledo Refinery, U.S. Manufacturing throughput and operating costs are now expected to fall modestly outside the guidance ranges.
For the remainder of 2022, we plan to focus our Capital Investment on:
•Sustaining production in the Oil Sands segment.
•Sustaining drilling programs in the Conventional segment.
•The Superior Refinery rebuild project.
•The Terra Nova ALE project and the West White Rose project in the Offshore segment.
•Refining operations and reliability in our downstream segments.
Further information on the changes in our financial and operating results can be found in the Reportable Segments section of this MD&A. Information on our risk management activities can be found in the Risk Management and Risk Factors section of this MD&A and in the notes to the interim Consolidated Financial Statements.
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| COMMODITY PRICES UNDERLYING OUR FINANCIAL RESULTS | |
| --- |
Key performance drivers for our financial results include commodity prices, quality and location price differentials, refining crack spreads as well as the U.S./Canadian dollar and Chinese Yuan (“RMB”)/Canadian dollar exchange rates. The following table shows selected market benchmark prices and average exchange rates to assist in understanding our financial results.
Selected Benchmark Prices and Exchange Rates (1)
| Nine Months Ended September 30, | ||||||
|---|---|---|---|---|---|---|
| (Average US$/bbl, unless otherwise indicated) | 2022 | Percent Change | 2021 | Q3 2022 | Q2 2022 | Q3 2021 |
| Dated Brent | 105.35 | 56 | 67.73 | 100.85 | 113.78 | 73.47 |
| WTI | 98.09 | 51 | 64.82 | 91.55 | 108.41 | 70.56 |
| Differential Dated Brent-WTI | 7.26 | 149 | 2.91 | 9.30 | 5.37 | 2.91 |
| WCS at Hardisty | 82.36 | 57 | 52.31 | 71.69 | 95.61 | 56.98 |
| Differential WTI-WCS | 15.73 | 26 | 12.51 | 19.86 | 12.80 | 13.58 |
| WCS (C$/bbl) | 105.54 | 61 | 65.41 | 93.53 | 122.07 | 71.80 |
| WCS at Nederland | 91.81 | 49 | 61.58 | 82.91 | 103.34 | 65.79 |
| Differential WTI-WCS at Nederland | 6.28 | 94 | 3.24 | 8.64 | 5.07 | 4.77 |
| Condensate (C5 @ Edmonton) | 97.24 | 51 | 64.56 | 87.26 | 108.34 | 69.24 |
| Differential WTI-Condensate (Premium)/Discount | 0.85 | 227 | 0.26 | 4.29 | 0.07 | 1.32 |
| Differential WCS-Condensate (Premium)/Discount | (14.88) | (21) | (12.25) | (15.57) | (12.73) | (12.26) |
| Average (C$/bbl) | 124.62 | 54 | 80.73 | 113.89 | 138.30 | 87.18 |
| Synthetic @ Edmonton | 102.61 | 62 | 63.24 | 100.34 | 114.46 | 68.98 |
| Differential WTI-Synthetic (Premium)/Discount | (4.52) | (386) | 1.58 | (8.79) | (6.05) | 1.58 |
| Refined Product Prices | ||||||
| Chicago Regular Unleaded Gasoline (“RUL”) | 126.58 | 53 | 82.81 | 121.52 | 149.05 | 91.90 |
| Chicago Ultra-low Sulphur Diesel (“ULSD”) | 144.82 | 75 | 82.99 | 148.24 | 166.62 | 89.96 |
| Refining Benchmarks | ||||||
| Chicago 3-2-1 Crack Spread (2) | 34.57 | 92 | 18.04 | 38.87 | 46.50 | 20.67 |
| Group 3 3-2-1 Crack Spread (2) | 34.29 | 85 | 18.49 | 38.57 | 44.35 | 20.35 |
| Renewable Identification Numbers (“RINs”) | 7.45 | 7 | 6.97 | 8.11 | 7.80 | 7.32 |
| Natural Gas Prices | ||||||
| AECO (C$/Mcf) | 5.56 | 79 | 3.11 | 5.81 | 6.28 | 3.54 |
| NYMEX (US$/Mcf) | 6.77 | 113 | 3.18 | 8.20 | 7.17 | 4.01 |
| Foreign Exchange Rate | ||||||
| US$ per C$1 - Average | 0.780 | (2) | 0.799 | 0.766 | 0.783 | 0.794 |
| US$ per C$1 - End of Period | 0.730 | (7) | 0.785 | 0.730 | 0.776 | 0.785 |
| RMB per C$1 - Average | 5.147 | — | 5.172 | 5.246 | 5.180 | 5.136 |
(1)These benchmark prices are not our realized sales prices and represent approximate values. For our average realized sales prices and realized risk management results, refer to the Netback tables in the Reportable Segments section of this MD&A.
(2)The average 3-2-1 crack spread is an indicator of the refining margin and is valued on a last in, first out accounting basis.
Crude Oil and Condensate Benchmarks
In the third quarter of 2022, global crude oil prices remained strong despite the easing of crude oil supply and demand balances. However, weak economic sentiment and slow demand growth in China, Europe and the U.S. put downward pressure on crude oil prices. Global crude oil supply was strong due to high Saudi Arabia and United Arab Emirates production and unprecedented releases of U.S. Government Strategic Petroleum Reserves (“SPRs”). Russian supply and exports have remained consistent due to large purchases from India and China, eroding some of the geopolitical risk premium on pricing.
WTI is an important benchmark for Canadian crude oil since it reflects inland North American crude oil prices and the Canadian dollar equivalent is the basis for determining royalty rates for a number of our crude oil properties.
The price received for our Atlantic crude oil and Asia Pacific NGLs is primarily driven by the price of Brent. The Brent-WTI differential widened compared with 2021 and the second quarter of 2022 due to higher shipping costs and supply disruptions as a result of Russia’s invasion of Ukraine.
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WCS is a blended heavy oil which consists of both conventional heavy oil and unconventional diluted bitumen. The WCS at Hardisty differential to WTI is a function of the quality differential of light and heavy crude and the cost of transport. In the three months ended September 30, 2022, the average WTI-WCS differential at Hardisty widened compared to 2021 and the second quarter of 2022, in part due to a wider quality differential at the U.S. Gulf Coast outlined below, as well as higher production activity in Western Canada following planned turnarounds.
WCS at Nederland is a heavy oil benchmark at the U.S. Gulf Coast (“USGC”) which is representative of pricing for our sales in the USGC. The WTI-WCS at Nederland differential widened compared with 2021 and the second quarter of 2022, mainly attributed to reduced demand due to planned and unplanned refinery maintenance, and increased supply due to some incremental medium and heavy oil barrels into the market from OPEC+ and from the release of volume from SPRs in the U.S.
We upgrade heavy crude oil and bitumen into a sweet synthetic crude oil, the Husky Synthetic Blend (“HSB”), at the Lloydminster Upgrader. The price realized for HSB is primarily driven by the price of WTI and by the supply and demand of sweet synthetic crude oil from Western Canada, which influences the WTI-Synthetic differential.
Synthetic crude at Edmonton strengthened significantly in the third quarter of 2022 compared with the third quarter of 2021 as a result of widespread upgrader maintenance and strong refinery demand for light crude. The WTI-synthetic premium widened compared with the second quarter of 2022 as synthetic crudes continue to be supported by strong demand for refined products.
Blending condensate with bitumen enables our production to be transported through pipelines. Our blending ratios, calculated as diluent volumes as a percentage of total blended volumes, range from approximately 22 percent to 35 percent. The WCS-Condensate differential is an important benchmark as a wider differential generally results in a decrease in the recovery of condensate costs when selling a barrel of blended crude oil. When the supply of condensate in Alberta does not meet the demand, Edmonton condensate prices may be driven by USGC condensate prices plus the cost to transport the condensate to Edmonton. Our blending costs are also impacted by the timing of purchases and deliveries of condensate into inventory to be available for use in blending as well as timing of sales of blended product.
Average Edmonton condensate benchmark prices widened relative to WTI in the third quarter of 2022. Condensate prices globally have been pressured due to higher supply from strong refinery utilization and weak global petrochemical demand.
Refining Benchmarks
RUL and ULSD benchmark prices are representative of inland refined product prices and are used to derive the Chicago 3-2-1 market crack spread. The 3-2-1 market crack spread is an indicator of the refining margin generated by converting three barrels of crude oil into two barrels of regular unleaded gasoline and one barrel of ultra-low sulphur diesel using current month WTI- based crude oil feedstock prices and valued on a last in, first out basis.
The Chicago 3-2-1 market crack spread reflects the market for our Toledo, Lima and Wood River refineries. The Group 3, 3-2-1 market crack spread, reflects the market for our Borger Refinery.
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Average Chicago refined product prices increased significantly in the third quarter of 2022 compared with the third quarter of 2021. The strength in crack spreads and refined product prices has been driven by refinery rationalization since the beginning of the pandemic, combined with low global inventories of refined products. RINs remain high as a result of a tight biofuel market, rising feedstock prices and uncertainty around policies that drive RINs demand. Average Chicago refined product prices decreased in the third quarter of 2022 compared with the historically high second quarter of 2022 but remain well above seasonal norms as product markets are still extremely tight, distillate markets in particular. The drop in the third quarter can be attributed to some slight weakening of demand amid high inflation.
North American refining crack spreads are expressed on a WTI basis, while refined products are generally set by global prices. The strength of refining market crack spreads in the U.S. Midwest and Midcontinent will generally reflect the differential between Brent and WTI benchmark prices.
Our realized crack spreads are affected by many other factors such as the variety of crude oil feedstock; refinery configuration and product output; the time lag between the purchase and delivery of crude oil feedstock; and the cost of feedstock, which is valued on a first in, first out (“FIFO”) accounting basis. The market crack spreads do not precisely mirror the configuration and product output of our refineries, however they are used as a general market indicator.
(1) There are no forward prices for RINs.
Natural Gas Benchmarks
Average NYMEX natural gas prices increased in the third quarter of 2022, compared to the second quarter of 2022, and significantly improved compared to the third quarter of 2021 due to a rebound in U.S. domestic demand and high liquified natural gas exports, coupled with a muted supply response and strong global pricing amid Russia supply concerns. Average AECO prices decreased compared with the second quarter of 2022, and the differential between AECO and NYMEX widened compared with the second quarter of 2022 and the third quarter of 2021, due to planned and unplanned pipeline maintenance in Western Canada, limiting egress from Alberta. The price received for our Asia Pacific natural gas production is largely based on long-term contracts.
Foreign Exchange Benchmarks
A substantial amount of our revenues are subject to foreign exchange exposure as the sales prices of our crude oil, NGLs, natural gas and refined products are determined by reference to U.S. benchmark prices. An increase in the value of the Canadian dollar compared with the U.S. dollar has a negative impact on our reported revenue. In addition to our revenues being denominated in U.S. dollars, a significant portion of our long-term debt is also U.S. dollar denominated. As the Canadian dollar weakens, our U.S. dollar debt gives rise to unrealized foreign exchange losses when translated to Canadian dollars. In addition, changes in foreign exchange rates impact the translation of U.S. and Asia Pacific operations.
In the first nine months of 2022, the Canadian dollar on average weakened relative to the U.S. dollar compared with 2021, positively impacting our revenues year-over-year. The Canadian dollar weakened relative to the U.S. dollar as at September 30, 2022, compared with December 31, 2021, resulting in unrealized foreign exchange losses of $444 million on the translation of our U.S. dollar debt.
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A portion of our long-term sales contracts in Asia Pacific are priced in RMB. An increase in the value of the Canadian dollar relative to the RMB will decrease the revenues received in Canadian dollars from the sale of natural gas commodities in the region. In the first nine months of 2022, the Canadian dollar on average was relatively flat compared with RMB, resulting in minimal impact on our revenues year-over-year.
Interest Rate Benchmarks
Our short-term borrowing costs and reported decommissioning liabilities are impacted by fluctuations in interest rates. An increase in interest rates could increase our net interest expense and affect how certain liabilities are measured, both of which could negatively impact our cash flow and financial results.
As at September 30, 2022, the Bank of Canada’s Policy Interest Rate was 3.25 percent, increasing from 0.25 percent on December 31, 2021 due to concerns over inflation. On October 26, 2022, the rate increased 0.50 percent to 3.75 percent.
| COMMODITY PRICE OUTLOOK |
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Crude oil prices waned in the third quarter of 2022 but remain high as supply and demand balances are tight and crude oil spare capacity is limited. Crude oil price trajectory remains uncertain and volatile amid an increasingly volatile market with unpredictable key drivers. Russian supply risks remain the markets’ most significant geopolitical risk and the upcoming EU bans on Russian crude oil and products hold potential for disruption of exports. OPEC+ policy will continue to be a key driver of crude prices and the recent announcement of a cut to the group’s production quotas is supportive of pricing.
We expect the general outlook for crude oil and refined product prices will be volatile and impacted by the duration and severity of the ongoing Russian invasion of Ukraine, the extent to which Russian exports are reduced by sanctions, the timing and ability of producers and governments to replace reduced supply, the release of SPRs and OPEC+ policy. Potential incremental COVID-19 outbreaks and variants, weakening economic activity, inflation and rising interest rates, and the potential for a recession remain a risk to the pace of demand growth.
In addition to the above, our commodity pricing outlook for the next 12 months is influenced by the following:
•We expect that the WTI-WCS differential will remain largely tied to global supply factors and heavy crude processing capacity as long as supply stays within Canadian crude export capacity.
•OPEC+ production is not expected to grow with the announcement of reduced quotas, but policy is subject to change based on market developments.
•Global economic activity.
•We expect market crack spreads will remain volatile as Russia is a significant exporter of refined products. Sanctions are expected to reduce supply and result in a redirection of global trade flows. Economic effects of the conflict and central bank policies could impact demand. Refining market crack spreads are likely to continue to fluctuate, adjusting for seasonal trends and refinery utilization in North America.
•We expect both Henry Hub and AECO prices to remain strong. Current fundamentals suggest a tight market will persist, but this could be offset by increased associated gas production as well as fuel switching amid high prices. Prices will continue to be impacted by weather.
•We expect the Canadian dollar to continue to be impacted by crude oil prices, the pace at which the U.S. Federal Reserve Board and the Bank of Canada raise or lower benchmark lending rates relative to each other and emerging macro-economic factors.
Most of our upstream crude oil production and our downstream refined products are exposed to movements in the WTI crude oil price. Natural gas and NGLs production associated with our Conventional assets provide improved upstream economic integration for the fuel, solvent and blending requirements at our Oil Sands operations.
Our refining capacity is focused in the U.S. Midwest along with smaller exposures in the USGC and Alberta, exposing Cenovus to the market crack spread in all of these markets. We will continue to monitor market fundamentals and optimize run rates at our refineries accordingly.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 19 |
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Our WTI exposure to crude differentials includes light-heavy and light-medium price differentials. The light-medium price differential exposure is focused on light-medium crudes in the U.S. Midwest market region where we have refining capacity, and to a lesser degree in the USGC and Alberta. Our exposure to light-heavy crude oil price differentials is composed of a global light-heavy component, a regional component in markets we transport barrels to, as well as the Alberta differentials, which could be subject to transportation constraints. While we expect to see volatility in crude oil prices, we have the ability to partially mitigate the impact of crude oil and refined product differentials through the following:
•Transportation commitments and arrangements – using our existing firm service commitments for takeaway capacity and supporting transportation projects that move crude oil from our production areas to consuming markets, including tidewater markets.
•Integration – heavy oil refining capacity allows us to capture value from both the WTI-WCS differential for Canadian crude oil as well as from spreads on refined products.
•Dynamic storage – our ability to use the significant storage capacity in our oil sands reservoirs provides us flexibility on timing of production and sales of our inventory. We will continue to manage our production rates in response to pipeline capacity constraints, voluntary and mandated production curtailments and crude oil price differentials.
•Traditional crude oil storage tanks in various geographic locations.
All WTI contracts related to our crude oil sales price risk management activities closed by June 30, 2022. We continue to use financial instruments to mitigate our exposure to the prices of various commodities, including some WTI contracts for exposure management unrelated to crude oil sales price risk management; and products, including associated price differentials and refining margins.
| REPORTABLE SEGMENTS |
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UPSTREAM
OIL SANDS
In the third quarter of 2022, we:
•Delivered safe and reliable operations.
•Produced 585.0 thousand barrels of crude oil per day.
•Generated Operating Margin of $2.2 billion, an increase of $297 million compared with the third quarter of 2021 primarily due to higher average realized sales prices.
•Achieved first oil at our Spruce Lake North thermal plant. Production ramped up to approximately 10.0 thousand barrels per day by the end of the quarter.
•Invested capital of $360 million primarily on sustaining activities at Christina Lake, Foster Creek, the Lloydminster thermal assets and Sunrise.
•Achieved a Netback of $41.91 per BOE.
On August 31, 2022, we closed the purchase of the remaining 50 percent interest in Sunrise from BP Canada Energy Group ULC (“BP Canada”), giving Cenovus full ownership and further enhancing our core strength in oil sands. Total consideration included cash of $394 million net of closing adjustments, a variable payment with a maximum cumulative value of $600 million expiring after two years, and Cenovus’s 35 percent interest in the undeveloped Bay du Nord project offshore Newfoundland and Labrador.
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Financial Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Gross Sales (1) | 8,778 | 6,117 | 28,044 | 16,110 |
| Less: Royalties | 1,136 | 669 | 3,709 | 1,462 |
| Revenues | 7,642 | 5,448 | 24,335 | 14,648 |
| Expenses | ||||
| Purchased Product (1) | 1,933 | 629 | 4,216 | 1,748 |
| Transportation and Blending (1) | 2,758 | 2,114 | 9,114 | 6,048 |
| Operating | 689 | 616 | 2,197 | 1,793 |
| Realized (Gain) Loss on Risk Management | 42 | 166 | 1,468 | 584 |
| Operating Margin | 2,220 | 1,923 | 7,340 | 4,475 |
| Unrealized (Gain) Loss on Risk Management | (2) | (39) | (59) | 194 |
| Depreciation, Depletion and Amortization | 652 | 743 | 1,977 | 1,982 |
| Exploration Expense | 7 | 2 | 7 | 15 |
| Share of (Income) Loss from Equity-Accounted Affiliates | — | — | 8 | (5) |
| Segment Income (Loss) | 1,563 | 1,217 | 5,407 | 2,289 |
(1) Prior period results were revised for a change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending. See the Consolidated Financial Statements and Note 3 of the interim Consolidated Financial Statements for further details.
Operating Margin Variance
Three Months Ended September 30, 2022
(1)Reported revenues include the value of condensate sold as heavy oil blend. Condensate costs are recorded in transportation and blending expense. The crude oil price excludes the impact of condensate purchases.
(2)Other includes third-party sourced volumes, construction and other activities not attributable to the production of crude oil, NGLs or natural gas.
Nine Months Ended September 30, 2022
(1)Reported revenues include the value of condensate sold as heavy oil blend. Condensate costs are recorded in transportation and blending expense. The crude oil price excludes the impact of condensate purchases.
(2)Other includes third-party sourced volumes, construction and other activities not attributable to the production of crude oil, NGLs or natural gas.
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Operating Results
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||
|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||
| Total Sales Volumes (MBOE/d) | 578.0 | 613.1 | 583.8 | 571.4 | |
| Total Realized Price (1) ($/BOE) | 84.29 | 67.08 | 99.78 | 60.61 | |
| Crude Oil Production by Asset (Mbbls/d) | |||||
| Foster Creek | 182.4 | 187.1 | 189.3 | 169.1 | |
| Christina Lake | 252.8 | 242.5 | 245.2 | 232.0 | |
| Sunrise (2) | 30.9 | 28.3 | 26.8 | 26.1 | |
| Lloydminster Thermal | 102.1 | 98.0 | 99.0 | 97.3 | |
| Lloydminster Conventional Heavy Oil | 16.8 | 20.5 | 16.5 | 20.6 | |
| Tucker (3) | — | 20.6 | 2.1 | 21.7 | |
| Total Daily Crude Oil Production (4) (Mbbls/d) | 585.0 | 597.0 | 578.9 | 566.8 | |
| Oil Sands Natural Gas (5) (MMcf/d) | 12.6 | 11.9 | 12.5 | 12.7 | |
| Total Daily Production (MBOE/d) | 587.1 | 599.1 | 580.9 | 568.9 | |
| Effective Royalty Rate (percent) | 27.8 | 19.7 | 25.4 | 17.6 | |
| Transportation and Blending Cost (1) ($/BOE) | 7.72 | 7.09 | 7.48 | 7.40 | |
| Operating Expense (1) ($/BOE) | 13.40 | 10.90 | 13.83 | 11.44 | |
| Per Unit DD&A (1) ($/BOE) | 11.63 | 11.45 | 11.83 | 11.37 |
(1)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(2)Represents Cenovus’s 50 percent interest in Sunrise operations up to August 31, 2022. On August 31, 2022, we closed the acquisition of the remaining 50 percent interest from BP Canada.
(3)The Tucker asset sold on January 31, 2022.
(4)Oil Sands production is primarily bitumen, except for Lloydminster conventional heavy oil, which is heavy crude oil.
(5)Conventional natural gas product type.
Revenues
Price
As noted earlier, WTI benchmark for the three and nine months ended September 30, 2022, WTI benchmark prices increased, while over the same periods we saw a widening of the WTI-WCS differential. WCS at Hardisty averaged $93.53 and $105.54 in the three and nine months ended September 30, 2022, respectively (2021 – $71.80 and $65.41, respectively). WCS benchmark prices include the value of condensate used to transport heavy oil and bitumen.
Our heavy oil and bitumen production must be blended with condensate to reduce its viscosity to transport it to market through pipelines. Our realized bitumen sales price does not include the sale of condensate, however, it is influenced by the price of condensate. As the cost of condensate increases relative to the price of blended crude oil, our realized heavy oil and bitumen sales price decreases. Up to three months may lapse from when we purchase condensate to when we sell our blended production.
Our realized sales price, which excludes the value of condensate, was $84.29 per BOE and $99.78 per BOE in the three and nine months ended September 30, 2022, respectively (2021 – $67.08 per BOE and $60.61 per BOE, respectively). To improve our realized sales price, we sell some production to U.S. destinations. In the first nine months of 2022, we sold approximately 20 percent (2021 – 20 percent) to U.S. destinations. In the third quarter of 2022, the uplift from exporting barrels to the U.S. more than offset the impact of blending higher priced condensate purchased early in the quarter.
In the three and nine months ended September 30, 2022, gross sales included $1.9 billion and $4.0 billion, respectively (2021 – $562 million and $1.6 billion, respectively), from third-party sourced volumes which are not included in our realized price or our Netbacks. Refer to the Specified Financial Measures Advisory of this MD&A for more detail.
In the three and nine months ended September 30, 2022, gross sales included $79 million and $248 million, respectively (2021 – $39 million and $191 million, respectively) relating to construction, transportation and blending activities. These amounts are not included in our realized price or our Netbacks. Refer to the Specified Financial Measures Advisory of this MD&A for more detail.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 22 |
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Cenovus makes storage and transportation decisions about our marketing and transportation infrastructure, including storage and pipeline assets, to optimize product mix, delivery points, and transportation commitments and customer diversification. In order to price protect our inventories associated with storage or transport decisions, Cenovus employs various price alignment and volatility management strategies, including risk management contracts, to reduce volatility in future cash flows and improve cash flow stability. As announced on April 4, 2022, we suspended our crude oil sales price risk management activities related to WTI. Given the strength of our balance sheet and liquidity position, we determined these programs are no longer required to support financial resilience. All WTI contracts impacted by this decision were closed by June 30, 2022.
In the three months ended September 30, 2022, we incurred realized risk management losses of $42 million. In the first nine months of 2022, we incurred realized risk management losses of $1.5 billion, of which $431 million relates to the early liquidation of WTI positions in the second quarter. Also contributing to the losses was the settlement of benchmark prices rising above our risk management contract prices. In the three and nine months ended September 30, 2022, we recorded unrealized gains of $2 million and $59 million, respectively, on our crude oil and condensate financial instruments.
Production Volumes
Oil Sands crude oil production was 585.0 thousand barrels per day and 578.9 thousand barrels per day in the three and nine months ended September 30, 2022, respectively (2021 – 597.0 thousand barrels per day and 566.8 thousand barrels per day, respectively).
We sold the Tucker asset on January 31, 2022, resulting in decreased production of 19.6 thousand barrels per day in the first nine months of 2022 compared with 2021.
Production at Foster Creek decreased marginally in the three months ended September 30, 2022, compared with 2021, due to planned maintenance and an unplanned outage during the quarter, and natural declines. In the first nine months of 2022, production increased 20.2 thousand barrels per day compared with 2021, as we completed a planned turnaround at Foster Creek in the second quarter of 2021.
Production at Christina Lake increased 10.3 thousand barrels per day and 13.2 thousand barrels per day in the three and nine months ended September 30, 2022, respectively, compared with 2021. We completed a planned turnaround during the second quarter of 2022, however production impacts were offset by incremental production added from redevelopment wells drilled in 2022 and the last half of 2021.
Sunrise production increased slightly in the third quarter of 2022, compared with 2021, as we closed the Sunrise Acquisition on August 31, 2022. Year-to-date, production was relatively flat compared with 2021.
The Lloydminster thermal assets continued their strong performance. Production increased slightly as the Spruce Lake North thermal plant achieved first oil in August, and production ramped up to approximately 10.0 thousand barrels per day by the end of the quarter. Lloydminster conventional heavy oil production decreased marginally in the three and nine months ended September 30, 2022, compared with 2021, as wells were shut-in to meet new emissions regulations in Alberta.
Royalties
Royalty calculations for our Oil Sands segment are based on government prescribed royalty regimes in Alberta and Saskatchewan.
Our Alberta oil sands royalty projects (Foster Creek, Christina Lake and Sunrise) are based on government prescribed pre- and post-payout royalty rates, which are determined on a sliding scale using the Canadian dollar equivalent WTI benchmark price.
Royalties for a pre-payout project are based on a monthly calculation that applies a royalty rate (ranging from one percent to nine percent, based on the Canadian dollar equivalent WTI benchmark price) to the gross revenues from the project.
Royalties for a post-payout project are based on an annualized calculation which uses the greater of: (1) the gross revenues multiplied by the applicable royalty rate (one percent to nine percent, based on the Canadian dollar equivalent WTI benchmark price); or (2) the net revenues of the project multiplied by the applicable royalty rate (25 percent to 40 percent, based on the Canadian dollar equivalent WTI benchmark price). Gross revenues are a function of sales revenues less diluent costs and transportation costs. Net revenues are calculated as sales revenues less diluent costs, transportation costs, and allowed operating and capital costs.
Foster Creek and Christina Lake are post-payout projects and Sunrise is a pre-payout project.
For our Saskatchewan assets, Lloydminster thermal and Lloydminster conventional heavy oil, royalty calculations are based on an annual rate that is applied to each project, which includes each project's Crown and freehold split. For Crown royalties, the pre-payout calculation is based on a one percent rate and the post-payout calculation is based on a 20 percent rate. The freehold calculation is limited to post-payout projects and is based on an eight percent rate.
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Effective royalty rates increased primarily due to higher realized pricing and higher Alberta oil sands sliding scale royalty rates. In the three and nine months ended September 30, 2022, royalties were $1.1 billion and $3.7 billion, respectively (2021 – $669 million and $1.5 billion, respectively). The increases were mainly due to higher net revenue for royalty purposes as a result of higher realized pricing.
Expenses
Transportation and Blending
In the third quarter of 2022, blending costs increased $590 million to $2.3 billion compared with 2021. In the first nine months of 2022, blending costs rose $3.0 billion to $7.9 billion compared with 2021. The increases were largely due to higher condensate prices.
Transportation costs increased $54 million to $434 million in the third quarter of 2022 compared with 2021. In the first nine months of 2022, transportation costs rose $71 million to $1.2 billion compared with 2021. The increases were primarily due to increased tariff rates, partially offset by lower sales volumes.
Per-unit Transportation Expenses
Transportation costs were $7.72 per BOE and $7.48 per BOE in the three and nine months ended September 30, 2022, respectively (2021 – $7.09 per BOE and $7.40 per BOE, respectively).
At Foster Creek, per-unit transportation costs increased 18 percent and decreased two percent to $11.96 per barrel and $10.71 per barrel in the three and nine months ended September 30, 2022, respectively. The increase in the third quarter of 2022 compared with 2021 is primarily due to lower sales volumes, partially offset by reduced reliance on rail. Year-to-date, the decrease is mainly due to higher sales volumes combined with reduced reliance on rail, partially offset by increased tariff rates. In the three and nine months ended September 30, 2022, we shipped 40 percent (2021 – 40 percent and 35 percent, respectively), of our volumes from Foster Creek to U.S. destinations. Of those, we shipped less than five percent of our volumes by rail in the three and nine months ended September 30, 2022 (2021 – 15 percent).
At Christina Lake, transportation costs were $6.02 per barrel and $6.37 per barrel in the three and nine months ended September 30, 2022, respectively (2021 – $5.74 and $6.15, respectively). The slight increase is due to increased tariff rates.
At Sunrise, transportation costs in the three and nine months ended September 30, 2022, were $13.17 per barrel and $12.96 per barrel, respectively (2021 – $14.01 per barrel and $12.90 per barrel, respectively). In the three and nine months ended September 30, 2022 we shipped 40 percent and 50 percent, respectively (2021 – 60 percent and 50 percent, respectively), of our volumes from Sunrise to U.S. destinations.
At our Lloydminster thermal, Tucker and Lloydminster conventional heavy oil assets, transportation costs in the three and nine months ended September 30, 2022, were $3.57 per barrel and $3.45 per barrel, respectively (2021 – $3.80 per barrel and $4.27 per barrel, respectively). The Tucker asset was sold on January 31, 2022. Per-unit transportation costs decreased in the first nine months of 2022 compared with 2021, as we stopped shipping these barrels to U.S. destinations after the first quarter of 2021 as we optimized our pipeline capacity after the Arrangement.
Operating
Primary drivers of our operating expenses in the three and nine months ended September 30, 2022 were fuel, chemical, electricity, workforce, workovers, and repairs and maintenance. Total and per-unit operating expenses increased largely due to higher fuel costs as a result of higher natural gas prices. AECO benchmark natural gas prices increased 64 percent and 79 percent in the three and nine months ended September 30, 2022, respectively, compared with 2021. In addition, total and per-unit operating expenses increased due to higher electricity costs and inflationary pressures on chemical costs. Chemical costs and electricity costs are also influenced by rising crude oil and natural gas benchmark prices. Overall cost pressures are being managed by securing long-term contracts, working with vendors and purchasing long-lead items to mitigate future cost escalations.
Foster Creek per-unit non-fuel costs increased in the three months ended September 30, 2022, primarily due to higher electricity and chemical costs, and costs related to operational outages and planned maintenance during the quarter, combined with lower sales volumes. Year-to-date, per-unit non-fuel costs increased due to the same factors impacting the third quarter of 2022, partially offset by higher sales volumes.
Christina Lake per unit non-fuel costs increased in the three months ended September 30, 2022, mainly due to higher repairs and maintenance costs, partially offset by higher sales volumes. Year-to-date, per-unit non-fuel costs were relatively flat as higher sales volumes in 2022 offset the impact of costs related to the turnaround in the second quarter of 2022.
Per-unit non-fuel costs at our other Oil Sands assets increased in the quarter mainly due to costs related to the start up of the Spruce Lake North project and ramp up of volume through the quarter. Year-to-date, the increase was primarily due to higher chemical costs and workover activity at Sunrise and the Lloydminster thermal assets in the second quarter of 2022, partially offset by costs related to the planned turnaround at Sunrise in the second quarter of 2021.
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Unit Operating Expenses (1)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||
|---|---|---|---|---|---|---|
| ($/BOE) | 2022 | Percent <br>Change | 2021 | 2022 | Percent <br>Change | 2021 |
| Foster Creek | ||||||
| Fuel | 5.91 | 42 | 4.15 | 5.77 | 47 | 3.92 |
| Non-Fuel | 7.55 | 25 | 6.05 | 7.19 | 3 | 6.98 |
| Total | 13.46 | 32 | 10.20 | 12.96 | 19 | 10.90 |
| Christina Lake | ||||||
| Fuel | 4.46 | 26 | 3.53 | 5.00 | 55 | 3.23 |
| Non-Fuel | 4.73 | 10 | 4.30 | 5.01 | 4 | 4.81 |
| Total | 9.19 | 17 | 7.83 | 10.01 | 25 | 8.04 |
| Other Oil Sands (2) | ||||||
| Fuel | 5.32 | 9 | 4.89 | 7.19 | 60 | 4.50 |
| Non-Fuel | 14.93 | 33 | 11.20 | 14.33 | 17 | 12.23 |
| Total | 20.25 | 26 | 16.09 | 21.52 | 29 | 16.73 |
| Total | 13.40 | 23 | 10.90 | 13.83 | 21 | 11.44 |
(1)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(2)Includes Sunrise, Tucker, Lloydminster thermal and Lloydminster conventional heavy oil assets. The Tucker asset was sold on January 31, 2022.
Netbacks
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($/BOE) | 2022 | 2021 | 2022 | 2021 |
| Sales Price (1) | 84.29 | 67.08 | 99.78 | 60.61 |
| Royalties (1) | 21.26 | 11.84 | 23.20 | 9.36 |
| Transportation (1) | 7.72 | 7.09 | 7.48 | 7.40 |
| Operating Expenses (1) | 13.40 | 10.90 | 13.83 | 11.44 |
| Netback (2) | 41.91 | 37.25 | 55.27 | 32.41 |
(1)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(2)Contains a non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
DD&A
In the three and nine months ended September 30, 2022, DD&A was $652 million and $2.0 billion, respectively (2021 – $743 million and $2.0 billion, respectively). The decrease was mainly due to asset write-downs booked in the third quarter of 2021. The average depletion rate for the three and nine months ended September 30, 2022, was $11.63 per BOE and 11.83 per BOE, respectively (2021 – $11.45 per BOE and $11.37 per BOE, respectively).
CONVENTIONAL
In the third quarter of 2022, we:
•Delivered safe and reliable operations.
•Generated Operating Margin of $290 million, an increase of $99 million compared with the third quarter of 2021, largely due to higher average realized sales prices.
•Invested capital of $67 million focused on the ramp up of the drilling program and the remaining tie-in of the previous development program.
•Achieved a Netback of $24.06 per BOE.
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Financial Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Gross Sales | 1,010 | 833 | 3,201 | 2,235 |
| Less: Royalties | 68 | 40 | 228 | 103 |
| Revenues | 942 | 793 | 2,973 | 2,132 |
| Expenses | ||||
| Purchased Product | 464 | 445 | 1,460 | 1,113 |
| Transportation and Blending | 38 | 20 | 106 | 57 |
| Operating | 141 | 135 | 403 | 417 |
| Realized (Gain) Loss on Risk Management | 9 | 2 | 17 | 2 |
| Operating Margin | 290 | 191 | 987 | 543 |
| Unrealized (Gain) Loss on Risk Management | 8 | 9 | 7 | 10 |
| Depreciation, Depletion and Amortization | 103 | 99 | 282 | 309 |
| Exploration Expense | — | — | 1 | (3) |
| Segment Income (Loss) | 179 | 83 | 697 | 227 |
Operating Margin Variance
Three Months Ended September 30, 2022
(1)Reflects Operating Margin related to processing activities.
Nine Months Ended September 30, 2022
(1)Reflects Operating Margin from processing facilities.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 26 |
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Operating Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Total Sales Volumes (MBOE/d) | 126.2 | 131.4 | 128.0 | 136.2 |
| Total Realized Price (1) ($/BOE) | 44.07 | 31.28 | 48.17 | 28.76 |
| Light Crude Oil ($/bbl) | 132.08 | 87.31 | 125.99 | 71.98 |
| NGLs ($/bbl) | 55.80 | 47.37 | 61.98 | 39.79 |
| Conventional Natural Gas ($/Mcf) | 5.93 | 3.85 | 6.48 | 3.69 |
| Production by Product | ||||
| Light Crude Oil (Mbbls/d) | 6.9 | 8.7 | 7.8 | 8.8 |
| NGLs (Mbbls/d) | 19.9 | 22.8 | 23.0 | 26.7 |
| Conventional Natural Gas (MMcf/d) | 596.1 | 603.2 | 583.1 | 605.4 |
| Total Daily Production (MBOE/d) | 126.2 | 132.0 | 128.0 | 136.4 |
| Conventional Natural Gas Production (percentage of total) | 79 | 76 | 76 | 74 |
| Crude Oil and NGLs Production (percentage of total) | 21 | 24 | 24 | 26 |
| Effective Royalty Rate (percent) | 15.9 | 11.2 | 15.3 | 10.2 |
| Transportation Costs (1) ($/BOE) | 2.43 | 1.64 | 2.85 | 1.54 |
| Operating Expense (1) ($/BOE) | 11.77 | 10.41 | 11.03 | 10.57 |
| Per Unit DD&A (1) ($/BOE) | 8.51 | 7.98 | 8.23 | 8.12 |
(1)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
Revenues
Price
Our total realized sales price increased in the three and nine months ended September 30, 2022, due to higher crude oil and natural gas benchmark prices.
In the three and nine months ended September 30, 2022, gross sales included $464 million and $1.5 billion, respectively (2021 – $445 million and $1.1 billion, respectively), relating to third-party sourced volumes, which are not included in our per-unit pricing metrics or our Netbacks.
In the three and nine months ended September 30, 2022, revenues included amounts relating to processing and transportation activities undertaken for third-parties of $34 million and $58 million, respectively (2021 – $10 million and $53 million, respectively), which are not included in our per-unit pricing metrics or our Netbacks.
Production Volumes
Production volumes decreased in the three and nine months ended September 30, 2022, mainly due to asset sales in the first quarter of 2022 and the second half of 2021, and planned maintenance in the third quarter of 2022. The production decrease is partially offset by 29 net new wells brought on production during the year, combined with production from well reactivations and workover activity.
Royalties
The Conventional assets are subject to royalty regimes in Alberta and British Columbia. Total royalties and effective royalty rates increased in the three and nine months ended September 30, 2022, primarily due to higher realized pricing.
Expenses
Transportation
Our transportation costs reflect charges for the movement of crude oil, NGLs and natural gas from the point of production to where the product is sold. Transportation costs increased by $18 million and $49 million in the three and nine months ended September 30, 2022, respectively, compared with 2021. Per-unit transportation costs averaged $2.43 per BOE and $2.85 per BOE in the three and nine months ended September 30, 2022, respectively (2021 – $1.64 per BOE and $1.54 per BOE, respectively).
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 27 |
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Operating
Primary drivers of our operating expenses in the three and nine months ended September 30, 2022, were workforce, repairs and maintenance, electricity, property taxes and lease costs. Operating expenses per BOE in the three and nine months ended September 30, 2022, increased compared with 2021, primarily due to higher electricity costs. Total operating expenses in the three and nine months ended September 30, 2022, were relatively flat due to the same factors that impacted operating expenses per BOE, offset by lower sales volumes.
Netbacks
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($/BOE) | 2022 | 2021 | 2022 | 2021 |
| Sales Price (1) | 44.07 | 31.28 | 48.17 | 28.76 |
| Royalties (1) | 5.81 | 3.32 | 6.49 | 2.77 |
| Transportation and Blending (1) | 2.43 | 1.64 | 2.85 | 1.54 |
| Operating Expenses (1) | 11.77 | 10.41 | 11.03 | 10.57 |
| Netback (2) | 24.06 | 15.91 | 27.80 | 13.88 |
(1)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(2)Contains a Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
DD&A
The average depletion rate for the three and nine months ended September 30, 2022, was $8.51 per BOE and $8.23 per BOE, respectively (2021 – $7.98 per BOE and $8.12 per BOE).
In the three and nine months ended September 30, 2022, total Conventional DD&A was $103 million and $282 million, respectively (2021 – $99 million and $309 million, respectively). The year-to-date decrease was due to asset dispositions in the first quarter of 2022 and the second half of 2021.
OFFSHORE
In the third quarter of 2022, we:
•Delivered safe and reliable operations.
•Generated Operating Margin of $339 million, an increase of $11 million compared with the third quarter of 2021, largely due to higher average realized sales prices, partially offset by increased operating expenses and lower sales volumes.
•Earned a Netback of $66.81 per BOE.
•Invested capital of $81 million mainly for the Terra Nova ALE and the West White Rose projects in the Atlantic region.
On May 31, 2022, Cenovus and our partners announced we reached an agreement to restart the West White Rose project in the Atlantic region. The project is expected to restart in 2023. First oil is anticipated in the first half of 2026, with peak production anticipated to reach approximately 80 thousand barrels per day, 45 thousand barrels per day net to Cenovus, by 2029. Contributing to the decision to restart the project is an amended royalty structure with the Government of Newfoundland and Labrador which provides safeguards to the project’s economics in periods of low commodity prices. The remaining capital required to achieve first oil is expected to be approximately $2.0 billion to $2.3 billion net to Cenovus, of which we expect to spend an estimated $90 million in 2022. The project is around 65 percent complete. Following our decision to restart the project, we invested approximately $50 million as at September 30, 2022.
The Terra Nova ALE project remains underway in Spain, and the FPSO is anticipated to return to the field before the end of 2022.
At our equity-accounted assets in Indonesia, we drilled and completed the remaining three MDA field development wells planned for the year (five planned). We expect first gas production from the MDA field in November 2022. We achieved first gas production at the MBH field in October. At the MAC field, production facilities are under construction and we expect to start drilling three development wells in the fourth quarter of 2022.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 28 |
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Financial Results
| Three Months Ended September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||
| ($ millions) | Asia Pacific | Atlantic | Offshore | Asia Pacific | Atlantic | Offshore | ||||||
| Revenues | ||||||||||||
| Gross Sales | 337 | 113 | 450 | 336 | 68 | 404 | ||||||
| Less: Royalties | 20 | 2 | 22 | 20 | 4 | 24 | ||||||
| 317 | 111 | 428 | 316 | 64 | 380 | |||||||
| Expenses | ||||||||||||
| Transportation and Blending | — | 4 | 4 | — | 3 | 3 | ||||||
| Operating | 32 | 53 | 85 | 28 | 21 | 49 | ||||||
| Operating Margin (1) | 285 | 54 | 339 | 288 | 40 | 328 | ||||||
| Depreciation, Depletion and Amortization | 132 | 127 | ||||||||||
| Exploration Expense | 66 | 3 | ||||||||||
| (Income) Loss from Equity-Accounted Affiliates | (9) | (12) | ||||||||||
| Segment Income (Loss) | 150 | 210 |
(1)Asia Pacific and Atlantic Operating Margin are Non-GAAP financial measures. See the Specified Financial Measures Advisory of this MD&A.
| Nine Months Ended September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||
| ($ millions) | Asia Pacific | Atlantic | Offshore | Asia Pacific | Atlantic | Offshore | ||||||
| Revenues | ||||||||||||
| Gross Sales | 1,083 | 492 | 1,575 | 965 | 297 | 1,262 | ||||||
| Less: Royalties | 60 | (4) | 56 | 53 | 21 | 74 | ||||||
| 1,023 | 496 | 1,519 | 912 | 276 | 1,188 | |||||||
| Expenses | ||||||||||||
| Transportation and Blending | — | 12 | 12 | — | 10 | 10 | ||||||
| Operating | 88 | 146 | 234 | 74 | 92 | 166 | ||||||
| Operating Margin (1) | 935 | 338 | 1,273 | 838 | 174 | 1,012 | ||||||
| Depreciation, Depletion and Amortization | 441 | 369 | ||||||||||
| Exploration Expense | 91 | 3 | ||||||||||
| (Income) Loss from Equity-Accounted Affiliates | (19) | (36) | ||||||||||
| Segment Income (Loss) | 760 | 676 |
(1)Asia Pacific and Atlantic Operating Margin are Non-GAAP financial measures. See the Specified Financial Measures Advisory of this MD&A.
Operating Margin Variance
Three Months Ended September 30, 2022
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 29 |
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Nine Months Ended September 30, 2022
Operating Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Total Sales Volumes (MBOE/d) | 63.3 | 67.6 | 70.9 | 72.1 |
| Atlantic | 7.8 | 7.8 | 12.6 | 12.6 |
| Asia Pacific (1) | 55.5 | 59.8 | 58.3 | 59.5 |
| Total Realized Price (2) ($/BOE) | 88.02 | 74.55 | 91.32 | 72.25 |
| Atlantic - Light Crude Oil ($/bbl) | 158.42 | 94.26 | 142.96 | 85.93 |
| Asia Pacific (1) ($/BOE) | 78.19 | 71.99 | 80.16 | 69.36 |
| NGLs ($/bbl) | 108.39 | 81.82 | 113.04 | 74.73 |
| Conventional Natural Gas ($/Mcf) | 11.62 | 11.56 | 11.88 | 11.32 |
| Production by Product | ||||
| Atlantic - Light Crude Oil (Mbbls/d) | 9.1 | 13.9 | 12.0 | 15.3 |
| Asia Pacific (1) | ||||
| NGLs (Mbbls/d) | 12.2 | 12.7 | 12.4 | 12.6 |
| Conventional Natural Gas (MMcf/d) | 260.0 | 282.8 | 275.3 | 281.4 |
| Asia Pacific Total (MBOE/d) | 55.5 | 59.8 | 58.3 | 59.5 |
| Total Daily Production (MBOE/d) | 64.6 | 73.7 | 70.3 | 74.8 |
| Effective Royalty Rate (percent) | ||||
| Atlantic | 1.8 | 5.9 | (0.8) | 7.0 |
| Asia Pacific (1) | 11.1 | 8.0 | 11.7 | 6.9 |
| Operating Expense (2) ($/BOE) | 12.55 | 9.12 | 12.24 | 9.38 |
| Atlantic | 47.23 | 29.44 | 36.79 | 26.62 |
| Asia Pacific (1) | 7.70 | 6.49 | 6.94 | 5.73 |
| Per Unit DD&A (2) ($/BOE) | 30.89 | 26.75 | 30.29 | 25.96 |
(1)Reported sales volumes, associated per unit values and royalty rates reflect Cenovus’s 40 percent interest in the Madura-BD gas project. Revenues and expenses related to the HCML joint venture are accounted for using the equity method in the consolidated financial statements.
(2)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
Revenues
Price
The price we receive for natural gas sold in Asia is set under long-term contracts. Our realized sales price on light crude oil and NGLs increased in the three and nine months ended September 30, 2022, compared with 2021, primarily due to higher Brent benchmark pricing.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 30 |
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Production and Sales Volumes
Asia Pacific production decreased 4.3 thousand BOE per day in the third quarter of 2022 compared with 2021, due to the planned maintenance at block 29/26 in China that began in the second quarter and was completed in the third quarter, combined with changes to contracts at Liwan 3-1 and Liuhua 29-1 resulting in a net decrease in production. The decrease was offset by planned maintenance in China in the third quarter of 2021.
Asia Pacific production in the first nine months of 2022 decreased slightly compared with 2021, due to the same factors as discussed above combined with the completion of planned maintenance at the FPSO in Indonesia in the first quarter of 2022.
Atlantic production decreased 4.8 thousand barrels per day and 3.3 thousand barrels per day in the three and nine months ended September 30, 2022, respectively, compared with 2021. The decrease was due to the working interest restructuring on the White Rose fields in the second quarter of 2022, annual planned maintenance at the SeaRose FPSO completed during the quarter and natural declines. In 2021, the annual planned maintenance started late in the third quarter and was completed in the fourth quarter. Light oil from production at the White Rose fields is offloaded from the SeaRose FPSO to tankers and stored at an onshore terminal before shipment to buyers. The result is a timing difference between production and sales.
Royalties
Royalty rates in China and Indonesia are governed by production sharing contracts in which production is shared with the Chinese and Indonesian governments. The effective royalty rates for the three and nine months ended September 30, 2022 were 11.1 percent and 11.7 percent, respectively (2021 – 8.0 percent and 6.9 percent, respectively). The increases in the effective royalty rates in 2022 are due to the full recovery of development costs at the Madura-BD gas project in the third quarter of 2021.
Royalties at the White Rose fields are based on an amended agreement between our working interest partners and the Government of Newfoundland and Labrador. For 2022, retroactive to January 1, 2022, we pay a basic royalty of 1.0 percent of gross sales from the White Rose fields and 1.0 percent of gross sales from the satellite extensions. The effective royalty rates for the three and nine months ended September 30, 2022 were 1.8 percent and negative 0.8 percent, respectively (2021 – 5.9 percent and 7.0 percent, respectively). The second quarter of 2022 includes a year-to-date adjustment to reflect the amended royalty regime.
Expenses
Operating
Primary drivers of our Asia Pacific operating expenses in the first nine months of 2022 were repairs and maintenance, insurance and workforce. Total and per-unit operating expenses increased largely due to planned maintenance at block 29/26 in China in the second and third quarter.
Primary drivers of our Atlantic operating expenses in the first nine months of 2022 were repairs and maintenance, workforce, vessel costs and helicopter costs. Total and per-unit operating expenses increased mainly due to continued preparations for the Terra Nova FPSO’s return to field and a higher working interest in the Terra Nova field. The increase in total operating expenses was offset by the working interest restructuring on the White Rose fields in the second quarter of 2022.
Transportation
Transportation in the Atlantic region includes the cost of transporting crude oil from the SeaRose FPSO unit to onshore via tankers, as well as storage costs.
Exploration Expense
In the three and nine months ended September 30, 2022, we recorded exploration expense of $66 million and $91 million, respectively, primarily due to a $58 million write-off related to our decision not to pursue development at block 15/33 in China.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 31 |
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Netbacks
| Three Months Ended September 30, 2022 | ||||||
|---|---|---|---|---|---|---|
| ($/BOE, except where indicated) | China | Indonesia (1) | Atlantic (/bbl) | Total Offshore | ||
| Sales Price (2) | 80.68 | 66.97 | 88.02 | |||
| Royalties (2) | 4.63 | 26.80 | 7.94 | |||
| Transportation and Blending (2) | — | — | 0.72 | |||
| Operating Expenses (2) | 6.73 | 12.05 | 12.55 | |||
| Netback (3) | 69.32 | 28.12 | 66.81 |
All values are in US Dollars.
| Three Months Ended September 30, 2021 | ||||||
|---|---|---|---|---|---|---|
| ($/BOE, except where indicated) | China | Indonesia (1) | Atlantic (/bbl) | Total Offshore | ||
| Sales Price (2) | 73.32 | 65.39 | 74.55 | |||
| Royalties (2) | 4.39 | 12.78 | 5.77 | |||
| Transportation and Blending (2) | — | — | 0.46 | |||
| Operating Expenses (2) | 5.87 | 9.55 | 9.12 | |||
| Netback (3) | 63.06 | 43.06 | 59.20 |
All values are in US Dollars.
(1) Reported sales volumes, associated per unit values and royalty rates reflect Cenovus’s 40 percent interest in the Madura-BD gas project. Revenues and expenses related to the HCML joint venture are accounted for using the equity method in the consolidated financial statements.
(2) Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(3) Contains a Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
| Nine Months Ended September 30, 2022 | ||||||
|---|---|---|---|---|---|---|
| ($/BOE, except where indicated) | China | Indonesia (1) | Atlantic (/bbl) | Total Offshore | ||
| Sales Price (2) | 81.70 | 72.50 | 91.32 | |||
| Royalties (2) | 4.50 | 33.51 | 7.47 | |||
| Transportation and Blending (2) | — | — | 0.63 | |||
| Operating Expenses (2) | 5.71 | 13.06 | 12.24 | |||
| Netback (3) | 71.49 | 25.93 | 70.98 |
All values are in US Dollars.
| Nine Months Ended September 30, 2021 | ||||||
|---|---|---|---|---|---|---|
| ($/BOE, except where indicated) | China | Indonesia (1) | Atlantic (/bbl) | Total Offshore | ||
| Sales Price (2) | 70.61 | 62.71 | 72.25 | |||
| Royalties (2) | 3.94 | 9.11 | 4.98 | |||
| Transportation and Blending (2) | — | — | 0.49 | |||
| Operating Expenses (2) | 5.18 | 8.67 | 9.38 | |||
| Netback (3) | 61.49 | 44.93 | 57.40 |
All values are in US Dollars.
(1) Reported sales volumes, associated per unit values and royalty rates reflect Cenovus’s 40 percent interest in the Madura-BD gas project. Revenues and expenses related to the HCML joint venture are accounted for using the equity method in the consolidated financial statements.
(2) Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(3) Contains a Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
DD&A
In the three and nine months ended September 30, 2022, total Offshore DD&A was $132 million and $441 million, respectively (2021 – $127 million and $369 million, respectively). The average depletion rate in the three and nine months ended September 30, 2022 was $30.89 per BOE and $30.29 per BOE, respectively (2021 – $26.75 per BOE and $25.96 per BOE, respectively).
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 32 |
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DOWNSTREAM
CANADIAN MANUFACTURING
In the third quarter of 2022, we:
•Delivered safe operations.
•Averaged combined crude utilization of 89 percent at the Lloydminster Upgrader and Lloydminster Refinery, as we returned to full operations after completing planned turnarounds in the second quarter.
•Generated Operating Margin of $249 million, an increase of $119 million compared with the third quarter of 2021, primarily due to a higher upgrading differential and higher asphalt pricing, partially offset by lower sales volumes.
Financial Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Revenues | 1,478 | 1,215 | 4,043 | 3,109 |
| Purchased Product | 1,092 | 986 | 3,192 | 2,424 |
| Gross Margin (1) | 386 | 229 | 851 | 685 |
| Expenses | ||||
| Transportation and Blending | 3 | — | 3 | — |
| Operating | 134 | 99 | 438 | 284 |
| Operating Margin | 249 | 130 | 410 | 401 |
| Depreciation, Depletion and Amortization | 37 | 41 | 143 | 127 |
| Segment Income (Loss) | 212 | 89 | 267 | 274 |
(1)Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
Operating Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Crude Oil Throughput Capacity (Mbbls/d) | 110.5 | 110.5 | 110.5 | 110.5 |
| Lloydminster Upgrader (Mbbls/d) | 81.5 | 81.5 | 81.5 | 81.5 |
| Lloydminster Refinery (Mbbls/d) | 29.0 | 29.0 | 29.0 | 29.0 |
| Heavy Crude Oil Throughput (Mbbls/d) | 98.5 | 108.3 | 92.5 | 106.0 |
| Lloydminster Upgrader (Mbbls/d) | 71.3 | 81.2 | 68.8 | 78.6 |
| Lloydminster Refinery (Mbbls/d) | 27.2 | 27.1 | 23.7 | 27.4 |
| Crude Utilization (1) (percent) | 89 | 98 | 84 | 96 |
| Refined Products Output (Mbbls/d) | 99.2 | 109.2 | 92.9 | 107.1 |
| Sales Volumes (2) (Mbbls/d) | 111.5 | 125.5 | 99.7 | 115.3 |
| Upgrading Differential (3) | 39.36 | 17.00 | 28.69 | 15.84 |
| Refining Margin (4) ($/bbl) | 38.78 | 17.57 | 29.37 | 16.78 |
| Lloydminster Upgrader ($/bbl) | 38.17 | 16.93 | 30.08 | 16.91 |
| Lloydminster Refinery ($/bbl) | 40.39 | 19.29 | 27.34 | 16.58 |
| Unit Operating Expense (5) ($/bbl) | 11.72 | 7.38 | 13.95 | 7.39 |
| Crude-by-Rail Operations | ||||
| Volumes Loaded (6) (Mbbls/d) | 1.4 | 14.3 | 1.5 | 13.0 |
| Ethanol Production (thousands of litres/d) | 812.2 | 774.0 | 769.6 | 607.4 |
(1)Based on crude oil throughput volumes and results of operations at the Lloydminster Upgrader and Lloydminster Refinery.
(2)From the Lloydminster Upgrader and Lloydminster Refinery.
(3)Based on benchmark price differential between heavy oil feedstock and synthetic crude.
(4)Contains a Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A. Revenues from the Lloydminster Upgrader for the three and nine months ended September 30, 2022, were $951 million and $2.7 billion, respectively (2021 – $684 million and $1.8 billion, respectively). Revenues from the Lloydminster Refinery for the three and nine months ended September 30, 2022, were $600 million and $1.0 billion, respectively (2021 – $278 million and $611 million, respectively).
(5)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(6)Volumes transported outside of Alberta, Canada.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 33 |
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In the three months ended September 30, 2022, crude oil throughput decreased 9.8 thousand barrels per day compared with 2021 due to temporary unplanned outages at the Lloydminster Upgrader and Lloydminster Refinery during the quarter. Year-to-date, crude oil throughput decreased 13.5 thousand barrels per day compared with 2021 due to planned turnarounds at the Lloydminster Upgrader and Lloydminster Refinery completed in the second quarter of 2022. In addition, there were unplanned maintenance outages at the Lloydminster Upgrader in the first quarter of 2022.
Revenues and Gross Margin
Lloydminster Upgrader operations process blended heavy crude oil and bitumen into high value synthetic crude oil and low sulphur distillates. Revenues are dependent on the sales price of synthetic crude oil and diesel. Upgrading gross margin is primarily dependent on the differential between the sales price of synthetic crude oil and diesel, and the cost of heavy crude oil feedstock.
Lloydminster Refinery operations process blended heavy crude oil into asphalt and industrial products. Revenues are dependent on market prices for asphalt and other industrial products. The gross margin is largely dependent on asphalt and industrial products pricing and the cost of heavy crude oil feedstock. Sales from the Lloydminster Refinery increase during paving season, which typically runs from May through October each year.
The Lloydminster Upgrader sources crude oil feedstock primarily from our Lloydminster thermal production. The Lloydminster Refinery sources crude oil feedstock from our Lloydminster thermal and Lloydminster conventional heavy oil production.
In the three and nine months ended September 30, 2022, revenues increased by $263 million and $934 million, respectively, to $1.5 billion and $4.0 billion, respectively, mainly due to higher synthetic crude benchmark prices and higher asphalt and industrial products prices, partially offset by lower sales volumes as a result of the unplanned outages. The year-to-date increase was partially offset by lower sales volumes from the Lloydminster Upgrader and Lloydminster Refinery due to the planned turnarounds in the second quarter.
Gross margin increased $157 million quarter-over-quarter to $386 million in the third quarter of 2022 primarily due to a higher upgrading differential and higher asphalt and industrial product prices, partially offset by lower sales volumes.
Gross margin increased $166 million in the first nine months of 2022 compared with 2021, as a higher upgrading differential and higher asphalt and industrial product prices were offset by the approximately $55 million settlement of a take-or-pay contract in 2021 and lower sales volumes.
See the Specified Financial Measures Advisory of this MD&A for revenues and gross margin by asset.
Operating Expenses
Primary drivers of operating expenses in the third quarter of 2022 were repairs and maintenance, workforce and energy costs. Total and per-unit operating costs increased in the third quarter of 2022 compared with 2021 primarily due to operational outages, combined with higher energy costs and inflationary pressures on maintenance, workforce, and chemical costs. Year-to-date, total and per-unit operating costs increased due to the same factors impacting the third quarter, combined with planned turnarounds completed in the second quarter of 2022 at the Lloydminster Upgrader and Lloydminster Refinery. In addition, per-unit operating expenses increased due to lower crude oil throughput volumes.
DD&A
For the three and nine months ended September 30, 2022, Canadian Manufacturing DD&A was $37 million and $143 million, respectively (2021 – $41 million and $127 million, respectively).
U.S. MANUFACTURING
In the third quarter of 2022, we:
•Announced our intent to purchase the remaining 50 percent interest in the Toledo Refinery from BP.
•Completed a significant planned turnaround at the non-operated Toledo Refinery, which was completed by early August. The Toledo Refinery remains shut down following an incident on September 20, 2022.
•Commenced a planned turnaround at the Wood River Refinery in September, which was completed in October.
•Continued preparations for the Superior Refinery restart.
•Had crude utilization of 87 percent and crude oil throughput of 435.0 thousand barrels per day.
•Generated Operating Margin of $244 million, an increase of $122 million compared with 2021 largely due to significantly higher market crack spreads.
•Invested capital of $300 million focused primarily on the Superior Refinery rebuild, and refining reliability initiatives at the Wood River, Borger and Toledo refineries.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 34 |
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Financial Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Revenues | 8,719 | 5,723 | 23,702 | 13,889 |
| Purchased Product | 7,944 | 5,171 | 20,365 | 12,320 |
| Gross Margin (1) | 775 | 552 | 3,337 | 1,569 |
| Expenses | ||||
| Operating | 608 | 413 | 1,757 | 1,212 |
| Realized (Gain) Loss on Risk Management | (77) | 17 | 120 | 48 |
| Operating Margin | 244 | 122 | 1,460 | 309 |
| Unrealized (Gain) Loss on Risk Management | (8) | 5 | (22) | 38 |
| Depreciation, Depletion and Amortization | 91 | 103 | 259 | 320 |
| Segment Income (Loss) | 161 | 14 | 1,223 | (49) |
(1)Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
Select Operating Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Crude Oil Throughput Capacity (Mbbls/d) | 502.5 | 502.5 | 502.5 | 502.5 |
| Lima Refinery | 175.0 | 175.0 | 175.0 | 175.0 |
| Toledo Refinery (1) | 80.0 | 80.0 | 80.0 | 80.0 |
| Wood River and Borger Refineries (1) | 247.5 | 247.5 | 247.5 | 247.5 |
| Crude Oil Throughput (Mbbls/d) | 435.0 | 445.8 | 405.3 | 415.0 |
| Lima Refinery | 164.2 | 163.1 | 153.5 | 149.6 |
| Toledo Refinery (1) | 46.6 | 71.0 | 48.5 | 68.3 |
| Wood River and Borger Refineries (1) | 224.2 | 211.7 | 203.3 | 197.1 |
| Throughput by Product (Mbbls/d) | ||||
| Heavy Crude Oil | 145.2 | 143.8 | 135.2 | 133.0 |
| Light and Medium Crude Oil | 289.8 | 302.0 | 270.1 | 282.0 |
| Crude Utilization (percent) | 87 | 89 | 81 | 83 |
| Sales Volumes (Mbbls/d) | 453.5 | 462.8 | 425.8 | 431.6 |
| Refining Margin (2)(3) ($/bbl) | 18.98 | 13.45 | 29.94 | 13.84 |
| Unit Operating Expense (3)(4) ($/bbl) | 14.90 | 10.03 | 15.77 | 10.69 |
(1) Represents Cenovus’s 50 percent interest in Wood River, Borger and Toledo refinery operations.
(2) Contains a Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
(3) Based on crude oil throughput volumes and operating results at Wood River, Borger, Lima, Toledo and Superior refineries.
(4) Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
During the three and nine months ended September 30, 2022, crude utilization was 87 percent and 81 percent, respectively (2021 – 89 percent and 83 percent, respectively). We had strong operational performance in the third quarter of 2022 at the Lima, Wood River and Borger refineries, compared with temporary unplanned outages at the Wood River and Borger refineries in the third quarter of 2021. These positive impacts on throughput were offset by the planned turnaround at the Toledo Refinery completed by early August, the incident at the Toledo Refinery in September 2022, and the planned fall turnaround at the Wood River Refinery which commenced in the third quarter of 2022 and was completed in October. Year-over-year, crude utilization was relatively consistent, as the impact of the turnarounds and unplanned outages in 2022, were offset by higher throughput due to improved market conditions in 2022 and unplanned outages in 2021.
The Lima Refinery performed well in the three months ended September 30, 2022, achieving crude utilization of 94 percent. Throughput increased in the third quarter of 2022 compared with 2021, as production slowed at the end of September 2021 as we prepared for a planned turnaround in the fourth quarter of 2021. Year-to-date, crude utilization was 88 percent. Throughput was impacted by outages on the pipeline that delivers feedstock to the refinery in the second quarter of 2022. In the first quarter of 2022, temporary unplanned equipment outages impacted throughput, and we operated at reduced rates early in the first quarter due to low market crack spreads.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 35 |
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At the Toledo Refinery, throughput decreased 24.4 thousand barrels per day and 19.8 thousand barrels per day during the three and nine months ended September 30, 2022, respectively, compared with 2021. A significant planned turnaround commenced during the second quarter, which was completed in early August. The refinery ramped up to full rates by mid-August. On September 20, 2022, there was an incident at the refinery and it remains shut down. In the first quarter of 2022, throughput was optimized in line with market demand, and was reduced as a result of temporary unplanned outages.
The Wood River and Borger refineries achieved crude utilization of 91 percent in the third quarter. Throughput increased 12.5 thousand barrels per day in the in third quarter of 2022 compared with 2021, due to temporary unplanned outages in the third quarter of 2021. The increase was partially offset by a planned fall turnaround at the Wood River Refinery beginning in September and completed in October. Year-to-date, throughput was relatively flat compared with 2021. We commenced planned spring turnarounds in March 2022 which impacted throughput and were completed in the second quarter. The spring 2022 turnaround at Wood River was delayed due to cold weather which resulted in labour shortages and cost overruns. At the Wood River Refinery, we operated at reduced rates early in the first quarter of 2022 to optimize margins as market conditions dictated.
Revenues and Gross Margin
Market crack spreads do not precisely mirror the configuration and product output of our refineries, however they are used as a general market indicator. While market crack spreads are an indicator of margin from processing crude oil into refined products, the refining realized crack spread, which is the gross margin on a per-barrel basis, is affected by many factors. These factors include the type of crude oil feedstock processed, refinery configuration and the proportion of gasoline, distillate and secondary product output, the time lag between the purchase of crude oil feedstock and the processing of that crude oil through the refineries, and the cost of feedstock. Processing less expensive crude relative to WTI creates a feedstock cost advantage. Our feedstock costs are valued on a FIFO accounting basis.
Revenues increased $3.0 billion and $9.8 billion in the three and nine months ended September 30, 2022, respectively, compared with 2021. The increases were primarily due to significantly higher refined product pricing benchmarks, partially offset by lower sales volumes.
Gross margin increased $223 million and $1.8 billion in the three and nine months ended September 30, 2022, respectively, compared with 2021. The increases were largely due to significantly improved market crack spreads, partially offset by the impact of processing crude oil purchased in prior periods at higher prices, and lower sales volumes. In the three and nine months ended September 30, 2022, RINs costs were $320 million and $824 million, respectively (2021 – $248 million and $733 million, respectively). RINs prices averaged US$8.11 per barrel and US$7.45 per barrel in the three and nine months ended September 30, 2022, respectively (2021 – US$7.32 per barrel and US$6.97 per barrel, respectively).
In the three and nine months ended September 30, 2022, we incurred realized risk management gains of $77 million and losses of $120 million, respectively. We incurred a $36 million loss on the early liquidation of WTI positions in the second quarter. In the three and nine months ended September 30, 2022, we recorded unrealized gains of $8 million and $22 million, respectively, on our crude oil and refined products financial instruments.
Operating Expenses
Primary drivers of operating expenses for the three and nine months ended September 30, 2022, were repairs and maintenance, workforce, turnaround costs, and energy costs.
Operating expenses increased $195 million and $545 million in the three and nine months ended September 30, 2022, respectively, compared with 2021. The quarter-over-quarter increase was due to costs related to:
•The planned turnaround at the Toledo Refinery completed by early August.
•The fall turnaround at the Wood River Refinery.
•Increased maintenance at the Superior Refinery as we prepare for restart.
•Higher energy and utility pricing.
•Inflationary pressures on maintenance, electricity, workforce and chemical costs.
The year-over-year increase was mainly due to the same factors discussed above and the impact of planned turnarounds at the Wood River, Borger and Toledo refineries in the first half of 2022.
In the three and nine months ended September 30, 2022, per-unit operating expenses increased $4.87 per barrel of crude oil throughput and $5.08 per barrel of crude oil throughput, respectively. The increase was primarily due to the same factors as discussed above, combined with lower crude oil throughput.
DD&A
U.S. Manufacturing DD&A was $91 million and $259 million in the three and nine months ended September 30, 2022, respectively (2021 – $103 million and $320 million). Depreciation decreased in 2022 due to impairment charges recorded in the fourth quarter of 2021 at the Lima, Wood River and Borger refineries reducing the carrying value of our depreciable assets.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 36 |
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RETAIL
On September 13, 2022, we closed the sales of 337 gas stations within our retail fuels network for net cash proceeds of $404 million. We retained our commercial fuels business, which includes cardlock, bulk plant and travel centre locations. As of September 30, 2022, there were approximately 170 cardlock, bulk plant and travel center locations.
Financial Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Revenues | 881 | 592 | 2,424 | 1,540 |
| Purchased Product | 846 | 551 | 2,317 | 1,434 |
| Gross Margin (1) | 35 | 41 | 107 | 106 |
| Expenses | ||||
| Operating | 38 | 25 | 96 | 73 |
| Operating Margin | (3) | 16 | 11 | 33 |
| Depreciation, Depletion and Amortization | 5 | 11 | 21 | 36 |
| Segment Income (Loss) | (8) | 5 | (10) | (3) |
(1)Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
Select Operating Results
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Fuel Sales Volume, Including Wholesale | ||||
| Fuel Sales (millions of litres/d) | 6.9 | 7.3 | 6.7 | 6.9 |
| Fuel Sales per Retail Outlet (thousands of litres/d) | 15.2 | 13.9 | 13.5 | 12.8 |
Revenues and Gross Margin
Revenues are largely dependent on retail pricing for motor fuels. Gross margin is primarily dependent on the differential between retail pricing and gasoline and diesel prices. In the three and nine months ended September 30, 2022, revenues increased $289 million and $884 million, respectively, mainly due to significantly higher benchmark gasoline and diesel prices. Gross margin was relatively flat in the three and nine months ended September 30, 2022, compared with 2021.
Operating Expenses
Primary drivers of our operating expenses for the three and nine months ended September 30, 2022, were repairs and maintenance, property tax, workforce and utilities.
DD&A
For the three and nine months ended September 30, 2022, Retail DD&A was $5 million and $21 million, respectively (2021 – $11 million and $36 million, respectively).
CORPORATE AND ELIMINATIONS
In the three and nine months ended September 30, 2022, our corporate risk management activities resulted in:
•Unrealized risk management gains of $16 million and $14 million, respectively, related to renewable power contracts and foreign exchange risk management contracts (2021 – gains of $2 million and $16 million, respectively).
•Realized risk management losses of $16 million and $23 million, respectively, relate to foreign exchange risk management contracts (2021 – gains of $1 million and losses of $91 million, respectively). The losses in 2021 were mainly due to the realization of WTI put and call option contracts acquired as part of the Arrangement.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 37 |
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Expenses
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| General and Administrative | 128 | 158 | 545 | 491 |
| Finance Costs | 207 | 360 | 631 | 836 |
| Interest Income | (21) | (4) | (44) | (11) |
| Integration Costs | 27 | 45 | 79 | 302 |
| Foreign Exchange (Gain) Loss, Net | 316 | 196 | 406 | (93) |
| Revaluation (Gains) | (549) | — | (549) | — |
| Re-measurement of Contingent Payments | (109) | 135 | 142 | 571 |
| (Gain) Loss on Divestiture of Assets | 60 | (25) | (244) | (97) |
| Other (Income) Loss, Net | (59) | (107) | (467) | (208) |
| — | 758 | 499 | 1,791 |
General and Administrative
Primary drivers of our general and administrative expenses were employee long-term incentive costs, workforce costs and information technology costs. General and administrative expenses decreased quarter-over-quarter and increased year-over-year, primarily due to long-term incentive costs as a result of changes in our share price. Our closing common share price on September 30, 2022 was $21.22, a decrease from $24.49 on June 30, 2022, and an increase from $15.51 on December 31, 2021.
Finance Costs
In the three and nine months ended September 30, 2022, finance costs decreased by $153 million and $205 million, respectively, compared with 2021. The decrease is largely due to a $115 million net premium on the redemption of long-term debt in the third quarter of 2021. Comparatively, in the three and nine months ended September 30, 2022, we recorded a net discount on the redemption of long-term debt of $4 million and $29 million, respectively. In addition, our average long-term debt was lower in 2022 compared with 2021. Refer to the Liquidity and Capital Resources section of this MD&A for further details on long-term debt.
The weighted average interest rate of outstanding debt for the three and nine months ended September 30, 2022, was 4.8 percent and 4.7 percent, respectively (2021 – 4.7 percent and 4.6 percent, respectively).
Integration Costs
For the three and nine months ended September 30, 2022, we incurred $24 million and $76 million, respectively, of integration costs as a result of the Arrangement, not including capital expenditures (2021 – $45 million and $302 million, respectively). Integration costs decreased in 2022 as integration activities wind down.
In the first nine months of 2022, we incurred $81 million of Total Integration Costs(1), which include capital expenditures (2021 – $351 million). We expect to incur between $100 million to $150 million of Total Integration Costs this year.
Transaction costs of $3 million were recognized in net earnings (loss) in the three and nine months ended September 30, 2022 associated with the Sunrise Acquisition and the pending Toledo Acquisition.
Foreign Exchange
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Unrealized Foreign Exchange (Gain) Loss | 298 | 111 | 419 | (220) |
| Realized Foreign Exchange (Gain) Loss | 18 | 85 | (13) | 127 |
| 316 | 196 | 406 | (93) |
In the third quarter of 2022 and on a year-to-date basis, unrealized foreign exchange losses of $298 million and $419 million, respectively, were mainly as a result of the translation of our U.S. dollar denominated debt. Realized foreign exchange losses of $18 million and gains of $13 million were recorded in the three and nine months ended September 30, 2022, respectively, related to losses on the purchase of long-term debt, offset by gains on working capital.
(1) Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 38 |
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Revaluation Gains
Cenovus recognized revaluation gains of $549 million in the third quarter of 2022 as part of the Sunrise Acquisition. As required by IFRS 3, when an acquirer achieves control in stages, the previously held interest is remeasured to fair value at the acquisition date with any gain or loss recognized in net earnings (loss). Refer to Note 4 of the interim Consolidated Financial Statements for further details.
Re-measurement of Contingent Payments
The contingent payment associated with the acquisition of a 50 percent interest in the FCCL Partnership from ConocoPhillips Company and certain of its subsidiaries ended on May 17, 2022, and the final payment was made in July 2022.
In connection with the Sunrise Acquisition, Cenovus agreed to make quarterly variable payments to BP Canada for up to eight quarters subsequent to August 31, 2022, if the average WCS crude oil price exceeds $52.00 per barrel. The quarterly payment will be calculated as $2.8 million plus the difference between the average WCS price less $53.00 multiplied by $2.8 million, for any of the eight quarters the average WCS price is equal to or greater than $52.00 per barrel. If the average WCS price is less than $52.00 per barrel, no payment will be made for that quarter. The maximum cumulative variable payment is $600 million. For accounting purposes, the variable payment will be re-measured at fair value at each reporting date until the earlier of the cumulative maximum $600 million is reached or the eight quarters have lapsed, with changes in fair value recognized in net earnings (loss). The variable payment was recorded at a fair value of $600 million on the date of acquisition using an option pricing model, and will subsequently be re-measured at fair value with changes in fair value recognized in net earnings (loss) at each reporting date.
As at September 30, 2022, the fair value of the variable payment was estimated to be $491 million resulting in a non-cash re-measurement gain of $109 million. As at September 30, 2022, there is no outstanding payable under this agreement.
As of September 30, 2022, average WCS forward pricing for the remaining term of the variable payment is approximately $72.38 per barrel.
(Gain) Loss on Divestiture of Assets
In the third quarter of 2022, we recognized a loss on divestiture of assets of $60 million (2021 – $25 million gain), primarily due to the closing of the retail divestiture. In the first nine months of 2022, we recognized a gain on divestiture of assets of $244 million (2021 – $97 million), due to the closing of the sales of our Tucker and Wembley assets in the first quarter of 2022, and the divestiture of 12.5 percent of our interest in the White Rose field and satellite extensions in the second quarter of 2022 as well as the retail divestiture.
Other (Income) Loss, Net
For the three months ended September 30, 2022, other income decreased by $48 million primarily due to the settlement of a legal claim in favour of Cenovus in the third quarter of 2021. In the first nine months of 2022, other income increased by $259 million compared with 2021, primarily due to:
•Rebuild insurance proceeds of $271 million related to the Superior Refinery in the first nine months of 2022, compared with business interruption proceeds of $45 million in 2021.
•Insurance proceeds in the first nine months of 2022, related to a 2018 incident in the Atlantic region.
DD&A
DD&A for the three and nine months ended September 30, 2022, was $27 million and $86 million, respectively (2021 – $29 million and $91 million, respectively).
Income Tax
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Current Tax | ||||
| Canada | 187 | 58 | 1,124 | 72 |
| United States | (185) | — | 96 | — |
| Asia Pacific | 64 | 34 | 173 | 115 |
| Other International | 10 | — | 10 | 1 |
| Current Tax Expense (Recovery) | 76 | 92 | 1,403 | 188 |
| Deferred Tax Expense (Recovery) | 568 | 191 | 625 | 281 |
| Total Tax Expense (Recovery) | 644 | 283 | 2,028 | 469 |
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 39 | |||
| --- | --- |
Tax interpretations, regulations and legislation in the various jurisdictions in which Cenovus and its subsidiaries operate are subject to change. We believe that our provision for income taxes is adequate. There are usually a number of tax matters under review and with consideration of the current economic environment, income taxes are subject to measurement uncertainty. The timing of the recognition of income and deductions for the purpose of current tax expense is determined by relevant tax legislation.
For the three months ended September 30, 2022, the Company recorded a current tax expense related to taxable income arising in Canada and Asia Pacific. The increase is due to higher earnings compared to 2021 and the availability of tax deductions to calculate taxable income. For the three months ended September 30, 2022, the Company recorded a current tax recovery related to lower U.S. taxable income.
For the nine months ended September 30, 2022, the Company recorded a current tax expense related to taxable income arising in Canada, the U.S. and Asia Pacific. The increase is due to higher earnings compared to 2021 and the availability of tax deductions to calculate taxable income.
Our effective tax rate is a function of the relationship between total tax expense (recovery) and the amount of earnings (loss) before income taxes. The effective tax rate differs from the statutory tax rate for many reasons, including, but not limited to, different tax rates between jurisdictions, non-taxable foreign exchange (gains) losses, adjustments for changes in tax rates and other tax legislation.
| LIQUIDITY AND CAPITAL RESOURCES |
|---|
During the first half of 2022, we further defined our capital allocation framework to ensure we continue to strengthen our balance sheet, enable flexibility in both high and low commodity price environments, and improve our shareholder value proposition. The Company’s capital allocation framework enables a shift to paying out a higher percentage of Excess Free Funds Flow to shareholders with lower leverage and a lower risk profile. Our long-term Net Debt to Adjusted Funds Flow Target is approximately 1.0 times at the bottom of the cycle.
We expect to fund our near-term cash requirements through cash from operating activities and prudent use of our balance sheet capacity. This includes draws on our committed credit facilities, uncommitted demand facilities and other corporate and financial opportunities. We remain committed to maintaining our investment grade credit ratings at S&P Global Ratings, Moody’s Investor Service, DBRS Limited and Fitch Ratings. The cost and availability of borrowing and access to sources of liquidity and capital are dependent on current credit ratings and market conditions.
| Nine Months Ended September 30, | ||||
|---|---|---|---|---|
| ( millions) | 2021 | 2022 | 2021 | |
| Cash From (Used In) | ||||
| Operating Activities | 2,138 | 8,433 | 3,735 | |
| Investing Activities | (327) | (1,144) | (547) | |
| Net Cash Provided (Used) Before Financing Activities | 1,811 | 7,289 | 3,188 | |
| Financing Activities | (913) | (6,926) | (1,591) | |
| Foreign Exchange Gain (Loss) on Cash and Cash Equivalents Held in Foreign Currency | 57 | 258 | 35 | |
| Increase (Decrease) in Cash and Cash Equivalents | 955 | 621 | 1,632 | |
| As at ( millions) | September 30,<br><br>2022 | December 31,<br><br>2021 | ||
| Cash and Cash Equivalents | 3,494 | 2,873 | ||
| Total Debt | 8,774 | 12,464 |
All values are in US Dollars.
Cash From (Used in) Operating Activities
For the three months ended September 30, 2022, cash generated from operating activities increased compared with 2021 due to changes in non-cash working capital and higher Operating Margin. In the first nine months of 2022, cash generated from operating activities increased compared with 2021 due to a higher Operating Margin, combined with changes in non-cash working capital and lower integration costs.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 40 |
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Excluding the contingent payment, our adjusted working capital was $4.6 billion at September 30, 2022. At December 31, 2021, adjusted working capital excluding the contingent payment and assets held for sale and liabilities related to assets held for sale was $3.8 billion. The increase was primarily due to the improved commodity price environment as discussed in the Operating and Financial Results section of this MD&A. Working capital increased due to higher cash, accounts receivable and inventories, partially offset by higher income tax payable.
Our adjusted working capital decreased $1.5 billion compared with June 30, 2022, as we realized accounts receivable and inventory balances from June 30, 2022, when commodity prices were higher.
We anticipate that we will continue to meet our payment obligations as they come due.
Cash From (Used in) Investing Activities
Cash used in investing activities was higher in the third quarter of 2022 compared with 2021 largely due to the Sunrise Acquisition in 2022 and higher capital spending. The increase was partially offset by the divestiture of 337 gas stations within our retail fuels network in 2022.
Cash used in investing activities was higher in the first nine months of 2022 compared with 2021 mainly due to higher capital spending and the Sunrise Acquisition in 2022. The increase was partially offset by cash acquired in the Arrangement in 2021, higher proceeds from divestitures in 2022 and changes in non-cash working capital.
Cash From (Used in) Financing Activities
In the third quarter, we purchased unsecured notes due between 2025 and 2043 with principal amounts of US$2.2 billion at a premium of US$23 million.
As part of our overall deleveraging, in the first nine months of 2022, we:
•Paid US$402 million to purchase the full amount of our 3.80 percent unsecured notes due in 2023 and 4.00 percent unsecured notes due in 2024, with principal amounts of US$384 million. We paid a premium on redemption of US$18 million.
•Paid $750 million to purchase the full amount of our 3.55 percent unsecured notes due in 2025, with principal amounts of $750 million.
•Paid US$2.2 billion to purchase unsecured notes due between 2025 and 2043, as discussed above.
•Repaid $81 million in short-term borrowings.
In the nine months ended September 30, 2022, the Company purchased 97 million common shares through our NCIB, at a volume weighted average price of $22.10 per common share for a total of $2.1 billion. The common shares were subsequently cancelled.
Adjusted Funds Flow, Free Funds Flow and Excess Free Funds Flow
Adjusted Funds Flow is a non-GAAP financial measure commonly used in the oil and gas industry to assist in measuring a company’s ability to finance its capital programs and meet its financial obligations. Free Funds Flow is a non-GAAP financial measure used to assist in measuring the available funds the Company has after financing its capital programs. Excess Free Funds Flow is a non-GAAP financial measure used by the Company to deliver shareholder returns and allocate capital according to our shareholder returns plan. Excess Free Funds Flow is a new metric as of June 30, 2022.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 41 | |||
|---|---|---|---|---|
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
| --- | --- | --- | --- | --- |
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Cash From (Used in) Operating Activities | 4,089 | 2,138 | 8,433 | 3,735 |
| (Add) Deduct: | ||||
| Settlement of Decommissioning Liabilities | (55) | (38) | (101) | (67) |
| Net Change in Non-Cash Working Capital | 1,193 | (166) | (98) | (1,498) |
| Adjusted Funds Flow | 2,951 | 2,342 | 8,632 | 5,300 |
| Capital Investment | 866 | 647 | 2,434 | 1,728 |
| Free Funds Flow | 2,085 | 1,695 | 6,198 | 3,572 |
| Add (Deduct): | ||||
| Base Dividends Paid on Common Shares | (205) | (35) | ||
| Dividends Paid on Preferred Shares | (9) | (9) | ||
| Settlement of Decommissioning Liabilities | (55) | (38) | ||
| Principal Repayment of Leases | (78) | (70) | ||
| Acquisitions, Net of Cash Acquired | (389) | — | ||
| Proceeds From Divestitures, Net of Cash Paid | 407 | 83 | ||
| Excess Free Funds Flow | 1,756 | 1,626 |
Returns to Shareholders Target
| Three Months Ended | ||
|---|---|---|
| ($ millions) | September 30, 2022 | June 30, 2022 |
| Excess Free Funds Flow | 1,756 | 2,020 |
| Target Return (1) | 878 | 1,010 |
| Less: Purchase of Common Shares Under NCIB | (659) | (1,018) |
| Returns to Shareholders Under/(Over) Target Before Variable Dividend | 219 | (8) |
(1)Based on our capital allocation framework, as a result of Net Debt as at June 30, 2022 and March 31, 2022, respectively, being less than $9 billion and greater than $4 billion, Target Return was determined to be 50 percent of Excess Free Funds Flow.
Long-Term Debt and Total Debt
Long-term debt, including current portion, and Total Debt, as at September 30, 2022, was $8.8 billion (December 31, 2021 – $12.4 billion and $12.5 billion, respectively). The decrease in long-term debt and Total Debt was due to the purchase of US$2.6 billion and $750 million of our unsecured notes in 2022.
As at September 30, 2022, we were in compliance with all of the terms of our debt agreements.
Available Sources of Liquidity
The following sources of liquidity are available as at September 30, 2022:
| ($ millions) | Maturity | Amount Available |
|---|---|---|
| Cash and Cash Equivalents | N/A | 3,494 |
| Committed Credit Facility (1) | ||
| Revolving Credit Facility – Tranche A | August 18, 2025 | 4,000 |
| Revolving Credit Facility – Tranche B | August 18, 2024 | 2,000 |
| Uncommitted Demand Facilities | ||
| Cenovus Energy Inc. (2) | N/A | 1,022 |
| WRB Refining LP (3) | N/A | 308 |
| Sunrise Oil Sands Partnership (4) | N/A | 10 |
(1)No amounts were drawn on the committed credit facility as at September 30, 2022.
(2)Our uncommitted demand facilities includes $1.9 billion, of which $1.4 billion may be drawn for general purposes, or the full amount can be available to issue letters of credit. As of September 30, 2022, there were outstanding letters of credit aggregating to $472 million (December 31, 2021 – $565 million) and no direct borrowings.
(3)Represents Cenovus's 50 percent share of US$450 million (our proportionate share – US$225 million) available to cover short-term working capital requirements. As at September 30, 2022, no amounts were drawn on these facilities.
(4)Available for general purposes. There were no amounts drawn on this demand facility as at September 30, 2022.
Under the terms of our committed credit facility, we are required to maintain a debt to capitalization ratio, as defined in the debt agreements, not to exceed 65 percent. We are well below this limit.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 42 |
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U.S. Dollar Denominated Unsecured Notes and Canadian Dollar Unsecured Notes
In September 2022, we paid US$2.2 billion to purchase a portion of our unsecured notes. The following principal amounts of our unsecured notes were purchased:
•5.38 percent due 2025 – US$533 million.
•4.25 percent due 2027 – US$589 million.
•4.40 percent due 2029 – US$510 million.
•6.75 percent due 2039 – US$455 million.
•4.45 percent due 2042 – US$58 million.
•5.20 percent due 2043 – US$29 million.
In the first quarter of 2022, we paid US$402 million to purchase the full amount of our 3.80 percent unsecured notes due in 2023 and 4.00 percent unsecured notes due in 2024, with principal amounts of US$384 million. In the second quarter of 2022, we paid $750 million to purchase the full amount of our 3.55 percent unsecured notes due in 2025.
A premium on redemption of US$41million was recorded in finance costs on the above transactions.
At September 30, 2022, the total outstanding principal amount of U.S. dollar denominated unsecured notes was US$4.8 billion and the total outstanding principal amount of Canadian dollar denominated unsecured notes was $2.0 billion.
| Unsecured Notes | |||
|---|---|---|---|
| U.S. Dollar Denominated<br><br>(US $ millions) | Canadian Dollar Denominated<br><br>($ millions) | ||
| As at December 31, 2021 | 7,385 | 2,750 | |
| Purchases | (2,558) | (750) | |
| As at September 30, 2022 | 4,827 | 2,000 |
Base Shelf Prospectus
We have a base shelf prospectus that allows us to offer, from time to time, up to US$5.0 billion, or the equivalent in other currencies, of debt securities, common shares, preferred shares, subscription receipts, warrants, share purchase contracts and units in Canada, the U.S. and elsewhere, where permitted by law. The base shelf prospectus will expire in November 2023. As at September 30, 2022, US$4.7 billion remained available under the base shelf prospectus for permitted offerings (December 31, 2021 – US$4.7 billion). Offerings under the base shelf prospectus are subject to market availability.
Financial Metrics
We monitor our capital structure and financing requirements using, among other things, specified financial measures consisting of a Net Debt to Capitalization Ratio, Net Debt to Adjusted Funds Flow Ratio and Net Debt to Adjusted EBITDA Ratio. Net Debt to Adjusted Funds Flow is a new metric as at March 31, 2022. Refer to Note 19 of the interim Consolidated Financial Statements for further details.
We define Net Debt as short-term borrowings and the current and long-term portions of long-term debt, net of cash and cash equivalents and short-term investments. The components of the ratios include Capitalization, Adjusted Funds Flow and Adjusted EBITDA. We define Capitalization as Net Debt plus Equity. We define Adjusted Funds Flow, as used in the Net Debt to Adjusted Funds Flow Ratio, as cash from (used in) operating activities, less settlement of decommissioning liabilities and net change in operating non-cash working capital calculated on a trailing twelve-month basis. We define Adjusted EBITDA as net earnings before finance costs, net of capitalized interest, interest income, income tax expense (recovery), DD&A, E&E write-down, goodwill impairments, unrealized (gain) loss on risk management, foreign exchange (gain) loss, revaluation (gains), re-measurement of contingent payment, (gain) loss on divestiture of assets, other (income) loss, net and share of (income) loss from equity-accounted affiliates calculated on a trailing twelve-month basis. These ratios are used to steward our overall debt position and as measures of our overall financial strength.
| As at | September 30, 2022 | December 31, 2021 |
|---|---|---|
| Net Debt to Capitalization Ratio (percent) | 16 | 29 |
| Net Debt to Adjusted Funds Flow Ratio (times) | 0.5 | 1.3 |
| Net Debt to Adjusted EBITDA Ratio (times) | 0.4 | 1.2 |
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 43 | |
| --- | --- |
Our Net Debt to Adjusted Funds Flow Ratio and our Net Debt to Adjusted EBITDA Ratio Targets are approximately 1.0 times at the bottom of the commodity price cycle, which we believe is approximately US$45 per barrel WTI. This ratio may fluctuate periodically outside the range due to factors such as persistently high or low commodity prices. Our objective is to maintain a high level of capital discipline and manage our capital structure to help ensure we have sufficient liquidity through all stages of the economic cycle. To ensure financial resilience, we may, among other actions, adjust capital and operating spending, draw down on our credit facilities or repay existing debt, adjust dividends paid to shareholders, purchase our common shares for cancellation, issue new debt, or issue new shares.
As at September 30, 2022, our Net Debt to Capitalization Ratio decreased compared with December 31, 2021, primarily due to higher net earnings and ongoing reductions in Net Debt during the trailing twelve-month period.
Our Net Debt to Adjusted Funds Flow Ratio and Net Debt to Adjusted EBITDA Ratio decreased compared with December 31, 2021, as a result of higher Operating Margin and lower Net Debt in the trailing twelve-months. See the Operating and Financial Results section of this MD&A for more information on Operating Margin and Net Debt.
Share Capital and Stock-Based Compensation Plans
As at September 30, 2022, there were approximately 1,923 million common shares outstanding (December 31, 2021 – 2,001 million common shares) and 36 million preferred shares outstanding (December 31, 2021 – 36 million preferred shares). Refer to Note 24 of the interim Consolidated Financial Statements for further details.
In November 2021, we commenced a NCIB for the purchase of up to 146.5 million of the Company’s common shares until November 8, 2022. In the first nine months of 2022, Cenovus purchased and settled 97 million common shares for $2.1 billion (year ended December 31, 2021 – 17 million common shares for $265 million), at a volume weighted average price of $22.10 per common share. The common shares were subsequently cancelled. From October 1, 2022 to November 1, 2022, Cenovus purchased an additional 4 million common shares for $94 million. Cenovus purchased 118 million common shares for $2.5 billion from the commencement of our NCIB to November 1, 2022. Our existing NCIB expires on November 8, 2022. On November 1, 2022, the Board approved filing an application with the TSX to renew our NCIB to purchase up to 10 percent of the Company’s public float, or approximately 137 million of the Company’s common shares for twelve months once approved by the TSX.
As at September 30, 2022, there were approximately 57 million Cenovus Warrants outstanding (December 31, 2021 – 65 million Cenovus Warrants). Each Cenovus Warrant entitles the holder to acquire one common share for a period of five years (from the date of issue) at an exercise price of $6.54 per common share. The Cenovus Warrants expire on January 1, 2026. Refer to Note 24 of the interim Consolidated Financial Statements for further details.
Refer to Note 26 of the interim Consolidated Financial Statements for further details on our stock option plans and our performance share unit, restricted share unit and deferred share unit plans.
Our outstanding share data is as follows:
| As at October 28, 2022 | Units Outstanding<br><br>(thousands) | Units Exercisable<br><br>(thousands) |
|---|---|---|
| Common Shares | 1,918,887 | N/A |
| Cenovus Warrants | 57,355 | N/A |
| Series 1 Preferred Shares | 10,740 | N/A |
| Series 2 Preferred Shares | 1,260 | N/A |
| Series 3 Preferred Shares | 10,000 | N/A |
| Series 5 Preferred Shares | 8,000 | N/A |
| Series 7 Preferred Shares | 6,000 | N/A |
| Stock Options | 18,263 | 9,190 |
| Other Stock-Based Compensation Plans | 16,928 | 1,608 |
Common Share Dividends
In the third quarter of 2022, we paid base dividends of $205 million or $0.105 per common share (2021 – $35 million or $0.018 per common share). In the first nine months of 2022, we paid base dividends of $481 million or $0.2450 per common share (2021 – $106 million or $0.0525 per common share).
The Board declared a fourth quarter base dividend of $0.105 per common share, payable on December 30, 2022, to common shareholders of record as at December 15, 2022.
The Board declared a fourth quarter variable dividend of $0.114 per common share, payable on December 2, 2022, to common shareholders of record as at November 18, 2022.
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The declaration of common share dividends is at the sole discretion of Cenovus’s Board and is considered quarterly.
Cumulative Redeemable Preferred Share Dividends
In the three and nine months ended September 30, 2022, dividends of $9 million and $26 million, respectively, were paid on the series 1, 2, 3, 5 and 7 preferred shares. The declaration of preferred share dividends is at the sole discretion of Cenovus’s Board and is considered quarterly. The Board declared a fourth quarter dividend on the series 1, 2, 3, 5 and 7 preferred shares of $9 million, payable on January 3, 2023, to preferred shareholders of record as of December 15, 2022.
Capital Investment Decisions
Our 2022 capital program is forecast to be between $3.3 billion and $3.7 billion. Our Future Capital Investment is focused on maintaining safe and reliable operations, while positioning the Company to drive enhanced shareholder value. We expect our annual upstream production to average between 780 thousand BOE per day and 810 thousand BOE per day. Given the incident at the Toledo Refinery, we now expect our downstream crude oil throughput to fall modestly outside the guidance range of 530 thousand barrels per day to 580 thousand barrels per day in 2022.
Contractual Obligations and Commitments
We have obligations for goods and services entered into in the normal course of business. Commitments are largely related to transportation agreements and obligations that have original maturities of less than one year are excluded. For further information, see Note 31 to the interim Consolidated Financial Statements.
Our total commitments were $34.5 billion as at September 30, 2022, of which $21.3 billion are for various transportation and storage commitments and $10.6 billion are for fuel purchase commitments. Transportation commitments include $9.1 billion that are subject to regulatory approval or have been approved, but are not yet in service. Terms are up to 20 years subsequent to the date of commencement and should help align with the Company’s future transportation requirements.
Our commitments with HMLP at September 30, 2022, include $2.2 billion related to transportation, storage and other long-term contracts.
As at September 30, 2022, outstanding letters of credit issued as security for performance under certain contracts totaled $472 million (December 31, 2021 – $565 million).
Legal Proceedings
We are involved in a limited number of legal claims associated with the normal course of operations. We believe that any liabilities that might arise from such matters, to the extent not provided for, are not likely to have a material effect on our interim Consolidated Financial Statements.
Transactions with Related Parties
Transactions with HMLP are related party transactions as we have a 35 percent ownership interest in HMLP. As the operator of the assets held by HMLP, we provide management services for which we recover shared service costs. We are also the contractor for HMLP and construct its assets on a cost recovery basis with certain restrictions. For the three and nine months ended September 30, 2022, we charged HMLP $56 million and $133 million, respectively, for construction and management services (2021 – $101 million and $165 million, respectively).
We pay an access fee to HMLP for the use of its pipeline systems that are used by our blending business. We also pay HMLP for transportation and storage services. For the three and nine months ended September 30, 2022, we incurred costs of $64 million and $197 million, respectively, for the use of HMLP’s pipeline systems, as well as transportation and storage services (2021 – $70 million and $215 million, respectively).
| RISK MANAGEMENT AND RISK FACTORS |
|---|
For a full understanding of the risks that impact us, the following discussion should be read in conjunction with the Risk Management and Risk Factors section of our 2021 annual MD&A.
We are exposed to a number of risks through the pursuit of our strategic objectives. Some of these risks impact the energy industry as a whole and others are unique to our operations. The impact of any risk or a combination of risks may adversely affect, among other things, our business, reputation, financial condition, results of operations and cash flows, which may reduce or restrict our ability to pursue our strategic priorities, meet our targets or outlooks, goals, initiatives and ambitions, respond to changes in our operating environment, pay dividends to our shareholders, continue with share purchases under our NCIB and fulfill our obligations (including debt servicing requirements) and may materially affect the market price of our securities.
The following provides an update on our risks.
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Financial Risk
Dividend Payments and Purchase of Securities
The payment of dividends, whether base or variable, the continuation of our dividend reinvestment plan and any potential purchase by Cenovus of our securities is at the discretion of our Board, and is dependent upon, among other things, financial performance, debt covenants, satisfying solvency tests, our ability to meet financial obligations as they come due, working capital requirements, future tax obligations, future capital requirements, commodity prices and other business and risk factors set forth in this MD&A and in our 2021 annual MD&A.
Specifically, in connection with Cenovus's updated capital allocation framework, the Company will target returns to shareholders as a percentage of Excess Free Funds Flow, through share buybacks or variable dividends, based on Net Debt at the preceding quarter-end, as described in the Overview of Cenovus section of this MD&A. The frequency and amount of variable dividend payments, if any, may vary significantly over time as a result of our Net Debt, Excess Free Funds Flow, amount of share buybacks and other factors inherent with our capital allocation framework from time to time. As the payment of dividends remains at the discretion of our Board and dependent on, among other things, the factors described above, the Company can provide no assurance that it will continue to pay base or variable dividends or authorize share buybacks at the current rate or at all.
Further, the individual or aggregate amount of base or variable dividends, if any, paid by Cenovus from time to time may result in adjustments to the exercise price and the exchange basis (the number of common shares received for each Cenovus Warrant exercised) of the Cenovus Warrants under the terms of the indenture governing the Cenovus Warrants. Such adjustments may impact the value received by Cenovus upon the exercise of Cenovus Warrants and may result in additional issuances of common shares on the exercise of Cenovus Warrants which may have a further dilutive effect on the ownership interest of shareholders of Cenovus and on Cenovus's earnings per share.
Commodity Prices
Fluctuations in commodity prices, associated price differentials and refining margins impact our financial condition, results of operations, cash flows, growth, access to capital, our level of shareholder returns and cost of borrowing. We partially mitigate our exposure to commodity price risk through the integration of our business, financial instruments, physical contracts, market access commitments, renewable power contracts and generally through our access to committed credit facilities. In certain instances, we use financial instruments to manage our exposure to price volatility on a portion of our refined products, crude oil and natural gas production, and related inventory or volumes in long-distance transit. Previously, we had also used derivative instruments to manage our overall exposure to volatility in cash flow using WTI derivative instruments, however, as announced on April 4, 2022, we suspended our crude oil sales price risk management activities related to WTI. All WTI positions impacted by this decision were closed by June 30, 2022.
Risks Associated with Derivative Financial Instruments
Derivative financial instruments expose us to the risk that a counterparty will default on its contractual obligations. This risk is partially mitigated through credit exposure limits, frequent assessment of counterparty credit ratings and netting arrangements, as outlined in our Board-approved Credit Policy.
Derivative financial instruments also expose us to the risk of a loss from adverse changes in the market value of financial instruments or if we are unable to fulfill our delivery obligations related to the underlying physical transaction. These risks are managed through hedging limits authorized according to our Market Risk Management Policy.
Although we have suspended our crude oil sales price risk management activities related to WTI, certain financial instruments related to our condensate, feedstock and refined product price risk management programs which include WTI, remain outstanding and will continue to be used, in addition to electricity, interest and exchange rates applicable to our business. As such, we will be exposed to the risk of a loss from adverse changes in the market value of any such financial instruments. These financial instruments may also limit the benefit to us if commodity prices, interest or foreign exchange rates change. Fluctuations in the price of WTI may have a larger impact on our financial condition, results of operations, cash flows, growth, access to capital, our level of shareholder returns and our cost of borrowing, compared to the periods prior to the suspension of our crude oil sales price risk management activities related to WTI. For details of our financial instruments, including classification, assumptions made in the calculation of fair value and additional discussion on exposure of risks and the management of those risks, see Notes 28 and 29 to the interim Consolidated Financial Statements.
Impact of Financial Risk Management Activities
Cenovus makes storage and transportation decisions, considering our marketing and transportation infrastructure including storage and pipeline assets, to optimize product mix, delivery points, transportation commitments and customer diversification. In order to price protect our inventories associated with storage or transport decisions, Cenovus employs various price alignment and volatility management strategies, including risk management contracts, to reduce volatility in future cash flows and improve cash flow stability.
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In a rising commodity price environment, we would expect to realize losses on our risk management activities but recognize gains on the underlying physical inventory sold in the period and the opposite to occur in a falling commodity price environment. In the three and nine months ended September 30, 2022, we incurred a realized gain and realized loss, respectively, on our risk management positions due to the settlement of benchmark prices relative to our risk management contract prices, but recognized a loss and gain, respectively, on the underlying physical inventory sold during such period due to changing benchmark prices.
Transactions typically span across periods, as such, these transactions reside across both realized and unrealized risk management. As the financial contracts settle, they will flow from unrealized to realized risk management gains and losses.
| CRITICAL ACCOUNTING JUDGMENTS, ESTIMATION UNCERTAINTIES AND ACCOUNTING POLICIES |
|---|
Management is required to make estimates and assumptions, as well as use judgment in the application of accounting policies that could have a significant impact on our financial results. Actual results may differ from estimates and those differences may be material. The estimates and assumptions used are subject to updates based on experience and the application of new information. Our critical accounting policies and estimates are reviewed annually by the Audit Committee of the Board. Further details on the basis of preparation and our significant accounting policies can be found in the notes to the annual Consolidated Financial Statements for the year ended December 31, 2021.
Critical Judgments in Applying Accounting Policies and Key Sources of Estimation Uncertainty
Critical judgments are those judgments made by Management in the process of applying accounting policies that have the most significant effect on the amounts recorded in our annual and interim Consolidated Financial Statements. A full list of the key sources of estimation uncertainty can be found in our annual Consolidated Financial Statements for the year ended December 31, 2021. There have been no changes to our critical judgments used in applying accounting policies and key sources of measurement uncertainty during the nine months ended September 30, 2022.
New Accounting Standards and Interpretations not yet Adopted
A number of new accounting standards, amendments to accounting standards and interpretations were effective for annual periods beginning on or after January 1, 2022, but are not material to Cenovus’s operations. There were no new or amended accounting standards or interpretations issued during the nine months ended September 30, 2022, that are expected to have a material impact on the Company’s interim Consolidated Financial Statements.
| CONTROL ENVIRONMENT |
|---|
Management, including our President & Chief Executive Officer and Executive Vice-President & Chief Financial Officer, assessed the design and effectiveness of internal control over financial reporting (“ICFR”) and disclosure controls and procedures (“DC&P”) as at September 30, 2022. In making its assessment, Management used the Committee of Sponsoring Organizations of the Treadway Commission Framework in Internal Control – Integrated Framework (2013) to evaluate the design and effectiveness of ICFR. Based on our evaluation, Management has concluded that both ICFR and DC&P were effective as at September 30, 2022.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| ADVISORY |
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Oil and Gas Information
Barrels of Oil Equivalent – natural gas volumes have been converted to BOE on the basis of six Mcf to one bbl. BOE may be misleading, particularly if used in isolation. A conversion ratio of one bbl to six Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil compared with natural gas is significantly different from the energy equivalency conversion ratio of 6:1, utilizing a conversion on a 6:1 basis is not an accurate reflection of value.
Forward-looking Information
This document contains forward-looking statements and other information (collectively “forward-looking information”) about the Company’s current expectations, estimates and projections, made in light of the Company’s experience and perception of
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historical trends. Although the Company believes that the expectations represented by such forward-looking information are reasonable, there can be no assurance that such expectations will prove to be correct.
This forward-looking information is identified by words such as “anticipate”, “believe”, “capacity”, “commit”, “continue”, “could”, “estimate”, “expect”, “focus”, “forecast”, “future”, “may”, “objective”, “opportunities”, “option”, “plan”, “potential”, “project”, “seek”, “target”, and “will”, or similar expressions and includes suggestions of future outcomes, including, but not limited to, statements about: delivering value over the long-term; maximizing, growing or enhancing shareholder value and/or returns; returning incremental capital to shareholder beyond the base dividend; allocating and paying out Excess Free Funds Flow under the capital allocation framework; deleveraging the balance sheet; opportunistic share repurchases and variable dividend distributions; applying for approval to conduct a new NCIB; safety performance and culture; ESG governance and leadership; the Company’s targets for each of its five ESG focus areas; Free Funds Flow generation, allocation, pay out and growth through pricing cycles; daily annual upstream production and downstream throughput; monitoring overall market dynamics to assess management of upstream production; monitoring downstream market fundamentals and optimizing refinery run rates; funding near-term cash requirements and meeting payment obligations; maintaining investment grade credit ratings; Debt reduction and Debt and Net Debt targets; disciplined capital allocation; ensuring sufficient liquidity through all stages of the economic cycle strengthening and maintaining a strong balance sheet; flexibility in both high and low commodity price environments; managing capital structure; Net Debt to Adjusted Funds Flow Ratio and Net Debt to Adjusted EBITDA Ratio; cost savings and reductions; cost structure; interest expense; financial results; margin enhancement; improving efficiencies to drive incremental capital, operating and general and administrative cost reductions; shortening and optimizing the value chain; reducing condensate costs associated with heavy oil transportation; maintaining the Company’s capital program and sustaining the base dividend at US$45 WTI per barrel; maximizing value received for products; mitigating the impact of volatility in light-heavy crude oil differentials; partially mitigating the impact of exposure to various prices for commodities and associated price differentials and refining margins; managing upstream production rates in response to pipeline capacity constraints, voluntary and mandated production curtailments and crude oil differentials; variable payments in respect of the Sunrise acquisition; continued use of financial instruments to mitigate exposure to various commodities (including WTI, utilized in condensate and price risk management for refining operations) and products, including associated price differentials and refining margins; drilling activity, asset integrity and emissions initiatives in the conventional segment; initial production and exploration of new fields or projects; financial resilience; adjusting capital and operating spending, drawing down on credit facilities or repaying existing debt, adjusting dividends paid to shareholders, purchasing Cenovus common shares for cancellation, issuing new debt, or issuing new shares; future capital investment for: maintaining safe and reliable operations, sustaining Oil Sands production, sustaining drilling programs in the conventional segment, the Superior Refinery rebuild project, the Terra Nova ALE project and White Rose project, refining operations and reliability and debottlenecking at the Lloydminster Refinery to increase throughput capacity; the status and timing of closing the Toledo Acquisition and any opportunities and benefits (including increases in throughput) therefrom; applying the Company’s operating model at Sunrise and exceeding nameplate capacity at that facility; capital expenditure required to achieve first oil for the West White Rose project; capturing value from crude oil and natural gas production through to the sale of finished products such as transportation fuels; reinvestment in the business and diversification; the winter drilling program in the Conventional business; resuming projects, including restarting the West White Rose project and achieving first and peak oil therefrom; the return to the field of the floating, production, storage and offloading unit for the Terra Nova ALE project; first gas production from the MDA field; drilling development wells and construction of production facilities and production therefrom; liabilities from legal proceedings; and the Company’s outlook for commodities and the Canadian dollar and the effects thereof on Cenovus.
Readers are cautioned not to place undue reliance on forward-looking information as the Company’s actual results may differ materially from those expressed or implied.
Developing forward-looking information involves reliance on a number of assumptions and consideration of certain risks and uncertainties, some of which are specific to the Company and others that apply to the industry generally. The factors or assumptions on which the forward-looking information is based include, but are not limited to: forecast oil and natural gas, natural gas liquids, condensate and refined products prices, light-heavy crude oil price differentials; the Company’s ability to realize the anticipated benefits and anticipated cost synergies of the Arrangement and other acquisitions; the Company’s ability to successfully integrate the legacy Husky business with its own and any costs associated therewith; the accuracy of any assessments undertaken in connection with the Arrangement or other acquisitions; forecast production and throughput volumes; projected capital investment levels, the flexibility of capital spending plans and associated sources of funding; the absence of significant adverse changes to government policies, legislation and regulations (including related to climate change), Indigenous relations, interest rates, inflation, foreign exchange rates, competitive conditions and the supply and demand for crude oil and natural gas, NGLs, condensate and refined products; the political, economic and social stability of jurisdictions in which the Company operates; the absence of significant disruption of operations, including as a result of harsh weather, natural disaster, accident, civil unrest or other similar events; the prevailing climatic conditions in the Company’s operating locations; achievement of further cost reductions and sustainability thereof; applicable royalty regimes, including expected royalty rates; future improvements in availability of product transportation capacity; increase to the Company’s share price and market capitalization over the long term; opportunities to purchase shares for cancellation at prices acceptable to the Company; the sufficiency of cash balances, internally generated cash flows, existing credit facilities, management of the Company’s asset
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portfolio and access to capital and insurance coverage to pursue and fund future investments, sustainability and development plans and dividends, including any increase thereto; production from the Company’s Conventional segment providing an economic hedge for the natural gas required as a fuel source at both the Company’s oil sands and refining operations; realization of expected capacity to store within the Company’s oil sands reservoirs barrels not yet produced, including that the Company will be able to time production and sales of our inventory at later dates when demand has increased, pipeline and/or storage capacity has improved and future crude oil differentials have narrowed; the WTI-WCS differential in Alberta remains largely tied to global supply factors and heavy crude processing capacity; the ability of the Company’s refining capacity, dynamic storage, existing pipeline commitments, crude-by-rail loading capacity and financial hedge transactions to partially mitigate a portion of the Company’s WCS crude oil volumes against wider differentials; the Company’s ability to produce from oil sands facilities on an unconstrained basis; estimates of quantities of oil, bitumen, natural gas and liquids from properties and other sources not currently classified as proved; the accuracy of accounting estimates and judgments; the Company’s ability to obtain necessary regulatory and partner approvals; the successful, timely and cost effective implementation of capital projects, development projects or stages thereof; the Company’s ability to generate sufficient cash flow to meet current and future obligations; estimated abandonment and reclamation costs, including associated levies and regulations applicable thereto; the Company’s ability to obtain and retain qualified staff and equipment in a timely and cost-efficient manner; the Company’s ability to complete acquisitions and dispositions, including with desired transaction metrics and within expected timelines; the accuracy of climate scenarios and assumptions, including third party data on which the Company relies; ability to access and implement all technology and equipment necessary to achieve expected future results, including in respect of climate and GHG emissions targets and ambitions and the commercial viability and scalability of emission reduction strategies and related technology and products; continuing; collaboration with the government, Pathways Alliance and other industry organizations; alignment of realized WCS and WCS prices used to calculate the variable payment to BP; market and business conditions; forecast inflation and other assumptions inherent in the Company’s 2022 guidance available on cenovus.com and as set out below; the availability of Indigenous owned or operated businesses and the Company’s ability to retain them; and other risks and uncertainties described from time to time in the filings the Company makes with securities regulatory authorities.
2022 guidance, as updated July 27, 2022, and available on cenovus.com, assumes: Brent prices of US$103.00 per barrel, WTI prices of US$100.00 per barrel; WCS of US$84.00 per barrel; Differential WTI-WCS of US$16.00 per barrel; AECO natural gas prices of $5.30 per thousand cubic feet; Chicago 3-2-1 crack spread of US$38.00 per barrel; and an exchange rate of $0.78 US$\C$.
The risk factors and uncertainties that could cause the Company’s actual results to differ materially from the forward-looking information, include, but are not limited to: the effect of the COVID-19 pandemic, including any variants thereof, on the Company’s business, including any related restrictions, containment, and treatment measures taken by varying levels of government in the jurisdictions in which the Company operates; the success of the Company’s COVID-19 workplace policies and the return of people to the Company’s workplace; the Company’s ability to realize the anticipated benefits of the Arrangement and other acquisitions in a timely manner or at all; the Company’s ability to successfully integrate the legacy Husky business and other acquired businesses with its own in a timely and cost effective manner; unforeseen or underestimated liabilities associated with the Arrangement or other acquisitions; risks associated with acquisitions and dispositions; the Company’s ability to access or implement some or all of the technology necessary to efficiently and effectively operate its assets and achieve expected future results including in respect of climate and GHG emissions targets and ambitions and the commercial viability and scalability of emission reduction strategies and related technology and products; the development and execution of implementing strategies to meet climate and GHG emissions targets and ambitions; the effect of new significant shareholders; volatility of and other assumptions regarding commodity prices; the duration of any market downturn; foreign exchange risk, including related to agreements denominated in foreign currencies; the Company’s continued liquidity is sufficient to sustain operations through a prolonged market downturn; WTI-WCS differential will remain largely
tied to global supply factors and heavy crude processing capacity; the Company’s ability to achieve lower transportation costs as a result of temporarily suspending the crude-by-rail program; the Company’s ability to realize the expected impacts of its capacity to store within its oil sands reservoirs barrels not yet produced, including possible inability to time production and sales at later dates when pipeline and/or storage capacity and crude oil differentials have improved; the effectiveness of the Company’s risk management program; the accuracy of cost estimates regarding commodity prices, currency and interest rates; lack of alignment of realized WCS prices and WCS prices used to recalculate the variable payment to BP; product supply and demand; the accuracy of the Company’s share price and market capitalization assumptions; market competition, including from alternative energy sources; risks inherent in the Company’s marketing operations, including credit risks, exposure to counterparties and partners, including the ability and willingness of such parties to satisfy contractual obligations in a timely manner; risks inherent in the operation of the Company’s crude-by-rail terminal, including health, safety and environmental risks; the Company’s ability to maintain desirable ratios of Net Debt to Adjusted EBITDA and Net Debt to Adjusted Funds Flow; the Company’s ability to access various sources of debt and equity capital, generally, and on acceptable terms; the Company’s ability to finance growth and sustaining capital expenditures; changes in credit ratings applicable to the Company or any of its securities; changes to the Company’s dividend plans; the Company’s ability to utilize tax losses in the future; the accuracy of the Company’s reserves, future production and future net revenue estimates; the accuracy of the Company’s accounting estimates and judgements; the Company’s ability to replace and expand crude oil and natural gas reserves; the costs to acquire
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exploration rights, undertake geological studies, appraisal drilling and project developments; potential requirements under applicable accounting standards for impairment or reversal of estimated recoverable amounts of some or all of the Company’s assets or goodwill from time to time; the Company’s ability to maintain its relationships with its partners and to successfully manage and operate its integrated operations and business; reliability of the Company’s assets including in order to meet production targets; potential disruption or unexpected technical difficulties in developing new products and manufacturing processes; the occurrence of unexpected events resulting in operational interruptions, including blowouts, fires, explosions, railcar incidents or derailments, aviation incidents, gaseous leaks, migration of harmful substances, loss of containment, releases or spills, including releases or spills from offshore facilities and shipping vessels at terminals or hubs and as a result of pipeline or other leaks, corrosion, epidemics or pandemics, and catastrophic events, including, but not limited to, war, extreme weather events, natural disasters, iceberg incidents, acts of vandalism and terrorism, and other accidents or hazards that may occur at or during transport to or from commercial or industrial sites and other accidents or similar events; refining and marketing margins; cost escalations, including inflationary pressures on operating costs, such as labour, materials, natural gas and other energy sources used in oil sands processes and downstream operations and increased insurance deductibles or premiums; the cost and availability of equipment necessary to the Company’s operations; potential failure of products to achieve or maintain acceptance in the market; risks associated with the energy industry’s and the Company’s reputation, social license to operate and litigation related thereto; unexpected cost increases or technical difficulties in operating, constructing or modifying manufacturing or refining facilities; unexpected difficulties in producing, transporting or refining bitumen and/or crude oil into petroleum and chemical products; risks associated with technology and equipment and its application to the Company’s business, including potential cyberattacks; geo-political and other risks associated with the Company’s international operations; risks associated with climate change and the Company’s assumptions relating thereto; the timing and the costs of well and pipeline construction; the Company’s ability to access markets and to secure adequate and cost effective product transportation including sufficient pipeline, crude-by-rail, marine or alternate transportation, including to address any gaps caused by constraints in the pipeline system or storage capacity; availability of, and the Company’s ability to attract and retain, critical talent; possible failure to obtain and retain qualified leadership and personnel, and equipment in a timely and cost efficient manner; changes in labour demographics and relationships, including with any unionized workforces; unexpected abandonment and reclamation costs; changes in the regulatory frameworks, permits and approvals in any of the locations in which the Company operates or to any of the infrastructure upon which it relies; government actions or regulatory initiatives to curtail energy operations or pursue broader climate change agendas; changes to regulatory approval processes and land use designations, royalty, tax, environmental, GHG, carbon, climate change and other laws or regulations, or changes to the interpretation of such laws and regulations, as adopted or proposed, the impact thereof and the costs associated with compliance; the expected impact and timing of various accounting pronouncements, rule changes and standards on the Company’s business, its financial results and Consolidated Financial Statements; changes in general economic, market and business conditions; the impact of production agreements among OPEC and non-OPEC members; the political, social and economic conditions in the jurisdictions in which the Company operates or supplies; the status of the Company’s relationships with the communities in which it operates, including with Indigenous communities; the occurrence of unexpected events such as protests, pandemics, war, terrorist threats and the instability resulting therefrom; and risks associated with existing and potential future lawsuits, shareholder proposals and regulatory actions against the Company. In addition, there are risks that the effect of actions taken by us in implementing targets, commitments and ambitions for ESG focus areas may have a negative impact on our existing business, growth plans and future results from operations.
Readers are cautioned that the foregoing lists are not exhaustive and are made as at the date hereof. Events or circumstances could cause our actual results to differ materially from those estimated or projected and expressed in, or implied by, the forward-looking information. For a full discussion of the Company’s material risk factors, see Risk Management and Risk Factors in the Company’s Annual MD&A, and in this MD&A, and the risk factors described in other documents the Company files from time to time with securities regulatory authorities in Canada, available on SEDAR at sedar.com, and with the U.S. Securities and Exchange Commission on EDGAR at sec.gov, and on the Company’s website at cenovus.com.
Information on or connected to the Company’s website at cenovus.com does not form part of this MD&A unless expressly incorporated by reference herein.
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ABBREVIATIONS
The following abbreviations have been used in this document:
| Crude Oil | Natural Gas | ||
|---|---|---|---|
| bbl | barrel | Mcf | thousand cubic feet |
| Mbbls/d | thousand barrels per day | MMcf | million cubic feet |
| MMbbls | million barrels | MMcf/d | million cubic feet per day |
| BOE | barrel of oil equivalent | Bcf | billion cubic feet |
| MBOE | thousand barrels of oil equivalent | MMBtu | million British thermal units |
| MBOE/d | thousand barrels of oil equivalent per day | GJ | gigajoule |
| MMBOE | million barrels of oil equivalent | AECO | Alberta Energy Company |
| WTI | West Texas Intermediate | NYMEX | New York Mercantile Exchange |
| WCS | Western Canadian Select | SAGD | steam-assisted gravity drainage |
| HSB | Husky Synthetic Blend | ||
| OPEC | Organization of Petroleum Exporting Countries | ||
| OPEC+ | OPEC and a group of 10 non-OPEC members | ||
| FPSO | Floating production storage and offloading unit |
SPECIFIED FINANCIAL MEASURES
Certain financial measures in this document do not have a standardized meaning as prescribed by IFRS including Operating Margin, Operating Margin for the Upstream or Downstream operations, Operating Margin by asset, Total Integration Costs, Adjusted Funds Flow, Free Funds Flow, Excess Free Funds Flow, Gross Margin, Refining Margin, Forward-looking Integration Costs, and Netbacks (including the total netbacks per BOE).
These measures may not be comparable to similar measures presented by other issuers. These measures have been described and presented in order to provide shareholders and potential investors with additional measures for analyzing our ability to generate funds to finance our operations and information regarding our liquidity. This additional information should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. The definition and reconciliation, if applicable, of each specified financial measure is presented in this Advisory and may also be presented in the Operating and Financial Results or Liquidity and Capital Resources sections of this MD&A.
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Operating Margin
Operating Margin and Operating Margin by asset are non-GAAP financial measures, and Operating Margin for the Upstream or Downstream segment are specified financial measures. These are used to provide a consistent measure of the cash generating performance of our operations and assets for comparability of our underlying financial performance between periods. Operating Margin is defined as revenues less purchased product, transportation and blending, operating expenses, plus realized gains less realized losses on risk management activities. Items within the Corporate and Eliminations segment are excluded from the calculation of Operating Margin.
| Three Months Ended September 30, 2022 | Three Months Ended June 30, 2022 | Three Months Ended March 31, 2022 (1) | Nine Months Ended September 30, 2022 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions) | Upstream (2) | Downstream (2) | Total | Upstream | Downstream | Total | Upstream | Downstream | Total | Upstream (2) | Downstream (2) | Total |
| Revenues | ||||||||||||
| Gross Sales | 10,238 | 11,078 | 21,316 | 11,685 | 10,844 | 22,529 | 10,897 | 8,247 | 19,144 | 32,820 | 30,169 | 62,989 |
| Less: Royalties | 1,226 | — | 1,226 | 1,582 | — | 1,582 | 1,185 | — | 1,185 | 3,993 | — | 3,993 |
| 9,012 | 11,078 | 20,090 | 10,103 | 10,844 | 20,947 | 9,712 | 8,247 | 17,959 | 28,827 | 30,169 | 58,996 | |
| Expenses | ||||||||||||
| Purchased Product | 2,397 | 9,882 | 12,279 | 1,461 | 9,046 | 10,507 | 1,818 | 6,946 | 8,764 | 5,676 | 25,874 | 31,550 |
| Transportation and Blending | 2,800 | 3 | 2,803 | 3,238 | (2) | 3,236 | 3,194 | 2 | 3,196 | 9,232 | 3 | 9,235 |
| Operating | 915 | 780 | 1,695 | 1,010 | 866 | 1,876 | 909 | 645 | 1,554 | 2,834 | 2,291 | 5,125 |
| Realized (Gain) Loss on Risk Management | 51 | (77) | (26) | 563 | 87 | 650 | 871 | 110 | 981 | 1,485 | 120 | 1,605 |
| Operating Margin | 2,849 | 490 | 3,339 | 3,831 | 847 | 4,678 | 2,920 | 544 | 3,464 | 9,600 | 1,881 | 11,481 |
(1)Prior period results were revised to more appropriately reflect the cost of blending. See Note 3 of the interim Consolidated Financial Statements for further details.
(2)Found in Note 1 of the interim Consolidated Financial Statements.
| 2021 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Upstream | Downstream | Total | ||||||||||||||||
| Year-to-Date | Three Months Ended | Year-to-Date | Three Months Ended | Year-to-Date | Three Months Ended | |||||||||||||
| ($ millions) | Q4 | Q3 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q4 | Q3 | Q2 | Q1 |
| Revenues | ||||||||||||||||||
| Gross Sales (1) | 27,844 | 19,607 | 8,237 | 7,354 | 6,128 | 6,125 | 26,673 | 18,538 | 8,135 | 7,530 | 6,318 | 4,690 | 54,517 | 38,145 | 16,372 | 14,884 | 12,446 | 10,815 |
| Less: Royalties | 2,454 | 1,639 | 815 | 733 | 533 | 373 | — | — | — | — | — | — | 2,454 | 1,639 | 815 | 733 | 533 | 373 |
| 25,390 | 17,968 | 7,422 | 6,621 | 5,595 | 5,752 | 26,673 | 18,538 | 8,135 | 7,530 | 6,318 | 4,690 | 52,063 | 36,506 | 15,557 | 14,151 | 11,913 | 10,442 | |
| Expenses | ||||||||||||||||||
| Purchased Product (1) | 4,059 | 2,861 | 1,198 | 1,074 | 717 | 1,070 | 23,526 | 16,178 | 7,348 | 6,708 | 5,502 | 3,968 | 27,585 | 19,039 | 8,546 | 7,782 | 6,219 | 5,038 |
| Transportation and<br><br>Blending (1) | 8,714 | 6,115 | 2,599 | 2,137 | 2,006 | 1,972 | — | — | — | — | — | — | 8,714 | 6,115 | 2,599 | 2,137 | 2,006 | 1,972 |
| Operating | 3,241 | 2,376 | 865 | 800 | 791 | 785 | 2,258 | 1,569 | 689 | 537 | 515 | 517 | 5,499 | 3,945 | 1,554 | 1,337 | 1,306 | 1,302 |
| Realized (Gain) Loss on Risk Management | 788 | 586 | 202 | 168 | 188 | 230 | 104 | 48 | 56 | 17 | 10 | 21 | 892 | 634 | 258 | 185 | 198 | 251 |
| Operating Margin | 8,588 | 6,030 | 2,558 | 2,442 | 1,893 | 1,695 | 785 | 743 | 42 | 268 | 291 | 184 | 9,373 | 6,773 | 2,600 | 2,710 | 2,184 | 1,879 |
(1) Prior period results were revised for a change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending. See the Consolidated Financial Statements and Note 3 of the interim Consolidated Financial Statements for further details.
| Three Months Ended December 31, 2020 | Three Months Ended September 30, 2020 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions) | Upstream | Downstream | Total | Upstream | Downstream | Total | ||||||
| Revenues | ||||||||||||
| Gross Sales | 2,749 | 1,124 | 3,873 | 2,746 | 1,252 | 3,998 | ||||||
| Less: Royalties | 143 | — | 143 | 153 | — | 153 | ||||||
| 2,606 | 1,124 | 3,730 | 2,593 | 1,252 | 3,845 | |||||||
| Expenses | ||||||||||||
| Purchased Product | 334 | 1,016 | 1,350 | 389 | 1,133 | 1,522 | ||||||
| Transportation and Blending | 1,149 | — | 1,149 | 1,036 | — | 1,036 | ||||||
| Operating | 389 | 192 | 581 | 367 | 187 | 554 | ||||||
| Realized (Gain) Loss on Risk Management | 40 | (15) | 25 | 137 | 2 | 139 | ||||||
| Operating Margin | 694 | (69) | 625 | 664 | (70) | 594 | ||||||
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 52 | |||||||||||
| --- | --- |
Operating Margin by Asset
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions) | Asia Pacific | Atlantic | Offshore (1) | Asia Pacific | Atlantic | Offshore (1) | ||||||
| Revenues | ||||||||||||
| Gross Sales | 337 | 113 | 450 | 1,083 | 492 | 1,575 | ||||||
| Less: Royalties | 20 | 2 | 22 | 60 | (4) | 56 | ||||||
| 317 | 111 | 428 | 1,023 | 496 | 1,519 | |||||||
| Expenses | ||||||||||||
| Transportation and Blending | — | 4 | 4 | — | 12 | 12 | ||||||
| Operating | 32 | 53 | 85 | 88 | 146 | 234 | ||||||
| Operating Margin | 285 | 54 | 339 | 935 | 338 | 1,273 |
(1)Found in Note 1 of the interim Consolidated Financial Statements.
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions) | Asia Pacific | Atlantic | Offshore (1) | Asia Pacific | Atlantic | Offshore (1) | ||||||
| Revenues | ||||||||||||
| Gross Sales | 336 | 68 | 404 | 965 | 297 | 1,262 | ||||||
| Less: Royalties | 20 | 4 | 24 | 53 | 21 | 74 | ||||||
| 316 | 64 | 380 | 912 | 276 | 1,188 | |||||||
| Expenses | ||||||||||||
| Transportation and Blending | — | 3 | 3 | — | 10 | 10 | ||||||
| Operating | 28 | 21 | 49 | 74 | 92 | 166 | ||||||
| Operating Margin | 288 | 40 | 328 | 838 | 174 | 1,012 |
(1)Found in Note 1 of the interim Consolidated Financial Statements.
Total Integration Costs
Total Integration Costs is a non-GAAP financial measure representing costs incurred as a result of the Arrangement, excluding share issuance costs.
| Nine Months Ended September 30, | ||||
|---|---|---|---|---|
| ( millions) | 2022 | 2021 | 2022 | 2021 |
| Integration Costs (1) | 24 | 45 | 76 | 302 |
| Capitalized Integration Costs (2) | 1 | 15 | 5 | 49 |
| Total Integration Costs | 25 | 60 | 81 | 351 |
All values are in US Dollars.
(1)See Note 7 of the interim Consolidated Statements of Earnings (Loss).
(2)Included in capital expenditures on the interim Consolidated Statements of Cash Flows.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 53 |
|---|
Adjusted Funds Flow, Free Funds Flow and Excess Free Funds Flow
Adjusted Funds Flow is a non-GAAP financial measure commonly used in the oil and gas industry to assist in measuring a company’s ability to finance its capital programs and meet its financial obligations. Adjusted Funds Flow is defined as cash from (used in) operating activities excluding settlement of decommissioning liabilities and net change in non-cash working capital. Non-cash working capital is composed of accounts receivable and accrued revenues, inventories (excluding non-cash inventory write-downs and reversals), income tax receivable, accounts payable and accrued liabilities and income tax payable.
Free Funds Flow is a non-GAAP financial measure used to assist in measuring the available funds the Company has after financing its capital programs. Free Funds Flow is defined as cash from (used in) operating activities excluding settlement of decommissioning liabilities and net change in non-cash working capital minus capital investment.
Excess Free Funds Flow is a non-GAAP financial measure used by the Company to deliver shareholder returns and allocate capital according to our shareholder returns and capital allocation framework. Excess Free Funds Flow is defined as Free Funds Flow minus base dividends paid on common shares, dividends paid on preferred shares, other uses of cash (including settlement of decommissioning liabilities and principal repayment of leases), and acquisition costs, plus proceeds from or payments related to divestitures. Excess Free Funds Flow was a new metric as of June 30, 2022.
| 2022 | 2021 | 2020 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions) | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | ||||||
| Cash From (Used in) Operating Activities | 4,089 | 2,979 | 1,365 | 2,184 | 2,138 | 1,369 | 228 | 250 | 732 | ||||||
| (Add) Deduct: | |||||||||||||||
| Settlement of Decommissioning Liabilities | (55) | (27) | (19) | (35) | (38) | (18) | (11) | (6) | (3) | ||||||
| Net Change in Non-Cash Working Capital | 1,193 | (92) | (1,199) | 271 | (166) | (430) | (902) | (77) | 328 | ||||||
| Adjusted Funds Flow | 2,951 | 3,098 | 2,583 | 1,948 | 2,342 | 1,817 | 1,141 | 333 | 407 | ||||||
| Capital Investment | 866 | 822 | 746 | 835 | 647 | 534 | 547 | 242 | 148 | ||||||
| Free Funds Flow | 2,085 | 2,276 | 1,837 | 1,113 | 1,695 | 1,283 | 594 | 91 | 259 | ||||||
| Add (Deduct): | |||||||||||||||
| Base Dividends Paid on Common Shares | (205) | (207) | (69) | (70) | (35) | (36) | (35) | ||||||||
| Dividends Paid on Preferred Shares | (9) | (8) | (9) | (8) | (9) | (8) | (9) | ||||||||
| Settlement of Decommissioning Liabilities | (55) | (27) | (19) | (35) | (38) | (18) | (11) | ||||||||
| Principal Repayment of Leases | (78) | (75) | (75) | (78) | (70) | (77) | (75) | ||||||||
| Acquisitions, Net of Cash Acquired | (389) | (1) | — | — | — | — | (7) | ||||||||
| Proceeds From Divestitures, Net of Cash Paid | 407 | 62 | 950 | 247 | 83 | 100 | 5 | ||||||||
| Excess Free Funds Flow | 1,756 | 2,020 | 2,615 | 1,169 | 1,626 | 1,244 | 462 | Nine Months Ended September 30, | |||||||
| --- | --- | --- | |||||||||||||
| ($ millions) | 2022 | 2021 | |||||||||||||
| Cash From (Used in) Operating Activities | 8,433 | 3,735 | |||||||||||||
| (Add) Deduct: | |||||||||||||||
| Settlement of Decommissioning Liabilities | (101) | (67) | |||||||||||||
| Net Change in Non-Cash Working Capital | (98) | (1,498) | |||||||||||||
| Adjusted Funds Flow | 8,632 | 5,300 | |||||||||||||
| Capital Investment | 2,434 | 1,728 | |||||||||||||
| Free Funds Flow | 6,198 | 3,572 |
Gross Margin, Refining Margin and Unit Operating Expense
Gross Margin and Refining Margin are non-GAAP financial measures, or contain a non-GAAP financial measure, used to evaluate the performance of our downstream operations. We define Gross Margin as revenues less purchased product. We define Refining Margin as Gross Margin divided by barrels of crude oil throughput. Unit Operating Expenses are specified financial measures used to evaluate the performance of our upstream and downstream operations. We define Unit Operating Expense as operating expenses divided by barrels of crude oil throughput in our downstream operations.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 54 |
|---|
Canadian Manufacturing
| Three Months Ended September 30, 2022 | |||||
|---|---|---|---|---|---|
| Basis of Refining Margin Calculation | |||||
| ($ millions) | Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | Other (1) | Total Canadian Manufacturing (2) |
| Revenues | 951 | 600 | 1,551 | (73) | 1,478 |
| Purchased Product | 694 | 498 | 1,192 | (100) | 1,092 |
| Gross Margin | 257 | 102 | 359 | 27 | 386 |
| Operating Statistics | |||||
| Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | |||
| Heavy Crude Oil Throughput (Mbbls/d) | 71.3 | 27.2 | 98.5 | ||
| Refining Margin ($/bbl) | 38.17 | 40.39 | 38.78 |
(1)Includes ethanol and crude-by-rail operations, and marketing activities.
(2)These amounts, excluding gross margin, are found in Note 1 of the interim Consolidated Financial Statements.
| Nine Months Ended September 30, 2022 | |||||
|---|---|---|---|---|---|
| Basis of Refining Margin Calculation | |||||
| ($ millions) | Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | Other (1) | Total Canadian Manufacturing (2) |
| Revenues | 2,651 | 1,027 | 3,678 | 365 | 4,043 |
| Purchased Product | 2,088 | 851 | 2,939 | 253 | 3,192 |
| Gross Margin | 563 | 176 | 739 | 112 | 851 |
| Operating Statistics | |||||
| Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | |||
| Heavy Crude Oil Throughput (Mbbls/d) | 68.8 | 23.7 | 92.5 | ||
| Refining Margin ($/bbl) | 30.08 | 27.34 | 29.37 |
(1)Includes ethanol and crude-by-rail operations, and marketing activities.
(2)These amounts, excluding gross margin, are found in Note 1 of the interim Consolidated Financial Statements.
| Three Months Ended September 30, 2021 | |||||
|---|---|---|---|---|---|
| Basis of Refining Margin Calculation | |||||
| ($ millions) | Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | Other (1) | Total Canadian Manufacturing (2) |
| Revenues | 684 | 278 | 962 | 253 | 1,215 |
| Purchased Product | 556 | 230 | 786 | 200 | 986 |
| Gross Margin | 128 | 48 | 176 | 53 | 229 |
| Operating Statistics | |||||
| Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | |||
| Heavy Crude Oil Throughput (Mbbls/d) | 81.2 | 27.1 | 108.3 | ||
| Refining Margin ($/bbl) | 16.93 | 19.29 | 17.57 |
(1)Includes ethanol and crude-by-rail operations, and marketing activities.
(2)These amounts, excluding gross margin, are found in Note 1 of the interim Consolidated Financial Statements.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 55 | ||||
|---|---|---|---|---|---|
| Nine Months Ended September 30, 2021 | |||||
| --- | --- | --- | --- | --- | --- |
| Basis of Refining Margin Calculation | |||||
| ($ millions) | Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | Other (1) | Total Canadian Manufacturing (2) |
| Revenues | 1,811 | 611 | 2,422 | 687 | 3,109 |
| Purchased Product | 1,449 | 487 | 1,936 | 488 | 2,424 |
| Gross Margin | 362 | 124 | 486 | 199 | 685 |
| Operating Statistics | |||||
| Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | |||
| Heavy Crude Oil Throughput (Mbbls/d) | 78.6 | 27.4 | 106.0 | ||
| Refining Margin ($/bbl) | 16.91 | 16.58 | 16.78 |
(1)Includes ethanol and crude-by-rail operations, and marketing activities.
(2)These amounts, excluding gross margin, are found in Note 1 of the interim Consolidated Financial Statements.
U.S. Manufacturing
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Revenues (1) | 8,719 | 5,723 | 23,702 | 13,889 |
| Purchased Product (1) | 7,944 | 5,171 | 20,365 | 12,320 |
| Gross Margin | 775 | 552 | 3,337 | 1,569 |
| Crude Oil Throughput (Mbbls/d) | 435.0 | 445.8 | 405.3 | 415.0 |
| Refining Margin ($/bbl) | 18.98 | 13.45 | 29.94 | 13.84 |
(1)Found in Note 1 of the interim Consolidated Financial Statements.
Retail
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Revenues (1) | 881 | 592 | 2,424 | 1,540 |
| Purchased Product (1) | 846 | 551 | 2,317 | 1,434 |
| Gross Margin | 35 | 41 | 107 | 106 |
(1)Found in Note 1 of the interim Consolidated Financial Statements.
Per Unit DD&A
Per Unit DD&A is a specified financial measure used to measure DD&A on a per-unit basis. We define Per Unit DD&A as DD&A divided by sales volumes.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 56 |
|---|
Netback Reconciliations
Netback is a non-GAAP financial measure commonly used in the oil and gas industry to assist in measuring operating performance and is also presented on a per-unit basis. Our Netback calculation is aligned with the definition found in the Canadian Oil and Gas Evaluation Handbook. Netbacks per BOE reflect our margin on a per-barrel of oil equivalent basis. Netback is defined as gross sales less royalties, transportation and blending and operating expenses, and netback per BOE is divided by sales volumes. Netbacks do not reflect non-cash write-downs or reversals of product inventory until it is realized when the product is sold. The sales price, transportation and blending costs, and sales volumes exclude the impact of purchased condensate. Condensate is blended with crude oil to transport it to market.
The following tables provide a reconciliation of the items comprising Netbacks, and Netbacks per BOE to Operating Margin found in our interim Consolidated Financial Statements.
Total Production
Upstream Financial Results
| Adjustments | Basis of Netback Calculation | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended September 30, 2022 ($ millions) | Total Upstream (1) | Condensate | Third-Party Sourced | Internal Consumption (2) | Equity Adjustment (3) | Other (4) | Total<br><br>Upstream | |||||||||||||
| Gross Sales | 10,238 | (2,333) | (2,346) | (235) | 63 | (113) | 5,274 | |||||||||||||
| Royalties | 1,226 | — | — | 25 | (6) | 1,245 | ||||||||||||||
| Purchased Product | 2,397 | — | (2,346) | — | (51) | — | ||||||||||||||
| Transportation and Blending | 2,800 | (2,333) | — | — | (24) | 443 | ||||||||||||||
| Operating | 915 | — | — | (235) | 6 | 3 | 689 | |||||||||||||
| Netback | 2,900 | — | — | — | 32 | (35) | 2,897 | |||||||||||||
| Realized (Gain) Loss on Risk Management | 51 | — | — | — | — | 51 | ||||||||||||||
| Operating Margin | 2,849 | — | — | — | 32 | (35) | 2,846 | Adjustments | Basis of Netback Calculation | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Three Months Ended September 30, 2021 ($ millions) | Total Upstream (1) | Condensate | Third-Party Sourced | Internal Consumption (2) | Equity Adjustment (3) | Other (4) | Total<br><br>Upstream | |||||||||||||
| Gross Sales (5) | 7,354 | (1,734) | (1,007) | (175) | 60 | (49) | 4,449 | |||||||||||||
| Royalties | 733 | — | — | — | 11 | — | 744 | |||||||||||||
| Purchased Product (5) | 1,074 | — | (1,007) | — | — | (67) | — | |||||||||||||
| Transportation and Blending | 2,137 | (1,734) | — | — | — | 20 | 423 | |||||||||||||
| Operating | 800 | — | — | (175) | 6 | (11) | 620 | |||||||||||||
| Netback | 2,610 | — | — | — | 43 | 9 | 2,662 | |||||||||||||
| Realized (Gain) Loss on Risk Management | 168 | — | (2) | — | — | — | 166 | |||||||||||||
| Operating Margin | 2,442 | — | 2 | — | 43 | 9 | 2,496 |
(1)These amounts, excluding netback, are found in Note 1 of the interim Consolidated Financial Statements.
(2)Represents natural gas volumes produced by the Conventional segment used for internal consumption by the Oil Sands segment.
(3)Revenues and expenses related to the HCML joint venture are accounted for using the equity method in the consolidated financial statements.
(4)Other includes construction, transportation and blending and third-party processing margin.
(5)Prior period results were revised for a change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending. See the Consolidated Financial Statements and Note 3 of the interim Consolidated Financial Statements for further details.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 57 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Adjustments | Basis of Netback Calculation | |||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Nine Months Ended September 30, 2022 ($ millions) | Total Upstream (1) | Condensate | Third-Party Sourced | Internal Consumption (2) | Equity Adjustment (3) | Other (4) | Total<br><br>Upstream | |||||||||||||
| Gross Sales | 32,820 | (7,892) | (5,461) | (821) | 194 | (306) | 18,534 | |||||||||||||
| Royalties | 3,993 | — | — | 89 | (11) | 4,071 | ||||||||||||||
| Purchased Product | 5,676 | — | (5,461) | — | (215) | — | ||||||||||||||
| Transportation and Blending | 9,232 | (7,892) | — | — | (35) | 1,305 | ||||||||||||||
| Operating | 2,834 | — | — | (821) | 21 | (28) | 2,006 | |||||||||||||
| Netback | 11,085 | — | — | — | 84 | (17) | 11,152 | |||||||||||||
| Realized (Gain) Loss on Risk Management | 1,485 | — | (8) | — | — | 1,477 | ||||||||||||||
| Operating Margin | 9,600 | — | 8 | — | 84 | (17) | 9,675 | Adjustments | Basis of Netback Calculation | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Nine Months Ended September 30, 2021 ($ millions) | Total Upstream (1) | Condensate | Third-Party Sourced | Internal Consumption (2) | Equity Adjustment (3) | Other (4) | Total<br><br>Upstream | |||||||||||||
| Gross Sales (5) | 19,607 | (4,894) | (2,682) | (469) | 162 | (244) | 11,480 | |||||||||||||
| Royalties | 1,639 | — | — | — | 23 | — | 1,662 | |||||||||||||
| Purchased Product (5) | 2,861 | — | (2,682) | — | — | (179) | — | |||||||||||||
| Transportation and Blending | 6,115 | (4,894) | — | — | — | — | 1,221 | |||||||||||||
| Operating | 2,376 | — | — | (469) | 18 | (33) | 1,892 | |||||||||||||
| Netback | 6,616 | — | — | — | 121 | (32) | 6,705 | |||||||||||||
| Realized (Gain) Loss on Risk Management | 586 | — | (2) | — | — | — | 584 | |||||||||||||
| Operating Margin | 6,030 | — | 2 | — | 121 | (32) | 6,121 |
(1)These amounts, excluding netback, are found in Note 1 of the interim Consolidated Financial Statements.
(2)Represents natural gas volumes produced by the Conventional segment used for internal consumption by the Oil Sands segment.
(3)Revenues and expenses related to the HCML joint venture are accounted for using the equity method in the consolidated financial statements.
(4)Other includes construction, transportation and blending and third-party processing margin.
(5)Prior period results were revised for a change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending. See the Consolidated Financial Statements and Note 3 of the interim Consolidated Financial Statements for further details.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 58 |
|---|
Oil Sands
| Three Months Ended September 30, 2022 ( millions) | Foster Creek | Christina Lake | Sunrise | Other Oil Sands (1) | Total Bitumen and Heavy Oil | Natural Gas | Total Oil Sands |
| Gross Sales | 1,486 | 1,847 | 218 | 929 | 4,480 | 4 | 4,484 |
| Royalties | 432 | 594 | 18 | 82 | 1,126 | 4 | 1,130 |
| Purchased Product | — | — | — | — | — | — | — |
| Transportation and Blending | 199 | 137 | 36 | 38 | 410 | — | 410 |
| Operating | 224 | 209 | 49 | 229 | 711 | 4 | 715 |
| Netback | 631 | 907 | 115 | 580 | 2,233 | (4) | 2,229 |
| Realized (Gain) Loss on Risk Management | 42 | ||||||
| Operating Margin | 2,187 |
All values are in US Dollars.
| Basis of Netback Calculation | Adjustments | ||||||
|---|---|---|---|---|---|---|---|
| Three Months Ended September 30, 2022 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (2) | Total Oil Sands (3) | ||
| Gross Sales | 4,484 | 2,333 | 1,882 | 79 | 8,778 | ||
| Royalties | 1,130 | — | — | 6 | 1,136 | ||
| Purchased Product | — | — | 1,882 | 51 | 1,933 | ||
| Transportation and Blending | 410 | 2,333 | — | 15 | 2,758 | ||
| Operating | 715 | — | — | (26) | 689 | ||
| Netback | 2,229 | — | — | 33 | 2,262 | ||
| Realized (Gain) Loss on Risk Management | 42 | — | — | — | 42 | ||
| Operating Margin | 2,187 | — | — | 33 | 2,220 | ||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Three Months Ended September 30, 2021 ( millions) | Foster Creek | Christina Lake | Sunrise | Other Oil Sands (1) | Total Bitumen and Heavy Oil | Natural Gas | Total Oil Sands |
| Gross Sales | 1,325 | 1,405 | 173 | 876 | 3,779 | 3 | 3,782 |
| Royalties | 238 | 324 | 8 | 98 | 668 | 1 | 669 |
| Purchased Product | — | — | — | — | — | — | — |
| Transportation and Blending | 192 | 125 | 33 | 50 | 400 | — | 400 |
| Operating | 194 | 171 | 33 | 212 | 610 | 5 | 615 |
| Netback | 701 | 785 | 99 | 516 | 2,101 | (3) | 2,098 |
| Realized (Gain) Loss on Risk Management | 166 | ||||||
| Operating Margin | 1,932 |
All values are in US Dollars.
| Basis of Netback Calculation | Adjustments | |||||
|---|---|---|---|---|---|---|
| Three Months Ended September 30, 2021 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (2) | Total Oil Sands (3) | |
| Gross Sales (4) | 3,782 | 1,734 | 562 | 39 | 6,117 | |
| Royalties | 669 | — | — | — | 669 | |
| Purchased Product (4) | — | — | 562 | 67 | 629 | |
| Transportation and Blending | 400 | 1,734 | — | (20) | 2,114 | |
| Operating | 615 | — | — | 1 | 616 | |
| Netback | 2,098 | — | — | (9) | 2,089 | |
| Realized (Gain) Loss on Risk Management | 166 | — | — | — | 166 | |
| Operating Margin | 1,932 | — | — | (9) | 1,923 |
(1)Includes Lloydminster thermal and Lloydminster conventional heavy oil assets.
(2)Other includes construction, transportation and blending margin.
(3)These amounts, excluding netback, are found in Note 1 of the interim Consolidated Financial Statements.
(4)Prior period results were revised for a change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending. See the Consolidated Financial Statements and Note 3 of the interim Consolidated Financial Statements for further details.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 59 | ||||||
|---|---|---|---|---|---|---|---|
| --- | --- | --- | --- | --- | --- | --- | --- |
| Nine Months Ended September 30, 2022 ( millions) | Foster Creek | Christina Lake | Sunrise | Other Oil Sands (1) | Total Bitumen and Heavy Oil | Natural Gas | Total Oil Sands |
| Gross Sales | 5,441 | 6,498 | 728 | 3,222 | 15,889 | 14 | 15,903 |
| Royalties | 1,445 | 1,900 | 46 | 302 | 3,693 | 5 | 3,698 |
| Purchased Product | — | — | — | — | — | — | — |
| Transportation and Blending | 559 | 431 | 93 | 110 | 1,193 | — | 1,193 |
| Operating | 676 | 677 | 133 | 703 | 2,189 | 17 | 2,206 |
| Netback | 2,761 | 3,490 | 456 | 2,107 | 8,814 | (8) | 8,806 |
| Realized (Gain) Loss on Risk Management | 1,468 | ||||||
| Operating Margin | 7,338 |
All values are in US Dollars.
| Basis of Netback Calculation | Adjustments | ||||||
|---|---|---|---|---|---|---|---|
| Nine Months Ended September 30, 2022 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (2) | Total Oil Sands (3) | ||
| Gross Sales | 15,903 | 7,892 | 4,001 | 248 | 28,044 | ||
| Royalties | 3,698 | — | — | 11 | 3,709 | ||
| Purchased Product | — | — | 4,001 | 215 | 4,216 | ||
| Transportation and Blending | 1,193 | 7,892 | — | 29 | 9,114 | ||
| Operating | 2,206 | — | — | (9) | 2,197 | ||
| Netback | 8,806 | — | — | 2 | 8,808 | ||
| Realized (Gain) Loss on Risk Management | 1,468 | — | 1,468 | ||||
| Operating Margin | 7,338 | — | — | 2 | 7,340 | ||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Nine Months Ended September 30, 2021 ( millions) | Foster Creek | Christina Lake | Sunrise | Other Oil Sands (1) | Total Bitumen and Heavy Oil | Natural Gas | Total Oil Sands |
| Gross Sales | 3,037 | 3,674 | 427 | 2,309 | 9,447 | 9 | 9,456 |
| Royalties | 487 | 733 | 13 | 228 | 1,461 | 1 | 1,462 |
| Purchased Product | — | — | — | — | — | — | — |
| Transportation and Blending | 520 | 386 | 83 | 165 | 1,154 | — | 1,154 |
| Operating | 517 | 506 | 118 | 628 | 1,769 | 15 | 1,784 |
| Netback | 1,513 | 2,049 | 213 | 1,288 | 5,063 | (7) | 5,056 |
| Realized (Gain) Loss on Risk Management | 584 | ||||||
| Operating Margin | 4,472 |
All values are in US Dollars.
| Basis of Netback Calculation | Adjustments | |||||
|---|---|---|---|---|---|---|
| Nine Months Ended September 30, 2021 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (2) | Total Oil Sands (3) | |
| Gross Sales (4) | 9,456 | 4,894 | 1,569 | 191 | 16,110 | |
| Royalties | 1,462 | — | — | — | 1,462 | |
| Purchased Product (4) | — | — | 1,569 | 179 | 1,748 | |
| Transportation and Blending | 1,154 | 4,894 | — | — | 6,048 | |
| Operating | 1,784 | — | — | 9 | 1,793 | |
| Netback | 5,056 | — | — | 3 | 5,059 | |
| Realized (Gain) Loss on Risk Management | 584 | — | — | — | 584 | |
| Operating Margin | 4,472 | — | — | 3 | 4,475 |
(1)Includes Tucker, Lloydminster thermal and Lloydminster conventional heavy oil assets. The Tucker asset was sold on January 31, 2022.
(2)Other includes construction, transportation and blending margin.
(3)These amounts, excluding netback, are found in Note 1 of the interim Consolidated Financial Statements.
(4)Prior period results were revised for a change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending. See the Consolidated Financial Statements and Note 3 of the interim Consolidated Financial Statements for further details.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 60 |
|---|
Conventional
| Basis of Netback Calculation | Adjustments | |||
|---|---|---|---|---|
| Three Months Ended September 30, 2022 ($ millions) | Conventional | Third-party Sourced | Other (1) | Conventional (2) |
| Gross Sales | 512 | 464 | 34 | 1,010 |
| Royalties | 68 | — | — | 68 |
| Purchased Product | — | 464 | — | 464 |
| Transportation and Blending | 29 | — | 9 | 38 |
| Operating | 137 | — | 4 | 141 |
| Netback | 278 | — | 21 | 299 |
| Realized (Gain) Loss on Risk Management | 9 | — | — | 9 |
| Operating Margin | 269 | — | 21 | 290 |
| Basis of Netback Calculation | Adjustments | |||
| --- | --- | --- | --- | --- |
| Three Months Ended September 30, 2021 ($ millions) | Conventional | Third-party Sourced | Other (1) | Conventional (2) |
| Gross Sales | 378 | 445 | 10 | 833 |
| Royalties | 40 | — | — | 40 |
| Purchased Product | — | 445 | — | 445 |
| Transportation and Blending | 20 | — | — | 20 |
| Operating | 125 | — | 10 | 135 |
| Netback | 193 | — | — | 193 |
| Realized (Gain) Loss on Risk Management | — | 2 | — | 2 |
| Operating Margin | 193 | (2) | — | 191 |
| Basis of Netback Calculation | Adjustments | |||
| --- | --- | --- | --- | --- |
| Nine Months Ended September 30, 2022 ($ millions) | Conventional | Third-party Sourced | Other (1) | Conventional (2) |
| Gross Sales | 1,683 | 1,460 | 58 | 3,201 |
| Royalties | 228 | — | — | 228 |
| Purchased Product | — | 1,460 | — | 1,460 |
| Transportation and Blending | 100 | — | 6 | 106 |
| Operating | 385 | — | 18 | 403 |
| Netback | 970 | — | 34 | 1,004 |
| Realized (Gain) Loss on Risk Management | 9 | 8 | — | 17 |
| Operating Margin | 961 | (8) | 34 | 987 |
| Basis of Netback Calculation | Adjustments | |||
| --- | --- | --- | --- | --- |
| Nine Months Ended September 30, 2021 ($ millions) | Conventional | Third-party Sourced | Other (1) | Conventional (2) |
| Gross Sales | 1,069 | 1,113 | 53 | 2,235 |
| Royalties | 103 | — | — | 103 |
| Purchased Product | — | 1,113 | — | 1,113 |
| Transportation and Blending | 57 | — | — | 57 |
| Operating | 393 | — | 24 | 417 |
| Netback | 516 | — | 29 | 545 |
| Realized (Gain) Loss on Risk Management | — | 2 | — | 2 |
| Operating Margin | 516 | (2) | 29 | 543 |
(1)Reflects Operating Margin from processing facilities.
(2)These amounts, excluding netback, are found in Note 1 of the interim Consolidated Financial Statements.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 61 |
|---|
Offshore
| Adjustments | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended September 30, 2022 ( millions) | China | Indonesia (1) | Asia Pacific | Atlantic | Total Offshore | Equity Adjustment (1) | Other (2) | Total Offshore (3) | |
| Gross Sales | 337 | 63 | 400 | 113 | 513 | (63) | — | 450 | |
| Royalties | 20 | 25 | 45 | 2 | 47 | (25) | — | 22 | |
| Purchased Product | — | — | — | — | — | — | — | — | |
| Transportation and Blending | — | — | — | 4 | 4 | — | — | 4 | |
| Operating | 28 | 10 | 38 | 34 | 72 | (6) | 19 | 85 | |
| Netback | 289 | 28 | 317 | 73 | 390 | (32) | (19) | 339 | |
| Realized (Gain) Loss on Risk Management | — | — | — | — | |||||
| Operating Margin | 390 | (32) | (19) | 339 |
All values are in US Dollars.
| Adjustment | ||||||||
|---|---|---|---|---|---|---|---|---|
| Three Months Ended September 30, 2021 ( millions) | China | Indonesia (1) | Asia Pacific | Atlantic | Total Offshore | Equity Adjustment (1) | Total Offshore (3) | |
| Gross Sales | 336 | 60 | 396 | 68 | 464 | (60) | 404 | |
| Royalties | 20 | 11 | 31 | 4 | 35 | (11) | 24 | |
| Purchased Product | — | — | — | — | — | — | — | |
| Transportation and Blending | — | — | — | 3 | 3 | — | 3 | |
| Operating | 27 | 7 | 34 | 21 | 55 | (6) | 49 | |
| Netback | 289 | 42 | 331 | 40 | 371 | (43) | 328 | |
| Realized (Gain) Loss on Risk Management | — | — | — | |||||
| Operating Margin | 371 | (43) | 328 |
All values are in US Dollars.
| Adjustment | ||||||||
|---|---|---|---|---|---|---|---|---|
| Three Months Ended June 30, 2021 ( millions) | China | Indonesia (1) | Asia Pacific | Atlantic | Total Offshore | Equity Adjustment (1) | Total Offshore (3) | |
| Gross Sales | 308 | 50 | 358 | 119 | 477 | (50) | 427 | |
| Royalties | 16 | 5 | 21 | 9 | 30 | (5) | 25 | |
| Purchased Product | — | — | — | — | — | — | — | |
| Transportation and Blending | — | — | — | 3 | 3 | — | 3 | |
| Operating | 23 | 8 | 31 | 35 | 66 | (7) | 59 | |
| Netback | 269 | 37 | 306 | 72 | 378 | (38) | 340 | |
| Realized (Gain) Loss on Risk Management | — | — | — | |||||
| Operating Margin | 378 | (38) | 340 |
All values are in US Dollars.
| Adjustment | ||||||||
|---|---|---|---|---|---|---|---|---|
| Three Months Ended March 31, 2021 ( millions) | China | Indonesia (1) | Asia Pacific | Atlantic | Total Offshore | Equity Adjustment (1) | Total Offshore (3) | |
| Gross Sales | 321 | 52 | 373 | 110 | 483 | (52) | 431 | |
| Royalties | 17 | 7 | 24 | 8 | 32 | (7) | 25 | |
| Purchased Product | — | — | — | — | — | — | — | |
| Transportation and Blending | — | — | — | 4 | 4 | — | 4 | |
| Operating | 21 | 6 | 27 | 36 | 63 | (5) | 58 | |
| Netback | 283 | 39 | 322 | 62 | 384 | (40) | 344 | |
| Realized (Gain) Loss on Risk Management | — | — | — | |||||
| Operating Margin | 384 | (40) | 344 |
All values are in US Dollars.
(1)Revenues and expenses related to the HCML joint venture are accounted for using the equity method in the consolidated financial statements.
(2)Relates to costs in the Atlantic.
(3)These amounts, excluding netback, are found in Note 1 of the interim Consolidated Financial Statements.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 62 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Adjustments | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Nine Months Ended September 30, 2022 ( millions) | China | Indonesia (1) | Asia Pacific | Atlantic | Total Offshore | Equity Adjustment (1) | Other (2) | Total Offshore (3) | |
| Gross Sales | 1,083 | 194 | 1,277 | 492 | 1,769 | (194) | — | 1,575 | |
| Royalties | 60 | 89 | 149 | (4) | 145 | (89) | — | 56 | |
| Purchased Product | — | — | — | — | — | — | — | — | |
| Transportation and Blending | — | — | — | 12 | 12 | — | — | 12 | |
| Operating | 75 | 34 | 109 | 127 | 236 | (21) | 19 | 234 | |
| Netback | 948 | 71 | 1,019 | 357 | 1,376 | (84) | (19) | 1,273 | |
| Realized (Gain) Loss on Risk Management | — | — | — | — | |||||
| Operating Margin | 1,376 | (84) | (19) | 1,273 |
All values are in US Dollars.
| Adjustment | ||||||||
|---|---|---|---|---|---|---|---|---|
| Nine Months Ended September 30, 2021 ( millions) | China | Indonesia (1) | Asia Pacific | Atlantic | Total Offshore | Equity Adjustment (1) | Total Offshore (2) | |
| Gross Sales | 965 | 162 | 1,127 | 297 | 1,424 | (162) | 1,262 | |
| Royalties | 53 | 23 | 76 | 21 | 97 | (23) | 74 | |
| Purchased Product | — | — | — | — | — | — | — | |
| Transportation and Blending | — | — | — | 10 | 10 | — | 10 | |
| Operating | 71 | 21 | 92 | 92 | 184 | (18) | 166 | |
| Netback | 841 | 118 | 959 | 174 | 1,133 | (121) | 1,012 | |
| Realized (Gain) Loss on Risk Management | — | — | — | |||||
| Operating Margin | 1,133 | (121) | 1,012 |
All values are in US Dollars.
(1)Revenues and expenses related to the HCML joint venture are accounted for using the equity method in the consolidated financial statements.
(2)Relates to costs in the Atlantic.
(3)These amounts, excluding netback, are found in Note 1 of the interim Consolidated Financial Statements.
Sales Volumes (1)
The following table provides the sales volumes used to calculate Netback:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| (MBOE/d) | 2022 | 2021 | 2022 | 2021 | ||||
| Oil Sands | ||||||||
| Foster Creek | 180.7 | 206.3 | 190.9 | 173.5 | ||||
| Christina Lake | 247.2 | 238.1 | 247.8 | 230.5 | ||||
| Sunrise (2) | 29.7 | 25.5 | 26.3 | 23.6 | ||||
| Other Oil Sands | 120.4 | 143.2 | 118.8 | 143.8 | ||||
| Total Oil Sands (2) | 578.0 | 613.1 | 583.8 | 571.4 | ||||
| Conventional | 126.2 | 131.4 | 128.0 | 136.2 | ||||
| Sales before Internal Consumption | 704.2 | 744.5 | 711.8 | 707.6 | ||||
| Less: Internal Consumption (3) | (80.7) | (84.0) | (84.3) | (85.2) | ||||
| Sales after Internal Consumption | 623.5 | 660.5 | 627.5 | 622.4 | ||||
| Offshore | ||||||||
| Asia Pacific - China | 45.4 | 49.8 | 48.6 | 50.1 | ||||
| Asia Pacific - Indonesia | 10.1 | 10.0 | 9.7 | 9.4 | ||||
| Asia Pacific - Total | 55.5 | 59.8 | 58.3 | 59.5 | ||||
| Atlantic | 7.8 | 7.8 | 12.6 | 12.6 | ||||
| Total Offshore | 63.3 | 67.6 | 70.9 | 72.1 | ||||
| Total Sales | 686.8 | 728.1 | 698.4 | 694.5 |
(1)Presented on dry bitumen basis.
(2)Sunrise sales volumes have been re-presented to reflect a change in classification of marketing activities for the first and second quarters of 2021.
(3)Less natural gas volumes used for internal consumption by the Oil Sands segment.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 63 |
|---|
The following tables have been re-presented for the first, second, third and fourth quarters of 2021 and the first quarter of 2022 to more appropriately reflect the cost of blending at our Lloydminster Thermal and Lloydminster conventional heavy oil assets, which resulted in a reclassification of costs between purchased products and transportation and blending. In addition, the tables were also re-presented for the first, second and third quarters of 2021 for a change in the presentation of product swaps and certain third-party purchases used in blending and optimization activities and a change in the classification of marketing activities at Sunrise. Sunrise sales volumes, gross sales, royalties, transportation and blending, and operating expenses have been re-presented. See Adjustments to the Interim Consolidated Statements of Earnings (Loss) below for further details.
Upstream Financial Results
| Adjustments | Basis of Netback Calculation | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended<br><br>March 31, 2022 ($ millions) | Total Upstream | Condensate | Third-Party Sourced | Internal Consumption (1) | Equity Adjustment (2) | Other (3) | Total<br><br>Upstream | |||||||||||||
| Gross Sales | 10,897 | (2,758) | (1,750) | (239) | 61 | (76) | 6,135 | |||||||||||||
| Royalties | 1,185 | — | — | — | 28 | — | 1,213 | |||||||||||||
| Purchased Product | 1,818 | — | (1,750) | — | — | (68) | — | |||||||||||||
| Transportation and Blending | 3,194 | (2,758) | — | — | — | 1 | 437 | |||||||||||||
| Operating | 909 | — | — | (239) | 7 | (21) | 656 | |||||||||||||
| Netback | 3,791 | — | — | — | 26 | 12 | 3,829 | |||||||||||||
| Realized (Gain) Loss on Risk Management | 871 | — | (4) | — | — | — | 867 | |||||||||||||
| Operating Margin | 2,920 | — | 4 | — | 26 | 12 | 2,962 | Adjustments | Basis of Netback Calculation | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Year Ended<br><br>December 31, 2021 ($ millions) | Total Upstream | Condensate | Third-party Sourced | Internal Consumption (1) | Equity Adjustment (2) | Other (3) | Total<br><br>Upstream | |||||||||||||
| Gross Sales | 27,844 | (7,095) | (3,761) | (710) | 224 | (390) | 16,112 | |||||||||||||
| Royalties | 2,454 | — | — | — | 52 | — | 2,506 | |||||||||||||
| Purchased Product | 4,059 | — | (3,761) | — | — | (298) | — | |||||||||||||
| Transportation and Blending | 8,714 | (7,095) | — | — | — | — | 1,619 | |||||||||||||
| Operating | 3,241 | — | (8) | (710) | 25 | (36) | 2,512 | |||||||||||||
| Netback | 9,376 | — | 8 | — | 147 | (56) | 9,475 | |||||||||||||
| Realized (Gain) Loss on Risk Management | 788 | — | (2) | — | — | — | 786 | |||||||||||||
| Operating Margin | 8,588 | — | 10 | — | 147 | (56) | 8,689 | Adjustments | Basis of Netback Calculation | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Three Months Ended<br><br>December 31, 2021 ($ millions) | Total Upstream | Condensate | Third-Party Sourced | Internal Consumption (1) | Equity Adjustment (2) | Other (3) | Total<br><br>Upstream | |||||||||||||
| Gross Sales | 8,237 | (2,201) | (1,079) | (241) | 62 | (146) | 4,632 | |||||||||||||
| Royalties | 815 | — | — | — | 29 | — | 844 | |||||||||||||
| Purchased Product | 1,198 | — | (1,079) | — | — | (119) | — | |||||||||||||
| Transportation and Blending | 2,599 | (2,201) | — | — | — | — | 398 | |||||||||||||
| Operating | 865 | — | (8) | (241) | 7 | (3) | 620 | |||||||||||||
| Netback | 2,760 | — | 8 | — | 26 | (24) | 2,770 | |||||||||||||
| Realized (Gain) Loss on Risk Management | 202 | — | — | — | — | — | 202 | |||||||||||||
| Operating Margin | 2,558 | — | 8 | — | 26 | (24) | 2,568 | Adjustments | Basis of Netback Calculation | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Three Months Ended<br><br>June 30, 2021 ($ millions) | Total Upstream | Condensate | Third-Party Sourced | Internal Consumption (1) | Equity Adjustment (2) | Other (3) | Total<br><br>Upstream | |||||||||||||
| Gross Sales | 6,128 | (1,620) | (651) | (145) | 50 | (105) | 3,657 | |||||||||||||
| Royalties | 533 | — | — | — | 5 | — | 538 | |||||||||||||
| Purchased Product | 717 | — | (651) | — | — | (66) | — | |||||||||||||
| Transportation and Blending | 2,006 | (1,620) | — | — | — | (17) | 369 | |||||||||||||
| Operating | 791 | — | — | (145) | 7 | (11) | 642 | |||||||||||||
| Netback | 2,081 | — | — | — | 38 | (11) | 2,108 | |||||||||||||
| Realized (Gain) Loss on Risk Management | 188 | — | — | — | — | — | 188 | |||||||||||||
| Operating Margin | 1,893 | — | — | — | 38 | (11) | 1,920 | |||||||||||||
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 64 | |||||||||||||||||||
| --- | --- | |||||||||||||||||||
| Adjustments | Basis of Netback Calculation | |||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Three Months Ended<br><br>March 31, 2021 ($ millions) | Total Upstream | Condensate | Third-Party Sourced | Internal Consumption (1) | Equity Adjustment (2) | Other (3) | Total<br><br>Upstream | |||||||||||||
| Gross Sales | 6,125 | (1,540) | (1,024) | (149) | 52 | (90) | 3,374 | |||||||||||||
| Royalties | 373 | — | — | — | 7 | — | 380 | |||||||||||||
| Purchased Product | 1,070 | — | (1,024) | — | — | (46) | — | |||||||||||||
| Transportation and Blending | 1,972 | (1,540) | — | — | — | (3) | 429 | |||||||||||||
| Operating | 785 | — | — | (149) | 5 | (11) | 630 | |||||||||||||
| Netback | 1,925 | — | — | — | 40 | (30) | 1,935 | |||||||||||||
| Realized (Gain) Loss on Risk Management | 230 | — | — | — | — | — | 230 | |||||||||||||
| Operating Margin | 1,695 | — | — | — | 40 | (30) | 1,705 |
(1)Represents natural gas volumes produced by the Conventional segment used for internal consumption by the Oil Sands segment.
(2)Revenues and expenses related to the HCML joint venture are accounted for using the equity method in the consolidated financial statements.
(3)Other includes construction, transportation and blending and third-party processing margin.
Oil Sands
| Basis of Netback Calculation | Adjustments | |||||
|---|---|---|---|---|---|---|
| Three Months Ended<br><br>March 31, 2022 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (1) | Total Oil Sands | |
| Gross Sales | 5,264 | 2,758 | 1,144 | 52 | 9,218 | |
| Royalties | 1,082 | — | — | — | 1,082 | |
| Purchased Product | — | — | 1,144 | 68 | 1,212 | |
| Transportation and Blending | 397 | 2,758 | — | 1 | 3,156 | |
| Operating | 687 | — | — | 15 | 702 | |
| Netback | 3,098 | — | — | (32) | 3,066 | |
| Realized (Gain) Loss on Risk Management | 867 | — | — | — | 867 | |
| Operating Margin | 2,231 | — | — | (32) | 2,199 | |
| Adjustments | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Year EndedDecember 31, 2021 ( millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (1) | Total Oil Sands | |
| Gross Sales | 13,297 | 7,095 | 2,106 | 329 | 22,827 | |
| Royalties | 2,196 | — | — | — | 2,196 | |
| Purchased Product | — | — | 2,106 | 298 | 2,404 | |
| Transportation and Blending | 1,530 | 7,095 | — | — | 8,625 | |
| Operating | 2,437 | — | — | 14 | 2,451 | |
| Netback | 7,134 | — | — | 17 | 7,151 | |
| Realized (Gain) Loss on Risk Management | 786 | — | — | — | 786 | |
| Operating Margin | 6,348 | — | — | 17 | 6,365 |
All values are in US Dollars.
| Basis of Netback Calculation | Adjustments | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended<br><br>December 31, 2021 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (1) | Total Oil Sands | |||||||||
| Gross Sales | 3,841 | 2,201 | 537 | 138 | 6,717 | |||||||||
| Royalties | 734 | — | — | — | 734 | |||||||||
| Purchased Product | — | — | 537 | 119 | 656 | |||||||||
| Transportation and Blending | 376 | 2,201 | — | — | 2,577 | |||||||||
| Operating | 653 | — | — | 5 | 658 | |||||||||
| Netback | 2,078 | — | — | 14 | 2,092 | |||||||||
| Realized (Gain) Loss on Risk Management | 202 | — | — | — | 202 | |||||||||
| Operating Margin | 1,876 | — | — | 14 | 1,890 | Basis of Netback Calculation | Adjustments | |||||||
| --- | --- | --- | --- | --- | --- | --- | ||||||||
| Three Months Ended<br><br>June 30, 2021 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (1) | Total Oil Sands | |||||||||
| Gross Sales | 3,005 | 1,620 | 364 | 86 | 5,075 | |||||||||
| Royalties | 469 | — | — | — | 469 | |||||||||
| Purchased Product | — | — | 364 | 66 | 430 | |||||||||
| Transportation and Blending | 347 | 1,620 | — | 17 | 1,984 | |||||||||
| Operating | 589 | — | — | 3 | 592 | |||||||||
| Netback | 1,600 | — | — | — | 1,600 | |||||||||
| Realized (Gain) Loss on Risk Management | 189 | — | — | — | 189 | |||||||||
| Operating Margin | 1,411 | — | — | — | 1,411 | |||||||||
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 65 | |||||||||||||
| --- | --- | |||||||||||||
| Basis of Netback Calculation | Adjustments | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | ||||||||
| Three Months Ended<br><br>March 31, 2021 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (1) | Total Oil Sands | |||||||||
| Gross Sales | 2,669 | 1,540 | 643 | 66 | 4,918 | |||||||||
| Royalties | 324 | — | — | — | 324 | |||||||||
| Purchased Product | — | — | 643 | 46 | 689 | |||||||||
| Transportation and Blending | 407 | 1,540 | — | 3 | 1,950 | |||||||||
| Operating | 580 | — | — | 5 | 585 | |||||||||
| Netback | 1,358 | — | — | 12 | 1,370 | |||||||||
| Realized (Gain) Loss on Risk Management | 229 | — | — | — | 229 | |||||||||
| Operating Margin | 1,129 | — | — | 12 | 1,141 |
(1)Other includes construction, transportation and blending margin.
Adjustments to the Interim Consolidated Statements of Earnings (Loss)
Certain comparative information presented in the Consolidated Statements of Earnings (Loss) within the Oil Sands segment and Corporate and Eliminations segment was revised. See Consolidated Financial Statements and Note 3 of the interim Consolidated Financial Statements for further details.
During the three months ended December 31, 2021, the Company made adjustments to more appropriately record certain third-party purchases used for blending and optimization activities and to ensure consistent treatment of product swaps. As a result, revenues and purchased product increased with no impact to net earnings (loss), segment income (loss), cash flows or financial position. Refer to the annual Consolidated Financial Statements for the year ended December 31, 2021, for further details.
During the three months ended June 30, 2022, the Company made adjustments to more appropriately reflect the cost of blending at our Lloydminster thermal and Lloydminster conventional heavy oil assets, which resulted in a reclassification of costs between purchased product and transportation and blending. An associated elimination entry was recorded in our Corporate and Eliminations segment to represent the change in the value of condensate that was extracted at our Canadian Manufacturing operations and sold back to the Oil Sands segment. As a result, purchased product decreased and transportation and blending increased, with no impact to net earnings (loss), segment income (loss), cash flows or financial position. Refer to the interim Consolidated Financial Statements for the periods ended June 30, 2022, for further details.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 66 |
|---|
The following table reconciles the amounts previously reported in the interim Consolidated Statements of Earnings (Loss) to the corresponding revised amounts:
| Three Months Ended<br>March 31, 2021 | Three Months Ended<br>June 30, 2021 | Three Months Ended<br>September 30, 2021 | Three Months Ended<br>December 31, 2021 | Three Months Ended<br>March 31, 2022 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions) | Previously Reported | Revision | Revised | Previously Reported | Revision | Revised | Previously Reported | Revision | Revised | Previously Reported | Revision | Revised | Previously Reported | Revision | Revised |
| Oil Sands Segment | |||||||||||||||
| Gross Sales | 4,775 | 143 | 4,918 | 5,015 | 60 | 5,075 | 6,114 | 3 | 6,117 | 6,717 | — | 6,717 | 9,218 | — | 9,218 |
| Purchased Product (1)(2) | 718 | (29) | 689 | 574 | (144) | 430 | 822 | (193) | 629 | 868 | (212) | 656 | 1,483 | (271) | 1,212 |
| Transportation and<br><br>Blending | 1,778 | 172 | 1,950 | 1,780 | 204 | 1,984 | 1,918 | 196 | 2,114 | 2,365 | 212 | 2,577 | 2,885 | 271 | 3,156 |
| Corporate and Eliminations Segment | |||||||||||||||
| Purchased Product | (973) | 138 | (835) | (1,110) | 146 | (964) | (1,244) | 153 | (1,091) | (1,561) | 192 | (1,369) | (1,497) | 215 | (1,282) |
| Transportation and<br><br>Blending | (15) | (138) | (153) | (6) | (146) | (152) | (18) | (153) | (171) | (8) | (192) | (200) | (6) | (215) | (221) |
| Consolidated | |||||||||||||||
| Gross Sales | 9,523 | 143 | 9,666 | 11,110 | 60 | 11,170 | 13,431 | 3 | 13,434 | 14,541 | — | 14,541 | 17,383 | — | 17,383 |
| Purchased Product | 4,094 | 109 | 4,203 | 5,253 | 2 | 5,255 | 6,731 | (40) | 6,691 | 7,197 | (20) | 7,177 | 7,538 | (56) | 7,482 |
| Transportation and<br><br>Blending | 1,785 | 34 | 1,819 | 1,796 | 58 | 1,854 | 1,923 | 43 | 1,966 | 2,379 | 20 | 2,399 | 2,919 | 56 | 2,975 |
(1)Revisions include $143 million for the three months ended March 31, 2021, $60 million for the three months ended June 30, 2021, $3 million for the three months ended September 30, 2021, and $nil for the three months ended December 31, 2021 and March 31, 2022, related to adjustments for product swaps and third-party purchases used in blending and optimization activities.
(2)Revisions include $172 million for the three months ended March 31, 2021, $204 million for the three months ended June 30, 2021, $196 million for the three months ended September 30, 2021, $212 million for the three months ended December 31, 2021, and $271 million for the three months ended March 31, 2022, to more appropriately reflect the cost of blending at our Lloydminster thermal and Lloydminster conventional heavy oil assets.
| Nine Months Ended<br>September 30, 2021 | Twelve Months Ended<br>December 31, 2021 | ||||||
|---|---|---|---|---|---|---|---|
| ($ millions) | Previously Reported | Revision | Revised | Previously Reported | Revision | Revised | |
| Oil Sands Segment | |||||||
| Gross Sales | 15,904 | 206 | 16,110 | 22,827 | — | 22,827 | |
| Purchased Product (1)(2) | 2,114 | (366) | 1,748 | 3,188 | (784) | 2,404 | |
| Transportation and Blending | 5,476 | 572 | 6,048 | 7,841 | 784 | 8,625 | |
| Corporate and Eliminations Segment | |||||||
| Purchased Product | (3,327) | 437 | (2,890) | (4,888) | 629 | (4,259) | |
| Transportation and Blending | (39) | (437) | (476) | (47) | (629) | (676) | |
| Consolidated | |||||||
| Gross Sales | 34,064 | 206 | 34,270 | 48,811 | — | 48,811 | |
| Purchased Product | 16,078 | 71 | 16,149 | 23,481 | (155) | 23,326 | |
| Transportation and Blending | 5,504 | 135 | 5,639 | 7,883 | 155 | 8,038 |
(1)Revisions include $206 million for the nine months ended September 30, 2021, and $nil for the twelve months ended December 31, 2021, related to adjustments for product swaps and third-party purchases used in blending and optimization activities.
(2)Revisions include $572 million for the nine months ended September 30, 2021, and $784 million for the twelve months ended December 31, 2021, to more appropriately reflect the cost of blending at our Lloydminster thermal and Lloydminster conventional heavy oil assets.
| Cenovus Energy Inc. – Q3 2022 Management's Discussion and Analysis | 67 |
|---|
Document
Exhibit 99.3
Cenovus Energy Inc.
Interim Consolidated Financial Statements (unaudited)
For the Periods Ended September 30, 2022
(Canadian Dollars)
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| For the periods ended September 30, 2022 | |||
|---|---|---|---|
| TABLE OF CONTENTS | |||
| --- | CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (UNAUDITED) | 3 | |
| --- | --- | ||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) | 4 | ||
| CONSOLIDATED BALANCE SHEETS (UNAUDITED) | 5 | ||
| CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) | 6 | ||
| CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | 7 | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | 8 | ||
| 1. DESCRIPTION OF BUSINESS AND SEGMENTED DISCLOSURES | 8 | ||
| 2.BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE | 15 | ||
| 3. ACCOUNTING POLICIES, CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY | 16 | ||
| 4. ACQUISITIONS | 17 | ||
| 5. GENERAL AND ADMINISTRATIVE | 19 | ||
| 6. FINANCE COSTS | 19 | ||
| 7.INTEGRATIONCOSTS | 19 | ||
| 8. FOREIGN EXCHANGE (GAIN) LOSS, NET | 20 | ||
| 9. DIVESTITURES | 20 | ||
| 10. OTHER (INCOME) LOSS, NET | 20 | ||
| 11. INCOME TAXES | 21 | ||
| 12. PER SHARE AMOUNTS | 21 | ||
| 13. EXPLORATION AND EVALUATION ASSETS, NET | 22 | ||
| 14. PROPERTY, PLANT AND EQUIPMENT, NET | 23 | ||
| 15. RIGHT-OF-USE ASSETS, NET | 24 | ||
| 16. JOINT ARRANGEMENTS | 24 | ||
| 17. OTHER ASSETS | 25 | ||
| 18. GOODWILL | 26 | ||
| 19. DEBT AND CAPITAL STRUCTURE | 26 | ||
| 20. LEASE LIABILITIES | 30 | ||
| 21. CONTINGENT PAYMENTS | 30 | ||
| 22. DECOMMISSIONING LIABILITIES | 31 | ||
| 23. OTHER LIABILITIES | 32 | ||
| 24. SHARE CAPITAL AND WARRANTS | 32 | ||
| 25. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | 33 | ||
| 26. STOCK-BASED COMPENSATION PLANS | 34 | ||
| 27. RELATED PARTY TRANSACTIONS | 35 | ||
| 28. FINANCIAL INSTRUMENTS | 35 | ||
| 29. RISK MANAGEMENT | 37 | ||
| 30. SUPPLEMENTARY CASH FLOW INFORMATION | 39 | ||
| 31. COMMITMENTS AND CONTINGENCIES | 41 | ||
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 2 | ||
| --- | --- | ||
| CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (unaudited) | |||
| --- |
For the periods ended September 30,
($ millions, except per share amounts)
| Three Months Ended | Nine Months Ended | ||||
|---|---|---|---|---|---|
| Notes | 2022 | 2021 (1) | 2022 | 2021 (1) | |
| Revenues | 1 | ||||
| Gross Sales | 18,697 | 13,434 | 56,827 | 34,270 | |
| Less: Royalties | 1,226 | 733 | 3,993 | 1,639 | |
| 17,471 | 12,701 | 52,834 | 32,631 | ||
| Expenses | 1 | ||||
| Purchased Product | 10,012 | 6,691 | 26,890 | 16,149 | |
| Transportation and Blending | 2,684 | 1,966 | 8,707 | 5,639 | |
| Operating | 1,439 | 1,150 | 4,207 | 3,428 | |
| (Gain) Loss on Risk Management | 28 | (28) | 157 | 1,540 | 951 |
| Depreciation, Depletion and Amortization | 14,15 | 1,047 | 1,153 | 3,209 | 3,234 |
| Exploration Expense | 73 | 5 | 99 | 15 | |
| (Income) Loss From Equity-Accounted Affiliates | 16 | (9) | (13) | (11) | (40) |
| General and Administrative | 5 | 128 | 158 | 545 | 491 |
| Finance Costs | 6 | 207 | 360 | 631 | 836 |
| Interest Income | (21) | (4) | (44) | (11) | |
| Integration Costs | 7 | 27 | 45 | 79 | 302 |
| Foreign Exchange (Gain) Loss, Net | 8 | 316 | 196 | 406 | (93) |
| Revaluation (Gains) | 4 | (549) | — | (549) | — |
| Re-measurement of Contingent Payments | 21 | (109) | 135 | 142 | 571 |
| (Gain) Loss on Divestiture of Assets | 9 | 60 | (25) | (244) | (97) |
| Other (Income) Loss, Net | 10 | (59) | (107) | (467) | (208) |
| Earnings (Loss) Before Income Tax | 2,253 | 834 | 7,694 | 1,464 | |
| Income Tax Expense (Recovery) | 11 | 644 | 283 | 2,028 | 469 |
| Net Earnings (Loss) | 1,609 | 551 | 5,666 | 995 | |
| Net Earnings (Loss) Per Common Share ($) | 12 | ||||
| Basic | 0.83 | 0.27 | 2.87 | 0.48 | |
| Diluted | 0.81 | 0.27 | 2.79 | 0.47 |
(1) See Note 3 for revisions to prior period results.
See accompanying Notes to Consolidated Financial Statements (unaudited).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 3 |
|---|---|
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) | |
| --- |
For the periods ended September 30,
($ millions)
| Three Months Ended | Nine Months Ended | ||||
|---|---|---|---|---|---|
| Notes | 2022 | 2021 | 2022 | 2021 | |
| Net Earnings (Loss) | 1,609 | 551 | 5,666 | 995 | |
| Other Comprehensive Income (Loss), Net of Tax | 25 | ||||
| Items That Will not be Reclassified to Profit or Loss: | |||||
| Actuarial Gain (Loss) Relating to Pension and Other Post- Employment Benefits | 1 | (1) | 58 | 21 | |
| Change in the Fair Value of Equity Instruments at FVOCI (1) | 2 | 1 | 2 | — | |
| Items That may be Reclassified to Profit or Loss: | |||||
| Foreign Currency Translation Adjustment | 724 | 235 | 896 | (76) | |
| Total Other Comprehensive Income (Loss), Net of Tax | 727 | 235 | 956 | (55) | |
| Comprehensive Income (Loss) | 2,336 | 786 | 6,622 | 940 |
(1) Fair value through other comprehensive income (loss) (“FVOCI”).
See accompanying Notes to Consolidated Financial Statements (unaudited).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 4 |
|---|---|
| CONSOLIDATED BALANCE SHEETS (unaudited) | |
| --- |
As at
($ millions)
| Notes | September 30,<br>2022 | December 31, 2021 | |
|---|---|---|---|
| Assets | |||
| Current Assets | |||
| Cash and Cash Equivalents | 3,494 | 2,873 | |
| Accounts Receivable and Accrued Revenues | 4,302 | 3,870 | |
| Income Tax Receivable | 111 | 22 | |
| Inventories | 4,356 | 3,919 | |
| Assets Held for Sale | 9 | — | 1,304 |
| Total Current Assets | 12,263 | 11,988 | |
| Restricted Cash | 22 | 205 | 186 |
| Exploration and Evaluation Assets, Net | 1,13 | 663 | 720 |
| Property, Plant and Equipment, Net | 1,14 | 35,907 | 34,225 |
| Right-of-Use Assets, Net | 1,15 | 1,880 | 2,010 |
| Income Tax Receivable | 66 | 66 | |
| Investments in Equity-Accounted Affiliates | 16 | 361 | 311 |
| Other Assets | 17 | 323 | 431 |
| Deferred Income Taxes | 495 | 694 | |
| Goodwill | 1,18 | 2,923 | 3,473 |
| Total Assets | 55,086 | 54,104 | |
| Liabilities and Equity | |||
| Current Liabilities | |||
| Accounts Payable and Accrued Liabilities | 6,250 | 6,353 | |
| Short-Term Borrowings | 19 | — | 79 |
| Lease Liabilities | 20 | 297 | 272 |
| Contingent Payments | 21 | 294 | 236 |
| Income Tax Payable | 1,093 | 179 | |
| Liabilities Related to Assets Held for Sale | 9 | — | 186 |
| Total Current Liabilities | 7,934 | 7,305 | |
| Long-Term Debt | 19 | 8,774 | 12,385 |
| Lease Liabilities | 20 | 2,572 | 2,685 |
| Contingent Payments | 21 | 197 | — |
| Decommissioning Liabilities | 22 | 2,759 | 3,906 |
| Other Liabilities | 23 | 864 | 929 |
| Deferred Income Taxes | 4,212 | 3,286 | |
| Total Liabilities | 27,312 | 30,496 | |
| Shareholders’ Equity | 27,762 | 23,596 | |
| Non-Controlling Interest | 12 | 12 | |
| Total Liabilities and Equity | 55,086 | 54,104 | |
| Commitments and Contingencies | 31 |
See accompanying Notes to Consolidated Financial Statements (unaudited).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 5 |
|---|---|
| CONSOLIDATED STATEMENTS OF EQUITY (unaudited) | |
| --- |
($ millions)
| Shareholders’ Equity | ||||||||
|---|---|---|---|---|---|---|---|---|
| Common Shares | Preferred Shares | Warrants | Paid in<br><br>Surplus | Retained<br><br>Earnings | AOCI (1) | Total | Non-Controlling Interest | |
| (Note 24) | (Note 24) | (Note 24) | (Note 25) | |||||
| As at December 31, 2020 | 11,040 | — | — | 4,391 | 501 | 775 | 16,707 | — |
| Net Earnings (Loss) | — | — | — | — | 995 | — | 995 | — |
| Other Comprehensive Income<br> (Loss), Net of Tax | — | — | — | — | — | (55) | (55) | — |
| Total Comprehensive Income (Loss) | — | — | — | — | 995 | (55) | 940 | — |
| Common Shares Issued | 6,110 | — | — | — | — | — | 6,110 | — |
| Preferred Shares Issued | — | 519 | — | — | — | — | 519 | — |
| Warrants Issued | — | — | 216 | — | — | — | 216 | — |
| Warrants Exercised | 2 | — | — | — | — | — | 2 | — |
| Stock-Based Compensation <br> Expense | — | — | — | 11 | — | — | 11 | — |
| Base Dividends on Common Shares | — | — | — | — | (106) | — | (106) | — |
| Dividends on Preferred Shares | — | — | — | — | (26) | — | (26) | — |
| Non-Controlling Interest | — | — | — | — | — | — | — | 11 |
| As at September 30, 2021 | 17,152 | 519 | 216 | 4,402 | 1,364 | 720 | 24,373 | 11 |
| As at December 31, 2021 | 17,016 | 519 | 215 | 4,284 | 878 | 684 | 23,596 | 12 |
| Net Earnings (Loss) | — | — | — | — | 5,666 | — | 5,666 | — |
| Other Comprehensive Income<br> (Loss), Net of Tax | — | — | — | — | — | 956 | 956 | — |
| Total Comprehensive Income (Loss) | — | — | — | — | 5,666 | 956 | 6,622 | — |
| Common Shares Issued on Exercise <br>of Stock Options | 165 | — | — | (32) | — | — | 133 | — |
| Purchase of Common Shares Under<br><br>NCIB (2) (Note 24) | (826) | — | — | (1,317) | — | — | (2,143) | — |
| Warrants Exercised | 76 | — | (25) | — | — | — | 51 | — |
| Stock-Based Compensation <br>Expense | — | — | — | 10 | — | — | 10 | — |
| Base Dividends on Common Shares | — | — | — | — | (481) | — | (481) | — |
| Dividends on Preferred Shares | — | — | — | — | (26) | — | (26) | — |
| As at September 30, 2022 | 16,431 | 519 | 190 | 2,945 | 6,037 | 1,640 | 27,762 | 12 |
(1) Accumulated other comprehensive income (loss) (“AOCI”).
(2) Normal course issuer bid (“NCIB”).
See accompanying Notes to Consolidated Financial Statements (unaudited).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 6 |
|---|---|
| CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | |
| --- |
For the periods ended September 30,
($ millions)
| Three Months Ended | Nine Months Ended | ||||
|---|---|---|---|---|---|
| Notes | 2022 | 2021 | 2022 | 2021 | |
| Operating Activities | |||||
| Net Earnings (Loss) | 1,609 | 551 | 5,666 | 995 | |
| Depreciation, Depletion and Amortization | 14,15 | 1,047 | 1,153 | 3,209 | 3,234 |
| Deferred Income Tax Expense (Recovery) | 11 | 568 | 191 | 625 | 281 |
| Unrealized (Gain) Loss on Risk Management | 28 | (18) | (27) | (88) | 226 |
| Unrealized Foreign Exchange (Gain) Loss | 8 | 298 | 111 | 419 | (220) |
| Realized Foreign Exchange (Gain) Loss on Non-Operating Items | 120 | 139 | 146 | 137 | |
| Revaluation (Gains) | 4 | (549) | — | (549) | — |
| Re-measurement of Contingent Payments, Net of Cash Paid | (286) | 79 | (489) | 515 | |
| (Gain) Loss on Divestiture of Assets | 9 | 60 | (25) | (244) | (97) |
| Unwinding of Discount on Decommissioning Liabilities | 22 | 43 | 49 | 132 | 143 |
| (Income) Loss From Equity-Accounted Affiliates | 16 | (9) | (13) | (11) | (40) |
| Distributions Received From Equity-Accounted Affiliates | 16 | 13 | 26 | 54 | 115 |
| Other | 55 | 108 | (238) | 11 | |
| Settlement of Decommissioning Liabilities | (55) | (38) | (101) | (67) | |
| Net Change in Non-Cash Working Capital | 30 | 1,193 | (166) | (98) | (1,498) |
| Cash From (Used in) Operating Activities | 4,089 | 2,138 | 8,433 | 3,735 | |
| Investing Activities | |||||
| Acquisitions, Net of Cash Acquired | 4 | (389) | — | (390) | 735 |
| Capital Investment | 13,14 | (866) | (647) | (2,434) | (1,728) |
| Proceeds From Divestitures, Net of Cash Paid | 9,17 | 407 | 83 | 1,469 | 188 |
| Payment on Divestiture of Assets | 9 | — | — | (50) | — |
| Net Cash Received on Assumption of Decommissioning Liabilities | — | 75 | — | 75 | |
| Net Change in Investments and Other | 51 | (2) | (185) | (33) | |
| Net Change in Non-Cash Working Capital | 30 | 107 | 164 | 446 | 216 |
| Cash From (Used in) Investing Activities | (690) | (327) | (1,144) | (547) | |
| Net Cash Provided (Used) Before Financing Activities | 3,399 | 1,811 | 7,289 | 3,188 | |
| Financing Activities | 30 | ||||
| Net Issuance (Repayment) of Short-Term Borrowings | (2) | (19) | (81) | (108) | |
| Issuance of Long-Term Debt | — | 1,557 | — | 1,557 | |
| (Repayment) of Long-Term Debt | (2,889) | (2,336) | (4,149) | (2,336) | |
| Net Issuance (Repayment) of Revolving Long-Term Debt | — | — | — | (350) | |
| Principal Repayment of Leases | 20 | (78) | (70) | (228) | (222) |
| Common Shares Issued Under Stock Option Plans | 13 | — | 133 | — | |
| Purchase of Common Shares Under NCIB | 24 | (659) | — | (2,143) | — |
| Proceeds From Exercise of Warrants | 7 | 1 | 51 | 2 | |
| Base Dividends Paid on Common Shares | 12 | (205) | (35) | (481) | (106) |
| Dividends Paid on Preferred Shares | 12 | (9) | (9) | (26) | (26) |
| Other | — | (2) | (2) | (2) | |
| Cash From (Used in) Financing Activities | (3,822) | (913) | (6,926) | (1,591) | |
| Effect of Foreign Exchange on Cash and Cash Equivalents | 224 | 57 | 258 | 35 | |
| Increase (Decrease) in Cash and Cash Equivalents | (199) | 955 | 621 | 1,632 | |
| Cash and Cash Equivalents, Beginning of Period | 3,693 | 1,055 | 2,873 | 378 | |
| Cash and Cash Equivalents, End of Period | 3,494 | 2,010 | 3,494 | 2,010 |
See accompanying Notes to Consolidated Financial Statements (unaudited).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 7 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 1. DESCRIPTION OF BUSINESS AND SEGMENTED DISCLOSURES |
|---|
Cenovus Energy Inc., including its subsidiaries, (together “Cenovus” or the “Company”) is an integrated energy company with crude oil and natural gas production operations in Canada and the Asia Pacific region, and upgrading, refining and marketing operations in Canada and the United States (“U.S.”).
Cenovus is incorporated under the Canada Business Corporations Act and its common shares and common share purchase warrants are listed on the Toronto Stock Exchange (“TSX”) and New York Stock Exchange. Cenovus’s cumulative redeemable preferred shares series 1, 2, 3, 5 and 7 are listed on the TSX. The executive and registered office is located at 4100, 225 6 Avenue S.W., Calgary, Alberta, Canada, T2P 1N2. Information on the Company’s basis of preparation for these interim Consolidated Financial Statements is found in Note 2.
Management has determined the operating segments based on information regularly reviewed for the purposes of decision making, allocating resources and assessing operational performance by Cenovus’s chief operating decision makers. The Company evaluates the financial performance of its operating segments primarily based on operating margin. The Company operates through the following reportable segments:
Upstream Segments
•Oil Sands, includes the development and production of bitumen and heavy oil in northern Alberta and Saskatchewan. Cenovus’s oil sands assets include Foster Creek, Christina Lake, Sunrise, as well as the Lloydminster thermal and Lloydminster conventional heavy oil assets. Cenovus jointly owns and operates pipeline gathering systems and terminals through the equity-accounted investment in Husky Midstream Limited Partnership (“HMLP”). The sale and transportation of Cenovus’s production and third-party commodity trading volumes are managed and marketed through access to capacity on third-party pipelines and storage facilities in both Canada and the U.S. to optimize product mix, delivery points, transportation commitments and customer diversification.
•Conventional, includes assets rich in natural gas liquids (“NGLs”) and natural gas within the Elmworth-Wapiti, Kaybob‑Edson, Clearwater and Rainbow Lake operating areas in Alberta and British Columbia and interests in numerous natural gas processing facilities. Cenovus’s NGLs and natural gas production is marketed and transported with additional third-party commodity trading volumes through access to capacity on third-party pipelines, export terminals and storage facilities, which provides flexibility for market access to optimize product mix, delivery points, transportation commitments and customer diversification.
•Offshore, includes offshore operations, exploration and development activities in China and the east coast of Canada, as well as the equity-accounted investment in the Husky-CNOOC Madura Ltd. (“HCML”) joint venture in Indonesia.
Downstream Segments
•Canadian Manufacturing, includes the owned and operated Lloydminster upgrading and asphalt refining complex, which upgrades heavy oil and bitumen into synthetic crude oil, diesel, asphalt and other ancillary products. Cenovus seeks to maximize the value per barrel from its heavy oil and bitumen production through its integrated network of assets. In addition, Cenovus owns and operates the Bruderheim crude-by-rail terminal and two ethanol plants. Cenovus also markets its production and third-party commodity trading volumes of synthetic crude oil, asphalt and ancillary products.
•U.S. Manufacturing, includes the refining of crude oil to produce gasoline, diesel, jet fuel, asphalt and other products at the wholly-owned Lima Refinery and Superior Refinery, the jointly-owned Wood River and Borger refineries (jointly owned with operator Phillips 66) and the jointly-owned Toledo Refinery (jointly owned with operator BP Products North America Inc. (“BP”)). Cenovus also markets some of its own and third-party volumes of refined petroleum products including gasoline, diesel and jet fuel.
•Retail, includes the sale of Cenovus's own and third-party volumes of refined petroleum products, including gasoline and diesel, through retail, cardlock, travel center locations, bulk petroleum outlets, and wholesale channels in Canada. In September 2022, the Company divested the majority of our retail fuels network.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 8 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
Corporate and Eliminations
Corporate and Eliminations, primarily includes Cenovus-wide costs for general and administrative, financing activities, gains and losses on risk management for corporate related derivative instruments and foreign exchange. Eliminations include adjustments for internal usage of natural gas production between segments, transloading services provided to the Oil Sands segment by the Company’s crude-by-rail terminal, crude oil production used as feedstock by the Canadian Manufacturing and U.S. Manufacturing segments, the sale of condensate extracted from blended crude oil production at our Canadian Manufacturing operations and sold to the Oil Sands segment, and diesel production in the Canadian Manufacturing segment sold to the Retail segment and unrealized profits in inventory. Eliminations are recorded based on current market prices.
The following tabular financial information presents segmented information first by segment, then by product and geographic location.
A) Results of Operations – Segment and Operational Information
i) Results for the Three Months Ended September 30
| Upstream | ||||||||
|---|---|---|---|---|---|---|---|---|
| For the three months ended | Oil Sands | Conventional | Offshore | Total | ||||
| September 30, | 2022 | 2021 (1) | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 (1) |
| Revenues | ||||||||
| Gross Sales | 8,778 | 6,117 | 1,010 | 833 | 450 | 404 | 10,238 | 7,354 |
| Less: Royalties | 1,136 | 669 | 68 | 40 | 22 | 24 | 1,226 | 733 |
| 7,642 | 5,448 | 942 | 793 | 428 | 380 | 9,012 | 6,621 | |
| Expenses | ||||||||
| Purchased Product | 1,933 | 629 | 464 | 445 | — | — | 2,397 | 1,074 |
| Transportation and Blending | 2,758 | 2,114 | 38 | 20 | 4 | 3 | 2,800 | 2,137 |
| Operating | 689 | 616 | 141 | 135 | 85 | 49 | 915 | 800 |
| Realized (Gain) Loss on Risk <br> Management | 42 | 166 | 9 | 2 | — | — | 51 | 168 |
| Operating Margin | 2,220 | 1,923 | 290 | 191 | 339 | 328 | 2,849 | 2,442 |
| Unrealized (Gain) Loss on Risk<br><br>Management | (2) | (39) | 8 | 9 | — | — | 6 | (30) |
| Depreciation, Depletion and <br> Amortization | 652 | 743 | 103 | 99 | 132 | 127 | 887 | 969 |
| Exploration Expense | 7 | 2 | — | — | 66 | 3 | 73 | 5 |
| (Income) Loss From Equity-<br> Accounted Affiliates | — | — | — | — | (9) | (12) | (9) | (12) |
| Segment Income (Loss) | 1,563 | 1,217 | 179 | 83 | 150 | 210 | 1,892 | 1,510 |
(1)Prior period results have been adjusted for the change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending (see Note 3).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 9 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| Downstream | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the three months ended | Canadian Manufacturing | U.S. Manufacturing | Retail | Total | ||||||||||
| September 30, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||
| Revenues | ||||||||||||||
| Gross Sales | 1,478 | 1,215 | 8,719 | 5,723 | 881 | 592 | 11,078 | 7,530 | ||||||
| Less: Royalties | — | — | — | — | — | — | — | — | ||||||
| 1,478 | 1,215 | 8,719 | 5,723 | 881 | 592 | 11,078 | 7,530 | |||||||
| Expenses | ||||||||||||||
| Purchased Product | 1,092 | 986 | 7,944 | 5,171 | 846 | 551 | 9,882 | 6,708 | ||||||
| Transportation and Blending | 3 | — | — | — | — | — | 3 | — | ||||||
| Operating | 134 | 99 | 608 | 413 | 38 | 25 | 780 | 537 | ||||||
| Realized (Gain) Loss on Risk<br> Management | — | — | (77) | 17 | — | — | (77) | 17 | ||||||
| Operating Margin | 249 | 130 | 244 | 122 | (3) | 16 | 490 | 268 | ||||||
| Unrealized (Gain) Loss on Risk Management | — | — | (8) | 5 | — | — | (8) | 5 | ||||||
| Depreciation, Depletion and<br> Amortization | 37 | 41 | 91 | 103 | 5 | 11 | 133 | 155 | ||||||
| Exploration Expense | — | — | — | — | — | — | — | — | ||||||
| (Income) Loss From Equity-<br> Accounted Affiliates | — | — | — | — | — | — | — | — | ||||||
| Segment Income (Loss) | 212 | 89 | 161 | 14 | (8) | 5 | 365 | 108 | For the three months ended | Corporate and Eliminations | Consolidated | |||
| --- | --- | --- | --- | --- | ||||||||||
| September 30, | 2022 | 2021 (1) | 2022 | 2021 (1) | ||||||||||
| Revenues | ||||||||||||||
| Gross Sales | (2,619) | (1,450) | 18,697 | 13,434 | ||||||||||
| Less: Royalties | — | — | 1,226 | 733 | ||||||||||
| (2,619) | (1,450) | 17,471 | 12,701 | |||||||||||
| Expenses | ||||||||||||||
| Purchased Product | (2,267) | (1,091) | 10,012 | 6,691 | ||||||||||
| Transportation and Blending | (119) | (171) | 2,684 | 1,966 | ||||||||||
| Operating | (256) | (187) | 1,439 | 1,150 | ||||||||||
| Realized (Gain) Loss on Risk Management | 16 | (1) | (10) | 184 | ||||||||||
| Unrealized (Gain) Loss on Risk Management | (16) | (2) | (18) | (27) | ||||||||||
| Depreciation, Depletion and Amortization | 27 | 29 | 1,047 | 1,153 | ||||||||||
| Exploration Expense | — | — | 73 | 5 | ||||||||||
| (Income) Loss From Equity-Accounted Affiliates | — | (1) | (9) | (13) | ||||||||||
| Segment Income (Loss) | (4) | (26) | 2,253 | 1,592 | ||||||||||
| General and Administrative | 128 | 158 | 128 | 158 | ||||||||||
| Finance Costs | 207 | 360 | 207 | 360 | ||||||||||
| Interest Income | (21) | (4) | (21) | (4) | ||||||||||
| Integration Costs | 27 | 45 | 27 | 45 | ||||||||||
| Foreign Exchange (Gain) Loss, Net | 316 | 196 | 316 | 196 | ||||||||||
| Revaluation (Gains) | (549) | — | (549) | — | ||||||||||
| Re-measurement of Contingent Payments | (109) | 135 | (109) | 135 | ||||||||||
| (Gain) Loss on Divestiture of Assets | 60 | (25) | 60 | (25) | ||||||||||
| Other (Income) Loss, Net | (59) | (107) | (59) | (107) | ||||||||||
| — | 758 | — | 758 | |||||||||||
| Earnings (Loss) Before Income Tax | 2,253 | 834 | ||||||||||||
| Income Tax Expense (Recovery) | 644 | 283 | ||||||||||||
| Net Earnings (Loss) | 1,609 | 551 |
(1)Prior period results have been adjusted for the change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending (see Note 3).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 10 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
ii) Results for the Nine Months Ended September 30
| Upstream | ||||||||
|---|---|---|---|---|---|---|---|---|
| For the nine months ended | Oil Sands | Conventional | Offshore | Total | ||||
| September 30, | 2022 | 2021 (1) | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 (1) |
| Revenues | ||||||||
| Gross Sales | 28,044 | 16,110 | 3,201 | 2,235 | 1,575 | 1,262 | 32,820 | 19,607 |
| Less: Royalties | 3,709 | 1,462 | 228 | 103 | 56 | 74 | 3,993 | 1,639 |
| 24,335 | 14,648 | 2,973 | 2,132 | 1,519 | 1,188 | 28,827 | 17,968 | |
| Expenses | ||||||||
| Purchased Product | 4,216 | 1,748 | 1,460 | 1,113 | — | — | 5,676 | 2,861 |
| Transportation and Blending | 9,114 | 6,048 | 106 | 57 | 12 | 10 | 9,232 | 6,115 |
| Operating | 2,197 | 1,793 | 403 | 417 | 234 | 166 | 2,834 | 2,376 |
| Realized (Gain) Loss on Risk <br> Management | 1,468 | 584 | 17 | 2 | — | — | 1,485 | 586 |
| Operating Margin | 7,340 | 4,475 | 987 | 543 | 1,273 | 1,012 | 9,600 | 6,030 |
| Unrealized (Gain) Loss on Risk<br><br>Management | (59) | 194 | 7 | 10 | — | — | (52) | 204 |
| Depreciation, Depletion and <br> Amortization | 1,977 | 1,982 | 282 | 309 | 441 | 369 | 2,700 | 2,660 |
| Exploration Expense | 7 | 15 | 1 | (3) | 91 | 3 | 99 | 15 |
| (Income) Loss From Equity-<br> Accounted Affiliates | 8 | (5) | — | — | (19) | (36) | (11) | (41) |
| Segment Income (Loss) | 5,407 | 2,289 | 697 | 227 | 760 | 676 | 6,864 | 3,192 |
(1)Prior period results have been adjusted for the change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending (see Note 3).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 11 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| Downstream | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the nine months ended | Canadian Manufacturing | U.S. Manufacturing | Retail | Total | ||||||||||
| September 30, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||
| Revenues | ||||||||||||||
| Gross Sales | 4,043 | 3,109 | 23,702 | 13,889 | 2,424 | 1,540 | 30,169 | 18,538 | ||||||
| Less: Royalties | — | — | — | — | — | — | — | — | ||||||
| 4,043 | 3,109 | 23,702 | 13,889 | 2,424 | 1,540 | 30,169 | 18,538 | |||||||
| Expenses | ||||||||||||||
| Purchased Product | 3,192 | 2,424 | 20,365 | 12,320 | 2,317 | 1,434 | 25,874 | 16,178 | ||||||
| Transportation and Blending | 3 | — | — | — | — | — | 3 | — | ||||||
| Operating | 438 | 284 | 1,757 | 1,212 | 96 | 73 | 2,291 | 1,569 | ||||||
| Realized (Gain) Loss on Risk<br> Management | — | — | 120 | 48 | — | — | 120 | 48 | ||||||
| Operating Margin | 410 | 401 | 1,460 | 309 | 11 | 33 | 1,881 | 743 | ||||||
| Unrealized (Gain) Loss on Risk<br><br>Management | — | — | (22) | 38 | — | — | (22) | 38 | ||||||
| Depreciation, Depletion and<br> Amortization | 143 | 127 | 259 | 320 | 21 | 36 | 423 | 483 | ||||||
| Exploration Expense | — | — | — | — | — | — | — | — | ||||||
| (Income) Loss From Equity-<br> Accounted Affiliates | — | — | — | — | — | — | — | — | ||||||
| Segment Income (Loss) | 267 | 274 | 1,223 | (49) | (10) | (3) | 1,480 | 222 | For the nine months ended | Corporate and Eliminations | Consolidated | |||
| --- | --- | --- | --- | --- | ||||||||||
| September 30, | 2022 | 2021 (1) | 2022 | 2021 (1) | ||||||||||
| Revenues | ||||||||||||||
| Gross Sales | (6,162) | (3,875) | 56,827 | 34,270 | ||||||||||
| Less: Royalties | — | — | 3,993 | 1,639 | ||||||||||
| (6,162) | (3,875) | 52,834 | 32,631 | |||||||||||
| Expenses | ||||||||||||||
| Purchased Product | (4,660) | (2,890) | 26,890 | 16,149 | ||||||||||
| Transportation and Blending | (528) | (476) | 8,707 | 5,639 | ||||||||||
| Operating | (918) | (517) | 4,207 | 3,428 | ||||||||||
| Realized (Gain) Loss on Risk Management | 23 | 91 | 1,628 | 725 | ||||||||||
| Unrealized (Gain) Loss on Risk Management | (14) | (16) | (88) | 226 | ||||||||||
| Depreciation, Depletion and Amortization | 86 | 91 | 3,209 | 3,234 | ||||||||||
| Exploration Expense | — | — | 99 | 15 | ||||||||||
| (Income) Loss From Equity-Accounted Affiliates | — | 1 | (11) | (40) | ||||||||||
| Segment Income (Loss) | (151) | (159) | 8,193 | 3,255 | ||||||||||
| General and Administrative | 545 | 491 | 545 | 491 | ||||||||||
| Finance Costs | 631 | 836 | 631 | 836 | ||||||||||
| Interest Income | (44) | (11) | (44) | (11) | ||||||||||
| Integration Costs | 79 | 302 | 79 | 302 | ||||||||||
| Foreign Exchange (Gain) Loss, Net | 406 | (93) | 406 | (93) | ||||||||||
| Revaluation (Gains) | (549) | — | (549) | — | ||||||||||
| Re-measurement of Contingent Payments | 142 | 571 | 142 | 571 | ||||||||||
| (Gain) Loss on Divestiture of Assets | (244) | (97) | (244) | (97) | ||||||||||
| Other (Income) Loss, Net | (467) | (208) | (467) | (208) | ||||||||||
| 499 | 1,791 | 499 | 1,791 | |||||||||||
| Earnings (Loss) Before Income Tax | 7,694 | 1,464 | ||||||||||||
| Income Tax Expense (Recovery) | 2,028 | 469 | ||||||||||||
| Net Earnings (Loss) | 5,666 | 995 |
(1)Prior period results have been adjusted for the change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending (see Note 3).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 12 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
B) Revenues by Product
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Upstream (1) | ||||
| Crude Oil | 6,754 | 5,143 | 22,392 | 13,574 |
| NGLs | 1,323 | 754 | 3,557 | 1,921 |
| Natural Gas | 839 | 625 | 2,547 | 2,125 |
| Other | 96 | 99 | 331 | 348 |
| Downstream | ||||
| Canadian Manufacturing | ||||
| Synthetic Crude Oil | 657 | 492 | 1,786 | 1,289 |
| Diesel and Distillate | 190 | 107 | 444 | 283 |
| Asphalt | 248 | 177 | 482 | 358 |
| Other Products and Services | 383 | 439 | 1,331 | 1,179 |
| U.S. Manufacturing | ||||
| Gasoline | 3,919 | 2,942 | 11,180 | 7,245 |
| Diesel and Distillate | 3,384 | 1,719 | 8,535 | 4,497 |
| Other Products | 1,416 | 1,062 | 3,987 | 2,147 |
| Retail | 881 | 592 | 2,424 | 1,540 |
| Corporate and Eliminations | (2,619) | (1,450) | (6,162) | (3,875) |
| Consolidated | 17,471 | 12,701 | 52,834 | 32,631 |
(1)Prior period results have been adjusted for the change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending (see Note 3).
C) Geographical Information
| Revenues (1) | ||||
|---|---|---|---|---|
| Three Months Ended | Nine Months Ended | |||
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Canada (2) | 7,984 | 6,246 | 26,456 | 16,980 |
| United States | 9,169 | 6,139 | 25,354 | 14,740 |
| China | 318 | 316 | 1,024 | 911 |
| Consolidated | 17,471 | 12,701 | 52,834 | 32,631 |
(1)Revenues by country are classified based on where the operations are located.
(2)Prior period results have been adjusted for the change in presentation of product swaps and certain third-party purchases used in blending and optimization activities, and to more appropriately reflect the cost of blending (see Note 3).
| Non-Current Assets (1) | ||
|---|---|---|
| As at | September 30,<br><br>2022 | December 31,<br><br>2021 (2) |
| Canada | 34,390 | 33,981 |
| United States | 4,943 | 4,093 |
| China | 2,256 | 2,583 |
| Indonesia | 361 | 311 |
| Consolidated | 41,950 | 40,968 |
(1)Includes exploration and evaluation (“E&E”) assets, property, plant and equipment (“PP&E”), right-of-use (“ROU”) assets, income tax receivable, investments in equity-accounted affiliates, precious metals, intangible assets and goodwill.
(2)Canada excludes assets held for sale of $1.3 billion that were divested in 2022.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 13 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
D) Assets by Segment
| E&E Assets | PP&E | ROU Assets | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As at | September 30,<br>2022 | December 31, 2021 | September 30,<br>2022 | December 31, 2021 | September 30,<br>2022 | December 31, 2021 | ||||||
| Oil Sands | 654 | 653 | 24,249 | 22,535 | 728 | 754 | ||||||
| Conventional | 5 | 6 | 1,802 | 2,174 | 2 | 2 | ||||||
| Offshore | 4 | 61 | 2,459 | 2,822 | 156 | 160 | ||||||
| Canadian Manufacturing | — | — | 2,258 | 2,353 | 270 | 339 | ||||||
| U.S. Manufacturing | — | — | 4,625 | 3,745 | 239 | 252 | ||||||
| Retail | — | — | 196 | 205 | 3 | 49 | ||||||
| Corporate and Eliminations | — | — | 318 | 391 | 482 | 454 | ||||||
| Consolidated | 663 | 720 | 35,907 | 34,225 | 1,880 | 2,010 | Goodwill | Total Assets | ||||
| --- | --- | --- | --- | --- | ||||||||
| As at | September 30,<br>2022 | December 31, 2021 | September 30,<br>2022 | December 31,<br><br>2021 (1) | ||||||||
| Oil Sands | 2,923 | 3,473 | 31,421 | 31,070 | ||||||||
| Conventional | — | — | 2,100 | 3,026 | ||||||||
| Offshore | — | — | 3,223 | 3,597 | ||||||||
| Canadian Manufacturing | — | — | 2,874 | 2,918 | ||||||||
| U.S. Manufacturing | — | — | 9,483 | 7,509 | ||||||||
| Retail | — | — | 502 | 966 | ||||||||
| Corporate and Eliminations | — | — | 5,483 | 5,018 | ||||||||
| Consolidated | 2,923 | 3,473 | 55,086 | 54,104 |
(1)Total assets include assets held for sale in the Oil Sands segment of $593 million, in the Conventional segment of $159 million and in the Retail segment of $552 million that were divested in 2022.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 14 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
E) Capital Expenditures (1)
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Capital Investment | ||||
| Oil Sands | 360 | 198 | 1,111 | 617 |
| Conventional | 67 | 41 | 188 | 135 |
| Offshore | ||||
| Asia Pacific | 3 | 18 | 5 | 21 |
| Atlantic | 78 | 51 | 220 | 109 |
| Total Upstream | 508 | 308 | 1,524 | 882 |
| Canadian Manufacturing | 17 | 9 | 67 | 23 |
| U.S. Manufacturing | 300 | 301 | 774 | 743 |
| Retail | 7 | 16 | 10 | 22 |
| Total Downstream | 324 | 326 | 851 | 788 |
| Corporate and Eliminations | 34 | 13 | 59 | 58 |
| 866 | 647 | 2,434 | 1,728 | |
| Acquisitions (Note 4) | ||||
| Oil Sands (2) | 1,596 | — | 1,596 | 5,122 |
| Conventional | 5 | — | 6 | 569 |
| Offshore | — | 84 | — | 3,061 |
| Canadian Manufacturing | — | — | — | 2,283 |
| U.S. Manufacturing | — | — | — | 2,140 |
| Retail | — | — | — | 422 |
| Corporate and Eliminations | — | — | — | 155 |
| 1,601 | 84 | 1,602 | 13,752 | |
| Total Capital Expenditures | 2,467 | 731 | 4,036 | 15,480 |
(1)Includes expenditures on PP&E, E&E assets, and capitalized interest.
(2)Cenovus was deemed to have disposed of its pre-existing interest in Sunrise Oil Sands Partnership (“SOSP”) and reacquired it at fair value as required by IFRS 3, “Business Combinations” (“IFRS 3”), which is not reflected in the table above (see Note 4). The carrying value of the pre-existing interest was $960 million and the estimated fair value was $1.6 billion as at August 31, 2022.
| 2. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE |
|---|
In these interim Consolidated Financial Statements, unless otherwise indicated, all dollars are expressed in Canadian dollars. All references to C$ or $ are to Canadian dollars and references to US$ are to U.S. dollars.
These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of interim financial statements, including International Accounting Standard 34, “Interim Financial Reporting”, and have been prepared following the same accounting policies and methods of computation as the annual Consolidated Financial Statements for the year ended December 31, 2021, except for income taxes. Income taxes on earnings or loss in the interim periods are accrued using the income tax rate that would be applicable to the expected total annual earnings or loss.
Certain information and disclosures normally included in the notes to the annual Consolidated Financial Statements have been condensed or have been disclosed on an annual basis only. Accordingly, these interim Consolidated Financial Statements should be read in conjunction with the annual Consolidated Financial Statements for the year ended December 31, 2021, which have been prepared in accordance with IFRS as issued by the IASB.
These interim Consolidated Financial Statements were approved by the Board of Directors effective November 1, 2022.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 15 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 3. ACCOUNTING POLICIES, CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY |
|---|
Accounting policies, a list of critical accounting judgments and key sources of estimation uncertainty can be found in the Company’s annual Consolidated Financial Statements for the year ended December 31, 2021.
Adjustments to the Consolidated Statements of Earnings (Loss)
Certain comparative information presented in the Consolidated Statements of Earnings (Loss) within the Oil Sands segment and Corporate and Eliminations segment was revised.
During the three months ended December 31, 2021, the Company made adjustments to more appropriately record certain third-party purchases used for blending and optimization activities and to ensure consistent treatment of product swaps. As a result, revenues and purchased product increased with no impact to net earnings (loss), segment income (loss), cash flows or financial position. Refer to the annual Consolidated Financial Statements for the year ended December 31, 2021, for further details.
During the three months ended June 30, 2022, the Company made adjustments to more appropriately reflect the cost of blending at our Lloydminster thermal and Lloydminster conventional heavy oil assets, which resulted in a reclassification of costs between purchased product and transportation and blending. An associated elimination entry was recorded in our Corporate and Eliminations segment to represent the change in the value of condensate that was extracted at our Canadian Manufacturing operations and sold back to the Oil Sands segment. As a result, purchased product decreased and transportation and blending increased, with no impact to net earnings (loss), segment income (loss), cash flows or financial position. Refer to the interim Consolidated Financial Statements for the periods ended June 30, 2022, for further details.
2021 Revisions
| Three Months Ended<br>September 30, 2021 | Nine Months Ended<br>September 30, 2021 | |||||
|---|---|---|---|---|---|---|
| Oil Sands Segment | Previously Reported | Revisions | Revised | Previously Reported | Revisions | Revised |
| Gross Sales | 6,114 | 3 | 6,117 | 15,904 | 206 | 16,110 |
| Purchased Product (1) | 822 | (193) | 629 | 2,114 | (366) | 1,748 |
| Transportation and Blending | 1,918 | 196 | 2,114 | 5,476 | 572 | 6,048 |
| 3,374 | — | 3,374 | 8,314 | — | 8,314 |
(1)Revisions include $3 million and $206 million for the three and nine months ended September 30, 2021, respectively, related to adjustments for product swaps and third-party purchases used in blending and optimization activities. Revisions include $196 million and $572 million for the three and nine months ended September 30, 2021, respectively, to more appropriately reflect the cost of blending at our Lloydminster thermal and Lloydminster conventional heavy oil assets.
| Three Months Ended<br>September 30, 2021 | Nine Months Ended<br>September 30, 2021 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Corporate and Eliminations Segment | Previously Reported | Revisions | Revised | Previously Reported | Revisions | Revised | ||||||||
| Purchased Product | (1,244) | 153 | (1,091) | (3,327) | 437 | (2,890) | ||||||||
| Transportation and Blending | (18) | (153) | (171) | (39) | (437) | (476) | ||||||||
| (1,262) | — | (1,262) | (3,366) | — | (3,366) | Three Months Ended<br>September 30, 2021 | Nine Months Ended<br>September 30, 2021 | |||||||
| --- | --- | --- | --- | --- | --- | --- | ||||||||
| Consolidated | Previously Reported | Revision | Revised | Previously Reported | Revision | Revised | ||||||||
| Gross Sales | 13,431 | 3 | 13,434 | 34,064 | 206 | 34,270 | ||||||||
| Purchased Product | 6,731 | (40) | 6,691 | 16,078 | 71 | 16,149 | ||||||||
| Transportation and Blending | 1,923 | 43 | 1,966 | 5,504 | 135 | 5,639 | ||||||||
| 4,777 | — | 4,777 | 12,482 | — | 12,482 | |||||||||
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 16 | |||||||||||||
| --- | --- |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 4. ACQUISITIONS |
|---|
A) Sunrise Oil Sands Partnership
i) Summary of the Acquisition
On August 31, 2022, Cenovus closed the transaction with BP Canada Energy Group ULC (“BP Canada”) to purchase the remaining 50 percent interest in SOSP, a joint operation, in northern Alberta (the “Sunrise Acquisition”). The Sunrise Acquisition had an effective date of May 1, 2022. It provides Cenovus with full ownership and further enhances Cenovus’s core strength in the oil sands.
The Sunrise Acquisition has been accounted for using the acquisition method pursuant to IFRS 3. Under the acquisition method, assets and liabilities are recorded at their fair values on the date of acquisition and the total consideration is allocated to the assets acquired and liabilities assumed. The excess of consideration given over the fair value of the net assets acquired, if any, is recorded as goodwill.
ii) Identifiable Assets Acquired and Liabilities Assumed
The preliminary purchase price allocation is based on management’s best estimate of fair value. Upon finalizing the fair value of net assets acquired, adjustments to initial estimates, including goodwill, may be required.
The following table summarizes the recognized amounts of assets acquired and liabilities assumed at the date of acquisition.
| As at | August 31, 2022 |
|---|---|
| 100 Percent of the Identifiable Assets Acquired and Liabilities Assumed | |
| Cash | 9 |
| Accounts Receivable and Accrued Revenues | 164 |
| Inventories | 88 |
| Property, Plant and Equipment (Note 14) | 3,192 |
| Accounts Payable and Accrued Liabilities | (313) |
| Income Tax Payable | (39) |
| Decommissioning Liabilities (Note 22) | (22) |
| Deferred Income Tax Liabilities | (486) |
| Total Identifiable Net Assets | 2,593 |
The fair value and gross contractual amount of acquired accounts receivables and accrued revenues is $164 million, all of which is expected to be collectible.
iii) Total Consideration
Total consideration for the Sunrise Acquisition consisted of $600 million in cash, before closing adjustments, and Cenovus’s 35 percent interest in the undeveloped Bay du Nord project offshore Newfoundland and Labrador. Cenovus also agreed to make quarterly variable payments to BP Canada for up to two years subsequent to August 31, 2022, if crude oil prices exceed a specific threshold. The maximum cumulative variable payment is $600 million. The following table summarizes the fair value of total consideration:
| As at | August 31, 2022 |
|---|---|
| Cash, Net of Closing Adjustments | 394 |
| Bay Du Nord | 40 |
| Variable Payment (Note 21) | 600 |
| Total Consideration | 1,034 |
Non-monetary assets transferred as part of consideration must be re-measured at their acquisition-date fair value, with any gain or loss recognized in net earnings (loss). As a result, the Company re-measured its interest in Bay du Nord to its estimated fair value and recognized a revaluation gain of $40 million.
Cenovus agreed to make quarterly payments from SOSP to BP Canada for up to two years subsequent to the closing date for quarters in which the average Western Canadian Select (“WCS”) crude oil price exceeds $52.00 per barrel. The first quarterly period ends on November 30, 2022. The quarterly payment will be calculated as $2.8 million plus the difference between the average WCS price less $53.00 multiplied by $2.8 million, for any of the eight quarters in which the average WCS price is equal to or greater than $52.00 per barrel. If the average WCS price is less than $52.00 per barrel, no payment will be made for that quarter. The maximum cumulative variable payment is $600 million.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 17 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
The variable payment is accounted for as a financial instrument. The fair value of $600 million on August 31, 2022, was estimated by calculating the present value of the future expected cash flows using an option pricing model, which assumes the probability distribution for WCS is based on the volatility of West Texas Intermediate (“WTI”) options, volatility of Canadian-U.S. foreign exchange rate options and WCS futures pricing. Subsequent to the closing date, the variable payment will be re-measured at fair value with changes in fair value recognized in net earnings (loss) at each reporting date until the earlier of when the maximum $600 million in cumulative payments is reached or the eight quarters have lapsed.
iv) Goodwill
Goodwill arising from the Sunrise Acquisition is:
| As at | August 31, 2022 |
|---|---|
| Total Purchase Consideration (Note 4Aiii) | 1,034 |
| Fair Value of Pre-Existing 50 Percent Ownership Interest in Sunrise Oil Sands Partnership | 1,559 |
| Fair Value of Identifiable Net Assets (Note 4Aii) | (2,593) |
| Goodwill | — |
Current and deferred income tax liabilities was recognized in the purchase price allocation in relation to the 50 percent interest in SOSP acquired. The deferred income tax liability arises from the difference between the fair value of the acquired assets and liabilities assumed and their tax basis.
Fair Value of Pre-Existing 50 Percent Ownership Interest in Sunrise Oil Sands Partnership
Prior to the Sunrise Acquisition, Cenovus’s 50 percent interest in SOSP was jointly controlled with BP Canada and met the definition of a joint operation under IFRS 11, “Joint Arrangements”; therefore, Cenovus recognized its share of the assets, liabilities, revenues and expenses in its consolidated results. Subsequent to the Sunrise Acquisition, Cenovus controls SOSP, as defined under IFRS 10, “Consolidated Financial Statements” and accordingly, SOSP has been consolidated. As required by IFRS 3, when an acquirer achieves control in stages, the previously held interest is remeasured to fair value at the acquisition date with any gain or loss recognized in net earnings (loss). The acquisition-date fair value of the previously held interest was estimated to be $1.6 billion and has been included in the measurement of the total consideration transferred. The carrying value of the SOSP assets was $960 million, including previously recorded goodwill (see Note 18). As a result, Cenovus recognized a non-cash revaluation gain of $599 million ($457 million, after-tax) on the re-measurement of its existing interest in SOSP to fair value.
v) Revenue and Profit Contribution
The acquired business contributed revenues of $92 million and net earnings of $30 million for the period from August 31, 2022, to September 30, 2022. If the closing of the Sunrise Acquisition had occurred on January 1, 2022, Cenovus’s consolidated pro forma revenue and net earnings for the nine months ended September 30, 2022, would have been $51.8 billion and $6.2 billion, respectively. These amounts have been calculated using results from the acquired business, adjusting them for:
•Additional depreciation, depletion and amortization (“DD&A”) that would have been charged assuming the fair value adjustments to PP&E had applied from January 1, 2022.
•Additional accretion on the decommissioning liability if it had been assumed on January 1, 2022.
•The consequential tax effects.
This pro forma information is not necessarily indicative of the results that would have been obtained if the Sunrise Acquisition had actually occurred on January 1, 2022.
B) BP-Husky Refining LLC
On August 8, 2022, Cenovus announced an agreement with BP to purchase the remaining 50 percent interest in BP-Husky Refining LLC, a joint operation, in Ohio (the “Toledo Acquisition”). After closing the transaction, Cenovus will operate the Toledo Refinery. Total consideration for the transaction includes US$300 million in cash plus the value of inventory. The Toledo Acquisition will be accounted for using the acquisition method pursuant to IFRS 3. On September 20, 2022, a tragic fire occurred at the Toledo Refinery, resulting in two worker fatalities. Investigations into the cause of the incident are ongoing and the refinery remains shut down in a safe state. The Company continues to assess the status and timing of closing the transaction.
C) Husky Energy Inc.
On January 1, 2021, Cenovus and Husky Energy Inc. closed a transaction to combine the two companies through a plan of arrangement (the “Arrangement”). For more details, see Note 5 of the annual Consolidated Financial Statements for the year ended December 31, 2021.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 18 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
D) Terra Nova
On September 8, 2021, the Company acquired an additional working interest of 21 percent of the Terra Nova field in Atlantic Canada. Cenovus’s working interest in the joint operation is now 34 percent. The total consideration paid was $3 million, net of closing adjustments, and the effective date of the transaction was April 1, 2021. The additional working interest acquired was accounted for as an asset acquisition. Cenovus acquired cash of $78 million and PP&E of $84 million, and assumed decommissioning liabilities of $159 million.
| 5. GENERAL AND ADMINISTRATIVE | | --- || | Three Months Ended | | Nine Months Ended | | | --- | --- | --- | --- | --- | | For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 | | Salaries, Benefits, Administrative and Other | 129 | 103 | 361 | 360 | | Stock-Based Compensation Expense (Recovery) (Note 26) | (1) | 28 | 193 | 97 | | Other Incentive Benefits Expense (Recovery) | — | 27 | (9) | 34 | | | 128 | 158 | 545 | 491 | | 6. FINANCE COSTS | | --- || | Three Months Ended | | Nine Months Ended | | | --- | --- | --- | --- | --- | | For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 | | Interest Expense – Short-Term Borrowings and Long-Term Debt | 121 | 146 | 381 | 424 | | Net Premium (Discount) on Redemption of Long-Term Debt (Note 19) (1) | (4) | 115 | (29) | 115 | | Interest Expense – Lease Liabilities (Note 20) | 40 | 43 | 123 | 129 | | Unwinding of Discount on Decommissioning Liabilities (Note 22) | 43 | 49 | 132 | 143 | | Other | 9 | 7 | 27 | 25 | | | 209 | 360 | 634 | 836 | | Capitalized Interest | (2) | — | (3) | — | | | 207 | 360 | 631 | 836 |
(1)Net Premium (Discount) on Redemption of Long-Term Debt includes the premium or discount on redemption, transaction costs, and the amortization of fair value adjustments and issue costs.
| 7. INTEGRATION COSTS |
|---|
Arrangement integration costs of $24 million and $76 million, respectively, were recognized in net earnings (loss) in the three and nine months ended September 30, 2022 (three and nine months ended September 30, 2021 – $45 million and $302 million, respectively).
Transaction costs of $3 million were recognized in net earnings (loss) in the three and nine months ended September 30, 2022, associated with the Sunrise Acquisition and pending Toledo Acquisition.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 19 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 8. FOREIGN EXCHANGE (GAIN) LOSS, NET | | --- || | Three Months Ended | | Nine Months Ended | | | --- | --- | --- | --- | --- | | For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 | | Unrealized Foreign Exchange (Gain) Loss on Translation of: | | | | | | U.S. Dollar Debt Issued From Canada | 324 | 148 | 444 | (132) | | Other | (26) | (37) | (25) | (88) | | Unrealized Foreign Exchange (Gain) Loss | 298 | 111 | 419 | (220) | | Realized Foreign Exchange (Gain) Loss | 18 | 85 | (13) | 127 | | | 316 | 196 | 406 | (93) | | 9. DIVESTITURES | | --- |
On January 31, 2022, the Company closed the sale of its Tucker asset in its Oil Sands segment for net proceeds of $730 million and recorded a before-tax gain of $165 million (after-tax gain – $126 million).
On February 28, 2022, the Company closed the sale of its Wembley assets in its Conventional segment for net proceeds of $221 million and recorded a before-tax gain of $76 million (after-tax gain – $58 million).
On September 13, 2022, the Company closed the sales of 337 gas stations in the Retail segment, located across Western Canada and Ontario, for net cash proceeds of $404 million and recorded a before-tax loss of $74 million (after-tax loss - $56 million).
The above 2022 divestitures were classified as assets held for sale at December 31, 2021.
In September 2021, the Company entered into an agreement with a partner in the White Rose project in the Atlantic region which would transfer 12.5 percent of Cenovus’s working interest in the White Rose field and the satellite extensions, subject to certain closing conditions. On May 31, 2022, the final closing conditions were satisfied, which included the approval of the West White Rose project restarting. Cenovus paid $50 million associated with transferring the Company’s working interest, resulting in a before-tax gain of $62 million (after-tax gain – $47 million).
On June 8, 2022, the Company sold its investment in Headwater Exploration Inc. (“Headwater”) for proceeds of $110 million, with no gain or loss recognized as the investment was recorded at fair value prior to the sale.
On May 1, 2021, the Company closed the sale of its gross overriding royalty interests in the Marten Hills area of Alberta relating to the Conventional segment. Cenovus received cash proceeds of $102 million and recorded a before-tax gain of $60 million (after-tax gain – $47 million).
The Company sold Conventional segment assets in the Kaybob area in July 2021 and assets in the East Clearwater area in August 2021 for combined gross proceeds of approximately $82 million. For the three months ended September 30, 2021, a before-tax gain of $17 million (after-tax gain – $13 million) was recorded on the dispositions.
| 10. OTHER (INCOME) LOSS, NET |
|---|
For the three and nine months ended September 30, 2022, the Company recorded insurance proceeds related to the 2018 Superior Refinery incident of $3 million and $271 million, respectively (three and nine months ended September 30, 2021 – $nil and $45 million, respectively), and insurance proceeds related to the 2018 incident in the Atlantic region of $nil and $57 million, respectively (three and nine months ended September 30, 2021 – $nil).
For the three and nine months ended September 30, 2022, decommissioning liabilities of $20 million and $48 million, respectively (three and nine months ended September 30, 2021 – $13 million and $30 million, respectively) were settled under the Site Rehabilitation Program.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 20 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 11. INCOME TAXES |
|---|
The provision for income taxes is:
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Current Tax | ||||
| Canada | 187 | 58 | 1,124 | 72 |
| United States | (185) | — | 96 | — |
| Asia Pacific | 64 | 34 | 173 | 115 |
| Other International | 10 | — | 10 | 1 |
| Total Current Tax Expense (Recovery) | 76 | 92 | 1,403 | 188 |
| Deferred Tax Expense (Recovery) | 568 | 191 | 625 | 281 |
| 644 | 283 | 2,028 | 469 | |
| 12. PER SHARE AMOUNTS | ||||
| --- |
A) Net Earnings (Loss) Per Common Share – Basic and Diluted
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Net Earnings (Loss) | 1,609 | 551 | 5,666 | 995 |
| Effect of Cumulative Dividends on Preferred Shares | (9) | (9) | (26) | (26) |
| Net Earnings (Loss) – Basic and Diluted | 1,600 | 542 | 5,640 | 969 |
| Basic – Weighted Average Number of Shares | 1,927.9 | 2,017.6 | 1,962.8 | 2,017.5 |
| Dilutive Effect of Warrants | 42.0 | 25.6 | 45.0 | 22.7 |
| Dilutive Effect of Net Settlement Rights | 7.2 | 0.3 | 10.7 | 0.2 |
| Dilutive Effect of Cenovus Replacement Stock Options | 1.6 | — | — | — |
| Diluted – Weighted Average Number of Shares | 1,978.7 | 2,043.5 | 2,018.5 | 2,040.4 |
| Net Earnings (Loss) Per Common Share – Basic ($) | 0.83 | 0.27 | 2.87 | 0.48 |
| Net Earnings (Loss) Per Common Share – Diluted (1) ($) | 0.81 | 0.27 | 2.79 | 0.47 |
(1)In the three months ended September 30, 2022, the Cenovus replacement stock options were dilutive. For the nine months ended September 30, 2022, excluded from the calculation of dilutive net earnings (loss) per share were net earnings of $35 million (three and nine months ended September 30, 2021 - $3 million and $14 million, respectively), and common shares of 1.6 million (three and nine months ended September 30, 2021 - 1.9 million and 1.8 million, respectively), related to the assumed exercise of the Cenovus replacement stock options as the impact was anti-dilutive.
B) Common Share Dividends
For the nine months ended September 30, 2022, the Company paid base dividends of $481 million or $0.245 per common share (nine months ended September 30, 2021 – $106 million or $0.0525 per common share).
On November 1, 2022, the Company’s Board of Directors declared a fourth quarter base dividend of $0.105 per common share, payable on December 30, 2022, to common shareholders of record as at December 15, 2022. The declaration of common share dividends is at the sole discretion of the Company’s Board of Directors and is considered quarterly.
On November 1, 2022, the Company’s Board of Directors declared a fourth quarter variable dividend of $0.114 per common share, payable on December 2, 2022, to common shareholders of record as at November 18, 2022. The declaration of common share variable dividends is at the sole discretion of the Company’s Board of Directors and is reviewed quarterly.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 21 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
C) Preferred Share Dividends
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Series 1 First Preferred Shares | 1 | 2 | 5 | 6 |
| Series 2 First Preferred Shares | 1 | — | 1 | — |
| Series 3 First Preferred Shares | 3 | 3 | 9 | 9 |
| Series 5 First Preferred Shares | 3 | 3 | 7 | 7 |
| Series 7 First Preferred Shares | 1 | 1 | 4 | 4 |
| Total Declared and Paid Preferred Share Dividends | 9 | 9 | 26 | 26 |
The declaration of preferred share dividends is at the sole discretion of the Company’s Board of Directors and is considered quarterly. If a dividend on any preferred share is not paid in full on any dividend payment date, then a dividend restriction on the common shares shall apply. The preferred share dividends are cumulative.
On November 1, 2022, the Company’s Board of Directors declared fourth quarter dividends for Cenovus’s preferred shares, payable on January 3, 2023, in the amount of $9 million, to preferred shareholders of record as at December 15, 2022.
| 13. EXPLORATION AND EVALUATION ASSETS, NET | | --- || As at December 31, 2021 | 720 | | --- | --- | | Additions | 15 | | Exploration Expense | (63) | | Change in Decommissioning Liabilities | (12) | | Exchange Rate Movements and Other (1) | 3 | | As at September 30, 2022 | 663 |
(1)Immediately prior to the Sunrise Acquisition, Bay du Nord had a carrying value of $nil. The Company re-measured its interest in Bay du Nord to $40 million and recognized a revaluation gain of $40 million.
For the nine months ended September 30, 2022, $2 million and $61 million of previously capitalized E&E costs were written off in the Oil Sands segment and Offshore segment, respectively, as the carrying value was not considered to be recoverable.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 22 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 14. PROPERTY, PLANT AND EQUIPMENT, NET | | --- || | Oil and Gas Properties | Processing, Transportation and Storage Assets | Manufacturing Assets | Retail and Other Assets (1) | Total | | --- | --- | --- | --- | --- | --- | | COST | | | | | | | As at December 31, 2021 | 38,443 | 228 | 10,495 | 1,735 | 50,901 | | Acquisition (Note 4) (2) | 3,198 | — | — | — | 3,198 | | Additions | 1,509 | 1 | 840 | 69 | 2,419 | | Change in Decommissioning Liabilities | (945) | (3) | (58) | (44) | (1,050) | | Divestitures (Note 4 and Note 9) (2) | (557) | — | — | — | (557) | | Exchange Rate Movements and Other | 230 | 15 | 653 | 14 | 912 | | As at September 30, 2022 | 41,878 | 241 | 11,930 | 1,774 | 55,823 | | ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION | | | | | | | As at December 31, 2021 | 10,912 | 53 | 4,572 | 1,139 | 16,676 | | Depreciation, Depletion and Amortization (3) | 2,542 | 34 | 331 | 78 | 2,985 | | Divestitures (Note 4) (2) | (84) | — | — | — | (84) | | Exchange Rate Movements and Other | (2) | 17 | 281 | 43 | 339 | | As at September 30, 2022 | 13,368 | 104 | 5,184 | 1,260 | 19,916 | | CARRYING VALUE | | | | | | | As at December 31, 2021 | 27,531 | 175 | 5,923 | 596 | 34,225 | | As at September 30, 2022 | 28,510 | 137 | 6,746 | 514 | 35,907 |
(1)Other assets includes office furniture, fixtures, leasehold improvements, information technology and aircraft.
(2)In connection with the Sunrise Acquisition, Cenovus was deemed to have disposed of its pre-existing interest and reacquired it at fair value as required by IFRS 3. The carrying value of the pre-existing interest in SOSP was $454 million.
(3)DD&A includes asset write-downs of $51 million.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 23 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 15. RIGHT-OF-USE ASSETS, NET | | --- || | Real Estate | Transportation and Storage Assets (1) | Manufacturing Assets | Retail and Other | Total | | --- | --- | --- | --- | --- | --- | | COST | | | | | | | As at December 31, 2021 | 592 | 1,841 | 161 | 62 | 2,656 | | Additions | — | 18 | 1 | — | 19 | | Modifications | 9 | 32 | 3 | 2 | 46 | | Re-measurements | — | 4 | 2 | (3) | 3 | | Terminations | — | (6) | (1) | — | (7) | | Exchange Rate Movements and Other | (2) | (67) | 11 | 11 | (47) | | As at September 30, 2022 | 599 | 1,822 | 177 | 72 | 2,670 | | ACCUMULATED DEPRECIATION | | | | | | | As at December 31, 2021 | 92 | 520 | 33 | 1 | 646 | | Depreciation | 26 | 171 | 16 | 11 | 224 | | Terminations | — | (6) | — | — | (6) | | Exchange Rate Movements and Other | (1) | (75) | 4 | (2) | (74) | | As at September 30, 2022 | 117 | 610 | 53 | 10 | 790 | | CARRYING VALUE | | | | | | | As at December 31, 2021 | 500 | 1,321 | 128 | 61 | 2,010 | | As at September 30, 2022 | 482 | 1,212 | 124 | 62 | 1,880 |
(1)Transportation and storage assets include railcars, barges, vessels, pipelines, caverns and storage tanks.
| 16. JOINT ARRANGEMENTS |
|---|
A) Joint Operations
BP-Husky Refining LLC
Cenovus holds a 50 percent interest in the Toledo Refinery with BP, which holds the remaining interest and operates the refinery in Ohio. See Note 4 for further details on the announcement made during the three months ended September 30, 2022.
WRB Refining LP
Cenovus holds a 50 percent interest in the Wood River and Borger refineries with Phillips 66, which holds the remaining interest and operates the Wood River Refinery in Illinois and the Borger Refinery in Texas.
B) Joint Ventures
Husky-CNOOC Madura Ltd.
The Company holds a 40 percent interest in the jointly controlled entity, HCML, which is engaged in the exploration for and production of natural gas resources in offshore Indonesia. The Company’s share of equity investment income (loss) related to the joint venture is included in the Consolidated Statements of Earnings (Loss) in the Offshore segment.
Summarized below is the financial information for HCML accounted for using the equity method.
Results of Operations
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Revenue | 92 | 119 | 256 | 348 |
| Expenses | 85 | 75 | 247 | 330 |
| Net Earnings (Loss) | 7 | 44 | 9 | 18 |
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 24 | |||
| --- | --- |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
Balance Sheet
| As at | September 30,<br>2022 | December 31,<br>2021 |
|---|---|---|
| Current Assets (1) | 205 | 167 |
| Non-Current Assets | 1,580 | 1,433 |
| Current Liabilities | 134 | 62 |
| Non-Current Liabilities | 948 | 896 |
| Net Assets | 703 | 642 |
(1)Includes cash and cash equivalents of $65 million (December 31, 2021 – $46 million).
For the nine months ended September 30, 2022, the Company’s share of income from the equity-accounted affiliate was $19 million (nine months ended September 30, 2021 – $36 million). As at September 30, 2022, the carrying amount of the Company’s share of net assets was $361 million (December 31, 2021 – $311 million). These amounts do not equal the 40 percent joint control of the revenues, expenses and net assets of HCML due to differences in the values attributed to the investment and accounting policies between the joint venture and the Company.
For the nine months ended September 30, 2022, the Company received $32 million of distributions from HCML (nine months ended September 30, 2021 – $78 million) and paid $41 million in contributions (nine months ended September 30, 2021 – $2 million).
Husky Midstream Limited Partnership
The Company jointly owns and operates HMLP, which owns midstream assets, including pipeline, storage and other ancillary infrastructure assets in Alberta and Saskatchewan. The Company holds a 35 percent interest in HMLP, with Power Assets Holdings Ltd. holding a 49 percent interest and CK Infrastructure Holdings Ltd. holding a 16 percent interest in HMLP.
For the nine months ended September 30, 2022, HMLP had net earnings of $112 million (nine months ended September 30, 2021 – $74 million). The Company’s share of (income) loss from the equity-accounted affiliate does not equal the 35 percent of the net earnings of HMLP due to the nature of the profit-sharing arrangement as defined in the partnership agreement. The Company’s share of earnings will fluctuate depending on certain income thresholds. For the nine months ended September 30, 2022, the Company did not record its pre-tax loss relating to HMLP of $14 million (nine months ended September 30, 2021 – loss of $21 million). The carrying value was $nil at September 30, 2022 and December 31, 2021.
As at September 30, 2022, the Company had $22 million in cumulative unrecognized losses and OCI, net of tax (September 30, 2021 – $12 million). The Company records its share of equity investment income related to the joint venture only in excess of the cumulated unrecognized loss and is included in the Consolidated Statements of Earnings (Loss) in the Oil Sands segment.
For the nine months ended September 30, 2022, the Company received $22 million of distributions from HMLP (nine months ended September 30, 2021 – $37 million) and paid $30 million in contributions (nine months ended September 30, 2021 – $32 million) to HMLP. The net amount of the distributions received and contributions paid are recorded in earnings from equity-accounted affiliates.
| 17. OTHER ASSETS | | --- || As at | September 30,<br>2022 | December 31,<br>2021 | | --- | --- | --- | | Intangible Assets | 71 | 78 | | Private Equity Investments (Note 28) | 55 | 53 | | Other Equity Investments (1) | — | 77 | | Net Investment in Finance Leases | 63 | 60 | | Long-Term Receivables and Prepaids | 55 | 77 | | Precious Metals | 79 | 85 | | Other | — | 1 | | | 323 | 431 |
(1)On June 8, 2022, the Company sold its investment in Headwater for proceeds of $110 million. The investment was recorded at fair value prior to the sale.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 25 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 18. GOODWILL | | --- || As at | September 30,<br>2022 | December 31,<br>2021 | | --- | --- | --- | | Carrying Value, Beginning of Year | 3,473 | 2,272 | | Goodwill Recognized on the Acquisition (Note 4) | — | 1,289 | | Goodwill Disposed or Reclassified to Assets Held for Sale (Note 4) | (550) | (88) | | Carrying Value, End of Period | 2,923 | 3,473 |
The carrying amount of goodwill allocated to the Company's cash-generating units is:
| As at | September 30,<br>2022 | December 31,<br>2021 |
|---|---|---|
| Primrose (Foster Creek) | 1,171 | 1,171 |
| Christina Lake | 1,101 | 1,101 |
| Lloydminster Thermal | 651 | 651 |
| Sunrise (Note 4) | — | 550 |
| 2,923 | 3,473 | |
| 19. DEBT AND CAPITAL STRUCTURE | ||
| --- |
A) Short-Term Borrowings
| As at | Notes | September 30,<br>2022 | December 31,<br>2021 |
|---|---|---|---|
| Uncommitted Demand Facilities | i | — | — |
| Sunrise Oil Sands Partnership Uncommitted Demand Credit Facility | i | — | — |
| WRB Uncommitted Demand Facilities | ii | — | 79 |
| Total Debt Principal | — | 79 |
i) Uncommitted Demand Facilities
As at September 30, 2022, and December 31, 2021, the Company had uncommitted demand facilities of $1.9 billion in place, of which $1.4 billion may be drawn for general purposes, or the full amount may be available to issue letters of credit. As at September 30, 2022, there were outstanding letters of credit aggregating to $472 million (December 31, 2021 – $565 million) and no direct borrowings.
As at September 30, 2022, SOSP had an uncommitted demand credit facility of $10 million, which was available for general purposes. The Company’s proportionate share was $5 million prior to the Sunrise Acquisition. As at September 30, 2022, there were no direct borrowings.
ii) WRB Uncommitted Demand Facilities
As at September 30, 2022, WRB had uncommitted demand facilities of US$450 million (the Company’s proportionate share –US$225 million), which may be used to cover short-term working capital requirements. As at December 31, 2021, WRB had uncommitted demand facilities of US$300 million (the Company’s proportionate share – US$150 million). As at September 30, 2022, there were no direct borrowings.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 26 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
B) Long-Term Debt
| As at | Notes | September 30,<br>2022 | December 31,<br>2021 |
|---|---|---|---|
| Committed Credit Facility (1) | i | — | — |
| U.S. Dollar Denominated Unsecured Notes | ii | 6,616 | 9,363 |
| Canadian Dollar Unsecured Notes | ii | 2,000 | 2,750 |
| Total Debt Principal | 8,616 | 12,113 | |
| Debt Premiums (Discounts), Net, and Transaction Costs | 158 | 272 | |
| Long-Term Debt | 8,774 | 12,385 |
(1)Committed credit facility may include Bankers’ Acceptances, London Interbank Offered Rate based loans, prime rate loans and U.S. base rate loans.
i) Committed Credit Facility
As at September 30, 2022, Cenovus had in place a committed credit facility that consisted of a $2.0 billion tranche and a $4.0 billion tranche with a maturity date of August 18, 2024, and August 18, 2025, respectively. As at September 30, 2022, no amount was drawn on the credit facility (December 31, 2021 – $nil).
ii) U.S. Dollar Denominated Unsecured Notes and Canadian Dollar Unsecured Notes
During the nine months ended September 30, 2022, Cenovus purchased outstanding principal amounts of the following unsecured notes. A total net discount of $29 million on the purchase was recorded in finance costs.
| US$ Principal | ||||
|---|---|---|---|---|
| U.S. Dollar Unsecured Notes | ||||
| 3.80% due September 15, 2023 | 115 | |||
| 4.00% due April 15, 2024 | 269 | |||
| 5.38% due July 15, 2025 | 533 | |||
| 4.25% due April 15, 2027 | 589 | |||
| 4.40% due April 15, 2029 | 510 | |||
| 6.75% due November 15, 2039 | 455 | |||
| 4.45% due September 15, 2042 | 58 | |||
| 5.20% due September 15, 2043 | 29 | |||
| 2,558 | C$ Principal | |||
| --- | --- | |||
| Canadian Dollar Unsecured Notes | ||||
| 3.55% due March 12, 2025 | 750 | |||
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 27 | |||
| --- | --- |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
The principal amounts of the Company’s outstanding unsecured notes are:
| September 30, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| US$ Principal | C$ Principal and Equivalent | US$ Principal | C$ Principal <br>and Equivalent | |
| U.S. Dollar Unsecured Notes | ||||
| 3.80% due September 15, 2023 | — | — | 115 | 146 |
| 4.00% due April 15, 2024 | — | — | 269 | 341 |
| 5.38% due July 15, 2025 | 133 | 183 | 666 | 844 |
| 4.25% due April 15, 2027 | 373 | 511 | 962 | 1,220 |
| 4.40% due April 15, 2029 | 240 | 329 | 750 | 951 |
| 2.65% due January 15, 2032 | 500 | 685 | 500 | 634 |
| 5.25% due June 15, 2037 | 583 | 799 | 583 | 739 |
| 6.80% due September 15, 2037 | 387 | 530 | 387 | 490 |
| 6.75% due November 15, 2039 | 935 | 1,282 | 1,390 | 1,763 |
| 4.45% due September 15, 2042 | 97 | 133 | 155 | 197 |
| 5.20% due September 15, 2043 | 29 | 39 | 58 | 73 |
| 5.40% due June 15, 2047 | 800 | 1,097 | 800 | 1,014 |
| 3.75% due February 15, 2052 | 750 | 1,028 | 750 | 951 |
| 4,827 | 6,616 | 7,385 | 9,363 | |
| Canadian Dollar Unsecured Notes | ||||
| 3.55% due March 12, 2025 | — | — | — | 750 |
| 3.60% due March 10, 2027 | — | 750 | — | 750 |
| 3.50% due February 7, 2028 | — | 1,250 | — | 1,250 |
| — | 2,000 | — | 2,750 | |
| Total Unsecured Notes | 4,827 | 8,616 | 7,385 | 12,113 |
As at September 30, 2022, the Company was in compliance with all of the terms of its debt agreements. Under the terms of Cenovus’s committed credit facility, the Company is required to maintain a total debt to capitalization ratio, as defined in the agreements, not to exceed 65 percent. The Company is well below this limit.
C) Capital Structure
Cenovus’s capital structure consists of shareholders’ equity plus net debt. Net Debt includes the Company’s short-term borrowings, and the current and long-term portions of long-term debt, net of cash and cash equivalents and short-term investments, and is used in managing the Company’s capital. The Company’s objectives when managing its capital structure are to maintain financial flexibility, preserve access to capital markets, ensure its ability to finance internally generated growth and to fund potential acquisitions while maintaining the ability to meet the Company’s financial obligations as they come due. To ensure financial resilience, Cenovus may, among other actions, adjust capital and operating spending, draw down on its credit facilities or repay existing debt, adjust dividends paid to shareholders, purchase the Company’s common shares or preferred shares for cancellation, issue new debt, or issue new shares.
Cenovus monitors its capital structure and financing requirements using, among other things, specified financial measures consisting of Total Debt, Net Debt to adjusted earnings before interest, taxes and DD&A (“Adjusted EBITDA”), Net Debt to Adjusted Funds Flow and Net Debt to Capitalization. These measures are used to steward Cenovus’s overall debt position as measures of Cenovus’s overall financial strength. Net Debt to Adjusted Funds Flow was a new metric as at March 31, 2022.
Cenovus targets a Net Debt to Adjusted EBITDA ratio and a Net Debt to Adjusted Funds Flow ratio of approximately 1.0 times and Net Debt at or below $4 billion over the long-term at a WTI price of US$45.00 per barrel. These measures may fluctuate periodically outside this range due to factors such as persistently high or low commodity prices.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 28 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
Net Debt to Adjusted EBITDA
| As at | September 30,<br>2022 | December 31,<br>2021 |
|---|---|---|
| Short-Term Borrowings | — | 79 |
| Current Portion of Long-Term Debt | — | — |
| Long-Term Portion of Long-Term Debt | 8,774 | 12,385 |
| Total Debt | 8,774 | 12,464 |
| Less: Cash and Cash Equivalents | (3,494) | (2,873) |
| Net Debt | 5,280 | 9,591 |
| Net Earnings (Loss) | 5,258 | 587 |
| Add (Deduct): | ||
| Finance Costs, Net of Capitalized Interest | 877 | 1,082 |
| Interest Income | (56) | (23) |
| Income Tax Expense (Recovery) | 2,287 | 728 |
| Depreciation, Depletion and Amortization | 5,861 | 5,886 |
| E&E Write-down | 60 | 18 |
| Share of (Income) Loss From Equity-Accounted Affiliates | (28) | (57) |
| Unrealized (Gain) Loss on Risk Management | (312) | 2 |
| Foreign Exchange (Gain) Loss, Net | 325 | (174) |
| Revaluation (Gains) | (549) | — |
| Re-measurement of Contingent Payments | 146 | 575 |
| (Gain) Loss on Divestitures of Assets | (376) | (229) |
| Other (Income) Loss, Net | (568) | (309) |
| Adjusted EBITDA (1) | 12,925 | 8,086 |
| Net Debt to Adjusted EBITDA | 0.4x | 1.2x |
(1) Calculated on a trailing twelve-month basis.
Net Debt to Adjusted Funds Flow
| As at | September 30,<br>2022 | December 31,<br>2021 |
|---|---|---|
| Net Debt | 5,280 | 9,591 |
| Cash From (Used in) Operating Activities | 10,617 | 5,919 |
| (Add) Deduct: | ||
| Settlement of Decommissioning Liabilities | (136) | (102) |
| Net Change in Non-Cash Working Capital | 173 | (1,227) |
| Adjusted Funds Flow (1) | 10,580 | 7,248 |
| Net Debt to Adjusted Funds Flow | 0.5x | 1.3x |
(1) Calculated on a trailing twelve-month basis.
Net Debt to Capitalization
| As at | September 30,<br>2022 | December 31,<br>2021 | ||
|---|---|---|---|---|
| Net Debt | 5,280 | 9,591 | ||
| Shareholders’ Equity | 27,762 | 23,596 | ||
| Capitalization | 33,042 | 33,187 | ||
| Net Debt to Capitalization | 16 | % | 29 | % |
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 29 | |||
| --- | --- |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 20. LEASE LIABILITIES | | --- || | Total | | --- | --- | | As at December 31, 2021 | 2,957 | | Additions | 19 | | Interest Expense (Note 6) | 123 | | Lease Payments | (351) | | Modifications | 46 | | Re-measurements | 3 | | Terminations | (2) | | Exchange Rate Movements and Other | 74 | | As at September 30, 2022 | 2,869 | | Less: Current Portion | 297 | | Long-Term Portion | 2,572 |
The Company has lease liabilities for contracts related to office space, transportation and storage assets, which includes barges, vessels, pipelines, caverns, railcars and storage tanks, retail assets and other refining and field equipment. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions.
The Company has variable lease payments related to property taxes for real estate contracts. Short-term leases are leases with terms of twelve months or less.
The Company has included extension options in the calculation of lease liabilities where the Company has the right to extend a lease term at its discretion and is reasonably certain to exercise the extension option. The Company does not have any significant termination options and the residual amounts are not material.
| 21. CONTINGENT PAYMENTS |
|---|
A) Sunrise Oil Sands Partnership
In connection with the Sunrise Acquisition (see Note 4), Cenovus agreed to make quarterly variable payments from SOSP to BP Canada for up to eight quarters subsequent to August 31, 2022, when the average WCS crude oil price exceeds $52.00 per barrel. The quarterly payment will be calculated as $2.8 million plus the difference between the average WCS price less $53.00 multiplied by $2.8 million, for any of the eight quarters the average WCS price is equal to or greater than $52.00 per barrel. If the average WCS price is less than $52.00 per barrel, no payment will be made for that quarter. The maximum cumulative variable payment is $600 million. The first quarterly period ends on November 30, 2022. The variable payment will be re-measured at fair value at each reporting date until the earlier of the maximum $600 million in cumulative payments is reached or the eight quarters have lapsed, with changes in fair value recognized in net earnings (loss).
| Total | |
|---|---|
| As at December 31, 2021 | — |
| Initial Recognition | 600 |
| Re-measurement (1) | (109) |
| As at September 30, 2022 | 491 |
| Less: Current Portion | 294 |
| Long-term Portion | 197 |
(1) The variable payment is carried at fair value. Changes in fair value are recorded in net earnings (loss).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 30 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
B) FCCL Partnership
On May 17, 2022, the contingent payment obligation associated with the acquisition of a 50 percent interest in the FCCL Partnership (“FCCL”) from ConocoPhillips Company and certain of its subsidiaries ended. The final payment of $177 million was made in July 2022 (as at December 31, 2021 – $160 million was owing).
| Total | |
|---|---|
| As at December 31, 2021 | 236 |
| Re-measurement (1) | 251 |
| Liabilities Settled | (487) |
| As at September 30, 2022 | — |
(1) The contingent payment was carried at fair value. Changes in fair value were recorded in net earnings (loss).
| 22. DECOMMISSIONING LIABILITIES |
|---|
The decommissioning provision represents the present value of the expected future costs associated with the retirement of producing well sites, upstream processing facilities, surface and subsea plant and equipment, manufacturing facilities, retail and the crude-by-rail terminal.
The aggregate carrying amount of the obligation is:
| Total | |
|---|---|
| As at December 31, 2021 | 3,906 |
| Liabilities Incurred | 8 |
| Liabilities Acquired (Note 4) (1) | 22 |
| Liabilities Settled | (148) |
| Liabilities Disposed | (76) |
| Liabilities Divested (Note 4) (1) | (11) |
| Change in Estimated Future Cash Flows | 2 |
| Change in Discount Rate | (1,072) |
| Unwinding of Discount on Decommissioning Liabilities (Note 6) | 132 |
| Foreign Currency Translation | (4) |
| As at September 30, 2022 | 2,759 |
(1) In connection with the Sunrise Acquisition, Cenovus was deemed to have disposed of its pre-existing interest and reacquired it at fair value as required by IFRS 3.
As at September 30, 2022, the undiscounted amount of estimated future cash flows required to settle the obligation has been discounted using a credit-adjusted risk-free rate of 6.2 percent (December 31, 2021 – 4.4 percent) and an inflation rate of two percent (December 31, 2021 – two percent).
The Company deposits cash into restricted accounts that will be used to fund decommissioning liabilities in offshore China in accordance with the provisions of the regulations of the People’s Republic of China. As at September 30, 2022, the Company had $205 million in restricted cash (December 31, 2021 – $186 million).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 31 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 23. OTHER LIABILITIES | | --- || As at | September 30,<br>2022 | December 31,<br>2021 | | --- | --- | --- | | Pension and Other Post-Employment Benefit Plan | 226 | 288 | | Provision for West White Rose Expansion Project (1) | 207 | 259 | | Provisions for Onerous and Unfavourable Contracts | 99 | 99 | | Employee Long-Term Incentives | 120 | 74 | | Drilling Provisions | 26 | 56 | | Deferred Revenue | 46 | 41 | | Other | 140 | 112 | | | 864 | 929 |
(1) On May 31, 2022, the Company divested of 12.5 percent of its working interest in the White Rose field and satellite extensions reducing the provision by $47 million (see Note 9). Cenovus expects to draw down the provision by $49 million in the next twelve months.
| 24. SHARE CAPITAL AND WARRANTS |
|---|
A) Authorized
Cenovus is authorized to issue an unlimited number of common shares, and first and second preferred shares not exceeding, in aggregate, 20 percent of the number of issued and outstanding common shares. The first and second preferred shares may be issued in one or more series with rights and conditions to be determined by the Board of Directors prior to issuance and subject to the Company’s articles.
B) Issued and Outstanding – Common Shares
| September 30, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| Number of<br><br>Common<br><br>Shares<br><br>(thousands) | Amount | Number of<br><br>Common<br><br>Shares<br><br>(thousands) | Amount | |
| Outstanding, Beginning of Year | 2,001,211 | 17,016 | 1,228,870 | 11,040 |
| Issued Under the Arrangement, Net of Issuance Costs | — | — | 788,518 | 6,111 |
| Issued Upon Exercise of Warrants | 7,755 | 76 | 314 | 3 |
| Issued Under Stock Option Plans | 10,659 | 165 | 535 | 7 |
| Purchase of Common Shares Under NCIB | (96,904) | (826) | (17,026) | (145) |
| Outstanding, End of Period | 1,922,721 | 16,431 | 2,001,211 | 17,016 |
As at September 30, 2022, there were 43 million (December 31, 2021 – 30 million) common shares available for future issuance under the stock option plan.
C) Normal Course Issuer Bid
In the nine months ended September 30, 2022, the Company purchased and settled 97 million common shares through the NCIB. The shares were purchased at a volume weighted average price of $22.10 per common share for a total of $2.1 billion. Paid in surplus was reduced by $1.3 billion, representing the excess of the purchase price of the common shares over their average carrying value. The common shares were subsequently cancelled. From October 1, 2022, through to November 1, 2022, the Company purchased an additional 4 million shares for $94 million. The current NCIB will end on November 8, 2022. On November 1, 2022, the Company received approval from the Board of Directors to make an application for another NCIB program and will apply to the TSX for approval to repurchase up to approximately 137 million of the Company’s common shares for twelve months once approved by the TSX.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 32 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
D) Issued and Outstanding – Preferred Shares
In the nine months ended September 30, 2022, there were no additional preferred shares issued. As at September 30, 2022, there were 36 million preferred shares outstanding (December 31, 2021 – 36 million), with a carrying value of $519 million (December 31, 2021 – $519 million).
| As at September 30, 2022 | Dividend Reset Date | Dividend Rate | Number of Preferred Shares (thousands) | |
|---|---|---|---|---|
| Series 1 First Preferred Shares | March 31, 2026 | 2.58 | % | 10,740 |
| Series 2 First Preferred Shares (1) | March 31, 2026 | 5.05 | % | 1,260 |
| Series 3 First Preferred Shares | December 31, 2024 | 4.69 | % | 10,000 |
| Series 5 First Preferred Shares | March 31, 2025 | 4.59 | % | 8,000 |
| Series 7 First Preferred Shares | June 30, 2025 | 3.94 | % | 6,000 |
(1)The floating-rate dividend was 1.86 percent for the period from December 31, 2021, to March 30, 2022, 2.35 percent for the period from March 31, 2022, to June 29, 2022, and 3.21 percent from the period from June 30, 2022 to September 29, 2022.
E) Issued and Outstanding – Warrants
| September 30, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| As at | Number of<br><br>Warrants<br><br>(thousands) | Amount | Number of<br><br>Warrants<br><br>(thousands) | Amount | ||
| Outstanding, Beginning of Year | 65,119 | 215 | — | — | ||
| Issued Under the Arrangement | — | — | 65,433 | 216 | ||
| Exercised | (7,755) | (25) | (314) | (1) | ||
| Outstanding, End of Period | 57,364 | 190 | 65,119 | 215 | ||
| 25. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | ||||||
| --- | Pension and Other Post-Employment Benefits | Private Equity Instruments | Foreign Currency Translation Adjustment | Total | ||
| --- | --- | --- | --- | --- | ||
| As at December 31, 2020 | (10) | 27 | 758 | 775 | ||
| Other Comprehensive Income (Loss), Before Tax | 27 | — | (76) | (49) | ||
| Income Tax (Expense) Recovery | (6) | — | — | (6) | ||
| As at September 30, 2021 | 11 | 27 | 682 | 720 | ||
| As at December 31, 2021 | 28 | 27 | 629 | 684 | ||
| Other Comprehensive Income (Loss), Before Tax | 78 | 2 | 896 | 976 | ||
| Income Tax (Expense) Recovery | (20) | — | — | (20) | ||
| As at September 30, 2022 | 86 | 29 | 1,525 | 1,640 | ||
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 33 | |||||
| --- | --- |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 26. STOCK-BASED COMPENSATION PLANS |
|---|
Cenovus has a number of stock-based compensation plans which include net settlement rights (“NSRs”), Cenovus replacement stock options, performance share units, restricted share units and deferred share units.
The following tables summarize information related to the Company’s stock-based compensation plans:
| Units<br><br>Outstanding | Units<br><br>Exercisable | |
|---|---|---|
| As at September 30, 2022 | (thousands) | (thousands) |
| Stock Options With Associated Net Settlement Rights | 14,767 | 7,090 |
| Cenovus Replacement Stock Options | 4,211 | 2,807 |
| Performance Share Units | 8,702 | — |
| Restricted Share Units | 6,700 | — |
| Deferred Share Units | 1,625 | 1,625 |
The weighted average exercise price of NSRs and Cenovus replacement stock options outstanding as at September 30, 2022, were $12.37 and $11.82, respectively.
| Units<br><br>Granted | Units<br><br>Vested and<br><br>Exercised/<br><br>Paid Out | |
|---|---|---|
| For the nine months ended September 30, 2022 | (thousands) | (thousands) |
| Stock Options With Associated Net Settlement Rights | 2,031 | 11,181 |
| Cenovus Replacement Stock Options | — | 5,380 |
| Performance Share Units | 3,224 | 1,413 |
| Restricted Share Units | 3,156 | 2,229 |
| Deferred Share Units | 467 | 115 |
In the nine months ended September 30, 2022, 10,155 thousand NSRs (see Note 24), with a weighted average exercise price of $12.95, were exercised and net settled for cash.
In the nine months ended September 30, 2022, 1,026 thousand NSRs with a weighted average exercise price of $11.23, were exercised and net settled for 423 thousand common shares (see Note 24).
In the nine months ended September 30, 2022, 102 thousand Cenovus replacement stock options were exercised with a weighted average exercise price of $14.98 and settled for 81 thousand common shares (see Note 24) and 5,278 thousand Cenovus replacement stock options, with a weighted average exercise price of $15.57, were exercised and net settled for cash.
The following table summarizes the stock-based compensation expense (recovery) recorded for all plans:
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Stock Options With Associated Net Settlement Rights | 3 | 3 | 12 | 11 |
| Cenovus Replacement Stock Options | (5) | 3 | 36 | 17 |
| Performance Share Units | 1 | 9 | 66 | 30 |
| Restricted Share Units | 4 | 11 | 65 | 28 |
| Deferred Share Units | (4) | 2 | 14 | 11 |
| Stock-Based Compensation Expense (Recovery) | (1) | 28 | 193 | 97 |
| Stock-Based Compensation Costs Capitalized | — | 2 | — | 5 |
| Total Stock-Based Compensation | (1) | 30 | 193 | 102 |
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 34 | |||
| --- | --- |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 27. RELATED PARTY TRANSACTIONS |
|---|
Transactions with HMLP are related party transactions as the Company has a 35 percent ownership interest (see Note 16). As the operator of the assets held by HMLP, Cenovus provides management services for which it recovers shared service costs.
The Company is also the contractor for HMLP and constructs its assets based on fixed price contracts or on a cost recovery basis with certain restrictions. For the three and nine months ended September 30, 2022, the Company charged HMLP $56 million and $133 million, respectively, for construction costs and management services (three and nine months ended September 30, 2021 – $101 million and $165 million, respectively).
The Company pays an access fee to HMLP for pipeline systems that are used by Cenovus’s blending business. Cenovus also pays HMLP for transportation and storage services. For the three and nine months ended September 30, 2022, the Company incurred costs of $64 million and $197 million, respectively, for the use of HMLP’s pipeline systems, as well as transportation and storage services (three and nine months ended September 30, 2021 – $70 million and $215 million, respectively).
| 28. FINANCIAL INSTRUMENTS |
|---|
Cenovus’s financial assets and financial liabilities consist of cash and cash equivalents, accounts receivable and accrued revenues, restricted cash, net investment in finance leases, accounts payable and accrued liabilities, risk management assets and liabilities, investments in the equity of companies, long-term receivables, lease liabilities, contingent payments, short-term borrowings, long-term debt and other liabilities. Risk management assets and liabilities arise from the use of derivative financial instruments.
A) Fair Value of Non-Derivative Financial Instruments
The fair values of cash and cash equivalents, accounts receivable and accrued revenues, accounts payable and accrued liabilities, and short-term borrowings approximate their carrying amount due to the short-term maturity of these instruments.
The fair values of restricted cash, net investment in finance leases and long-term receivables approximate their carrying amount due to the specific non-tradeable nature of these instruments.
Long-term debt is carried at amortized cost. The estimated fair value of long-term borrowings has been determined based on period-end trading prices of long-term borrowings on the secondary market (Level 2). As at September 30, 2022, the carrying value of Cenovus’s long-term debt was $8.8 billion and the fair value was $7.7 billion (December 31, 2021, carrying value – $12.4 billion, fair value – $13.7 billion).
The Company classifies certain private equity investments as FVOCI as they are not held for trading and fair value changes are not reflective of the Company’s operations. These assets are carried at fair value on the Consolidated Balance Sheets in other assets. Fair value is determined based on recent private placement transactions (Level 3) when available.
The following table provides a reconciliation of changes in the fair value of private equity investments classified as FVOCI:
| Total | |
|---|---|
| As at December 31, 2021 | 53 |
| Changes in Fair Value (1) | 2 |
| As at September 30, 2022 | 55 |
(1) Changes in fair value are recorded in OCI.
B) Fair Value of Risk Management Assets and Liabilities
The Company’s risk management assets and liabilities consist of crude oil, condensate, natural gas, and refined product futures, and, if entered into, swaps, forwards, options and interest rate swaps; as well as renewable power contracts, power and foreign exchange swaps.
Crude oil, natural gas, condensate, refined product contracts and power swaps are recorded at their estimated fair value based on the difference between the contracted price and the period-end forward price for the same commodity, using quoted market prices or the period-end forward price for the same commodity extrapolated to the end of the term of the contract (Level 2). The fair value of foreign exchange rate contracts, and interest rate swaps are calculated using external valuation models which incorporate observable market data, including foreign exchange forward curves (Level 2) and interest rate yield curves (Level 2), respectively. The fair value of cross currency interest rate swaps are calculated using external valuation models which incorporate observable market data, including foreign exchange forward curves (Level 2) and interest rate yield curves (Level 2).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 35 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
The fair value of renewable power contracts are calculated using internal valuation models that incorporate broker pricing for relevant markets, some observable market prices and extrapolated market prices with inflation assumptions (Level 3). The fair value of renewable power contracts are calculated by Cenovus’s internal valuation team that consists of individuals who are knowledgeable and have experience in fair value techniques.
Risk management assets and liabilities are carried at fair value on the Consolidated Balance Sheets in accounts receivable and accrued revenues, and accounts payable and accrued liabilities (for short-term positions) and other liabilities (for long-term positions). Changes in fair value are recorded in the Consolidated Statements of Earnings within (gain) loss on risk management.
Cenovus suspended its crude oil sales price risk management activities related to WTI. Given the strength of Cenovus’s balance sheet and liquidity position, the Company determined these programs are no longer required to support financial resilience. All WTI positions related to crude oil sales price risk management were closed by June 30, 2022.
Summary of Unrealized Risk Management Positions
| September 30, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Risk Management | Risk Management | |||||
| As at | Asset | Liability | Net | Asset | Liability | Net |
| Crude Oil, Natural Gas, Condensate and Refined Products | 44 | 43 | 1 | 46 | 116 | (70) |
| Renewable Power Contracts | 26 | — | 26 | — | — | — |
| Foreign Exchange Rate Contracts | — | 10 | (10) | 2 | — | 2 |
| 70 | 53 | 17 | 48 | 116 | (68) |
Level 2 prices sourced from observable data or market corroboration refers to the fair value of contracts valued in part using active quotes and in part using observable, market-corroborated data. Level 3 prices are sourced from partially observable data used in internal valuations.
The following table presents the Company’s fair value hierarchy for risk management assets and liabilities carried at fair value:
| As at | September 30,<br>2022 | December 31,<br>2021 |
|---|---|---|
| Level 2 – Prices Sourced From Observable Data or Market Corroboration | (9) | (68) |
| Level 3 – Prices Sourced From Partially Observable Data | 26 | — |
| 17 | (68) |
The following table provides a reconciliation of changes in the fair value of Cenovus’s risk management assets and liabilities from January 1 to September 30:
| 2022 | |
|---|---|
| Fair Value of Contracts, Beginning of Year | (68) |
| Change in Fair Value of Contracts in Place at Beginning of Year | (12) |
| Change in Fair Value of Contracts Entered Into During the Period | (1,530) |
| Fair Value of Contracts Realized During the Period | 1,628 |
| Unrealized Foreign Exchange Gain (Loss) on U.S. Dollar Contracts | (1) |
| Fair Value of Contracts, End of Period | 17 |
C) Fair Value of Contingent Payments
The variable payment (Level 3) associated with the Sunrise Acquisition is carried at fair value on the Consolidated Balance Sheets. Fair value is estimated by calculating the present value of the future expected cash flows using an option pricing model (Level 3), which assumes the probability distribution for WCS is based on the volatility of WTI options, volatility of Canadian-U.S. foreign exchange rate options and both WTI and WCS futures pricing discounted using a credit-adjusted risk-free rate. Fair value of the variable payment has been calculated by Cenovus’s internal valuation team, which consists of individuals who are knowledgeable and have experience in fair value techniques. As at September 30, 2022, the fair value of the variable payment was estimated to be $491 million applying a credit-adjusted risk-free rate of 6.8 percent. The maximum cumulative variable payment is $600 million.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 36 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
As at September 30, 2022, average WCS forward pricing for the remaining term of the variable payment C$72.38 per barrel. The volatility of WTI options and the Canadian-U.S. foreign exchange rates was 53 percent and 10 percent, respectively. Changes in the following inputs to the option pricing model, with fluctuations in all other variables held constant, could have resulted in unrealized gains (losses) impacting earnings before income tax as follows:
| Sensitivity Range | Increase | Decrease | |
|---|---|---|---|
| WCS Forward Prices | ± $5.00 per barrel | (56) | 85 |
| WTI Option Volatility | ± five percent | (1) | 1 |
| Canadian to U.S. Dollar Foreign Exchange Rate Option Volatility | ± five percent | — | — |
The contingent payment (Level 3) associated with the acquisition of a 50 percent interest in FCCL from ConocoPhillips Company and certain of its subsidiaries ended on May 17, 2022. The final payment was made in July 2022.
D) Earnings Impact of (Gains) Losses From Risk Management Positions
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Realized (Gain) Loss | (10) | 184 | 1,628 | 725 |
| Unrealized (Gain) Loss (1) | (18) | (27) | (88) | 226 |
| (Gain) Loss on Risk Management | (28) | 157 | 1,540 | 951 |
(1) All WTI positions related to crude oil sales price risk management were closed by June 30, 2022. In the three months ended June 30, 2022, Cenovus recorded a realized net loss related to these positions of $467 million.
Realized and unrealized gains and losses on risk management are recorded in the reportable segment to which the derivative instrument relates.
| 29. RISK MANAGEMENT |
|---|
Cenovus is exposed to financial risks, including market risk related to commodity prices, foreign exchange rates, interest rates, commodity power prices as well as credit risk and liquidity risk.
To manage exposure to commodity price movements between when products are produced or purchased and when sold to the customer or used by Cenovus, the Company may periodically enter into financial positions as a part of ongoing operations to market the Company’s production and physical inventory positions of crude oil, natural gas, condensate, refined products, power consumption and carbon offset requirements. On April 4, 2022, Cenovus announced the suspension of its crude oil sales price risk management activities related to WTI. As at June 30, 2022, those risk management positions were closed.
The Company entered into risk management positions to help capture incremental margin expected to be received in future periods at the time products will be sold and to mitigate overall exposure to fluctuations in commodity prices related to inventories and physical sales. Mitigation of commodity price volatility may utilize financial positions to protect future cash flows. To manage exposure to interest rate volatility, the Company may periodically enter into interest rate swap contracts. To mitigate the Company’s exposure to foreign exchange rate fluctuations, the Company periodically enters into foreign exchange contracts. To manage interest costs on short-term borrowings, the Company periodically enters into cross currency interest rate swaps. To manage electricity costs associated with the production and transportation of crude oil, the Company may enter into power swaps and other energy instruments, including renewable power contracts. To manage exposure to carbon costs, the Company may enter into carbon credit instruments, which may be embedded in renewable power contracts or may be entered into separately.
As at September 30, 2022, the fair value of risk management positions was a net asset of $17 million and consisted of crude oil, natural gas, condensate, refined products, power and foreign exchange rate instruments. As at September 30, 2022, there were foreign exchange contracts with a notional value of US$220 million outstanding and no interest rate contracts or cross currency interest rate swap contracts outstanding.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 37 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
Net Fair Value of Risk Management Positions
| As at September 30, 2022 | Notional Volumes (1) (2) | Terms (3) | Weighted<br><br>Average<br><br>Price (1) (2) | Fair Value Asset (Liability) |
|---|---|---|---|---|
| Futures Contracts Related to Blending (4) | ||||
| WTI Fixed – Sell | 4.0 MMbbls | October 2022 - May 2023 | US$87.77/bbl | 52 |
| WTI Fixed – Buy | 1.7 MMbbls | October 2022 - March 2023 | US$84.11/bbl | (12) |
| Other Financial Positions (5) | (13) | |||
| Foreign Exchange Rate Contracts | (10) | |||
| Total Fair Value | 17 |
(1) Million barrels (“MMbbls”). Barrel (“bbl”).
(2) Notional volumes and weighted average price represent various contracts over the respective terms. The notional volumes and weighted average price may fluctuate from month to month as it represents the averages for various individual contracts with different terms.
(3) Contract terms represent various individual contracts with different terms, and range from one to eight months.
(4) Condensate related futures contract positions consist of WTI contracts to help manage condensate price exposure.
(5) Other financial positions consists of risk management positions related to WCS, heavy oil and condensate differential contracts, Belvieu fixed price contracts, reformulated blendstock for oxygenate blending gasoline contracts, heating oil and natural gas fixed price contracts, power swaps, renewable power contracts and the Company’s U.S. manufacturing and marketing activities.
A) Commodity Price, Interest Rate and Foreign Currency Risk
Sensitivities
The following table summarizes the sensitivity of the fair value of Cenovus’s risk management positions to independent fluctuations in commodity prices and foreign exchange rates, with all other variables held constant. Management believes the fluctuations identified in the table below are a reasonable measure of volatility.
The impact of fluctuating commodity prices and foreign exchange rates on the Company’s open risk management positions could have resulted in an unrealized gain (loss) impacting earnings before income tax as follows:
| As at September 30, 2022 | Sensitivity Range | Increase | Decrease |
|---|---|---|---|
| WCS and Condensate Differential Price | ± US$2.50/bbl Applied to WCS and Differential Hedges Tied to Production | (8) | 8 |
| Refined Products Commodity Price | ± US$5.00/bbl Applied to Heating Oil and Gasoline Hedges | (3) | 3 |
| Natural Gas Basis Price | ± US$0.10/MCF Applied to Natural Gas Basis Hedges | 1 | (1) |
| Power Commodity Price | ± C$20.00/MWH Applied to Power Hedges | 99 | (99) |
| U.S. to Canadian Dollar Exchange Rate | ± 0.05 in the U.S. to Canadian Dollar Exchange Rate | 20 | (23) |
B) Credit Risk
Credit risk arises from the potential that the Company may incur a financial loss if a counterparty to a financial instrument fails to meet its financial or performance obligations in accordance with agreed terms. Cenovus has in place a Credit Policy approved by the Audit Committee and the Board of Directors, which is designed to ensure that its credit exposures are within an acceptable risk level. The Credit Policy outlines the roles and responsibilities related to credit risk, sets a framework for how credit exposures will be measured, monitored and mitigated, and sets parameters around credit concentration limits.
Cenovus assesses the credit risk of new counterparties and continues risk-based monitoring of all counterparties on an ongoing basis. A substantial portion of Cenovus’s accounts receivable are with customers in the oil and gas industry and are subject to normal industry credit risks. Cenovus’s exposure to its counterparties is within its credit policy tolerances. The maximum credit risk exposure associated with accounts receivable and accrued revenues, net investment in finance leases, risk management assets and long-term receivables is the total carrying value.
As at September 30, 2022, approximately 91 percent of the Company’s accruals, receivables related to Cenovus’s joint ventures and joint operations, trade receivables and net investment in finance leases were investment grade, and 99 percent of the Company’s accounts receivable were outstanding for less than 60 days. The associated average expected credit loss on these accounts was 0.2 percent as at September 30, 2022 (December 31, 2021 – 0.1 percent).
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 38 |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
C) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet all of its financial obligations as they become due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Cenovus manages its liquidity risk through the active management of cash and debt, and by maintaining appropriate access to credit, which may be impacted by the Company’s credit ratings. As disclosed in Note 19, over the long term, Cenovus targets a Net Debt to Adjusted EBITDA ratio and Net Debt to Adjusted Funds Flow ratio of approximately 1.0 times to manage the Company’s overall debt position.
Undiscounted cash outflows relating to financial liabilities are:
| As at September 30, 2022 | Less than 1 Year | Years 2 and 3 | Years 4 and 5 | Thereafter | Total |
|---|---|---|---|---|---|
| Accounts Payable and Accrued Liabilities | 6,250 | — | — | — | 6,250 |
| Long-Term Debt (1) | 405 | 993 | 2,039 | 11,416 | 14,853 |
| Contingent Payment | 221 | 301 | — | — | 522 |
| Lease Liabilities (1) | 440 | 759 | 612 | 2,968 | 4,779 |
| As at December 31, 2021 | Less than 1 Year | Years 2 and 3 | Years 4 and 5 | Thereafter | Total |
| Accounts Payable and Accrued Liabilities | 6,353 | — | — | — | 6,353 |
| Short-Term Borrowings (1) | 79 | — | — | — | 79 |
| Long-Term Debt (1) | 561 | 1,608 | 2,603 | 14,892 | 19,664 |
| Contingent Payment | 238 | — | — | — | 238 |
| Lease Liabilities (1) | 453 | 794 | 634 | 3,192 | 5,073 |
(1) Principal and interest, including current portion if applicable.
| 30. SUPPLEMENTARY CASH FLOW INFORMATION |
|---|
A) Working Capital
| September 30,<br>2022 | December 31,<br>2021 | |
|---|---|---|
| Total Current Assets | 12,263 | 11,988 |
| Total Current Liabilities | 7,934 | 7,305 |
| Working Capital | 4,329 | 4,683 |
As at September 30, 2022, adjusted working capital was $4.6 billion (December 31, 2021 – $3.8 billion), excluding assets held for sale of $nil (December 31, 2021 – $1.3 billion), the current portion of the contingent payment of $294 million (December 31, 2021 – $236 million) and liabilities related to assets held for sale of $nil (December 31, 2021 – $186 million).
Changes in non-cash working capital is as follows:
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| For the periods ended September 30, | 2022 | 2021 | 2022 | 2021 |
| Accounts Receivable and Accrued Revenues | 1,746 | (399) | 119 | (1,273) |
| Income Tax Receivable | (111) | — | (88) | 13 |
| Inventories | 1,138 | (106) | (172) | (1,120) |
| Accounts Payable and Accrued Liabilities | (1,547) | 452 | (388) | 1,092 |
| Income Tax Payable | 74 | 51 | 877 | 6 |
| Total Non-Cash Working Capital | 1,300 | (2) | 348 | (1,282) |
| Net Change in Non-Cash Working Capital - Operating Activities | 1,193 | (166) | (98) | (1,498) |
| Net Change in Non-Cash Working Capital - Investing Activities | 107 | 164 | 446 | 216 |
| Total Non-Cash Working Capital | 1,300 | (2) | 348 | (1,282) |
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 39 | |||
| --- | --- |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
B) Reconciliation of Liabilities
The following table provides a reconciliation of liabilities to cash flows arising from financing activities:
| Dividends Payable | Short-Term Borrowings | Long-Term Debt | Lease Liabilities | |
|---|---|---|---|---|
| As at December 31, 2020 | — | 121 | 7,441 | 1,757 |
| Acquisition | — | 40 | 6,602 | 1,441 |
| Changes From Financing Cash Flows: | ||||
| Net Issuance (Repayment) of Short-Term Borrowings | — | (108) | — | — |
| (Repayment) of Revolving Long-Term Debt | — | — | (350) | — |
| Issuance of Long-Term Debt | — | — | 1,557 | — |
| (Repayment) of Long-Term Debt | — | — | (2,336) | — |
| Principal Repayment of Leases | — | — | — | (222) |
| Base Dividends Paid on Common Shares | (106) | — | — | — |
| Dividends Paid on Preferred Shares | (26) | — | — | — |
| Non-Cash Changes: | ||||
| Exchange Rate Movements and Other | — | (5) | 6 | (3) |
| Net Premium (Discount) on Redemption of Long-Term<br> Debt | — | — | 115 | — |
| Finance Costs | — | — | (49) | — |
| Lease Additions | — | — | — | 101 |
| Lease Modifications | — | — | — | 6 |
| Lease Re-measurements | — | — | — | (5) |
| Base Dividends Declared on Common Shares | 106 | — | — | — |
| Dividends Declared on Preferred Shares | 26 | — | — | — |
| As at September 30, 2021 | — | 48 | 12,986 | 3,075 |
| As at December 31, 2021 | — | 79 | 12,385 | 2,957 |
| Changes From Financing Cash Flows: | ||||
| Net Issuance (Repayment) of Short-Term Borrowings | — | (81) | — | — |
| (Repayment) of Long-Term Debt | — | — | (4,149) | — |
| Principal Repayment of Leases | — | — | — | (228) |
| Base Dividends Paid on Common Shares | (481) | — | — | — |
| Dividends Paid on Preferred Shares | (26) | — | — | — |
| Non-Cash Changes: | ||||
| Exchange Rate Movements and Other | — | 2 | 591 | 74 |
| Net Premium (Discount) on Redemption of Long-Term<br> Debt | — | — | (29) | — |
| Finance Costs | — | — | (24) | — |
| Lease Additions | — | — | — | 19 |
| Lease Modifications | — | — | — | 46 |
| Lease Re-measurements | — | — | — | 3 |
| Lease Terminations | — | — | — | (2) |
| Base Dividends Declared on Common Shares | 481 | — | — | — |
| Dividends Declared on Preferred Shares | 26 | — | — | — |
| As at September 30, 2022 | — | — | 8,774 | 2,869 |
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 40 | |||
| --- | --- |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
All amounts in $ millions, unless otherwise indicated
For the periods ended September 30, 2022
| 31. COMMITMENTS AND CONTINGENCIES |
|---|
A) Commitments
Cenovus has entered into various commitments in the normal course of operations primarily related to demand charges on firm transportation agreements. In addition, the Company has commitments related to its risk management program.
Future payments for the Company’s commitments are below:
| As at September 30, 2022 | Remainder of Year | 2 Years | 3 Years | 4 Years | 5 Years | Thereafter | Total |
|---|---|---|---|---|---|---|---|
| Transportation and Storage (1) | 426 | 1,657 | 1,884 | 1,498 | 1,381 | 14,483 | 21,329 |
| Product Purchases (2) | 440 | 1,762 | 1,635 | 996 | 996 | 4,730 | 10,559 |
| Real Estate (3) | 12 | 45 | 47 | 47 | 46 | 618 | 815 |
| Obligation to Fund Equity-Accounted Affiliate (4) | 20 | 92 | 107 | 98 | 98 | 226 | 641 |
| Other Long-Term Commitments | 300 | 113 | 88 | 76 | 96 | 444 | 1,117 |
| Total Payments (5) | 1,198 | 3,669 | 3,761 | 2,715 | 2,617 | 20,501 | 34,461 |
(1) Includes transportation commitments of $9.1 billion (December 31, 2021 – $8.1 billion) that are subject to regulatory approval or have been approved, but are not yet in service. Terms are up to 20 years subsequent to the date of commencement.
(2) Previously included in Transportation and Storage.
(3) Relates to the non-lease components of lease liabilities consisting of operating costs and unreserved parking for office space. Excludes committed payments for which a provision has been provided.
(4) Relates to funding obligations for HCML.
(5) Commitments are reflected at Cenovus’s proportionate share of the underlying contract.
As at September 30, 2022, the Company had commitments with HMLP that include $2.2 billion related to long-term transportation and storage commitments (December 31, 2021 – $2.6 billion). There were also outstanding letters of credit aggregating to $472 million (December 31, 2021 – $565 million) issued as security for financial and performance conditions under certain contracts.
B) Contingencies
Legal Proceedings
Cenovus is involved in a limited number of legal claims associated with the normal course of operations. Cenovus believes that any liabilities that might arise from such matters, to the extent not provided for, are not likely to have a material effect on its Consolidated Financial Statements.
Decommissioning Liabilities
Cenovus is responsible for the retirement of long-lived assets at the end of their useful lives. Cenovus has recorded a liability of $2.8 billion (December 31, 2021 – $3.9 billion), based on current legislation and estimated costs, related to its producing well sites, upstream processing facilities, surface and subsea plant and equipment, manufacturing facilities, retail and the crude-by-rail terminal. Actual costs may differ from those estimated due to changes in legislation and changes in costs.
Income Tax Matters
The tax regulations and legislation and interpretations thereof in the various jurisdictions in which Cenovus operates are continually changing. As a result, there are usually a number of tax matters under review. Management believes that the provision for taxes is adequate.
Contingent Payments
In connection with the Sunrise Acquisition (see Note 4), Cenovus agreed to make quarterly variable payments from SOSP to BP Canada for up to two years subsequent to August 31, 2022, when the average WCS crude oil price exceeds $52.00 per barrel. As at September 30, 2022, the estimated fair value of the variable payment was $491 million (see Note 21). The maximum cumulative variable payment is $600 million.
| Cenovus Energy Inc. – Q3 2022 Interim Consolidated Financial Statements | 41 |
|---|
Document
ex99.4
CENOVUS ENERGY INC.
Supplemental Financial Information (unaudited)
Exhibit to the September 30, 2022 Interim Consolidated Financial Statements
Consolidated Interest Coverage Ratios
The following financial ratios are provided by Cenovus Energy Inc. (the “Company”) in connection with the offering of common shares, debt securities, preferred shares, subscription receipts, warrants, share purchase contracts and/or units of the Company by way of base shelf prospectus dated October 7, 2021. These ratios are based on the Company's consolidated financial statements that are prepared in accordance with International Financial Reporting Standards, which are generally accepted in Canada.
Interest coverage ratios for the twelve months ended September 30, 2022
| (times) | |
|---|---|
| Net earnings available for all interest bearing financial liabilities (1) | 11.3x |
| Net earnings available for all interest bearing financial liabilities before unrealized (gains) and losses on risk management activities (2) | 10.9x |
(1)Calculated as net earnings plus income tax and borrowing costs on all interest bearing financial liabilities; divided by borrowing costs on all interest bearing financial liabilities, as well as declared and undeclared cumulative preferred share dividends. Borrowing costs include capitalized interest. Net earnings includes a non-cash revaluation gain of $549 million.
(2)Calculated as net earnings plus income tax and borrowing costs on all interest bearing financial liabilities before unrealized (gains) and losses on risk management activities; divided by borrowing costs on all interest bearing financial liabilities, as well as declared and undeclared cumulative preferred share dividends. Borrowing costs include capitalized interest. Net earnings includes a non-cash revaluation gain of $549 million.
The Company believes the interest coverage ratio based on net earnings available for all interest bearing financial liabilities before unrealized (gains) and losses on risk management activities is a relevant measure for investors as the realization of unrealized (gains) and losses are yet to be determined and will be realized in future periods.
Document
Exhibit 99.5
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Alex J. Pourbaix, President & Chief Executive Officer of Cenovus Energy Inc., certify the following:
1.Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Cenovus Energy Inc. (the “issuer”) for the interim period ended September 30, 2022.
2.No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a)designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i)material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii)information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b)designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework in Internal Control – Integrated Framework.
5.2 ICFR - material weakness relating to design: N/A
5.3 Limitation on scope of design: N/A
6.Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2022 and ended on September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: November 2, 2022
/s/ Alex J. Pourbaix
Alex J. Pourbaix
President & Chief Executive Officer
Document
Exhibit 99.6
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Jeffrey R. Hart, Executive Vice-President & Chief Financial Officer of Cenovus Energy Inc., certify the following:
1.Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Cenovus Energy Inc. (the “issuer”) for the interim period ended September 30, 2022.
2.No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4.Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”), as those terms are defined in National Instrument 52‑109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5.Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework in Internal Control – Integrated Framework.
5.2 ICFR - material weakness relating to design: N/A
5.3 Limitation on scope of design: N/A
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2022 and ended on September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: November 2, 2022
/s/ Jeffrey R. Hart
Jeffrey R. Hart
Executive Vice-President & Chief Financial Officer